WSJ, Financial Times Raise Issue of Oil Prices Causing Recession
Posted by Gail the Actuary on March 28, 2011 - 10:39am
The idea that high oil prices cause recessions shouldn’t be any surprise to those who have been following my writings, those of Dave Murphy, or those of Jeff Rubin. Last month, though, the Wall Street Journal finally decided to mention the idea to its readers, in an article called “Rising Oil Prices Raise the Specter Of a Double Dip“. The quote they highlight as a “call out” is
When consumers spend more at the pump, they often cut back on discretionary purchases.
The WSJ shows this graph, linking oil price hikes to recessions:
A Financial Times blog by Gavyn Davies says something very similar:
Each of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices. Sometimes (e.g. in the 1970s and in 1990), the surge in oil prices has been due to supply restrictions, triggered by OPEC or by war in the Middle East. Other times (e.g. in 2008), it has been due to rapid growth in the demand for oil.
But in both cases the contractionary effects of higher energy prices have eventually proven too much for the world economy to shrug off.
In this post, I explain what the WSJ and Financial Times articles are missing regarding the connection between oil and the economy. I also explain how the inability of oil prices to rise very far suggests that the downslope may be considerably steeper than most models based only on the Hubbert curve would predict.
Impacts of High Oil Prices on the Economy
The graph shown in the WSJ is very familiar. On November 5, 2008, I wrote a post called Jeff Rubin: Oil Prices Caused the Current Recession that included this graphic from this publication of CIBC World Markets.
A more recent analysis by James Hamilton called “Historical Oil Shocks” published (here or here) as a National Bureau of Economic Research Working Paper shows that almost an “if and only if” relationship exists between oil price shocks and U. S. recessions. According to page 26 of his paper,
All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War.
My own research relates to reasons why changes in oil price can be expected to have a disproportionate effect on the economy. It has not entirely been published, but has been presented at conferences including the 2009 Biophysical Economics Conference and at the 2010 Advances in Energy Conference in Barcelona, Spain, and will shortly be written up in a book in Springer’s Brief’s in Energy Analysis series, under Professor Charles Hall. My analysis indicates some of the reasons for the connection between oil price spikes and recessions are as follows:
Cutbacks in Discretionary Spending. If a person (or state government, or other organization that cannot easily pass through its costs) faces an increase in oil costs, it has a tendency to cut back in discretionary spending, since many oil expenditures are for necessities, like commuting to work. This is an exaggerated graphic I put together in a post I wrote called There is plenty of oil but . . . showing that because most incomes do not rise when oil prices rise, there is a compression in discretionary spending.
In Figure 3, I combine food and oil prices, because food prices tend to rise at the same time as oil prices. This occurs because oil is used very extensively in raising crops (operating farm machinery, herbicides and pesticides, irrigation, fertilizer) and in food transportation and packaging. A comparison of FAO’s Food Price Index and Brent oil prices (spot prices from the EIA) shows a high correlation:
Interest Rates and Inflation Rates. Higher oil food prices directly affect the inflation rate. Furthermore, if prices of other types of goods rise because of higher transportation costs, this also tends to raise inflation rates.
In the 2004 -2006 period, when oil prices rose, the Federal Reserve raised target interest rates, from 1% to over 5%, specifically mentioning rising oil prices, and their expected impact on inflation rates as a problem. To the extent that these higher interest rates affected consumer loans, the higher interest costs also acted as a reduction to income, over and above higher food costs.
The WSJ doesn’t seem to think that the Federal Reserve will again raise target interest rates this time. The WSJ reports:
In part because it is driven by something other than increased demand, the rising price of oil is unlikely to prompt the Federal Reserve to move more quickly toward raising short-term interest rates, now near zero, or otherwise moving to tighten credit. That could change if higher energy and goods costs begin to seriously feed into prices of other goods and services. But with unemployment high, a large share of U.S. manufacturing capacity still idle, and little sign that public or market expectations for inflation are moving up, Fed policymakers see the chances of inflation rising by more than their informal target of about 2% this year as remote.
Of course, it isn’t necessary for the Federal Reserve to raise target interest rates in order for interest rates on debt to rise. If investors can see that inflation is heating up, they will demand higher interest rates to compensate for the higher expected inflation rates. CNN Money shows the chart shown in Figure 5 in a February 7 article titled Bond shoppers: 10-year yields pushing near 4%.
These higher interest rates on 10-year treasuries tend to translate to higher rates for other types of loans, such as mortgages, as well. So interest rates seem already to be headed higher, perhaps in part reflecting the inflationary impact of higher oil prices over the past year.
Decline in Home Prices. Another type of discretionary purchase is the purchase of a home. A person needs to have considerable discretionary income to purchase a more expensive home. So cutbacks in discretionary income tend to reduce demand for homes, and because of this, home prices tend to drop. Figure 4 shows that oil prices started rising in 2004. The timing of the 2006 -2007 home price drop matches very well with what a person might expect, based on the 2004-2006 oil price rise and the interest rate rises that followed the run-up in oil prices.
Debt Defaults. If oil and food prices are higher, some of the more marginal buyers are likely to find it difficult to keep up their payments, and miss payments. In the 2006-2007 period, many of the more marginal home buyers were holders of subprime loans, but there are many others as well. Businesses facing cutbacks in buying because of reduced demand for discretionary goods are also likely to be affected by reduced demand, and find it difficult to pay their mortgages.
Eventually, banks figure out that loan applicants are likely to have a hard time repaying their loans, and cut back on offering credit because it doesn’t make sense to offer loans to people (and businesses) who are likely not to be able to repay them.
Balance of Payments. If oil prices rise, balance of payments are likely to get more out of balance than otherwise, with oil sellers benefitting from the higher oil prices.
What oil price level is needed for recession?
The WSJ article linked above says:
Most economists reckon that the price of oil would have to rise to at least $120 a barrel, and stay there, to threaten the recovery.
It is not clear how good an estimate we can expect from economists regarding when oil can be expected to affect the economy. The question of oil prices has only recently begun appearing on the radar screen of most economists.
One factor that may make recent estimates too low is the recent disparity between West Texas Intermediate oil prices and Brent prices. Most US analysts follow West Texas Intermediate (WTI) oil prices. These are the oil prices shown in Figure 1. WTI prices are now depressed relative to most other oil prices, as I discuss in this recent post, because of processing/shipping issues in the US Midwest. Another oil index, Brent, which many think is more representative, is $114 barrel now. So while WTI prices are “only” at around $100 barrel, other more representative oil indices are already higher.
Furthermore, other analyses show lower oil prices can lead to recessions. Charles Hall, Steven Balogh, and David Murphy did an analysis of the connection between the price of oil and when recession can be expected (Figure 6). In their view, recession is likely when oil amounts to more than 5.5% of GDP. When their analysis was done in 2008, this corresponded to a price of about $85 barrel.
If rising oil prices leads to recession, what are the implications for future oil supply?
If there were no problem with oil prices leading to recession, prices could keep on rising as much as they need to, to encourage additional production and to encourage alternatives. It is the fact that high oil prices cause recession, and the fact that recession tends to causes oil prices to drop, that prevents oil prices from continuing to rise, in a fashion that would allow oil companies, and makers of alternatives to be able to rely on the higher prices. This hampers the continued growth of oil supply.
If we think about it, extracting oil requires investment at many steps along the way: whenever exploration is done; whenever a new well is drilled, or “fracking” is done; when a decision is made to replace a broken oil and water separator; even when decisions are made to hire and train new staff members. As long as oil prices are rising enough that there is an adequate gap between the cost of production and what the oil can be sold for, there is the possibility that there will be enough funds left to reinvest.
In terms of Charlie Hall's “cheese slicer model,” if the Energy Return on Energy Invested (EROI) is high enough, there will be enough energy coming out of the red arrows of Figure 7 for both (1) New Investment in Oil Extraction and (2) Demand for New Products that Use Oil. (See Nate Hagen’s post, At $100 oil, what can the scientist say to the investor?)
On Figure 7, there are two red arrows. The one pointing to the right is the one relating to discretionary spending, and the one pointing down is the one for reinvestment. What happens is that over time, the easy-to-extract, high EROI oil, is depleted, and it takes more and more energy the extract the remaining oil. As the EROI declines, the size of the investment for new oil extraction keeps going up (the black arrow across the bottom gets larger).
Barclay’s recently illustrated their view as to how much the cost of oil production is increasing (Figure 26 in a publication called The Return to Scarcity).
A rise in oil cost of production generally corresponds with lower EROI. I don’t know whether Barclay’s analysis is precisly correct, but it is clear that the cost of oil production has been rising, both in dollar terms, and in energy required to produce the energy we are using. What happens when increasing energy is required to produce oil is that the amount of energy coming out of the red “discretionary use” arrows becomes less and less, so the arrows become smaller.
As the red arrows denoting discretionary output become smaller (compare Figure 9 to Figure 7), the need for investment (big black arrow at the bottom) becomes larger, causing a serious conflict between what is needed for investment, and what is available for investment.
It seems as though we may already be reaching this point of conflict, especially if oil prices do not keep rising. We have been able to disguise this conflict in the need for investment funds partly through borrowing, but if credit restrictions associated with recession occur, it will become increasingly difficult to find adequate funds for investment.
The small arrow to the right for discretionary purchases (for Figure 9, compared to Figure 7) indicates that there is a constriction in demand for goods of all kinds (including those using oil), because the system of extracting oil uses so much energy itself. If the red arrow to the right were bigger, it would denote higher demand for goods and services, even goods and services made with expensive oil. But with weak demand, we get recession, rather than demand for goods produced from high-priced oil. At times, this lack of demand may manifest itself as a glut of high-priced oil on the market, because people can’t afford it. The net effect of all of this is that the lack of energy “push” from the red arrows is what brings the system to a halt. This may look like a lack of “oil demand” to economists.
The way I visualize the situation is to think of oil resources as a triangle, with the easiest to extract at the top, and the most difficult to extract at the bottom. These resources would include both conventional and unconventional oil. These resources would also include oil that can be gotten through very advanced (and expensive) extraction techniques, as well as oil that can be extracted very simply (and cheaply).
Right now, many people assume that all of the oil resources that we can “see” will eventually be economic. But if prices cannot rise high enough, then there is a limit on which of this oil can be extracted. It is not obvious from just looking at the available resources where this might be, but the limit is there. For example, if the limit where the economy goes into recession is $120, and if a particular “high-tech” extraction method needs a price of $140 to be economic, then that approach is not going to be economic, and what looks like usable oil resources using that method is likely to prove to be a mirage. Technology improvements may cause some oil extraction to move above the line, that would otherwise be below the line, and lack of investment funds may cause some oil to move below the line.
Many people see Hubbert’s Curve as predicting a peak and slow decline, based on M. King Hubbert’s analysis of how individual reservoirs depleted. It seems to me that Hubbert’s analysis more or less says what will happen to conventional liquid oil, extracted using low tech methods. But it really doesn’t tell us much about how much oil from lower quality sources or extracted using more and more advanced techniques will prove to be economic. The cutoff really takes place when prices are not high enough relative to production costs, so that there are not enough funds for investment and to support continued demand for energy-using products by consumers.
Once we start reaching economic limits (marked by serious recession and inadequate funds for reinvestment), we are likely to be well past the point where 50% of the oil that is economic to extract has been removed. Lack of funds for reinvestment can act to cut of future development fairly quickly, it would seem to me. If prices are not very high, say $60, much of the more expensive oil production will cease.
It should be noted that this model is not really complete. There may be other types of limits in addition to the cutoff relating to what is economic. We are hearing about the possibility of the breakup of Libya and damage to oil fields. To the extent that political turmoil makes it impossible to extract oil, then even what appears to be economic in Figure 10 may prove to be impossible to extract.
See also: Developed countries share of oil
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Nice piece. I doubt you would get more than 5% of economists to conclude that the 2008 recession was caused by the oil spike at that time.
Strangely enough, less than 5% of economists had any clue that the GFC was coming up, at that time.
Why do people continue to listen to manifest failures?
I have discovered at least some actuaries are quite interested in what I am saying, because recession very much affects insurance, and actuaries are not particularly tied to what economists are saying. I was at a conference this week, and talked about the connection between oil price spices and recession, as well as the fact that exponential growth cannot go on indefinitely in a finite world. My talk was well-received.
Given that "finite" is not a recognised economic concept, I'm not surprised.
I think the fact that your talk was well-received among actuaries is very significant. Actuaries have a huge influence in the insurance industry. Would you say that when actuaries speak, insurance executives listen? Executives may not always make their decision based only on what actuaries say, but I imagine they pay close attention. That may determine what industries can get insurance and at what price. If the price of insurance for oil companies goes up, would that not be another factor in what oil becomes feasible to exploit?
