Drumbeat: February 14, 2010

Is the end of fossil-fuel era really close?

(MENAFN - Arab News) Global energy dynamics are changing - and changing fast. And these carry tremendous implications for both producers as well as consumers. Over the last few months, the energy world has undergone a complete metamorphosis. Hardly 19 months ago, crude was almost $147 a barrel - and pundits were clamoring that the world was about to enter the phase of supply being less than demand.

That Peak Oil had arrived and crude could even cross the $200 mark. All this now seems a matter of distant past. The recession that enveloped the world in the meantime, added with fast changing global consumption pattern, has changed the sentiments from bullish to bearish - to say the least.

But is it a temporary phase or is it here to stay? That is a big question haunting the energy world. However, indications are that dynamics have changed - and changed for ever.

An oil-less recovery dims the future for oil

The world may lose its taste for oil long before oil itself runs out, if the trend in the West becomes global. Demand for oil may well have peaked in the developed world, the International Energy Agency said on Thursday, postponing further any possible supply crunch. But emerging nations still want more, the IEA said. More efficient cars and the increasing use of electricity and gas instead of oil in areas outside transport, such as heating, have driven the move in the West.

Peak Oil Is Real, Act Now Or Face The Consequences

Oil is, obviously, stored energy. But what I think many fail to consider, is that it is cheap energy, and it accomplishes a great deal of work that otherwise may have had to been performed by human energy.

Cheap energy has affected everything about our lives as human beings ever since the combustion engine.

I am reminded of how America went from an agricultural society with most of its citizens living and working on farms, to today the work that would take perhaps a few hundred men or more can be accomplished by two guys, and an oil powered tractor.

By ancient standards, every single person in the western world lives a lifestyle of a King. From the wide variety of foods we so conveniently have available to us in our grocery stores, to simple conveniences we have for generations taken for granted. Is this solely because humans are so much more advanced technologically, or does it perhaps have something to do with how cheap energy has been for the last 50 years?

All options open at OPEC meet - Algeria oilmin

ALGIERS (Reuters) - All options are open at the next meeting of the Organization of the Petroleum Exporting Countries (OPEC) in March, Algerian Energy and Mines Minister Chakib Khelil said on Sunday.

No hike in fuel prices for now: Oil Minister

NEW DELHI: Facing opposition from key allies in the UPA Government, Finance Minister Pranab Mukherjee and Oil Minister Murli Deora today discussed an "all-acceptable" hike in fuel prices but it appeared the two failed to reach a consensus and the fuel price hike may not happen immediately.

China's natural gas short of demand

BEIJING: Although China's natural gas output rose by 7.7 percent last year, it was still not enough for ever rising domestic demand, data released by an industry association said.

Iran begins drilling oil well in Caspian Sea

TEHRAN, Iran (AP) -- State TV reports that Iran has began drilling its first exploratory oil well in the Caspian Sea.

The Sunday report quotes head of Iran's North Drilling Company Hedayatollah Khademi as saying the well is one of the three planned to gauge the amount of recoverable oil available in Iran's territorial waters of the sea.

Clinton wants Saudis to prod China on Iran sanctions

Secretary of State Hillary Clinton flew to the Gulf on Sunday to seek oil-rich Saudi Arabia's help in pressing China to join the US drive for sanctions against Iran, aides said.

The US chief diplomat's three-day trip to Qatar and Saudi Arabia is also aimed at enlisting broader regional support, including Turkey's, in a drive to stop Iran's sensitive nuclear work, her aides told reporters.

Shale Gas Rush Presents Another Problem for Russia and Gazprom

The historical experience in commodity markets has been of shocks making a complete shambles of confident predictions. In the 70s and early 80s, it was widely believed that oil prices would escalate inexorably, reshaping geopolitics as a result. The exact opposite happened. Geopolitics were indeed reshaped, but in a very different way.

Marcellus Shale group says Rendell tax plan, Pa.'s outdated drilling laws are ill-conceived

HARRISBURG, Pa. (AP) - The natural gas industry in one of the nation's hottest exploration spots is bracing for a political tussle over whether and how Pennsylvania will tax methane from the potentially lucrative Marcellus Shale formation.

Report Says Cape Wind Would Save Billions

An offshore wind farm in the Nantucket Sound could save the New England region billions of dollars over 25 years, according to a new report.

Windmills stir up a storm in Cape Vincent

On one side: supporters who see the windmills as a source of income for struggling farmers, tax revenue for the town and county, and jobs, however temporary, in a community whose economy is dependent on summer tourism and a state prison.

On the other: opponents, many of them summer residents, who see the turbines as a blight on the gateway to the Thousand Islands and a threat to wildlife, health and property values.

David Gelbaum, Clean Energy Investor, Remains Bullish Despite the Downturn

When the news emerged in December that David Gelbaum, the wealthy former hedge fund manager, conservationist and philanthropist, had suspended his annual $20 million bequest to the American Civil Liberties Union, as well as high-dollar contributions to other organizations, a shudder ran through the renewable energy world.

Mr. Gelbaum, after all, is one of the country’s largest private investors in green technology, and the Quercus Trust, his family fund, has approximately $400 million parked in more than 40 green technology firms.

Speculation that Mr. Gelbaum’s green technology investments might be next to suffer quickly sprang up online. “David Gelbaum Cuts Donations – Bye-Bye, Greentech Plays?” read a recent headline on Earth2Tech.com, a green energy blog.

Even "green" technologies depend on dirty, destructive mining operations for rare metals

(NaturalNews) The advent of new "green" technologies may seem like a perfect remedy to many former methods that caused heavy pollution and environmental destruction. The only problem is that many of these new technologies require the mining of rare earth metals which often leads to the destruction of land, farms, and water supplies.

Ethiopian Hydro Plant Suffers Setback

A tunnel collapse has closed the largest hydropower plant operating in Ethiopia, only 10days after its inauguration.

The event was attributed to “an unforeseen geological event,” which caused a partial collapse inside a 16-mile water tunnel at the newly opened Gibe II hydropower plant, according to a statement from the Italian construction firm behind the project, Salini Costruttori.

Chinese climate allegations 'ludicrous': Minister

OTTAWA — Allegations from an internal Chinese government report that Canada was "conniving" to get the world to accept weakened climate change goals at last December's international summit on global warming are ludicrous, Environment Minister Jim Prentice said Thursday.

"Canada has always been completely open, completely transparent and we have been constructive," Prentice said in an interview with Canwest News Service. "We have not been conniving."

How Will Global Warming Change Ecosystems?

Scientists have made lots of projections over the past few years about how warming temperatures and a changing climate will affect the planet. Real-world measurements have confirmed at least some of them: sea level is clearly rising, for instance, and the ice that covers the Arctic Ocean is shrinking and thinning — in the latter case, faster than anyone had expected just a few years ago.

Other measurements are a lot more difficult, though. It's reasonable to expect, for example, that ecosystems will change as plants and animals respond to a rising thermometer — but how do you measure the change of an ecosystem that may consist of hundreds or even thousands of species?

It isn't just the Iraqis who have to guard their pipelines:

RCMP serve summons to convicted oilpatch bomber


"Police say EnCanada, Canadian Superior Energy, and Seaview Energy want an Alberta court to issue peace bonds because the companies fear the trio will cause personal injury to their employees or will damage their property.
Ludwig spoke to CTV News Saturday and believes his son and Boonstra are being unfairly targeted by industry giants.
All three men will appear in Grande Prairie Court on Wednesday to set a date for the hearing. During the hearing the court will determine whether there is enough evidence to substantiate the allegations in the peace bond application."

