Will 2011 be a rerun of 2008? (Longer version)

An article similar to this ran in ASPO-USA's December 20, 2010 newsletter. I call this one "longer version" to distinguish it from the "two-graph" version that ran in the newsletter.

We all remember the oil price run-up (and run back down) of 2008. Now, with prices similar to where they were in the fall of 2007, the question quite naturally arises as to whether we are headed for another similar scenario.

Of course, we know that the scenario cannot really be the same. World economies are now much weaker than in late 2007. Several countries are having problems with debt, even with oil at its current price. If the oil price rises by $20 or $30 or $40 barrel, we can be pretty sure that those countries will be in much worse financial condition. And while governments have learned to deal with collapsing banks, citizens have a “been there, done that” attitude. They may not be as willing to bail out banks that seem to be contributing to the problems of the day.

If we look back at what happened three years ago, there was a huge run up in the price of oil, but very little change in oil supply.

Figure 1. Production of oil (crude and condensate) for OPEC and Non-OPEC countries, compared to West Texas intermediate oil price, in September 2010$. Based on EIA data.

Oil price roughly corresponded to today’s price in October 2007. Between then and July 2008 (the peak in both prices and production), OPEC increased its oil supply by 1.3 million barrels. Non-OPEC actually decreased its supply by about 0.3 million barrels a day between October 2007 and July 2008, providing a net increase in oil supply of only about 1 million barrels a day, despite the huge run-up in prices.

It can be seen from the above graph that the supply of OPEC oil has tended to increase, as oil prices increase. Non-OPEC supply has been much less responsive to price. This is another way of graphing the relationship between oil price and oil production:

Figure 2. Relationship of oil production (crude and condensate) and West Texas Intermediate price, expressed in September 2010 $, based on monthly EIA data from January 2001 through September 2010.

In Figure 2, as oil price increases along the horizontal axis, we see that non-OPEC oil production remains virtually flat. As oil price increases for the OPEC 12, we see the kind of supply curve we might expect to see for a supplier that has a small amount of more expensive capacity that it can put on line when prices justify it. The catch is that the amount of supply added as prices rise isn’t really very much–as we just saw, 1.3 million barrels a day, between October 2007 and July 2008.

Eventually, the economy could not handle the high oil prices, and prices dropped. Credit availability began dropping and recession became a greater and greater issue.

Will this time be different? It seems to me that OPEC has done a good job of convincing the world that it has a lot of extra supply, but it is less than clear that it has much more excess capacity than it had in the 2007-2008 period. OPEC shows this image on its website, but this may just be a long-standing approach aimed at convincing the world that it has more oil (and power) than it really does.

Figure 3. OPEC’s view of its own spare capacity.

Spare capacity, like oil reserves, is not audited. The higher the numbers proclaimed to the world, the more powerful OPEC appears, both in the eyes of its own people, and in the eyes of people around the world. OPEC shows lists of new projects and investment amounts, but it is not clear that the new capacity being added is more than what is needed to offset declines in other fields. The new production amounts listed (shown separately by country--this is the one for Saudi Arabia) come to something like 6% of production – this could simply represent offsets to declines in fields elsewhere. The problem is we really don’t know, because no auditing is ever done. We are just expected to trust Saudi Arabia and OPEC on a matter of importance to the world.

OPEC tells us it is acting as a cartel, but when a person looks closely at the data, only three countries appear to be pumping at less than full capacity: Saudi Arabia, United Arab Emirates, and Kuwait. Production rises and falls with price for these countries. It is not all that difficult to coordinate the activities of three countries, especially when one of them–Saudi Arabia–is doing most of the adjustment to oil supply. So all of OPEC’s marvelous abilities may not be all that marvelous. If Saudi Arabia knows it can sell oil it withholds from the market at a higher price later, it is not a bad move to hold a bit of oil off the market, and claim that the amount being held off the market is much higher.

In the next year, there is a significant chance that oil demand may rise. While oil supplies are at this point adequate, if demand continues to grow, we could very well see another surge in oil prices, and another test as to whether there really is spare capacity. If the supply curves shown in Figure 2 are any indication, we won’t be getting much more oil, perhaps another 1.5 million barrels a day, even if prices spike.

The one possibility that would seem to postpone such a price run-up is if world economies in the very near term start heading into major recession. Such a recession might indicate that even the current oil price is too high for economies to handle, in their weakened state.

I believe the limit on how much oil will be supplied is not the amount of oil in the ground; rather the limit is how high a price economies can afford. This in turn is tied to the true value of the oil to society–whether oil can really be used to produce goods and services to justify its price. The problems we experienced in 2008, and may experience in the not-to-distant future, suggest that we may be reaching this limit.

Originally posted on Our Finite World.

There is one economy that seems to thrive with high oil prices, namely China. They continue to increase their imports yearly no matter what the price. In Darwinian terms we are going to have survival of the fittest in a war for the oil that is left.

I think what they have done, by running huge trade surpluses year after year, is cornered the world's supply of dollars and translated that into a flow of oil (at least what is left of it). Since they have converted all of those dollars into treasuries, they have effectively created a never ending supply of oil, as our federal reserve prints money, it ends up in China, either through the trade surplus, or direct payments from our treasury. As the flow of money continues to divert oil supplies into China, it will drive the price higher and higher, making it more unaffordable for the rest of the word. If the price of oil goes down, it helps china, if it goes up, it helps them as well, this is a cycle that can only end badly for anyone outside of China.

Any way you look at it, there is about to be a tremedous redistribution of wealth in this world.

There is one economy that seems to thrive with high oil prices, namely China. They continue to increase their imports yearly no matter what the price.

Thats because they increase their money/credit supply faster than we do. I.e. the 'affordability' of the oil is not organic.

There is no free lunch, but many gaming the system can and do eat early..

Another thing about China is that they don't use much oil. Instead, they use a lot of coal, and they have been ramping up coal usage greatly. So their total energy usage has been growing greatly. Even their oil use has been growing, because they have been able to import more and more (with increased money/credit and with all of their exports, that depend a lot on coal).

Coal only generates electricity. China still needs oil for transportation, diesel, and manufacturing involving plastics etc. It's just that they don't have a large car based middle class. It is not true to say they use coal in the place of oil.

There are some substitutions that can be made--electric bicycles for cars, for example. China seems to have at least some electric passenger trains, as well.

All new trains and train lines being built these days are electric, without exceptions (to my knowledge)
And indeed China is building quite a few of them (much more than a few actually)

Thats because they increase their money/credit supply faster than we do

Nate, could you expand on that? What are the mechanics of the expansion of money that you have in mind?

As best I can tell, China's economy is expanding because their economy is immature, and it's partly a command economy. OTOH, the US's economy is mature and more decentralized, which means that when people get scared, it's easy for the economy to slow down.

I'm assuming, Nate, that you are saying that China increases their money supply relative to their GDP at a faster rate than the US grows its money/credit supply relative to its GDP. It would seem growing the money/credit supply quickly would devalue the currency some. That of course would make oil more expensive. This is not a problem if increased cost for oil is dwarfed by real increases in the GDP brought about by importing that more costly oil. It all kind of makes my head spin, and it does that enough already naturally (after I used concrete as a headrestraint--but hey no whiplash).

China is not alone in showing increasing oil consumption--at the end of this decade versus the late Nineties--against a long term increase in oil prices:

How do you think China is getting more oil, when the supply for the U.S. and India, seem to be stunted by the high prices?

See my reply above. Also, what little oil they are using ends up disproportionately benefiting the manufacturing and distribution of goods that can be sold to others, rather than discretionary use (visiting relatives, for example). The additional cash from the goods sale makes it easier to buy imports.

Do you have data to support this?

China now has 60m cars on the road with 12-18m (depending on the source) new added each year. Even if they drive half the miles that US drivers travel, it is starting to have a significant effect.

Remember that China's middle class population is almost as large as the entire US population. They also now have a national highway system that rivals the US system.

The Chinese don't display the same usage patterns as Americans. They don't buy huge SUV's to commute to work every day, and they don't live on 2-acre lots in vast sprawling suburbs.

They don't drive because e.g. their job is 20 miles in one direction, the shopping center is 20 miles in the other direction, and there is no public transit - which is the motivation behind a lot of US driving.

In China the job will be within bicycling distance, the shopping will be within walking distance, and there will be public transit, including high-speed rail to other cities. When they do drive somewhere, it is because it is difficult to get to by bicycle or high-speed train, and when they go, they usually take as many people in the car as they can, not just themselves. However, because driving is a rare thing for most car owners, it is something they can afford to do when they want to.

As you said, China's middle class is almost as large as the entire US population, but unlike in the US they have a lot of disposable income since their lifestyles are still rather frugal, and their disposable incomes are increasing rapidly.

Have you a source for this stuff?

Have you a source for this stuff?

I find The Economist is a good source for this kind of stuff. Also I've been in China, seen the Chinese in action in other countries, and consulted for international oil companies which (unbeknownst to most people) were controlled by Chinese interests.

The dense cities and short journeys are very clear if you go to China: incredible investment in subways in the big cities, and if you take a bus out on a Chinese inter-city motorway in what would be the rush-hour it's strikingly empty.

The Chinese don't display the same usage patterns as Americans. They don't buy huge SUV's to commute to work every day, and they don't live on 2-acre lots in vast sprawling suburbs.

Correct Chinese usage patterns are not the same as the US. Yet the US managed to build sprawling suburbs and drive SUV's and grow VMT at a steady rate while oil usage remained basically flat to falling ?

Maybe one day I won't be the only one thats skeptical about changes in actual Chinese oil consumption.

Us consumption patters from 1992-2008 show about a 4mpd increase in demand over 16 years. High prices reduced this back to only about 3mbd from 1992-2010 basically 20 years. The annual change is minute 150kbd or so.

One reason is simple geometry as the radius increases the amount of land increases geometrically while distance traveled does not. Its complex because new office centers in suburbia also introduce new centers or locus points.

If anything Chinese growth patterns are even tighter than the US. I'd argue that they can easily do what they are doing with and even lower average annual increase in oil usage indeed almost noise level.

Obviously Chinese oil imports are increasingly strongly but I'd argue that I see no reason that this is not also because of the same reasons that US imports increase i.e falling domestic production rising demand plays a significantly secondary role.

Given the nature of Chinese growth vs the US with its similarities to say New York or Tokyo not Chicago even giving them a 300kbd annual net increase in demand is significant vs the US. Thats certainly possible.
However if this is actually having a big effect oil prices well then supply would have to be under serious strain. Obviously falling domestic production coupled with rising imports as I suspect can be a lot larger as its geologically driven. If they are losing say 300kbd of production and demand is rising by 300kbd per year well now 600kbd is starting to reach a number that would have a real impact on global prices. A few years of that and net imports become pretty large.

If we assume other large producing nations that are also net importers are facing a similar situation indeed lets assume even exporters are under the same situation rising demand and falling production. You have demand for imports increasing rapidly as exports fall rapidly.

Again looking at the US if it was simply a case of rising prices and relatively steady production well it seems the US is capable of cutting back on demand at certain price points. One would expect the same is true for China or any nation for that matter with a lot of flexibility in demand if oil prices become onerous. I think a pure demand pull model with relatively steady oil production results in a rapid flattening of prices at some balanced level. In fact if this was the case then I would argue that oil prices should reach some fairly reasonable but slightly painful level and then remain flat for a long time as efficiency gains offset growth. Demand elasticity would keep prices in a fairly narrow but high range. Historically high prices would also support alternatives not just conservation.

Its interesting that simply assuming China is actually similar to the US and furthermore its consumption pattern is closer to what we see in New Your city allows you paint and entirely different picture of the situation yet get the same result.

I don't think you are actually describing typical America. There are SOME with the commute patterns that you describe, but given that minimum 1/3 of us are crammed in at 2000/square mile or denser, if you assume every family is 5 (way high) you get 400 families/acre, or 1.6 acres/family -- with no space left over for anything else. Families of 4 or smaller are the rule, that gives only 1.3 acres/family -- and the street/utility bite is proportionally larger.

Those of us who live in dense areas, ought to consider transporting ourselves like other people in other countries (including wealthy ones) who live in dense areas. We'd save a fair amount of gasoline, we'd spend less on medicine, economic activity would probably increase (in our town, it is often parking-limited; using bikes to get around gives an order-of-magnitude increase in potential traffic). Those of us who live in sparse areas, should approve of this, because you'd like cheaper gasoline, wouldn't you?

I don't think you are actually describing typical America. There are SOME with the commute patterns that you describe, but given that minimum 1/3 of us are crammed in at 2000/square mile or denser, if you assume every family is 5 (way high) you get 400 families/acre, or 1.6 acres/family -- with no space left over for anything else. Families of 4 or smaller are the rule, that gives only 1.3 acres/family -- and the street/utility bite is proportionally larger.

I'm describing people at the margin (an economic concept). It is not the 1/3 who are living at a density of 2000 families/square mile who will be in trouble, it is the ones with working class incomes who live in 3500 square foot McMansions on two-acre lots 20 miles from the nearest services that will find themselves in trouble when oil supplies start to decline in earnest. They are the ones who will find themselves pushing a shopping cart 20 miles down the freeway to the nearest food bank to keep themselves from starving to death.

However, I have some bad news for you. You need to get the density up over 8 dwelling units per acre if you want to make public transit viable. This works out to 5120 families per square mile, and assuming 4 persons per family, that means 20,480 people per square mile - ten times the population density that you are describing as "crammed". This is why public transit is not viable in much of the US.

However, I don't consider that particularly dense. I've lived in some very nice neighborhoods in Canadian cities with a much higher population density than that (Vancouver is particularly nice despite its high density). Most of the cities in Europe and Asia have higher densities in their residential areas, and they have many perfectly lovely neighborhoods for families to raise children in.

It's just a huge conceptual leap for most Americans to realize that this may be their future. Either that or living in a cardboard box and pushing a shopping cart down the freeway to the food bank.

I struggle with the density requirement for mass transit, as an areal calculation. Most mass transit appears to be linearly driven -- trains and trams on tracks, buses on routes, even cars on highways -- so it would seem that passenger density should be given as a "people per mile of route" rather than "people per square mile".

This is important, obviously, if you envision a lower density area laterally feeding into a higher-density transport route. If your neighborhood is 1/10th the target density, you may have to walk 10 times as far to catch your stop, but you have a nice big yard to walk to.

I guess there are secondary costs for sidewalks and other infrastructure besides transportation, but those would also be trade-offs of lifestyle and location versus convenience.

With a hub-and-spoke system, even a fairly large suburban area could be readily aggregated to fill a single high-capacity line, with real-estate near the hubs commanding a commercial premium for traffic.

Over time, you'd have malls and shops at the aggregation hubs, apts and condos near the stops on the lines, single family residences and perhaps estates a little further out, and then farms and large-acreage businesses. Bikes and/or EVs (park and ride) could easily cover the mile or two from the stops to the homes for the underbuilt areas.

I think this was part of Alan's Transit Oriented Development, and seems viable to me.

The guideline of requiring a minimum of 8 dwelling units per acre to make public transit viable for most people is just a general rule of thumb. If you go with transit corridors, this just means 8 dwelling units per acre within the transit corridor.

However, I did some checking and the arbitrary assumption of 4 persons per dwelling unit is not valid in modern society. It looks like it is closer to 2.5 persons per dwelling unit, which would give a density of 20 people per acre, or 12,800 people per square mile. Also, that is net density, not gross density - it's only the density in areas people actually live in. Unpopulated areas don't really count.

Another rule of thumb is that most people are willing to walk 5 minutes to a bus stop or 10 minutes to a rail rapid transit station. Since people generally walk about 3 miles per hour, that means they will walk 1/4 mile to a bus stop or 1/2 mile to a rail station. This defines the width of your transit corridors - 1/2 mile wide for a bus route, and 1 mile wide for a rail system. However, within that corridor you need adequate density to get the passenger traffic for an efficient system.

It is true that you could build a city as a radial pattern of transit corridors with green space between them. This would have the advantage that, in the rail case, all the people would not only be within a 10 minute walk of a rail line, but also within a 10 minute walk of a green space. I would say that it would make for a rather pleasant neighborhood to live in. Actually, I lived in a neighborhood like that, and it was very pleasant.

If your neighborhood is 1/10th the target density, you may have to walk 10 times as far to catch your stop, but you have a nice big yard to walk to.

The problem with walking "10 times as far to catch your stop" is that you will be walking 50 minutes to the bus stop, or 1 hour 40 minutes to the train station. How many people are willing to do that? Not many.

Most parts of US cities have densities which are too low, so their transit systems operate with mostly empty vehicles and with heavy government subsidies. Many European and Asian cities have higher densities along their transit routes, so their buses and trains run full most of the time.

European and Asian governments also tend to tax gasoline heavily and use the money to subsidize public transit because they do not want to incur the balance of trade deficits that result from importing oil to keep cars on the road. The US government has not caught on to the rational behind this strategy, and thus incurs very large balance-of-trade deficits as a result of the huge oil import demands for all those cars driving everywhere. This is becoming less and less sustainable as world oil demand tightens and prices rise.

A 10 minute walk is only maybe a 2-minute bike ride, or a 1 minute EV ride. I would think the goal would be to fill the trains and trams, and have a "modified" walkable area to get the transit density up in suburbia.

As an example, the town I'm in has 70K people. That's enough for what, maybe 6 sq miles of supportable density (as opposed to the maybe 35 or 40 sq miles it has today)? In transit terms that would be maybe 3 miles of rail or 6 miles of busing.

To overlay that here, you'd end up at best with a train close to town center (it's freight-only today, but in the right place, just like it was 100 years ago!), or buses partway along the two highway-edges. In essence, where people exit the highways today you'd need park-and-ride to get home across the last few miles. A lucky few could walk, more could bike, and some would need a vehicle.

But all of that is traversed by school buses today -- a partial bus infrastructure subsidy that could arguably transfer to city buses. Part also has a city bus today, but very infrequent. Parts have a "senior van" service as well.

All in all, I think the transit design approach would work, but about half the existing neighborhoods in my town are where "green space" ought to be. To preserve those means either adding more people (via apartments) or spending a higher fracture on transit. Maybe the latter as a step toward the former? And EVs/bikes/cycles as a step before that?

To me, this sort of layout doesn't seem unsustainable IF you have work to go to. I'm less worried about how to get to the priorities of life (work, stores, doctors, schools) than I am about keeping them available to get to.

As an example, the town I'm in has 70K people. That's enough for what, maybe 6 sq miles of supportable density (as opposed to the maybe 35 or 40 sq miles it has today)?

In many countries in Europe, it would actually occupy 6 square miles or less. They have innumerable cozy little towns dotting the countryside, rather than having the towns sprawl all over the landscape as in the US. A lot of these towns date back to the middle ages, when there was no such thing as automobile transportation, and in fact most people didn't even have horses, so they had to be able to walk to the marketplace.

I think the rules in these countries are such that you can't indiscriminately subdivide farmland, and so there is a very sharp dividing line between the dense little towns, and the pastoral countryside. The goal is to preserve farmland as farmland, not create huge suburban building lots for people to build McMansions on.

Anyhow, if you put 70K people into 6 square miles in a radial pattern, common for medieval towns, no point would be more than 1.4 miles from the center, or a 30 minute walk at most. That would be 5 minutes or so by bicycle, and everyone would have a bicycle. If you put an inter-city train station at the center, that would quite nicely serve the whole town.

That would be rather typical for Europe, but I think it would be a huge conceptual leap for most Americans.

I think the rules in these countries are such that you can't indiscriminately subdivide farmland, and so there is a very sharp dividing line between the dense little towns, and the pastoral countryside. The goal is to preserve farmland as farmland, not create huge suburban building lots for people to build McMansions on.

You have hit the core of the problem right there, though your line (which I italicized) might be taken to imply a crop of McMansions was the goal of a long term plan. Of course we all know those travesties are merely the result of a process that makes short term dollar revenue per square foot of land its goal. It's what might be called an 'organic' process which utilizes every shortcut to quick revenue it can. Of course the process that ended up yielding this most unwieldly of crops grew the oil business, among so many others, big time. So many comfortable lives and retirements have thus been created...it is a tangled web ?-)

Being 1 mile from a commuter rail line is not the same as being 1 mile from a commuter rail station.

Even with much higher population densities and gasoline taxes over 80% of passenger miles are traveled by car.

Your math doesn't match reality, at least not if you throw bicycles into the mix (and it seems rather artificial to exclude them).

Groningen, Netherlands. 6000 per square mile (far less than 20,000). 57% bicycle trip share. Sounds like something-not-cars is working quite well at 1/3 the density you think is required. There's a glitch in your math or your assumptions. (I'm trying to get a map of the city that helps me check that they don't have an artificial concentration in the middle; there is some, but my guesstimate is less than 3:1 crowding).

And at any rate, other Dutch towns are less dense, yet still manage non-trivial (> 1/3) bike trip shares. Bikes have the additional advantage, if you combine them with transit stations, of multiplying the feed-in radius (vs walking) by at least a factor of 3, so 9x the area, or 9x less density required to be viable. Commuter rail stations in Boston burbs tend to be parking-limited, but the roads feeding them are grossly unfriendly to bikes.

Of course, the frustrating thing to me is that we already have cities demographically/geographically similar to Groningen here in the US (I live on the edge of one), yet almost everyone prefers to sit on their butts, get fat, burn gas, and complain about the traffic and parking.

India showed only a small decline in consumption in 2009. Note the difference in 2009 consumption versus 1998 for the various countries (although there were of course huge differences in magnitudes). In any case, I think that developing countries can outbid many developed OECD countries because such a large percentage of OECD oil consumption is related to discretionary spending, and of course subsidies are certainly a factor in many countries. Here is a chart of global net oil export numbers versus Chindia's net oil imports.

And this article looks at a couple of scenarios for 2015:


To summarize Scenario #2, if we extrapolate the 2005 to 2009 rate of increase in consumption by the exporting countries out to 2015 and if we extrapolate Chindia’s 2005 to 2009 rate of increase in net oil imports out to 2015, and if we assume a slight production decline among the exporting countries (0.5%/year from 2005 to 2015), then for every three barrels of oil that non-Chindia countries (net) imported in 2005, they would have to make do with two barrels of oil in 2015.

The Chindia consumption increase is not unique. Many developing countries have shown significant increases in oil consumption, relative to their late Nineties consumption levels, despite large increase in oil prices. Our forecast for the US and for many other developed OECD countries is that we are well on our way to becoming free of our dependence on foreign sources of oil–just not in the way that many people anticipated.

Deutsche Bank pointed out in a report issued last month that:

The fact that 2010 demand growth (+2.2mb/d) will likely be the second
fastest for 30 years raises a red flag, especially as we work through OPEC spare
capacity - prices will be spiking by 2012 if demand continues to grow at this rate.

Judging from what's listed in the megaprojects wiki it looks like we didn't bring enough online last year to overcome declines, either. The front page says 3240 kb/d for 2010; when I tally up all the projects on individual pages I get 4950 kb/d, but don't get excited - 1850 kb/d of that is Rumalia, which might have been boosted up 18.5 kb/d. Maybe.