I think the reason the talk resonated well in the insurance industry is the fact that they are aware that recessions have always affected insurance companies by a huge amount. One of my employers "went under" subsequent to the 1973-1974 oil spike; another of my employers almost did--had to be bailed out, by a buyer who bought the company for $2 a share. This is one reason I have always worried about a connection between oil limits and the health of financial institutions.
There are some companies that are affected favorably though. If people drive fewer miles, private passenger auto rates may prove to be too high in a recession.
Actuaries are not as "hung up" by the pronouncements of economists as a lot of business people /economists, because they generally have not had a lot of economics courses. Typically, they have majors (or masters degrees or PhDs) in math or a hard science. Some of them have had quite a bit of exposure to what happens in practice with the financial system, though. I also think of actuaries as being practical, rather than hugely theory driven. There aren't a whole lot of actuaries from Ivy League schools; most seem to come through university systems or local private colleges. The Casualty Actuarial Society exams are given outside of the university system, so most people work and study the actuarial material on their own.
I am not sure that this particular talk will reach terribly far, because it takes time for new ideas to work their way through the system, and the initial impact was only the people in the breakout session at the Ratemaking and Project Management Seminar who heard my talk. People who are aware of what I am doing are writing about it though. Two different people plan to write up the work I am doing, one in a publication for insurance executives, the other in a publication for actuaries. There has also been discussion about putting this subject as a major panel at the Annual Meeting later this year.
Beware of this article...
As an economist and mathematician with years of experience in forecasting models,
I would urge some circumspection here.
(1) The record of forecasting models in economics is generally poor. The oil analysis
may have some nuggets of gold in it BUT in general one ought to be cautious on
interpretations.
(2) More specifically, I would argue this...
Recessions often occur after a period of growth. A consequence of growth periods
is resource exhaustion, and higher prices of eg oil, food etc.
Recessions can be caused by different factors.
When a recession occurs finally after eg a boom, it is likely that one will
notice that oil rose prior to the recession.
This does NOT necessarily imply oil was the cause in ALL cases.
Oil may have been the rpimary cause in some cases;
a secondary cause sometimes; or frankly not really a factor, more of a coincidence
of timing.
Economics, being the study of human productive and financial interactions is complex.
I abhor any explanation which takes ONE factor and says..there that's it.
Life in general is MULTI-FACTORIAL in its driving motives.
I am not convinced that the issue is oil by itself. I think energy in general is an issue, and oil prices quickly spill to food prices.
Electricity prices have not spiked in the same way as oil, and in fact, are now down a bit because of low natural gas prices. If electricity prices were to spike, or if electricity were to become less available, as it is now in northern Japan, I expect that these would also have a huge impact on economies.
Yet, I'll bet that you wouldn't have a problem blaming it on an increase in interest rates if that had happened. That would be a single factor that can bring on a recession.
Oil touches almost every step of production in our modern world. An increase in the price raises the cost of raw materials, transportation, manufacturing, it raises the price that the workers have to pay to get to the factories to make everything. An increase in oil prices is a de facto value added tax of enormous magnitude that hits suddenly, and without warning. When almost all costs go up, everything being equal, profits must come down. When profits go down quickly at every stage of production, how can you possibly avoid a recession?
In fact, you could argue that it is worse than a value-added-tax, because the money is not staying in this country, an enormous amount is transferred over seas in the form of a trade deficit. At least in earlier recessions, the increased profits from higher oil prices that oil companies received, stayed mainly in the U.S. and helped even things out.
http://cr4re.com/charts/charts.html?Trade#category=Trade&chart=TradeDefi...
Now the money goes to the unstable ends of the earth and Canada. There is also no shadow banking system left to recycle that money back into mortgages and CDOs.
There are all kinds of indirect effects too. If people have less income to spend, they can't afford to buy more expensive homes, and the demand for homes goes down, as does the price of homes.
One would expect the stock market to go down, but with Quantitative easing, the stock market tends to stay up, and interest rates tend to stay artificially low. It is not clear how well the government will be able to QE, without the bad impacts reappearing. The Economist had an article recently, called Stopping quantitative easing may be harder than starting it.
Something wrong with this link Gail?
It should be fixed now.
Some people point to Canada as evidence that the recession was caused by other factors. One argument goes that Canada had no real recession because they kept tight regulatory control over their home loans. But then again, they have a much larger oil reserves than USA especially with respect to their population base. Which factor tipped the scale?
I'm not quite sure of the answer, but I suspect it has to do with the fact that Canada is an oil exporter, and the US is an oil importer.
When oil prices spiked, OPEC countries did well, and so did Canada. Additional funds relating to the higher price of oil flowed back to Canadian stockholders and to employees. Employment in the oil industry rose. I had thought that the fact that OPEC countries limited oil prices to consumers made a difference (and it no doubt did), but it may be that the higher oil prices, and higher employment (leading to higher demand for homes) also played an important role in helping these countries avoid recession.
The US is an oil importer, and in fact has been an oil importer for the entire time period since World War II. So Hamilton's study is really of the impact of price spikes on a large oil importer. In the US and quite a few other OECD countries, high oil price seems to trigger lower consumption. In Canada, high oil price did not lower consumption until 2010. See Energy Export Data Browser. Lower oil consumption seems to be correlated with recession.
Edit
When I look up economic growth for Alberta on Google, I find that in October 2006, an article says,
A Januuary 2008 report says, Alberta Economic Growth the envy of other provinces.
The Alberta Quick Economic Facts says
So the oil riches have spilled through to a very low tax environment otherwise.
I wonder what kind of economic growth the rest of Canada had. I expect it would be fairly much reduced, if oil exporting areas were excluded.
Generalizations can be fairly dangerous.
No doubt the energy resources including the oil in Alberta helped make the recession less severe in Canada, but Alberta is less than 15% of Canada by population.
Other factors that clearly had a role in limiting the recession were a budgetary surplus going into the recession and relatively sound banking practices. Specifically, the sub prime mortgage market didn't really exist in Canada and an number of other shady practices such as paying a fee not to document income, and securitization of mortgages were not allowed.
The world is not as simple as I would like it to be.
I wonder what kind of economic growth the rest of Canada had. I expect it would be fairly much reduced, if oil exporting areas were excluded.
The rest of Canada did not fare so well. Canada's auto industry (centred in Ontario) had to be bailed out same as the US, some major retail companies went broke, as did many other businesses. The property market did not collapse aka the US, but did get the wind knocked out of it's sails. Many projects have been halted, many property developers went broke, lots of construction industry workers laid off/reduced hours etc. The maritimes have been an economic basket case for years, so this didn't help that cause. Quebec is, well, Quebec - they used this to leverage even more money form the fed gov - that has been a "long bailout" if ever there was one. The prairies have done OK, because they produce lots of food and some oil. And here in BC, where no one will really admit that the economy is based on property development and retirees (from the rest of Canada), well the property market died and retirees stopped coming here and/or spending, with predictable results.
My take on Alberta it is that the oil industry, and governments, who receive oil royalties and taxes from oil related companies, did benefit from higher oil prices. However, lower natural gas prices were not so great - they took quite a chink out of Alberta's revenues, though I'm not sure if it was made up for by oil. Alberta gov was debt free in 2007, but has had to go into deficit to do its own "stimulus spending" , so Alberta did not escape unscathed. Even the oil industry had its casualties - many oilsands expansion projects were shelved - some have resumed, but many, particularly heavy oil "upgraders" have not. Rocky Mtn guy is the exert here though - he can give a much better picture on Alberta (and Canada in general, actually).
Also, keep in mind that 87% of Canada's exports go across the border, so no matter what Canada does, if the US is in recession, Canada will feel the pinch. The US has more cross border trade with Canada at the Windsor-Detroit bridge than it does with Japan, so you start to see how big of a deal it is for Canada. One politician described it as being in the same room as a wounded elephant - you have to make sure it doesn't fall on top of you! The steadily rising Cdn dollar (or depreciating US dollar) has hurt the exporting industries that are still operating.
Some protectionist US policies didn't help either, like the requirement to use only US made steel on gov funded reconstruction projects - caused some trouble for long time suppliers, and ensured US gov projects got less for their steel dollar!
Overall, the economy was not nearly as over-extended as the US, so there was less pain to be had, but no matter how good any business is, if your biggest customer is in trouble, you share some of the pain.
Beating the US for the hockey gold medal at the Olympics provided a brief distraction from the depressing realities...
All of what you say is true and very well put, but still the complaints got fairly thick in Canada when the recession threatened to head into its 3rd quarter and unemployment inched over 8.5%. Note that this performance is far less harsh than than what happened in most other parts of the US. The Canadian economy tends to suffer more frequent, longer and deeper recessions than the US economy for all of the reasons that you detail. The variance from the normal pattern of the Canadian economic is surprising and contrary to recent history.
It is undeniable that high oil prices were a trigger for the recession. (Gas prices peaked at about $6.00 per gallon.) It appears to me that the difference in performance comes largely from the institutional framework that dampened (rather than amplified) the feedback loops once the recession hit. Specifically, better banking (and especially mortgage lending) practices prevented the housing market meltdown and protected the financial system.
Construction slowed down a bit, unemployment went up a bit, and government deficits reappeared as they put in stimulus programs to counter the recession. And then, surprisingly sluggish growth started up.
It was very clearly not the oil industry in Alberta that ended the recession. The conventional oil production seems to be stable to declining. The tar sands were struggling with a cost squeeze before the recession hit. Steel was in short supply. Labor was in short supply. Fuel prices to run everything from heavy equipment to heaters to liquify the tar for extraction were making operations very marginal. When the recession hit, oil demand and prices dropped. New projects were put on hold. (All of the foregoing seems to fit pretty well with Gail's analysis.) Alberta didn't really get going again until after oil prices started to go up and after sluggish growth had returned elsewhere in Canada.
About 1000 days before you joined us, Gail gave a forecast for '08. Maybe we should beware of you.
http://www.theoildrum.com/node/3382
The Barclay's piece tells an interesting story and I believe it is the ultimate driver of prices at peak oil. Last year, I predicted much higher oil prices due to the distinction between "cost push" (Barclays illustrates) and "demand pull inflation". The interesting, worrisome and key question will be how long this 45 plus degree trendline will continue and how high it will go.
The cost-push story is really a "declining EROI" story. We are rapidly reaching the point where EROI is too low to support all of society's needs. This is indeed worrisome.
Very good report Gail. I agree with your views that finance and politics will be the big game changers as oil supply diminishes. It always has been !!
Gail
It is not just the WSJ or FT that are taking notice. I see increasing commentary in the British press, specifically the Daily Telegraph's Ambrose Evans Pritchard's recent articles on world food and the margin of spare world oil capacity, that begin to connect the different pieces of the scene.
I am interested in the geopolitics of food production. With regard to food and food pricing the world has not stood still in the last two decades. In particular, increasing urbanization and industrialization, and westernized dietary changes, have driven up the need for primary food commodities to be internationally traded. Competition for these internationally traded food commodities appears to have been on a long term upward trend.
My guest post you posted on ToD in 2008 http://www.theoildrum.com/node/5181 has an FAO chart that illustrates the trend in international trading of cereals, increasing from a previously low base. The chart is only to 2003, but the trend continues.
http://www.fao.org/es/esc/en/15/70/81/highlight_79.html
The internationally traded cereals depend on areas that in turn depend on high inputs of fossil fuel, including oil. (The trends in fertilizer pricing are more complex.)
There seems to be a tightening of the coupling between fuel costs and the cost of food supplies for urban populations (affordability) but I note that some important areas are not in recession. 'Emerging' economies like the BRIC countries, illustrate the point. I read also that even in the USA there are disparities between 'growing' and recessionary areas; the big agricultural producing States have been described as more like an emerging economy; seeing growing prosperity with fewer municipal and State financing problems compared with the rest of the USA.
Is 'recession' more of an affect of competition, where there are winners as well as losers? The balance between growing and shrinking economies has some interesting tipping points.
best
phil
Fill up, set the cruise control to 55mph, and watch 1000 miles of open freeway roll by. (If you can find 1000 miles of open freeway without major hills)
"When consumers spend more at the pump, they often cut back on discretionary purchases."
Duh of the day.
"If you can find 1000 miles of open freeway without major hills)"
Cheyenne, WY to Columbus OH. I've done Billings,MT to Madison WI more than once.
My discretionary spending is restaurants in cities. I also tend to drive up and down interstate 35 for about 2-4 hours at a time, and I spend quite a bit more on food in a week than I do on fuel.. I also get about 60 miles per petroleum gallon when running a prius on E-40, and the corn that made the ethanol that has provided 30-50% of my fuel energy for the last 90,000 miles is also providing DDG's to raise the roast beef I had in a sandwich yesterday. The petroleum I burned is just gone, one use only.