Still no conclusive action by the Mounties against the pipeline bomber. Ludwig is one of the usual suspects, but if the RCMP had any serious evidence against him surely they would have charged him by now.

so the great die off begins. some one important had his lifestyle reduced. death comes to the high and mighty just as it comes to the
homeless bum.

"ANCHORAGE, Alaska (AP) -- The president of ConocoPhillips Alaska was killed and another person was feared dead after the two were swept away while snowmobiling on Alaska's Kenai Peninsula, state police said."

having all that money and power did not help him. and this is how we are all to go, in some tragic preventable accident called peak oil.

did this fellow have a bug out bag? if only he made $14 per hour and could not afford to go snowmobiling he would still be alive!

should we mourn him more or less than some one in haiti? folks till suffering there. looks like tons of lifestyle reduction.

"it's all good"

ATV's, Snowmobiles, Dirt Bikes--
Mother nature has a way of cleansing the gene pool of pathogens.

Perhaps trekker. But as time passes I'm beginning to feel that the half life of stupidity is just too long.

My observations seem to confirm yours.

Whilst I'm no fan of jet skis, ATVs, snowmobiles and the like, these two men are likely leaving behind a partner or spouse, children and other love ones. I don't understand how any of us could derive satisfaction from their death.


Point well taken. Compassion is a thing that keeps us human.

ATVs, snowmobiles, cigarettes, bungie jumping, risky sex, peak oil, climate change, population overshoot and die-off, these things do not kill you.

Life is what kills you, and this is not preventable.

"Life is what kills you, and this is not preventable."

Pro Lifers will love that!

if only he made $14 per hour and could not afford to go snowmobiling he would still be alive!

The snowmobilers in my neck of the woods are generally working people (we don't have any rich folk -- they all live up in Vermont). It's sort of a right of passage for a kid to get his first "sled" around here -- usually a slower, smaller hand-me-down machine. I don't care for the things myself. I generally think that anything that makes that much racket and pollution ought to damn well produce something useful, but to each his own. Still, I can't help but wonder what the snowmobilers would think if they understood that they were burning the last hours of ancient sunlight.

They are actually essential travel machines for many northern communities, not toys.

That said, a GREAT many ski-doos (Western Maine Nickname) are surely used just for recreation.

Personally, I don't even generally XC Ski for fun.. I do it to get out to our cabin, to have access to snowbound places. THEN, being on skis is completely fun for me! Same for Bikes, Canoes, etc.. there is great joy in self-propulsion, and even in taking the right kinds of other transportation, as long as they are means to an end. They aren't the end themselves.

It seems Nevada has something to add to the world of electric vehicles:


A friend of mine had a small contract with one of the lithium mining firms and brought it to my attention. Also other rare minerals (gallium etc.)are mined here.

Maybe peak demand occurred in advance of peak oil, just as maybe Haitians reached peak demand for housing and since then it has been declining. In fact they can now get by with a simple plastic tarp, much the way the displaced from peak demand can now get by just fine in their Chevy Suburban.

So maybe high oil prices resulting from a plateau in oil production since late 04 wasn't the root cause for lowering oil demand in the developed countries, just as it wasn't the earthquake in Haiti that caused a sharp reduction in housing.

Sure, maybe there is no such thing as cause and effect. Maybe something can be thrown upwards and it will not fall. Sure, why not?

LOL I think Peak Demand is simply a politically correct way to say Peak Oil.

I mean if they really are worried about peak demand then lower the price of oil to 30 a barrel and see what happens. I suspect that peak demand will be shown to be a theory with no fundamental basis.

Of course Peak Oil theory suggests that once geologic production has peaked then oil production will be lower than fundamental demand resulting in higher prices and at least attempts at substitution. Indeed basic economic theory suggests that if the supply of any good and service is in short supply then prices will rise and substitution will happen. Given that Peak Demand is a natural result of Peak Oil how on earth can one claim Peak Oil did not happen ?

The only way is of course if we see steadily falling oil prices showing that the demand is really not there and the market is well supplied.

70+ a barrel simply is not cheap oil no matter what the pundits say.

Now what amazing is not this as it does not take a lot of thought to question the concept of peak demand.
Whats amazing is that this concept is being spewed in the MSM. This is in my opinion far more worrisome as if we had any sort of real independent press one would think peak demand would have as many skeptical articles as supporting ones. Its the rampant social engineering thats the issue not the facts.

A lot of crazy concepts are spewed forth by the media... I often wonder who is doing it, and why. Government propaganda? Corporate propaganda? Ignorant reporters?

I question whether peak oil will lead to rising prices, when I never questioned this before. What if the good in question (Oil...) is so vital to the economy that we just recess, depress, and get poorer without being able to support higher prices in the face of shortages? And production drops (more than geologically determined) because we can't afford/finance further/more expensive production? Or alternatives...

What if we see falling prices and global economic collapse?

So oil sits at $80/barrel and society slowly collapses and we all get poor...

Another issue: Gail mentioned yesterday that she thought the financial crisis, going forward, would prevent us from burning enough fossil fuels to cause the worst of climate change. My thought has been that the financial crisis - ongoing - will make AGW WORSE. Solar and nuclear and alternatives to FF's will get ever more expensive, while our poor societies will cut down forests, burn oil sands/shale, dig up all the coal, farm destructively, and do all the desperate things desperately poor people do... making AGW worse than in some sunny technocopian solar zero-point energy future.

LOL I think Peak Demand is simply a politically correct way to say Peak Oil.

Couldn't agree more memmel, especially by those institutions most in denial of peak oil.

Whats amazing is that this concept is being spewed in the MSM. This is in my opinion far more worrisome as if we had any sort of real independent press one would think peak demand would have as many skeptical articles as supporting ones. Its the rampant social engineering thats the issue not the facts.

It's as if the denialist still have the upper hand in deciding what MSM reports. Surely a strange form as you state of 'rampant social engineering'. A willingness by the most powerful in the news to report in a way that keeps the populace believing BAU will come back as the recession theoretically, yet unrealistically is expected to wane in the face of high oil prices.

Peak demand has a whole lot to do with peak credit, and that comes when oil supply is not rising fast enough. Once credit is cut back, people can't buy things, demand drops, and price drops. Maybe we can get a sawtooth effect, as a partial bounce back in demand takes place in the world, but if peak credit starts having major impacts on monetary systems, the result will not be good.

Gail, you have been pointing out how the economy goes into a stall once a certain price is reached. Call it peak demand or peak credit. I am wondering if you subscribe to the idea that some economies are able to function fairly well with say $80 oil and will continue to win out?

(So that OECD's, for instance, which cannot reconfigure themselves to the new price/availability/debt paradigm will continue to stagnate, thus allowing others to outbid them for resources)

IMO this way overall demand can still mirror HL decline while a 'fairly stable' high price forces 'prosperity' declines to be redistributed toward efficiency.

Gail, you have been pounding the drum for a while of how much a key is the role of money/credit in the peak oil/energy drama. It is finally starting to sink in to my thick noggin anyway. The close analogy, which has been noted many times before, is how enough food to feed 7B people is fairly easily produced each year, but famines or at least local shortfalls leading to starvation often happen because of money/credit issues. Same thing is going on in energy with some countries able to outbid others for the energy, even though some of these countries waste plenty of energy. There is likely 'enough' energy available to go around and I suspect, even as energy availability approaches true global shortage points, some will still have enough to squander while others starve.

Peak demand has a whole lot to do with peak credit


Whats credit used for i.e how is credit allocated ?

By far the vast majority of credit in existence is used to purchased long lasting fixed assets aka buildings or these same assets are used to secure credit. On top of this additional credit is granted for business based on cash flow and profits. On top of this unsecured credit lines for individuals are extended based on salaries from said companies.

