Why High Oil Prices Are Now Affecting Europe More Than the US
Posted by Gail the Actuary on March 7, 2012 - 10:25am
The world is presently sharing a limited supply of oil. When oil prices rise, oil production doesn’t rise very much, if at all.
The issues then become: Which buyers get the oil? What uses get priced out of the market? Which countries are disproportionately affected?
It seems to me that this time around, Europe, and in particular the Eurozone, is the area of the world getting hit the hardest by high oil prices. Part of this has to do with the relative level of the Euro and the US dollar. If we look at the price of Brent oil (a European oil) in Euros (Figure 2), we find that prices are as high now as they were in mid-2008.
The situation in the United States is fairly different. The dollar-Euro comparison works more in the favor of the US, so that the rise of Brent in US dollars has been smaller this time than in 2008. In addition, refineries in the United States have been fortunate enough to purchase quite a bit of the oil they buy at prices below that of Brent. The issue leading to lower prices in the United States is lack of pipeline capacity, creating a bottleneck for shipping oil to Gulf Coast refineries. (See my earlier articles, Why are WTI and Brent Prices so Different? and Pipeline changes to fix WTI/Brent spread are likely to add new problems.)
Figure 3 shows two different benchmark prices of crude oil in the United States: Brent and West Texas Intermediate (WTI). Oil that is imported to the United States from Europe and Africa can be expected to follow Brent prices, as will oil that is produced along the Gulf Coast, and has convenient access to Gulf Coast refineries. Oil that comes from the North, such as crude from Canada and the Bakken, is subject to pipeline limitations, and its price will tend to follow that of WTI (or trade for an even lower price than WTI). Oil purchased by US refineries thus reflects a blend of WTI and Brent prices, and perhaps some lower ones as well. Based on Figure 3, it is clear that the current prices are far below the 2008 price peak, quite unlike the situation shown in Figure 2 for Europe, with Brent priced in Euros.
Availability of Locally Produced Oil versus Imports
Europe’s oil production has been declining since about 2002.
This decline in oil production by itself has a negative impact–fewer jobs and less tax revenue.
In comparison, oil production in North America (Figure 5, below) has been much more level, and has even been rising somewhat recently. A rise in US and Canadian production has helped offset a decline in Mexican production. Since the amounts shown are “all liquids,” the amounts shown include biofuels and natural gas liquids, which are oil supply extenders, but are not true “crude oil.”
An even more important issue, though, is that European oil does not benefit all European nations. Instead, it is the countries that extract the oil that benefit, primarily Norway and the United Kingdom. Countries that do not extract the oil must import any oil they use.The countries that import oil generally import natural gas as well, at prices that are partially tied to the price of oil, so they are hit doubly hard.
Paying for these high-priced imports reduces the amount that residents of these countries can be spend on other discretionary goods, and contributes to a tendency toward recession. Furthermore, if a country is not producing oil and natural gas itself, it does not get the offsetting benefits of additional jobs in the oil and gas sectors.
Figure 6 shows that the PIIGS countries are all very heavy importers of oil and natural gas. In fact, they are the five countries listed on the on the left of Figure 6, with the highest level of imports. When oil prices rise, these countries are disproportionately affected, because, for example, tourists can no longer afford vacations in their countries. Their debt problems are in part tied in to high oil prices, since when workers are laid off, a country collects less in taxes and needs to pay more in benefits to unemployed workers.
The US has a relatively low level of imported oil and gas imports compared to most European countries. This occurs partly because of its significant use of coal and nuclear, and also because of the large size of its own oil and gas production.
Another factor that helps the United States in dealing with high energy prices is its current low price of natural gas, relative to that of Europe and Japan (Figure 7).
US natural gas prices are currently extremely low, because of an imbalance between natural gas supply and demand. These low prices for natural gas mean that the cost of home heating and of electricity are now lower than they have been historically in some parts of the country. These lower heating and utility costs help offset the rising price of oil. The issue of why US natural gas prices are so low will be the subject of another post in the near future.
The low price of natural gas also makes the cost of refining heavy oil less expensive in the United States than elsewhere, because natural gas is used by complex refineries that refine heavy oil, both as a feedstock, and to fire the furnace that heats the crude oil. This makes the United States a sought out destination for refining heavy crude oil, and helps add jobs to the US economy. For example, nearly half of crude oil imported from Mexico to the US is exported back to Mexico as oil products, according to EIA data. EIA data also shows that we import crude and export a smaller amount of products back to Canada, Brazil, Ecuador, and Venezuela. The low price of natural gas is thus a reason US product exports, such as diesel and gasoline, have been increasing recently, even though the United States continues to be a big importer of crude oil.
Nuclear Makes a Difference
The reason why Japan, Germany, Switzerland, and France have as low imported oil and gas dependencies as they do (Figure 6, above) is because they historically have all had very significant nuclear energy installations. If the amount of nuclear energy production is added to oil and gas imports, the resulting ratios are more like that of the PIIGS countries, with imported oil and gas dependencies exceeding 65% of total energy consumption (Figure 8).
If countries with nuclear programs decide to discontinue them, it will be a challenge to find other sources of energy with which to replace the nuclear. While LNG production is increasing, it is doubtful that it can increase enough to match everyone’s needs. Many are hopeful that wind and solar will work as substitute, but this is far from proven. Scale up tends to be very slow.
What is Ahead for the Eurozone?
The Eurozone includes 17 countries that have adopted the Euro. It does not include the major oil-producing countries of Norway and the United Kingdom, and it does not include Switzerland.
Figure 9 (below) shows that the oil supply situation for the Eurozone is very poor. It is pretty much entirely dependent on imports.
Figure 10 shows that the natural gas supply situation is only a bit better:
With no oil supply, and a modest but declining natural gas supply, Eurozone countries can expect to spend more money on oil and gas imports in the future, assuming that they can get these products when they want them.
The Eurozone has the additional problem of having a common currency, but debts entered into by individual countries. Individual countries cannot issue currency. If a particular country would benefit by having their currency have a higher or lower value, there is nothing that can be done about the situation, because the Euro is at a common level for all. So it is easy to reach the situation we are in today, with Greece and a number of other countries near debt defaults, when oil prices are high.
The question going forward, besides the debt problems, is how the Eurozone’s energy problems will be solved. After the Fukushima accident, many are questioning whether nuclear is really a good option. Another option is coal, although it is problematic from a CO2 point of view. There is some coal in the Eurozone, but less than is currently consumed, and extraction is declining each year:
The countries that have banded together in the Eurozone are in a weak position because of their poor energy supply situation. There has been a great deal of work done on wind and solar in the Eurozone, but these still comprise only a small percentage of energy consumption. While many would argue that “renewables” are the way of the future, the fact remains that the vast majority of energy is not from renewables today, and the high price of oil and gas is already causing a problem.
Various policies have been put in place to curb fossil fuel use, but Eurozone countries remain very dependent on fossil fuels. With world oil supply flat, and other parts of the world growing more rapidly than the Eurozone, the Eurozone will need to make major cuts in oil usage in the years ahead. One way this might happen is by one or more countries dropping out of the Eurozone, going back to their old currencies, and letting their currencies devalue. With devalued currencies, these countries will be better able to compete for tourist trade and for export markets. This would leave the remaining Eurozone countries in a less competitive position, however, and make it advantageous for other Eurozone countries to drop out. This scenario would seem to lead to the end of the Eurozone and many debt defaults.
Are Other Countries Better Off for the Long Run?
While the United States, United Kingdom, and Japan would seem to be in better shape, this is not necessarily the case for the long run.
In part, the long run is different because individual situations are temporary. Japan is vulnerable now, with most of its nuclear generating stations down, and the need for more imports of some sort to balance the situation. The United States for now has lower oil prices due to pipeline problems, but these will eventually be solved.
In part, the long run can be expected to be different because problems of one country affect other countries. If there are debt defaults in PIIGS countries, these are likely to affect banks and insurance companies around the world. Also, almost every country has a debt problem, unless economic growth returns for that country. If the nations of the world are sharing a virtually flat oil supply, it is difficult for very much economic growth to take place, because high oil prices reduce funds available for other purposes. Need for greater energy resources is likely to lead to more resources of all types (people, capital, and raw materials) being devoted to creating energy of some type (high priced oil and gas, or substitutes), leaving less for other economic sectors, such as those making discretionary goods.
So in the end, it may not matter which countries were first and most affected by limited oil supply and high oil prices. It will be all of us that feel the impact.
This post originally appeared on Our Finite World.
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In some ways this is a good thing for Europe as it will force them to
move more and more of their Transportation oil usage over to their fairly extensive Green Transit network of high speed Rail, Rail, Light Rail , trolleys, biking and walking. Europe's other major priority is to move much more of their freight to energy efficient Rail. As was pointed out in an interesting data compilation by Richard Gilbert and Anthony Perl in
"Transport Revolutions: Moving People and Freight without Oil"
( http://transportrevolutions.info ) it was Europe's increase in Cars and Trucks greenhouse emissions which led to their utter failure to meet Kyoto Protocol standards:
The figure I recall is that Green Transit already provides 17% of Europe's
transportation. This will grow with higher diesel prices.
The irony of the Real Estate crashes in Ireland and Spain is that these countries already had reasonable Green development with real Main street walkable towns, rail and transit options. But the housing collapse came from McMansions built by private developers in the US style...
As I understand it, Europe's rail system is only for people. (The US' rail system is primarily for freight.) Freight in Europe is moved by truck.
One reason why Europe's rail system is for people is because there are different rail "gauges" (widths) in some different countries. It is possible to have people get out and walk to a different train, but more difficult to transfer goods across the dividing points.
Rails in the US are primarily single-track. I don't know about in Europe. There tend to be different speeds for freight (slow) and passenger (fast). Mixing fast and slower trains on a single-track system doesn't work very well.
Look at my articles about world greenhouse gas emissions, which have been rising (here and here). If reductions in Europe lead to the purchase of more outsourced goods from Asia, the overall result may be much less good than the individual country's numbers seem to show.
According to Wikipedia, which seems to be using reputable sources, the fraction of freight carried by rail relative to that carried by road is 42% is the US and 18% in the EU as a whole. In Germany it's about 22%. So not negligible, but your point stands. According to this pamphlet (http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-DK-10-001/EN/KS-DK-... ), Poland is up at US levels, as is much of central/eastern Europe.
The US probably had a lot more kilogram-distance traveled by freight than Europe does. The 44% of US freight thus gets to be quite a lot, in absolute amounts.
Also, if distances are relatively short, as in Europe, it is easier to match rail travel times to people's schedules. If trains are traveling very long distances, there get to be quite a few pick-ups and drop offs at odd times --between midnight and 4:00am, for example. As a result, passenger trains can end up running nearly empty quite at times, if they aren't running commuter type schedules, or routes during popular times to popular places (as in Boston-New York_Washington DC route).
We also (in the U.K.) had an extensive canal system. Some of which is extant today, however, mostly used for pleasure I think. Some of the canals that go right through the heart of London are still there, buried under new buildings and roads. Always seemed like a very pleasant way of moving "things", much more civilised than monstrous lorries (trucks).
http://en.wikipedia.org/wiki/History_of_the_British_canal_system
The Erie Canal was a big deal. I note that today it is mostly used for recreational boating
http://www.eriecanal.org/
True, the Erie Canal is mainly recreational, but there has been a very slight change of late.
Source: The Localization Reader: Adapting to the Coming Downshift. (2012) The MIT Press (p. 110).
Original story: Christopher Maag, “Hints of Comeback for Nation’s First Superhighway,” New York Times, November 3, 2008.
Interesting! I hadn't heard about this. Canals are a lot cheaper than trains, especially if they are already built and available for service.
Too bad canals are totally useless for a huge amount of goods due to their low speeds. You can transport some foods and construction materials over canals efficiently. That's about it.
If we go back to canals, much of the present economy becomes impossible. iPads, for example, can't be efficiently transported over canals (just to make one dumb example), because things like global synchronization would become impossible.
Well, your 1500 mile salad will be toast, but there is nothing to stop them being used to transport food within a region to the nearest large town or anywhere less than two or three days travel away. At 4 mph you can get over 150 miles in a couple of days, not really a problem if the barges are refrigerated.
The causal order will likely be reversed: we'll go back to canals after the present economy is no longer possible. Which some folks suggest might be right soon now.
At that point, we'll be thankful we didn't fill in the canals to build tract housing. And we'll begin a trails-back-to-rails initiative.
Under such a scenario quickly transporting iPads, and other luxury goods, becomes somewhat moot. We'll likely be carefully planning (and saving/paying for) our few purchases well in advance -- focusing more on the seed corn and much less on the Farmville app.
Under such a scenario quickly transporting iPads, and other luxury goods, becomes somewhat moot.
Or, maybe we'll use iPads and iPhones to arrange carpools while we wait for our EVs to arrive, and preserve the current economy.
Here's a May 2010 proposal to start container service on the NYS Canal to allow increased container traffic from Post-Panamax vessels into the Port of NYNJ w/o increasing truck congestion.
http://www.canals.ny.gov/corporation/modern-freightway.pdf
Canals and rivers do move a lot of freight. Mostly bulk materials, like coal or wheat. I would lump river plus canal freight in with railroads -as both are oil efficient freight ton miles. Don't know what the numbers are. But I bet a lot moves on the Rhein. I known a lot moves on the Mississippi.
Not sure about the Rhein alone (you do see a lot of freight ships travelling on it though), but 12% of total freight in Germany is moved via rivers [1]. Travel via rivers is probably one of the most efficient. However, it is oil based rather than electrified.
[1] http://de.wikipedia.org/wiki/G%C3%BCterverkehr
A lot of barges move up and down the Mississippi. I live about 5 minutes from the river and see them all summer long coming down from the Twin Cities and up from St Louis and points south. The river does close in the late fall and should open here sometime in the next month. The locks along the river do slow things, but keep the channel at a set depth for the most part. I would gather, just from all my years on the river, that barge traffic could be increased quite a bit. A rail line runs right along the river here in Wisconsin and up into the Twin Cities area.
The key would be to move truck traffic onto barges and rail.
What do you mean "had"? They may have been somewhat buried in London but they are fully alive around the rest of England and you can go pretty far on them. They are just waiting to be used again commercially and maybe cleaned up a little.
When they stopped being used for work, they became recreational and heritage areas and that has saved them.
The problem with UK canals is that most of them are very narrow, and have large numbers of small locks that limit their effective capacity even further. The average UK canal's effective carrying capacity is less than that of a single lane highway. It is economical and useful, but the existing network will not carry more than a tiny fraction of the freight of a modern industrial nation.
....which was used for the transportation of heavy goods.
I should have added to that sentence. I did say they still exist and are used primarily for pleasure now, however.
I recall several attempts, over the years, to whip up interest in restoring and perhaps widening them for more modern use.
None of these ideas have come to much as far as I know.
Yet, anyway.
re European railways / Greece
The three different gauges in the European railway system are only a minor problem. You have the normal gauge in most of Europe, an iberian gauge in Spain and Portugal, a Russian one and an Irish one. There is a direct freight train running from Göttingen to Porto/Lissabon covering a distance of over 2700 km. The railway cars fitted with adaptable wheels change gauge at Irun. There are also passenger trains operated by the russian railways connecting Moscow with Nice and with Paris. Their gauge is changed at Brest.
The main obstacle of state run monopolistic railways is absurd unionism. For instance in the border stations between Austria and Italy the austrian engine is not allowed to return to Austria under own power. It has to be shunted back to Austria by an italian crew of three ( Two engine drivers and one shunter) . Italy insists on two engine drivers, whereas in germanic countries one is enough etc. etc. Unions are also the reason for miniscule trade trough mediterrean ports even though they are much closer to Asia than Hamburg, Bremerhafen, Amsterdam or Rotterdam. Rail traffic to Italy is very lopsided, with freight trains returning empty. Slowly but surely the European Union and since december also the Monti government is forcing these closed shops open.