The biggest impact on my mileage is not whether I put 50/50 gas/ethanol in, vs straight gas... It's what direction the wind is blowing. That 80mpg vehicle will drop to 45mpg with a 25-40mph wind coming at the car from 20 degrees off the direction of travel. The best you could do is maybe 100mpg if you have a low-turbulence tailwind coming exactly from behind the vehicle.
What you see in that 1000 miles of open freeway is a lot of farmland, and in Iowa/Minnesota, you see a lot of wind turbines installed as well as on the road en-route to installation. You can also find a lot these blender pumps outside the cities too..
Hummers are so last century. What you need in these more environmentally responsible times is the Cadillac CTS-V Sportwagon. A 6.2L/556-hp/551-lb-ft supercharged OHV 16-valve V-8 propels it 0 to 60 mph in 4.2 seconds.
At EPA city/hwy fuel economy of 14/19 mpg, this appears to be Cadillac's answer to the Volt.
http://www.motortrend.com/roadtests/wagons/1012_2011_cadillac_ctsv_wagon...
Perhaps it's more correct to refer to 'fuel burn' than 'fuel economy' on this vehicle. :)
Recession in a country is closely tied to how much oil a country is able to consume. OECD countries have been declining in their share of the worlds' oil consumption, even as world oil production has been flat. This explains how OECD countries were in recession, even as BRIC countries continued to expand.
(I believe you typo'd: OECD, not OPEC)
Comment: Fixed it. Thanks!
The graph says OECD. Your comment was about OECD, right? Then what about OPEC? Wouldn't their share of consumption be expected to be flat or rising?
OPEC is part of the remainder. It is in the piece with increasing consumption. (Sorry about the original typo--it is now fixed.)
Hi Phil,
We have similar interests. Wanted to get more of your take on the situation.
It is amazing to watch the quantity of land being brought into production in tropical countries. Much is geared towards the cereal export market. One thing that concerns me is the input costs of this. How costly is it to fertilize those highly oxidized, wet tropical soils?
I see it similarly to this issue of how declining EROI for oil impacts reinvestment funds for further extraction. Does the world reach a point where food prices need to be very high in order to justify the cost of fertilizer applications? And since food is a staple like energy, does this cut so much into discretionary spending to cause recession and dampen the ability to invest in food production?
While this all worries me, I do see the world essentially wasting a huge amount of cereals each year so theoretically we have a large buffer if distribution inefficiencies could be improved.
Refrigeration and good transportation have helped distribution inefficiencies. It is possible we could see an increase in distribution inefficiencies, before there is a complete return to relocalization at some point in the future.
Investment in storage and transportation is likely leading to less spoilage of grains. However, my comment on inefficiencies of distribution was about the proportion of cereals going to biofuels and animal feed, and the ability to afford food during economic duress.
Most biofuels are complete waste (i.e., corn ethanol), while grains to meat is a caloric EROI of ca. 1:8. Therefore, even with a huge decrease in the amount of cereals produced there'd theoretically be plenty of food. Just that in such a situation (meaning a world in which cereal production crashes because of declining investment in production) I worry about how many people would be unable to pay for food.
Jason
I have only just come back to this discussion.
Thanks for your thoughts. I agree with your point about 'inefficiencies', where calories and primary protein go for animal feed, or heaven help us, the calories go for biofuels.
Despite the modern trends and their profitability, the large majority of the world though is still not fed by the internationally traded cereals and legumes, which are still a minor part of total world yields of these crops. However, these globally traded bulk commodities have increased as a proportion of total world yields and are critical for price setting. There always have been large populations subject to 'food insecurity' as long as I can remember, but a very few years ago I thought that 'world food security' would not be a general issue for another 20 years. However, the speed of developments seems to match those of the 'energy issues'. Modern trends might continue, while at the same time, more and more people are hard put to it to afford food? The situation in North Africa, Middle East, perhaps illustrates the coming dilemma for much of the world? (The first part of my 2008 TOD guest post, linked already above, refers to a 1999 paper by Dyson that addresses potential regional vulnerabilities. Some but not all of his analysis is proving prescient.)
I wish I knew more about tropical soils. The British Empire did a lot of R&D in tropical agriculture, plantation crops and forestry in particular, but in general found introduction of temperate modern agricultural methods inappropriate in the tropics. The 'green revolution', when it came with new varieties that could use high NPK fertilizer input, transformed yields in the vast intensive traditional agricultural systems of Asia as well as in our industrialized agriculture, for a while. The question in my mind this last 15 years has been whether rapid industrialization elsewhere and the need to feed the growing urban populations in places like China and India will adversely impact their vast and populous rural economies, which must compete against the world market. Governments in those countries have no option but to ride the unstable situation. The situation looks increasingly unstable to me, and the cropping of new land in the tropics seems high risk and likely to be part of the problem, not the answer. But like biofuels, these ventures could be highly profitable in the short term.
best
phil
Nice work Gail. So what is the current global cost of extraction for conventional oil per barrel? Anyone know?
Gail, what about investment in renewable energy sources then? Won't there be an impact there too, and not for the good?
Investment funds are limited, and we now have an inflated view of how much investment funds are available, because of the borrowing (particularly government borrowing) that is being done. The government borrowing is being used for stimulus funds and to support investment in renewables--also the subsidies are having the same effect.
The high price of renewables on a delivered basis indicates that they are very low EROI energy sources on a "delivered" basis--there is a huge difference between the "wellhead" basis and the "delivered" basis which standard EROI calculations do not measure. The fact that we are supporting investment in high priced renewables takes investment dollars away from higher EROI investments.
The system is not sustainable, but "picking winners," when the winners represent expensive ways of saving a little natural gas, doesn't help at all.
If there was something that truly worked and was cheap (thorium for nuclear??), it might be helpful.
For all practical proposes there is only one renewable liquid fuel at the moment that amounts to anything: ethanol.
This paragraph makes no sense in regards to ethanol. We are not supporting ethanol more than oil. If all the tax subsidies, expenditure for oil wars and defense of shipping lanes are taken into account the cost of oil is much higher than ethanol.
The economic cost of imported oil is higher still since resources are sent of of the country to pay for it. This is the main reason the economy goes into recession with higher oil prices.
If the oil were coming from the American economy it would not matter so much since the higer expenditure would stay within the economy. This is the big benefit of ethanol that ethanol critics refuse to talk of even think about.
They remain fixated on meaningless comparisons of different things using EROEI. Even oil that is exactly the same is different depending whether domestically produced or imported. EROEI doesn't even recognize this problem. EROEI is nonsense.
It may have some utility comparing two ajacent oil wells, but $RO$I wouild do the same thing without all the hocus pocus. All oil is not the the same even if has identical characteristics. It matters that oil is imported or not.
Imported oil is especially toxic as oil prices rise. On the other hand domestic produced ethanol which keeps resources within the economy does not have this problem. If its prices rises the revenue stays at home without the draining effect that is participating recession after recession as Gail correctly points out.
It is hard to understand why energy analysts can not see the importance of domestically produced liquid fuel over imported.
It is blind spot they refuse to acknowledge.
I agree that imports are definitely worse than home-produced energy, but even locally produced low EROI energy is a problem.
You missed what X said that he does not believe in EROI.
I suggest that we give X enough fossil fuel to grow his corn for one season. At the end of that season he can sell off his corn for food or to a distillery. The catch is that every subsequent year he can only refuel using the ethanol that came from the distillery that he sold his corn to and the distilled fuel they produced from his bushels. That is he has to buy it back. He can't use any gasoline or diesel for anything related to farming. We can also extend that to natural gas for his fertilizer.
This is called a bootstrap experiment. See how far he gets.
The same can be said for wind farms and solar in terms of embedded energy, but we all know this is a factor. But we don't appear to go to the lengths that X does to create some fantasy land for ethanol.
Now I understand why he calls himself X. If X is the amount of corn he sells as food and 1-X is the amount that he sells to a distillery, I wouldn't doubt that X may turn out to be a big fat ZERO.
If I have some of this problem statement wrong, let's clean it up a bit. It might help people understand EROI.
"If the oil were coming from the American economy it would not matter so much since the higer expenditure would stay within the economy."
X is right here, but only to a small extent. In his hypothetical situation oil profits would enrich domestic oil producers and their shareholders, but high oil prices would still create a massive reduction of discretionary income for the middle and working class. Thus the U.S. would be in a similar situation to where we are now--the economy has hit a ceiling because the middle class' pocketbook is over extended and consumer spending can't grow. Oil profits are great for the rich, not so much for the rest of society unless there is substantial redistribution of wealth. In the case of ethanol we can say that domestic production creates wealth for midwestern farmers and Con Agra, but less so for the average American (without the redistribution of, in this case, federal subsidies).
The game-changer here, in this hypothetical situation, would be if the federal government nationalized our oil or ethanol resources and sent out royalty checks to every family, something like Alaska has done. That would truly keep oil profits within the domestic economy.
We get statements of this general sort all the time, and each and every time they still carry the strong whiff of the Broken Window Fallacy. Even if cycling the money (i.e. markers) more directly might be slightly better, in the end, fruitless makework is still just fruitless makework. Some variation of Fischer–Tropsch would surely be a much less Rube Goldberg way to convert coal and natural gas into liquid fuel.
Actually, FT itself is not unlike like a Rube Goldberg process - very complex and must be very well managed . A good write up about a real FT facility is by Robert Rapier when he went to Shell's Bintulu GTL plant in Malaysia
Doing coal/gas to methanol is much simpler...
Either way though, you are facing much higher expenditure with these X-to-liquids technologies.
Gail,
I always love your posts! I have another somewhat depressing thought. What about the established interests in the economy? Why would they have an interest in seeing alternatives (any alternatives) from upsetting their existing profitability? I would expect that the normal rules of competition would "force them" to defend the existing technologies and make it very hard for new entrants. For example, one could make a good case that battery technology has been neglected (suppressed?) in the effort to maintain the current ICE car market. This could extend all the way to influencing the political process through donations to "friendly" politicians, i.e. those that would favor the existing large market entities over potential "threats". I would think that this would increase the risk of the existing technologies being stretched past their useful life and increase the chance of a "discontinuity".
I use this paragraph as a preamble. I believe that there are a FEW possible alternative technologies that offer some technological hope of ameliorating the decline. However, I am very worried that the existing economic order would make the widespread acceptance of such technologies much more difficult than it would other wise be. I would love to see Thorium fission reactors become a reality in the world. However, combined heat and power would seem to be a more likely short term partial solution to some of the problems posed by the Peak Oil challenge. My favorite long term "solution" (not a real solution but a hope), is Chemically Assisted Nuclear Reactions-CAGR (sometimes called "Cold Fusion"):
www.lenr-canr.org
There has been a huge volume of peer reviewed work accomplished since Pons + Fleishman to show that this is a real physical phenomenon (e.g. more than 5000 peer reviewed publications). However, it is a long way from a practical energy source that would enable cheap electricity as a substitute for coal and natural gas. It is ever farther from anything that could substitute for liquid fuels in vehicle and aircraft. I have some hope nevertheless. Perhaps it is a fool's hope, but as long as we pursue the best energy policies that we can under the assumption that fossil fuels are going to decline pretty rapidly, perhaps it is worth some small amount of research investment (e.g. 1-5% of energy research), in a possible breakthrough technology, perhaps it is worthwhile.
Hope springs eternal in the Human psyche!
I am not sure that work has been neglected (suppressed) on batteries. We had electric cars 100 year ago, that were only marginally worse than the ones today. See last year's guest post The status quo of electric cars: better batteries, same range.
Furthermore, if we lose nuclear power because of (valid) concerns regarding safety, the whole idea of recharging cars off the grid may be moot anyhow. Nuclear is a big source of power (20% in the US, including 30%-35% on the East Coast). If the licenses for these plants are not renewed when they come up in the next few years, it will be hard to maintain the current level of electric power service, much less add more for electric cars. I have written about this on Our Finite World, here and here.
It would have been good if our original nuclear research had been along the thorium route. Maybe we could have gotten that to work.
At this point, it is getting late to start ramping up new technology.
Gail, Thorium may be a possibility. Some intermediate technology may be appropriate in the near term. We must address depletion of low cost fossil fuels, over-population, and climate changed. A good path is to trust science and technology. Embrace modern Ag and nuclear power. Provide affordable nuclear power to the third world so that they can industrialize and grow their economies. The solution to overpopulation is wealth and urbanization. Nations with GDPs above $7500/capita have negative birthrates. Urban women choose to have small families.
Energy is equal to wealth. Nuclear power is an inexhaustible energy source and its energy density is 50 million times greater than chemical energy on a volume basis. New generation reactor designs are needed to produce electricity cheaper than dirty coal plants.
TerraPower is a company founded by Bill Gates for the express purpose of building a high temperature Traveling Wave Reactor (TWR) with potential to replace liquid fossil fuels and coal. The aim is to combat global warming. The TWR is designed to use the spent fuel from our current LWRs and it will be loaded with enough fuel to operate for 60 years without refueling.