Oil consumption certainly interacts with the world of credit. I.e you don't have cash so you use your credit card to purchase gasoline but the interaction between credit and oil is indirect.

Its fairly trivial to look at different regions with different credit availability and income levels and not that per capita oil consumption is not tightly correlated with credit. Its certainly correlated with longer term infrastructure aka roads and overall "wealth" on a broad basis. For example US consumers who generally have enough credit to purchase cars and roads to drive them on use more oil than a third world person.

But that has little to do with any short term flux in credit. Indeed looking at VMT which is a good measure of oil usage we find that after bottoming out its been rising.


Now as oil prices rose VMT flatlined then fell however again the relationship with peak credit is not simple.

For credit the number one issue is simple when credit is issues its paid back using a term agreement which splits the payment into principal and interest until the amount is paid off. Generally its a fixed payment based on the amount of credit extended.

Now if your facing both a credit bubble and rising prices for oil at some point you cannot expand debt indeed you face problems servicing your existing debt. Certainly you can conserve but if wages don't rise and prices for needed commodities such as food and oil rise then the price of oil is one factor contributing to peak debt. Not peak credit but peak debt as in servicing existing debt. Now this fairly naturally limits your ability to take on more debt and this coupled with rising defaults on existing debt results in peak credit.

Again looking at VMT the pattern seems to indicate that oil consumption was reduced to some sort of lower bound in fact below before rising again. This makes sense if oil consumption is closely coupled to the existing infrastructure. You can make some reduction but in the end your tied to the infrastructure.

Given that for most of the US the infrastructure is quite similar across the country then its not surprising that per capita oil consumption is not closely related to the large variations in income and thus associated credit in various regions. Indeed US household income varies from a low of around 20k to about 70k depending on the region while percapita consumption basically barely varies. Indeed its often lower in the higher income regions. Obviously someone making 70k has access to a lot more credit than someone making 20k and generally substantially more debt. The vast majority of that debt is in you guessed it housing.

Now one can consider price as the price of oil depends a lot on the elasticity of demand this depends on two things your ability to conserve which is determined in general by your infrastructure and your cash flow i.e how much income do you bring in a month. Eventually of course conservation is limited by the infrastructure when that limit is reached lets leave open except to say VMT suggests we are awfully close.

Of course the other side is cash flow at the extreme the wealthy i.e Bill Gates has effectively no limit on what he can pay for gasoline. At the other end is the guy working for minimum wage. Ignoring the super wealthy the amount you can pay depends on your wages and cost of living. Or your basic bills food,rent,utilities and debt payments. As the price of oil rises you have two basic choices you can lower your other living costs or conserve or of course both of course it also depend on changes in wages.

Now finally the price movement of oil itself depend on how much cash you have and how you allocate it. The more people are willing to allocate their income to purchasing gasoline the higher the price will go aka causing demand destruction where certain people are simply priced out and cannot allocate because they don't have the money. However thats not the only factor you can decide to reallocate your income to keep your gasoline usage constant despite rising prices.

Now we hit the critical point if you will. As gasoline prices rise at some point people have to decide if they are going to continue to pay their debt obligations. Sure if they rent they can choose cheaper housing however for many their debt and rent are the same because its a mortgage payment. And also for many selling is not a option as the mortgage is underwater.

The most probable outcome if you have falling house prices is people will default on their mortgage debt and as their credit rating falls or their lines of credit are used up default on revolving credit.

Now we get into a very direct relationship between oil and credit. If we face rising oil prices people have to make painful choices between using oil for daily life and maintaining their credit ratings and servicing debt.

In a large part the price of oil will depend on how this decision unfolds. Given most of the credit thats defaulted on is locked up in mortgages the impact of default is surprisingly little on the "real" economy.

The first round of defaults because of the combo of peak credit and oil certainly has a huge impact on housing construction but we are now well past that point. A further collapse of the housing industry esp new construction will simply have less and less a impact on overall oil usage. Certainly falling wages are a issue but invariably anyone that loses a job defaults on their debt. If they find another job the simply don't have the credit availability to expand debt.

Until this massive amount of outstanding debt is either paid off or defaulted on you have this constant interaction between rising oil prices and debt defaults.

For now at least it seems that this balance has resulted in oil reaching a price of around 70 a barrel which is quite high. If the supply is simply not there aka peak oil then there is really nothing keeping prices from rising as long as enough people are willng and able to default on debt so they can purchase gasoline.

Now whats really interesting is that once construction ceases further debt defaults have a smaller and smaller impact on the daily economy. Someone gets foreclosed on they rent a cheaper place and can buy gasoline. Job loss eventually leads to working somehow even if doing odd jobs this pushes personal fuel usage back up. Moving in with friends and family dramatically increases the cash flow available for food and gasoline.

Thus right at the peak you had a close coupling between credit and oil usage while people tried to hang in there and keep their credit but later on they steadily decouple as the consumer simply lives day to day without credit or debt. The effect of further defaults is concentrated in the top layers of our wealth classes amongst those that actually extended the credit aka banks, MBS losses etc.

The relationship steadily becomes one of continued credit defaults to continue daily life. Often increasing cash flow and allowing smaller cash purchases to be made out of savings.

Indeed we have seen a strong stabilization in all parts of the economy not linked to the need to take on massive debt outside of housing and cars things are basically ok.

Given that a fair precentage of people will choose the friends and family route for housing we also see falling rents and vacancies. The building crisis has extended to commercial real estate leading to falling rents for businesses all of this frees cash flow going forward.

Thus from now on out in general credit default will work to support peoples abilities to purchase gasoline even as the price rises.

This is very different from the original interaction where rising gasoline prices helped put a ceiling on credit and attempts to service credit in hopes of a short downturn cut consumption of gasoline.

Thus you end in the situation that the consumer now basically rejects buying anything that requires credit instead they live day to day and give up on home ownership preferring to rent as their incomes become variable and the rising price of gasoline steadily pushes out what they can afford for housing. And of course their tarnished credit records mean they can no longer buy regardless of income.

We can readily set in this loop for years or until most of the debt is defaulted on of course continued defaults will devalue our currency leading to higher oil prices and pressure on wages is non-existant as persistent high unemployment take hold etc etc. So other factors will eventually become important how fast is anyones guess.

And last but not least if we assume we have actually reached infrastructure based per capita consumption levels then gasoline demand will become rapidly inelastic i.e conservation will simply not help.

Given that most Americans have the out of defaulting on debt coupled with the intrinsic infrastructure issues I argue that the price of oil can go surprisingly high and we can and will pay for it.

We simply won't but houses and new cars. As we slow on buying new cars as we don't have credit the fleet fuel economy won't change much regardless of what overpriced EV's are offered for sale. Its literally a fight to the death. If you assume that the edifice somehow manages to continue then perhaps new infrastructure will be developed resulting in much lower per capita oil consumption and people will fundamentally move off of oil. However this is a very slow process and all the other factors seem to be much faster. Intrinsically the consumer can't get away with defaulting forever as eventually the country itself is forced to default on its obligations.

And one last thing obviously the economy moves rapidly back to cash this movement and the simple fact that expensive goods esp houses won't be bought means tax revenue will drop substantially. Falling wages will drive down income tax revenue. Our governments at all levels will face massive deficits. Pension plans unfunded etc.

If you look around then you will see that whats happening right now is rising defaults falling taxes and high oil prices that have no real intrinsic barrier keeping them from going much higher of course this leads to more defaults and devaluation of the currency and ever higher prices.

There are in my opinion no real constraints over the short term preventing this death spiral of default and currency devaluation and rising oil prices. Indeed sovereign defaults in other areas making the dollar a bit of safe haven is causing some short term reprieve. But its just a matter of time before all the fiat currencies start falling rapidly vs oil as intrinsic demand for oil and rejection of debt collapse the system.