Cruise ships are big business but none of them are calling at greek ports. Greek unions insist on greek sailors. This law had to be changed last year under "Troika" pressure. Nowadays greek law stipulates generous fees for the greek sailors pension fund from cruise ships. The result: Still no calls and still no tourists. This behaviour is not competitive in a currency union. Greece´s economy represents about 2% of the Eurozone, nothing decisive in the bigger picture. Both possible outcomes are good: If Greece fails reforming, it will serve as a cautionary tale for the rest of the Club Med. If it succeeds, which is unlikely but not impossible it could morph into a functioning member of the european club. It is brinkmanship with an open outcome.
Just as long as people who worked for decades being promised a certain pension from the state during those decades let the state out from their contract. And, given the fact that those pensions don't exactly match normal wages at all (between 60 and 80% for the best pensions, and no cost-of-living adjustments), they should ... well, what exactly.
I know a lot of these people and you can basically divide them into two groups : the group that has managed to buy and pay off a house and the group that did not. The second group is much larger. The first group is relatively comfortable, although they don't have the money to go on big holidays or anything. The second group lives at the edge of what is possible : they have barely enough for rent + food, and they cannot afford elder care (or anything else, really, you hear stories of people save half a decade to buy a second-hand tv because they had no kids to give them one).
So as long as the second group, well, dies fast enough while forgiving their contract with the government for a pension in trade for massive tax payments (social security taxes are >30% of bruto wages for 4 decades now). Well as long as they don't mind the government going back on that contract, with the consequence that death follows immediately after their very limited savings run out ... well as long as people peacefully accept that option, things will change.
I hope people here realize that it'll be a cold day in hell if that happens. This would not at all be a good thing, it would be a disaster. If the world forces this to happen, we get a revolt and Europe returns to the dark ages. It's that simple.
Stolen from Pitt the Elder's reply to my pointing out (on the Dec2nd 2011 Drumbeat) that Europe moves a lot more freight (as a percentage) by water than we do, in fact as a proportion they move as much more by water as we do by rail:
"45% of EU freight goes by water, vs. 20% in the US. (Interestingly, much more goes by barge in the US -- 12% vs. 4% -- and the difference is due to coastal shipping, 41% vs. 8%.)"
High speed rail does not support freight. Among other reasons, the high mass of freight cars will not navigate the curves of high speed rail track.
Rubbish.
A lot of the media is about high speed passenger services but the ability to use these lines for bigger faster freight services is a very important reason to build these lines. The freight is probably what pays for the developents. The Swiss are building high speed tunnels and lines to get the freight off their roads and slow curvy steep rail.
http://en.wikipedia.org/wiki/Gotthard_Base_Tunnel
http://www.alptransit.ch/en/media/publications.html
There is a publication (in english) 'The New Gotthard Rail Link' that covers how these high speed lines will take freight off the roads and increase freight speeds.
"Freight traffic will enter a new era
when high-performance freight trains
travel at speeds of up to 160 km/h.
Thanks to these high speeds, freight trains
will not have to stop so often, or so long,
to let passenger trains overtake."
No that is not high speed rail, which is commonly defined as 200km/h up to 300km/h. The US had 160 km/h (100mph) freight back in the days of steam engines.
Low-bulk, high value, high speed package freight moved by air or road in the U.S. can move quite well using high speed rail with significantly lower energy consumption and carbon intensity.
No, we won't be seeing coal cars on the TGV anytime soon.
A major reason for the UK high speed proposal is freight - both overnight high value directly on it and to free up capacity for bulk freight on the existing lines by reducing the speed differentials. In Britain there is a second reason for having freight on the high speed lines - they are built to the larger European loading gauge and standard wagons will fit which they won't in the rest of the UK. Note the comment above that most lines are single track is only really true for the US, most European systems are two or four track. High speed is a relative term - HS1 (Ashford to London) is capable of 180mph but the domestic trains are 140 and the timetable only demands 125 as the commercial case for going faster is not there (Eurostars use the full capability). Non the less this has shortened journeys to the north by 1-2 hours as the terminus connects with all the north-south lines far better than the old lines do. OTOH commuters working south of the Thames see little gain for the extra cost as they end up further from their offices than before while services on the old route are even slower now.
Gail,
Can you explain that first chart? Has supply really remained that flat? When I first saw the chart I was slightly confused, but I guess if you include everything that is not oil, then this is possible but I have not done any of that research yet myself. I would have thought supply had increased from some much lower point and reached a plateau more recently.
I think the message from that chart is more a "things are going fine" one than one which would suggest we begin a fall off the plateau soon.
Yes, it is really that flat, and this is including everything that is not oil. It is even flatter, if a person only includes oil.
I think the shape of what is ahead is likely to look much more like financial collapse, caused by the inability of society to get along with a plateau (because there is not enough economic growth with oil production this flat/high priced, so countries and businesses in oil-importing countries default on their debt). The number one issue I am worried about is "Limits to Growth, related to this kind of squeeze on society. I also expect overthrows of governments of countries whose exports are declining, and countries like Libya to break apart into multiple pieces. I don't think that modeling geological decline is necessarily very helpful in determining what is ahead.
It looks a little flatter when you don't put the prices on a secondary axis.
The chart below corrects for the lower energy density of NGL and other liquids (these have about 70% less energy per barrel than crude). Also the Brent prices are a 12 month moving average.
Oil supply is still quite flat after 2005 when the y-axis is zero scaled. When the y-axis range increases to 140, it looks even flatter.
Note that this data comes from the EIA and JODI (crude only), I have averaged JODI and EIA crude data and then used EIA data for NGL, other liquids, and processing gain. NGL and other liquids are reduced by 70 % to account for the lower energy per barrel. EIA data is used to fill in data missing from the JODI database.
The red line is the JODI EIA crude average with EIA data for NGL, other liquids, and processing gain added(with appropriate energy adjustments discussed above). The blue line is EIA data only adjusted to account for energy density differences. All data including prices are a 12 month moving average to smooth the volatility.
By clicking on the chart a clearer chart should open in a separate window.
I presume you mean "multiplied by 70%" as opposed to "reduced by 70%" in your above comment related in to NGL and other limits.
One of the main reasons your chart looks so strange is the unusually high 180 maximum you chose for Brent Crude oil price, which is unusually high relative to the data. The upper limit on oil could easily be chosen to be higher. If this were done, your graph would look more like mine.
Yes you are correct the NGL and other liquids was multiplied by 70 % so that the energy per barrel would be similar to that of crude. My graph looks different from yours because the axes were done differently. By not creating a secondary axis you arbitrarily flatten the supply curve. Also I thought it would be interesting to smooth out prices to see how a 12 month moving average looked. My thinking here is that a couple of months of high prices is less important than the long term trend.
I have created a new chart with the high mark for prices at 140 as on yours and have included monthly data as well as a 6 month moving average (MA)for price (instead of the 12 month MA used on the previous chart). The main point is that how flat supply "looks" depends on your scale. If we chose 200 or even 1000 for the top number on the y axis scale we could make supply "appear" very flat indeed.
click on chart for better resolution
With regard to European prices for Brent Crude. Since October 2008 the relative prices for Brent Crude in US dollars vs the Brent Price in Euros have remained very consistent over the period since October 2008 according to the Indexmundi website.
Euros
http://www.indexmundi.com/commodities/?commodity=crude-oil-brent&months=...
US Dollars
http://www.indexmundi.com/commodities/?commodity=crude-oil-brent&months=180
I have also found the ratio of Brent Crude Price in Euros divided by the Brent Crude Price in US Dollars and multiplied by 100 (see green line in figure below). The average of this ratio from Jan 2006 to Feb 2012 has been 74 % so I chose the scales of the two axes to be 75 % to reflect this (and to make the comparison easier to see on the figure. Looking at the figure the relative prices have tracked fairly closely over the period since the financial crisis with the price ratio fluctuating between 70 and 78 % over most of the period since Oct 2008.
The Bottom line, the Brent prices in Euros are not particularly high at present relative to the Brent Price in Dollars when compared over the period from 2003 to the present.
Gail you are a prophet!
Eastern Libya which contains most of Libya's oil just announced its
quasi-independence
http://rt.com/news/libya-split-cyrenaica-autonomy-971/
I would not be surprised if Yemen heads this direction too. Also Syria.
Regarding North American production, the BP data base shows combined net oil exports (total petroleum liquids) from the seven major net oil exporters* in the Americas and the Caribbean declining from 6.2 mbpd in 2004 to 4.8 mbpd in 2010, a 23% decline in six years.
*Net oil exporters with 2004 net exports of 100,000 bpd or more: Venezuela, Canada, Colombia, Mexico, Argentina, Ecuador, Trinidad & Tobago
With all of the excitement about Brazil, many people don't realize it is still a net importer of oil, so is not on your list of oil exporters. Its oil use is growing rapidly also, so it will be difficult to move very far into the exporter category.
(There may be a little distortion with ethanol in the mix. I haven't tried to look at numbers in detail. Detail is available only through 2009, I believe.)
And that ultra-deepwater oil is going to be very expensive with semi-sub dayrates now over 600K rapidly headed for 700K. IMO, when Actic drilling finally intensifies, dayrates for such specialized rigs will reach 1M and drag semi-sub rates to 800K. Without such efforts, the all liquids plateau will decline even faster.
Gail - Another indication of how Brazil views their future potential for exporting energy. I recall over a year Brazil began expanding their LNG IMPORT capabilities. Perhaps part of the motivation was to use more LNG so they could export more oil. Or maybe, given the long time lag between discovery and production, they've projected an inability to satisfy their own consumption requirements.
What I have read, Brazil intends to become a frist world nation. As such,they will need their own oil. They are not planning to export oil at all. Ever.
Somehow, this news isn't shocking. Brazil's population is about 2/3 as much as the US population. Using "all liquids," their latest and highest production amount is 2,769,725 barrels a day, for November, 2011. For the same period, crude oil including lease condensate is 2,188,486. (Quite a bit of this difference is probably ethanol--I haven't check the details.)
In comparison, US production amounts are much higher. Our "all liquids" amount is claimed to be 10,492,933 per day in November, and our crude and condensate amount is shown to be 5,842,267 barrels a day. US consumption is shown to be 18,738,000 barrels per day in December 2011.
To get to the US level of consumption, they would need to consume about 12,500,000 barrels per day. Their "all liquids" production now allows them only to consume about 2,769,725 / 12,500,000 = 22% of this amount. Even if they managed to double this amount, it would not be at all difficult to consume this amount, if they want to be a first world nation.
Gail - Your numbers seem to paint a clear picture of Brazil's future. Unlike the KSA that has few resources (like farm land and water) other than oil, Brazil has a lot of potential to transform themselves as you've described. In fact, it seems similar to the US at the beginning of the 20th century. Between Canada and Brazil the US doesn't seem like it will continue to be the Big Daddy of the western hemisphere as we stumble down the PO road.
From the WP ...
Oil could make the crisis in Europe so much worse
I didn't realize that the Washington Post blog by Brad Plumer had picked up my post. Thanks!
Too bad Brad didn't give your blog the credit :-/
My crack spread comments (building on prior comments by Undertow):
The crack spread is the gross profit per barrel between what a refinery pays for a barrel of crude oil and what they get from selling the refined products.
Gasoline prices on the East & West Coasts are traditionally more expensive than in the center of the country, e.g., the gap between West Coast and Midwest gasoline prices in early March, 2008 (31¢) was similar to early March, 2012 (45¢), and in any case when considering regional differences in gasoline prices, we need to consider differences in state taxes and EPA requirements for regional blends of gasoline.
Note that the average WTI crude oil price in March, 2008 was $105, and the average Brent crude oil price in March, 2008 was almost identical, $104.
On March 4, 2008, the closing WTI crack spread was $10, and the closing Brent crack spread was $12.
The current price spread between Brent and WTI crude oils is about $17.
Here are the Bloomberg charts for WTI and Brent crack spreads. If you click on the five year option, you get an idea of historical trends:
WTI crack spread (currently about $30):
http://www.bloomberg.com/quote/CRK321M1:IND/chart/
Brent crack spread (currently about $13):
http://www.bloomberg.com/quote/ACK321A:IND/chart/
Note that the difference between the two crack spreads is also about $17. Refiners are getting a gross profit of about $13 per barrel from refining a barrel of Brent crude, but they are getting a gross profit per barrel of about $30 from refining a barrel of WTI.
In other words, Mid-continent refiners are paying WTI crude oil prices, but basically charging Brent based prices for refined product, and it appears that the only real overall winners from the current spread between WTI and global crude oil prices are the Mid-continent refiners, who are doing quite well.
Therefore, what the Bloomberg data show is that US consumers are generally paying refined product prices that are based on global crude oil prices, and thus American consumers are almost fully exposed to global crude prices, which makes the daily MSM reports on WTI prices almost irrelevant, from a consumers point of view.
With that as a background, the average annual rate of increase in annual Brent crude oil prices from 2005 to 2011 was 12%/year, or about one percent per month, although prices have of course fluctuated above and below this trend line.
As I have noted before, rising oil prices were necessary in order to balance demand against a declining supply of Global Net Exports of oil (GNE), with developing countries like the Chindia region consuming an increasing share of a declining volume of GNE.
I think we can agree on a couple of things:
1. A lot of oil companies are unhappy with the prices their oil is selling for right now, relative to Brent prices. They feel that their rightful profits have been taken away from them.
2. If the bottleneck had not occurred, US consumers would be paying prices for oil products based on something like Brent pricing.
The question then is, "Where did the missing profits, owed to Canadian, Bakken, and other oil producers who got low prices for their oil, really go?"
You are saying their missing profits went entirely to US refiners. If this is true, presumably the US government is taxing these profits, and the US government is a winner, as well.
I say that at least part of these missing profits went to US consumers, in the form of lower prices for diesel and gasoline, and are helping prevent recession.
At any rate, US consumers are not paying more than they would have otherwise.
The Canadian government is clearly coming out behind, in terms of lower tax revenue, if Canadian companies are coming out behind. The US balance of payments is better off than it otherwise would be.
The profits from the divergence in oil prices (WTI vs. Brent) are almost all going to refiners in the Mid-Continent area. OTOH, the refiners in the Northeast which don't have any access to WTI-price oil and have to compete against the Mid-West refineries are going broke and are shutting down their refineries.
The US government could, in theory, profit from the high profit margins of the Mid-Continent refineries, but I think the US tax system is structured such that the government gets a much smaller share of the profits than you would expect.
The consumers which are profiting from this situation are those in the Rocky Mountain States, notably Colorado and Wyoming which have the lowest gasoline prices in the US. There are very few people in those states (Wyoming is the 50th most populous state). OTOH, the consumers which are profiting the least because they are most dependent on high-priced oil are those in the Northeast and California, which are in the most populous states.
The Canadian government is highly aware that it is on the losing end of this pricing equation because Canadian governments collect a much higher share of oil company revenue in taxes and royalties than in the US. As a result, Canadian governments are actively pursuing alternatives which will gain them more revenue. This is why the Canadian government was so annoyed at US government stalling on the Keystone XL pipeline to the US Gulf Coast, and why it is aggressively promoting pipeline construction to the Canadian West Coast so it can export the oil to China and India rather than the US.
Kind of cold hearted of you to deprive Mid-continent refinery executives of their nice bonuses.
At the end of last year the share price of TSO (major refiner in NW and central US) was $23 per share. Now at almost $27 per share and has been up to $28 per share in the last two weeks. Probably go higher unless Keystone XL is approved.
One problem with Bakken and tar sands oil getting to refiners beyond the mid continent is not enough pipeline capacity. BNSF railroad is hauling unit trains of oil tank cars to the east and south (I was in Fargo, ND last week and saw these passing through there), so at $6 per barrel transport cost some of this price differential is going to RR's and not to refiners.
One of the reasons for the original route of the Keystone XL pipeline was it ran right though the middle of the Bakken Formation of North Dakota, Montana, and Saskatchewan. This was probably not an accident - pipeline companies keep a close eye where oil companies are developing new oil production.
OTOH, the fact that it crossed the Sandhills region and Ogallala aquifer in Nebraska and got the environmentalists upset was probably more or less an accident.
The pipeline company can reroute the pipeline around the Sandhills and the Ogallala, but unfortunately for them, this means it skirts the edge of the Bakken Formation as well. The pipeline would really like to move all the oil itself and not give the railroads too much of the business.
Pipelines are much cheaper than railroads for moving oil, but the railroads fought all their battles 100 years ago (they won) and they don't have to refight the battles over again now.