Prof. Per Peterson at UC Berkeley has designed a low cost Pebble Bed Advanced High Temperature Reactor. The power output of a full-sized 4 m tall (2 m wide) reactor core unit would be 400+ MWe, which is surprising large for such a small size core. The driving aim is to get these units commercialized in the near term, and to bring down costs, thereby paving the way for later widespread commercial deployment of full Generation IV designs like the LFTR and IFR, which not only achieve high burn up, but also completely close the fuel cycle.”
Nuclear fission can provide the energy to make affordable liquid fuel from water and carbon dioxide. Iceland is building a facility which will open in 2014 that will produce dimethyl ether from carbon dioxide and hydrogen. Dimethyl ether is a clean fuel for diesel engines. They expect that the new dimethyl ether plant will reduce their imported petroleum of by one third. High temperature nuclear reactors can split hydrogen form water at high efficiency. The thermo-chemical splitting of water at high temperature looks like a winner. One such system uses sulfuric acid and iodine as catalysts. I have read of 60% efficiency for hydrogen production at temperatures in the 900 to 1000 degree C range. Synfuels can be produced by chemically reducing atmospheric carbon dioxide with the efficiently produced hydrogen. Wealth remains in our own economy when we use domestically syn-fuels. The hydrogen split from water can also be used to make nitrogen fertilizer. Five percent of our natural gas is now used as a source of hydrogen.
For our environment's sake and our economy's sake we need to embrace modern Ag (including genetically engineered organisms) and nuclear energy. To do otherwise will place our grandchildren in a world of mass starvation.
I'd prefer to see relocalisation, reduced consumption and a simpler way of life as a prescription for change. The quest for technological "solutions" to the mess we find ourselves in seems to me like (to paraphrase Einstein) using the same thinking to fix a problem as was used to cause it.
Or, to put it another way, working with nature instead of constantly challenging it.
I agree in principle with all you say;however, in the short to mid term, our only slim hope for preventing a dieoff on the grand scale is to embrace science ant technology.
There is simply no way we will ever reduce the population fast enough to swith over to a renewables based economy without suffering a major dieoff-with the associated wars that will accompany the resource crunch thrown in by the devil(figuratively speaking) for additional good measure.
The things that will kill us over the long run are the only things that can get us, or at least might get us, thru the short to medium term still in the land of the living..
It is interesting to revisit EROI ideas in light of the cost of oil these days. The premise that the decline could be rapid as opposed to a smooth descent makes sense. As the cost increases, the relative standing of one currency against another will also become problematic as money buys less and less in real terms. More change than the US dollar as reserve currency, will large purchases of oil one day be bartered for other goods.....say... we will provide 15 f-15s for .....? (We don't want your stinkin money, man) Seriously, if the profit is hard to predict, then why would any sane business invest billions in dollars and effort to be paid in funny money of decreasing value?
People lose millions playing the airline game; the lure, cachet, and flying is irresistible for those infected. I find it hard to believe the same willingness to play a losing hand exists in resource exploration and oil production? (Panning for gold excepted, of course.)
The plateau dropping away as predicted by Ron and others starting 2012...with an upward view of 2020. The staircase model seems likely as the struggle for BAU renews over and over, until one day we wake up and walk towards a simpler life. This could be a fine scenario for those prepared and living in a benign place of hope, but God help the rest of us.
Thanks for a great article.
Paul
The basic decline curve when available resources have been extracted in the animal world is overshoot and collapse.
The Limits to Growth book from 1972 tries to look at the interactive impacts, and comes up with a decline scenario, starting about now (varying, depending on the scenario chosen). The book very explicitly says its model is not set up to determine what happens after the decline scenario sets in, because things will be so different then.
It seems to me that during the decline phase, Liebig's Law of the minimum will come into play, quite a bit. There may be some additional oil available, as societies drop to lower levels, and can function on lower EROIs. But this is likely to be offset by countries overthrowing their rulers, as conditions become intolerable. The new governments are likely to function less well than the old ones--some states may break up into component parts. This was a post on my view of Libya's situation, which did not run on TOD. I have a hard time believing that a new government will be formed which will keep up oil production as well as the old one.
It is hard for us to foresee precisely what will happen. But we can already see what happens when a little part for new cars is not available. If some oil production is taken offline because of revolution, or if the EU dissolves, or if major countries dissolve, there could be much bigger impacts.
As I recall, Limits to Growth and its sequel Beyond the Limits both targeted about 2012 as the year when worldwide industrial economic production would peak for BAU. One of the scenarios which gave more credit for improving technology pushed things out another 20 years or so.
Thanks for the article. One of the most interesting points is Figure 8, the cost of production. One would like to read more on that.
Unfortunately, this is one thing that it is hard to get good numbers on.
Sometimes, even when numbers seem to be available, for example on the oil-rich plays in the US, it is hard to interpret them. The calculations are set up as if the huge initial investment will in fact make extraction over a very long time period (40 years?) possible. If this assumption is wrong, the calculations will make it look like less investment is needed than is really the case.
Thanks. It makes sense that the numbers are hard to come by ... which means informed estimates based on projected total output for a given area are the best we can do. And of course weeding through the spin of the numbers-producers is a must.
The value of oil is much greater than its retail price.
Over at Automatic Earth blog they partially dismiss oil prices as a cause of recession. If you just take cash value of fuel this seems reasonable, but less oil means less work done. Less work done feeds back through consumer confidence and all the other complexities of the economy.
If you just count the cost of the fuel and don't look at the losses from people not travelling, not working, not visiting the malls, not going on holidays, not ploughing the land the cut in oil use multiplies its effects. Less oil burnt means less professional drivers and less jobs.
Max
There are a lot of different connections with oil. Some posts I have written on Our Finite World that are not on TOD include
How is an oil shortage like a missing cup of flour? and
The Oil Employment Link, Part 1
The many connections between oil and the economy is really the theme of my book, which is tentatively being called, "Beyond Hubbert: How Limited Oil Supplies Cause Economic Crises".
In the best scenario I can think of, we will all stop driving, and we will walk around our neighborhoods or small towns, write poetry, have plenty of time to engage in creative cooking with a much smaller number of ingredients, make music, make love, and play with the kids and the dogs.
In short, back to idyllic Medieval Europe, the sort of thing they show in dioramas and "intentional communities."
Was it ever this nice?
No, the Black Death intervened.
Normalized Oil Consumption (100 = 1998, EIA) for the US and Four Developing Countries, 1998 to 2009:
From 1998 to 2008, average annual US spot crude oil prices rose at 20%/year. From 1998 to 2009, they rose at 14%/year.
If we extrapolate the 2005 to 2009 rate of increase in Chindia's net oil imports, they would be consuming 100% of global net oil exports sometime around 2025.
Interesting coincidence that if we extrapolate the 2005 to 2009 rate of decline in the US petroleum C/P (Consumption/Production) ratio, the US would approach zero net oil imports around 2024 (C/P ratio of 100% indicates zero net oil exports and zero net oil imports):
In any case, as they say, somethings gotta give, and right now it's hard to tell what. But a safe assumption is that the outlook for the US economy is less than rosy.
With the US trade deficit running over $500 billion / year, and oil imports running on the order of $1 billion / day, it is only a matter of time until US oil imports have to go to zero. 2024 is as good a year as any other, although I would think it would be sooner.
Besides economic recession, changes in international finance and geopolitics are also foreseeable.
Japan, which had recently fallen to third place in the GDP tables, is likely to continue to decline as a result of the earthquake/tsunami/reactor disaster. The US is in no position to bail out Japan with cargos of oil and gas, or to assist Japanese reconstruction in any meaningful way. Japan is somewhat in play and will likely move towards closer integration with Southeast Asia, China and the Russian Far East.
The Middle East situation has gotten beyond the ability of the US to control events. If democratic forces succeed, the result will be more energy consumption at home, higher prices for oil exports, and less friendly relationships with the US and its allies in the region.
Post USSR, the US's approach has been to expand NATO and to prevent any rapprochement between Russia and Europe. However, it is clear that Central and Eastern Europe's best hope for energy security is to achieve some arrangement for energy supplies from Russia, Central Asia and the Caspian Sea states, including Iran. These supplies should be overland or via the Black and Mediterranean Seas, and they should avoid transiting the Persian Gulf, Indian Ocean and Red Sea.
NATO meanwhile is proving to be unresponsive to US and UK direction with respect to Libya -- its expansion has resulted in a "talking shop". The Eurozone has its own problems, specifically Ireland, Portugal and Greece. It is notable that these problem countries all have long historic ties to the UK, and Anglo-America style banking and finance was part of the cause of their financial woes. The Eurozone needs to reorganize its economic structures on sounder principles, and it may need to eliminate some recalcitrant members.
The trilaterlist's troika of New York, London, and Tokyo continues to decline in the face of new international finance centers and new geopolitical events.
I'm pretty much up to here with all the economic disaster starts at $XXX a barrel or XX million barrels/day of production. There is no physical reason why the current global population can't do just fine of half of that. Or less. And none in the long run.
Assuming that the costs of production go somewhere, the money isn't lost and increased production expenditures add to GDP. As one wag pointed out, in our culture a heart bypass is seen as a drain on the economy while a facelift is economic growth.
Granted, given our current state of organizational paralysis and lack of foresight, oil price 'spikes' do create recessions. Then we wait for market forces to do their thing and go back to doing the same stupid stuff with the same organizational model as before.
If we took a fraction of the amount of real capital we can deploy - human endeavor currently sidelined by unemployment of engaged in non productive crap games - and got on with alternative energy and efficiency projects we wouldn't need the article.
Almost all of the US building and housing stock is obsolete and functionally worthless; indeed, all of the houses built during the recent boom are useless crap in the long run yet somehow we can't figure out how to put any significant fraction of the money expended and labor consumed into things like the power grid or CSP plants. Never enough money to do it right but always money to do it over - and wrong again. Instead of millions of excess houses in abandoned subdivisions we could have had......
The only recession is in our inability to conceive of an economic and organizational system that could actually efficiently utilize our endeavors for our mutual long term benefit. We're still making cheap crap to fall apart and require replacement to keep churning a 'vig' to capital, yet have no national railway system [horrors!; socialism] yet somehow an interstate highway system.
So whenever I hear that we can't do X because of a recession I have to point out that until we haven't any more serious work to do the blame lies with the publics own gutlessness at tolerating an organizational system that is run by grifters and liars and sycophantic idiots who haven't realized that the parasite has almost devoured the host.
Then it will be 'Who knew?' time.
To be fair, I don't think the public is given an alternative by any parties, but I agree with everything else.
Alternatives aren't usually given or offered but rather demanded or just taken. Thus the question becomes at what state of disfunctionality the citizenry decide to actually get involved in their long term future and whether sufficiently robust and competent organization can be maintained long enough to achieve anything.
The current Tweedledee/dum two parties system is so firmly entrenched that there is no word for tripartisanship. Or quadpartisanship. Say what?? So we're either with them - or the other them. And each election is a tale full of sound and fury.
Canada currently has "quadpartisanship", and it does not necessarily create any better results, especially since the Westminster system, which both countries use, is really meant to be a two party system.
The more parties you have, the more you tend towards minority governments, which, by definition, do not have a strong mandate to govern. In systems like Canada, this leads to frequent and unnecessary elections - minority government was defeated last Friday so now we get the 4th election in 7 years, and likely to result in another minority! In fixed term systems, minority situations often render the government impotent for the whole of the term.
The more parties, the more they each represent specific minority groups (e.g. the Quebec separatists), and the more pandering that has to be done to get them on board -though they can still turn on the gov at the drop of a hat.
Ultimately, it is up to the people, collectively, to demand better government - having more parties involved is no guarantee of getting it, and often makes it worse.
Just a short look outside the US. Using the oil export browser and Wikipedia GDP data, plus a danger threshold of 5.5% of GDP spent on oil, I get an oil price recession threshold of
$107 per barrel for the USA
and
$214 per barrel for France
Interesting!
If US oil consumption per capita fell back to our 1949 rate (EIA) it would still be higher than France's 2005 per capita consumption rate (Nationmaster).
I am not sure that you can extrapolate the US results to France. This is link to a site showing France's real GDP growth by quarter. It looks like they had recession in 2008-2009, too.
There is also an issue of "wholesale" vs "retail" calculations. Different people have done the calculations on a wholesale price basis vs a retail basis, and gotten different percentages, but similar dollars. It is possible you are mixing apples and oranges in your comparisons.
Yeah France had a recession too but I think there is some truth to the point that France's economy is more resilient to high oil prices. Their land use and transportation patterns are much more energy efficient. People can still get to work without driving if they have to. They have a more robust local agriculture.
The US has none of these things. Yet our consumption has propped up the world's economy for generations. When we go down everyone else will go down too, but other countries will have a shorter fall to the bottom than we will.