There are in my opinion no real constraints over the short term preventing this death spiral of default and currency devaluation and rising oil prices. Indeed sovereign defaults in other areas making the dollar a bit of safe haven is causing some short term reprieve. But its just a matter of time before all the fiat currencies start falling rapidly vs oil as intrinsic demand for oil and rejection of debt collapse the system.

While topics such as "peak demand" appear in the MSM, the reality of the post peak oil decline in economic output has already set in - at least in the first world. The shock wave starting just as new year's 2008 arrived has indeed been significant and evidence is accumulating that the cycle of default and contraction will continue - although it can maybe put on hold temporarily, and even reversed for a few months, but not stopped. Possibly the US and the OECD will even have a repreive and experience growth in the first half of 2010 - mostly due to stable oil prices brought on by a minor Spring time uptick in OPEC output and a generally panicky atmosphere that has taken over the financial markets - that lead to distress sales of physical assets.

However at some point, people eventually figure that it is foolish to place great faith in paper money with no intrinsic value - when literally a trillion of new ones are being printed up in less than one year. It's not clear at what point the masses will quickly swing to worrying about 'deflation' to worrying about why they willingly would hold any fiat currency.

When that happens state and local governments will default and cut back more, as interest costs become impossibly high, and the Federal Reserve if not also the IMF will print up even more money.

Maybe it's time to get some sort of grip on the terms, the way philosophers do.

- Supply is the 'it' available at any given time. 'It' can be oil but doesn't have to be.

- Demand is the sccess to the means needed to possess and use the 'it'. The means is money or credit made available my some kind of economic activity.

- Consumption is 'it' that is actually made use of.

Demand is probably inelastic and is integrated with economic development and related expectations. These are set by marketing, television and peer pressure; general modernization such as the creation of 'icons' such as banks, high rise towers, expressways and parking garages as well as by available currency and claims mechanisms. Economic development promises higher wages and the possibility of means to acquire goods. Modernism is the 'style' which determines which goods are the most desirable. The level of demand relates to the level of overall economic development. Large amounts of consumer goods in markets is a key to demand as selling these kinds of goods - even in the underground or black market economies - provides the means to obtain both more goods and more means.

Demand is the mechanism by which drives fuel price bidding. In these kinds of auctions there is usually one winner and a multitude of losers, all of whom would have consumed the fuel in question had they not been outbid. In any event there is always a high and persistent level of demand. Demand is inelastic and is bounded by either by available supply or available means. (Hamilton)

The price is that which the market will bear - up to a point. High demand means consumption closely tracks production. Very high demand means a very high price even if the level of consumption is below that which might be suggested by consumption models or by inventories. In auctions, supply and demand are not mechanical, particularly if auction participants have methods to bring forward future demand and have the means to pay for those means. The implication of 'means- to- means' is that the market is highly derivative - both the presence and nature of derivatives amplifies demand. With derivatives, one bidder can act for multitudes.

There are also market dynamics that by themselves amplify demand in addition to the effects of derivatives. One outcome is that market bidders who do not win are nevertheless required to pay part of the winner's cost - as the price for participating in the market! This also effectively adds to demand.

If demand was declining as is suggested, the auction for fuel will have fewer participants and the price would decline, credit would flee the fuel markets for better returns elsewhere. There would be sufficient cash demand to gain the fuel and additional future demand would not be required. This would be the case even if the same amount of fuel was actually consumed in either high or low demand scenarios.

The difference is when supply is constrained. Demand becomes a credit/money phenomenon rather than an supply phenomenon. Any icrease in price requires adding credit to bring forward consumption, this increases demand and causes prices to rise further requiring the inpot of even more credit in a vicious cycle.

The current high price for oil and voracious demand for credit is one reason that credit markets all over the world are under severe stress.

Ultimately, it is the high real price of fuel - or anything else - that constrains demand. The real price is the productivity price of oil versus the productivity price of commerce leveraged from oil's use. Businesses and individuals do not profit much from direct fuel consumption. Returns on consumption speed directly to producers bypassing intermediaries who - in the past - profited far more from the commerce leveraged from fuel rather than from consumption of fuel itself. Keep in mind the supply and pricing structure of the petroleum industry was designed by John D. Rockefeller in the mid- to late 19th century to promote an expanding market for a good that had little function at the time. Rockefeller's aim was t keep prices low and the supply plentiful and convenient so that many businesses would use his fuels, earn profits and generate even more customers for his fuels. That model has been made obsolete by insatiable demand, the producers have gained almost complete control of the markets as a consequence. The intermediaries that remain are being squeezed ferociously; see the various Oil Drum articles about failing refiners, retailers and other fuel users. The declining money return on consumption - even when amplified by demand brought forward by cheap credit - means that the funds available to bid prices are shrinking. As Jevons has made clear, adding efficiencies into oil productivity simply amplifies the consumption that is brought forward shortening the time until energy use becomes unproductive, again.

All of this is evidence that peak oil actually took place sometime in the past. It is the marketplace actions of demand - not statements by bureaucrats or geologists - that indicates that oil is diminishing and that credit distortions are required to obtain it. Since the credit problems began in 2007 it is likely that oil on the market peaked some years before then, as the credit markets themselves would have required some years to construct institutional mechanisms necessary to make the credit available in the amounts needed. If five years were required to do this prior to 2007, the period of peak oil would then be some time before 2002.

Yes, Gail is absolutely right, the peak of demand is a matter of available credit. However that market aspect is also shifting and oil trading is becoming more of a cash business.

That third paragraph from the bottom:


Is HUGE. Thank you.

So what does that mean, in your opinion, about oil prices going forward? The state of the global economy, in the future?

Seamless transition? Doom?

Yes, Gail is absolutely right, the peak of demand is a matter of available credit. However that market aspect is also shifting and oil trading is becoming more of a cash business.

Wrong sorry very little credit is used in the oil industry from finding it till its finally burned as products.
Its always been a predominately cash and or at best short term credit business.

The use of credit and or stock sales by micro producers in the US means nothing on the global scale.
What credit is used is almost always fully backed by various production sharing agreements i.e as good as cash or closer to bonds than loans.

The credit markets and oil markets interact in the sense that rising oil prices reduce your ability to service debt as cash flow is diverted to purchasing oil products and can't be used to make debt payments.

Rising oil prices certainly constrain the growth of credit but the reverse is simply wrong as falling availability of credit does not imply falling oil prices. Cash flow problems including cash like short term credit like letters of credit and falling revenue again cash flow certainly impact your ability to purchase oil products.

Look at the nature of outstanding debt if credit was used to purchase significant quantities of oil then we would see a significant amount of debt associated with past purchases. Thats simply not the case in fact its the exact opposite a significant amount of Government Debt i.e Treasuries are bought with the CASH used to import oil. Its called the petrodollar.

I don't understand how the credit economy and extension of credit became linked with the oil economy and spending of cash for oil. Credit simply does not play a big role in any part of the oil economy.
By far its the larges cash business in the world in fact I'd suspect that most of our actual cash or hard money flows through the oil industry. If you could follow a dollar of real money or deposit money it invariably ends up being spent on either a oil product or food. This is not surprising given they are consumable commodities and once purchased are destroyed few people are going to extend significant amounts for credit for something thats consumed.

Probably the biggest place where credit in the traditional sense is used is in the shipping industry but this is for both tankers and other types of shipping. Next some refineries in some countries also use credit.


n the year 2009 till July 21, oil and gas companies worldwide raised $136.8 billion from the sale of corporate bonds, almost double the $76.4 billion raised in full-year 2008, according to UK-based financial data provider Dealogic. Since then, others including Malaysian state Petronas have joined the rush. Even if the trend slows down, the sector will see a record number and value of bond issues.