Rocky - Interesting perspective some folks have about how someone is getting someone else's profits. I'm sure you've listened to many operators complain about getting only $X/bbl compared to what someone else was getting elsewhere. Like the old joke about the searching for his lost car keys under a street light. He actually lost them down that dark alley but the light was better out by the street. When i eventually get tired of hearing the whining I'll suggest that maybe they should just go drill in that market area where folks are getting higher prices. And the typical response is "But this is where we prefer to drill". Right...because the light is better there.
Very simple solution: if an operator wants to get those higher prices he should go drill in those areas. Want Brent prices...go produce Brent oil. Want a higher price for your NG go drill where there is a shortage. Just human nature I suppose. Same reason some folks build in flood prone areas: the land was cheaper. And then want to blame someone else when their house floods.
Your observation that Northeast refineries are going broke at current gasoline prices relates to my observation that some of the cost savings (maybe a lot of the cost savings) is being passed through to US customers, and is allowing us to pay gasoline and diesel prices that are lower than they would be if we had to pay full Brent prices for crude, as people in Europe do. I believe these cost savings are at least a small part of the reason why we are doing better financially than Europe.
Another part of the European problem is that individual countries that use the Euro have no ability to control their money supply so that monetary policy is not an option to get the economy going. Also many economists seem to think that cutting back on government spending will increase overall aggregate demand due to an increase in business confidence. What businesses see is an overall lack of demand which makes them unwilling to invest. The classical economists believed that the economy would approach a full employment equilibrium in the long run, Keynes's famous quip was that in the long run we are all dead. The reason the US is doing better than Europe is that we attempted some measure of monetary and fiscal policy to improve the economy. The policy response was too small by a factor of 2. Had we cut back on government spending drastically in an attempt to balance the budget, while households started to increase their savings rate, we would currently be in as bad shape as Europe. The energy cost savings are a pretty small part of the picture.
The real problem the Europeans have is that the Euro has declined in relation to the Dollar, so in Euro terms they are paying record high prices for oil, which Americans are not in Dollar terms.
The fact that Brent has increased in price relative to WTI is a secondary factor. Of course, the combined effect is very severe on their economies.
The WTI crack spread this morning is $32, versus $13 for Brent, a spread of $19, which curiously enough is the current spread between WTI and Brent crude oil prices.
The weekly WTI spot crude oil price in the first week of March, 2008 was $103, and the average Midwest gasoline retail price was $3.15.
The weekly WTI spot crude oil price in the first week of March, 2012 was $108, and the average Midwest gasoline retail price was $3.82.
So, an increase of 12¢ per gallon of WTI crude, from 3/08 to 3/12, corresponded to an increase of 67¢ per gallon of gasoline.
Note that from the first week of March, 2008 to the first week of March, 2012, the price of Brent increased from $102 to $125, an increase of 55¢ per gallon of crude.
So, are product prices in the Midwest (check out those crack spreads) more closely following WTI or Brent crude oil prices?
I hadn't realized the difference in crack spreads. Where do you find links to crack spreads? Or do you have to calculate them from the difference between oil price and product prices?
Gail,
Great work. In your opinion is the price of oil already so great as to cause further economic troubles in Europe?
Brad
I think the price of oil is one of the major things behind the debt default problems they are having right now in Europe.
If the price of oil stays high, things can only get worse. If the price of oil drops, it will likely because major countries are falling into recession. Things won't necessarily get much better.
It would be very interesting to analyze the impact of oil trade-deficits on the PIIGS.
I have't dug into where to find information on oil trade deficits for PIIGS, I am afraid.
Anybody interested in digging that up?
Stuart?
It may be interesting to note that while Ireland tops the chart for percentage of imported energy, over 80%, they actually have an overall trade surplus:
Interesting that the country with the highest percent of imported energy also has the "highest trade surplus relative to GDP in the EU." Just a tidbit. Still looking for a breakdown...
That is interesting, and worth looking at further imo. Energy trade balance vs total trade balance. China I would assume looks something like Ireland in this regard. The US on the other hand looks pretty good on Gail's chart, but has huge trade deficits.
The US has been able to "get away with" importing more than it exports, for many years. At least part of this is related to being the world's reserve currency, and the fact that other countries considered US debt to be a good investment. I am sure the large US military presence around the world helps maintain this view.
The US standard of living has been higher than it should be based on goods and services produced in the US, because of year-after-year of trade deficits.
It is hard to see how this can continue indefinitely, or for that matter, all that much longer. Witness all of the actions now to keep interest rates low, and to try to pump up share prices.
This has a lot to do with reverse pricing where by a lot of multi nationals book there profits trough ireland. Also drug comanys have set up here due to low corporation tax. Viagra alone worth 5% of Gdp. . house prices are down over55% since peak.
One of the reasons countries are having so much difficulty collecting adequate tax revenue is because the countries are now collecting so little from companies, because of these tax havens. With less taxes collected from businesses, countries end up trying to tax citizens more. But this doesn't work well either, because wages aren't rising enough. Perhaps the whole idea of letting multinational companies incorporate in tax havens was not a good idea.
I don't think the idea of multinational corporations incorporated in tax havens is really sustainable, if air travel becomes very restricted. If travel by boat were required, a lot of executive time would be spent on boats.
The best idea I have seen in a long time!!
Put all the rapacious corporate executives on slow-moving sailboats and let them find their way with only wind power back to their tax havens, or headquarters, summer mansions, etc.
They will then be forced to adopt a slow, quiet, meditative, materially basic, and contemplative way of life---hopefully giving them much-needed insights into the way the planet actually functions--- that will surely be bracing, salutary, and beneficial for all of them.
And that will be good for all of the rest of us too!
The mess will be (and is already) global, that's for sure, regarding Europe vs US, US still has more ressources, but also a much higher dependancy in overall volume (due to much less efficient vehicle fleet, urbanism, etc), and then geopolitics and ability or not regarding money printing or selling debts, etc ...
One thing is clear, no serious plan to cope with PO on either side, or wherever else.
(and of course not the first sight of the beginning of a talk regarding a volume based gas tax in the US either)
The mess will be global, but as Gail pointed out, could already be at the tipping point in Europe since the price in Euros is so high.
A gasoline tax is a great idea:
1. reduce consumption of oil.
2. accelerate alternatives.
3. Help with the deficit.
The one sure thing that reduced consumption of cigarettes: higher taxes. Besides, Europe is way ahead of the USA on this with much higher gasoline taxes and a much lower per-capita consumption of gasoline.
Also, I think US foreign policy should try to convince oil exporting countries that subsidizing domestic oil prices is a stupid and wasteful thing.
Regarding the price, not sure whether WTI and Brent index represents any difference in price paid (in € or $) by the US or EU countries on the market, why would that be ?
Then there is the relative evolution of € vs $ of course.
Otherwise another difference might be ability to push higher on conservation in Europe vs the states (especially with respect to taxes and perception fof it in the US for gas especially), as clearly the primary source to gain anything right now is still completely in efficiency much more than alternatives, clearly, and by far :
world electricity mix :
http://www.iea.org/stats/pdf_graphs/29ELEC.pdf
world global energy mix :
http://www.iea.org/stats/pdf_graphs/29TPES.pdf
US electricity mix :
http://www.iea.org/stats/pdf_graphs/USELEC.pdf
US global energy mix :
http://www.iea.org/stats/pdf_graphs/USTPES.pdf
France electricity mix :
http://www.iea.org/stats/pdf_graphs/FRELEC.pdf
France global energy mix :
http://www.iea.org/stats/pdf_graphs/FRTPES.pdf
UK electricity mix :
http://www.iea.org/stats/pdf_graphs/GBELEC.pdf
UK global energy mix :
http://www.iea.org/stats/pdf_graphs/GBTPES.pdf
Germany electricity mix :
http://www.iea.org/stats/pdf_graphs/DEELEC.pdf
Germany global energy mix :
http://www.iea.org/stats/pdf_graphs/DETPES.pdf
Spain electricity mix :
http://www.iea.org/stats/pdf_graphs/ESELEC.pdf
Spain global energy mix :
http://www.iea.org/stats/pdf_graphs/ESTPES.pdf
China electricity mix :
http://www.iea.org/stats/pdf_graphs/CNELEC.pdf
China global energy mix :
http://www.iea.org/stats/pdf_graphs/CNTPES.pdf
India electricity mix :
http://www.iea.org/stats/pdf_graphs/INELEC.pdf
India global energy mix :
http://www.iea.org/stats/pdf_graphs/INEPES.pdf
In some ways, if Europe has already cut way back, it becomes harder to cut back further. For example, there is less possibility of going to smaller cars. The USA has more downside flexibility, in many ways.
But this takes a huge amount of time, and a lot of a "culture" thing in it as well.
Anyway, I see things on a different time scale I guess, for me the credit bubble started in 74 75 following Bretton Woods full scrapping and in some ways already related to peak oil (US peak in 71), and so these mountains of debt (for the US as well as for Europe) cannot get eaten up at all with any form of real growth.
(and the fact of not being able to point out the real cause -- not here of course, makes things only worse)
There was a big upslope in energy use per capita, back following World War II, but this pretty much came to a halt in the late 70s.
I think part of the credit bubble was to cover up the lack of real growth in energy. If the real growth in energy had continued, maybe the credit bubble could have been paid back. (The credit bubble in fact started earlier, on the consumer side in the US, but was disguised immediately following World War II by its pay-down in debt. There are some graphs in my post, "The 65 year Debt Bubble". )
I vaguely recall a horsepower race during the 50's. Young males lusted for a Corvette or a Thunderbird. The 55 Chevy became super popular. Some of the automobile dealers sponsored drag racing. Then there was George Romney.
From Wiki:
"...In 1939 he moved to Detroit and joined the American Automobile Manufacturers Association, where he served as the chief spokesperson for the automobile industry during World War II and headed a cooperative arrangement in which companies could share production improvements. He joined Nash-Kelvinator in 1948, and became the chief executive of its successor, American Motors Corporation, in 1954. There he turned around the struggling firm by focusing all efforts on the compact Rambler car. Romney mocked the products of the "Big Three" automakers as "gas-guzzling dinosaurs..."
Thanks for the link Gail, nice article, and indeed close to how I see current things, as in fact the result of a quite long process and associated dynamics.
Electric vehicles would work just fine.
Still, trucking is a bigger problem in Europe than personal transportation - they really need to move to rail.
As pointed out, our rail network is designed for people, not cargo. Sweden for example moves 4% of cargo on rail. To even doubleit wouldtake so much investments it is redicoulous.
But Europe have another advantage; water. Lots of coastline, we only have a few countries without it. And large rivers going deep inland. The Baltic Sea connects 9 or 10 countries. If you move a trailer fullof goods on a freight ship,energy cost is 1/200 of road cost.
My sugestion is we expand this by building large transport hubs around all coastlines, and use trucks only for local transport.
But it does then make the leap from car down to bike a lot easier. An important psychological leap.
One of the things I've long thought, if the US stopped being stupid, it would actually be in quite a good position.
If they implemented real programmes to cut their overconsumption, say bringing their per capita oil consumption down to the Europe average, then they could end up with 10-12 Mbpd consumption without requiring any new technology. Couple that with their existing stable production of 5.7 Mbpd, a touch of biofuels, some fracking, leaning on Canada for exports, and they are basically covered for decades out.
That's a much better position than most everyone else is in.
It does, however, require that serious attention to overconsumption - which would require society change (eg less hubris, less stupidity).
On the Europe side, there is a trick that hasn't been played yet, that can help them. Cutting the fuel duties in lockstep with the rise in oil prices can protect industry/consumers from shocks for less money than is currently wasted bailing out banks. Its a question of priorities and putting the financiers back in their box (preferably with bars on the windows).
I think you've caught wind of the edge of the problem, garyp.
The issue is indeed one of overconsumption, but it's not confined to oil (or even energy in general) and it's not confined to the USA. The problem is the overconsumption of everything - whether it's matter or energy, animal, vegetable or mineral, social, cultural or spiritual. Even overconsumption is not "the problem" - consumption is not a cause, it's a symptom of the absolute necessity for growth in human activity. In order to support this endless growth and enable the omnivorous consumption that drives it we have commoditized and monetized the entire planet.
This cancerous growth is mandated by the very structure of the economic system we've decided to use. The reason we have growth as humanity's primary imperative is, as far as I can tell, the charging of interest on loans. The charging of interest is the mutation that has caused human activity to metastasize our of control, and has enabled its growth until the situation is inoperable.
The need to pay interest annually on every borrowed dollar makes growth inevitable. Unless we could completely restructure the global economic system, there is simply no way to stop its growth short of the collapse of the system that requires it - in the cancer analogy, until the disease kills its host.
We are structurally locked into our current course of action because nobody, whether 1% or 99%, will be willing to stop using interest as the engine of our global civilization. The disruption would be too complete - in a macabre Faustian twist we now depend on our cancer for survival. As a result we are facing an outcome that has been inevitable for the last couple of thousand years. All the good-hearted, high-minded "solutions" in the world will do is alter the slope of the rising curve. They can not affect its destination in the slightest. The growth will simply continue until it can't. The best we can do is slow down the rate of growth, and even that may only guarantee that we digest the planet more thoroughly.
I'm pretty much convinced that the whole predicament - the destruction of the air, land and water, the global warming, Peak Oil, chemical pollution, nuclear accidents, wars, overpopulation, the whole shebang - is the inevitable end result of charging interest on loans. If this take is anywhere near correct, any possible solution appears to be utterly beyond our technical capability, cultural desire or political will.
We of course need to keep working on alternative living arrangements, especially investigating how to being back interest-free economic arrangement wherever we can. We don't have a lot of time left to figure out ways to adapt and maybe protect limited bits of the planet. But the fact is, we are a lot more screwed as a species than I thought in my darkest doomer days five years ago. And since then I've turned into an optimist...
I think you have pretty much hit the nail on the head.
We need growth to keep the financial system going. Even with government scaling back interest rates to zero, they can't scale them back enough. Also, with interest rates scaled back as far as they are, it messes up incentives for new investment, and it makes it impossible for pension plans to make good on their promises.
With our whole growth-based system, we need more and more energy to keep our system expanding. If it stops expanding, it collapses. There is no steady state economy!!! Adding a bit of so-called "renewable" energy doesn't keep the system going well enough to make a difference.
Many well-meaning individuals think that we can nicely move to a lower-energy future, but if that happens, the whole financial system collapses, and with it, our ability to extract oil and natural gas and coal and uranium. We don't get the downslope of a Hubbert Curve; we get a collapse. We end up with nuclear reactors full of hot rods that we cannot keep cool. We end up with farms that cannot get fuel for their tractors, and that cannot obtain the hybrid seed that they are accustomed to using. If crops do get grown, there is not a way to get them to markets. Getting parts to repair essential equipment, like water and sewer systems, and electrical transmission lines, will become a problem very quickly.
In such a situation, I expect many governments will be overthrown, or will disappear. Theoretically, local areas could each move to their own independent monetary system, without a provision for long-term debt. But I think that would probably mean a huge reduction in trade, and the need to make nearly all goods with local materials (including recycled materials). With such a system, we couldn't support the world's current large population. It would be almost impossible to maintain the electrical systems that we have today for very long. We would have a major mess--not a transition to someone's nice idea of a sustainable future, full of people driving Priuses while we continue to live in today's homes, and telecommute to our jobs.
There are two scales of problem.
The first is financial growth fixation in a finite world (something the economists won't accept). Whilst it's not true that financial growth necessarily requires energy growth, it has been correlated to date (ish).
That's the long term problem.
The short term problem is that our societies are JIT unstable piles, built on fossil fuels, and in particular oil for transport. Reduced availability with a decline rate over a tipping point rate and those unstable piles come falling down.
That's the short term problem.
Order of business is to deal with the short term problem so you have the opportunity to deal with the long term problem. That means dealing with the decline rate and the transition away from the oil dependence such that societies don't collapse.
Of course, to date we haven't shown ourselves capable to dealing with anything but powder puff scale issues - mainly because politicians are failures and short term focused financiers actively prevent change. Maybe that should be No. 1 in the order of business?
We face a large number of short term problems - from Peak Oil, climate change and overpopulation to the death of the oceans and "the diminishing marginal return on social complexity". Different people choose different problems to champion depending on which ones resonate with their experience and values. They all need champions.