I think it is fair to say that most OECD countries experienced a recession, or at least a plateau, in the last couple of years.
But what I find interesting is that this seemed to happen regardless of their oil consumption. Canada uses as much oil per capita (and more per GDP) than US, but had (has) a much less severe recession. The euro countries use half the oil per capita, and they all had recessions, to varying degrees. Australia is somewhere in between, and had a flattening of growth,but not a real recession, and is well out of it now - regardless of oil prices.
So while oil prices may trigger recessions, it seems that other factors, mostly domestic, determine, or at least majorly influence, how deep/long they run.
That said, I'm all for using less oil, regardless
OIl usage kept going up in China, India and quite a few oil exporting nations. They didn't have recessions.
China uses mostly coal, rather than oil, so it was less affected. Oil exporting nations generally don't charge their own people the high prices that outsiders pay for oil, so their own people don't ever see the high prices, perhaps explaining the lack of cut back.
Quite so - that is why I was only considering the OECD economies, which I regard as "mature" economies, but China and India, and most of the oil exporters, are certainly not. And the China/India oil/GDP is certainly much lower then OECD.
But among the OECD group both UK and USA have severe recessions, but UK uses half the oil/capita. Mind you, with the very high fuel taxes, making the pump price double the US -the $ spent per person on fuel might be similar, with similar results on discretionary spending.
In any case, the depth of (OECD) recessions does not appear to be solely linked to oil/capita or per GDP, though the timing certainly is.
Hi Paul. I think that Australia has a unique position in what has unfolded during the recession. Australia has enormous reserves of industrial raw materials, particularly coal and iron ore, that are in high demand from China. China has maintained growth and continues to demand these raw materials. Just how much China needs was illustrated by the impact of the mine closures in Queensland as a result of disastrous floods early this year.
Great article Gail, fascinating thread Oiler's.
Thai,
i would agree with that assessment 100%. Australia has real materials to sell that are in real demand, so has dodged the bullet. Canada has real materials to sell, and got off almost as lightly as Australia. The US has to sell - well, treasury bonds!
It would be nice if Australia did some value adding instead of just shipping the raw commodities as soon as they are dug up - but China does that part cheaper than Australia, or anyone else...
This was indeed a good article and discussion. I am going to send it to my contact in the Australian government.
In order to add value, you would need a larger workforce necessitating a larger population. From what I have seen, the Australian government does not want the population to rise too much more than what it is right now. Alternatively, they seem to be content exporting raw materials with a smaller population.
n order to add value, you would need a larger workforce necessitating a larger population.
Not necessarily. Converting iron ore to iron, or NG to ammonia/fertiliser, or bauxite to alumina to aluminium are all high energy, high capital, low labour operations. Australia has lots of energy, capital, and a skilled workforce. Going further than iron to making widgets from it is a whole differrent story, and is not likely, more for the labour cost than the population issues.
Making widgets is tough, because you never really know if your widget will still be needed in the future, and someone else can copy the design - stealing/devaluing the IP. But iron, fertiliser and aluminium will always be needed, and there is no IP to steal in their manufacture, be, so we might as well turn the raw commodity into the upgraded version, then let others take it from there - Australia does largely do that with bauxite-aluminium.
As for population, yes, there is no real need to grow it - some are of the opinion that pop growth in and of itself will grow the economy, and it may, but there are other, better ways to grow the economy too. There are some limits, particularly fresh water, on how many people can comfortably live in Australia.
Gail,
while it is true that discretionary spending declines the increased investment for producing the energy also provides economic support- Consumption plus investment doesn't change so neither does economic growth.
It seems to me that there is a difference between low cost oil sold at a high price with the funds received by the oil producers deposited in a bank and high cost oil sold at a high price. The former situation hss a handful of very large winners while the latter creates both large winners and losers -great for people living near or associated with oil production and so good for consumers who have to drive a lot but whose wages are not going up.
If I am right then perhaps higher oil prices because of higher costs of production doesn't result in a recession. The date points for co-relating recessions and oil prices all relate to low cost oil sold at a high price.
"Consumption plus investment doesn't change so neither does economic growth."
Crazyv, thanks for pointing out the enormous flaw in the logic of economists. You really think that whats going on Fort McMurray, Alberta is sustainable economic growth, equal to the growth that would have occurred if oil prices were low and consumers could still drive, shop, visit tourist destinations etc? Well thats what our current method for calculating GDP would tell us, and its f-ing crazy.
I live in Western Colorado, an area where there is a lot of expensive oil and gas being produced, where in theory it should return wealth to the local economy. In the long run its a disaster for the local economy. The only people it enriches are a few local landowners (the old boys club) and a bunch of roughnecks from Louisiana who have the side benefit of making our town unlivable for anyone else who would like to add longterm economic value. And then the bust will come, landvalues will bust, and the region will have put all our economic eggs in the oil and gas basket, and we will be mired in (another) localized depression for the next twenty years. All this boom/bust cycle does is redistribute wealth to the top 3% of society and those most willing to cut corners and rape our local land and water, throw up crappy subdivisions, and discourage any stable economic forces from coming in. But hey, its all economic growth!!
You are forgetting about the declining EROI issue. There is less net energy being produced, with the same number of real dollars. And it is net energy, particularly high quality net energy, that determines real output. Economists don't seem to think that net energy is important, but it is very important. In a way, it means that $$ spent for investment now provide less real benefit now than they did in the past.
When people pay a higher price for food, it goes for a higher price for fertilizer--same amount of food, and same amount of fertilizer, but more money needs to be invested to get the same amount of fertilizer. There are people paid more wages, but there is not more fertilizer produced or more food produced, just more inflation, because of the lack of real improvement in output.
So with lower EROI, what we get is inflation (at least in oil, food, and energy intensive goods). People are forced to cut back on other goods, causing recession.
I suppose a person could develop a model of a world with only three goods: oil (used to produce food and widgets), food, and widgets. As more and more labor and capital are required for oil production, less oil is produced for a given amount of investment. In order to get adequate food output, a high proportion of the oil must be used for food production, leaving less for widget production. Workers may be paid the same amount, but what they end up purchasing is a similar amount of food (because this is a necessity) and less widgets. The result looks like food inflation to the worker. (I am assuming the worker is not buying oil.)
So what exactly are the OP's and commenters' predictions for oil prices over the next 20 years? As I read the OP, she seems to be saying prices won't go very high because as soon as the price increases some the world will go into recession and bring the price back down.
I disagree. I still think prices will go to the moon. Oil prices are set internationally. The increase in demand from China, elsewhere, population growth and the declining supply will overwhelm any recessionary effects (although prices will go up in a fashion of two steps forward and one step back).
pasttense,
I used to agree with you, but have since come to believe that the enormous debt burden that banks and governments have leveraged on our wealth will precipitate a more serious collapse. Its the oil problem PLUS the debt problem that will be too much for China's momentum to overcome. China's growth is dependent on the over-leveraged American consumer, so they are just as screwed as we are.
Without the debt explosion of the last 25 years (it really started in 1986) you are right, oil prices would go two steps forward and one back. Then again, all that debt explosion is what allowed us to use so much oil so fast in the first place, so prices would probably be lower now and peak oil would be put off another ten years.....
Anyways.....I think if the only problem were peak oil, civilization could over come it. If the only problem were our debt burden, we could muddle through and fix our financial system. Put the two together and its pretty tough. Overhauling our energy system's infrastructure would require a lot of debt, and we just don't have the wiggle room we need (thanks G.W. Bush for the tax cuts and wars!)
It is a mistake to assume that China is still dependent on America to drive it's economy. The continued Chinese auto sales growth is an example of strong domestic demand. They will also be ready to supply the products which Japan will be unable to deliver due to their crisis.
It seems possible that the Chinese RMB may increase in value. Then their cost would remain the same even as the dollar value of the oil price goes higher. We will be outbid for the oil in the open market IMHO.
One person’s / entities debt is somebody else’s asset.
Rgds
WeekendPeak
In many cases, they are assets of insurance companies, pensions, or banks. If people don't pay back the loans, our financial institutions are "toast".
I am doubtful that our current financial system will last for 20 years, so I am not sure there is a real answer to your question.
I expect we are going to see more and more countries with serious financial problems (like Ireland, Greece, Portugal). Eventually, financial problems are likely to spread to other parts of the world, and countries will be less willing to trade with partners that don't have something of value to trade in return. So unless a buyer has food or some other highly desired good to trade for oil, it may not be available. So perhaps the answer needs to be denominated in "bushels of wheat".
Gail, your analysis as usual is very well done. It should be obvious to people that escalating input costs affect output.
I do think, however, that you have somewhat overlooked the human element in this, that being the speculators who make the problem of rising prices even worse. Speculators pile their money into areas where they see the potential to make more money. Unfortunately, essential commodities is one of those areas right now. This leads to a feedback loop of escalating prices creating a ripe environment for speculation and speculation leading to higher prices. Given that both oil and food are essential commodities with supply problems it is almost impossible to separate the effects of speculation from the effects of supply problems. It is very likely that a large part of the reason your chart shows oil and food prices rising together is because speculators were pushing up the prices of both because that is where the market saw the money-making opportunity.
It is good to see you mention the impact of the Fed in this, though I think additional analysis is warranted. For instance, you should also take into account the impact of monetization on prices. When the US dollar is used to buy oil and food around the world then there is significant impact on prices due to the fact that the supply of dollars has increased. Unfortunately this impact in prices is not at the same time reflected in wages; it generally takes years for the impact of currency devaluation (Just talking inflation here, not hyperinflation) to result in increased wages for the average working person. This is how wealth flows from the poorer parts of the economy to the wealthier parts of the economy, and is why we now see such incredible disparities in wealth between the upper classes and the middle and lower classes.
To be clear, I am not saying that we don't have a supply problem; we absolutely do, and the costs of acquiring supply are going up. But we also have an excess money liquidity problem where the Fed is injecting a lot of new money into the top of the financial system. That money has to go somewhere, and one of the immediate destinations is into the market to realize returns through speculation.
This is unfortunate (depending on one's moral outlook), because we are making an already bad problem worse by allowing people and institutions at the top tiers of the economy to gamble on essential commodities, thereby making them even more unaffordable for people in the bottom tiers of the economy. In a world without basic supply problems this would not be so bad because it would stimulate investment and innovation to increase supply into the market. In a world with supply problems it appears morally repugnant.
On the other hand, this may not be so unfortunate to many, because the fact is that there are too many people on this planet and a large number of them need to be removed somehow. Escalating commodity costs are a good way to trigger wars and reduce standards of living which will result in a higher death rate. The fact is that those involved in speculation will be affected much less than the rest of the planet, because they have the means to ride out the storm. We cannot discount the fact that this may all be part of the plan of the ruling elite. Whether this plan is merely to pad the pockets of the wealthy or to ultimately save the planet and the human race is an interesting question.
DD
Here's a recent ag blog post on the role of speculators in food prices:
http://bigpictureagriculture.blogspot.com/2011/03/are-speculators-to-bla...
Take away message from this is that speculators are not a big deal since they don't take physical possession.
That is a good article, and makes one re-think the role of speculators in market price discovery.
However, for food crops I think it may be missing something. From what I understand farmers negotiate the price of their harvest ahead of time on the futures market. At that time future supply is "predicted", but not really "known" until harvest comes around. Whether the harvest is a bumper crop or not, the farmer will be paid the same amount per bushel as what has been negotiated in the futures market. In this case physical supply is not setting the price, but rather predictions of physical supply are setting the price.
This says to me that speculators do not have to take delivery to affect food prices because their activities affect the futures market. I would need to research the matter a lot more to see if it really makes sense.
In the case of other commodities, some speculators do indeed take physical delivery and stockpile it, wait for the prices to go up, then dump it. These speculators would without a doubt affect the prices of commodities. However with a large volume commodity such as oil it seems it would be difficult to speculate in this manner without being the producer who has the option of leaving the resource in the ground.
The point that speculation may actually artificially depress prices in some commodities does indeed make sense. Look at the paper market for silver versus the physical market for silver. There are signs that the physical silver market is much tighter than current prices would lead one to believe.
Regardless, it is still true that you can't dump trillions of new dollars into the financial system without major negative effects on those who are not receiving the dollars.
Thanks for the link!
DD
From what I understand farmers negotiate the price of their harvest ahead of time on the futures market. At that time future supply is "predicted", but not really "known" until harvest comes around. Whether the harvest is a bumper crop or not, the farmer will be paid the same amount per bushel as what has been negotiated in the futures market.
This is overstating the case somewhat. Farmers can forward sell their crop, if they so choose (as can any other commodity producer) but that does not mean they have to, and they can be taking a big risk in doing so.
If they take out a futures contract to supply 100 tons at X, and then there is a wet harvest, disease, or something, the farmer may not even have 100 tons to sell. Then, because he must deliver on the contract, he is forced to buy on the open market to make up the volume. because it was a poor harvest, the spot price is high, and he will pay more than X for that part, and then sell the lot, including what he produced, at X, not the spot price. So the farmer can lose big.