A whopping 136.8 billion in a industry thats immense simply sizing it based on the price of a barrel of oil
70*25GB = 1,750 billion dollars thats not including all the rest of the industry.
I don't know the size of the entire industry but guessing its around 4 trillion a year at least seems reasonable.

This puts the food industry which is of a similar scale at 4.8 trillion.

Cash flow into both these industries has a serious effect on the credit markets however again the reverse is not true in the sense that declining credit for other industries does not necessarily mean that the oil industry declines since this credit generally was not used to purchase oil.

Most of the world has little access to credit esp at the individual level yet global oil demand is robust.

However certainly credit played a huge role in expanding demand as it provided the means to build the houses and roads and cars etc that used oil. However falling credit means and end to expansion not necessarily a contraction everything thats been built will eventually be used even if its sold for pennies on the dollar. Credit losses don't have a huge impact on demand driven from existing infrastructure paid for or not.

Indeed as I keep saying its the exact opposite once defaults become widespread the increased cash flow actually increases the amount of income that can be spend on oil and food products that used to go to servicing debt. Without the expansion of credit yes growth ends however changes in existing consumption are a completely different issue and not tightly coupled to the credit markets.

Rising commodity prices pretty much ensure peak credit however falling credit availability does not have a simply relationship with commodity prices outside of the fact demand probably won't grow that much.

Credit = Growing commodity demands as infrastructure expand.
No Credit = Flat to slight rising commodity demand depending on population/existing infrastructure.

Finally if oil production is in decline one would expect to see rising oil prices as demand is effectively constant and supply is falling. The cash needed to bid for these rising prices is generally secured via default on debt obligations.

For countries outside the US where people don't have large amounts of debt and are already in a cash society the credit becomes concentrated in the National Government and the default is in the form of inflation of the currency. In many countries the national government is responsible for procuring oil and setting product prices often with a subsidy. Obviously they also have to acquire the dollars to purchase oil.

If your interested you should look into Pakistan for example where oil imports and government debt are tightly intertwined. All over Africa of course. Even in the US the relationship between importing oil and debt is quickly concentrated in outstanding government debt. The relationship between rising oil imports and rising government debt is surprisingly common globally across all types of economies. But obviously this is the last debt to default so until your country outright defaults and devalues your currency to zero oil consumption will probably remain fairly constant. However before this point is reached every country in the world will expand sovereign debt to buy food and oil until they can't.

But at this point whats the difference food and oil are money i.e the ability to import both if needed without debasing the currency sets the intrinsic value of the currency. If you have to steadily debase then your in your typical third world economy serially defaulting on debt. But thats as I said money itself thus its difficult to talk about fiat currencies and oil/food imports as distinct they are not.

One last thing if one looks at total outstanding debt of all types its not clear that its actually declined.
A tremendous amount of debt has been moved onto the balance sheets of governments but very little has actually been written down. Certainly a lot of this is simple outright accounting fraud with the valuation of assets.
But we have not really seen a significant contraction in overall debt indeed its probably actually expanded significantly again depending on how you do the accounting.

This practice of hiding debt via moving it to the governments balance sheet is of course highly inflationary vs imports of needed commodities and as I said a trick used by third world countries to maintain imports of food and oil to prevent collapse.

The collapse in the creation of new debt via the contraction in extending new credit is deflationary in the monetary sense and also of course deflationary in the economic sense but current oil demand is not driven by expansion of credit and again the certain default on existing debt regardless of the games you play is highly inflationary vs imports of vital commodities.

I mention this because one of the critical turning points I see looks like it might happen soon.
This is when China allows its currency to increase in value vs the dollar to lower its cost of import of raw materials despite its impact on exports.

Goldman Sachs Group Inc. Chief Economist Jim O’Neill said China may be poised to let its currency strengthen as much as 5 percent to slow the world’s fastest growing major economy.

My interpretation of this event is entirely different from most peoples. It signals that China is now concerned about commodity prices and imports and maintaining its internal economy at the expense of its exports. For me this is a HUGE signal that things are changing fast. If they do this they are giving themselves a 5% discount on all imports esp of course oil.

If I'm right and given the size of the Chinese economy then this will result in increasing the price of commodities in dollars which will prompt the Chinese to allow the value to increase even more if their focus is now on their internal economy. Obviously they will also be divesting of their dollar holdings which will devalue the dollar even further.

This could very well be the first shot in the new commodity war with economies forced to allow their currencies to float higher to support their economic zone and or devalue. In any case it will lead to a major divergence with the debt laden weaker economies forced into collapse and the stronger economies growing ever stronger.

If credit is not part of the problem, then please explain the huge USA trade deficit.

Does SA have a trade deficit?

No. Saudi Arabia's trade surplus with the U.S. came to $7.5 billion in 2008.

Thats my point actually.

Oil producers are flush with cash and have no need to access the credit markets.
Declining credit markets don't have a direct effect on the oil industry itself from the consumer all the way up as its a cash business. Just as well consider the effect of credit availability on the illicit drug industry same difference.

Now the second half your first statement this cash was created by running a trade imbalance. If we cannot expand this imbalance then we still have to pay cash for the oil. This means that you have to start defaulting on internal debt to free cash flow. But this gets directly into recycling of petrodollars through treasuries.

Regardless if our trade imbalances are trimmed nothing you can do but default and redirect cash flow to buy oil instead of paying debt. Of course this eventually means that interest rate rise as the default make our creditors less likely to buy treasuries and our export of dollars rapidly becomes highly inflationary as recycling slows.

This has actually already happened so its in the past tense. The dollar has already blown up. But its like GM shares that continued to trade for a few bucks after bankruptcy the shear size of the flow has slowed the rate at which dollars have been revalued. Certainly a big part of this is the CB's actively trying to avert the realization that the petrodollar has already collapsed. And of course in the magical world of fiat currency if the dollar has collapsed all the other currencies also collapsed thus since all have no value they have value simply because of lack of replacement. Commodities are a prime candidate to rapidly replace these collapsed fiat currencies.

Underlying this of course is the simple fact that commodity producers are flush with cash and don't need credit therefore as credit dries up and collapses they can still demand cash and more of it as the real values of the fiat currencies are exposed which is close to zero.

Memmel, all money is credit, even 'cash' currency is credit. If you have ten dollars in your pocket you owe someone ten dollars worth of production of some kind or other. The more money you have the more you owe.

Wealth is a big problem for productive economies as it represents a large amount of unpayable debt. Successful entrepreneurs are effectively massive deadbeats: the more wealth they amass, the more purchasing power is removed from their economies.

Willem Buiter wrote an interesting blog piece describing gold as another form of fiat money and of course he's right.

The 'effect' of credit is renting purchasing power - what someone owes - from the future.

Credit is at the center of our current crisis because without it we would be experiencing very sharp energy shortages. This is why people cannot tell we are having an energy crisis. We can only see the distortions in the credit markets as banks fail and loans go bad. 'Cheap' money is allowing oil to be purchased even at the current high price. Of course, the cheap money drives the price higher at the same time.

When people talk about the value of something like oil or the 'cost of oil' or the 'price of oil' they are talking about the value of future work that they agree to lend in exchange for that oil. The core of the crisis is that any work done with the oil - money debt - is not worth as much as the price of the oil itself.

The debt exists regardless of the form of the transaction.

(EDIT) When I remarked the oil market is shifting from credit to cash I mean the ability to pull demand forward by means of credit is diminishing. This will lead to declining dollar prices for oil. Oil is likely become quite cheap in dollars ... but getting the dollars might be almost impossible. Read more about this @ Automatic Earth/Stoneleigh.