Assuming a decline of -3755 kb/d - i.e., 4.39% x 85471 kb/d - we would be in the hole -515 kb/d. Or so. Or not. 85471 is just an arbitrary number for global demand I'm using; 4.39 is IEO 2008's 4.35% decline rate that's grown .01%, as the IEA said the natural decline rate would do. Maybe it's really 4.44%? Or?

Certainly it doesn't seem like we needed that spare cap, or, again, OPEC are just letting us know how "happy" they are. Incidentally, if you adjust for inflation $28 in 2001 equates to $34.59 now. That might explain some of the OPEC attitude. Well, not really. Let's hope they use it as an excuse some day, that would be funny.

"Assuming a decline of -3755 kb/d - i.e., 4.39% x 85471 kb/d -"

You can't take a percentage of the total liquids production which contains crude, NGLs, bio fuels and processing gains. NGLs are growing. Any assumed decline rate should be applied to crude only

It's just a ballpark figure, I haven't examined this in any exhaustive manner. Not sure why a decline rate wouldn't apply to NGLs, either. C+C reached a new absolute in 2008, too; dampened output thereafter is due to OPEC quotas which NGLs aren't subject to, and in fact OPEC all liquids spare capacity is smaller than C+C at the moment, paradoxically enough.

I noticed that the megaprojects database hasn't been yupdated since January 2010. Is anyone working to keep it current or is it a dead duck?

I wrote a post about Wiki Oil Megaprojects - overall tallies at my blog. Tony made some updates last year, but mostly of an editing nature I think; the big addition seems to be Rumalia for 2010 adding 1.8 mb/d, which, if you haven't noticed, hasn't happened! This is a topic I'm devoting some time to, albeit right now I'm trying out varying approaches to conducting the research. I've compiled a list of company websites but those aren't actually of much use, although it's nice to have on hand. Searching for 'oil startup 201_" will be my next tack; perhaps trawling through industry rags like RIGZONE to see what pops up.

By my calc all liquids spare capacity measured from OPEC's July 2008 absolute peak is ca. 1.4 mb/d, while C+C is ca. 1.7, as I state above a rather odd circumstance. This is purely shut-in production, I'm disregarding new oil like Khurais Mk 2, which presumably is up and running while An Dar and Shedgum take a nap. Presumably.

How do you think China is getting more oil, when the supply for the U.S. and India, seem to be stunted by the high prices?

I'm reminded of the older camper's saying - how you don't have to be faster than the bear, you just have to be faster than the other campers.

Whether we're increasing oil production, holding stable, or declining, someone still gets plenty and someone still gets outcompeted. The number of countries that are falling short is increasing, as the higher prices hurt the "developing countries" (I wonder how much longer that optimistic tag will last?) and the middling countries, such as ourselves, see their assets drain away simply to maintain the status quo.

...so China is out in front, while the bear is right on our tail. They could have years before they have much to worry about - plenty of us slow campers out here still.

I think your contention that China is buying up US Treasuries is probably incorrect. The last time I looked, they had (with emphasis on the past tense) bought up a fairly large number of US Treasuries. The amount that sticks in my mind is around $550 Billion. That was up until a couple of years ago. In the last couple of years, there seems to be some evidence that they haven't purchased many more US Treasuries and have behaved in a way that would suggest that they are diversifying their holdings among a broad basket of commodities and currencies. The reporting on this is a bit murky because they seem to use a range of third parties to do significant parts of their trading.

There has even been a fair amount of buzz suggesting that they are trying to reduce their holdings of US Treasuries because they think that the US government is trying to devalue the US dollar with respect to the Yuan.

The scary part is that they are probably correct in this contention.

In the last couple of years, there seems to be some evidence that they haven't purchased many more US Treasuries and have behaved in a way that would suggest that they are diversifying their holdings among a broad basket of commodities and currencies

I think the Chinese are trying to get rid of their US Treasuries by exchanging them for resource assets around the world. They're trying to be subtle about it because if people became aware of what was happening, the value of those Treasuries would drop and they would lose money on them.

There has even been a fair amount of buzz suggesting that they are trying to reduce their holdings of US Treasuries because they think that the US government is trying to devalue the US dollar with respect to the Yuan.

I think it's fairly obvious the US government is trying to devalue the US dollar with respect to the Yuan. In fact Obama got a fair amount of flak at the last G-20 meeting for charging that the Chinese government was manipulating its currency to keep its value down, because it was obvious to other countries that the US was doing the same thing with the US dollar.


Thanks for the detail.

I think the US government is being disingenuous about its intentions.

The Chinese are being fairly straight up about things.

The Fed inflates the money supply --- everyone else in the world gets inflation.

I believe the limit on how much oil will be supplied is not the amount of oil in the ground; rather the limit is how high a price economies can afford. This in turn is tied to the true value of the oil to society–whether oil can really be used to produce goods and services to justify its price.

This was well said, and little understood...

Have you read "Griftopia" by Matt Taibi? I understand he has a chapter about the oil price spike of 2008 being purely a matter of speculation. This matters because his book is #260 at Amazon and a lot of the people who we ultimately can reach with a message about constraints may well be clouded by Taibbi and others dismissiveness about oil depletion- he is a good writer and popular.

My own view is that oil price spike WAS speculation, but not in the sense typically claimed. It (and the other commodity movements) in 2008 were symptoms of the terminus of the private credit bubble, (we've yet to have the terminus of the public/govt credit bubble). Thus it was 'speculation' but not on oil individually per se, and we see how oil supply responded (not much).

Though it seems to be the terminus of the private credit bubble:

Private Debt Dominates

it's rare that there ever is a single cause for any event. The context must be correct before some cause can have its impact. We are in awe of the person who runs very fast but pay no attention to the ground that makes the speed possible. Or we marvel at the 100th story of a building and forget the other 99 that make the 100th possible.

So what are all the causes to the 2008 run up in price? I'm not going to attempt to list them all now but speculation is certainly one of them. So was a flood of credit.

However, if we are looking for some sort of sequence of causes, I think Collin Campbell expresses it best when he says that "speculators spotted a rising trend." In other words, a fundamental tightness due to supply and demand started to push up prices and speculators then did what they always do: they tried to make money before the bubble popped. They used whatever means was at their disposal and credit was very easy to obtain at that time.

Reading your comment closely Nate I don't think that you are saying that private credit was the only cause of the price spike but a quick read could leave someone with that impression.

I agree with you, borrowed money tends to drive up the price of everything it touches and when it is withdrawn, watch out.


I work in the oil industry (in finance) and there was NO spare capacity in the global marketplace in 08. Demand was clearly exceeding what the industry was capable of supplying by June/July of 08. So while I agree there was money flowing into oil during the run up it was not the catalyst for $147 oil.

In addition, most of what you call the "speculative" market is simply companies like mine hedging our crude production with a bank with a put or a call. This is not funny money, it is two counterparties trading or "speculating" on acutal physical volumes. Most times the banks are just intermediaries taking a fee on each barrel. These trades are very important for helping companies manage cash flow to cushion commoditiy price volitility.

Unless you consider reletively new ETF's like ticker USO speculative trading which is held by a broad array of americans in their retirement accounts and has actually had terrible performance in relation to the price of oil due to contango I am not sure where you see the speculative money flows coming from and what instruments they would they be purchasing? Crude contracts are traded with purpose, to help it's producers (E&P's) and consumers (i.e. SouthWest Airlines) smooth cash flow and a allow for budgetary planning. When talking heads ramble on about speculative trading of oil they are talking about futures contracts that represent physical volumes, if oil supply increased dramatically it is certain that the price of oil would head down but that is not happening.

People did not all of the sudden realize oil was an asset and start speculating on it three years ago causing the price to quadruple, it was supply that failed to keep up. Look at the 80's and 90's, oil traded within in a relative range (cheap by today's standards) and speculating on oil futures contracts was being done all day long.

To blame speculators for the high oil price is simply too easy, if it were that easy the banks would have total control over markets and as we saw in 08 they really have no ability to mitigate or even defend themselves against an oil supply induced market contraction. There is no evil man behind the curtain here, the banks are actually doing us all a favor right now (although they think it's for different reasons) by printing money and softening the blow of no growth in the liquids supply. Without the banks floating us with a buffer of liquidity our time would be up right now and unemployment would easily be north of 20%.

Without the banks floating us with a buffer of liquidity our time would be up right now and unemployment would easily be north of 20%.

Yup. How long it can last and what happens to trade if/when it ends are some important questions.

Unemployment already *is* north of 20% in some places if you go by U-6 (the broadest measure).

Why didn't $145 dollar oil bring more supplies into the US? China sure did not have a problem getting imports at that price?

Here is China's net imports for the last several years:


It's primarily because China is capable of out bidding the U.S. for crude now. They have a much lower debt load and are the new 800 lbs gorilla in the global oil marketplace. Since the U.S. is now a debtor nation we have to borrow vast sums of money from countries like China to purchase our oil. This adds a significant premium to what we have to pay and essentially chokes off our ability to out bid China who is paying with not only cash but cash the U.S. is sending them to pay our debts.

They are in a superior financial position to out bid us for each barrel and as we have seen for each additional barrel that China consumes the U.S. loses. Since there is not enough additional supply for both nations to grow their consumption one has to give it up, since we are the debtor nation it is us. This is why we can watch the Chinese have a rising standard of living while ours goes down. The Chinese however are not invincible to the oil price and it's effects and have already seen significant inflation especially with food prices.

Do you think that the Brent crude price is what China is currently willing to pay for each barrel?

Well, every contract is different. With Venezuela they are paying primarily with investment in Venezuela itself through infrastructure and technology, with some African nations they simply provide bribes. The other advantage China has is political. Much of the oil left in the world is in unsavory places run by corrupt regimes. China has a no strings attached attitude when it comes to procurement of resources. Like in Darfur or Nigeria the U.S. comes in with all these humanitarian demands and conditions that come with doing business. China doesn't care if these regimes are committing genocide, they just want the oil and will pay regimes whatever it takes.

Because they are more ruthless and have no pre-conditions, they are able to outmaneuver us. Combine this with their financial superiority and aggresive resource procurement agenda and they will continue to suck up the worlds resources in a hurry. I mean if there was oil in North Korea the Chinese would be there putting Kim Jong up in a palace if it meant they could access it. The U.S. just can't politically pull these things off.

If you look at the graph of their imports, they are adding one million barrels per day per year. Are they adding refinery capacity at the same rate?

Not sure, I know that in the case of Venezuela they are specifically building refineries to process their heavy crude from the Orinoco belt down there. Currently only the U.S. has refineries that can process Venezuela’s crude, once the Chinese refineries are complete this year or next Venezuela will start shifting exports from the U.S. to China, this will be another blow to our fuel supplies and economy. In my opnion it would be wise to have a military intervention down there to take Hugo out before this happens. Otherwise our economy is going to take yet another huge hit.

Wouldn't China respond by selling U.S. bonds en masse? They could really wreak financial destruction on us, by raising our iterest rates.

It would have to be a covert operation I suppose. At a minimum we could fire up the rhetoric to put pressure on him. His government has run their oil industry into the ground due to mismanagement and corruption, Hugo went out to bid to find a buyer last month for much of his oil assets (like Citgo) to bring them back to full operation and no one showed up to bid for fear after they made a huge investment his government would sieze the assets again without warning. This is a weakness we could expliot if we wanted. Venezuela is one of our top three crude suppliers and we can't afford to lose them.

This is a huge problem for his government and funding their social programs. Yes, China could interveign and disrupt our debt markets but that would have huge negative implications for them as well as they are not yet entirely separated from us financially.

We either give up our oil consumption willingly through diplomatic complacency and thus deeper recession or we get aggresive like China. It's really going to come down to eat or be eaten most likely but at the same time you obviously want to avoid an all out resource conflict.

At what point do you think that they will be able to separate from us financially? That will probably be the end game at that point. We will probably have to pay off our debt at that time like Germany after WWI. What will we pay it off with?

When China becomes the largest consumer of oil, I'll bet the dollar really starts to decline in value.

That's a tough call but my assumption is that over the course of this decade it will take place. It's a slow process but China has to replace U.S. consumption with it's own domestic consumption. This is happening now, they have a growing middle class and we have shrinking one.

As their internal demand increases they will rely less on us for exports and buy less of our debt, treasury rates will spike and the U.S. will look like current day Euruope - austerity being force everywhere you look, high unemployment and social unrest all while the blame will be put on politicians who will be helpless to fix anything.

I think this is happening right now, their exports to the U.S. are gradually declining even as their oil imports are rising. We are less and less able to afford our trade deficit so it continues to decline. Our debt has expanded to the point where any rise in interest rates will further cripple our economy. I wonder if anyone in Washington is paying attention to the situation.



You guys ought to put your previous dialog in one of those "Teddy Bears Explain It All" video like you see on the Web. It would be perfect!


You guys ought to put your previous dialog in one of those "Teddy Bears Explain It All" video like you see on the Web. It would be perfect!

Bravo to both. Until they get round to doing the teddy bear video, I took the liberty to showcase this illuminating dialogue in a post on the baobab2050.org blog, titled Wildcatter and nebraska Discuss The US - China Great Game Over Oil and Debt

USO holds futures as "assets". As of this moment they are long http://www.unitedstatesoilfund.com/uso-holdings.php
3 different feb contracts. So what that means is that somebody else SOLD those contracts to USO - i.e. somebody else is short. The net number of contracts is zero. Nada. Nothing. Zilch.
Why people think that ETFs which have financial assets rather than physical assets as underlying collateral can influence prices is beyond me. Similarly with puts and calls - for every long there is a short. Futures and options are risk transfer tools, nothing else. They don't change the total amount of outstanding risk, they just shift it.

Buy=Sell and Long=Short


Great posts Wildcatter, interesting to read an insider's perspective.

Not too sure if the US should be indulging in "Covert Operations", or outright "Military Intervention" (= war), to rid itself of inconvenient dictators though. I kind of recall that hasn't worked out too well for the US lately ....

Agreed there. Every time I hear that sort of nonsense from americans I can't help thinking "It serves you right". Why not identify what you want specifically from Venezuela, then co-operate with whomever they've elected as their legitimate government to make that happen? Oh, I forgot, you've pissed them off so much in the past trying to help your oil companies steal their stuff for nothing that now they don't like you and would rather trust China, which you identify as a bunch of exploitive jerks who can't be trusted.... Hmmm... A reality disconnect there somewhere perhaps?

Is it even possible to avoid an 'all out resource conflict'? Seems to me these are signs of incresing tension leading up to the 'big grab' for whatever is left.

"it would be wise to have a military intervention down there"

I am saddened when I read this. Isn't the USA a city on a hill? A light to the nations?

As during anytime in history when resource shortages start effecting the well being of the population all bets are off. As we have seen with China it pays to protect your own countries interests. I don't want the U.S. to turn into Europe and have a 25%+ unemployment rate and a rioting soon to be starving population. Do you? If our liquid fuel supplies get choked off or we are out bid into poverty we all lose big time, and I don't mean just giving up your SUV I mean you don't have a job or any food on the table.

Just food for thought, I wonder how much of our military equipment comes from China. I was in the Air Force once and ripped the liner out of my Beret. The liner said "union made in the USA" but underneath it said "made in Czechoslovakia." This was in 1985 when they were communist.

As during anytime in history when resource shortages start effecting the well being of the population all bets are off. As we have seen with China it pays to protect your own countries interests. I don't want the U.S. to turn into Europe and have a 25%+ unemployment rate and a rioting soon to be starving population. Do you?

Wow, all those good comments, and then you write that.

What history really tells us - and this includes recent US history - is that no one's a winner in war, dude. If possible you want to try to prevent war, not invoke it.

If this kind of thinking becomes prevalent in the US, then major resource wars (or one big one) will become inevitable. God help us all.

It's easy to talk about peace when your stomach is full and your children are fed. But history has shown that when people watch there children go hungry, wars are soon to follow. I'm not saying it is right, but the reality of it must be recognized. We must deal with peoples expectations now and set up a system where all needs are met, to avoid bloodshed in the future.

remember 10 kcal of hydrocarbons = 1 kcal of food

I think that depends upon the food. There's a big difference between eating plants and eating animals, and even between eating birds and eating mammals (birds are more efficient converters). What I read (Pimentel) is that peanuts are about 1:1.

One reason I suspect (no references) that India and China keep on buying oil, is that they get more bang out of each barrel that they import. Look at what we do with imported oil -- single-occupancy fat-mobiles. One of the links on the post-o-graphs, was to a very interesting presentation on the spread of e-bikes and e-mopeds in China. A lot, plain and simple, and those get you all the speed of a car in urban traffic, plenty of range, but they are cheap and are very efficient, even compared to motorcycles.

Plain and simple, if one economy can get 200 person-miles of transportation out of a gallon of gasoline, and the other can get 20, that gallon is "worth more" to the efficient economy. I imagine 4-person carpools in Tatas (or whatever they call that new tiny Indian car).

And as far as war goes, as long as I see so many people stupidly wasting oil, I am no mood to go to war over it. Carpooling in a subcompact to work to save money, is a long long way from sending your kids to bed hungry. There are things worth fighting for. Our "right" to drive the largest possible vehicles for the shortest and stupidest of trips, is not one of those things.

We are an oil tribe. Take a mental note of everything around you that is either made from oil, or transported by it. We have even figured out how to convert hydrocarbons into food. What is going to happen is similar to what would happen to an amazon rain forest tribe, it their river dried up or was diverted.

No, we're a bunch of lazy-asses (and speak for yourself, says the guy who rode his bike to work yesterday, and drove a Honda Civic today). Other people living developed-world lives have figured out how live well on less oil;. we don't even have to figure, merely do what they do. People eventually respond to price signals. We can do something that tribe cannot do, which is read about how other people very much like us solved the problem, and imitate their solutions.

Amen to that, but we need to figure out how to convince our Society, how dangerous the situation is before large scale change begins to happen. How do we do that?

I am not entirely sure. I don't know if "danger" is the right thing to sell. I will say that the popular definitions of "responsibility" and "American values" have gotten completely f***ed around in recent decades.

Off in bicycle-world, there is a larger and larger movement to get "normal people" on bicycles in "normal clothes" for everyday transit (sample books include Pedaling Revolution by Mapes, Bicycle Diaries by Byrne, Bike Snob's new book; sample blogs include amsterdamize, copenhagenzie, a view from the cycle path, and many more). I've signed on to this slightly myself. Long term, I *must* ride, or at least I must get serious amounts of exercise (so says my doctor, so says my blood chemistry, so says my aversion to a sensible diet). And so I ride, at least 2x/week to work (more in the summer), usually in "normal" clothes, a cargo bike with a chain case, so I don't get grease on my clothes, and so I can carry stuff that people normally "need" cars to carry (including, sometimes, my kids). Winter, I put snow tires, with studs, on my bike, because there's ice, especially yesterday. At night, I've got (good) lights. What is generally proposed, is facilities that feel safe for everyone (your mom, your wife, your grandmother), because that is what worked in the Netherlands. Or "wouldn't it be nice for you if your neighbors rode bikes, what do you suppose it would take to make that happen?"

And understand, people promoting bikes are not saying "works great in the Netherlands, therefore, you should ride a bike in rural West Virginia". They are saying (for example), "Groningen has a 57% bike trip share, and the Cambridge(Mass)+neighboring towns are very similar, so why not there, hmmm?" It's completely stupifying, because Cambridge really is traffic+parking limited, and it can easily take longer to drive home than bike home, though car-best-case it does not. So on the one hand, if it's not working here, where would it ever work, on the other hand, this is clearly the place to hammer on it, because if you CAN ride a bike in Cambridge, it's easily better than driving. The one big problem is that as people switch to bikes, it will free up street space, and "important" people on "urgent" trips will take advantage of this to drive quickly, and no doubt carelessly.

So, not sure. I'm sure that this is the place to hammer on it, but I am also well aware that it has not worked yet. I certainly wouldn't expect much progress in rural hilly places.

NOW, once you spend a little time (a year or so) biking to work and thus and such, you may eventually start to think, "unnecessary car use, bad for me, bad for my community, bad for my country". That doesn't appear to be a message with much traction among non-cyclists.

For one thing, how about treating with the legitimately elected government of Venezuela fairly and honestly as equals, rather than the sort of knee-jerk response seen above? If they won't let you own the oilfields or refineries, well, how much do you want the oil?

I imagine 4-person carpools in Tatas (or whatever they call that new tiny Indian car).

It's the Tata Nano, and there have been some problems with it quite recently.

I notice " 'It's seen as a poor man's car,' said Masih. 'People don't want to take that image along with them.' "

Conspicuous consumption (Thorstein Veblen) lives. It's a social problem, not a technical problem.


I totally agree,in the abstract, with the SENTIMENT AND REASONING behind the contention that nobody wins a war.

I am sorry to say the facts do not correlate with such sentiments and reasoning.

We live and die as individuals, and as societies,in constant Darwinian competition.

History records a constant string of winners of wars.War, in reality, if not name, is a constant in human affairs.If it is not conducted with such weapons as rocks, clubs, assault rifles, and aircraft, it is conducted with pen, ink, bribery, and propaganda.

Right now, within our own society, it seems that the banksters and their puppets in govt are raking in all the pots.

At this time, we are sacrificing a few thousand of our own young men and women , plus a lot of treasure, in the business of getting the oil necessary to maintain our position as a superpower.While I feel pain and sorrow for every soldier currently lost,anyone with a hard head(as opposed to a soft head) realizes that we sacrifice many, many times more lives for no reason at all, other than that as a society , we don't REALLY give a damn.

And gasoline is still cheap enough that I can afford to renew the registration and insurance on our old 4x4 pickup truck for the winter months,even though it gets only around ten mpg on the local mountain roads. ;)

I personally know of many people who have died prematurely due to a lack of medical care. :(

As a matter of fact, based on my personal experience, I wonder if a young man in the American armed forces is not safer in uniform than out, given that soldiers seem to come disproportionately from the poorer and more violent portions of our society.At least they eat fairly well, and are not likely to be consuming large quantities of dangerous drugs, or riding high performance motorcycles while intoxicated,or racing their cars on the street, and they have access to good medical care.

Of course the time must inevitably arrive,in historical terms, when we will lose a war in a big way.

Till then, we might as well, enjoy the spoils, as we are still winning-for the moment, at least.

I wonder for how long.

Our remaining days on top may be drawing to a close soon.

Paint me a realist.

I know where you are coming from Farmer Mac, history does indeed read like a contstant string of wars, many or most of which can be attributed to a resource grab of some kind(although usually due to greed rather than shortage).

However the cost of war, even in just a financial sense, as America has so dearly suffered of late, isn't just about the actual military conflict. The true cost, both ecomonically, socially and politically often comes later. It's not just a moral argument I'm making here.

You know, as an aside, it's not only big wars and large standing armies that hold an empire together. The Roman Empire's amazing longetivy is sometimes attributed to it's willingness to take bring "civilization" to "the barbarians", some of whom could become Roman citizens themselves, no doubt some local leaders couldn't wait to get in on the act. Romans also respected and even worshiped local deities. Maybe a few lessons here the US could take from the Romans. I for one would hope the America's 'days on top' are not due for immediate closure...

I don't want the U.S. to turn into Europe and have a 25%+ unemployment rate and a rioting soon to be starving population.