If it is a bumper harvest, and the spot price is subsequently down, then he can win.
In this regard, the taking out a futures contract is a risk multiplier - it makes a good situations better and bad ones even worse. Many farmers, given the normal risks in their business, choose not to multiply them by forward selling, and just sell at harvest on the spot market. of course, some farmers actually short sell so they have a risk reducer! Some others (my brother does this on his farm in Australia) simply store their harvest on farm and then sell in the off season, when prices are usually better, and if selling to the big grain pools, they get a late delivery bonus.
If you are gambling on prices, it is much easier to do so, as a farmer, when you have the product in hand. If you take out a futures contract, when you have the physical grain, and the spot price has fallen by expiry, you can close out the position for a profit and if it has risen, you can deliver your product. Doing it when you don;t have the grain in the silos exposes you to a lot of downside - get it really wrong and you may lose your farm - and most farmers aren't willing to gamble on that.
Corporate farms may be a different story...
In the end, over any extended period of time, speculators do not affect agricultural prices very much if at all;if a speculator buys up a farmers crop , at a fixed price, and he makes a killing because prices go up, he simply reaps the windfall instead of the farmer, or some other physically involved middleman , or the final customer-who may be one and the same as the speculator.
If the speculator buys and holds for higher price, when he does sell for actual delivery, his delivery will have the net effect of helping force the then current price down, or at least keeping it from rising as fast.
Over any mid term to long period, speculation is a wash in ag commodities.
This is not to say that speculation can't move prices quite a bit sometimes in the short term-especially if the speculators are purchasers with real muscle, such as say for example the Chinese govt, buying up future production on the reasonable theory that it might not be available for purchase later.
Antsy govts building stockpiles are responsible for strong prices to a large extent- they are as much soeculators as anybody, we just don't think of them that way.
Incidentally this also helps them get rid of some dollars that might soon be inflated away in the opinion of some Chinese bankers and economists.
You are simply talking about the difference between hedging and speculation. I believe that the futures markets are clear in recognizing the difference and that one must actually register as a speculator or a hedger (someone correct me if I'm wrong). Both are, in a sense, gambling on a future price but the hedger actually takes delivery.
Yes, the farmers are indeed hedging, but by brother has never had to register as anything. When he has done hedging, he does it through his "stock and station" agent, who trades in all the commodities on behalf of many clients, some of whom are armchair speculators that have never taken/delivered anything. When the agent's orders hit the market floor, no one knows who the agent is trading for - and they don't tell.
ET - Not my area but I don't think folks who play the oil futures market have to ID themselves either. You can call a broker this afternoon and have him buy a position for you. I think all that is required is that your credit checks out OK.
No, you don't need much ID to trade oil futures. My brother got reassigned to the oil marketing department one year, so he called up the broker and told him he was going to be trading $100 million or so in oil a year for his company.
The broker said, "Well, it's good to have your business." My brother said, "Don't you want any kind of identification or references or anything," and the broker said, "No, your word is good enough for me."
And that was it. Every few weeks he would call him up and put a few million dollars worth of oil on the market, and the guy would trade it for him with no questions asked. It was a lot easier than renting a car.
As you say, it is hard to separate speculation out. But the fact that world food exports have not increased by much, while population has, gives reason to believe that there is real reason for food costs to escalate, apart from speculation. We also know that oil drilling costs are way up. So there seems to be a very large real component of the price increases.
Also this money seems to have inflated stocks and created the illusion of recovery, which is perhaps what the central banks in the US & UK intended? Anyhow, it seems clear (as you say) that short-term benefits from QE have been in the financial centres and among the wealthy instead of a more equitable "green new deal" type of investment, for the long-term, in the real economy. Another opportunity squandered.
An uber-cynic (moi?!) might conclude that the laissez-faire attitude of the power-elite is prepared to compromise it's own future (safe in the knowledge that their riches will afford personal security) in order to 'solve the population problem' by business-as-usual exacerbating the global crises we are all too aware of.
I understand the issue from the perspective of the physical economy and EROI, how we'll have to spend more of our efforts into getting the energy just to keep things going (the Red Queen effect). This must eventually translate into less discretionary "goodies" for the average person - such as air travel, air conditioning, meat, etc.
But I'm rather puzzled about the way it works out through the concept of "money". In particular, the extra money spent on energy when prices are high does not evaporate - it is given to somebody who then spends it on something else. How does this additional exchange of funds affect the "recession", employment, and so on?
I'd say high oil prices create profits that accumulate with the elite who spend very little of it in a way that helps the broader economy. So you are sucking money out of the working and middle classes and giving it to Exxon shareholders, drivers of those enormous trucks in the tar sands of Alberta, Saudi Sheiks, and Vladimir Putin. St. Barts will continue to do very well. Ft. McMurray Alberta will continue to do well (until they run out of tar sands). Peoria, Illinois--not so much. Vermont, not so much.
stThe "elite" are people who have generally earned (or their family earned) money. The vast majority earned their money fairly and productively (admittedly some small minority cheated or won the lottery). When these productive people don't spend money (they tend to be savers(that is how many became wealthy, by saving more than they spent)...(and because they generally don't need to consume as much of what they earn since they earn more on average) those extra funds are put somewhere...typically a stock investment or a bank account or a bond or in a business. That money is then recirculated back into the economy for some other use...ie. the company which issues stock invests it...the bank lends it...etc. Just because someone's bank book has more zeros it doesn't mean they consume more than they produce or that their produced wealth has disappeared from the planet.
Yes, many rich overconsume (and many of them will eventually no longer be rich) but so do many people at all levels (it is called spending more than you produce).
Yes, Alberta will do well, they have important resources and are producing energy for the world. Vermont on the other hand is producing socialists like Senator Sanders who do much more damage than good because although well intentioned, he doesn't have the vaguest practical idea about how human nature works.
"socialists" and "privateers" have different views on what constitutes "human nature". One can hardly say that either one is "wrong", only that human nature is multi-dimensional, and how we act depends to a large degree on the environment we face. The Quakers say that "everyone has a piece of the truth".
Giant oil companies, agricultural mega-corporations, "defense" industries, massive insurance, health care and financial schemes-- they all require a powerful government to force the "free" market into their web. Where will Raytheon or United Health Care be when the U.S. government collapses into bankruptcy?
nate - Do you understand that the majority of ExxonMobil stock is owned by pension funds and thus the beneficiaries, including millions of union workers, are "the working and middle classes" folks you refer to? Most of the trillions of dollars in retirement accounts in the US are held in "blue chip" stocks. In essence the American people own ExxonMobil and all the other Big Oils as well as all the other major corporations in this country. I've known a number of rather wealthy indiviuals and none of them would own XOM...not nearly enough profit for them.
Don't take my word for it...just Google shareholder profile. Also, check the ExxonMobil annual reports and you can see just how meager a profit the shareholders get for their ownership. There is no Mr. ExxonMobil sitting in his villa at St. Barts. If you've got any money in your company's retirement accounts there's a fair chance you're one of those fat cats you're refering to. LOL
The problem with most models is that they don't take into account declining EROI. If there is not a decline in EROI, then what you say is probably more or less OK. But what you really need is a declining EROI model.
I was trying up above to figure out a model where there were only three goods--oil (used to make food and widgets), food, and widgets. As EROI goes down, it takes more labor, capital, and previously extracted oil to produce a barrel of oil. This leaves less labor, capital, and oil for food and for widgets. But since food is essential, and widgets are not, labor, capital, and oil tend to be dropped from widget production, and moved to oil production, but even with greater labor, capital, and oil as inputs, gross oil production does not increase, and net production decreases. Production of oil is not very labor-intensive. What probably is required with declining EROI is mostly additional capital and additional oil, but only a relatively as small amount of additional labor. So what happens is some of the labor used in making widgets becomes unemployed, while oil and capital that would previously been used in widget-making gets transferred to oil production.
In order to figure out how this economy compares to the old economy, we really need to figure out how the costs work. Oil is more expensive because it takes more labor, capital, and oil to produce the same oil. Food is more expensive, because it uses the expensive oil to a significant extent in its production. Widgets would also be more expensive, to the extent they were made, because more expensive oil was used in the process.
The amount of money injected into the economy is (1) the wages for the workers who continue to work (which includes somewhat fewer widget-makers) (2) plus the return on capital. The amount of (food + widgets) available for those earning wages or returns on capital to buy is less, because less net oil is now being produced. The workers who continue to work experience inflation, because their wages and the returns on capital are chasing fewer goods. This occurs because the drop in goods produced is greater than the decline in wages / capital needed for goods production.
I probably need a more complete model with numbers attached, but you get the idea. Goods produced are disappearing fastest. Wages are disappearing less fast. The need for capital remains high--even increases, but with little return to show for it.
Very well done. My superficial analysis is that rising oil prices follow a steady trend but with "noise" superimposed. The noise comes from price spikes or boomlets caused by short-term divergences between supply and demand, which are quickly corrected and overcorrected by rapid demand destruction, then the noise cycle starts over. I think we are at a point where the system noise will be much more evident because the basic gap between supply and demand is increasing. It would be interesting if someone could do a frequency analysis on the noise as a function of the underlying gap magnitude.
As a footnote my company is developing cellulase enzymes to convert nonfood cellulosic biomass to sugars, which are a partial substitute for oil hydrocarbons (www.generalbiomass.com). What I see in that space is a lot of confusion and far too little sustained investment to make a difference in the short term. Over the longer term I expect that there will be substantial substitution of liquid biofuels and bioplastics for their oil-based counterparts, though not nearly enough to make up for lost oil capacity.
I think that three component model is a great one - flesh it out a bit more and we may have something that even a politician can understand.
Your model actually seems like a three component version of West Texas Export Land Model - the more export land has to reinvest oil in its own production, at lower EROI, the less it can export, and the less money it has to buy widgets. Import land, is of course, in an even worse situation.
In regard to the increasing capital on oil(=energy) for less return, one good example is all the R&D and VC that has gone into biofuels. With the single exception of corn ethanol, it has produced virtually nothing, (zero EROI) and we know that corn ethanol's EROI is less than oil (even oilsands oil), and we have put more and more capital, and oil/energy, into ethanol and biofuels, arguably making the situation worse, faster. That is looking at total energy, if we are purely concerned with oil/liquid fuel, ethanol does produce more liquid fuel than it consumes, so the LFEROI is better - though I expect it is still not as good as oil's LFEROI
Of course, there was the hope that we would get a breakthrough in biofuels to increase EROI, but that just hasn't happened, despite $bn's spent.
Would military expenditures be significant enough to be a branch in your proposed model or would they be included in the "Widgets" category?
I was envisioning including them in the widgets category.
But ideally, a person would like a more complex model, that really follows what goes on. Military expenditures are likely to get squeezed too, by high oil prices. If it continues as usual, then other categories get squeezed.
Actually, I was thinking that military expenditures would rise as competition increases to secure supplies and reduce prices. I'm just not sure of its significance as we tend to use the same amount of military resources to tackle the top concerns regardless of what they are.
Thanks for the reply.
I've been wondering if the actual trigger for the recession might be the local derivative of the price of oil. In figure 2, the recessions mostly come when there is almost a step up in the price. The percentage of GDP and the percentage of household income would also seem to play a role but the run-up from 2002 to 2008 was pretty much exponential and if a recession had hit in 2005 we might have looked back at it and seen the spike as occurring there as easily as saying it happened in 2008. It seems to me that a lot of what causes a recession is that people suddenly and collectively decide to cut back on discretionary spending and the need to do this happens when we hit a vertical "wall" in prices. The recession in the early 90's was preceded by a jump from ~$40 to $60, but on either side of that spike the prices were relatively constant.
Question about figure 4: Aren't the Brent prices one month front prices? Did they get shifted back in time to reflect actual current prices? There seems to be a remarkable correlation which seems to indicate that the real driver is final transportation costs because the other FF inputs would have occurred much earlier in the growing season and should show up as a lag in food prices.
I haven't examined the trigger question enough myself to know whether it is the local derivative or something else that is the trigger. George Mobus suggested that it might be the area under the price curve, above the acceptable price level, that is the trigger--so it is really a combination of high high, and how long. That would seem reasonable to me.
Figure 4 figures are Brent spot prices from the EIA, I believe. I am not sure how different they are from front month prices.
I think food prices are affected by oil prices when food is sold. Usually these aren't too different than what prices were when planting was done, and harvesting was done. Quite a bit oil is used in transport and refrigeration of food, so energy use is not as front-eneded as you would think.