The question your comment raises for me though, is this: Is the "problem" posed by the 5,000 year history of interest really a long term problem any more? It looks to me like it's on our doorstep. The digestion of our planetary meal is almost complete, and it feels like the postprandial burp is on its way.
The difficulty I see in attacking even short term problems is that the reason all of them exist is because of the underlying issue of interest-driven growth. As a result, addressing them requires us to somehow short-circuit our entire cultural narrative around money, interest and growth. It goes without saying that a vast majority of people see no problem at all with money, interest and growth. They see no way of existing without them, and will feel deeply, fundamentally threatened by suggestions that they have been species-scale mistakes that need to be rectified. It seems more and more obvious to me that the issue of interest, even more than our evolved neuro-psychology or our sense of separation from nature, is close to the root of our predicament.
Whenever we try to address the short-term problems, we run smack into a wall of unreasoning resistance founded on our attachment to interest-driven growth. Environmental remediation costs jobs. Aging and shrinking populations threaten national economic growth. Responsible agricultural practices are too expensive. Even the lifespan of consumer goods has been reduced though the policy of planned obsolescence in order to maximize economic opportunity. Stopping mountain-top removal, the burning of fossil fuels, overfishing, or the dumping of toxic waste all run into the barrier of having to meet next month's interest payment. The reason I'm suddenly so utterly pessimistic again after four years of diligent work repairing my psyche is that this truly does look like it makes the problem insoluble.
We must work urgently on short-term, regional, local and personal solutions. With that work there is always room for a miracle, and without it there is none. But I'm a firm believer in understanding the real problem. Unless we have that understanding we will not be able to come up with solutions that don't simply make the problem bigger.
I wouldn't fixate on interest. Interest in no way precludes growth. Not that I have a problem with growth, nor money for that matter. I would argue that doesn't make me defective however.
Also, I can't think of any other species to emulate that has a LOWER time preference than humans. Most of nature's species have an extremely high time preference and I still love them:)
Interest per se is not the problem. If interest rates were at zero there would be an incentive to borrow infinite amounts, thereby introducing massive credit risk. Note that right now in the US, although short UST rates are effectively are zero, rates for people who can't print money is not zero. Interest is one of the ways which controls the amount of credit in the system. If the total amount of currency per (capita and productivity) were steady through time interest would serve simply as the price of credit(risk). Right now interest is the cost of credit risk plus the timevalue of money. When there is no timevalue because there is no real per capita GDP growth interest becomes the price of credit risk.
I think a huge part of the problem is that TPTB can create as many currency units whenever they want to. I don't think a gold standard, or any other commodity would solve that though because population and productivity continuously change, which would leave one with either deflation or inflation depending on how the economic/demographic and other inputs into the economic process are flowing.
Rgds
WeekendPeak
Interest creates the incentive to lend, yes? If I'm going to get little-to-nothing back for my effort, my incentive to lend - especially to higher-risk borrowers like entrepreneurs - is drastically curtailed, regardless of how eager the borrowers may be.
There are probably a number of posts at Our Finite World that you might be interested in reading. For example,
European Debt Crisis and Sustainability
Human Population Overshoot-What Went Wrong?
More Reasons Why We are Reaching Limits to Growth
Can We Invest Our Way Out of an Energy Shortfall?
Why the US Debt Limit is Only a Temporary Solution
Best two posts I have read for a long time, many thanks.
Gail, we face a multi-factorial "Liebig's Law of the Minimum" situation. Even if we were to completely solve the energy problem, there are a hundred others lined up, waiting to provide the stumbling block to growth. You're absolutely right, so long as we retain the mechanism of interest there can be no hope of a steady state economy.
So, who will bell the cat? Or do the mice have to wait in increasing misery until the cat dies of its "interesting" condition?
I keep writing about pieces of our multi-factorial "Liebig's Law of the Minimum" issue, mostly at Our Finite World. I have described limited oil supply as one of these limiting issues. Also political stability. Also the financial system, and the need for continuing growth.
Liebig's Law of the Minimum is basically what underlies "Limits to Growth" models, except that the models don't include enough variables. In particular, they don't include models of the financial system, or of political stability. The more variables are included, the worse the outcome looks. I talked about the issue in relationship to Hubbert's Curve in this post.
Thanks, Gail. I'll get busy reading.
You completely overlook improvements in efficiency and changes in technology that make the transition possible. I can easily buy a regular Prius and cut my family's gasoline consumption in half. I will buy a plug-in Prius next year (don't want to buy the first version). Others can do the same. The cost of a new car is low when amortized over a 10-15 year period.
In India, electricity from solar panels is already cheaper than electricity from diesel backup generators. Solar energy is blooming in India.
By 2020, electric cars will be cheaper than gasoline cars. The cost per KWhr for car batteries is falling.
I can see the economy slowing down and a recession that lasts for a long time, but that is hardly the same thing as a collapse of civilization. If the private sector cannot offer credit, the government and the central banks will. You can already see that the private sector credit has contracted, but overall credit has expanded because of the government.
There will be hardship and increase in poverty and loss of standard of living for many, but no collapse.
Exactly right.
Except: if you look at Total Cost of Ownership, EVs and EREVs are already cheaper than ICE vehicles, and the comparison will continue to improve.
I agree. A long, terrible adjustment period, but I believe no collapse. We may see a 10 or 20 year recession/depression. Also, there may be extreme trauma in Third World countries as the price of food increases with the price of oil.
However, gov'ts will go on a "war" footing to solve the PO crisis. Liquid fuels will still be available, at a price. If oil was $200/barrel there would be hardship but no collapse. There are a lot of ways to make oil or find oil at $200/barrel. The problem is to ramp up production in a timely fashion.
I don't believe that by 2020 ev's will be cheaper than gas cars. Car battery tech is advancing slowly. I believe many cars will run on ng or methanol. In the USA small cars will dominate - the era of the "hog" SUVs will be over.
I only wish. Maybe we will get more of what we have been getting. Lack of economic performance blamed on a whole host of issues, other than LTG ones. Expensive oil blamed of speculators, or above ground factors. denial seems to be alive and well, and well supported by monied interests.
"There will be hardship and increase in poverty and loss of standard of living for many, but no collapse."
In my part of the country people will travel far to get a $12/hr job. What happens when gas reaches $8/gal? Game over for them as well as many others for whom energy becomes the straw that breaks their back economically. That would be the majority of working class people in my town. So who pays their property tax? Not so good for the towns we live in. If they rent, not so good for the landlords. Not so good for their insurance companies when they stop paying homeowners, auto ins, etc.
Things have a way of cascading unexpectedly.
People have a way of discounting what they have never experienced before.
And not only there is no steady state economy, but even if there could be one in "economical terms", or let's say a zero growth GDP, in the case of a modern industrial society this would be evertyhing but steady, simply meaning : same number of barels burnt as previous year, same number of cars, houses, computers, builded and sold as previous year, etc ...
Right. We don't really have the oil to maintain a steady state economy, if we wanted to. It is a dream.
Which is why we need to replace oil.
That's not that hard - move trucking to rail, and eventually electrify rail; move ICEs to hybrids then EREVs; replace fuel for space heating with NG and then heat pumps; etc, etc, etc.
Intrest on loans was forbidden by severalof the old religions, declared a sin. We now know why...
But of course those were just Bronze-Age superstitions. We marvelously advanced moderns have a much more scientific grasp of these matters than a bunch of desert shepherds. What would they know about how interest works? They didn't even have computers...
Off course they didn't know. But they knew interest on loans lead to slavery. What has happened since is that we built a far more complex society, wich made the slvery farmore complex. But the main observation was made already in the bronze age. And has not changed.
Yes, I agree completely. My post was intended to be sarcastic.
Ok. I fail to detect sarcasm in 9 cases of 10.
Yeah, we've been warned for millenia:
A LOT of stuff was forbidden by several old religions lol! Should we all be orthodox [insert superstition]?
I completely disagree that interest (i.e. paying compensation for borrowing something) is somehow evil. Is the idea that we should all consume everything we can instantly like locusts so there is nothing at all to lend, or just that those who did delay consumption of something and saved it instead of consuming it should be forced to lend it to those who already consumed theirs for free?
Offhand in fact I find this whole line of reasoning antithetical to general PO concerns. If we wanted to slow things down a bit then interest rates should be HIGHER not zero or negative!
Nobody here is saying that those who delayed consumption and saved should be forced to lend. Rather, that they should not assume that delaying consumption somehow can magically fund MORE consumption later. A functional money system should allow savings to maintain their purchasing power. But for money to beget more money, in the sense of the power to purchase more actual goods and services, requires an ever-growing economy, an impossibility on a finite planet.
An approach that was used by hunter gatherers, and to a considerable extent in small groups later was a "gift economy." People shared what they had, and expected others in the group to share what they have, as well. People received status based on what they gave away, rather than what they accumulated.
If the system changed so that people were required to borrow funds and repay with interest, this pretty much negated this arrangement. It became a business arrangement, rather than a voluntary arrangement to help each other. I think this, too, may have been part of the injunction against it.
We still use this gift economy concept at the family level today, and for quite a few other things (for example, Wikipedia). In Africa, I understand it is still used to a considerable degree. Part of capitalism's growth has come from converting work that used to be done in gift economy settings (for example, child care) to paid services.
It IS voluntary. No one has to borrow at interest and you're free to gift your lending if you want. The requirement would be if you force people to "gift".
Sure gift lending existed and still functions on some levels to some extent, at least until someone figures out that it makes sense to consume instead of save, and then get "gifted" your neighbor's savings. I doubt that gift based status was enough to hold that tendency in check.
Rhetoric notwithstanding, in my view, it's more likely the injunction against it came from the same feeling nearly everyone gets after you finish your piece of cake and see that the person next to you has only taken one small bite. You want their cake too!
I would say interest was in defense of greed more than OUT of greed. Remember, those people most likely to lend are those that have a lower time preference, and more self control. Typically, the exact kind of behavior we consider NOT greedy.
The gift economy is great, but it tends not to scale. For a village, or a band of hunter gatherers, the number of people one interacts with is small enough for gifting to be viable. Generally, it doesn't work well with large organizations. We've seen certain types of computerized information exchange, where it scales to large size, which is really cool, but I doubt it will work for material goods.
Usery is often defined as excessive interest rates. And while the borrower in principle can just refuse to borrow, a lot of people have weaknesses that can be exploited. And in fact unscruplous people do it all the time. A libertarian system which simply assumes all transactions are voluntary actions of intelligent actors, will generate a lot of misery and abuse.
I see this as a feature, not a bug. Scaling economy is what brought us this enviornmental disaster we area heading right towards and no one know how to stop. At the bottomlevel I agree with Richard Heinbergs analysis that the invention of agriculture (and thus growth) was were everything went wrong in the first place.
I think when humans first inhabited the earth it involved small numbers of humans in small groups. This "worked" fine, as did the gift economy.
Humans started growing in number, about the time they became more intelligent, about 100,000 years ago. They also began using fire (so indirectly increasing their energy consumption) and began killing off whole species of animals as they moved into new territories. Improved nutrition through the use of fire for cooking may have helped intelligence.
Craig Dilworth (from Upsalla University in Sweden) talks about what he calls the "Vicious Circle Principle" in Too Smart for Our Own Good: The Ecological Predicament of Humankind. A particular lifestyle at some point ceases to provide enough food for a growing population, so we with our intelligence develop a new approach that is not really better–for example, farming instead of hunter-gathering, or applying chemicals for fertilizer instead of waiting for natural cycles to take their course. We end up temporarily so with more people, but those people are not really better off, and we find ourselves further into overshoot. With these new approaches, we use more and more outside energy. At some point, this pattern is no longer sustainable.
One of the things that disappeared with all this growth was the small groups that allowed gift economies to operate. People realized that they could get more goods and services by co-operating rather than fighting, and this led to the need for money and financial systems.
I write more about Dilworth's book in Human population overshoot-what went wrong?
Why? I and everybody else I know can pay off our home mortgage loans with our current incomes, given a little time. Companies typically gets loans for investments based on a reasonably conservative and static expected income stream. So why would we need growth to pay interest?
So, Islamic nations are decidedly better in these respects?
What do you do if you decide you want to expand your current income? Long ago I tried to start a (very) small business using just my savings as seed capital. To use Canadian understatement, it was not a smashing success. If I had developed a business plan, gone to a bank and borrowed $100,000 at 10% (for example) I could have started my business, but in addition to my draw I'd have had to generate an extra $10,000 a year to pay the interest. The business would have to be larger than it needed to be if I didn't owe the money. If one wants to expand a business further, it's not generally feasible to use just savings (retained earnings), so more borrowing and interest-paying is required. Most income is generated by companies that depend on loans for startup and operation, so each of them has to generate extra economic activity in order to make the interest payments.
Perhaps it might be more accurate to regard interest as a growth amplifier. Once money has been invented (usually at about the same time as agriculture and the specialization of labour) it doesn't take anyone long to figure out that they can have a better life if they expanded their operation, and about ten seconds after that they're asking somebody with extra money for a loan and offering to pay them an incentive fee.
Growth is the result a complex feedback loop that probably starts from the inventions of agriculture, the division of labour, money and interest-bearing loans. The more successful the growth, the more affluence and technology is generated, the easier it is for populations to grow, and the more the impact on the planet increases (I=PAT). The question is, what drives the growth of P, A and T? I think they are all joined and the linkage is the leverage provided by interest.
The next question is, what will stop it? Obviously, the inability to borrow money puts the brakes on pretty fast.
I don't know this for sure yet, but I suspect that in the competition between victorious and vanquished societies (like those described in Jared Diamond's "Guns, Germs and Steel") that the victors always had interest as part of their exchange system, while the vanquished more often than not didn't.
I think it would be helpful to think of money as a medium of exchange.
Really, when you borrow money you're borrowing resources. It would be the same as borrowing your neighbor's shovel and promising to return it along with a bit of whatever you were going to dig up with it.
Money just simplifies the process: you can borrow the symbolic exchange medium, and go to one place and get the shovel, another for the barrow, etc., etc.
Not so in our "fractional reserve banking" economy, where loaned money is created out of thin air. It's not borrowing resources that can be returned. It's the organizing of society in ways that use up nonrenewable resources as fast as possible, so that a few can get rich, based on false promises of future prosperity for everybody. This pyramid scheme will collapse due to hitting planetary limits, but the damage has been done: resources used up, planet polluted, climate destabilized, human population overgrown and dying off.
loaned money is created out of thin air
Again, it's just a medium of exchange, for real resources. Your credit card is just an intermediary for exchange real goods and services.
the organizing of society in ways that use up nonrenewable resources as fast as possible
How is the medium of exchange related to use of nonrenewable resources?
I agree. The current system is designed to extract resources as quickly as possible until it collapses. It's the way it's designed and there is no alternative in the current system.
Contrary to popular belief, economic growth is not required because money returns interest. This is because inflation rates are artificially held above the rate of interest. Theoretically, this could continue indefinitely in a steady state economy, as long as you can continue to fool savers.
Our economies must grow for two reasons: one, because technological automation throws people out of work and therefore to avoid unemployment from rising, the economy must grow to absorb the displaced workers into other activities.
This could be (and ultimately must be) easily solved by reducing the work week. That is, after all, what technology is supposed to do, right? Make us more efficient workers and make our lives easier? Then why isn't it?
This solution of reducing the work week is not, however, being pursued, for the other reason that economic growth must continue: to offset wealth concentration. The wealth of the middle class is continually stolen by the elite class and in order to prevent the middle class from entering poverty, that wealth must be replenished, which of course comes from your slave labour at 40+ hour work weeks just to make ends meet, ultimately with the goal of extracting and processing more resources from the natural world.
The tools enabling this theft from the middle class are of course the debt based monetary system and the convoluted network of usurious abuses rampant at the top layers of control which transfer obscene amounts of wealth to our Owners. This system works just fine as long as there are more and more resources available to replenish this theft. Of course, now there aren't, which is why the monetary system will soon collapse into hyperinflation, the world will be thrown into chaos, and we will clearly see how "free" we really are.