The 25%+ unemployment rate is just not correct. The EU's overall rate in 8.3% --not even Latvia has an unemployment rate that high. http://en.wikipedia.org/wiki/Economy_of_the_European_Union#Unemployment Actually, if the U.S. government reported the real numbers accurately, we'd be a lot closer to 25% than Europe: http://www.shadowstats.com/alternate_data/unemployment-charts.

While not as overfed as we are, I rather doubt Europe's population is going to be starving anytime soon. As far as the rioting goes, we could learn a thing or two from the Europeans about civil disobedience. Over there, government tends to fear the people, while over here it's the exact opposite.

Add to this, the fact that Europeans get cradle-to-grave healthcare coverage, paid time off, sick and maternity leave, and generally better unemployment benefits. We should *be* so lucky.

And all of this has been subsidized by large amounts of cheap oil coming out of the North Sea. It will be interesting to see if they can maintain this utopia as production continues to decline.

Cheap oil, you think? Well, 85% of our gasoline cost is tax.

And right now the gasoline price is around $10.00 /gallon, and I think you'll find that Norwegians, who unlike us still have a big crude oil surplus, are paying around the same.

You might find that the Utopia is not on this side of the Atlantic......

I said cheap oil, not cheap gasoline. The people who run your refineries have been selling your gasoline and refined products to the U.S. while keeping the diesel fuel and feedstocks. Fully 25% of refinery output has been diverted to the U.S. and this has allowed the profits to remain in Europe and subsidize your standard of living. The high price of gasoline has discouraged it's use on the continent and left it's availability for export.

To be honest we have both lived in a Utopia of sorts which is about change drastically.

And the VAT tax is 12-18%. A better taxing scheme pays for more benefits. Also defense spending is minuscule compared with the US.

This is not as important as you think. The entire North Sea produces less than 4 million barrels (and that is a roughly 2 year old number so it is lower still), the rest is imported, mostly from the Middle East and Russia.

What I worry about is the downwarding global export trends. But you americans import to, so when these levels start getting to low, we are all up the creek with no paddle.

cartoonish and exaggerated description of the state of europe. 25% unemployment is off the mark as in the notion of starvation on the near horizon.

civil unrest is growing and will be a factor in 2011 but this will not result in starvation.

Here is the formula that most corporations in the developed world use to survive and prosper:

profits= products sold - expenses.

Pretty much every company has figured out how to cut their expenses to the bone by using cheap oil in some way, either in during the manufacturing or delivery process. Any company that has not used this formula has not been able to compete and is no longer with us. This is darwinism. The enviroment is getting ready to radically change, oil is becoming more and more expensive, and companies are not really able to increase the price of products sold, so their bottom lines are being squeezed almost universally. The companies that are able to adapt to this changing enviroment will survive. I think the Chineese see this changing reality, our country needs to recognize it as well.

I am not happy with this liberal use of the Darwinism term. Natural selection is a complex process of many interacting variables on the biological world yet it gets co-opted as a political term again and again as if using the term is scientific proof in of its self for the ideas behind that political vision.

not saying your wrong in your analysis you understand..

IMHO your short term doomerocity is over wrought. Especially given the tenure of the post concerns 2011

You're much too kind. But then the new policy is to be nice to the factually and logically challenged. Apparently, this results in a better world.

I am not happy with this liberal use of the Darwinism term. Natural selection is a complex process of many interacting variables on the biological world yet it gets co-opted as a political term again and again as if using the term is scientific proof in of its self for the ideas behind that political vision.


We already tried a junta there. Didn't work.

I wouldn't put it past us to try again, but Latin America is turning more and more against us, and any interference in V would just accelerate this tendency.

We need to get off of oil. The idea that we all need to drive around in enormous trucks in order to have a tolerable lifestyle is beyond laughable. The Europeans are rioting because their governments are threatening to scale back free university educations and fully funded retirement at 55...

We should be so lucky to be able to riot over such 'austerity measures.'

We have already long ago given up on anything like life in a modern industrial economy as most of the rest of the industrial world has known it--no public transport, no universal medical coverage.....--mostly because Reagun and co. destroyed unions.

Our best hope is for some relatively civilized country like Venezuela or China to take us over and show us how it's done.

Our best hope is for some relatively civilized country like Venezuela or China to take us over and show us how it's done

Well, let's hope not. But I do agree with you about America's over dependence on oil - the key is to reduce that dependence, and as quickly as possible.

Venezuela is quickly becoming a destitute nation because as it's oil reserves deplete so do it's coffers to fund it's socialized state run economy. Furthermore Hugo cannot even attract outside investment to run his operations anymore because he has scared off all capital after nationalizing and gutting industry there.

Modern day "civilized" safety net nations are the direct result of fossil fuel wealth that is quickly depleting. Europe's seemingly draconian austerity is the result of making promises that are impossible to keep such as "retirement". The concept of retirement and free education will come and go with fossil fuel age. But I digress because this is not a political debate it is a matter of resource depletion, the illusion of temporary wealth it has created and the loss of civility and peace of nations that comes with it.

All I am suggesting is being a bit tougher diplomatically to ensure we don't have an abrupt disruption in our fuel supply. As we had a preview of shortages in the 70's a stretch of months, years or more of shortages would surely change your mind as to the importance that oil supply has to feeding and mobilizing this nation.

I am not arguing that a reduction in our dependence of fossil fuels is absolutely imperative, but it’s not realistic, we are a reactive society. Our government is actively promoting getting back to BAU right now as we speak. The time to act was in the 70’s, now all that’s left is damage control and trying to engineer the softest landing possible. That may include trying to extend fossil fuel supplies as long as possible. This is the only thing our government knows how to do anyway. Do you really expect a peaceful outcome here? With all do respect, it is foolish to think so.

Unfortunately, if we continue on the path we are going, the more likely armed conflict becomes. Connecting the dots paints a very ugly picture.

Here I’m with Nebraska and Wildcatter. The current attempts at BAU don’t paint a pretty picture, and there’s a real chance it’s all going to end bad.

Should fossil fuel shortages hit us sooner rather than later, there’s gonna be some real anger out there and public opinion on what to do about it could get nasty.

Aggressive behaviour by the US is probably inevitable, and the US like any other decent democratic country, will seek to protect it’s citizens in the best way it sees. The problem is that if short-sighted behaviour leads to major military conflict, neither the US or anybody else will be ‘winners’. I don’t see this as some soft “easy to say when your kids are well fed” statement, it’s bloody obvious.

The scary thing is how close all this could be, and how just a few hotheads in the wrong place at the wrong time could make for a very bad outcome to the PO problem

The scary thing is how close all this could be, and how just a few hotheads in the wrong place at the wrong time could make for a very bad outcome to the PO problem

Perhaps the "few hotheads" have influenced power for a long time?

Armageddon it yet? Or more importantly are you?

Aggressive behaviour by the US is probably inevitable, and the US like any other decent democratic country, will seek to protect it’s citizens in the best way it sees.

... errrrrr


Looks pretty aggressive already.
Let's hope you don't start 'starving and rioting' like your European cousins !

mostly because Reagun (sic) and co. destroyed unions.

Right, if only the auto companies had a strong union the imports would not have had a chance. And if the teachers could get a union going our schools would be first class.

Oh wow! You mean it is that simple? Get rid of the unions and all will be well? Whocodanode?

But then, why is that AR, AL, MS and LA, all right-to-work states where teacher unions are virtually powerless (and where some school districts do not even have unions) all rank at or near the bottom for student performance on all national assessment tests?

Why is it that MN and ND, states with strong teachers unions, are generally at the top of those same tests? Why is is that VA, a right to work state with weak (though not powerless) teachers unions ranks in the upper third on most of those same tests and in the top 10 if you only look at scores from districts in the Northern VA? Meanwhile, MI, with strong teachers' unions ranks about the same as VA overall, though higher if you drop scores from the three biggest metro areas?

If only there was such a simple correlation between teachers' unions and student performance.

The same for the auto industry. I worked in GM plants in MI in the early 70's while going to college. The Japanese were just beginning to make measurable inroads in auto sales then. My shift manager claimed that there was nothing to worry about because the "Japs" would never build a car that any but the poorest or dumbest Americans would buy. I later heard the same idea from the plant manager. Unfortunately, some of the top union leaders seemed to agree with that sentiment.

After some of the managers found out I was doing a degree in business I was asked to take part in a "round table" discussion among managers and selected workers to come up with ways to improve our production. I mistakenly thought that "product" was a key part of production and suggested that the line be modified to include cut-outs every few assembly stations where we could set aside cars that had visible defects and those defects could be fixed before the car continued down the line.

Trouble was, managers got paid bonuses based on production so my proposal never really had a chance. Production was, essentially, cars out the door, and that included cars that left the line with known defects. Those cars were supposedly tagged by inspectors on the line and the defects were corrected after the finished car came off the line.

We had a good sized lot where such cars sat waiting to be pulled into a garage, partially disassembled, fixed and then reassembled. The defect lot was often used as a punishment for workers who had ticked off managers or union leaders and for new hires waiting to get on the line.

Full time workers could buy a new car every three years directly from the line at cost. We were offered a discount price on cars from the defect lot. I was quickly told to never take one of those cars. Instead, the company pushed them off on the unsuspecting public.

In the late 70's I spent a few days visiting a friend from college days who worked as a junior manager at a Big 3 plant in MI. He told me he had nearly been hooted out of a management meeting for bringing in a workers suggestion from one of the suggestion boxes.

The derision was for two reasons. First, the suggestion was obviously from a newbie since the old hands all knew the suggestion boxes were just decorations. Second, worker suggestions were obviously questionable since, after all, they came from workers and not college-educated engineers and managers and workers would only have a "little picture" view of how an auto plant and the auto manufacturing business should work.

I could go on a lot longer about the patronizing and demeaning attitude of managers towards workers, the reciprocated dislike of managers by the workers and the often dysfunctional workplaces that resulted from those attitudes, but this post is already too long and I think I have at least raised a valid counterpoint to your simplistic claim.

Care to tell me again how the decline of the American auto industry was the sole fault of the unions?

Obviously any viable production line should not have much rework required, so I would question the quality of the process, workers, training, and suppliers in this example, besides the mgmt. Obviously what people want is better value embodied by the car puchase, and the Japanese still excel at this. "Better" is subjective, as Japanese cars from Japan do not necessarily cost less than US cars, nor do Japanese cars built in America. A Honda Fit (made in Japan) and a Chevy Aveo (made in Korea) are about the same size, about the same cost, and look at lot a like. One is best in class and the other is worst in class. What caused GM to contract and quite successfully sell such a crappy car, when Japan was able to do so much better? It's not a labor issue, nor a production mgmt one -- it's a pretty fundamental flaw in understanding what a good car actually IS.

Another major issue is the notion of "workers" and "managers". Who ever came up with that distinction? Division of labor doesn't mean arbitrary classifications of work levels, but simply compartmentalized expertise.

Each of us readily sees the weaknesses in a situation in which they have experience. I have my Medicaid and crazy exec amd insurance company stories and so forth....and we each make our life decisions based on the viewpoints we have.

When things go badly, there are always multiple faults. When things go well, there are always multiple reasons as well. Unions may not have been the death of US automaking, but they were not the cause of its early success nor sufficient to prevent its demise either. Ditto for the US educational system. Somewhere in both is an overall acceptance of low performance by those inside, with a modicum of choice by those outside. Capitalism has its downsides, but freedom to choose (including free enterprise) does work out a lot of inefficiencies.

Unions can sit around and argue with mgmt about which one is at fault, until their organizations simply evaporate.

Care to tell me again how the decline of the American auto industry was the sole fault of the unions?

Who said that? Stop putting false words in my mouth. The actual comment in question is;

We have already long ago given up on anything like life in a modern industrial economy as most of the rest of the industrial world has known it… mostly because Reagun and co. destroyed unions.

Apparently you agree, I do not.

More importantly, the problem with education is that it is not run like a competitive enterprise; it is run more like the Motor Vehicle Department or the post office.

My recommendation for education, like my recommendation for energy, is based on the observation that excellence rarely happens by accident. Excellence is most likely in an environment of well informed competition on a level playing field.

1…Determine what constitutes a good education.

2…Develop testing that accurately measures the level of achievement of the goals in #1.

3…Publish a document with the test results at the end of each year.

When we test students we are really testing the teachers. The document would contain a list of all schools, all teachers and all classes taught by each teacher. The teacher would get a numerical score for each class indicating the gain their students achieved relative to their average lifetime performance.

4…Allow parents to choose their school. There would be no cherry picking. When applications exceed capacity a lottery would determine who gets in.

5…The money goes with the student.

This system would point out which schools have the most effective teachers. The best teachers would command much higher salaries in a competitive marketplace, and that would encourage sharp people to get into education. The ineffective teachers would have to find work elsewhere.

Public schools would compete with private schools on a level playing field.

We could spend hours on each of these points, and it is well worth doing.

The worst thing that could happen under this system is that there would be no change because the public schools are doing such a great job, and in fact, there would be little change where that is the case.

The biggest improvements would be where schools are worst.

You are obviously an ideologue, sure that 'free markets' and competition will solve every conceivable problem.

I do now share this faith, and don't care to try to shake yours.

Best wishes for a happy New Year.

The recent perhaps overly greedy history of unions eg. in Detroit, is not a very true picture of the history of the union movement. I've worked out what proportion of gross sales go to (union and management) employees of large paper companies in Canada, and it comes out between 12% and 15%, probably about exactly the same percentage as goes to loan interest and share dividends. I'd guess its not much different in the auto industry.

So in your ideal world, what SHOULD be the proper proportion of gross sales going to capital versus labour?

No people or nation has a clean history. Humans are tribal apes who find joy in massacring each another, without exception.

Still, the U.S. is responsible for the single greatest crime in the history of war. Luckily for the U.S. the Fourth Geneva Convention only came into being in 1949 - not that it means much, as there is no global government. I'm sure the dead of Hiroshima and Nagasaki would agree, had they a voice.

IMHO, after that action the U.S. irrecoverably ceded any moral authority it might have once had.

The authority of the U.S. is based on power. And what power it is.

Still, the U.S. is responsible for the single greatest crime in the history of war.

Not trying to get the U.S. off the hook for nuking Japan here, but if we're going by wartime civilian body count, Hiroshima and Nagasaki are probably not even in the top 5. The Jewish Holocaust, the Armenian Genocide, and the Rwandan Genocide killed an order of magnitude more people each, and that's just off the top of my head.

Nice notion, that Geneva Convention thing (and the largely but mostly supported 1977 restriction on indiscriminate warfare). Happened to come about when the US, as the newly emerged superpower/empire awash in energy and resources, happened to be in control. The US is perhaps the least bloodthirsty empirical regime in history, pushing along such pleasant concepts as eliminating disease and hunger in Africa and Asia.

Now we have way more people, less energy, fewer resources, and the law-abiding nations have tied their own hands.

War used to include rape and pillage, wholesale slaughter, salting of fields, and all that. Even in the Civil War purposefully burning cities of our own countrymen was common.

People like to flagellate the US, but I think it's clear that people are people, and much more bloodthirsty wars have been common throughout history, as they are today. A lot of people are killed without even declaring war these days.

Wonder how many decades it will be before the Geneva Convention will no longer apply to "civilized" nations? It obviously already does not for many conflicts.

Well, the Cambodian farmers trying to work dryland rice crops alongside the Ho Chi Min trail, and burying the kids who still today encounter unexploded ordinance might take a somewhat different view of the begnign enlightment of the US as empire. And the US still refuses to ratify any international treaty to limit the use of air-sown mines or bomblets. Many many other examples, eg. refusal to recognize any international authority over any US citizen regarding anything from genocide to war crimes.

Agreed, the US is probably not the worst imperial power ever, by many measures. But there is no denying that a LOT of innocents have done a lot of suffering to support the incomes of US overseas investors.

Why would anybody agree to anything that limits their power, if they don't have to? I've been in legal situations before and had attorneys advise me exactly so - never give away rights without adequate compensation. International law has obvious value in that it keeps trade working well, but beyond the point that bullets start flying it has little substance. It would make more sense to not even attempt to pass such agreements if there is no viable enforcement action (which the UN is not, IMHO).

Definitely sucks to be the board on which multinational games and conflicts are played. ME and Africa are likely going to learn this again.

So okay, I know that's how the world works. The biggest bully on the block etc. It simply burns / entertains me to then see a lot of self-righteous jerks stand up in the UN and demand that Iran or N. Korea should voluntarily relinquish their weapons programs "for the good of the world". You want that sort of world, quit moaning about it.

I still can see in my mind those images of Iraqi military in 2002 / 03 publicly destroying all their missile arsenal on TV, on the understanding that if they disarmed, then there would be no invasion. I was thinking "you can't be that naive, the US is determined to invade you regardless".

My point is, your international negotiators would get a lot further esp. re. credibility with your allies and with others less friendly, if you quit lying about the reality you choose to live by.

Of course the proper way to live in the world is to renounce offensive / pre-emptive violence and pitch your forces in with those of your allies to create a single world force which can truely monopolize the use of violence for deterrent purposes only. But the bully on the block never agrees to that, does he?

Well, IMHO the UN should not go beyond sternly worded condemnations and progress to threats of action on topics for which they are unwilling to actually act. The US should also maintain a clear foreign policy -- something we do very poorly of late, and of course it shifts every few years. I suspect Saddam was expert at playing UN brinkmanship, and simply miscalculated in the game versus the US.

The US has a mish-mash of rules of engagement and foreign policies which don't seem terribly consistent, and which invites misunderstanding and long-drawn struggles. We really aren't good at fighting limited wars or in building nations, and the notion of defensive rules of engagement in occupations we originate is just silly. We are very good at destroying regimes and infrastructure. IMHO, our foreign policy would be better based on "don't make us come over, destroy your personally satisfying 2nd-world regime, and leave your country a 3rd-world wasteland of political insurgencies and infighting". Did Saddam really want to end up in a war? Does Kim Jong Il (or son)?

The problem with the deterrent policy is that eventually somebody goes first, and they have the element of surprise (a la the Taliban and 9/11). Why would the most powerful sit back and let events develop such that a fast-acting conglomerate of others could unseat them violently? Deterrence is a game for players 2 and below...especially if they intend to game for #1.

Fair play sounds nice and all that, and on a sporting field that mostly works. For wars and even business dealings, lop-sided foregone-conclusion contests make a lot more sense.

That's pretty cynical.

It is not "the US" which isn't good at occupations and rebuilding in the aftermath of war (witness the superb job done in Germany and Japan after WWII, and the 50 shelf-feet of documents prepared by the US State Dept. on rules of occupation, in advance of the 2003 invasion of Iraq and deliberately ignored by Rumsfeld. See the Italian movie comedies made after WWII, some featuring small principalities trying in every way to engage the US in war so they could get defeated and reap the benefits). It was Bush Jr., Rumsfeld and Cheney who completely screwed up that event, costing I'd guess 2,000 lives of US military and 50,000+ lives of Iraqi civilians, plus huge amounts of treasure. Anyone in the US who ever votes Republican again (or even in 2004) deserves what they've got now IMHO.

Fair play works well, overfair play of a military victor works best.

Isn't the USA a city on a hill? A light to the nations?

I am afraid that, maybe, we are more "king of the mountain" today, than city on a hill. If we did not cede our moral high ground as we ended WWII by bombing civilian populations in Japan (or had not already by bombing a free city, and killing tens of thousands of civilian refugees), we certainly did with our conduct in the Middle East.

And, whatever its roots, WWII (which was just a continuation after some delay of WWI) was in the end a resource war.

Meanwhile, we continue to waste resources and lives, refuse to tax those who benefit, and bitch about $3 gasoline. Who woulda thought, back in the day?


Good question.


However as with all things about China the devils in the details and whats left undefined.

Being pressed by central government policy of industrial consolidation and shutting down small plants, local small oil players have stepped up refining capacity expansion actions. 245,000 million barrels per day refining capacity expansions have been seen being completed by local small enterprises

For the cars we don't know the scrapping rate and same for refining we don't know the real consolidation rate.
In general Chinese government stats are highly unreliable esp if they result in the Government looking good.

My best guess is your seeing a major consolidation in refining capacity and conversion to more complex refining with small inefficient refiners shutdown. A lot of this is geared towards refining heavy sour imported crudes.
As a model you can use the evolution of US refining capacity.

Given everything I think I know about China my best guess is their auto industry and refining industry can be model as very similar to what happened in the US from the late 1970's early 1980's through the late 1990's.

Falling internal oil production rising imports and increasing numbers of cars etc including rising VMT.

Total oil consumption however is probably flat to falling over the entire time period basically just like the US and for the same reasons.

To some extent this is probably related I think to how car ownership changes. Once people can afford one car they tend to buy 2-3. Net mileage actually decreases as the taxi effect subsides. I remember this from when I was a kid and recently on a trip to India. One car and multiple drivers results in the car being driven constantly. The simple case is you drop someone at work drive home and then repeat. The car travels twice the distance to accomplish the same task vs if you had two cars. Indeed often even more in the case of multiple destinations.

Of course it seems a lot of oildrum readers ignore the historical record for the US and assume that everything is linear in China and that they are telling the truth.

The key to the real truth in china is mileage per vehicle and fuel economy both have changed dramatically just like they did in the US.

Given everything I think I know about China my best guess is their auto industry and refining industry can be model as very similar to what happened in the US from the late 1970's early 1980's through the late 1990's.

More likely it will model what happened in the Japanese car industry in the 1970's through 1990's, but on ten times the scale. They will start by introducing cheap econoboxes to the international market with low prices and terrific fuel economy, then start improving the quality and moving up the food chain. You will get the equivalent of the old 1970's Honda Civic and Toyota Corolla, then equivalents of the bigger Honda Accord and Toyota Camry, and then the luxury Acura and Lexus models.

But on ten times the scale, so they will overwhelm the global market with high-quality but dirt-cheap cars. Gentle hint - don't buy any General Motors stock. The Chinese won't lend the US government the money to save GM the next time.

Also, the Chinese will have bought up all the world's remaining resources of oil by that time, so there will be no fuel for Americans to drive on anyway.

If it turns out that the typical Chinese car owner does drive only a couple of thousand miles per year then even if the cars are typical Chinese consumer junk, they will last a very long time.

Furthermore, I hazard a guess that repairs will be relatively, cheap due to low labor costs, in comparison to a new car.

Furthermore,the new cars being built there are mostly small and fuel efficient-there will not be much incentive to scrap them later due to rising fuel costs, as compared to a place such as the US.We have an elderly (1997) full size Buick that will last for two more decades probably since we drive it very little;but even so, I expect we will give it up for a much smaller car eventually, as fuel prices rise.

(On the other hand, it seems doubtful that gasoline will go up fast enough to make it practical for us to trade our current farm trucks-a 92 Ranger, an 84 Toyota, and a 91 Chevy 4x4, which we use on the highway only during the winter months.

We used to own a big truck,capable of hauling ten tons, but it is nowadays cheaper to borrow or rent such a truck for occasional use.

The scrapping rate of Chinese cars is apt to be very low, in comparison to most other countries

That might have been a special deal for the Olympic games, to avoid shortages which would have been very embarrassing in front of a global audience.