The link to that analysis is: It's the area under the curve
George
Thanks Gail and George. I agree that the integral must play a large part - it's the measure of how much (discretionary) income is being diverted to oil consumption. My thought was that the psychological effect of a sudden spike might be what finally tips us into a recession. Right now we seem to be in the "under the integral" stage where maybe people are struggling a bit, but it hasn't generated panic yet. The shape of the curve in the Brent spot price is looking quite similar to 2008 (actually it's about $10-15 above where it was at this time in 2008), so maybe we're headed for another step down soon. As you say in "It's the Area Under the Curve", it looks like an integral control, but might there not also be the proportional and derivative parts, too (PID)? Interesting times ...
I think this is quite true. The area under the curve (integral) is what builds up the pressure. It results in things like excessive debt. Then some impulse event like a price spike (regardless of what actually causes it) is like the pin prick in a balloon. A sudden high D. Proportional would be the straight supply-demand relation, I think. The supply part being the net energy not just the raw energy inputs (e.g. barrels of oil). Due to declining EROI the supply of net has been declining proportionally and thus the amount of work to produce real physical wealth has been in decline as well. Very interesting times indeed.
George
Just an interesting straw in the wind, purely anecdotal evidence and hardly meeting the criteria of a scientific sample...and yet...
This evening going out to eat at my local Pizza Place was
the following sign:
Anyone else see signs like this appearing?
My local Macdonald's now charges for some dipping sauces
Great article Gail. Complementary to that I try to briefly summarize all the works that analyzed the impacts of high oil prices on the economy:
- STEVE KOPITS suggests that when
• Crude oil expenditures exceed 4% of GDP,
• Oil prices increase by more than 50% year-on-year,
• Oil price increases are so great that a potential demand adjustment should have to reach 0.8% of
GDP on an annual basis,
then a recession in the US is very likely. See here for more details:
http://www.dw-1.com/files/files/438-06-09_-_Research_Note_-_Oil_-_What_P...
- JAMES HAMILTON (and other academic works as well) suggests that there is a nonlinear response of GDP to oil price. Particularly, his model published in the Journal of Econometrics in 2003,
http://dss.ucsd.edu/~jhamilto/oil.pdf
shows that hat oil prices only start to matter when they make a new 3-year high, so that either the oil price should be higher than 130$ or "...we probably won't have to worry about crossing that threshold until June of 2011". See also here
http://www.econbrowser.com/archives/2010/12/worrying_about.html
http://www.econbrowser.com/archives/2011/02/libya_oil_price.html
- DEUTSCHE BANK (Global Markets Research report 2009) suggests that "...each country seems to have a threshold percentage of national income at which crude pricing meets stern resistance and demand is broken. As outlined, we consider the marginal price sensitive major market to be the United States. For the United States that threshold was hit at about 11% for a short-term peak, and 9% for a
more sustained period (annual average)."
"... For the reasons outlined at the start of this section, we believe that the US will once again be the key marginal breakpoint of demand. Given the US consumers’ reaction to the 2008 price shock, we don’t think it will take a surge to 11% or even 9% of GDP to again break demand. The oil crises of the 1970’s compelled massive permanent substitution away from oil in the power and industrial sectors, thus involving a much wider swath of the economy. The 2008 spike, and future crises, will be about transportation, and natgas. The natgas shift is already there, but marginal. Thus in all likelihood a surge in price towards the 7.5% oil/GDP threshold that was tested in 2008 will be enough to provoke a decisive demand reaction from American drivers. Our GDP growth forecast (1.5% per annum), coupled with a 7.5% threshold, suggests the critical price of oil will be somewhere around $175/bbl within the next six years."
See here: http://www.odac-info.org/sites/default/files/The%20Peak%20Oil%20Market.pdf
- DEUTSCHE BANK (Global Markets Research report 2010) further lowers the threshold level after which the oil demand is broken as well as the oil price spike necessary for that:
"... We think that it will take less of a spike, perhaps 6.5% of GDP, for the next price surge to destroy demand because,
• the last shock set in motion major behavioral and policy changes that will facilitate rapid behavioral changes when the next one comes, and
• underemployment and weak wage growth has increased sensitivity to gasoline prices, last time it took $4.50/gal gasoline to finally tip demand, this time it might only take $3.75/gal to $4.00/gal to do it.
• The counter argument is that Americans have become comfortable with paying more for gasoline, and it may take higher prices to force behaviour change.
• Note that in early 2008 we argued that oil could not surpass $200/bbl because of the economic impacts, both negative (US, China) and positive (Middle East, Russia) that would over-whelm economies on both sides. In the event, as we reached $150/bbl, refining margins were crushed, and as the price of a tanker of oil spiraled, small cap US refiners were quickly pushed towards bankruptcy. We believe that if prices had gone higher, before long, shortages would have occurred in US product supply as
refiners went bust, and demand would have corrected that way. In the event, US consumers changed behaviour..."
"... If we translate the break point of oil cost relative to GDP in US$ per barrel, again we arrive at a price around $125 per barrel as the next peak point, sometime before 2015, depending on demand strength in the interim."
See here for more details: http://bioage.typepad.com/files/1223fm-05.pdf
- CHARLES HALL, STEVEN BALOGH, and DAVID MURPHY show that a recession is likely when oil amounts to more than 5.5% of GDP, as discussed by Gail above.
I hope I did not forget anyone! Please add if you know other similar analyses.
I might mention that the difference between the 4% (Kopits) and 5.5% (Hall, Balogh, Murphy) cutoff is simply a wholesale vs retail difference. The result comes out the same.
There is of course James Hamilton's new study referenced above, that shows that in 11 out of the 12 recessions since World War II, oil price spikes preceded the recession.
Thanks.
In November 2009 David Smith, economics editor of the Sunday Times in London, ran a piece comparing the recovery from the 2007/8 recession to the 1992 recession. I wrote a letter to the paper, which I was suprised to find published, claiming that peak oil provided a significant difference between the events he was comparing. In a series of emails subsequently he has refuted that we are at or past "peak oil" and the assertion that high oil prices cause recession (as below)
It fascinates me that people in government and the media, who are paid sizeable salaries to be knowledgable about these things, seem to be blind to the obvious. Are their positions genuine, are they in denial, or is it that they are prepared to take the money, live with the contradiction, and simply cannot admit the truth to the public in order to maintain "consumer confidence"?
I am not sure what the reason is. I think part of the problem may be the way peak oil is explained can make it hard to believe.
I tend to describe the story of peak oil being one of unaffordable oil; oil prices that cause recession. The idea that in a very general sense, it takes more energy to pump the oil out than the oil itself produces (when you consider all of the infrastructure needed to get and distributed the oil, including roads, schools, medical system, etc.)
I leave out the "50% of oil before peak and 50% after peak" part, because on a world-wide basis, I don't think it is true. I talk about the easy, cheap oil being pumped out first. I also talk about oil production rising and falling in many different areas of the world, and running out of cheap places to find oil, although there is still plenty of expensive oil left.
I think another part of the reason people in government and the media don't talk about the problem is because people in leadership positions who clearly should know (Steven Chu, for example) are telling an "all is well" story, even though it is not true. Politicians don't like to be the bearers of bad news.
Politicians don't like to be the bearers of bad news.
That is the best the best summary of the real problem with Peak Oil I have yet seen!
I think the unenlightened find the "we are not running out of oil, just cheap oil" line much easier to understand, even though there is much more to the real situation than that.
As you say, people like Chu know all this, and likely more. I wonder what he is thinking about his kids' future?...
Of course, global crude oil production has been at or below the 2005 annual rate for five years. We have seen a slight increase in total liquids, but global net oil exports, which are calculated in terms of total petroleum liquids, show a different picture:
http://i1095.photobucket.com/albums/i475/westexas/Slide3-1.jpg
But something that I haven't paid much attention to is the prequel to the ELM, to-wit, what happens to net oil exports given a production increase in an oil exporting country? Let's look at 20 years of data for "Export Land," from 1990 to 2010. The peak for our hypothetical country was 2000, when production was 2.0 mbpd, consumption was 1.0 mbpd and net exports were 1.0 mbpd. Let's assume a steady 2.5% rate of increase in consumption from 1990 to 2010, with production increasing at 5%/year from 1990 to 2000, and then declining at 5%/year from 2000 to 2010.
I have endlessly talked about the post-peak ELM net export decline (net export decline rate exceeds the production decline, and the net export decline rate accelerates with time), but from 1990 to 2000, the rate of increase in net oil exports exceeded the rate of increase in production (8.4%/year for net exports, versus 5%/year for production).
We saw something similar in Russia. Their 1999 to 2009 rate of increase in total liquids production was 4.5%/year, but their rate of increase in net exports over the same time frame was 6.4%/year (EIA).
Consider the supply signals reaching the market. Until net exports peak (which they appear to have done globally in 2005/2006), it appears that the rate of increase in net exports tends to exceed the rate of increase in production*, signaling ample supplies in the future, but then the peak hits, and everything changes--the net export decline rate exceeds the production decline rate, and the net export decline rate tends to accelerate with time, with all of this of course being compounded by the "Chindia" factor.
*Unless the rate of increase in consumption is very high, with a high consumption to production ratio, e.g., China and the US.
The cost of gasoline (commuting) and the value of suburban/exurban land are inversely related.
The more a household spends getting from home to work and back, the less they can spend on their house. When gas was cheap and relatively stable, people "drove until they qualified". Far flung sites are no longer as attractive with gas approaching $4/gallon once again. Building and accessorizing McMansions in the hinterland used to be a big chunk of our economy. Now, not so much. Is the housing industry capable of adapting to a "tighter" city form? Do the same skills used in building a stick-frame house in the boondocks apply in an inner-city rehab?
Rehabbing old city construction is a real can of worms-there are so many variables no general rules can be depended on in terms of costs, materials, ans skills needed, but one thing is certain.
The level of skills needed on site for rehabbing is substantially higher than for new residential construction, which is pretty much cut and dried with a crew of painters following a crew of siding installers following a crew of drywall installewrs following installation installers following the electriciam, etc.
An intelligent person with good basic math (eigth grade) can get good at any of these repetitious jobs in very short order.
A good rehabber needs some brains, many different skills, and organizational ability.
No two rehab jobs are ever really that much alike,in effect, until the rehabber has accumulated years of experience with the many various types of construction and materials used in the past.
We can learn from the hermit crab -- they do very well rehabbing old shells. And they never went to school at all.
Mostly a matter of expectation -- are you looking for shelter, for profit, for amusement, for art, or something else?
The embodied energy in existing structures--Stone, brick, steel and wood--will be hard to turn down when energy tightens up. Also proximity to work will change the value of inner city properties.
The old architecture may be stronger than newer builds in many cases.
But skills are going to be different indeed. Zoning laws. Utilities. Old wires. Lead paint. Asbestos. Lots of old friends in existing structures.
Having rehabbed a couple of places myself, I absolutely concur a much greater skillset, and problem solving ability, is needed - that is why many tradesmen hate/refuse working on reno's! That changes as they get hungry, of course.
But the real issue is not just renovating the houses, is rehabbing the cities/communities themselves to make them into places where people want to live. The nicest renovated inner city house in the world is not a nice place to live if you do not feel safe walking on the streets, day or night, and many American cities are particularly bad in this regard. Leaving aside the safety, if the community has degraded streetsparks/shops/schools (especially) etc, rehabbing the houses is of little use. Once these things are addressed to improve the community, people start to seek it out - you can easily find areas ike this in an city.
But rehabbing the houses themselves also misses that what is needed are new, smarter housing designs, for inner city living. Of course, they don;t actually have to be "new" designs - many 200+year old buildings in Euro cities are still housing happy people today. What is really needed though is design for city/community living, and that is a totally different approach from how most American neighbourhoods are built.
While you may not agree with everything the author of this series of photo essays on cities has to say, I do agree with his emphasis on getting rid of cars and really narrow streets - almost all the good parts of any city, usually the oldest, have really narrow streets - they make people primary, and cars secondary, and also use up a lot less land for streets (=cars) and leave more for houses/parks etc (=people). Almost any resort town, especially ski resorts, are like this too - they are designed to make people feel good, yet we design our cities/suburbs primarily to make car driving more efficient - small wonder many people don't feel good living in them!
The urban consolidation will happen, it is just of question of whether we jump or are pushed...
Good point Paul. The inner cities in America are in ruin after 4 decades of suburban sprawl and degeneration. A lot of services and commercial activity are needed; i.e, food and community and for that matter jobs. Many businesses move to the burbs after all for tax purposes.
A walkable city sounds like an utopian ideal and yet that was once how everything was.
Yes, the walkable city has been around, in one form or another, for up to 6000 years, and appeared on every continent (except Australia and Antarctica) As the author of that website says, this is either;a) a wild coincidence, or b) becasue it works.
Having lived in the walkable parts of several major cities myself I am of the opinion they are always the best parts of them. The first time I visited Portland, Or I was trying to work out was was so good about the downtown - and then realised it was the lack of cars. Small blocks, one way, narrow streets with sidewalks as wide as the street made it a pleasure to walk and a pain to drive - so people park and walk!- the Really Narrow Streets theory in action.