This is not a must, merely a consequence. Innovation that reduces that amount of labor required leads to freed up resources that can (and will, if not hindered by government policies) find other productive uses.
This is simply a choice.
Does Buffet come home to his customers at night and steal their money, or do they voluntarily go to his stores since it's a win-win prospect? Also, it's nonsense that the middle class would enter poverty from wealth concentration.
Now you're just letting your fingers run at the keyboard with no thought. Nobody has the goal of "extracting and processing more resources from the natural world". It's just a means to an end.
How soon? (It won't happen at all.)
No, because of Jevon's Paradox -- which is the observation that more efficient extraction, processing, and use of natural resources paradoxically leads to greater demand and consumption of that resource. The conventional explanation for J's Paradox is that lower prices from efficiency gains lead to greater demand, but I don't buy this. Instead, what happens is that technological automation throws people out of work, which then requires economic growth to suck up the unemployment, which then leads to greater overall resource demand. Because ...
Technological automation / information technology does not significantly decrease the amounts of resources necessary to manufacture a product. For example, let's say hypothetically that over a certain period of time advancements in robotics have resulted in a halving of the number of workers required to manufacture a car. But conversely, the amounts of resources needed to make a car haven't dropped by a half along with this. This is a result of the laws of thermodynamics which stipulate that energy / matter can be neither created nor destroyed, but only transformed. Even though some robot can make decisions and weld faster and more precisely than a person can, it still requires X amount of coal, Y amount iron ore, and Y amount of natural gas, etc. to manufacture a car. There’s no way of escaping that! (except of course recycling, but that is a difficult process for many commodities. And you can't recycle energy -- the 2nd law of thermodynamics says so).
In fact, we are now reaching the point where any efficiency gains are being overrun by efficiency losses due to resource shortages, so that we are now beginning to require MORE natural resources to manufacture things than we did before, even with modern technological automation -- due to the decreasing net energy returns of extracting the resources. The remaining ore fields are now less dense, requiring more energy to extract and "produce" a tonne of steel, and the energy sources themselves needed to power this mining activity are now becoming so poor that we have to pour in lots of energy externally just to get more energy out (due to the diminishing EROEI). For example, to extract, refine and deliver one unit of energy from Alberta oil sand now requires about 3 units of natural gas -- this is an EROEI of 3:1. Compare this with the old oil wells (now gone) that used to produce oil with an EROEI of 100:1. It’s about exponential functions. Exponentially increasing energy requirements for poorer and poorer raw materials are meeting exponentially decreasing EROEI.
I recommend Chris Martenson’s “Unfixable” talk:
http://www.chrismartenson.com/blog/unfixable/65829
This line of logic is a very unfortunate, misleading, and destructive consequence of the false premise on which neoclassical economics is built – that economic activity “produces” goods. This is completely false and easily debunked with a simple analysis using thermodynamics. Wealth is not “created” – rather, it is “taken” and “transformed” -- from the natural world. In our past, humanity was not of a size approaching the limits of capacity of the physical processes of the planet to support economic activity and this led to the false meme amongst economists, still fervently clung to today by the vast majority, that economic activity “produces” things.
It therefore follows that any of these absurdly wealthy elites who have personal fortunes exceeding the worth of entire countries have not achieved that wealth by “creating” it; rather, they have taken that wealth, in one way or another, from the other inhabitants of this finite planet. It also follows from this that a highly skewed wealth distribution on a planet starved for natural resources can only impoverish the majority.
I don’t quite follow this line of reasoning. Of course we have a goal of extracting and processing resources from the natural world. That’s what every miner, fossil fuel worker, or farmer has as their goal, to extract resources (primary wealth) from the natural world. And this is done to serve those working in the industries surrounding transforming that primary wealth into secondary wealth – stuff for people to buy. That encompasses most jobs in the economy. The remaining “tertiary” wealth sector – the financial sector -- is about wealth concentration, where people try to use the monetary system to gain ownership of greater and greater amounts of primary and secondary wealth.
But the data supports it. The unemployment/increased resource demand use you refer to would be delayed, spread among all commodities and just not the one that is used more efficiently, and so on. As a Swedish saying goes - to think freely is big, but to think correctly is bigger. Jevons Paradox occurs simply when the slope of the demand curve is unusually steep.
Care to show this with hard numbers? I think you're wrong.
Most steel is recycled. China, for instance, is now in the process of saturating itself with steel, after which it too will have a substantially smaller demand for virgin iron. Also, mining and milling operations has become more and more efficient over time, so I doubt the energy requirements have been rising that much.
How much energy was used to produce the NG for the Alberta oil sand? Why don't we use that energy as the basis for the EROEI of Alberta oil? And why don't we include the old, inefficient transportation and refining in the EROEI of the "old oil wells"? You can get whatever numbers you want. All that matters is how much labor energy procurement requires.
I would argue that energy requirements increases due to lower ore grades are logarithmic. For instance, the size of uranium reserves is said to increase 300-fold for every tenfold decrease in ore grade. Also, could you explain how EROEI is "decreasing exponentially"? Where's the numbers for that?
So, the high end Intel Xeon E5-2690 server processor with a price of some $2000 and a die size smaller than a thumbnail, is not created wealth, but something taken "from the natural world"? Well, of course the raw materials is "from the natural world", but the raw materials' value is nothing in themselves. It's human transformation and demand that adds all the value.
Now you lost me again. You said that wealth is taken from the natural world, not from its inhabitants. But anyhow, your ideas constitute a particularly useless model of the world. Voluntary exchange increase the apparent value of stuff, and allows value being added, and leaves everybody richer. Voluntary exchanges doesn't happen if there is not a perceived win-win situation. That model of value being added and increased by voluntary exchanges is, in contrast, very useful.
Wealth distribution is largely irrelevant to living standards. Living standards depend on consumption, which is more equally distributed than raw income, which is more equally distributed than wealth. Some wealth concentration is necessary to enable big investment and big businesses doing complex stuff and realizing economies of scale. Global GINI is falling, btw, due to convergence of China et al. Someone needs to have capital and manage companies, and who has that working capital is of little importance, as long as he manage it well. Capitalism's inherent evolutionary tendencies gives the most capital to the capitalist that manages the money best.
No we don't. Our goals are cars, computers and stuff.
Our goals are cars, computers and stuff.
And services - don't forget the services: I want much better healthcare, education, travel, senior and childcare, etc, etc.
In fact, to some extent we don't really want cars, computers and stuff: we want transportation, computing and the other services the stuff provides. Heck, I'd sell my car in a heartbeat if there was an automated high-response taxi service.
Alberta oil sand requires an EROEI of 3:1 whereas historical oil used to have 100:1. Alberta oil sand is now the largest single petroleum deposit in the world, and represents 6-10 years of global oil consumption.
But if we are going to grow the economy then we will need more steel which needs to be mined, and recycling is nowhere near 100% efficient. And iron is actually pretty plentiful in the Earth’s crust. Many other metals aren’t. And you can’t recycle energy – the laws of thermodynamics say so.
Obviously milling operations have become more efficient in their use of energy due to robotics and automation. But there is a limit to this and we are approaching it due to the Law of Diminishing Returns … because robots do not produce energy.
But mining operations, by contrast, have in no way become more efficient. That’s my whole point. They have become much much LESS efficient, because we always harvest the lowest hanging pear fruit first, leaving us with poorer and poorer resources left with which to power our economies. Ore grades are continually going down because we always build the mines to extract the best quality ores first.
We don’t include the EROEI for the NG needed to extract oil sand because we want to compare apples to apples. Regardless of whether you include this or not, you will come to the same conclusion – that we are running out of fossil fuels and the EROEI of our remaining sources is dropping fast. Back when EROEI’s were 100: 1 we hardly needed ANY natural gas so that’s why the EROEI of that natural gas was not included – it was insignificant to the overall calculation. When it does become significant, as it is now, that tells us we’re in trouble.
Even Alberta’s oil industry admits this, on www.capp.ca -- “The easier-to-produce sources of natural gas are in decline, so our industry is turning to sources that are more difficult and expensive to develop.”
Yes, and the energy required to extract that 300-fold increase in uranium will also go up accordingly due to the 10-fold decrease in ore grade! And the issue with nuclear is somewhat moot because the current predicament we now face is not yet an electricity shortage, it is a liquid fuels shortage, and that cannot be helped on any significant scale by building new nuclear reactors until most cars are converted to electric drive, which surprise surprise, will require fossil fuels.
Again, I recommend watching Chris Martenson’s “Unfixable” talk referenced above. Alberta oil sand has an EROEI of 3:1 whereas historical oil used to have 100:1. Three is a lot closer to 1 than it is to 100.
Again, you are confusing information technology with energy. As I explained, information technology / automation is great for displacing labour inputs and freeing up spare time for people, but its ability to decrease the raw materials necessary to manufacture an item is minimal. Most of those gains were realized long ago when robotics first entered mass production factories. You can’t eat an Intel Xeon E5-2690 or heat your house with it, and the amount of energy you’d get from burning one is less than what you’d get from burning an equivalent sized lump of coal, because it took lots of energy to make the Intel Xeon E5-2690 in the first place.
Well if you want to argue semantics … if the natural world is finite in its ability to provide resources for people to consume, and if one person hogs more of it for himself, that leaves less available for the other inhabitants of the planet to enjoy. If we are sharing a pizza and I eat 9 of the 10 pieces, there is only 1 left for you.
Actually, my “model” is nothing less than an understanding the laws of thermodynamics -- the most indisputably inescapable rules in existence that characterize everything that happens in the universe. It is actually as accurate a description of how our economies work as you could ever get.
To some extent, yes, although economy of scale doesn’t necessarily imply wealth concentration. But regardless, there is a difference between “some wealth concentration” versus 99.999999% of the population being Owned by the 0.0000001% trillionaires.
Unregulated free market capitalism’s evolution leads to the greatest accumulation of wealth in the fewest number of hands, and the only “efficiency” this leads to is how smoothly the average person’s wealth gets transferred to the top.
Actually, pretty much everything we do on an economic level has as its goal the discovery of ever more low-entropy sources of potential energy so that we can trigger those energy transfer events to happen in order to create entropy, or disorder, to do useful things for us – and this comes entirely from “consuming” things available from the natural world.
Which is no problem.
That's only valid for a pretty strict interpretation of "recycle".
Again, ore grades diminish very slowly. You have to prove that this is a real-world problem - that significant amounts of additional energy needs to be diverted to virgin metals production.
Why not compare pears to pears, if that's a more interesting comparison? EROEI in the sense you are presenting it is meaningless.
You forgot to admit that this is not exponential, but logarithmic. I.e. extremely slow growth of energy requirements.
No, please present the numbers, if there are any.
You were talking about wealth not being created. I responded with the server processor. Your reply to that has got nothing to do with wealth. Try to hold on to the context, please.
Again, that is about consumption, but you talked about wealth. Wealth, i.e. who owns Wal-mart and Microsoft, has very little to do with who gets to consume the gasoline. Let's agree wealth is largely irrelevant.
Oh, please!
Who owns you, then?
Let me guess: Since thermodynamics say so?
Yeah, sure, that's what I'm having as a goal when I buy a steak. A good meal? Nah!
Actually, it’s a major problem if we’re running out of energy since, as you may have heard, doing anything requires energy.
Huh? Once you burn oil you can’t capture the exhaust and burn it again, unless you have in your possession secret plans for a perpetual motion machine?
I did present the numbers -- via Chris’ excellent talk. If you aren’t willing to click your mouse and open a website I guess that confirms what anyone reading your posts has already surmised by now – that you really aren’t interested in learning the “facts”, but merely in arguing. In which case it doesn’t matter what I present, since you will not look at it if it does not agree with your preconceived notions about how the world works.
I did a quick Google search and found the following article about iron ores running out in a few decades due to diminishing ore grades:
http://www.abc.net.au/science/articles/2010/07/14/2953402.htm
And this one which shows that copper ore grades have decreased from 4% 100 years ago to 1% now. We are now at the point where mined ore grades have decreased to the discovered ore grades, which is a similar concept to the idea of Peak Oil, that global oil discovery rates dropped below consumption rates decades ago.
This decreasing copper ore grade increases the amount of ore available; however, what is also required is more energy to mine lower quality ore grades. After Peak Oil this will become increasingly prohibitive.
http://www.minexconsulting.com/publications/Growth%20Factors%20for%20Cop...
I don’t follow you. Why is it meaningless? It is the standard way of presenting energy return throughout the world of energy extraction. If you’ve discovered a better way of expressing it than everyone else working in this field you should write a paper about it right away! It’s actually pretty straightforward. EROEI is a measure of how much external energy is required to extract, process and distribute an additional amount of new energy so it’s ready for the market.
I still don’t follow your line of reasoning. If you really want to pursue this further you can read Wikipedia’s page on logarithmic growth, in which it states that the two are one in the same, one is the inverse of the other. The point is that as EROEI gets closer to 1:1 we will experience an exponentially decreasing net energy return available to power our economies. This is exponential growth, not logarithmic as you erroneously suggest.
Huh? You keep talking about how computing power represents “wealth” and I was pointing out that this is false, because computing power merely offers a way to facilitate energy transfer events more efficiently and using less human labour (up to a point). If you don’t have energy or raw materials available, then computer processers and information technology are completely useless. As I have explained before, wealth comes from natural resources, not robots. Again, you are confusing energy with information technology.
This makes very little sense. Wealth represents resources available to be consumed. It makes a huge difference who owns Walmart because the profits go to the top of the pyramid, and when there’s only one person at the top with the remainder of the population living as serfs, that represents extreme wealth concentration. If there are instead millions of small pyramids in a democratic republic, that represents more equitable wealth distribution.
Actually, if you had put some effort into learning about how energy behaves you would understand how important the laws of thermodynamics are, and that nothing in the universe can violate them. Therefore, if an economic theory is predicated on a process that violates the laws of thermodynamics it can be quickly dismissed as being invalid.
Those very wealthy individuals who control the bond market (the money supply).
To some extent, yes. It’s more about simple observation of human nature combined with how resources historically tend to flow through our economies and result in wealth concentration.
Again, if you had put any effort into understanding how energy works before coming to a website fully devoted to analyzing energy and trying to argue with people, you would understand that indeed this really is why we eat – to obtain energy. That’s why you get really skinny and die after a few weeks if you don’t eat. I’m not going to explain this any further since if you can’t grasp this simple concept I’m not going to waste any more of my time here. You can look at the ingredients list of any box of food you buy and notice that they list “Calories” on the side. Calories are a unit of energy. That’s why people who are trying to lose weight try to limit the amounts calories they eat.
Now, I don’t have a problem with your lack of understanding of energy since there is no law requiring this. I just find it odd, however, that you would come here trying to further your world view to people who have already clearly demonstrated your logic to be flawed. You’re obviously not interested in learning so I’m growing tired of repeating myself and hearing the same empty responses in return. I’m now going to get ready to go back to work tomorrow designing coal mines and mills, and analyzing energy flows through various industrial processes.
Regards
No, but if you roll a car up a hill using oil, some of the energy expended can and will be "recycled". Also, the waste heat of the car's engine may be "recycled" to other useful purposes, such as heating the interior of the car. Also, if you use energy (oil) to create a plastic bag, the energy may be recycled when you burn it.
I'm happy to open a website and look at numbers and graphs - those I've discussed with often know this - I love hard data. But I consider videos and speeches as extremely inefficient forms of communication, and I've grown tired of being referred to long, tedious, bad videos for proof of some point (that should be easily proven with a few naked stats from a reputable source), only to find that there was actually nothing of real relevance in there. So if someone asks me to look in a video or a talk for something, I typically refuse. I may do it, however, if I'm told to look at a video "from 23:40 and 30 seconds onwards" or something.
The known high-grade ores in Australia runs out in 50 years, the article says. Which is quite typical, as when you have 50 years of really good ores, there's really not much point in exploring further.
This is actually great, and probably means the energy requirements per mass unit of metal have gone down during these 100 years. Also, this shows how slowly ore grades degrade. During the period, copper production has increased at least 50-fold, yet ore grades have fallen so very little.
Show me an oil patch company that cares about EROEI. The measure is academical, and its limitations seems pretty well known and has been discussed on TOD many times before.