The dollar price of crude will depend to a large degree on the quality of Chinese dollar reserves. Sharply declining crude prices will suggest that Chinese dollar reserves are overstated.

Memmel, all money is credit, even 'cash' currency is credit. If you have ten dollars in your pocket you owe someone ten dollars worth of production of some kind or other. The more money you have the more you owe.Memmel, all money is credit, even 'cash' currency is credit. If you have ten dollars in your pocket you owe someone ten dollars worth of production of some kind or other. The more money you have the more you owe.

Look the easiest way to determine if a fiat dollar is cash or debt is to see if your paying interest or getting interest.

If your getting interest then its money if your paying interest then its debt. And of course the interest itself is money or cash assuming of course you did not borrow to pay that.

Now on top of that if you have fractional reserve lending the interest bearing loan is money as long as its repaid i.e the principal is money only if it defaults does the money supply shrink.

In effect with fractional reserve lending a lot of the money supply is in a gray area as it acts like cash until it does not in the case of default.

But if you go with this definition its not all that hard to understand money vs debt. The fact we have throughly mixed up our used of debt with "cash" or real money leads to all kinds of problems.

However if one considers the case of a non-fiat loan one can see this definition still holds. If I loan you 10 oz's of gold as a loan and you default on the loan then I'm out X oz of gold and need to debit my account.
In the case of a fixed or gold backed currency obviously the value of the currency increases over time if the economy is expanding thus your basically looking at a loan with constantly rising interest rates in real terms. If I bought a house for 10 gold pieces then by the time I pay it off its worth 9 gold pieces as the currency has gained in value plus I paid say 5 gold pieces in interest plus 1 more because of the increased value of the money. In a non fiat world this effect of intrinsically increasing interest for loans is what makes them so nasty.

When I remarked the oil market is shifting from credit to cash I mean the ability to pull demand forward by means of credit is diminishing. This will lead to declining dollar prices for oil. Oil is likely become quite cheap in dollars ... but getting the dollars might be almost impossible. Read more about this @ Automatic Earth/Stoneleigh.

And I'll repeat you guys are completely wrong. There is no shortage of dollars they can be created in infinite quantities. They are not a natural resource with supply limits. The claim that credit pulls demand forward simply has zero proof. Its easy enough to look at food as and example credit does not pull forward demand for wheat nor does lack of credit. The demand for wheat is tied to the number of people. Oil works in a similar fashion with demand tied to population. Now credit certainly allows the creation of new infrastructure that increases the per capita demand for oil but if it dries up it does not magically lower existing demand. It means demand does not expand obviously if new infrastructure is not built.

The reason your wrong is that your assuming that once the credit declines the "pulled forward" demand declines why should it ???? Roads are roads houses are houses it does not matter if they are built using cash or credit nor does it matter what value is attached to them. Once they are created then the oil demand results from their use not the bankers balance sheet attached to the asset.

The argument is thus fatally flawed because its assuming that the demand created by the extension of credit declines as debt is defaulted on and credit is contracted. Thats not they way it works. Regardless of the use of cash or credit once infrastructure is created and cars are built they exist until they wear out.

As and example consider say a corvette bought by a mortgage broker you goes bankrupt the corvette is repossessed and sold at auction eventually say to the son of a banker. The corvette is still driven and uses exactly the same amount of gasoline as if the broker had driven it. The credit event at best causes a slight pause in consumption.

Also since oil demand is intrinsically related to simple geometry as newer infrastructure is built you see a maxima in demand. Think of a expanding circle esp one that contains smaller interior circles. As the overall circle expands the inclusion of new areas results in a slower and slower increase in the distance from the center vs the area included and new centers form. In short few drive more than 10-20 miles in the US.
The exception of course are some of the coastal regions which expanded farther down the coast. But even these areas reach a maxim for average distance driven. Absolute population increases thus play a increasingly larger role.

Regardless I think that a lot of people are making some serious mistakes and not understanding the interaction of credit with the "real" oil burning daily economy. Your best bet is to drop your ideas go back and look at food demand and how food works and water. Oil is the same sort of fundamental commodity these days. The only real variation is it takes investment in infrastructure to allow oil demand to reach a certain level. But this same sort of infrastructure investment is also present in the modern food industry so even here the differences are minimal.

Rather obviously outside of some minor flux food is related to the population level. Wealthier nations of course consume more per capita i.e they eat meat instead of grain have a more varied diet etc etc but the physical amount of food consumed is directly related to the number of people.

This is the important tie for both food and oil. Since they are actually closely bound to population levels people that don't recognize this make tremendous blunders esp in claims consumption can decline if credit declines. Oil consumption can't decline any more than food consumption can. Obviously there is excess i.e you can eat less meat but only to a point same for oil.

Finally its again important however to recognize that once credit is rejected in favor of conserving cash flow to purchase oil and food its obvious that default actually works to buffer demand on the down side where people that don't have credit to default on and already spend cash on oil have a lot smaller buffer.

Defaulting on debt thus works to increase the amount of cash that can be spent purchasing oil. Its only at the peak of credit where the economy tries to not default and conserves on fundamentals such as food and oil that you find consumption declining. Once this event is over then it literally reverses with defaults ensuring purchasing power for food and oil remains even as expansion stops.

And I'll repeat you guys are completely wrong. There is no shortage of dollars they can be created in infinite quantities.

First, this is true only in theory and on Fox news: that money can be created in infinite quantities. In reality, creating infinite or even large amounts of money is counterproductive. Those who have the largest amounts of money will not accept it - and won't allow it.

Note all the talk about inflation among economists and from hawks on the FOMC. The outcome is a factual shrinkage of the money supply - courtesy of the Saudi's dollar/oil peg - which requires some rationalization from the ideologues. Saudia will not accept dilution of their cash flow and they have taken steps to insure it. Because the Saudis understand peak oil and we refuse to, they understand what we need oil at any given time more than they need dollars.

For Saudia, less is more!

Money creation is dependent on both ideology and use. Any increase in the use of money - and the greater variety of goods - results in an increase in the money supply. Right now, both the variety of available goods and velocity is shrinking. You may think I am wrong, but poll your friends and neighbors and ask local realtors about house prices. Your friends and neighbors will universally have little money or "No money at all!". House prices will be declining. There is simply no infinite amount of money ... anywhere.

Second, having very large amounts of money does not change relationships between creditors - those who distribute money - and borrowers for very long. A house always costs more than a loaf of bread and a banker is always worth more than a school teacher, regardless of how many zeros are at the end of the respective price tags. When bread is worth more than a house then the money system has broken down completely.

Third, the point that I (and Gail) are making is that the use of credit has allowed purchasing power to be brought forward in order for people - with access to money/credit - to pay higher prices for energy than they otherwise would be able to do. There is no other way to explain the high price of oil in an ongoing contraction. Because of this fact, the various oil producers are supporting the US credit system in ways certain to guarantee the flow of future dollars into their cash registers.

They are also making sure there is no 'infinite supply' of currency which would diminish the value of that which they already hold. The producers have taken our economy hostage. The Federal Reserve's threat to bomb the economy with dollars is rhetoric. There is no intention to do so on the Fed's part and is likely impossible even if it was attempted. Inflation is more a matter of velocity than currency creation. Excess currency created is swept into private hands by liquidity traps that prevent the funds from leaking into the hands of the public.

I agree, there are forms of credit - currency, interest rate and cash flow swaps that exist in monumental amounts reaching tens or hundreds of trillions of dollars - that cannot be exchanged for oil in ordinary business. Nevertheless, the entire money supply of the world is lent into existence with the mutual - if winking - understanding that production will be done with the oil which will result in the retirement of that debt.