Because of the private credit bubble in the US? US consumers had no spare financial capacity to purchase more oil.
There's far more at play here than a shortage of oil. And the west has over-extended consumers who are far more sensitive to price changes. If oil goes up in price, it can push consumers over the limit. The oil shortage probably broke the private credit bubble and collapsed the housing market. Private credit bubbles have happened before, it's what happened in the 1920s, leading to the depression in the 30s. Only difference today is that governments are deficit spending to replace the lost demand from the private sector.
I expect western demand will be slow for years to come as western economies reorganise around lower levels of credit, meaning growth in demand will continue to come from China etc.

I show some graphs regarding the connection between oil consumption and employment in today's post at Our Finite World, and a person can see a definite bubble in the 2004 to 2007 period (third figure in the post--sorry they are not numbered). It seems to be me that lax credit during that period was helping to provide additional cash for spending of all kinds. So maybe it was really the credit bubble that contributed to higher oil use during that period, and because of higher oil use, higher oil prices. Speculation may have gone along.

But even if there was increased oil use because of excessive credit and speculation because of high oil prices, this is not all that was going on. If there really had been capacity for additional production, it would have brought oil prices back down. And if it had been possible to run economies on high priced oil, things might have continued smoothly. It seems to me that all that the speculation and additional credit did is move forward effects we might have seen a bit later otherwise.

So maybe it was really the credit bubble that contributed to higher oil use during that period

Fair enough. But your point just shows how hard it is to distinguish causality.

It makes equally no sense to me when people say that the GFC was caused by the subprime mortgage mess or oil or fraud or [fill in the blank]. It was the whole mess all acting together.

Good point, Aangel. And it illustrates quite well the way that complex systems can dramatically implode from the failure of any one of many subsystems. IMO, we are far from being out of the woods today... and one reason that I spend some time on TOD every day is that I am constantly 'looking over my shoulder' for the next event, the next 'black swan,' the next flash point that will ignite the next jolting drop down for our society. And, I see PO as just one of a number of converging crises that loom on the horizen, any one of which could create a positive feedback loop of causality, with horrific impact on the 'whole mess.'


Perhaps americans have never experienced a "rush on government bonds" or threat of same, so have no concept of how it works. In the 1990's, big hedge funds were accumulating sufficient capital to combine (collude) to take serious runs at the governments of countries like Sweden and Canada.

An excellent relevant read: Reflections on the Sovereign Debt Crisis – July 2010

Good post Gail. Would like to see Fig. 1 updated.

I tuned into CNBC this AM and they are all smiles and positive bantor about the first rally of the new year. Meanwhile oil went up another chunk today to 92 something, and although the topic of oil price came up, it was glossed over like it was just par for the course along with other higher commodity prices.

Really find it difficult to understand how the gravity of the situation with oil is not a better understood and discussed topic on CNBC. But, maybe when there is another 08 style economic drop down, the other shoe will fall? And I specify that channel, because monetary issues, the stock market, commodities, etc. are their forte. If any MSM news service should understand the siutation as explained in Gail's post, then it should be them.

CNBC's, and the media's overall, lack of focus is very easy to explain. If you had a huge financial incentive to keep the party going, would you point out that there was an armed psychopath in the basement and surely send everyone fleeing? This is the same mechanism at work regarding the media and climate change, although that topic also has a highly organized and well financed denial machine to contend with.

CNBC is a hard core front runner for BAU.
They "don't believe" in anything that might stand in the way of BAU.
Interestingly, however, certain of the talking heads, (Maria Bartiromo comes to mind) are very much aware that there are exogenous "issues" with energy supply. I suspect that there are a lot of peer pressures for the folks who are more or less aware to just keep their mouths shut and not tread too heavily upon the culture.

Sort of like a room full of drunken alcoholics and the one or two sober people don't want to start pointing fingers and naming names. They'd have to leave the party after all and they wouldn't want to have to do that.

Maria Bartiromo

Thanks for the tip.

Yeah, it's understandable that CNBC would want to cheer on the market while neglecting to mention detractions in order to maximize viewership. However, ethically it would seem reasonable for a TV show wholly about investing, to provide a balanced view of the positives and possible negatives to its inherent risks. But maybe that's idealistic, rather than greed based thinking. Profit first, people 2nd.

Afterall, it wasn't long ago in 08 that people lost their shirts in the stock market. Funny how those lessons get forgotten so fast. Time to ride another bubble while CNBC cheers people on. Rah, rah!

ethically it would seem reasonable for a TV show wholly about investing, to provide a balanced view of the positives and possible negatives

I remember watching the huge and rapid conglomeration of "the media" through the de-regulation of the 1980's and thinking "and so the world ends". When mainstream news has to support itself on its selling of advertisements, (and the producer's bonuses depend on advertising sales) pitch ethics out the window.

$92 dollars is the sign of a strong economy not one on the verge of problems.

look at your history. If our econonomy was strong we could afford $145 dollar oil, and the amount actually coming into this country would be the same as 2008.


I think he was being snarky.

The Deutsche Bank report does a fairly compelling analysis of the prospects for a recovery in oil prices. It projects a price spike for 2012.

The report also explores China's progress to a future with electrified transport.

Just read on Zero hedge that govt allows 13 companies to drill in GOM without environmental clearances,oil down,silver down.Wall street analyst say there is direct correlation between drilling for oil and silver.WTF?Are these guys crazy.

*When I first saw this post in the editing queue I thought Gail meant that 2011 would be a longer version of 2008...;-)

Maybe it will seem that way.

Comparing oil price to 08. In my opinion this is not correct. If you want to make a comparison to the past then 02-03 is probably a much better historical range to compare with todays price model.

Plenty of technical methods exist for following price. Simply using them to match a best fit with a historical price period seems reasonable. If needed you can splice together some past periods.

After the last oil spike back in the 1980's the new floor price was about twice the previous floor.
I'd argue we have seen a similar thing happen. 70-80 is the new 20.

If you accept this basic match and a spike is on the horizon then the pattern is repeating starting with 2000-2003 not 2007.

If so then the equivalent to the runnup in prices over 2003-2007 would take us to the previous high and the real spike aka matching 2008 would take us much higher.

The time scale seems compressed this time around shortened by perhaps 50-70% recognizing the old cycle did not end until oil prices had rebounded back to around 70. About November of 09. What took three years to set up the first time seems to have taken only one year this time around.

Assuming this shortening holds well the matching runnup historically took from 2003-2007 before the spike or 3-4 years. If compression is correct then it will take 1.5-2 years for prices to ramp to about twice what they are now.

I happen to think that the time compression is not static but accelerating i.e at each stage the lifetime is falling by half. Our current stage seems to be going twice as fast as the equivilent. I think the time compression will double the next stage i.e four times faster. Obviously the spike would then be rapid.

What this means is if the pattern is to repeat but be different is that we would see 180-200 a barrel oil by the end of 2011 and then the spike would hit sending oil to say 400.

If the time compression hypothesis is correct then whats really happening this time around is there is simply not enough oil to support the industrialized world i.e OECD, China, India. One or more of the industrialized nations will find itself in endemic and real shortage situations. Perhaps the diesel shortage in China is a precursor to this ? Dunno.

If this is correct then the 150-200 dollar range is not a peak price but the price point at which the wealthy nations can successfully out bid the poorer nations for oil and keep their economies well supplied with oil. Shortages are generally relegated to the third world. Prices higher than this are then the result of shortages occurring in the deep pocketed wealthier nations. Thus the onset of a ruinous price spike coupled with outright shortages as the bidding war simply cannot result in everyone getting enough oil at basically any price.

For debtor nations like the US such a situation will be interesting to say the least.

Shortages esp persistent ones result in significant losses to productivity the coupled with high prices seems to result in the nation experiencing shortage falling rapidly its ability to compete with others to secure fuel to offset the shortages and return to its previous productive level. The proverbial monkey wrench in the engine.
One has to imagine that monetary inflation to offset the falling productivity would result. Print money like mad to try and stabilize the situation. This of course devalues the currency.

Perhaps the balance of trade begins to shift but I think the time scale is simply to long. Imports of goods from other countries should dry up and the monetary inflation should eventually make exports more competitive. Especially if one assumes printing was successful in taming the shortage situation. If it does not i.e financial games fail then the situation simply worsens rapidly and parts of the economy begin to fail.

In my opinion the important part is not the absolute price changes but if I've correctly matched today with past behavior and deduced the rapid increase in tempo of events. Its the change in time that matters because the changing timescale is the intrinsic difference between now and last time. It is what allows events to eventually go off the chart so to speak and no longer follow the historical pattern. The time compression effectively allows you to insert a new situation around the spike in this case shortages in deep pocketed nations.

Indeed one can to some extent look beyond even the spike. Assuming some sort of spike as prices then fall nations are facing crippled infrastructure from lack of oil. Obviously this will ensure a rapid rebound in demand as they attempt to restart their economic engines. Perhaps more efficient but the key is going from dysfunctional to functional even if total consumption has declined significantly. This new condition puts almost instantaneous pressure on prices and brings you quickly back to the brink of shortages. Attempts to change infrastructure to stabilize productivity would require diversion of oil demand to the conversion attempt.

So I think your looking at a series of price shocks and cyclic shortages after the first price shock. I'd argue that one of the global economies almost has to collapse to simply allow the others to stabilize. You literally have to remove a player at this point I don't see any other way out. Assuming this happens the rest can convert and the loser slowly rebuild. If I was going to pick the economy that would crash right now I'd argue it will be Japan not the US perhaps even Korea. You can see how if this time shortening concept is correct that at each cycle the contraction opens up room for a new condition to arise. This time shortages and the next cycle actual economic collapse of one of the large economies in the world. I wonder how many of these pure cycles can be executed before war becomes unavoidable.

we should all remember that gas prices didn't cause the recession. gas prices climbed even during the recession.


In my opinion variances like what your point out point towards what I'm trying to say that the overall system is undergoing a series of transitions and next and in my opinion far more important the time scales are shortening at each stage. Abnormal situations like rising gasoline prices even as the economy heads into recession are indicative that the underlying fundamentals are starting to change at rates that are difficult for the economy to absorb.
These overshoot situation are indeed the red flags that suggest some very basic and fundamental shifts are occurring under the covers.

Not only was the global economy unable to adapt to rising oil prices in the past since the rate of change is increasing they will become increasingly less able to adapt in the future.

Thus the global economy must start breaking as it cannot bend. Heck we already had one break. However its important to understand that the next breakdown is going to be very different from the last one. At each stage the shortening of the cycles adds a new and more serious twist to the game.

Shortages esp persistent ones result in significant losses to productivity the coupled with high prices seems to result in the nation experiencing shortage falling rapidly its ability to compete with others to secure fuel to offset the shortages and return to its previous productive level. The proverbial monkey wrench in the engine.
One has to imagine that monetary inflation to offset the falling productivity would result. Print money like mad to try and stabilize the situation. This of course devalues the currency.

I cannot imagine that terrorists haven't realised this. Hitting Venezuela's oil export capacity hits the US directly, as well as cutting into the global supply numbers. With no investment to fix things, it's long lasting.

While a strike on KSA's oil terminals or the Straits of Hormuz is most obvious, a hit on the direct suppliers to the US would actually help the arab world, raising prices and not crimping production.

I think Venezuelan net exports and US imports from Venezuela have fallen to the point that the US doesn't really care what happens to Venezuela. The country is becoming a basket case.

The US can get the same kind of oil from Canada, and Canada presents far fewer political problems.

No doubt Venezuela does not need terrorists they have Chavez :)

As you probably suspect I'm a bit of a fan of Chavez Venezuela needed a bit of a shakeup.
However his nationalization efforts have to rank as the most bungled in history. He seems hell bent on digging is own grave. Overall his execution is horrendous. Eventually I think he is going to piss everyone off and lose all support.
Hell Gaddafi despite being a bit of a nutcase outshines Chavez. In fact offhand I can't think of anyone who has screwed things up as bad as Chavez. I can't think of one revolutionary movement thats derailed itself so rapidly at the hands of its leader. Not even Zimbabwe declined as rapidly.

All he had to do was systematically and steadily nationalize the systems and make sure the people saw real progress each year. Instead he is hell bent on creating some sort of socialist paradise as fast as possible. One would think Castro would at least give him a bit of a talking too.

The really sad part is that I think his mistakes will eventually shatter Venezuela plunging the nation into civil war once he finally messes up to the point that he losses popular support. He is no longer helping his people but destroying his own country.

Chavez is a typical Latin American populist nutbar leader - he just has more money than most to screw things up with because of Venezuela's vast oil reserves.

I've often thought, while travelling in Latin America, that if the countries there had competent and honest governments, they would be among the most affluent in the world. They certainly have the natural resources to be rich. However, competent and honest governments are exactly what they do not have, so most of the people (except for a privileged minority) continue to be poor.

The most notable exception is Chile, where for reasons best known to them, they brought in experts from the University of Chicago to tell them how to run their economy. They just did what the economics professors told them to do, and, guess what? It worked, and now they are much more prosperous than their neighbors. Many of their neighbors are taking note of that, excluding of course Venezuela.

Well, you'll get no argument from any sane person about Chavez being a nut case and an incompetent one at that.

The most notable exception is Chile, where for reasons best known to them, they brought in experts from the University of Chicago to tell them how to run their economy. They just did what the economics professors told them to do, and, guess what? It worked, and now they are much more prosperous than their neighbors.

Actually a much more notable exception would be Brazil which has emerged from a history of economic instability and military dictatorship to become a full fledged democracy and the economic engine of south America. It had a left leaning working class socialist President recently and the baton of power has been passed to it's first ever female president an ex revolutionary. You can fully expect the pragmatic Brazilians to continue with their planned social reforms that benefit large segments of the working poor. Public health care is provided to all Brazilian permanent residents and is free at the point of need. Imagine that, an example of socialism that actually works! A more equitable and just system than what exists in the US.

As for the Chicago School of economics, and Chile's Economic success, I'll bet they have very little to do with it.

Chile's financial sector has grown faster than other areas of the economy over the last few years; a banking law reform approved in 1997 broadened the scope of permissible foreign activity for Chilean banks. Domestically, Chileans have enjoyed the recent introduction of new financial tools such as home equity loans, currency futures and options, factoring, leasing, and debit cards.

Where else have we seen this recently?

Doesn't bode well for the future in my opinion. Though my guess is the Chileans will come to their senses sooner or later and will probably toss the Chicago economists in the dustbin of discredited losers where they belong. Maybe we in the US should have done the same a long time ago.

The Chicago school, which advocates for unfettered free markets and little government intervention (albeit within a strict, government-defined monetary regime), came under attack in the wake of the financial crisis of 2007–2010.[17] The school has been blamed for growing income inequality in the United States.[18] Economist Brad DeLong of the University of California, Berkeley says the Chicago School has experienced an "intellectual collapse", while Nobel laureate Paul Krugman of Princeton University, says that recent comments from Chicago school economists are "the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten,"[19] charging that the school has done nothing to help salvage the economy in the wake of the crisis.[20] Free market intellectuals argue that the 2007-09 economic collapse was due to government mis-management and over regulation of the mortgage loan sector; saying Wall Street was forced to give credit to individuals with no capacity to make payments.[21][22] Thomas Sowell in his book "The Housing Boom and Bust" makes the case for excessive government misbehavior which he contends led to the economic crisis. Community Reinvestment Act and the existence of Fannie Mae and Freddie Mac are commonly offered as examples of government intervention in the mortgage sector. In response to this, critics point out that a bulk of residential mortgage lending during the peak bubble years (2004-06) was through commercial entities such as Countrywide Financial that weren't subject to provisions of the CRA.
Source Wikipedia

That Chicago / Austrian "school of economics" is completely discredited, and did nothing for Chile but help Pinochet and his CIA backers ruin it socially and economically. A better comparison for observation would be Canada, which never bought into Chicago / Thatcherism / Reaganism / de-regulation economics, and which suffered hardly at all in the most recent recession other than the loss of exports to the US. Housing market stable with no significant deflation of sales prices, no bank crisis at all. The difference was and is, that banks in Canada are strictly regulated so never "bought in" to the mortgage bubble. And Canada has its equivalent to the Fannie /Freddie in its Central Mortgage and Housing Act (Federal agency), which insures mortgages but insists on standards for the entities making the loans it insures, which seems to me like an absolute no-brainer. Duh? Only one bank in Canada, CIBC, got caught holding ANY of the rubbish paper circulated worldwide by the New York bankers, and it lost only 345 million, about one qaurter years net profit for it.

The key to the US bubble then collapse was the lifting of the Glass-Steagal regulations on banks, plus that rider attached to the Gramm-Rudman act which fobid the SEC from doing any investigation whatever, for any reason including suspected fraud, of any securities derivatives. Thanks Rebublican neo-econs / Chicago School.

May as well thank the Dems while you're at it.

"But wait . . . as usual, the Democrats were eager to pile on to this reversal of New Deal regulatory progressivism -- fully 38 of 45 Senate Democrats voted for the repeal (which passed 90-8), including some famous names commonly associated with "progressive" politics by the easily gulled: Dodd, Kennedy, Kerry, Reid, and Schumer. And, of course, there was the inevitable shout of "yea" from the ever-servile corporate factotum Joseph Biden, Barack Obama's idea of a tribune of "change"--if by change one means erasing any lingering obstacle to corporate domination of the polity.

This disgraceful bow to the banking industry, eagerly signed into law by Bill Clinton in 1999, bears a major share of responsibility for the current banking crisis."

Cross-party idiocy is the most destructive of all.......

That Chicago / Austrian "school of economics" is completely discredited, and did nothing for Chile but help Pinochet and his CIA backers ruin it socially and economically. A better comparison for observation would be Canada, which never bought into Chicago / Thatcherism / Reaganism / de-regulation economics, and which suffered hardly at all in the most recent recession

I have some bad news for you. The current Prime Minister of Canada, Stephen Harper (who holds a masters degree in economics from the University of Calgary) is believed to be a follower of Friedrich Hayek who was an important contributor to the "Austrian school" of political economy and was a professor of economics at the University of Chicago.

Hayek received not only the Nobel Prize in economics, but was appointed as a member of the Order of the Companions of Honour by Margaret Thatcher and received the Presidential Medal of Freedom from President George H. W. Bush.

A common term for what Hayek espoused is Neoliberalism. Both Canada and Chile could be considered to have "Neoliberal" governments.

You have to keep in mind that Conservative politicians in Canada would never be considered Neoconservative by US standards, although they would object to the "Neoliberal" label.

Well Gary I think they do realize this. Its so obvious I don't think anyone has dismissed this issue.
Look at Nigeria as and example and these days to some extent Mexico and of course Iraq.

However I'd argue that the relationship between terrorists groups and the governments of producing nations is complex.

Given the pattern of terrorist attacks on oil installations one has too wonder if the old adage don't bite the hand that feeds you comes into play. Not that it always holds simply terrorists have shown some incredible constraint regarding Saudi Arabia. If so I doubt seriously its a stable situation.

We sit on the outside but one has to imagine that the relationship between governments, religion, freedom fighters and terrorists is fiendishly complex and fluid inside the Middle East and esp inside of Saudi Arabia itself.

Indeed the difference between supporting a particular cause and paying tribute or protection money can be quite thin at times.

I've said a few times that I have nothing but admiration for the Saudi government in lets call it the Machiavellian sense. They are bar none the best in the business especially at playing a weak hand. Indeed if I'm even close to right about the hand they are really holding then they are not only the best they are one of the best players of the great game in history. This is not all that surprising because if you think about it they are playing a poker game with someone holding a gun against their head if their bluff is called they are executed immediately. Tends to add a bit of incentive if you will. Hopefully this puts some of their more extreme statements of "fact" in perspective.

Sometimes I think the only real reason that they have held onto power is the recognition that if the Saudi royal family does fall then what will probably happen is a US or multi-lateral invasion of the country. This outcome is esp disgusting to the deepest religious fanatics. And in general the royal family or at least parts of it are supportive of at least some extremists. Not exactly the best reason in the world for the royal family to remain in power but I think its a lot stronger than most people realize.

If so then of course if it becomes clear or at least seems probable that the US is not capable of invading Saudi Arabia and supporting the kingdom one has to guess the situation could deteriorate rapidly.

For example if the US does leave Iraq for the most part and it falls into civil war and we are unable to do much about it I suspect that it will have some surprising repercussions regionally. Iran is also another test if you will.

Indeed if Iraq or Afghanistan turn into another Vietnam which seems more likely everyday I think the regional situation will destabilized as the US becomes viewed as a sort of paper tiger. Indeed its probably one reason the US is so aggressive in the ME it really has no choice any hint of weakness and the underlying strain esp in KSA could easily erupt. Certainly a lot of this also revolves around Israel effectively a proxy for US interests.

Don't forget that US troops where supposed to leave Iraq in 2011 I think what actually happens will be keenly watched in the region. For us at least its a no win situation. If we stay then the Iraqi government is viewed as a puppet with no credibility probably leading to civil war. If we leave then it will be clear that the current Iraqi government was a puppet government with no strong support as factions test its resolve and the nation falls into civil war. Either way we loose and are in a catch 22 situation. Puppet regimes that we support tend to cause this sort of problem for us.

Whats amazing to me is not the volatility in the ME we have seen over the decades but the fact that there are even times when the situation is relatively stable.

Indeed if one looks.


Peaceful periods without and event that threatens the whole regions stability seem to be few and far between lasting for a few years. Yet the Saudi Royal Family seems to manage to stay on top year after year. Its amazing what money can do.

Fascinating ain't it :)

However I'd argue that the relationship between terrorists groups and the governments of producing nations is complex.

Given the pattern of terrorist attacks on oil installations one has too wonder if the old adage don't bite the hand that feeds you comes into play. Not that it always holds simply terrorists have shown some incredible constraint regarding Saudi Arabia. If so I doubt seriously its a stable situation.

Kind of what I was saying. All the focus on this scenario tends to be on terrorists hitting Saudi oil terminals, etc. However these are the hands that feed, and there's a better target.

Hit Venezuela, or Mexico, or Canada, at the peak of demand and you get several benefits:

  • These countries export to the US almost entirely, so the cut hits directly at your foe
  • Shipping oil in from elsewhere involves longer transoceanic shipping links, longer time lines, and higher costs. There's a good chance the US wouldn't be able to make up the shortfall.
  • Middle East countries ship the same, but make more - eg paymasters are happy
  • For Venezuela (and Mexico to a lesser extent) the resources to rebuild a thoroughly destroyed export capability may not be there.
  • Less security checks to overcome

To be honest I dunno. However if your going to think about terrorists and the western hemisphere well I'd argue that the relationships between terrorists and the various drug gangs are worth considering. Obviously Afghanistan is a huge source of heroin. Now the Taliban when they where in power where against the drug trade but as far as I can tell they have no problem using it to finance their operations now.


According to the report, made by the UN office on drugs and crime, the Taliban’s control of the opium trade has made it possible for them to build up an awesome war machine that is technologically complex. Efforts at interdiction stops only about five percent of the drug traffic across Central Asia.


We have a business connection based on drugs and probably weapons trading as well. As the intercidal conflicts finally run their course in Mexico it looks like the drug lords are also ready to take on the Mexican government.