No, EROEI is typically measured at the wellhead. If refining were included, I guess EROEI has never been better than perhaps 6. Also, regarding "external energy", would the EROEI be great for oil sands if it didn't use NG but used it's own oil as process energy?
Well duh. But it matters if it's the inverse or not! (I have a masters degree in engineering, so you can safely assume that I know the math.)
You lost the context again. In this part, we were talking about your claim: "Exponentially increasing energy requirements for poorer and poorer raw materials". This is simply not correct, as it is logarithmic. You should admit that.
I explicity gave you the price of such a processor. $2,000 a piece. To manufacture tens of thousands of these, is this not creating wealth? You seem to be begging the question by assuming energy is the only wealth there is.
No, you are confusing energy with wealth.
How do you consume Wal-mart?
Again, how does that matter? Is this serfdom just a mental hygiene problem, or does it relate to real living standards? I made an argument that consumption is more equally distributed than income, which is more equally distributed than wealth. I also pointed out that we need large corporations and those corporations need owner. It would be nice if you answered that instead of just regurgitating dogma.
"Everything you have said until now is invalidated by the laws of quantum mechanics." Sorry, but your argument is equally silly. You can't just hand-wave affiliations with scientific theory. You need to REALLY make the connection, and no, you really haven't. (You can keep blaming it on my understanding, but the problem is you, not me.)
To me, it seemed more like shallow dogma.
I should have exemplified with something that hasn't got to do with food, I guess. Buying a TV, for instance. Does that "has as its goal the discovery of ever more low-entropy sources of potential energy"?
You invoke the laws of thermodynamics and make yourself a representative of the wisdom of TOD. I think this is all a bit presumptuous.
I would say the same about you, of course.
Good luck. As long as it doesn't involve discerning between logarithmic and exponential growth, you might be ok.
jep - I hate to jump into the middle of a good street fight but here we go: "It is the standard way of presenting energy return throughout the world of energy extraction. If you’ve discovered a better way of expressing it than everyone else working in this field you should write a paper about it right away!" About the only way I can offer any excuse for such a completely incorrect statement is that the "field" referred to includes virtually no one in the oil/NG extraction business. Perhaps the "field" is composed of only academics who study the subject. As we've discussed before not only does the oil patch not use the concept of EROEI in the decision making process I'm pretty sure that 99%+ of the folks in the biz couldn't tell you what EROEI stands for...not the concept but just the initials.
You just described the pursuit of profit not the need to pay interest as the driver of growth. Not that I'm bagging on profit mind you! Plenty of people start successful businesses without financing, and I would say the majority of even major public companies can pretty easily afford to pay their financing costs without zero growth--not that their shareholders would be happy about it.
If you outlawed interest payments than people would just invest in equity and companies would pay dividends instead, and I have COMPLETE faith that governments would figure out how to spend more than they collect in revenues no matter what you do lol. Hell you don't even have to outlaw it just manipulate the tax code a bit. Not much would change imo. I wouldn't even complain too much--I like dividends better anyway:)
I disagree. Your own money has a time value as well. If you borrow money to buy a car or if you use your own money - that doesn't change your capital costs much.
Yes, in a way. Interest and loans is a lubricant.
Yes, it would be very damaging. Also, it would make the concentration of wealth worse, since if you have an idea for a product or a company, you couldn't exploit it yourself by borrowing from the bank. You basically have to sell it (and/or your labor) to a capitalist with financial muscle.
jeppen, our world-views appear to be diametrically opposed on this, so arguing is somewhat futile. With that in mind, I present the following mostly as an illustration of how broad the gap can be between thoughtful peoples' views:
I view our current civilization as cancerous. We are devouring the planet and destroying its ability to support other species in the process. This outcome was involuntary, but still, if any act can be called a secular evil it's this one. As a result, I think that stopping human growth dead in its tracks would be a very good thing for the planet. We won't do that voluntarily, but the current convergence of global crises in energy, ecology and economics probably marks the involuntary beginning of the process.
I think the charging of interest, hand-in-glove with with our embrace and defense of power hierarchies, has enabled the consolidation of wealth to the point where people can now talk about "The 1%" and mean it. The current global economic arrangement works mainly to the benefit of the power elite. Any belief to the contrary is willing cooperation with one's own enslavement.
As far as I can tell, the current outcome (the unfolding semi-slomo planetary calamity) has been pretty much inevitable since we invented agriculture and money. As a species we have done some things that looked like good ideas at the time, but turn out with 20-20 hindsight to have been diabolical mistakes.
It looks to me as though the course of events is pretty much unstoppable at this point. A collapse of this cycle of civilization (with all that entails) is pretty much guaranteed - possibly over the next 50 years, almost certainly over the next 100. There is nothing that can be done at this point to prevent it, due to a combination of entrenched self-interests, semi-conscious self-delusion and both psychological and biophysical inertia.
We may rebuild a more sustainable, equitable arrangement with the planet after the current one has collapsed - or we may not.
I fully get that this is an extremist viewpoint. I understand that most people don't share it, and I certainly don't want to talk anyone else into it - it's not a comfortable set of opinions to hold.
To me, humanity is the highest "purpose" of life on Earth right now, and the highest good. It is fully possible the antropocene will come to an abrupt and disastrous end, but then that and any ill effects will simply be a short blip in the history of advanced life on Earth. At worst, I think we may impact the conditions and diversity of life for a million years after the demise of humanity. But complex animal life has been around for 500 million years and will be around for a few billion years more. So no real harm done.
On the contrary, the current social access orders of the modern democracies constitutes the first time in history that societies are based on free entry and open access to positions of economic and political power. In but a few dozen of these countries, the social access order is based on rent-seeking elites that restrict access to those positions. Also, the advantages of current, modern living is obvious. Long life, good health, safe and diverse foods, a rich cultural global life and so on. Every decade, average IQ of the current young increase by 3 points. Tools and knowledge at your fingertips that the president of the USA didn't have access to 20 years ago. So, I rather be a slave now than earlier in history, and I contend that we've never been less subjugated than today.
I don't see it, actually. I think we have a real shot to achieve a Star Trek future. We also run a real risk of total collapse. But I think the only possibility of avoiding the latter and reaching the former is through continued rapid world economic growth. Fortunately, that's what we'll try. I guess that may be the only thing we'll agree on - that we'll go for BAU and growth.
Jeppen, you seem to be quite delusional. Humanity is collectively behaving no more intelligently that rats. At least rats keep their populations within the bounds of the capacity of the environment, although admittedly of course this isn't "by design", it's merely due to the laws of ecological productivity. Humanity has erroneously convinced itself that we can somehow escape those laws when in fact we haven't; the further we progress, the greater will be the crash, just like any other population.
Animal life will not be around for a few billion more years. We have a couple hundred million more until the Sun envelopes the Earth. That is around the same time period that allowed for the diversification of mammals so after we die off the planet might get one last chance to diversify life again before being burnt to a crisp.
If you think that our societies are based on free entry and open access to positions of power you may be in for a bit of a surprise over the next year or two. Our societies now are fundamentally ordered no better than they were in the Dark Ages; we just have information technology to make it seem more friendly. The average person today is poorer than 50 years ago despite all the advances technology has brought. Even the little amount of wealth people believe they own today is based on a ponzi scheme bond market that only has any current market valuation because it is predicated on future growth in order to service existing debts. Since growth has now stagnated globally and interest rates cannot go any lower the debts will hyperinflate and all that illusory wealth will disappear, as it was destroyed over the last few decades but still artificially priced into the market. Attempting to grow the world out of its problems, when that economic activity is almost entirely powered with non-renewable fossil fuel sources, is a recipe for certain suicide. We are now at Peak Oil so we may see this unfold pretty soon.
Star Trek is for dreamers. See Tom Murphy's Do the Math posts on the insurmountable problems involved with colonizing space.
I replied in a drumbeat, to not be too off-topic.
As I said, we have diametrically opposed world views. Keep watching what actually happens as time goes on, and keep digging below the surface. The truth of the situation is never what you are being told. Neither of us will end up being "right".
I've made similar (but less eloquent) posts in the last few years.
The UK is already sliding on the high fuel taxes. Petrol and fuel taxes are part flat rate, part VAT at 20% of the sale price. The flat rate part was cranked up above inflation in the 1990s, but stalled after the 2001 fuel tax protests. The last 2 increases to match the rising retail price of fuel were delayed, so the overall percentage rate of tax has fallen.
We are paying about $8.50 for diesel at the moment. IF the government kept the price at that level, it would avoid a lot of public anger, but it would lose a lot of tax income which would need to be raised elsewhere, or it would have to cut services even further, both very unpopular with the public. It would also increase our dire national debt, because the public would not be forced to cut consumption of ever more expensive imported oil.
Better on the whole to keep the tax and force through efficiency measures. Still plenty of gas guzzlers on our roads.
Yes, we often tend to forget that petrol/gas is still very cheap (extremely cheap considering what it is), and for sure there is the psychological impact of price figures mixed with inflation, but for instance if you compare it to "minutes of minimal wage", you get below graph for France :
And on average even in Europe, cars have been getting heavier and heavier over the years since the sixties, and not the reverse at all:
- the mini cooper replica : 1,132 kg
- original : 617 - 686 kg
or :
- new bettle : 1230 kg
- original : 760 - 800 kg
or last Renault Clio (more or less entry model) heavier than was an R16 (more or less the "big" Renault model in the seventies)
Clearly a lot could be gained, and not even new tech required here.
But somehow it seems to me that we are now approaching some kind of "discontinuity" point, with plenty of things that have been piling up and reaching their limits, so that "rational" measures that could be taken in the seventies, aren't even really considered or discussed anymore.
Also we are also now "paying" the tremendous deficit in communication that has been going on for some years between the "CO2/climate change aspects" and the "PO/ressource depletion aspect" (deficit on PO side).
And I'm not an AGW denier or even a skeptic at all, but this almost complete "outsourcing" of the "resource depletion urgency message", on the back of the "CO2 and AGW urgency message" that you find everywhere, and in IEA reports in particular for instance, is really totally ridiculous (even though very understandable : much easier to point to the smoke as a bad thing, than showing the shrinking fuel stock necessary to keep the fire going ..).
However a clear fact is that necessary (and efficient in the long run) measures were taken in the seventies without talking CO2, through volume based tax in particular, whereas today you have the possibility to buy carbon credits when booking a plane ticket in order to feel better (with almost no volume based gas tax on jet fuel) ...
I think that part of our problem is that our expectations have changes, and laws enforcing these expectations have changed, as our capabilities grew, through technology changes and through additional fossil fuel use. For example, cars are now expected to come through crashes better, and thus need to have stronger bumpers and parts supporting the bumpers. Cars are expected to have amenities that were not considered in the past--power windows, power steering, air conditioning, outside temperature readings, CD changer, back up camera, etc.
With wages dropping, especially for young people, we need to make cars more affordable. But all of the laws help keep prices high, and companies are not yet competing to get absolute costs down, by removing features that are not required.
Gail,
This is very good, except that the very last section isn't really accurate.
If the nations of the world are sharing a virtually flat oil supply, it is difficult for very much economic growth to take place, because high oil prices reduce funds available for other purposes.
High prices for oil exports transfer income from importers to exporters, but the overall global net is a "wash".
As evidence, we can look at global growth since 2005, which has mostly continued despite pretty flat oil supplies.
For a while the income transfers were causing large increases in debt owed by importers to exporters, but lately oil importers are spending all of their income and recycling their income back to other countries.
Need for greater energy resources is likely to lead to more resources of all types (people, capital, and raw materials) being devoted to creating energy of some type (high priced oil and gas, or substitutes), leaving less for other economic sectors, such as those making discretionary goods.
Electricity for transportation is much cheaper than liquid fuels, and overall cost of electric transportation will be lower than ICEs with current fuel costs. Rail freight is cheaper than trucking. Increased efficiency for ICEs is even cheaper. The problem isn't high cost of alternatives, it's the "capex lag": the time it takes to transition away from an obsolete oil infrastructure.
Of course, the main cause of capex lag at the moment is the lack of capex, due to political resistance from the oil & gas industry.
I would agree your statement, "High prices for oil exports transfer income from importers to exporters, but the overall global net is a "wash"," if the world weren't moving toward spending more resources on pulling out oil and gas, uranium, building wind turbines, digging out coal, making solar panels, and everything else that is supposed to keep our supply flat, or increase it a bit. In many ways, this is just the impacts of falling EROEI we are feeling. With falling EROEI, it seems to me that the energy sector takes a larger share of resources of all types, labor of many types, and capital. This leaves less for investment of other types, so there truly is less for discretionary goods. (or maybe you don't care that we have fewer discretionary goods, in your way of looking at things).
Along with higher investment goes slower payback of funds. Because of this, CapEx gets to be in short supply. If companies drilling for shale gas were in a positive cash flow situation, (also deep-sea drilling, solar panel making, and many high front end expense endeavors), the flow of funds through could finance other energy investments, and even finance other things, like road and school improvements.
if the world weren't moving toward spending more resources on pulling out oil and gas, uranium, building wind turbines, digging out coal, making solar panels, and everything else that is supposed to keep our supply flat, or increase it a bit.
This isn't realistic.
1) Sure, some new oil & gas drilling is more expensive, but much of it is only slightly more expensive. For instance, Bakken oil is profitable if oil prices stay above $60. That's not very high.
2) coal and wind power are very affordable, and solar is getting cheap very fast.
Along with higher investment goes slower payback of funds. Because of this, CapEx gets to be in short supply.
That doesn't really make sense. If the $-ROI is ok, it's ok. And....it's ok.
Now, you might ask if we have the physical capacity and resources to build the windpower we need, and...we do.
If companies drilling for shale gas were in a positive cash flow situation
That's a unique situation, and gas prices only have to rise moderately to fix it. Gas prices would still be affordable.
also deep-sea drilling, solar panel making, and many high front end expense endeavors
Those things have great $-ROI. To be fair, both wind & PV manufacturers are being hit by low prices, due to business cycles and very low NG prices but that's a temporary cyclical boom and bust thing. As far as the cost to society goes - they're very affordable and effective.
Very high E-ROI.
I would argue that the true cost (and proper EROEI) of wind and solar needs to include battery backup, so that they feed into the grid in the same way as other electricity. Otherwise, they are being subsidized by the other fuels, and are not sustainable without those fuels. (To be sustainable, new units and new batteries need to manufactured only with the outputs of wind/solar system, as well.)
I would strongly disagree.
1) wind is far cheaper as part of a system. Wind and solar don't require fossil fuels, but to suggest that they operate (and load follow) without a grid is....highly unrealistic.
Nuclear plants are much bigger, and can go down entirely in minutes - but we don't expect them to provide their own 72GWhr battery backup.
2) batteries are a terrible form of backup. There are many much better ones, starting with Demand Side Management, which...requires a grid.
other forms of "intermittency" management include regional balancing; overbuilding; and use of surplus power to generate either H2 stored underground or synthetic methane, both of which could be burned in very cheap peaker-type generation.
3) we could retain coal and nat gas plants that were only used for 5-10% of total kWhs - that would extend supplies for 100's of years, which is far longer than they will be needed.
--------------------------
Eventually, a non-FF grid would certainly manufacture wind and solar successfully. To suggest that wind and solar need to become independent of FF before anything else does is...unreasonable.
"To be sustainable, new units and new batteries need to manufactured only with the outputs of wind/solar system, as well."
Why?
All is fair. Anything goes. whatever works.
In a transitional period, other energy inputs are available.
In the longer run, other energy inputs and new energy inputs are available.
Here is a fellow. He has lots of wood, some polyethylene plastic, and needs a motor fuel. A wood gasifier is a lot of work to make and a lot of rig to haul. So, he burns the wood to turn the plastic into a liquid fuel that will run the motorcar without modification.
"Plastic to oil refinery, in miniature"
http://www.youtube.com/watch?v=f6NbljcpDew
EROEI? It has no meaning: An excess of energy in the wrong form, wood, in the wrong place, can be turned into something useful. He could drive away in an ordinary car.
Poor coal and good ore can be turned into steel pretty much anywhere they occur. There is no need to go through a conversion to electricity. The steel can make wind-turbine towers. The power from wind-turbines co-exists with hydroelectric and other sources.