One reason for the oil embargo in 1973 was the displeasure of the sheiks at their inability to swap their oil for gold via the Bretton Woods Agreement. President Nixon closed the gold window of the Treasury in August of 1971. Having a large stash of gold proved problematic to the sheiks because it needed to be traded for something else in order to return value. The questions became, 'what something else?" and, "What value?" Had the gold been more valuable than the 'something else' then that particular trade would have been a loss. Had the gold been less valuable, the initial trade for gold would have been a loser.

As it was, the Saudis realized the gold hoard was a mistake and traded gold and dollars for US military equipment - which was the greatest of all possible mistakes! It was a complete dead loss to the Saudis and wound up reducing their security. An arms race heated up in he Middle East involving Saudia, Egypt, Iran, Iraq and Israel. The consequence has been a long sequence of ruinous wars. The sheiks should have thrown their gold into the ocean, instead.

Interest rates, fractional lending and quantity of money are not germane to this conversation. In fact, it's probably best to steer clear of these topics as they are the redoubt of ideologues and demagogues who do not understand economics but know how to rile people up with scary articles and misleading information.

Times are scary enough, thank you!


Third, the point that I (and Gail) are making is that the use of credit has allowed purchasing power to be brought forward in order for people - with access to money/credit - to pay higher prices for energy than they otherwise would be able to do. There is no other way to explain the high price of oil in an ongoing contraction. Because of this fact, the various oil producers are supporting the US credit system in ways certain guarantees the flow of future dollars into their cash registers.

Completely and utterly wrong. Gail and you have blown it completely on this. Again extension of credit allows the infrastructure to expand faster growing demand however contraction of credit does not shrink the demand the roads are not pulled up and the houses torn down etc because the credit is no longer available. Certainly the rate of growth slows substantially but thats not the same as contraction. And yes there is a temporary and fleeting period where attempts to cut costs are made in order to service debt. The example is eating ramen noodles to make the mortgage payment however this soon subsides and the debt is defaulted on.

The problem is neither you nor Gail have bothered to do your homework on oil demand therefore its not surprising your clueless on the subject. I have and the results are what I'm saying. I urge you to go study the pattern of oil demand in the Rust Belt as the regional economy collapsed. Of course the results are trivial to find Toledo uses effectively the same amount of oil per capita as Houston. One city benefited from the rising prices for oil one did not.

I think some of this StateMaster data is bogus but regardless the general trend is clear.

I.e not much of a trend despite major regional variation in income and credit availability.

Memmel, you are confusing demand and consumption. Consumption has to be paid for. Demand merely has to be wished for.

I don't know what your overall argument is. If you are arguing that there is no slacking in demand, we have no argument. Anyone who understands peak oil will not accept peak demand.

If you are arguing that credit has nothing to do with consumption then you don't understand money.

If you are arguing that credit has nothing to do with consumption then you don't understand money.

Someone does not understand that for sure.
I've not said credit does not have anything to do with consumption simply that the relationship between credit and consumption is not a simple case of declining credit availability leading to falling consumption.
Thats the claim thats being made and its wrong. The relationship is not that simple.

The reason is oil consumption and the paying of debts compete for cash flow and the relationship is at the cash flow level. With your monthly pay check if you will you have to pay for existing debt and for food and gasoline etc. Given a certain type of infrastructure their is a basic level of gasoline usage thats difficult to eliminate. More important however is the decision on how you allocate your cash flow or monthly check if you can no longer cover all your bills. You default on debt. The key point is that as long as the debt exists defaulting on it improves your current cash flow situation at the expense of the ability to procure more credit. I.e all this borrowing forward that expanded consumption to the level it is at today is resolved via default. Thus via default your able to maintain your present level of consumption by simply giving up the ability to borrow forward in the future. Next since a lot of this debt is associated with building both private and public as the default rate grows the values of the buildings decline as they are sold at a loss the asking rents for the structures declines. Thus via default your force one of the biggest outstanding costs or debts down which is the cost of shelter. Not only do you win via increased cash flow by defaulting you also make nominal gains in cash flow from falling rents. This is true in other areas also as overall credit contract the production capacity does not contract as fast and prices for goods and services start to fall underlying this of course is the same process of defaulting on debt.

Its all about cash flow as the linkage between debt and food and oil is at the cash flow level.

Another way to look at it is that debtors create their own jubilee if forced into a corner.

This is why I think peak oil is not mainstream as the result is self evident. If we are post peak and production is declining and I'm correct that demand is generally flat then that ensures that all outstanding
debt will be defaulted on as the price of oil rises. Nothing will stop this from happening. Given the nature of our currencies this means of course that at some point the monetary system itself collapses.

The paradox is of course that the large amount of outstanding debt that exists also consumes a lot of the daily cash flow to service thus default acts to buffer demand for basics such as oil and food. Thus peak credit if you will is simply a side effect of the allocation of more and more of our daily cash flow to necessities. Not only does not not mean demand will contract but its a signal that demand has reached its minimum and that from now on out vicious default will be used to free cash flow to purchase oil. Just as expansion of credit increased oil consumption on the front side contraction of credit via default ensures it won't decline for some time on the backside. Of course you never actually make it to the point where default has removed all debt and cash flow can no longer cover costs at least with our monetary system as it collapses at some point during this down cycle because of its nature.

How to put this ...

Credit is and interesting beast as the debtor can borrow twice if you will once to increase his standard of living and borrow forward as you put it. However he wins again if he is willing to forego future access t credit over the short term via defaulting and freeing up the cash flow that was being used to pay debts.

Heck look at Greece they are now in this situation. It does not matter if they practice austerity measures and pay their debt or default either way they don't get any more credit. The debtor of course makes the sensible choice and defaults since he is confident that eventually the creditors will come back and renew lending. For Greece its the same outcome either way. However via default they are assured that they can eventually secure credit on their terms in the future. The point is all this borrowing from the future is in the end simply notational not real. When the choice comes down to supporting this notational concept of debt or living your day to day life then the notational debt goes out the window.

Only right at the peak when you attempt to continue to service debt and daily expenses does debt briefly win after that it loses all the way down. Thus the argument that peak credit will result in falling demand for oil is not only wrong the inverse is actually the truth continued credit contraction ensures that demand for oil won't contract. Not that it will expand but contraction is not going to happen anytime soon as default actually supports oil demand via increasing cash flow.

I have been wondering, like the rest of you, where oil prices would go in the near future. My leanings were that they would go nowhere but up. The one big if is how will the increasingly more common heavy oil/crude, oil sands, etc. affect the price of oil.

In the past few months, refineries in the US have been shutting down and I have been lead to believe it was due to over capacity? Yesterday, there was this article in the Drumbeat, which suggests certain instabilities in European refineries.

With oil/barrel prices stalled between $70-80 and refineries seemingly having issues with refining heavy crude, is it possible that the price of oil per barrel of a heavier available crude could go down and the cost of refining that heavier crude would push pump prices up? If so, would the frame around this issue have to be slightly or largely changed to accomodate prices going in opposite directions at the same time?

Nic in Van.

Or perhaps oil importing OECD countries are seeing a long term drop in demand, as they are effectively outbid for oil exports by developing non-OECD countries. IMO, oil importing countries like the US probably look forward to consuming a declining share of a falling volume of global net oil exports.

Monthly Chinese oil imports for the month of January rose 33% YOY


China was building its own refineries to create downstream cash flow. India has been increasing refinery capacity. When Europeans will begin to realize carbon caps increase the cost of using oil and increases factory operating costs, they might need to close more gas stations and factories. Steel mills, electric utilities, refineries, and plastics industries are carbon intensive. Automakers and manufacturers need cheap steel, electricity, and transport for their supply and distribution networks. Consumers would rather buy Asian imports from factories using high energy, low cost fuels as inputs.