But some of those ruins will come back - when you have young people -college students, artists, designers, etc colonising those areas, they have a very different, new energy about them. some people theorise it is the lack of big corporate presence - when the area gets "big" enough to start attracting the chain stores, unless carefully managed, the edge starts to dissappear and the gradually becomes more mainstream, and uninteresting. A bit like the sequence of forest regeneration really - without the shade of the massive Douglas Firs, the alders, birch, larch, shrubs etc all get going rapidly, and you have a very dynamic system. Eventually, the big tree species re-appear and and start to outgrow the early ones, crowding them out in the end - until there is some externbal disruption causing collapse (fire, landslide, logging, pestilence etc)
I guess it shouldn;t be that surprising that our cities/corporate worlds follow the same progression.
Respectfully disagreeing with oldfarmermac:
I was a general contractor for 20 years until the current recession. First ten years mostly remodeling & rehab, second ten new construction. Mostly single family residential construction all 20 years.
Skill sets are generally transferable between the two types of construction activity. There are in fact general rules of estimating that are applied every day to remodel/rehab work. A general contractor would and could bring in the same sets of subcontractors, painters, plumbers, sheetrockers, etc. to either type of job.
Like any other type of work, building construction/rehab is an exercise in sequential logic. Modern construction techniques are specialized. The specialization has come to be enforced by law as different trades are required to have different certification and licensing requirements. Carpenters cannot install wiring, electricians cannot install plumbing. The rehab job follows the same logic as new construction.
The General Contractor is the one who needs some brains, access to workers with different skills, and organizational ability, whether new construction or rehab.
Most anyone who has skills learned in stick framing could be taught in relatively short order how to put those skills to use in rehab. Most anyone willing to work and physically fit for the task can be taught basic construction skills. It is mostly about the organization of the work.
You were able to become a general contractor simply because you were SMART ENOUGH to be one.
My argument stands.
The vast majority of "new construction" trades people are not smart enough, or well organized enough, to do rehab on budget or on time or up to cosmetic standards.
Of course in my part of the world the only people doing rehab that need special certs are generally electricians and hvac guys , plus engineers or architects on big enough jobs for them to be needed.Nobody really gives a hoot here who runs the water lines, unless there is a septic tank system involved.
And if you own the job, you can do whatever you want yourself in Virginia, barring engineering work;I used to be a capiutalist piglet myself, at odd times, and helped rehab or ran a couple of dozen residential rehabs;most of them still belong to good friends of mine who are currently collecting rent three times the PITI on properties bought twenty years or more ago.
Of course I used to be an ag teacher, and the other guys were mostly farm guys with construction experience.
If we had stayed at it, instead of doing it once or at most twice a year, we would be rich today.
I own some shares in a couple of them myself, which is partly why I have so much time to fritter away here on TOD.
Actually we could have probably gotten rich if we had simply worked steadily at ANYTHING almost; but personally I am a world class rolling stone and have never been interested in doing the same thing for very long.
The general contractor who tries to hire muscular young guys who are experienced at framing, or roofing, or drywall, in new construction only, usually has to stand over them like a mother hen to keep the job running right.
Or maybe the guys who do construction work in your part of the world are just smarter than the average.;)
I do agree that once a given skill has been mastered on a new construction basis, it is far easier and faster for the mechanic to learn to play it" by ear" rather than by the sheet music.
Some thoughts on commuting economics. For most...the fuel cost of commuting to work is quite small compared to the wages earned. If it's not...it's by choice...probably a poor vehicle selection, but I digress. Here is what I mean. I have recently found myself doing something I never thought I'd do again...commuting 70+ miles a day to work. It sucks, but it is what it is. My vehicle gets about 35mpg, so I use 2 gallons of fuel, costing me $7 a day....a very small % of my daily wages. By the time I drink my morning coffee and take my morning crap...I've already paid for my gas. Paying the $7 a day is pretty much a no brainer....and it would continue to be even if fuel went up to $10, $20,...even at $50 a gallon or higher....Now...at those prices, for sure I would change my driving habbits. I'd probably drive a bit slower, I'd draft behind big trucks, try to set up a carpool, and even start looking for a job closer that would net me more even with a lower wage, but in any case, the price of fuel would not stop me from commuting to work...even at $50 a gallon.
Those are my numbers...driving a ford escape hybrid. Someone commuting in a tahoe or an f250 would obviously have much different numbers....for them, $50 gasoline would dictate change....sell the gas guzzler and get a smaller more efficient vehicle. If they can't do the math and figure it out themselves...well I don't feel sorry for them and I don't want to hear their sob stories on the local news.
Finally...in general...people commute long distances to get to high paying jobs...not crappy jobs. We are talking Accountants, Engineers, nurses ect... However, go to any walmart or fast food joint, and probably 80-90% of the minimum wage employees are going to live within 5 or 10 miles...or less. Sure...there will always be the moron who drives his jacked up pickup truck 30 miles to his minimum wage job....but he's just plain stupid and nothing can fix that.
I think you are right, commuting will be with us for awhile, one way or another. Even if we are all eventually commuting in Tato Nanos. But it's going to be some time until the personal commute in a vehicle disappears, if it ever does.
I suspect one of the first things to go away on the descent will be after hours and weekend activity. I mean, nobody is going to have the money or the oil to drive around frivolously.
Which should make the roads that much clearer for the people who can afford them!
See that's what the kumbaya crowd doesn't understand. There's no such thing as everybody deciding to ride bikes for the good of humanity or the planet, and never will be. But there is poverty. And the more people who are poor, the more that's leftover for the rich.
Ultimately how you get around is going to depend on where you stand on the social food chain.
Pretty much ... yes. If people can't afford to drive as much, the commute, for those who still have one, will be the last thing to go. But in addition to "frivolous" driving, I think that what the Europeans refer to as "civil society", such as charitable, civic, and arts activities, and the like, will get a thrashing. That goes double or triple if governments panic themselves into outright rationing.
I strongly agree with this...
"Even if we are all eventually commuting in Tato Nanos."
While it would require a paradigm shift...like $50 gasoline... I imagine the future of commuting to be in ultralight go-cart sized personal vehicles. With small but efficient engines, or even batteries, and top speeds of 40-50 or so...surely over 100mpg...if not much higher can be achieved at a very low production cost compared to a modern car, no high tech needed.
This economics is why I comment as I do about, especially, bus service, even though it does tick off some of our resident wannabe social engineers. In most cases a bus (in the real world, two or three buses more often than not) will be absurdly time-consuming for a daily commute, equivalent to valuing one's time at only a dollar or two an hour at best.
That is why, in many cities, a majority of bus riders are students and seniors - whose time value is about that.
But just because many places get it wrong, does not mean it *can't* be done right.
If a private owner/operator gets to plan the bus service, they will optimise the route - find the profitable medium between maximising customers reached and minimising travel times. This will mean some places do not get bus service.
Unfortunately, many cities take the view that ALL areas must be served by the bus system, as it is a "public service", so none get's left out, thus making any chance of profitable service impossible.
When it comes to trains, they can't service all areas, so the smart cities pick their places for the train carefully - let the engineers and planners do the choosing, not the politicians in battleground ridings/wards. When done right, the results are very, very good;
From http://en.wikipedia.org/wiki/C-Train, emphasis added.
From other studies they have done, 43% of downtown workers get by the C-train, and if all the peak hour passenger passengers had to go by car , an extra 16 lanes of traffic to downtown would be needed.
I lived there for three years and can personally attest to the efficiency of this system. Everyone knows the fastest way to downtown, if you are anywhere near the train line, is the train.
Also, the system is 100% wind energy powered from a nearby (100mi) wind farm.
The real problem in most cities is they build cadillac transit systems when a base model chevy will do the job just as well, and much cheaper...
I am doubtful that the train is 100% wind powered.
At most, it has wind power equivalent to 100% of its day to day electricity needs. Because of wind variability, it is not really wind that powers the train most of the time; it is coal, I would expect. Also, a big part of train energy cost is its "embedded energy" cost, and this is likely heavily oil plus electricity from wherever it was made.
A huge amount of products we buy now days are from China, because the embedded electrical energy is 80% from coal, which is very cheap. It helps also that Chinese workers get paid very little (because of their meager lifestyles), so they use very little fossil fuels.
Actually, this is one of the rare cases where the wind will power it most of the time. The wind farm area in southern Alberta, east of Crowsnest Pass in the Rockies, is very, very consistent wind. There was actually a deal done specifically to develop wind farm for the train, about 10yrs ago, which re-started the wind industry in Alberta, there is now 900MW of wind there - they had to cap it as they were out of transmission capacity - now resolved. The usage of the C-train is a fraction of that.
But you are correct in that the majority of Alberta electricity is coal, and Alberta has lots of that, too.
No argument that there is a lot of embodied energy in trains and railroads, almost all of it coal. The real point is though, that because the trains get such high ridership, the energy per passenger mile is very low - about a tenth of cars - and even the embodied energy of the system, is much lower than that of the cars and road lanes the train displaces.
Even if the energy were coming from coal - the train ridership actually displaces about 1.5million car passenger miles per day - that is a lot of oil saved
The high ridership is the key - if you don;t plan that in and make it happen, then, energy speaking, you may gain little, or nothing.
Agree 110% about embodied energy of stuff made in China, or elsewhere. Our "national energy use" numbers way underestimate our true usage because of this - the slaves are out of sight and mind.
Actually, Alberta is shutting down a lot of the old coal-burning units since they are approaching the end of their useful lives, and natural gas peaking units are popping up like mushrooms across the landscape. With the current low price of gas it makes economic sense.
The big constraint is transmission capacity, and the government is involved in a scramble to kick the NIMBYs out of the way and get the transmission lines built. There are a lot of companies with plans for wind generators on hold just because they do not have transmission capacity.
The Pincher Creek wind farms have rather consistent winds compared to most places, but when the wind doesn't blow the NG units pick up the slack. They don't count the electrons, but on average the Calgary LRT system gets all its power from the wind farms.
People really have no idea how efficient the Calgary LRT system is until they take a hard look at how it is operated. Its costs are very, very low compared to the alternatives, and its speeds are high compared to the rather dismal situation for cars on the streets and roads.
"People really have no idea how efficient the Calgary LRT system is until they take a hard look at how it is operated. Its costs are very, very low compared to the alternatives, and its speeds are high compared to the rather dismal situation for cars on the streets and roads."
It is almost as if transport people from other cities refuse to believe that it can be so efficient. Vancouver likes to brag about their system, but the cost/mile to build is about 5x Calgary. The driverless trains cost more to operate and maintain than Calgary's driven trains. It is energy efficient in operation, but energy is a minimal operating cost, and the system is so expensive to build that they don't have nearly as much of it as they could if they did it Calgary style. But it "looks good" and this seems to be very important to Vancouverites.
This is interesting information. Everyone that listens to weather reports in the USA is aware of the phenomena of the "Alberta Clipper". Making the connection between the two could produce some marketing leverage.
By this I mean, why is not the LRT there called The Alberta Clipper?
Then you have the Manitoba Mauler and the Saskatchewan Screamer
I have seen the Calgary system, and heard people from there rave about it. It is quite a long ways up to the mining portion of the Oil Sands operations (20 or 30 miles) from Calgary, and not all that much parking at the other end. It makes sense for people to get on the train, and ride up there together. Calgary housing is pretty close together as well, because the soil is not stable enough to build on in many areas. So most people probably don't have to go very far to get to the train.
Vancouver (mentioned below) just reminds a person of a big city, situated along the ocean. Instead of one long straight shoot, it needs to take people in all different directions, like most train routes.
Not all recessions are caused by oil spikes nor do all oil spikes cause recessions. That said, I never understood how anyone could ignore the linkage between the two. I remember in the 70s when people tried to blame those recessions on government policy when a quadrupling of oil prices was slapping them in the face.
People like to blame others when they themselves are truly behind the resource constraints collectively. LOL. Imagine after this go-around when the North Sea and Alaska will not be there to save us.
Here's an article in today's Christian Science Monitor making the same point as Gail's Fig. 3, namely that: "Adjusted for consumer-price inflation, the [February] gains in [US] household earnings disappeared, with "real" disposable personal income actually falling 0.1 percent for the month."
http://www.csmonitor.com/Business/2011/0328/US-incomes-rise-but-disposab...
For a graphical presentation of data instead of a narrrative, see
http://dshort.com/inflation/PCE-update.html
For a longer-term view of inflation showing the "money illusion" under which most of us live, see the double-dip dynamic of the dot-com crash, reflation in the form of housing credit, and subsequent credit crash - leaving us currently 34% below the real (inflation-adjusted) S&P 500 Index value of March 2000.
http://dshort.com/articles/2010/mega-bear-2000.html