A lot of people get upset when anything other than a doom scenario is defended. A lot of artifice is used to support predictions of doom. Doom, too, is not spatially uniform. I can envision Chinese real-estate agents carving up America for their Brazilian clients.
The question becomes, "How long a transition period will be available, and what will it look like?"
I think most transition movement planning has been based on the assumption that there will be a long transition period, with some oil supply still available, but high priced, and other energy sources will be available. This view is based on the assumption that the only problem we are dealing with is geological decline, and that efficiency efforts and new technology will act to offset this decline.
If we are dealing with multiple converging problems, including financial, the transition is likely to be much shorter and more chaotic. In my view, we are basically hitting "Limits to Growth". The model underlying our current situation is "Overshoot and Collapse", not a nice looking Hubbert Curve. We are likely to be dealing with political overthrows, failed banks, and badly interrupted electricity availability. So the transition period will be short and steeply downward sloping.
"We are likely to be dealing with political overthrows, failed banks, and badly interrupted electricity availability. So the transition period will be short and steeply downward sloping."
Gosh, Gail the 'Doomerary' ;-) So where's your bugout Gail? All of those N.Atlanta bourgeoisie are going to be hard to live with when their little empires begin to collapse, en mass.
So, basically you're arguing that we're not primarily facing a physical resource problem, but a political and social problem?
That humanity won't be smart enough and society won't be stable enough to meet the challenge when it's stressed by the need to transition away from fossil fuels, especially oil?
The political and social problem (and an economic and monetary one) all stem form the physical resource problem. The issue is that when Peak Oil gets priced into the market the monetary system will collapse, and most of the world's apparent wealth will vaporize (it's all based on a paper ponzi scheme). This will throw the world into chaos, which will make the long term investments needed for solar or nuclear development more difficult (what will we use for money?), even though we might have 40 years of oil left. It's easier to just pull the last bits of oil out.
when Peak Oil gets priced into the market the monetary system will collapse
Why? Sheer fright? When there's plenty of energy (wind, solar and nuclear) and affordable ways to collect it?
Nick, first of all, I'll say that I fully agree with your commitment to EV's and developing a renewable energy infrastructure. I don't buy the argument promoted by many of the luddites here that we should return to using donkeys for transportation when we have all this modern technology that can turn sunshine into electricity at 10% efficiency, which could then be used to power electric transportation. I just disagree that it's going to be as simple or automatic as you seem to suggest, and that it likely won't happen at all on a scale that we'd imagine to be necessary. From a purely technical / resource standpoint, I think the world could transform to a renewable energy future that could support something close to 7 billion people before FF's run out, but practically, there are tremendous social, economic, and monetary headwinds preventing this -- just look at some of the comments here from those wide eyed Star Trek groupies trying to convince us about how humanity will be able to expand indefinitely with no limits -- unfortunately that is the same mentality pervading our leadership.
But we need to face the reality that the monetary system is very sick and it will soon end catastrophically. It has existed in its current form since the 1980's (well, the 1970's really, when the gold standard was dropped). The gold standard had to be dropped back then because the real world providing physical resources necessary to support the exponential debt growth in the system could no longer be tied to the small amount of gold. Plus there were other issues with the US's gold leaving the country, etc. But anyways, the end of the gold standard caused stagflation to heat up and this was getting out of control later in the decade and in order to put an end to this Volcker raised interest rates to 20% in the early 80's. This was done to increase demand for Treasuries and kill the stagflation.
Interest rates were able to be raised this high because 1) debt levels were still serviceable, and 2) there were still enough natural resources available to power future economic growth to bury the previous debt. Since then interest rates have continually dropped form 20% to 0% in the longest bond bull market in history.
Since bonds are just debt, and since debt levels are getting exponentially out of control because economic growth can no longer bury previous debt under growth, future debt issuance will not be able to be serviced when it comes due. And interest rates cannot possibly go lower than 0% so bond prices cannot go any higher. Now, to keep the system afloat, debt must be serviced by printing more money (quantitative easing) because there are no legitimate buyers for future debt left. This is resulting in about 10% inflation, with an interest rate of 3%. This is not in any way sustainable. It will end through hyperinflation. Interest rates cannot be raised because that would kill the economy with its debt levels. 0% interest = worthless dollar, and that ends with hyperinflation. The whole system is being held together with scotch tape and rubber bands right now; the only issue is timing. The elites are trying to keep it together for as long as possible so they can loot everything that remains before it collapses.
For your own sake, I hope you do not have any of your wealth parked in bonds, because you will lose it.
. From a purely technical / resource standpoint, I think the world could transform to a renewable energy future that could support something close to 7 billion people before FF's run out, but practically, there are tremendous social, economic, and monetary headwinds preventing this
I agree completely.
that is the same mentality pervading our leadership.
Not really. They know we're in trouble, and need to kick the FF habit. They also know they're fighting TPTB that buy elections.
Paradoxically, it's TPTB that would like us to believe that transitioning away from oil will be difficult, or necessarily reduce our standard of living. It's oil that's hurting us - that and the delay in moving away from it.
there were still enough natural resources available to power future economic growth to bury the previous debt.
PO makes growth more difficult, but not impossible. And, once we transition away from oil and FFs, we will no longer be limited by them.
interest rates cannot possibly go lower than 0% so bond prices cannot go any higher.
Well, real interest rates can go negative with inflation.
This is resulting in about 10% inflation
Are you getting that from shadowstats? It doesn't seem realistic to me. Consider the deflation in housing.
future debt issuance will not be able to be serviced when it comes due
If interest rates are zero, then debt is easy to service.
0% interest = worthless dollar, and that ends with hyperinflation.
I'm not clear on that - could you elaborate?
"Not really. They know we're in trouble, and need to kick the FF habit. They also know they're fighting TPTB that buy elections. Paradoxically, it's TPTB that would like us to believe that transitioning away from oil will be difficult, or necessarily reduce our standard of living. It's oil that's hurting us - that and the delay in moving away from it."
To some extent you have a point -- TPTB in the oil industry know we are running out of FF's and they see huge opportunities for profit in keeping everyone believing that there are centuries left. Our "elected" leaders are not really the ones making the big decisions -- they are largely puppets. As to the extent of knowledge they understand about PO, I can't say for sure, but I think many actually believe that economies can continue to grow using fossil fuels for energy.
"PO makes growth more difficult, but not impossible. And, once we transition away from oil and FFs, we will no longer be limited by them."
While we are using FF's for energy, growth cannot continue. I agree with your statement that once we transition to solar energy we will be less limited but the sheer scale necessary for this transition, in terms of both size and time, is just so far off into fantasy land right now that the idea of returning to global economic growth shouldn't even be considered. Our immediate concerns should be on how to maintain some semblance of a functioning economy after PO. This of course relies heavily on electric transportation.
"Well, real interest rates can go negative with inflation."
I was talking about nominal interest rates. They cannot go below 0%. With inflation, real interest rates they are about minus 5% to minus 10%.
"Are you getting that from shadowstats? It doesn't seem realistic to me. Consider the deflation in housing."
Yes that's the problem many people face -- monetary inflation coupled with asset deflation. Inflation in the US is being offset by deflation from the collapsing economy. This will soon turn to hyperinflation. In most of the rest of the world they are experiencing significant inflation right now. Shadowstats provides good overall stats. Just look at gas prices.
"If interest rates are zero, then debt is easy to service."
That's what the big banks have to pay to borrow from the Fed. This translates into 3% on US debt. Wait till rates rise! Just look at Europe. If rates don't rise then we get hyperinflation. Actually, you could argue we have already entered hyperinflation.
"I'm not clear on that - could you elaborate?"
If banks can borrow unlimited amounts of dollars for free then this implies that dollars are worthless. The only reason they don't borrow infinite amounts is because that would destroy the dollar tomorrow, rather than next year.
http://bullionbullscanada.com/index.php?option=com_content&view=article&...
monetary inflation
The only inflation that seems real to me is a general increase in prices.
Are you a follower of Austrian economics?
I suggest you be very skeptical of gold salesmen.
Who bought Obama's election and why is he opposing Keystone XL?
Again, who is that power? Bill Gates? T Boone Pickens? Rupert Murdoch (The Day After Tomorrow)? Richard Branson? Ted Turner? George Soros? Zhengrong Shi? Gordon Moore? Brin and Page of Google? Dell? Bloomberg?
No, I know, I know, it's the Koch Brothers! Nothing is too small to blow up to a world-wide conspiracy that governs the world.
It's very unclear if it is. It might hurt more to move away prematurely than to do it just in time.
Who bought Obama's election and why is he opposing Keystone XL?
In general, on energy issues, it's less who bought him, and more who bought the Republicans who are fighting change. Keystone XL is much more complicated: environmentalists were fighting it to the death.
who is that power?
Oil company investors. The Koch brothers. Murdoch.
I know, I know, it's the Koch Brothers! Nothing is too small to blow up to a world-wide conspiracy that governs the world.
Ridicule is not an argument.
It might hurt more to move away prematurely than to do it just in time.
We've passed that point.
As a reflection, I'm troubled by the meme that the US political system is completely corrupt. It's an incorrect and dangerous meme that hampers your democracy much more than it furthers it.
Perhaps not, but sometimes illuminating. Again, renewables are quite favored.
Again, this is not clear at all.
It's an incorrect and dangerous meme that hampers your democracy much more than it furthers it.
If it discourages people, then I agree.
OTOH, I think there's no question that special interests are far too powerful in the US, and we have a distance to travel to achieve as much participation as we need, and to create the best public policy.
A good example is the recent Iraq war: it was a mistake, and it was entered into because of inadequate decision making - inadequate because it was insufficiently democratic.
We've passed that point. - Again, this is not clear at all.
To be more precise: we're at the point where a large percentage of most uses of oil could be provided more cheaply in other ways, and where we would be all better off were we moving much faster to use those substitutes and further develop substitutes for the remaining uses.
Disagree. I remember the support for the Iraq war was overwhelming in the beginning. I think we are deluding ourselves if we think more democracy is a way to reach better policy decisions. Scientific studies have found that people cannot correctly gauge competence above their own, and simulations have shown we are unlikely to be able to choose representatives that are much better than average, even if competence is what we go for. I think much of the same applies for direct democracy - the decisions won't be better than what the average Joe can think of.
I think successful countries combine a democratic foundation with built-in merito/technocratic elements. The Swedish system of voting for parties with clear and coherent agendas, I feel, is somewhat superior to the US system of voting for faithful religious men with representative wives. (That being said, the Swedish system has its problems too, one of which is the historic luggage of the different parties making them all gather in the middle with slightly different focus on attracting certain groups (rural, academics, rich, blue-collars...), rather than each taking a different, clear-cut ideological stand.)
Again, I don't know if that's true. Assuming the market is well informed, the optimal pace is the pace of the market. This core idea of this forum, however, is that the market and the public are not well informed, and that we will see swift, dramatic changes that the market will be unable to handle. I don't believe this to be so. I think oil production is so diversified, and alternative liquids production modes are so plentiful, and conservation is so easy, that we will have lots of time to take on oil depletion at the pace of the market with little disruption. I don't see oil as necessarily mis-priced either.
I remember the support for the Iraq war was overwhelming in the beginning. ...I think much of the same applies for direct democracy - the decisions won't be better than what the average Joe can think of.
I'm not suggesting direct democracy. As you note, popular opinion was very successfully manipulated. For another example, referenda in California have often been terrible, as they've been proposed and pushed by special interests.
No, I'm simply suggesting more democracy than we have now - essentially, more involvement by middle class professionals: "built-in merito/technocratic elements". Less buying of votes by the very wealthy with campaign contributions.
Also, we need much more independent media. The internet is helping...
Assuming the market is well informed, the optimal pace is the pace of the market.
Of course. But, the market is not well informed in the US, in large part because external costs are not included in prices. In Europe, taxes have raised the cost of most oil products to an appropriate level. In the US, pollution, supply security ($2T oil wars, etc) are not priced in. Also, US media do a terrible job of informing consumers of the long-term costs of vehicle ownership or home HVAC costs: operating/fuel costs are not priced into the vehicle or home buying process.
Since politicians and even consumers favor renewables, and companies have no real preference, there are no net headwinds at all. On the contrary. Also, as FF depletes, the transition to alternatives will be more or less automatic, since the economic conditions (the invisible hand) will guide us. It already does, as oil prices are quite high.
I guess that refers to me, but I'll let it slip. The fact remains - renewables are heavily favored.
Actually, we do not, since it isn't and won't.
Since politicians and even consumers favor renewables, and companies have no real preference, there are no net headwinds at all.
Maybe in Europe. Not in the US.
Disagree.
It's a glass half full thing.
There is substantial support in the US for renewables - just not enough. For example, the wind power Production Tax Credit is small, and about to expire.
Why - because Republicans oppose it. That's a headwind.
I wouldn't call opposition to subsidies "headwind". I would call that "neutral".
I think that presumes the Republicans don't like subsidies, which isn't correct - they're entirely in favor of subsidies.
It's just a question of who or what gets them.
And, we're agreed that subsidies for wind power are a good idea, right? (we also agree that carbon fuel taxes would be much better, if they were achievable...)
Yes, we agree on that, but I still cannot get myself to say that too small subsidies is a head wind.
I know what you mean. And yet, if it walks like a duck....
Here are more factors:
the loss of the wind PTC is at best a sign of public policy inconsistency, and at worst a signal to developers that the political climate for their industry is getting worse.
More importantly, even if the subsidy weren't needed to make a project competitive, who would build something when they have reason to believe that it's payback will be substantially better in a year, when the PTC will likely be restored??
This in turn creates a crushing problem for suppliers, who have to wait a year for business, while paying their employees, etc!!
But by falling back on the Bakken as the example you are illustrating our dilemma. To keep our supply flat (or increase it) would require a huge increase in Bakken production. What would then happen to the proven and probable assessment of the 3.6 billion barrels of the Bakken. Short answer - we would drain it in short order.
That is our dilemma - our poster child Bakken is a very limited reserve, but it is one of the largest ones we have. What is next - the kerogen of Colorado? Good luck.
And where does the investment capital for all of this come from in a contracting economy?
And the declines in regional net exports (Americas and the Caribbean), in Global Net Exports and in Available Net Exports are all far in excess of the slow rate of increase in US crude oil production. So, at least until we see a sizable overall decline in global demand, it looks like American consumers will see rising oil prices, despite the slow rate of increase in US crude oil production.
Average annual increase in US crude oil production per year, 2009-2011: About 125,000 bpd per year
Average annual decline in regional net exports* from major exporters in the Americas 2005 to 2010: 240,000 bpd per year
Average annual decline in Global Net Exports of oil (GNE) 2005-2010: 600,000 bpd per year
Average annual decline in Available Net Exports (GNE less Chindia's net imports) 2005 to 2010: 1,000,000 bpd per year**
*Major net oil exporters in 2005 in the Americas and Caribbean: Venezuela; Mexico; Canada; Colombia; Argentina and Trinidad & Tobago (Total Petroleum Liquids, BP)
**I estimate that the volumetric annual ANE decline rate will increase to between 1.4 mbpd and 2.0 mbpd per year between 2010 and 2020.
I don't think your ANE computation is valid through 2020. Indian oil companies borrow a lot of US $ to purchase crude oil and are forced to sell petrol/diesel/kerosene and LPG at a loss. They are not even breaking even and on top of that they have tens of billions of dollars in debt on which they have to pay interest.
For political reasons it is nearly impossible to raise the price of petrol, diesel, kerosene and LPG to the extent required to restore the oil companies to financial health.
Very soon, something will give. I am guessing that they will curtail their purchase of oil which will force the Indian consumers to live with shortages, rationing and a black market. If they raise the price of refined fuel then you will have demand destruction. Either way, a lot of present Indian consumption is borrowed from the future.
On a related note, things are not any better for power companies who have to import expensive coal and then are forced to sell cheap electricity to consumers. To make things worse, transmission losses are high due to a rickety grid and a lot of electricity is simply stolen.
westexas,
Great but scary analysis, as usual. However, we may get that sizable decrease in demand if higher oil prices cause world-wide recession. I'm afraid that Europe may lead the way - since oil prices in Euros are so high. The upshot - it's risky to count on oil price increases.