If I was a Taliban commander it would be clear to me that the opportunity to directly attach the US via Mexico was coming. I would not waste efforts on one off attacks on the oil infrastructure now. A two front guerrilla war via allaying with the Mexican drug lords would cripple the US. I suspect that if the US did get dragged into Mexico that we would see Russian and Chinese military equipment suddenly become widely available. In my opinion its probably the only realistic route to any sort of real confrontation between ME extremist and the US that has a viable chance of being successful. If they actually think the same way then they probably would not risk whatever connections exist at this time on terrorist acts. For now at least they can kill all the Americans they want int their own backyards. However later assuming things continue to deteriorate in Mexico well the situation could change. As I said earlier its really the only route that I can think of where the Moslem extremist would have a snowballs chance vs the US.

The fact that they have yet to use the obviously porous border to engage in direct attacks to date is of course interesting. I'd argue that if the desire existed that the connections via the drug trade are there to smuggle any number of Taliban into the heart of America.

Man I sound like some right wing paranoid freak writing this but hey its not as crazy as it sounds if the Mexican goverment does eventually collapse like it looks like well all kinds of crazy crap thats hard to imagine today suddenly becomes viable.

Depends on your aims. Let me paint you a picture.

Now, if you take the muslim extremists at their word (and why not), they want an end to western interference in the middle east, and a caliphate. The second requires the first.

As such you want the US to draw in its horns and do one of its 'fortress CONUS' societal stages - rather than sticking its nose in around the world. Remember the real kick off to all this was the US using KSA as a staging post for attacking Kuwait/Iraq (eg the US getting expeditionary, if with good reason). That's the genesis.

So, what do you do?

Well, it's a well known effect that the US has a very CONUS focus. Stuff that goes on outside its borders tends not to work them up. So it you attack them outside their borders, you will get a level of reaction, but the US will be able to sustain it easily. You could attack oil infrastructure outside their borders, but with a full operational military ready and itching to react, you'd get a short/sharp war in your face.

So, you undertake a different strategy. You hit them at home, where you know it will wind them up and get them to come out fighting, without thinking. Getting them to fight in Afghanistan is a great battleground; the Brits found out last century, it's a losing proposition, as did the Russians - you don't fight a land war in Asia. You wear them down, or rather the Taliban do the job for you, reducing their desire to get into expeditionary wars. You let things slacken off, let them go home. Then you hit the oil infrastructure outside their borders, crippling their economy, but not triggering their weakened expeditionary capability. You make it so the military gets cut back to pay the bills. You don't hit them at home, since you don't want them that wound-up again. Job done - they stay out of your hair.

Well, it's a strategy that fits the facts, and makes some sense. Most US commentators tend to have a US focus - thinking that things revolve around the US and of course the desire is to attack it. I'd suggest the extremists are quite happy to neuter the rabid dog, they don't need to kill it. It's already old, diseased and bloated - its eventual death can come from within. You just need it under control in the meantime.

Mexico and drug lords don't come into it in that scenario - just the smart and strategic application of power.

I'd say that fits the facts so far. However I do agree with your caliphate concept. I'd say the idea is a bit more warped. Afghanistan was the seat of power the Taliban had control they owned it and where creating the new Islamic country. We took that away from them. I doubt seriously that any sort of Taliban caliphate would now be secure with a neutered America. We destroyed their dream society once and until we are gone we can do it again.

I don't really have a US focus to be honest however the US is one of the few countries in the world both capable and willing to muck things up anywhere in the world. Even with my super doomer future view when the US military might finally diminishes is beyond anything I can see. If anything I see it simply getting more powerful. Perhaps we can't invade say China or Russia directly but any sort of overt attack would probably go nuclear anyway. There is no need for a traditional invasion into the heart of Asia. I'd say the old domino theory never really died just moved around a bit.

My point is that until the beast (US) is killed any hope for a real new extremist Moslem empire is probably not gonna happen. Certainly they could wait till we kill ourselves but as far as I can tell even if democratic America fails it would simply be replaced by and even more militant and less constrained military government. I could easily see our military escapades around the world increasing steadily. Nothing like a expanding wartime economy to keep things going. Perhaps not the patriotic fight of WWII but hey in the end you have to eat right ? A militarized US would bring the crazies out of the woodwork however making the Tea party look like pansies. I hate to think about just how many Americans would fall for a return of the golden age gimmick and sacrifice to save our nation.

Eventually no matter what either we destroy the people fighting for a grand Moslem nation or they manage to help us destroy ourselves. What I describe with the drug lords and the terrorists is very similar to Japan and Germany.
The relationship between Japan and Germany was very much one of and enemy of my enemy is my friend. Heck look at the Soviet Union and the US vs Hitler. Talk about strange bedfellows. If you know anything about Asia China and Vietnam are not buddies and never have been again local differences where put aside to fight a common enemy.

Now just to back off a bit if Pan-Arab nationalism is real well whats wrong with a strong democratic Muslim nation.
If we had simply backed off I'd argue that Eygpt and a less radical Syria and say Turkey perhaps with real peaceful ties to a democratic Iran might have worked. Perhaps Israel early on might have allowed Palestinian refugees to return if we forced the issue creating a more balanced nation similar to Lebanon. Problems yes but not like we have today.
My point is we probably missed many chances for a real and upstanding strong and stable Middle East. Sure it would have been generally more religious than the US perhaps but no different from say Turkey or even the US itself during past times. Historically this region has often been a large and important empire with the fall of the Ottoman Empire still effecting things to this day. At the very least and EU style coalition makes a lot of sense.

So backing off from the insanity now and considering alternatives that might have been the basics of what these people want has historical precedence and its not "bad".

Now thats not to say that your wrong indeed I'd argue that what your suggesting is almost certainly whats taking place right now. I agree 100% that for the moment the game is a wait and see if we simply destroy ourselves.
However I think it will become clear in time that the end of democracy in the US is not even close to the end of the US no more than was the end of the republic the end of the Roman empire. Indeed most of our empire building is probably in our future if we keep our current path. Once the requirement of placating a democratic nation is gone then there is really no stopping and energized right wing military government.

I have and eerie feeling we may well be repeating a heated argument that happened between two top Taliban commanders :)

Indeed I suspect quite a few generals in many nations including our allies are considering what to do if the US goes rogue and militarizes. I'm not US centric but I hope you see we are potentially the number one problem the world faces.

If I'm right that the end of the republic is only the real beginning of and attempt at and American empire well I don't think many people will be happy to sit back and leave us to our own devices secure in fortress America.
The taliban would then simply be proxies backed by very deep military proxies. Indeed the irony is Russia could readily become one of the major arms suppliers to militant Islamic groups battling the US. Given what they went through in Afghanistan and Chechnya the irony runs way too deep.

Yet perhaps its already true ? What about Victor Bout ?



While Bout has not been charged in the official indictment, designed for Thai justice, in secret arms supply to al-Qaida and Taliban, literally all, without exception, Western press writes that Bout supplied weapons to militias, not only in Colombia, and local wars in Africa, but also to Al-Qaeda and the Taliban, whom the US is at war with.

Lets just see what happens in the US if we are lucky indeed if the world is lucky then the US will fragment into several nations. Sure it will cause a bit of chaos here but multiple national entities would easily be viable.
Indeed I hope all the physically large nation states break up and at best reform loose coalitions. I'd like to even see Russia break up a bit more. And China certainly has internal divisions that could readily cause fissures.

I think thats the best outcome if it happens and such a situation is very likely to lead to extreme protectionism over the short term dismantling the current globalization scheme. It probably won't eliminate war but in such a scenario peak oil itself will play a big role in limiting combat. No one would have the combination of oil and manpower to really wage any large scale war. Russia could perhaps try but why ? They need do nothing and benefit immensely until their own oil production declined to the point that Russia also fragmented. Plenty of war and I suspect some serious problems with famine but in the end you would have much smaller nation states aligned along natural and cultural boundaries with substantially less friction. Pan-Arabia would never be more than a loose coalition that was perhaps strong enough to force a real lasting peace with Israel with a real chance of becoming a center of alternative energy with real cooperation between the Israelis and Arabs historically Jews and Muslims where friends far more often than enemies.

So I think we are at a crossroads in a sense and unfortunately I think how the US evolves over the coming years is one of the most critical determinants of our future. Like it or not. With peak oil probably behind us and oil supplies steadily dwindling the window of opportunity where any nation is capable of controlling any large part of the world through military force is rapidly dwindling. Sooner than later there simply won't be enough oil to allow a nation large enough to exert such force. The only way this does not happen is if a single nation and the only viable choice is the US seizes and controls a substantial amount of the remaining oil supplies. We are the only ones really in position to do so. Even if we did as I said the economy would effectively become devoted to the military in any case.

If we can just get through this period of danger then I think although things will be really bad they won't be as bad as they would be if the US seizes this last chance for a world ruler using oil based military power.

So I really hope your right and the US falls like your saying. Problem is I doubt I'm the only one who has figured this out indeed I suspect I'm not even close to first in line. And of course you see that at least initially Russia and China will benefit from a collapsed US until falling oil supplies also take them out. I'd be surprised if either could actually take over the world even against a weakened and fragmented US. So even though I think they might dream of such exploits the reality is if the US goes down well everyone else will follow in short order. There is not enough oil for either of these countries to expand and surpass even our current position. And I'm sure the US itself or even a fragmented US would have no problem supplying arms to countries trying to stop Chinese or Russian aggression. This could well mean the US becoming a major arms supplier for say Iran :)

Sorry for the long post but I really want to try and make this concept of a window of opportunity where the US is still powerful enough and oil still plentiful enough for us to effectively corner it for military use.
Right now and indeed for the next few years the US could literally take the entire world by simply taking over oil supplies in the ME, Venezuela, Canada(by default) and say eventually parts of Africa. You don't need to take over Russia. At that point you could basically starve them out as their oil supplies deplete. The screamin obvious starting point would be a war with Iran and resulting need to "protect" the ME oil supply.

Not only are we at a threshold I think with oil but also the US is on the prepice of a financial threshold.
Both I think mean the US either has to move soon or eventually it won't be able too as both financial collapse and relentless oil depletion mean such and opportunity is in the past for any nation.

Its now or never. Or at least until we have we have renewable energy powered tanks and planes or perhaps a breakthrough in battery technology. But even then such and advancement would be shared the unique window to take control of the world via its oil supply is a one time opportunity that I think only the US can either seize or refuse.

Right now and indeed for the next few years the US could literally take the entire world by simply taking over oil supplies in the ME, Venezuela, Canada(by default) and say eventually parts of Africa.

There's a fundamental flaw in that argument - Americans don't like to see their young men coming back from overseas in body bags and wheelchairs. The American public gets upset at a few thousand casualties in Irag and Afghanistan. If you invaded the whole Middle East, particularly the holy cities, you could light up the whole Muslim world (between 1.2 and 1.6 billion Muslims) in AK-47 and RPG fire, and the casualty toll would go into the hundreds of thousands.

And then you wouldn't get any more oil out of it because, as I am fond of pointing out, oil burns. All it takes is a disgruntled worker with a match to light off a tank farm, and a disgruntled firefighting team that doesn't feel like putting it out to keep the fire burning.

At the end of the day it's a lot cheaper and simpler to just pay enough money buy all the oil you need, and bribe any government official who might hold up delivery, as the Chinese have found to their advantage.

Americans have no problem seeing 50K killed in car crashes, and many more maimed. In WWII, we had that many people die in single battles. Much more can be tolerated when deemed necessary - our decisions today are made from a position of wealth and privilege, and are just one example of affectations of wealth.

I fully expect that much of what we've spent on the military will turn out to be wasted technology-welfare, but also that simply changing our rules of engagement back to WWII or WWI standards would have the US and other solidly equipped armies (like the FSU) efficiently killing people in quantities the world has never seen before. And that's before the chemical, nuke, and bio weapons come out.

Somewhere in the long descent all of this will seem like a good idea for reasonable people to support, in one nation or another. Others will simply retaliate in kind. If we do not manage to control population and manage energy effectively, what other outcome is realistic?

Americans have no problem seeing 50K killed in car crashes, and many more maimed. In WWII, we had that many people die in single battles.

No, you didn't.

But then, when the facts don't support your argument, change the facts; it's the conservative way.

Battle of Normandy:
"Over 425,000 Allied and German troops were killed, wounded or went missing during the Battle of Normandy. This figure includes over 209,000 Allied casualties, with nearly 37,000 dead amongst the ground forces and a further 16,714 deaths amongst the Allied air forces. Of the Allied casualties, 83,045 were from 21st Army Group (British, Canadian and Polish ground forces), 125,847 from the US ground forces. The losses of the German forces during the Battle of Normandy can only be estimated. Roughly 200,000 German troops were killed or wounded. The Allies also captured 200,000 prisoners of war (not included in the 425,000 total, above). During the fighting around the Falaise Pocket (August 1944) alone, the Germans suffered losses of around 90,000, including prisoners. "

It depends a lot on where you draw the boundaries for a battle. Of course more died in WWI than WWII, and fortunately the casualties were lopsided against the adversary for the Pacific campaign where the island hopping cost "only" a few thousand per island. But the point remains -- America can accept far higher casualties than it has lately accommodated, especially when the other guy's stack is a lot bigger.

I just why, as a society, we have such a hard time defining the value of human life. If it's on an airliner, it's between $100M and $1B per life. If it's in cars, it's maybe 1/10th of that for manufacturers, and maybe just $50K for drivers. For workman's comp, maybe a $1M. For Planned Parenthood, about $500. For each person themselves, it varies -- I carry just $1.5M on myself, yet this is far more than most.

It's simple supply and demand -- with 7B people on this rock, life is a commodity with modest value to anybody other than the individual, and yet truth be told most people don't value their own life very highly either (else they'd eat right, stop smoking, drive less, and make a whole host of simple decisions to reduce risk). And this from a "choose life" conservative, who puts his money where his mouth is on a personal level.

Glad to see we're opposite sides again Toil. I found myself agreeing with you just before Christmas. Must have been the eggnog.

The damn hound's demanded to go out for a dump and so here I sit with tired eyes wondering what the reactionaries are saying tonight...

There are casualties and there are deaths. You were claiming that the US (your 'we') suffered more deaths in single battles than in a single year of US road crashes.

There were about 9400 American deaths at Normandy during June, July and August of 1944. Canada lost 5000 of its youth in Normandy that summer.

I wonder what preconception interfered with your comprehension of the sentences you cited. Could it be one born of all those films depicting how the TrueGrit (tm) American soldiers gave up their last breath, while simultaneously shooting 150 krauts or japs, on their way to single-nationally winning the war.

China lost over 3 million soldiers fighting the Japanese. The USSR lost over 8 million soldiers fighting the Germans, before they were able to raise the Hammer and Sickle over Berlin. Total US military deaths in the war were around 420,000, about 10 per cent less than were lost by Yugoslavia. All these numbers include those killed by enemy action and those killed in accidents and in other ways. About three quarters of US WW2 deaths were in combat.


Obviously I was painting broadly, as I said. I was educated by the US system, so you can't really expect me to have an accurate grasp on the details, and of course most of my context I get from TV and movies - good call. Fortunately I can Google anytime I need a real number for anything!

You're picking on details, which is fine (forest versus trees and all that), while evading the key point -- Americans absolutely COULD and WOULD accept larger casualty counts, if they actually felt at risk. Other nations have, and Americans have, and will again.

I thought your point was that Americans wouldn't stomach a big pile of body bags so all this military might would be effectively sidelined. My point was that I though they would, and probably will demonstrate this at some point. Little arm-chair regional conflicts like Iraq and Afghanistan don't warrant sacrifice or escalation in the collective view, but an existential conflict would be quite different. WWI and WWII weren't Vietnam. WWIII will be incredibly lethal, IMHO.

I totally agree. We have a position of advantage that we can either use to secure energy supplies for our future or watch fade away. I know this is not a long term solution but it buys us time whether that is used to continue the shift to renewables or just extend our lifestyles just a little bit longer.

Maybe we could start using the tacticts that China is using, which appears to be cutthroat capitalism. It may be down and dirty, but it sure appears to be effective

It probably won't eliminate war but in such a scenario peak oil itself will play a big role in limiting combat. No one would have the combination of oil and manpower to really wage any large scale war.

Wars in the eastern Congo and adjacent countries have demonstrated that simple bladed weapons are still able to kill and maim large numbers of combatants and non-combatants. The genocide in Cambodia did not require much input of fossil fuel.

Large amounts of fossil fuel are necessary for war only when:
- you are highly risk averse to your own casualties and require stand-off weapons, rapid mobility, heavy armor, and overwhelming conventional forces, and
- your concept of war is to use high-explosives to target only combatants and military assets.

The requirements for fossil fuels decrease dramatically if you broaden your scope to envision higher casualty rates on your own side, target civilians and civilian assets, limit the use of explosives to terroristic and sabotage targets, employ information warfare, and use chemical, nuclear and biological weapons,

By no means was I suggesting and end of war. However in your examples you have war with a level playing field so to speak. Anyone can use and edge weapon for defense and offense. Clearly the use of nuclear and biological weapon to kill large numbers are a problem thats not going away. However in general these weapons can also be readily created by two sides i.e they result in a level playing field. The whole cold war shows that nuclear and biological weapons are incapable of giving either side a distinctive edge.

And that does not mean that the wars won't be bloody and lead to huge causalities all I'm saying is once the oil goes the chances for a single entity to take full control of the world goes with it. Not that wars go away.

Limited war like your describing will eventually play itself out. Your can only poison, hack, and incinerate so many people. In the long run without oil and the ability to deploy overwhelming force combat becomes equal once foes are intermixed in a occupation scenario. Your can destroy and terrorize as much as you wish but the ability to actually hold and control regions is gone as you quickly reach the equality problem of guerrilla war.
Esp if you don't have oil. Indeed Africa is the perfect example despite all the war despots are unable to retain power many don't even hold it through their own lifetimes. I'll only mention this but guns and explosives over the long run give the advantage to the guerrilla fighter. Certainly you can expand on the subject but intrinsically now and for the foreseeable future holding territory against the will of the people becomes impossible in the long run without the application of overwhelming force.

Thus the heart of US military strategy.

After learning that the Japanese had attacked Pearl Harbor, thus ensuring that the United States would enter World War II, Prime Minister Winston Churchill breathed a sigh of relief. "Hitler's fate was sealed," he would later recall. "Mussolini's fate was sealed. As for the Japanese, they would be ground to powder. All the rest was merely the proper application of overwhelming force."


Hard to execute in a Chevy volt. And it does not really matter so much if the enemy is a unified fighting force or a guerrilla outfit. As long as you simply don't stop in your application of overwhelming force eventually you will destroy the enemies ability to fight. And generally kill a lot of civilians in the process.

Indeed Castro used it effectively :)



I'm simply arguing that without enough oil the ability to use overwhelming force which is the keystone to defeating guerrillas is lost. Without it no matter how much we fight in the long run no one can subvert the will of the people. Show me a situation where guerrillas where defeated without the application of overwhelming force and ability to apply it at anytime and generally application of some sort of slaughter as resistance crumbles. One has to imagine that there is and exception to every rule. I'm not aware of one.

One that might be close is the series of broken treaties used by Americans however genocide often via disease and application of overwhelming force played a big role. If you literally kill everyone then yes perhaps you do win. If your ability to apply overwhelming force is limited then and immediate application of genocide is critical to victory. Indeed before oil this was the norm not the exception. The ability to field large armies was limited by the availability of food. The army had to hit fast in a few seasons at most and then slaughter the losers or risk a protracted un-winnable guerrilla war. In time of course rebellions flared and they still lost.

Thus only oil tilts the balance as it allows most of the firepower to remain latent in the fighting machines that can be rapidly deployed. The standing army is far smaller and depends on its firepower and maneuverability to deliver overwhelming force as needed. Instead of depending on soldiers that must be fed and cared fore you have technicians maintaining fare more powerful mechanized forces that can escalate the application of force rapidly as needed.

As far as I can tell the only reason that application of overwhelming force has ever failed is when political constraints limit its application. Often in and attempt to contain the war. Practiced to its conclusion without giving in to political whims its always successful. Esp if one follows through with the required slaughter to quell the population.

I don't know why anybody would go to war with any other goal, nor why the US rules of engagements drop back once the war starts. It's almost like goal of our gov't is simply to remain at war, not to win it.

Keeps that military industrial machine humming right along does it not ?

Surely the US is not that decadent right ?

Decades of lack of any real progress towards world peace and and ever growing military industrial complex suggest otherwise. Till now with cheap oil we have been a cat willing to toy with the mice. I'm suggesting that we are rapidly approaching the point where this option is no longer viable. We either capture and kill most of the mice or stop eating mice.

garyp, another problem muslim extremists would have is that the Mexican drug lords, and there followers are Catholic. It would literally take a leap of faith to get the two groups to work together. Besides for the extremists its about destroying the U.S., and for the drug lords its about money which requires a strong U.S.

The premise was that the Mexican government collapsed and US troops entered Mexico to restore order. The fight or war if you will would start in Mexico. As far as Muslim vs Catholic well remember are good buddies the Soviets in the fight against Fascism.

In this case I'm arguing that if the Muslim extremist are interested in fighting US troops in both Mexico and the US that the drug lords would not have a problem supporting them. And it would work both ways a mutually beneficial pact.

As far as the drug lords requiring a strong US well no I don't agree. If the situation in the US became chaotic well then costs for moving and selling drugs would fall and so perhaps would prices but the profit margins could improve.
Certainly they would be in a position to expand their businesses. Indeed it would be similar to the fall of the Soviet Union where many of the criminals became respected business men. I think quite a few drug lords in Mexico would be happy to become warlords in California and Texas. If you remember your history we took them away from Mexico in the first place. So you do have a case for a bit or nationalism to go with such a land grab. I don't think any government in Mexico would have a lot of qualms about "taking" Texas or California back. Probably let us keep Arizona :) Much less a drug lord turned patriot.

The compelling part of the argument is really simple it would force the US into a two front war and also cause problems with our large Hispanic population thats over represented in the military. Quite a few Hispanic soldiers in the US army could see our intervention turn into and invasion and switch sides. Indeed you could see serious problems in many of the border communities that are Hispanic. What was initially and attempt to save the Mexican government and root out the drug lords could easily turn into something perceived to be and invasion.

Going a bit further if it did evolve this way well one has to imagine that racial tensions would erupt in the US.
Good chance that Muslim Extremist could become brothers in arms against the racist whites. Heck such a coalition is not even all that unnatural. If it turned ugly in this manner well now you probably have to deal with some blacks getting drawn in. Muslim citizens in the US could get drawn in. Indeed if it became racial all kinds of problems could potentially erupt. Plenty of white extremist still around to fan the flames of racial hatred.

Regardless the underlying reason remains simple it would force the US into a two three front war. Indeed one would imagine that Iran would take advantage spreading us even thinner. And of course you think North Korea is going to miss such and opportunity ?

If war spreads in the ME Israel is almost certain to get involved inflaming Muslims radicalism even further.
Back in South America you think Venezuela would stand aside ? Argentina could well erupt again. Brazil could start flexing its muscles. What about Africa ? Burma ? Pakistan extremist ?