There is a lot of misleading information about China lately. Recent monetary moves this last week are intended to slow the economy down from overheating - as credit expansion has defied efforts over the last few months to keep growth from getting out of hand, which could eventually lead to morer easily some kind of economic bust. Many pessimists have said that these moves mean that China's growth will be slowing. No, it means that China's growth was faster than generally expected.

While I agree completely in the longer term (10 to 20 years) peak energy may have a more devastating effect on China, than say the US, in the 2010s China as well as India and OPEC will continue to soak up any and all of the drop in OECD demand - and then some. With the recent fall in the pice of oil to slightly below the low end of the first quarter 2010 range I predicted ($75 to $85), China and others may be poised for slightly higher increases in oil demand than expected by the EIA and IEA (even considering the increase in demand forecasts they made last week).

China concentrated on industrial espionage. There were reports of anager's computers being seized at Chinese internaitonal airports and the hard drives copied. There have been sporadic reports of the Chinese hacking foreign company and govt. computers. There were reports that once you open a factory in China, a duplicate type of operation might open down the street. China is keen on making profits. Little else matters. It is the bottom line that counts. Can you produce, or are you only an expense?

Interesting. Are you commenting from China now?

'China is keen on making profits. Little else matters. It is the bottom line that counts.'

Why are you singling out China with such sweeping pronouncements? That applies to the whole Econ. system.

China is keen on making profits. Little else matters.

Absolutely. Unlike the well known common good approach of Wall St.

Wall St. was not given authority to create taxes, levy fines, or print money. They had to decide if the public would willingly buy their products at a price that would justify production.

Right. Just ask Bernie Madoff.

Wall St. was not given authority to create taxes, levy fines, or print money.

Well, that's why they decided to buy the government.

In Patrick Henry's time there was a problem as the Anglican church officials were guaranteed an income by the British government. The Parsons went to the King of England's court to demand more money from the American Colonials. Patrick Henry argued: "What about the parsons? he asked. Were they feeding the hungry and clothing the naked as the Scriptures told them to? No, he said. They were getting the king’s permission to grab the last hoecake from the honest farmer, to take the milk cow from the poor widow.”

The US constitution freed us from religious taxes, but allowed for freedom of religion and voluntary collection of offerings and tithes by the willing. This country has a long history of opposing unfair programs.

Infrastructure story:

Bursting Pipes Lead to a Legal Battle

State and local governments across the country may have to replace their water systems because of defective pipes, according to a whistle-blower lawsuit unsealed this week.

The whistle-blower, John Hendrix, accuses his former employer, one of the world’s largest pipe manufacturers, of falsifying test results about the quality of its products. Pipes that should last 50 years are in some cases rupturing in their very first year, according to Mr. Hendrix and some state documents. This can lead to explosions, leaks, fires and other dangers.

And this one of several stories that have appeared recently about how the recession isn't affecting people equally:

Spending Less in a Recession, and Talking About It, Too

The Depression was viewed more as something akin to a natural disaster, with no clear-cut villains, Professor Violante said. “Now there’s a very strong sense that a few bad guys caused this mess — bankers and financiers — and got out of it without too much pain, and some good guys — the general public — are paying the price.”

In addition, while income inequality was high before the Depression, during the 1930s and 1940s it compressed radically, Professor Conley said. The extremes of wealth and poverty didn’t begin again until the 1970s and only reached pre-Depression heights in 2007.

Despite the news stories about rich bankers losing their jobs, the fact is that few of the wealthy are unemployed. The unemployment rate among those earning $150,000 or more is only 3.2%. While the lowest earners are suffering a 30.8% unemployment rate.

In Toledo, OH, one in four people is under the poverty line.

But I guess this is something we have to get used to, if we're becoming a third world nation.

That Bursting Pipe post could be quite an issue. It seems like a huge part of the cost of replacing water pipes is moving all of the dirt necessary to pull up the old pipes and put new pipes in. I am sure this uses diesel powered equipment.

I know the City of Atlanta (ex suburbs) is one of the places that has been replacing 50 year old pipe--I don't know if it is from this supplier. I expect that the others replacing pipe are relatively old cities as well. I expect these cities are not going to be in financial position to replace the pipe without some kind of insurance award. Such an award (if it comes at all) is likely to take years. It is also hard to believe that there would be enough coverage for the whole mess--policy limits are generally not all that high. Also, I would wonder if the net worth of JM Eagle would be much in comparison.

Gail, my training in civil engineering compels me to discuss water and sewer pipes in the UnCrash Course. I go out of the way to point out that infrastructure breakdowns will outpace our ability to refurbish or replace said infrastructure. Essentially, we have two waves of pipes coming due for replacement, those that last 100 years and were placed at the beginning of the last century (iron) and those placed just after WWII, which have a 50 to 60 year lifespan. Without lots of cash, those pipes will not be replaced or relined or even if they are we can expect numerous waterless days from municipal systems in the mid-term.

Now there are faulty materials to contend with. Oi, vey.

Makes me wonder if we are going to get the extra 20 years from all those nuclear operating license extensions....

Thank you Leanan, pretty sobering.

Years ago they made polybutylene pipes to put in homes. The plastic pipes did not rust and did not require soldering. After a while the fittings started to break and there were millions of dollars worth of lawsuits. They do not use polybutylene much anymore.

Bill Gates: We need global 'energy miracles'

Gates called climate change the world's most vexing problem, and added that finding a cheap and clean energy source is more important than creating new vaccines and improving farming techniques, causes into which he has invested billion of dollars


Bill Gates has gained a better understanding of energy issues after spending some time with Vaclav Smil recently.

There's some discussion of this story in yesterday's DrumBeat.

I missed it. Thanks, Jim.

Gates on batteries: "So, in fact, we need a big breakthrough here. Something that's going to be of a factor of 100 better than what we have now."

Yes, William, it's a wonder nobody else thought of that. Well done. Here, let me give you the web address of some guys doing wonders in this area.

Hmmm, was that the wrong link?

If he could wish for anything in the world, Gates said he would not pick the next 50 years' worth of presidents or wish for a miracle vaccine.

He would choose energy that is half as expensive as coal and doesn't warm the planet.

He seems disturbingly unrealistic, for someone in control of so much money. I wonder if he is representative of the wealthy in general.

I know that Smil has a pretty good handle on much of this stuff discussed on TOD. He recently spent time with Gates and was recently featured on Gates website. http://www.thegatesnotes.com/Learning/article.aspx?ID=25
It could be helpful if Gates understands our energy situation and gives it some attention.

Bill Gates is not a scientist, so he is not constrained to the realm of the possible.


Here's more on the TerraPower reactor that Gates is discussing.

I spent an hour on Google looking into the Traveling Wave Breeder Reactor. I'd still like to see more details, but it appears to have a good fuel story, which is my primary concern about new nukes.

Unfortunately, it doesn't sound like there are any testbeds operating yet, so it's still very, very early. It's been reported that Gates talked at TED about a 20 year development cycle, followed by 20 more years to deploy. As I subscribe to the 2005 peak observation, and since I've read the Hirsch report, I see it as just 45 years too late.

Still, if Gates wants to foot the development costs...

Anyway, my biggest concern is that Gates, with his history of being stunningly successful in software, may have left an impression in the 1500 movers and shakers attending TED (at $6000 / seat) that he's got the answer to the energy problem in hand.

Europe faces rising power costs and new electric capacity builds constrained by regulation:


That story is two years old.

Britain was warned to prepare for a wave of coal and nuclear power plant closures and rising utility bills in an article published earlier this month. If they are forced to abandon natural gas due to its high carbon content their lot in life may not improve, but only worsen.