If the US gets bogged down in Mexico we could easily see the situation deteriorate rapidly. Even if the number of Muslim extremist that actually go and fight from Mexico is small. The flow of increasingly sophisticated weapons from Russia and China through them and into South America and Mexico won't be small. Indeed the flow could become more direct rapidly.

Certainly it would open up a huge gaping hole that allowed direct terrorist attacks on American soil from safe positions in Mexico. I have to think that some will take the opportunity. In fact simply the possibility alone is enough to push the US into extremism itself. My opinion is that at least a few attempts will be made. If they prove successful well then hey take the opening.

The US has run roughshod over many nations in the world for a very long time. I suspect that people will find it surprising how much blow back we might get if it looks like we are loosing control of the situation.

I think as it becomes clear that we are over committed and cannot fight multiple wars around the globe at the same time and deal with Mexico in our own back yard things could get very interesting rapidly.

If you go and read about WWII and esp WWI and in particular the fall of the Ottoman empire you can see that such issues played a big role in how events unfolded. The Nazi's with the Jews is well known but all kinds of other atrocities where committed along racial and ethic lines. And groups that did not have a lot in common or indeed had animosities united to defeat a common foe. Heck the fall of the British Empire.

Underlying such entanglements if you will is a long period of perceived and real imperialism. When finally the imperialist nation is perceived as to weak to maintain its grip everyone tends to rush to land a few blows and no one is willing to come to its aide. I think the US may well find itself with few friends perhaps not even the British.

In all honesty memmel this drug lords Islamist tag team mission is a tom Clancy movie nightmare... its more indicative of paranoid anxiety than anything else.

the retreat from empire stuff has its parallels but this strikes me as a dubious.

Specifically it's the plot of "Teeth of the Tiger" by Tom Clancy. But don't worry Jack Ryan Jr. and friends go to work for the "wet operations" department of Goldman Sachs and sort everything out. Or something like that :-)

No doubt but stranger things have happened. My key point is that people are very dismissive of such a chain of events but if you read history collapse via rebellion often follows a chain of events like I've outlined.

If someone had written a fictional novel describing how India escaped the British Empire with Gandhi people would have dismissed it as highly improbable yet it happened. The key component is when the Empire builder has stretched itself to thin and cannot use overwhelming force to crush its opposition. The exact route that actual events take is the stuff of fiction indeed most often the truth is stranger than fiction.

Underlying the weakness is finite resources in the end there is a cost associated with empire building and this cost saps the country that undergoes it day in and day out. Huge standing armies and a large military industrial complex weighs on the society every single day war or no war. In the end its simply miss-allocation of finite resources. Nothing really more complex than that. Eventually the resources both human and industrial are simply not there to fight any more.

For the US our weakest border is Mexico it seems sensible that if we suffered any sort of invasion if you will it would be a diffuse guerrilla style war across the Mexican border. All I did was concoct a scenario that resulted in such and event. Effectively a Vietnam in our own back yard. As far as drug dealers getting political well look at FARC and heck the Taliban themselves.

Next as far as the Mexican government goes well in general they have not been kind to their own people. Again we see the resource constraints indeed the Mexican government tied its own survival to oil. As the flow of revenue from oil fails and the drug war continues well I don't see a future for the Mexican government. To date the drug war in Mexico has been waged primarily between the various drug gangs. Historically its quite common for these sorts of complex gang wars to end with a series of treaties and the evolution of a powerful or several powerful gangs. As a few of these gangs emerge as winners well the violence will turn increasingly against government forces and not each other. Thus you have increasingly powerful vicious gangs fighting against a increasingly weakened government as the flow of oil subsides. At some point in Mexico the wealthy are going to read the writing on the wall and leave in large numbers looting the country on the way out. The tie with Muslim extremist well thats simply one of those interesting things that happen during war all kinds of weird relationships can happen if you have a common enemy. Literally anything is possible in war.

Despite how crazy it sounds given the right set of circumstance its not the low probability outliers chain of events that people seem to believe. The problem is people don't understand probabilities in times of extreme stress. Events that under normal circumstances that would be highly improbable become not only probable but even predictable at lease in theory. Whats happened is that the system has become highly chaotic the exact thread it actually takes can be influenced by almost any event. However the manifold if you will or overall surface that these events take place on is clear and leads to collapse. Exactly how is both unknowable and very likely to include some seemingly highly improbable events.

A lot of people focus on the energy side of the problem many on EV's many more on alternative energy. Although perhaps my example was outlandish or not. However under the covers what you have is a system thats literally worn out. Its exhausted itself generally via a serious misallocation of limited resources viewed as plentiful because they where cheap. With the system in its most weakened state it will also face its most dire challenges.
Exactly the form these take is clearly unknown but I argue that they will be coming faster and faster. Unsolvable problems rapidly mount. The Mexican story I have used has no real solution. None of the players in the drama can really escape. Regardless of how events unfold at this stage or act in the play none of the actors can leave the stage they are stuck.

I could easily write another story about government pensions and public unions. Different play same underlying thesis all the actors are stuck in a situation that has no pleasant solution. This goes on and on across our society if you look and consider how things evolve then you see numerous places where attempts to maintain BAU lead to the players are actors getting themselves stuck in a quagmire with no exits.

One way to look at it is the US is some huge army. We are setting off to march across a vast swamp with the edge unknown. At first we build this magnificent road to go across the swamp moving down the road as its built. As we get deeper into the swamp we get further and further away from the source of materials for the road. Some engineer comes up with the brilliant idea of using the roadbed thats already crossed to build the new road. So we start ripping out the old road and reusing the materials for a new road. In essence a mobile island.

The problem is at each stage they don't recover all the material as the rip out the old road some material is lost forever. In time the grand army finds itself stuck on and island in the middle of the swamp with no hope of reaching the other side. Even if they decide to throw half their number over the edge and build a smaller and smaller road it does not matter they may be unable to reach the other side. Even if a few do so what its no longer a grand army.

My point is that there are a number of problems that simply don't have good solutions. The above is a simple example that illustrates my point. Perhaps better than the mexican/taliban one :)

The mathematical one above makes it explicit. Also consider the only solution that actually works is for the army to accept and ever slower pace of progress and keep the road back to the source of raw materials at all costs. Eventually it will make it through the swamp but with progress slowing every step of the way. To solve the problem correctly requires foresight and understanding. Most of the time across the right answer looks stupid. Why not simply steal material from the road already crossed ?

These stuck in the middle of the swamp type of event will proliferate. People love the idea of black swans and dramatic events that cause things to change rapidly. Certainly these may occur however underneath the real problem is we have gotten ourselves suck in a swamp like I describe with no hope of escaping. Perhaps not as glamorous as a black swan but just as deadly.

Heck I can even use housing right now to illustrate this situation. We have built and enormous number of houses over the last few years far more than we need. Now housing construction has plummeted to extreme lows yet we still build. Most people think that time will eventually ensure that the current housing stock declines and demand will renew for housing. However I suspect what we really have done is got ourselves stuck in a swamp with no escape. For a whole host of reasons suburban housing will remain permanently in excess. We will never finish our road and cross the swamp. How many people are willing to consider that solution ? I'd argue very few consider it probable. Yet as far as I can tell this condition of getting stuck is the norm not the exception as empires collapse.

The diminishing returns on your military spending contracting empire thing yadda yadda is a no brainer. Reel in the CGI it never looks as good as the live action stunts.

The drugs thing is largely diffused by taking a big chunk of profit out of it by decriminalization. You could carry on debating the feasibility of that but whatever.

There is mitigation for many issues faced by todays empires and civilisations. Not all of them politically or practically easy/expedient (or solutions to maintain BAU). I think the swamp idea is just restating a tainteresque world view where the problem contracting empires have is a not any single problem but a conflation of many problems that results in part from diminishing returns.

I dont think it plays out in simple predictable scenarios, One thing that strikes me about these predict the short term future threads/posts is how hard it is to reach consensus. its even hard to reach a consensus about what happened in the past or what is happening in the present! The mantra is "whats going to happen" even before we have really put all the pieces together and joined the dots in the present or past. Predictions about the future are in a way testing our world views about the present. Very odd if if you pause for a second and look at what people are actually doing especially in relation to expressing a world view.

A general example is people making quite extreme predictions that do not come to past and then rewriting the past to explain the predictive failure. I think it causes quite a lot of noise in the debate and drowns out decent signal... hard to judge though as as not all predictive failure may be the result of a lack of insight. I think exaggeration is a human constant.

Ahh but now I can use my stupid graduate work in chaos theory !

People want "the path" well the path is unpredictable what you do have however is manifolds.
Think of a river flowing over a plain with almost no drop.
The absolute path of the river is impossible to predict i.e its chaotic.
However the probability of the river flowing through the plain in a perfect strait line is literally zero.

Instead it loops through the plain at surprisingly constant radii and the time it take to drift down the river remains surprisingly constant regardless of the absolute path. One of the control variable is the sedimentation rate and the flow rate. Another is of course gravity.

The path that everyone screams about is clearly irrelevant. Indeed and this is the important point it has little effect on the overall time. Get the time wrong i.e the path wrong for a bit well it will correct and reach the endpoint almost exactly is predicted.

Indeed once you really understand chaos you realize that there are magic winding numbers. Its threads wound around a shaft at basically maximum entropy. Not the thread laid perpendicular and not the thread wound with only at one end. Instead you find that there are magic windings that circle the shaft just right. Pitch is the key.

In chaos music rules and the perfect notes or pitch stands out. For any given diameter of a shaft there are winding numbers or pitches that just work and are natural.

Chaotic trajectories reflect and intertwine with these natural harmonics. The key to chaos is stochastic resonance.


Consider a thread thrown upon a white floor with a random pattern obviously purely unpredictable.

Next consider the same thread thrown against a set of springs differing only in pitch.

Throw it a few time and you notice that the thread gets hooked and reflected but the springs. Chaos is not random instead the chaotic trajectory reflects of the natural resonances. Springs that are to tight don't effect things much springs that are wound to loose again don't contribute to the path. Instead springs that interact with ...
The actual intrinsic thickness and friction of the thread stand out and reflect the string.

Are your ready for this. Real chaos works because the thread is itself finite in dimensions perpendicular to its direction. I.e chaos only exists because the thread has a quantum dimension.

No quantum mechanics no real chaos. Our simulations using computers which are finite intrinsically introduce this quantum cutoff behavior. We cannot not escape it. But few really recognize the real meaning.

Its like and infinitly long rope and all people care about is how long it is they never bother to ask how thick is it is and how rough is the rope. Yet the length matters not. Only when the rope is very very short does its actual length contribute. Real chaos fails if you had and infinite computation engine it would never reflect off the natural winding tori. Indeed its even deeper as the integers would never stand out mathematically. Real true mathematics is done purely with integers all other mathematics bounces around in these crystalline spheres that are infinite yet finite. Obviously I'm claiming the heresy of mathematics that all sequences repeat. I dare anyone to propose this self evident truth.


Godel is wrong. Not because his theorem is wrong but because the infinities reflect off of the integers and are forced to wrap. Lesser infinites can cancel out greater infinities in the aggregate. The river is not strait their is a ever so slight bend that eventually forces it into a circle or its equivalent. And infinite number of dimensions is impossible since the less dimensions couple and reflect or distort the higher dimensions. I don't know the exact curvature its probably friggin big. But the warping is there.

To produce it consider and arbitrary number of dimensions no matter how many you have you can always posit another that is at right angles to one. This new dimension adds and angular velocity component to the others. As you add dimensions the angular component does not cancel. No matter how many you add your still simply pushing the new dimension to follow a curve by adding yet another. The problem is you have two results. Either and infinitely tight spiral or perfectly strait. Infinities piled on infinities reduce too two opposing boolean outcomes.
Its not left or right but strait or infinitely curved. Because there are two perfect solutions the average has to be between the two or a circle with a finite radius. Thus infinity because its capable of two perfect outcomes must be imperfect and condensed and closed. The beauty that Godel missed is its bifurcated perfection that ensures the totality is closed. Its always boolean and boolean ensures closure aka the existence of 0 and 1 ensures that mathematics can never escape the existence of 0 and 1.

And I assure you me claiming Godel is wrong is the sin of the century if a real mathematician reads this I fear for my life :)

Thus there are intrinsic manifolds and if my years of studying chaos mattered then all I have to say is once you pass Memphis then you will be on in the gulf in a few weeks if you float down the Mississippi it does not matter what the river does in the interim. The exact path is irrelevant all that matters if if you have your closure theory right and therefore your manifolds and thence your sub-manifolds the bounds are practically absolute.
Lets discuss the matter five years from now :)

I'll add this quickly but the key is that in the case of angular momentum turning left or right does not matter unless the decision is perfectly balanced. The proof that godel is wrong can be seen as simply saying that a perfect balance that has no intrinsic support is improbable and infinitely improbable in infinite dimensions. Lacking any real reason to be perfectly balanced things wrap by default. The problem is Godels math itself was too ridged and missed the truth about a duality of solutions and its implications.

I still don't see how you have the Taliban parking up in Acapulco ;-)

I cannot imagine that terrorists haven't realised this.

Mmmmm, lets hope not too many international terrorists like to keep up with the gossip on TOD, and that we haven't sparked a bright idea in some nutter's brain cell.

There's an uban myth that this image, apparently from Wonder Woman commic #287 published in 1982 'predicted' the Twin Towers attack. But who knows, maybe some loser saw this in his youth, and thought "Mmm, there's an thought ..."

Perhaps off-topic, but I find these bits of literary history fascinating.

KR - new Community Ed.

There are a similar one involving Donald Duck, but i don't have it here now.

I'd argue that one of the global economies almost has to collapse to simply allow the others to stabilize.

That's an interesting way of looking at it. Competition for resources at ever higher prices causes attrition, which provides opportunity for surviving countries. 60-70-80-90, do I hear 95, 105, oh we've lost one. Who will bid 110, 115,...

This is an interesting point in time, because the 08 temporary collapse is seen by the majority of people via MSM, as having been purely resulting from the mortgage meltdown. As such, they think the economy is recovering and our biggest problems are behind us. When in reality the momentum of oil pricing as it rises in a bidding war for resources, is in fact building towards another break point. Maybe, as you say, some point in time when a fairly large sized player has to bow out and rebuild (a bartertown).

I'm looking forward to the point in time when most people catch up to the dire situation at hand via peak oil. That will be a poignant moment to remember.

Thanks :)

Its really no different from how the MSM LOVES !! same store sales statistics. What about all the stores that have gone out of business ? Using survival bias to show how things are getting better is and old trick.

I think this time around thats what will happen. Someone simply ain't gonna make it.

It's all a game of musical chairs. By the end, those remaining have really good track records.

I think your analysis is spot on.

Have you ever seen the effect of droping a pingpong ball into a tapering hole. The taper can be thought of as the converging difference between production capacity and demand. As this difference narrows so the boom bust cycle of growth and demand destruction will increase in frequency.

Many of the participants of TOD have expressed a view that the oil price simply cannot exceed $150 or $120 or some believe the limit is as low as $100. While I understand the reasoning I do not agree with this position. The total production cost/value of oil currently stands at around 5% of world GDP. If the price doubled over the next five years this would represent a steady inflationary effect of just 0.7% p.a.. I believe this is well within the capacity of the world economy to absorb. I don't intend this to indicate that we won't have problems....very big problems. It just means that there is ample capacity for the oil price to rise to $200 or $300 with spikes considerably higher than this.

As Memmel says the future will be framed by a series of progressively increasing price spikes that will drive particularly sensitive countries, economic sectors and individuals to the wall. The price spike and the subsequent financial crisis that unsues will supress demand for a period. During this period the world economy will adjust to a new reality by eliminating those sectors that are unsustainable at the higher price. This will then be followed by a faster runup to the next spike. The whole series of cycles will eventually end in either a resource war or governments nationalising the oil industry for essential services. Probably both.

Just want to point out that your doubling, 0.7% p.a., 5% GDP example is not clear to me.
This is not the same as inflation - often my salary also rises with inflation - but this rise of 0.7%
would be a net loss for my income - a cost I would have to pay. Can the general world citizen handle a
5% income loss over five years???

Remember in your thought example that oil went from 20 to 100 $ in last ten years. So we have gone through
something like oil being 1-2% of GDP to now 5% of world GDP? Without an increase in net energy input. Where is the limit for
"percentage of world GDP spent on oil", do you think?

We had a post on that http://europe.theoildrum.com/node/5388

Francois Cellier estimates 600$ per barrel is world GDP. So the real barrel price must be lower than that, he proposed 30% of that. Max 200 $.
I too believe paying 300 $ per barrel (or my energy expense personally going up from 5% to 20% that is I would need to reduce my other expenses with 15%) would crash the economy. Imagine all, except the oil exporting countries, reducing their economies 15% ...


Mississippi drivers spend 6.5% of their income on gasoline. 12% in a really tough economy is certainly doable.

Francois Cellier estimates 600$ per barrel is world GDP. So the real barrel price must be lower than that, he proposed 30% of that. Max 200 $.

600 for oil does not pass the sniff test to me. Just using this metric. Right now oil is about 100 a barrel and gasoline in the US say 3.50 a gallon we don't have a lot of taxes so its close to its real cost indeed wholesale is 2.40 so lets use 3 dollar with oil at 100. And US refinery margins are good at the moment. 6*3 = 18 dollars.

Lets say 20 dollars a gallon. No way is that all of GDP or even close. Using this approach to try and estimate a max price for oil well lets simply take minimum wage earned in a day as a possible max. For the US at eight hours a day and eight dollars and hour it would be 64 dollars for the lowest wage earner to spend all their income on gasoline. Like three times your posts estimate or about 1,800 a barrel.

If one looks at poor countries with much lower average daily wages many face a similar barrier. I.e they make a dollar a day and gasoline is say 3 dollars a gallon. Indeed for them the price is way over your estimate. Needless to say they don't burn a gallon of gasoline a day or at least the ones making one dollar and hour don't.

During the depression one of the striking occurrences was gasoline costing 25 cents a gallon and many men willing to work for 25 cents and hour. Thus one hours of work was equal to one gallon of gas.

If one then takes the establishment of a Depression as being signaled when the minimum wage per hour and cost of gasoline is equal well in the US this puts you at 8 and hour higher in some states or a price point of about 300 a barrel. Thats a long way from economic collapse. But I think many would agree that the US economy would be depressed if oil hits 300. If it goes to 600 well no its not the end of the world but obviously many poor people would have no choice but to abstain from using oil or gasoline on a daily basis. They are not completely out. With gasoline at 8 dollars a gallon they could still drive to work by themselves its 12% of their daily wages. At the extreme end but doable. At 16 dollars a gallon no way they would have to carpool. However obviously four minimum wage earners that shared a car could afford 16 dollars a gallon as it would cut their own expense back down to 4. The taxi effect i.e running around picking up and dropping off people would make it higher not as bad as the single car two job scenario.

12% of daily income seems to be a pretty good number for elasticity of usage. As you approach that your forced to make radical changes and often over conserve i.e the carpool.

Indeed in Europe with taxes drivers pay prices approaching this I'd have to look but 7 dollars a gallon is I think the norm in Norway.

Found this.

Eritrea tops the charts at Asmara, Eritrea | $9.59

This 2008 list has this when oil was near 140

1. Sierra Leone $18.42
2. Aruba 12.03
3. Bosnia Herze.. 10.86
4. Eritrea 9.58
5. Norway 8.73
6. UK 8.38

Almost 20 dollars a gallon in one of the poorest countries in the world.

Obviously and clearly rising gasoline prices would force structural changes. Clearly few people drive cars in Sierra Leone for a host of reasons however they can afford gasoline prices we cannot imagine in the US. Indeed a lot of the world already pays far more. Yes I know its taxes in many cases but still your paying and those that pay the price at the pump seldom benefit directly from the taxes at anything close to what they pay.

Thats why I like to explain it as Mississippi America its not the end of the world simply many American will find that their purchasing power will fall to what the norm in Mississippi. Not pleasant but not the end of the world.
For Mississippi itself however your looking at third world purchasing power.

Driving through Mississippi yes you can easily notice poverty is more prevalent but its not dramatically different from other parts of the US. At least until you look at home prices which are distinctly lower than most states.
This again fits with my thesis that home prices will adjust downwards to offset rising fuel costs.

Dated census data.

These are average listing prices not median sales prices but current.


Actual median sales prices can be 30%-50% lower than the average list price right now in the US in many areas.
Obviously a lot of overpriced listings that are not selling.

In any case clearly in areas with lower incomes housing prices are lower and gasoline takes a larger percentage of your income.

Eight dollars a gallon is certainly doable. It seems that perhaps something like 16 dollars a gallon is certainly the point that many will have to make serious changes in their lifestyle this is about 500 a barrel or so.

Using my house price concept if oil went to 500 a barrel and house prices are around 200k right now then I'd argue that the median would have to fall by 50% to counteract rising energy costs. If house prices fell by 50% I doubt they would stop there but keep on falling. Indeed 150-200 is probably more than enough to start housing prices falling again. As they fall below 100k savings from housing no longer work nearly as well to offset rising energy costs.
Energy costs start to eat too much of your income and a forced lifestyle change is required.

Somewhere between 10-16 dollars a gallon or 300-500 a barrel for oil is not the point at which society is dead simply the point at which a society capable of extravagant oil usage and high property prices are dead. Aka Mississippi America. Depressed economy certainly end of the world not even close. The end is up around 800-1000 dollars a barrel.
At that point yes the wheels are not falling off they simply stop turning.

My guess is that collapsing financial conditions will result in prices staying in the 300-500 band for quite a while.
Who knows for sure but it seems clear that a real and fairly easy to document serious stress point is in this band.

Support for lower price points like 100,150,200 is questionable. I think mine are quite rational.

500 dollar a barrel oil is expensive maybe it will convince us not to waste it.
Surprisingly even then those that make over 20 dollars and hour or about 40k or so a year can afford to buy gasoline assuming they use a gallon a day. Anyone that makes 60k+ can easily still afford to buy even at these high prices.

The median income in many areas is close to this. Shockingly high prices in Africa vs median incomes suggests that economies can handle much higher prices then most people can consider indeed higher than I think are possible.

However all it suggests is that the world economy would deteriorate to levels similar to Africa not that there is any limit on prices. Indeed the horrible economies and wars in Africa may well be the result of the disparity between oil prices in income not the other way around. Again thats basically what I'm saying. Eventually globally we are all basically Africa in the end.

First stop for the US however is Mississippi.

According to the Center for Housing Policy, Americans have been making a tradeoff between housing costs and transportation costs in moving to the suburbs.

On average, the study found that working families in the 28 metropolitan areas spend about 57 percent of their incomes on the combined costs of housing and transportation, with roughly 28 percent of income going for housing and 29 percent going for transportation.

That means most working-class Americans are spending between half and two-thirds of their incomes on transportation and housing costs combined. And critically, other studies indicate they are living paycheck-to-paycheck with little or no savings.

In their search for lower cost housing, working families often locate far from their place of work, dramatically increasing their transportation costs and commute times. Indeed, for many such families, their transportation costs exceed their housing costs. Recent census data suggest this trend may be accelerating. Of the 20 fastest growing counties in the United States, 15 are located 30 miles or more from the closest central business district.

This is really the root cause of the mortgage meltdown. When fuel costs rose, many people living in the suburbs far from work could no longer to afford to both drive and make their mortgage payments, and due to excessively lenient down payment terms, they had little or no equity in their houses, so they opted to default on their mortgages rather than stop driving.

However, this had a cascading effect, since a few foreclosed houses in a neighborhood drove down prices, and put most of the houses into the negative equity range. So other people, many of whom had lost their jobs or wanted to move, elected to default, and at the end of the day the mortgage bubble burst.

Most or all houses in many new suburbs far from employment centers were in negative equity range, and so many people stopped paying on their mortgages. Then the banks, who had insufficient reserves due to excessively lenient government regulation, went bankrupt, other banks stopped issuing new mortgages, and house prices went down even more because nobody could buy a house except for cash. It's a classic example of an economic bubble busting due to external stress.

Most likely, we can look forward to a rerun of this domino effect again in 2011, if fuel prices go up enough.

Most or all houses in many new suburbs far from employment centers were in negative equity range, and so many people stopped paying on their mortgages. Then the banks, who had insufficient reserves due to excessively lenient government regulation, went bankrupt, other banks stopped issuing new mortgages, and house prices went down even more because nobody could buy a house except for cash. It's a classic example of an economic bubble busting due to external stress.

Let's not forget another time bomb that's about to go off that will certainly compound the problem.

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said.

You are right the effect is better equated to a 0.7%pa hit to GDP. The other thing to point out is that the total percentage of GDP devoted to oil consumption is a function of both price and volume. I think as we progress into the future there will be two compounding factors that will act to decrease production below the underlying capacity constraints:
- as mentioned above there will be a progressive move to nationalise local production and ration demand for essential services. This will occur on a nation by nation basis starting in the third world and it may be 20 years before such rationing is universal. Of course military use will be deemed an essential service.
- Exporting nations we increasingly restrict production as they recognise the future value of their product. The higher prices will allow them to pursue this course while still balancing their national budgets.

Assuming a flat world GDP and a limit of 20% dedicated to oil supply and the demand decreasing to 40mbpd then the price would be around $900. Pretty well in line with the limiting numbers Memmel quotes below. Of course this is current dollars. By the time we get to this point there will most probably have been extensive bouts of high inflation as the oil price rises run through the monetary system and other financial crises lead to competitive currency devaluation.

One simple scenario i like to quote concerning the capacity to pay for higher oil prices involves airline tickets. The general accepted wisdom is that $200 oil will kill the airline industry. Back in 1985 I was a young junior engineer on a salary that was equivalent to the median wage in Australia. Despite this i managed to pay for a Australia-Europe air ticket which at the time cost me around $1500. In wage inflation adjusted terms that ticket is now worth $4700 but I can currently buy the same ticket for just $1800. Based on the component of the ticket price that is related to oil the oil price would have to increase to $490 /bbl in order to result in the same ticket price that I paid in 1985. The airline industry was not dead in 1985 and it will still be busy burning oil when the price hits $300 or $400.

There is still a huge capacity to pay for higher oil prices. Two years ago I did a rough sector by sector analysis of price sensitivity and published the results on TOD. From this simple analysis we will need prices in the order of $400 in order to induce even relatively small (10-20%) levels of demand reduction.

Yep like your numbers. I tend to use Mississippi expenditures on energy as a percentage of income as the pain threshold for the US. Same result a heck of a lot higher. Obviously the US could literally see its poorest states become effectively third world ( Again I grew up as a child in Mississippi it was definitely third world when I was a kid)

To add to this however its not just oil that how I think the oil situation will move. However the financial crisis is not going away if we only had and oil problem I'd feel a lot different about the situation.

Indeed one of my arguments is that the US has much deeper pockets than people realize since we can default on our high priced mortgages and divert the cash flow to staying alive. Indeed defaulting on debt esp real estate debt means consumers have a lot more cash to spend on oil and indeed any consumer good that does not require good credit.

Globally as oil prices rose one would then expect debt defaults to increase especially in nations that have already passed their housing bubble peaks. In others like China rising oil costs and inflation will will burst their housing bubbles. Again they can certainly decide to default on real estate and other debt when they are also forced.

So consumer pockets at least are a lot deeper then most people realize once you accept the obvious that everyone will default on debt when it becomes a matter of survival.

It does not take a lot of imagination to see how this will interact with the financial bubble. Attempts at inflation will simply drive up commodity prices even higher leading to increased defaults.

Which force proves to be the critical one and where is anyones guess. Here at least over the short term I think oil will be the major problem not a renewed expansion of debt defaults. The reason is all thats really happening is that bank balance sheets are simply getting further impaired. People that own homes see their equity evaporate. But in a sense your simply stabbing a dead horse. Its already gone down. At least in the US. Now I think the US will see sharply rising interest rates as we have no choice but to back down from attempting inflation as its backfiring.
Although I think we will blow even more money regardless. In general however rising fuel prices in the US will simply accelerate the already declining financial trends. Stock market will go down etc. Sorry bit of a prediction some are still nominally rising but not for long :)

This time around the financial crisis will again be in Asia and esp China and probably India. Whats really really interesting is that if they are facing a worsening financial crisis they dare not allow widespread fuel shortages to develop esp in China. That would really inflame things. And the Chinese have plenty of dollars to buy oil even if their property bubble bursts. Japan would also be in dire straits. Can you say dump treasuries like mad ?

The influx of dollars and whatever else the Saudis will except for oil will of course incite inflationary growth in the oil producing countries strengthening internal demand. WT export land will get a boost.

Europe is a big unknown certainly some interesting times ahead for the Euro but in general perhaps Europe is also similar to the US they will simply hunker down and start defaulting on debt. Australia is in for some very interesting times esp give their situation as a resource exporter Canada too. Potentially a sort of decoupling of the resource rich regions from the rest of the economy. I think both will see their housing bubbles burst.

Problem is who is going to fail thats big enough to make a difference. Spain might but is it big enough is Italy big enough ? Even if the Spanish economy does fail oil consumption won't drop to zero.
This gives Spanish consumption at 1.4 mbd. Say their economy fails if consumption fell 30% thats only 400kbd. And a 30% drop is huge and even if it did happen not overnight. Italy similar. You practically need the Eurozone to fall apart completely to get enough contraction to offset rising oil prices.

This is why I come back to Japan. I think they are the ones in the most precarious position. Their large hoard of treasuries won't do them a lot of good and they probably will have the hardest time procuring oil. Obviously I'm thinking a currency failure the Yen seems to be the weakest of all under these conditions.

Who knows for sure but understand even as oil goes into its moves we also have plenty of interesting financial situations that will unfold. Its the combination of both that will eventually determine just who the weakest player really is. If I'm right about leveraging default on debt to maintain cash flow for staying alive the game is even more interesting as the biggest debtor i.e the US is in a lot better position over the short term vs creditor nations at least as far as competing for short term oil consumption. Our debt is denominated in dollars so we win in default either way. And at least at first the chances of a national default by the US will be low even as interest rates rise.

Its our creditors that lose. Indeed the debtors may well prove to all be winners during this round of the game. That still leads your back to Japan and its government deficit and coupled with large US debt holdings. I keep coming back to them being the biggest loser and also they happen to have oil consumption level high enough if they did collapse they would indeed give everyone else some breathing room.

No telling really more likely its a combination of a partial collapse in a number of areas but just seems to me Japan will be the big one even if it does not collapse completely.

And as I said earlier I think the nations that do collapse as long as its not complete chaos will simply inflate like mad and and or default in and attempt to stave off total collapse so I see more of a pause in oil prices than any major pullback. But do consider the financial aspects they really make the whole thing a lot more complex and a lot less predictable. And weirdly enough it seems to me the US wins this round of the game albeit via sacrificing its housing but still wins. Everyone else will eventually play the same card I'm not sure being the first makes a lot of difference.

Hey, I live in Japan, so I guess I now have something to look forward to...at least if you're right, 2011 won't be a dull year.

I think you might be right. The Japanese have a sun on the flag and I think sometimes they have been waiting to use that sun more fully. And not oil I mean.

You can't start in 2000-2003 because we had then a boost on the supply side. Since 2005 we are now on this bumpy plateau with the 1st spike mid 2008 which was caused by extra demand from China for the Olympic games. Let's hope the next Olympic games won't create another demand spike in 2012. If there is a storm in the North Sea and a drop of UK production we could see extra demand for imports but UK is much smaller then China. Many European soccer fans can take electric trains to London, although there would be a capacity problem.

You can't start in 2000-2003 because we had then a boost on the supply side. Since 2005 we are now on this bumpy plateau

Memmel believes that published oil production figures for the last decade are increasingly divorced from reality. Therefore he can start earlier. In memmel's postulated universe major players have known all about Peak Oil for a very long time but downplayed it. It then became an extension of the game to continue to fool as many people as possible for as long as possible with paper barrels that the world had not actually peaked.

The "bumpy plateau" is an illusion then according to memmel.

I'm gonna start by being iconoclastic here, and then end up on the party line.

Reading The Oil Drum has persuaded me of a lot of things, but so far I remain totally unconvinced that the recession of 2009-2010 was a response to the high oil prices of 2007-2008. I think the conventional explanation (real estate bubble sparked by unwise, misregulated lending practices, amplified by a highly leveraged credit market) works just fine.

High gas prices in 2007-2008 were enough to cause people to change their driving and car-purchasing behavior, but they never got high enough to make a big dent in the average family budget. ($4/gallon * 2000 miles per month / 25 mpg = $320, just 8% of the median family income).

Where I disagree with the conventional wisdom is where it claims that those high oil prices were a fluke, a bubble just like real estate. Bubbles happen because speculative demand drives overproduction -- the 2008 housing bubble is a classic example. But Figure 2 in Gail's article (which I nominate for Best Graph of 2010, by the way) demonstrates that oil is incapable of bubbling: production cannot increase in response to high prices.

So rather than believing that high oil prices caused the recession, I see it the other way around: the current oil price is artificially lowered *by* the recession: this will prove to be a short-term blip in a decades-long trend of rising demand and declining resource availability.

And that opinion, I hope, means I can keep my The Oil Drum membership card.

For what it is worth, I completely agree with this.

So rather than believing that high oil prices caused the recession, I see it the other way around: the current oil price is artificially lowered *by* the recession: this will prove to be a short-term blip in a decades-long trend of rising demand and declining resource availability.

Actually that my conclusion. I think things definitely got out of hand for sure but I'd argue the initial attempt was to artificially cool down the economy a little bit. Indeed the initial attempts may well have not even been to cause a recession just slow things down a bit.

Indeed one has to wonder with new news like this just what really happened with Bear Energy and JP Morgan.




Anyone who wants to know the hottest bankers in mergers and acquisitions should look at the energy industry, where Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. are doing more business than anyone, including traditional leaders Morgan Stanley and Citigroup Inc.


Lehman Brothers Holdings Inc.'s estate sued J.P. Morgan Chase & Co., alleging J.P. Morgan illegally siphoned billions of dollars from Lehman in the days before the troubled investment bank filed for the largest bankruptcy in U.S. history.


SINGAPORE, Oct 22 (Reuters) - JPMorgan Chase & Co has hired two senior ex-Lehman Brothers employees to head its global oil trading and marketing divisions, according to an internal company note obtained by Reuters.

The note said that JPMorgan had hired Jeff Frase as its head of global oil trading, while Roy Salame has joined the bank as its head of global oil marketing. Both Frase and Salame will be based in New York.

The bank has been expanding in Asia and other regions, and recently made its first foray into physical oil trading.


J.P. Morgan, the investment banking division of JPMorgan Chase, said Monday that it had acquired a new European headquarters at 25 Bank Street, London, a Canary Wharf skyscraper occupied by Lehman Brothers until its collapse in 2008.



Law360, New York (December 22, 2010) -- A federal judge has shot down an effort by a slew of defendants, including Goldman Sachs & Co. and J.P. Morgan Securities LLC, to bifurcate class certification and merits discovery in a putative securities class action stemming from the collapse of SemGroup LP.

If tried to make this all up people would claim I was talking about a tinfoil conspiracy.
Lehman subprime riiiight ... Everyone involved in the mortgage industry was already technically bankrupt by this point and had been for some time.

Now thats not to say the whole thing did not blow skyward but I'd argue that it seems clear that energy was a big part of what was going on initially.
What unrolled afterwards and what role oil played might never be known but I doubt it lost its importance even as things probably did not go close to what might have been planned.

Indeed for me the clincher is that Paulson was obviously scared shitless later on indeed as more documents come to light the depth and breadth of what really happens becomes even clearer and worse than I thought. However clearly any thought of systematic risk or other long range financial issues where not even considered early on.
This means that financials where probably not even on the radar. Far more likely that the initial events with both Bear Stearns and Lehman where about oil. These guys where so focused on oil they inadvertently crashed the global economy. Oil had them so scared they almost took the whole system down.

The test is whether this year we can have high prices and no recession. If we can, you are right. If not, you will need to rethink your ideas.

Agreed. But you're giving me pretty generous terms: I don't plan on saying "toldja so" unless we get both rising oil prices and rising US GDP through 2012.


Do you think over time China could be uneffected by a US recession?


I think there is much in this article to consider this a possibility.

Also looking at articles regarding China's trade increasing with other countries, such as Russia, Venezuela, Brazil, Nigeria and many others, It looks to me that China is moving rapidly away from over reliance with the USA for trade.

If this happens then perhaps US could go into recession, China might not be effected and be in a position to buy the oil that the US does not use.

Eventually, China will go into recession too, since all resources are finite. The question is how long they can hold out.

Recent growth is based on growth in coal production. If Chinese coal extraction is no longer growing (or not growing very much), China will have to turn to more-expensive imports, and it may be difficult to grow these rapidly enough. So for this reason, China's growth could stop pretty quickly.

Also, China is counting on exports to OECD (if not the US specifically). If their demand is way down, they will either need to sell a lot more internally or cut back on production. In order to sell more internally, they will need quite a few workers to be making reasonable salaries in order to buy goods. So I am not sure how feasible substituting internal growth really will be.

"no recession" where? In the western world or developing nations?

Recession in the western world is mostly due to excessive debt and because globalization forces the labor in high wage countries to compete with labor in the developing world.

Eventually as the oil price continues to climb it will cause a recession in the developing world also. But I don't think we are there yet.

Exploding debt and high oil prices were both culpable in the recession. Should blame be apportioned 50/50 or weighted to one side? I don't know. But going forward if we only had a problem with one of them I think we would stand a chance of avoiding national default. Its the combination of the two that really kills us.

If we had been paying cash all along, it would be much easier to deal with high oil prices. In fact, changes of all types would be a lot easier--people could decide to become farmers at 25% of their prior income, without defaulting on loans. It is all of the debt we have that makes us very vulnerable to a slowdown in economic growth or to high energy prices (the two tend to go together).

Gail if we had been paying cash peak oil would almost be a non-event. It still would cause problems but I'd argue they would be minor. I'd have to imagine such a society would not have abandoned its trains and flung itself into suburbia like we had. A "cash" society would be intrinsically different from our own.

I suspect it would be similar in some ways to France or Russia where people live and work in the cities and have a dacha or small country home that they retreat too. In other cases we would have kept our small towns etc.

Once you make the assumption that you have a society that pays cash its really difficult to envision it creating the suburban sprawl we have today. It seems to me a cash society would have intrinsically developed to the point peak oil would not be a problem.

Next of course such a society would have also probably developed its oil resources at a much slower pace. One would think the oil business would have been run at a lot slower more systematic pace. I'd argue that peak oil would have been a multi-decade affair and not occurred because of lack of resources but because we would have rejected the extreme sources. The oil sands and Canada would never have been developed and probably not deepwater.

I'd suspect that even a lot of the offshore development would not have happened or if it did that plans to move off oil would already be underway. Perhaps they would have developed the North Sea for example but late in the game and it would have been known a long time before it was finally developed. If they decided it made sense then even as the North Sea was developed to stabilize prices alternatives would be brought online.

What I see is a very long lag between discovery in development falling discovery would be very clear and you would have plenty of time to decide.

On the global warming front since the C02 input per year would have been a lot lower global warming would have become clear but with a much slower rise in C02. I'm not saying we would be perfect but the fact that C02 was probably increasing would have been obvious and yet not dangerous.

One has to imagine such a society would also take a different view concerning population. Again thats not to say we would not have had population growth but I'd argue it would have taken us much longer to hit 4 billion and when we did we would have again considered the issue for some time before it became a real problem.

Literally across the board problems we face now would have matured over many decades this means generations would grow up as children learning about peak oil, global warming and population issues. If at first people where reluctant to address these issues as the younger generations matured they would be far more comfortable about adopting polices to address them. We lost the ability to have problems gnawed on for 2-3 generations before solving them esp hard problems that require sacrifice.

I'd argue my children and their children will have no problem take the hard steps to address peak oil and global warming and even population growth. But they will never get the chance we collectively pushed things so hard and so fast that we never gave our children a chance to solve the problems we created for them. Instead we simply stole their future.

I think that humanity would have had a population issue to deal with right now no matter what. I don't think that one was solvable in the past. A lot of the causes where fairly recent medical/technical/agricultural advances.
I think we would have created the population problem almost regardless of the nature of society. However everything else would have been much easier to deal with and I think we would have solved peak oil and global warming and all the other problems we caused such as pollution. And as we did so we would have accepted we had to solve the population problem. Success from our other solutions would have emboldened us to tackle population.

This is really important because you can see once you assume a fiscally conservative society all our other problems seem to become solvable ones. That does not mean they are easy simply that many solutions become viable and most importantly you have plenty of time to solve them.

This means our real intrinsic problem is not resources and never has been its our financial system its what lies at the heart of what makes solving our problems impossible. Indeed it literally creates problems that cannot be solved. Thats the real danger that we face and it is bigger deeper and larger than all our other unsolvable problems put together. Peak oil, global warming, population, pollution all of this are small secondary problems compared to the real beast we have created. They are capable of crippling our society and perhaps almost destroying our planets ecosystem and they are minor. The financial beast left unchecked will eventually not just destroy us but likely really destroy the ecosystem not simply cause a massive die off.

The problem is as long as we are willing to steal from the future and from our children each generation will find something to take even if its less and less stealing from the future is always possible and profitable over the short term. It only fails when your finally reach the point that there is nothing left to steal. Until we recognize that this both always works and we must stop doing it we can never solve our problems.

We must stop profiting by impoverishing our children indeed we have too or one day there won't be any.

You are partially correct, I don't think that it was the prices themselves which caused the recession. It was the actual decrease in oil, and refined products coming into the U.S. which started in 2005-2006 which set up the need for higher prices. The system began to ration itself because supplies were not enought to meet demand. However, this began to have the effect of a value added tax to every part of the economy. Everyone knows what happens when taxes or interest are increased, you get a recession. The same principle applies here.

To simplilfy: Nature imposed a new tax on our country. The higher the tax the slower the economy.

Ben is printing the money to pay that tax, but who do you think will ultimately win?

It was the actual decrease in oil, and refined products coming into the U.S. which started in 2005-2006 which set up the need for higher prices.

What decrease in 2005-2006? Both consumption and imports were at a plateau during that time period. Both started falling in 2007, as the housing bubble was bursting.

Try annual net imports

Certainly the decline accelerated after 2007 but 2005 was clearly the peak year.

I linked to the monthly data specifically to indicate the scatter: there is no statistically significant difference between 2005, 2006, and 2007. Even if it were significant, it's a change of just 10,000 bpd. You're trying to hang the fate of the entire US economy on one teaspoon less oil per person per day. Forgive me for being crude, but I've had farts worth more primary energy than that.

Even if it were significant, it's a change of just 10,000 bpd.

US net imports mb/day

2004    2005    2006    2007
12.097  12.549 	12.390 	12.036

That's a 159,000 bpd fall betwen 2005 and 2006 and 354,000 bpd fall from 2006 to 2007. Or a total fall of 513,000 bpd between 2005 and 2007. Where do you get your "change of just 10,000 bpd" from? Edit: I see you were using the figure for gross instead of net so were counting oil products no longer in the USA.

also look at:


it looks like a plateu, but it is really a downtrend

"Reading The Oil Drum has persuaded me of a lot of things, but so far I remain totally unconvinced that the recession of 2009-2010 was a response to the high oil prices of 2007-2008. I think the conventional explanation (real estate bubble sparked by unwise, misregulated lending practices, amplified by a highly leveraged credit market) works just fine."

Why should this be mutually exclusive ? For me clearly the high oil price and its spike in july 2008 had a clear role in the sept 2008 2009 recession, I'm in line on this with Jeff Rubin, who points out how an increase in oil price has many different effects, apart from the cost of gas for the "general public", he list quite a few during his 2009 peak oil talk for instance :
(XYZ millions dollars in revenue being transfered from developed nations to OPEC being a big one for instance)

Moreover, from a more "historical perspective", the generous credits, and suburbia building spree, can also be seen as a result of cheap oil being perceived as something that would continue for years, the spike in oil price having also "damaged" this vision (besides it being totally unmanageable in the short or mid term future).
So I would say that a historian or economical historian in 100 or 200 years, could only describe the cause of the crisis as a direct consequence of peak oil and the rise in oil price , or let's say as the "root cause" reason of the crisis, even if it manifested itself as a credit bubble being blown up.

Um, you missed a car. The average household has two (or more) cars and travels more than 23,000 miles per year. (According to [pdf] 2001 data.)

So your calculation should really be double that, and the average family took a 16% hit to their budget. Not only that, but prices went from a US average $2.11 in early 2007 to about $4.11 by mid 2008. So from $2.11/gallon * 4000 miles/month / 25mpg = $338 a month (8%) to $4.11/gal * 4000 miles/month / 25mpg = $658 a month, or %16 of the $4000/mo you used for average family income.

So, an 8% increase in expenses, for families that are typically not saving anything anyway, over the course of a year and a half.

Surely there was a real-estate bubble. But to say that high gas prices had nothing to do with the bubble being pricked assumes that average households had the extra 8% of household income just laying around, which we know from savings rates they didn't. If the housing bubble pricked itself somehow, we need an explanation in the housing market of similar magnitude. And resets/recasts back in 2007 were only a problem for sub-prime. Put the increase in transportation costs with the subprime problems and you have a good explanation.

Um, you missed a car. The average household has two (or more) cars and travels more than 23,000 miles per year.

No I didn't. The number of cars per household is irrelevant here: what matters is miles per household. And your figure of 23,000 miles per year per household works out to almost exactly 2000 miles per month, which is the figure I used.

Now, there are certainly lots of households which have two heavy commuters per household, but most of those are also dual income, which makes them more likely to be above the median household income.

The recession in the U.S. began in December 2007 which means the U.S. economy began slowing down in June 2007, a year before the oil price shock of 2008. SUV sales were declining in 2006 due to the rising price of gasoline. The rising price of crude oil initiated the recession.

The current (high) price of crude oil is not lowered by the recession. It is controlled by the OPEC cartel acting as a swing producer during a glut restricting production forcing the price up to where they want it. Without the cartel, the price would undoubtedly be lower, perhaps $20 / barrel. Because non-OPEC countries are unable to increase production enough to break OPEC's strangle hold over the world (unlike in the 1980's), this will continue until world demand rises and/or maximum world production declines causing them to intersect creating another oil price shock.

I agree that the recession (depression) ensuing after the oil price shock of 2008, was principally driven by the credit crunch related to the subprime crisis. The subprime crisis was enabled by deregulation (in 1999, repeal of the provision in the Glass-Steagall Act that kept investment and commercial banks separate) and lax regulation. Thus, I think the price of crude oil can rise higher than $147 / barrel before the world economy snaps from the high price alone. Because the subprime crisis is ongoing (resets of Alt-A and option-ARM loans have not yet peaked), there may be another credit crunch in 2011 that reduces the demand for crude oil and limits its price. Ultimately we will start down the falling edge of peak oil causing the oil price shocks to occur more frequently without preexisting economic bubbles limiting the price rises. The price of the crude oil will have to hammer down demand without the assistance of crooked bankers. After we pass the inflection point on the falling edge, the frequency of the oil price shocks will decrease. Because the more important uses for crude oil will yield only under high prices, the peaks of the oil price shocks should generally increase with time. This will continue until economies collapse, or we switch off of crude oil. This is the stair step descent model.

BTW, I do not expect collapse until after the global peak in natural gas production. Peak oil causes economic depression. Peak natural gas causes collapse. There is so mush wasted, unnecessary uses of crude oil in transportation that we can clearly reduce our consumption with conservation, improved efficiency and conversion. I can not envision a replacement for natural gas, being used to cook, heat, generate electricity, make fertilizer, make plastic, make ethanol and provide many other uses in industry, if we do not convert proactively and reduce human population.

OIl prices started going up in 2003-2004, and the Federal Reserve started raising interest rates in response to the rising oil prices in 2004. The rising oil prices and rising interest rates (in response to higher oil prices) continued into 2005 -2006, until finally we started seeing housing prices drop, the sub-prime crash, and all the rest. The idea that oil prices only spiked in 2008 is silly. Look at my first graph.

So if we're going to see a repeat of 2008, it's not going to play out the same way in dollar-terms, because the FED has been pumping so much money into the economy. Trying to determine which price of oil will cause demand destruction in the world economy requires looking at oil in relation to other metrics.

I've done an analysis of the scenario which Gail talks about by using the S&P 500 in relation to the price of oil, to try to determine which ratio will cause the economy to collapse.

It looks like at anything past 12:1, you want to be selling your stocks and shorting oil.

This is all due to the "bumpy plateau" which we are currently experiencing during this post-peak economic era:

Full analysis: http://www.peakoilproof.com/2011/01/profit-from-peak-oils-bumpy-plateau....

Read your link. If anything if your hell bent on investing under the current circumstances then I'd say you simply take very short term positions. I would not even look at fundamentals but do technical analysis. If you want to do fundamentals then you would have to guess way out in the futures market.

If you buy say oil futures for 2015 and we have another price spike before then well these would be in the money.
As far as trying to actually trade across or through a price spike well your out of your friggin mind :)

I think I'm the only one on the planet that does not expect a price spike as most people envision it.
Not that I don't expect oil prices to rise dramatically eventually and if I'm right they have already started.
However why a spike ? Why should the come down again ? My best guess is not a spike like we saw last time but a serious price rise
followed by a bumpy plateau until something fails. War, financial panic etc. You might not even get thee plateau.
Thus I'd argue if we do have another price spike good chance that our markets simply won't make it through.

A far more likely event is that as oil prices rise again and the stock market threatens to tank that we will see the markets
literally taken over and trading done under and entirely new set of rules. Indeed this was how the flash crash was handled.

I'd argue that the big financial firms would welcome the "Emergency Market Stabilization Program" EMSP.

We can guess who comes out on top. I suspect ordinary citizens will find that their trading accounts are frozen and
unwinding the mess will take years. In the interim some sort of controlled market operations will be conducted to ensure
that critical financial operations take place. ( The banks may big money on these controlled trades).

Effectively a command market economy under the guise of "fixing" the free market system that had derailed.
Assuming that such actions finally cause widespread panic in the streets well shortly after the market stabilization program.
We have the "Emergency Advanced Tactical Security Homeland Intervention Taskforce"

After this you simply get a cascade of intervention as the government is forced to take control of every aspect of the economy
in order to restore a viable free market. Yeah right.

We have the "Emergency Advanced Tactical Security Homeland Intervention Taskforce"

If you are anywhere close to correct in some of your analysis there's probably a few people in various agencies just spewed their coffee over the screen :-)

Got the acronym I see :)

Given that China owns most of US debt, I keep wondering which country would be hurt more if we just defaulted?

Or is it more a case of economic Mutually Assured Destruction?

Actually China does not hold most of US debt but it is the largest holder.


If USA defaulted, China would be effected, but no country would sell the US another barrel of oil or another computer.

Sure they would, just not for dollars. Wheat will still be a fine currency.

Given the apparent choice by Bernanke to monetize the debt, the only options for the US are to push for higher efficiency, more alts, and fewer people. Buying oil on credit is a losing gambit. Unfortunately, we're doing exactly the opposite. I cannot see any way that it can end well.

China and several oil producing countries are buying farmland in Africa to help feed their populations.


In time they may not need the U.S. even for grain.

These are the sort of investments that I can't see anyone sane making: African countries have nationalised foreign investments before, you're very clearly buying from a tyrant and the sale of the countryside is the sort of thing that has been known to leave tyrants hanging upside-down from lamp-posts. Whilst the UN is a reasonably toothless tiger, it is fairly clear which side the blue helmets, and the cruise missiles and spy satellites and asset seizures behind them, would be on if the purchaser of African farmland attempted to send troops to reverse its nationalisation.

"In early 2009, the Madagascar government announced that it had leased 1.3 million hectares of land for 99 years to the South Korean multinational Daewoo. The people took to the streets and eventually succeeded in removing the government of President Marc Ravolomanana. One of the first acts of the new President, Andry Rajoelina, was to cancel the deal with Daewoo. It also cancelled a deal with an Indian company, Varun International, which had taken 450,000 hectares on lease. Rajoelina said at the time that Madagascar’s land was not for “sale or lease” to foreign companies."

One word: "Climate change".

Oh thats two words. Whatever.

If you indeed did default on your dept, the new game would be to actually PAY for the stuff you import, instead of putting it on the credit tab. This would in one blow eliminate your import/export imbalances.

Wow, those figures are amazing. The UK has bought up $360bn of US debt in the last year?!

The US Treasury Web site points out (https://ustreas.gov/tic/shl94sum.html):

"This is because the data system which collects ongoing, monthly information on the purchases of U.S. securities by foreigners records the country from which U.S. securities are bought, but not the nationality of the actual purchaser. Thus, as frequently happens, if a Japanese firm purchases U.S. Treasury bonds by placing an order via a U.K. broker, this would appear as a U.K. purchase, not as a Japanese purchase."

So the large purchases labelled "UK" indicate that the UK possesses a very large number of brokers, which you already knew.

In other news, the small town of Bentonville, Arkansas consumes 12% of all the products sold in the US!

Seriously, why do we even bother recording the nationality of foreign purchasers? The information tells us nothing useful, and as just demonstrated, causes serious confusion. It's anti-data.

Ah ok, thanks for clearing that up - I was getting very confused seeing as that figure is way more than the entire NHS budget!

right now it would be mutually assured destruction, but it is clear that China is moving to change that equation. They want to be able to exist without the U.S.

There's certainly alot of speculation about China here, but always neglected is China's historical albatross of famine.

In spite of their recent one child policy and their present foray into third world farmland, I don't think they they have eliminated that monster. It has kept that nation in check for most of recent history, and will continue to do so.

As one notes upthread, per capita GDP of China is actually quite low. World grain stocks and food reserves are quite low, and unlike oil, cannot be offset by substitutes such as coal, or just "parking the car" till income improves. As ag commodities continue to climb, I doubt they will have the reserves of any form to feed their population. In this regard, the recent surge towards urbanization seems even more near sighted. Every family in the city becomes another to feed, whereas those remaining rural might at least partially feed themselves. As much as the increasing droughts and diminishing water tables, snowpack and glaciers will allow.

Food is quite substitutable, though not on one week's notice. Suppose China decides to spend some of the many dollars they have saved up, on corn (or wheat, or any other grain that we can grow a lot of). In a year, maybe two, farmers here start planting the corn that the Chinese want, and we have less left over for either making ethanol, or for feed pigs and cattle. It takes many pounds of corn to make a pound of beef. We have a huge food-growing capacity on this continent, but we use it very inefficiently. That could change.

The Chinese are buying up large amounts of farmland in Africa to grow crops to supply food for China. They don't need to bother to out-compete American drivers for the supply of corn which otherwise would be converted into fuel alcohol.

Of course, the knock-on consequences of this is that Africans end up starving, but that is a consequence of being lower on the food chain than either Chinese food consumers or American drivers.

There's certainly alot of speculation about China here, but always neglected is China's historical albatross of famine.

That's because the Chinese realized that famine is just a result of bad economics. If you fix the economics, the famine problem will go away. So they fixed the economics, and the famine problem went away.

And after that, they started their huge economic boom of the last two decades, but the first step was to fix the famine problem. It's all about finding economic solutions that work. Marxist theory doesn't work, but capitalism does, and the Chinese belated realized that, so modern "communist" China is really more capitalistic than most western countries. I can go into details if you want.

"If you fix the economics, the famine problem will go away."

That's as irrational as the Soviets proclaiming crop failures were because the soil was reactionary.

Famines have plagued China much longer than Marxism, and today they import ever increasing amounts of their food with their new economy. Famines are the result of very tight supplies, and the poor being unable to afford the food. As supplies become tighter, Chinese yields decrease due to loss a host of environmental factors, I don't see how the new economy will keep up. The well off will eat, the poor won't.

That's as irrational as the Soviets proclaiming crop failures were because the soil was reactionary.

Famines have plagued China much longer than Marxism

It's true that China has experience thousands of famines over its history. However, the Great Chinese Famine, of 1958–1961 in which somewhere around 36 to 45 million people died, was a direct consequence of Mao's Great Leap Forward. Similarly the Soviet famine of 1932–1933, in which about 6 million people died, was a direct consequence of Stalin's policy of forced collectivization. Both were a direct consequence of trying to implement Marxist economic theory in food production.

However, despite its history of famines, China has not had a famine since 1961, and Russia has not had one since 1947. They both have had droughts since then, but not famines. I think they've realized that Marxist economic theory just doesn't work, at least as regards food production.

In the modern world, regardless of crop failures in one part of the world, there is always surplus food production in some other part, so the only reason a country would have a famine is if it failed to import enough food from other countries with surpluses. If you have enough money, which China does, that is not a problem.

Per your last point, "there is always" should perhaps be "there has historically been". I know the mantra of "it's a distribution problem, not a production problem", and living lower on the food-chain and all that, but as global energy decreases and population increases the opportunity to have both global famines and localized famines increases. You can expect a time when some in New York and Hong Kong will dine on steak and drive E85 limos while others starve for lack of cornmeal. If China has the cash then Chinese may not starve soon, but others in Ethiopia probably will.

And none of this would say that we couldn't feed everybody longer, and to an extent we probably will, just as we have up until now. And that will keep pushing up population, until we can't, or more likely, just won't. Note that nobody inside or outside tried too hard to keep those 40M Chinese from starving back in '60, and it would have been relatively easier to prevent then.

I would urge you to remember the equation:

10 kcal of hydrocarbons= 1 kcal of food

What is your source for that? It is surely true (and perhaps more so) for the most costly foods (meats, etc), but not necessarily true for grains, beans, and some nuts. And, from Pimentel, I also notice that you can grow food with varying fuel efficiency, with a correspondingly inverse land efficiency (having a lot to do with application of fertilizer).

10 kcal of hydrocarbons= 1 kcal of food

Of course that's nonsense, because you can always go out in your back yard (if you have fertile soil), plant some seeds, and harvest a nice crop of vegetables or grains (if it rains enough). The real constrains are 1) do you have enough fertile soil and, 2) do you get enough rain.

In reality you can grow crops with zero petroleum input, and in many parts of the world people do. In the US, farmers use a lot of hydrocarbons to produce food, but that's the lifestyle they have chosen.

Yes, one can grow food with zero petroleum input. But can 7 billion?

Yes, one can grow food with zero petroleum input. But can 7 billion?

Yes, they can, but many of them don't want to. It's a lot of hard, sweaty work plowing land behind a mule. Most American farmers prefer the air-conditioned comfort of a cab on a four-wheel drive V8 diesel tractor.

In China, on the other hand, they manage to feed four times as many people on less farmland without even the advantage of having a mule to pull the plow.

In China, on the other hand, they manage to feed four times as many people on less farmland without even the advantage of having a mule to pull the plow.

They do, nevertheless, use huge quantities of fossil fuel-based fertilizers, which were responsible for a doubling or tripling of worldwide crop yields during the 20th century.


one of the things to keep in mind with regard to Chinese demand for oil and other raw materials is that a good portion of it is not really "Chinese demand" but rather demand which transits their economy as those materials are converted into products that the Chinese export to the rest of the world.

If much of what is imported by the US from China had in fact been made in the US we would have seen our demand for oil and commodities much higher. I don't know how important this effect is but unquestionably some of the improvement in the amount of energy required per dollar of GDP in the last 20 years has to be due to this substitution effect. The same thing is true about the "high productivity" in the US. If you import components that had previously been made in the US the productivity of the US work force goes up since the final product uses fewer US worker hours and that is how productivity is measured.

That is a point I hadn't thought of. There is also the substitution effect, of a machine operated on oil or electricity taking the place of manual labor so human hours are lower, and productivity goes up. Once there is less oil available, it seems like productivity may go down (or at least not rise as much) because these factors will work in the opposite direction.

Eventually, without oil, productivity will likely be back where it was originally without oil.

Hm you still have technical progress so I think we will always move forward.

I program computers and the right algorithm can always blow away anything. The right algorithm in custom hardware well the sky is the limit.

If you think about technology as first the right algorithm then the right hardware then productivity can be extremely high. The downside if there is one is that the task must deserve this specialization. It has to be important enough.
I still write plenty of linear searches esp for run once or seldom code.

We have adaptive compiler technology called first called hotspot that identifies bottlenecks and focuses on those.
Run once code is ignored no matter how awful.

Generalizing this efficiency in the generic sense can be optimized several thousandfold if it matters.

I think what we will lose is economy of scale. Optimization won't be scaled resulting in huge savings. Many tasks that if centralized could be broken down and optimized would be decentralized and seldom done often enough to optimize. Thus it looks like efficiency is declining. However whats really happening is highly optimized solutions which show the highest benefit when coupled with economy of scale are replaced with generic often custom solutions.

But ....

That does not mean optimizations are not applied even if a task is seldom done. If we share the knowledge about a task and maintain databases when the problem comes up we can review the literature and see how others solved it.
We can then synthesize a solution that fits our needs and if its novel enough add it to the database.
Often these solution might be suboptimal but benefit from lower setup costs for example.

This is what open source does it allows coders to rummage around and find best of breed or more often synthesize a new approach.

We where on this path back in the Middle ages but the various guilds chose to hide their knowledge eventually of course getting wiped by the power of economy of scale. I hope this time around that people won't be so worried about technical things. Indeed we are now smart enough to not really worry about technology its not semi-magic like it was back in the middle ages we have systematic methods that allow us to optimize any process.
Attempting to hide something fails fast if its important. With the scientific method simply knowing something exists is technically all you need to know to replicate it. Thus I don't think we can take some of the routes taken in the past as many are simply no longer possible.

However I do think we will lose economy of scale for the most part. Even if we build efficiently we will still be building a lot more one off solutions. The intrinsic boost from economy of scale will be lost.

But to me this just means we have to build to last. If you can't have economy of scale then you have to make your solution as close to a one time one as you can. This in my mind means focusing on duration. I'd argue this can be expanded to include a number of different type of solutions. Inefficient but dirt cheap. Expensive but durable.
Expensive but upgradeable. Etc. What your lose is probably cheap and efficient and disposable.

This covers dang near everything we make at least for consumers. If I went through my house and removed everything that was cheap efficient and disposable then it would be close to empty. Simple items like my can opener cannot be fixed. Once it wears out I have to discard it. How many things do you own are capable of lasting 60 years even allowing for repair ? I think I could put the items that really fit this criteria in a few boxes most of them super simple and ancient like a set of metal chopsticks. A few others like some bamboo items would fit other reasonable categories. Some like my bike could be. My car no sorry. My computer ?

Obviously if you run this sort of experiment you can see that what might be is so radically different from what we have today its almost impossible to guess. At every turn once you rule out economy of scale you would do things differently. Very little would transfer.

In the end it seems like it would be so different perhaps we really cannot guess. I suspect my great grandchildren will get a kick out of my guesses about how life will be like when they are old.

Indeed such a time capsule would be neat. I'm still young now it would be cool to leave something like that and crack it open when my health starts to fail god willing and I live a long life.

In one sense I'm not a doomer at all given a chance people are really smart they will solve all the nasty problems we have thrown at them. Future generations will deal with it. For many they won't even realize what we took since they simply won't know anything different. Indeed my dream is that future generations look back at us and deride us but also feel superior because they solved the damned problems their stupid ancestors created.
And most of all they are happy.

Now being the super doomer I am that does not mean our time is not coming to and end it is we are done and soon will be lost in the pages of history. But our death is not the end its the start of something new and different and one hopes eventually better.

Using progress coming basically from Moore's law as an example of what could happen in "heavy industry" domains such as food or energy can only lead to bad images I would say.

Eventually, without oil, productivity will likely be back where it was originally without oil.

I absolutely disagree. There are two things that the Oil Age has brought us that are permanent -- or at least, can endure for millenia.

The first is knowledge. Oil allowed us to massively accelerate our scientific and engineering research. Take our society and remove the oil, and after all the chaos is over, if the librarians have done their jobs you will still have a society that understands how electricity, magnetism, and thermodynamics work, how to build a heat engine, a generator, semiconductors, a radio. This knowledge allows a post-oil society to build machines with a much higher EROI than was possible in a pre-oil society.

The second is raw materials. In the 19th and 20th centuries, a phenomenal amount of energy went into extracting and smelting iron to produce steel. In the late 20th and 21st centuries, an equally phenomenal amount of energy was used to smelt aluminum. Smaller amounts of energy went into extracting gold, silver, lithium, yttrium, and all the rest. That stuff doesn't go away: it's there in our buildings and landfills for a post-oil society to use. (Well, some materials like iron do decay if improperly stored, but in a post-oil society they will be too valuable to allow to rust.)

The upshot is that an oil binge brings a society permanent benefits: even in a worst-case scenario, folks in the year 3000 will have technology and materials that can be used to create an energy industry with a much higher gain than was possible in the year 1000, and with a correspondingly higher quality of life.

Industry needs a source of energy, but it is not particularly committed to oil as such. Many industries use what is known as "burner-tip switching". They use whatever source of energy is cheapest, oil or natural gas. At this particular point in time, natural gas is cheaper, so most of them are probably using natural gas.

The exception is the transportation industry, which is largely committed to oil as a fuel source (mostly in the form of diesel fuel). This is harder to change because of the distributed infrastructure required, but it is possible. Railroads can convert their lines to electric power, and trucking companies can convert their trucks to compressed natural gas. If oil prices stay high, this is probably what will happen.

one of the things to keep in mind with regard to Chinese demand for oil and other raw materials is that a good portion of it is not really "Chinese demand" but rather demand which transits their economy as those materials are converted into products that the Chinese export to the rest of the world.

This has been very true for China throughout the OECD boom years that preceded the Great Recession. For the last three years however, in the face of slumping exports, China kept up its GDP growth by substituting in excessive internal malinvestment (e.g. google 'China ghost city ordos'). There must be millions of barrels of unsustainable demand for oil in all that malinvestment, which is not oil re-exported to the West, but a purely internal Chinese affair related to the need of the political elite to maintain the country's GDP growth rate "or else".

The problem with that Chinese strategy is that China's artifically pumped "growth" is preventing oil and commodity prices from resetting to the lower levels necessary to sustain an OECD recovery which would ultimately reignite a fire under China's export machine.

Nice, this post is getting some attention from more mainstream sources:

My gut says 2011 will be the year the end of cheap oil can't be ignored by the pundits anymore. The way Gail frames it in her post is smart. The actual date of peak oil is less important than the fact that the current tightness of supply/demand is impeding economic growth. And flat growth makes the debt tower quake.

I was talking to John Felmy (economist for API) recently and he used almost identical words to describe some of the issues that I use in my post. He talked about oil eventually being left in the ground, because the price can't rise high enough to justify the effort needed to get the oil out of some reservoirs. This idea is a lot easier for mainstream economists to understand than that oil will magically follow some pre-determined Hubbert curve, regardless of price--an idea I am somewhat skeptical of myself.

Gail the Actuary said:

This idea [...] that oil will magically follow some pre-determined Hubbert curve [...] I am somewhat skeptical of myself.

This idea was apparently opposed by Hubbert himself. Said L. F. Ivanhoe (King Hubbert - Updated; PDF!)

The Hubbert Curve starts at “zero” (0=production rate & time) and increases for the first years. This smooth
“idealized” curve is the mathematical “smoothed average” of the annual production which can oscillate wildly.
Quoting Hubbert:

“The curve does not keep going up, but passes over a hump and then goes back to zero. This is the one
future point on the curve that you definitely know and it greatly facilitates the mathematics. The area
under the (production) curve is graphically proportional to the amount of development. The area under
the curve cannot exceed your estimate. It is a very simple, but very powerful method of analysis.”1

“This complete cycle has only the following essential properties: The production rate begins at zero, increases
exponentially during the early period of development, and then slows down, passes through one or more
principal maxima, and finally declines negative exponentially to zero. There is no necessity that the
curve P as a function of t, have a single maximum or that it be symmetrical. In fact, the smaller the region,
the more irregular in shape is the curve likely to be. On the other hand, for large areas such as the United
States or the world, the annual production curve results from the superposition of the production from
thousands of separate fields. In such cases, the irregularities of small areas tend to cancel one another and
the composite curve becomes a smooth curve with only a single practical maximum. However, there is no
theoretical necessity that this curve by symmetrical. Whether it is or is not will have to be determined by
the data themselves.”2

Hubbert wrote virtually nothing about details of the “decline side” of his Hubbert Curve, except to mention that the
ultimate shape of the decline side would depend upon the facts and not on any assumptions or formulae. The decline
side does not have to be symmetrical to the ascending side of the curve - it is just easier to draw it as such, but no rules
apply. The ascending curve depends on the skill/luck of the explorationists while the descending side may fall off more
rapidly due to the public’s acquired taste for petroleum products - or more slowly due to government controls to reduce

Fantastic post.

The logistic was and useful mathematical abstraction. Barring any reason to believe otherwise a symmetric curve makes sense.

The area is all that matters. If technical advances can keep production rates high vs remaining reserves well obviously the curve is asymmetric. If advances in discovery overwhelm well then the curve is more symmetric but steeper. The exact shape depends on the details. Indeed with a bit of thought both probable outcomes yield a steep decline symmetric or asymmetric does not matter. Either the peak is higher or longer than the simple case. The down side slope is still steep.