Also, at some price point, CTL and GTL and biofuels may come online fast enough to mitigate oil shortages. $150 oil may not be sustainable if CTL or GTL can produce equivalent fuels at $120. Any idea what that price point might be, or what kind of timeline would be involved? I'm thinking in terms of a 10 yr timeline.
The NYT reports: "The current global spot price for methanol made from natural gas is $1.13 per gallon, without any subsidy." "It would cost approximately $3 today, including taxes, distribution and retail markup, to travel the same distance on methanol as on a gallon of gasoline" (of course, NG prices may go up ruining the price advantage)
http://www.nytimes.com/2012/02/24/opinion/methanol-as-an-alternative-to-...
We use more oil than natural gas (37% of US energy consumption is now oil; 25% is natural gas) according to EIA data. Even if natural gas increases by say, 10% or 20%, it is hard for gas to liquid to make much of a dent in our oil shortfall.
Minor correction (left Ecuador off the list):
Well, first of all that 3.6B estimate is very likely quite low. There are probably more than 200B bbls in the Bakken (perhaps 400b)- the percentage recovered isn't likely to be high, but it's very likely to be higher than 2%.
2nd, we don't have a contracting economy.
3rd, the US has an enormous surplus of energy: just double the average ridership of personal vehicles from somewhere around 1.3, and push usage to the 115M vehicles with above average fuel efficiency, and you reduce US oil imports by 60%.
3rd...I agree. We need to kick our oil habit ASAP.
The estimates of 200 to 400 billion barrels of oil in the Bakken Formation are really oil-in-place numbers. As all oil men who drill oil wells know, the amount of oil in place is irrelevant if you can't get it out of the ground.
The Bakken Formation is noteworthy for its very poor porosity and permeability. Estimates of recovery rates for the Bakken are 1% to 2% of the oil-in-place. This gives rough estimates of the recoverable oil ranging from 2 billion to 8 billion barrels.
The USGS has estimated that 3.6 billion barrels might be recoverable, but the USGS is notorious for being over-optimistic. We'll find out what the real number is eventually when the field is winding down, but at this point in time I'd suggest it is pointless to broadcast the oil-in-place number to the general public because they don't have a clue what it means.
I think it's useful to show just how low the recovery is, currently.
TOD peak production estimates have been way too low, so far.
As you've noted many times, most of the techniques are basically old, but they are being combined in new ways and refined in creative ways, so I think it's tough to forecast.
As usual.
Nick,
I think if you mean crude oil, then TOD estimates of peak production have been pretty close. We haven't really moved very far from the 2005 to 2010 plateau, so as far as peak production of crude world wide I think "way too low" misses the mark.
DC
if you mean crude oil
I was referring to Bakken production forecasts.
For what it's worth, TOD forecasts of global C&C have been consistently too low. OTOH, as you note, we are on a plateau, so the idea of a peak of some sort has indeed been very useful.
I fully agree with your argument. Great article by the way.
I suspect high prices don't really wash out, even though one persons spending is anothers revenues is an accounting identity. Higher priced resources lead to greater income inequality, whether within countries and/or between them, and that means that a greater fraction of goods produced are highend luxury goods -mansions, yaghts, speedboats, sortscars, $5000 designer dresses... rather than stuff for middle and lower class peoples. The utility function (of income) is not linear, but is probably more like logarithmic, so taking cash from the poor and giving it to the rich reduces net utility.
Even in oil exporting countries, high oil prices can be a problem. A relative handful of people get rich, but there are a huge number of poor people who are forced to pay more for food (because the price of oil raises the price of food grown and transported with oil). So the government of the oil-exporting country must be very nimble, and raise taxes on oil companies (or somehow else get more fund) and use those funds to help out the poor people so they don't revolt.
That's what they're doing.
That's why Saudi Arabia, and other countries, are now spending all their revenues.
Hi Gail, good work indeed, with which I mostly agree.
However, I would also add the extremely high taxes on gasoline in Europe compared to US:
http://fantazzini.narod.ru/gas.html#Gas_world
http://fantazzini.narod.ru/gas.html#gas_euro
http://fantazzini.narod.ru/gas.html#gas_usa
A country has to charge its taxes somehow. It can charge them on a base of income, or on a base of what people buy, or it can allocate part of them on the sale of gasoline products. The higher the taxes are on gasoline, the lower they are on other products, or on wages, so funds left for discretionary spending may be the same. The fact that the US does not include healthcare in taxes makes comparisons difficult.
I agree that taxes on oil products are higher in Europe, and as a result, Europeans drive smaller cars, and perhaps ride trains more. A major purpose of this tax was to reduce oil imports, and I agree that this method of taxation has done this.
I am not sure where high taxes on oil products put a country now, for the future. If oil consumption needs to drop to half its current level, now, what does Europe do for an encore, if it already has a high tax? Hasn't it already "shot its wad" on this approach? Does it double its tax on oil products? Are businesses subject to the same taxes on oil products?
one very important and oftern overlooked aspect of high taxes on gasoline (on a per liter basis as in Germany for instance) is that price increase of the the underlying product (gasoline) result in relatively lower relative increase of the end product. I.e. a doubling of crude will, c.p., result in a lot less than 100% increase in the price to the end customer. Of course, this also goes the other way. Either way, this helps "dampen" the effect of price changes. And of course, it helps incentivise efficient use of gas...
The recent rises in petrol prices in Ireland is down to increases in taxation as much as the rises in oil prices.
I have heard several stories of people giving up their cars & losing their jobs due to the costs being too high. Ireland has a huge commuter population living in remote rural towns and isolated houses as a result of crazy "Celtic tiger" (overriding)planning rules and building large numbers of houses in the wrong places.
Ireland will suffer more than most from high fuel prices.
I agree the tax does what you say it does. But now the Eurozone is in recession, regardless, and it is hard to see a way out of it. The tax helps in some ways (incentivizing using less), but it doesn't make jobs, and it doesn't create economic growth, and it doesn't help pay back debt that is being defaulted on.
Isn't the basic problem still there, with or without the tax?
The tax didn't keep countries from trying to develop ways to attract tourists--something that is very dependent on low oil prices. Wouldn't that suggest that there is something wrong with how the tax is structured? Or maybe that a different kind of tax was needed in addition?
Not so sure. The extra tax revenues can be spent, or used to offset other declining revenues, or used to pay down national debt. Taxation is simply currency transfers within a nationstate, imports are cash transfers to other countries. So overall they should on net reduce the costs of higher prices (assuming they lead to lower usage). If the government is overflowing with too much revenue, it could use it to stimulate tourism say, or whatever. If that is done in a manner that doesn't increase oil imports, it should be a net positive for the national economy.
We have a situation where oil supply is essentially constrained on a world wide basis. If one country reduces its usage, it leaves more for other countries to use. It does absolutely (or perhaps it is "virtually") nothing with respect to total worldwide usage of oil. Prices become a bit lower, so it is easier for the rest of the world to expand their usage. The revenue situation will be better for the country imposing the tax. I would argue that the improved revenue situation for the country imposing the tax is pretty much the primary reason such taxes are imposed.
You may remember some of my earlier posts what seems to be happening--limits in individual countries do not seem to be helping the world situation at all.
Is it really possible to decouple GDP Growth from Energy Growth/
Thought on Why Energy Use and CO2 Emissions are Rising as Fast as GDP
The improved balance of trade is extremely valuable - far more valuable to the economy than the meager marginal benefits of the fuel consumption.
This is exactly my view Gail!
Every time a hambuerg chain or any other franachise put up a sign and write "we performed reform X, and because of that, Y tonnes of CO2 did not hit the atmosphere" they should write instead ""we performed reform X, and because of that, Y tonnes of CO2 were set free to be released in China".
We can't "reduce" our way out of this problem.
If attitudes change then less carbon will be released into the atmosphere, it has to start somewhere, in order to get anywhere steps must be taken, you do not move forward if you stay in place. For the sake of argument let's say it makes no difference if the countries which emit the largest amounts of carbon per capita reduce their emissions because the fuel will be burnt elsewhere. As countries develop ways to reduce carbon emissions through technology, changes in attitude, and possibly taxation those countries will be better prepared for the high prices that result as supplies run short, eventually those countries late to the low carbon game can utilize the attractive methods developed by the early adopters to reduce their emissions as well. I don't envision this occuring smoothly, but it does seem to me that individuals, businesses and nations that act on carbon emissions will eventually help the transition to occur worldwide. It would help to accomplish this if people started to believe the science.
It depends upon how the tax law is written. If it is a fixed amount per unit volume (the US model), then taxation damps out the consumer price wrt. oil price changes. If it is proportional, say 50% of the refiners cost, then there is no damping. I think much of Europe is closer to the proportional model, but it would be nice to see some data.
AFAIK, very high European fuel taxes only apply to personal transportation.
I believe freight is their primary problem, which only makes sense - if they don't tax fuel for trucking, they won't push it to reduce fuel consumption.
I think this implicit business subsidy is a big part of the Euro shift to diesel: diesel was cheaper, so naturally personal transportation took advantage of that.
In Europe Diesel is cheaper because it is taxed at a lower rate. Decades ago, most cars were petrol and diesel was largely seen as an industrial /haulage fuel. It was taxed lower because it was seen as more critical to sustaining the economy, but private transport was more discretionary. Also, it was supply and demand, as to a large extent diesel and petrol are two different fractions of the same barrel of oil, and to talk of diesel being cheaper to produce is meaningless. They are two products of a single process.
In the UK tax was raised on diesel to make it more expensive in the 1990s because diesel PM10 particulate emissions were seen as more hazardous, and it's use should be discouraged. It is still more economic to drive diesel cars because diesel is more energy dense, and also diesel cars have higher compression ratios and are more efficient. The particulate emissions have been addressed by catalytic converters and other design changes.
In the UK tax was raised on diesel to make it more expensive in the 1990s
So gasoline and diesel taxes are equal?
diesel is more energy dense
FWIW, that means more CO2 per gallon.
Yep, both gas and diesel excise duty the same at 57p per litre. At $1.564/£ => $0.89 per litre. Or, $3.37 per US gallon. But, then you have VAT at 20% on the post-excise duty cost or approx 24.3p per litre diesel or another $0.92 per US gallon.
So, total UK diesel taxes per US gallon => $4.29. Total gas taxes are slightly less.
If the excise duty and VAT are the same, why are gas taxes less?
Because gas costs less the diesel (approx £1.37 for gas v £1.45 for diesel). The excise duty is the same. The VAT is the same _rate_ but not the same amount. HTH.
Thanks.
For example in Italy, high taxes on gasoline together with economic recession are decreasing oil consumption quite fast:
- Monthly oil consumption (from January 2006 up to January 2012 - grouped by year - millions of tons, plot from http://mondoelettrico.blogspot.com/)
- Monthly oil consumption (from January 2006 up to January 2012 - time series - from http://mondoelettrico.blogspot.com/)
Moreover, the number of registered new cars in Italy is decreasing at a good pace: (plot from http://mondoelettrico.blogspot.com/)
____FEBRUARY __ 1st TWO MONTHS
2011 161.194 326.265
2012 130.661 268.240
Diff. - 30.533 - 58.025
Var. - 18,9% - 17,8%
As for taxes on businesses, they are usually much higher in continental Europe than in US (particularly in Italy -of course health and social contributions make the tax burden even heavier). See these websites for an international comparison:
http://www.worldwide-tax.com
http://en.wikipedia.org/wiki/Tax_rates_around_the_world
The question now is whether GDP will drop correspondingly fast, and if there will be major debt defaults to match the reduced oil consumption. If Italy were to default on its loans, it would be a huge problem--many times larger than that of Greece.
The question now is whether GDP will drop correspondingly fast
Why would it? US oil consumption has fallen 17% from it's recent peak, while GDP has risen 3% (with corresponding growth in manufacturing).
GDP can grow for ever as long as we run trillion dollar deficits. If we could not borrow, loan, and print money into existence, then we would already be much further down the road to collapse.
that's right. the nominal increases hide what is going on on a real basis. One of the downsides of having the reserve currency is that you can fool yourself for a very long time.
Rgds
WP
Greater debt isn't the reason economic growth continues.
Creating money by borrowing, loaning, or printing doesn't create physical resources.
People are getting to work, shipping more goods to customers, and providing more services, despite a sharp drop in oil consumption.
And, why not? A Prius will get you to work with 40% as much fuel. Trains replace trucks, heat pumps replace fuel oil, etc, etc.
Why do you think we bother to run deficits then? Deficits subsidize businesses, states, and Municipalities that are under economic strain from the increased price of oil. It is no coincidence that the U.S. started running huge deficits as it domestic oil supply peaked.
“Creating money by borrowing, loaning, or printing doesn't create physical resources”.
That is why we have deficits, so we can paper over the increased price of energy. But the game will end at some point. Our debt to GDP ratio in the U.S. has become banana republic like. The clock is ticking.
Why do you think we bother to run deficits then?
Because people are trying to improve their lives by saving their money. Unfortunately, that doesn't work, because no on is investing that money, because there isn't enough consumer demand to justify investment....and around the cycle goes.
That cycle of excess savings and under-spending can be broken by government borrowing that money by running deficits.
That has nothing to do with oil.
It is no coincidence that the U.S. started running huge deficits as it domestic oil supply peaked.
Well, it's partly coincidence, and partly the fact that the US started running a trade deficit that it had to finance.
That is why we have deficits, so we can paper over the increased price of energy.
It's really not. How does symbolic money paper over a lack of physical resources? The fact is that the US has reduced oil consumption - that's a good thing, not a bad thing: it reduces the trade deficit, and therefore the budget deficit.
I think savings may be at the lowest point in a long time. The living standard goes down by the decade, with women added to the work force just to maintain what the single male could accomplish in the 1950’s. It is my understanding that when the U.S. deficit really started to pick up steam, people still were able to save money.
”Because people are trying to improve their lives by saving their money. Unfortunately, that doesn't work, because no on is investing that money, because there isn't enough consumer demand to justify investment....and around the cycle goes.
That cycle of excess savings and under-spending can be broken by government borrowing that money by running deficits”.
As always we will just have to disagree, but I think the reason deficits spiraled out of control was due to the loss of CHEAP energy that industrial civilization was haphazardly built upon. Sure that human ingenuity and the free market would bring cold fusion or some other techno marvel to the rescue if we ever ran low.
“It's really not. How does symbolic money paper over a lack of physical resources”?
When a physical resource becomes scarce, the price increases. When the price of a commodity that is basis of economy goes up, the economy falls apart. If my small business has a $1000 transportation budget, and suddenly the price is $2000, I go out of business if I can’t pass the cost on. Unlike General Motors or G.E., I get no bail out. But the big boys do. From the government and it is deficit spending.
The U.S. reducing oil consumption will destroy the economy slowly. Because fossil fuels were cheap, we built our modern world to run on CHEAP energy. Now as our national infrastructure falls apart, and we are mired in debt that can never be repaid, we will attempt to change our modern world to run on more expensive energy. It will take a miracle in my opinion.
And as always Nick, I hope you are right and that I am wrong! Best wishes for a sustainable, fossil fuel free future. We will need a lot of luck to navigate the next fifty years safely though.
Yair...There is an old posed photo somewhere (maybe even somewhere on TOD) that shows some blokes shooting the breeze outside a general that is showing twenty three cents a gallon on the gasoline pump...the comment was that would have been about the hourly wage for the blokes in the picture.
Could that have been right?
Just asking.
Cheers.
I remember paying 23 cents a gallon back about 1965, but the lowest wage I ever received, even as a teenager, was $1 an hour.
Scrub, that’s a very valid question and I do not know for sure. I am thirty six years old so that is long before my time and I have never seen a wage/gas price comparison. But I do know that my business model cannot survive $7 gas, $6 may be dicey. I cannot just buy a Prius because I haul heavy equipment. And the upfront cost would not allow me to buy and electric truck. Where I live in western Virginia, there are already many people sitting at home from economic contraction due to high energy prices. I think we need to localize our lives, but not many people in my blue collar town can “just buy a Prius”.
Admittedly my post is over simplistic, but it is just my attempt to understand a very complex situation.
Cheers
What's your business? More info would help me address your situation better.
It's worth mentioning that $7 fuel is pretty standard in Europe; many trucking firms are going to natural gas or electric trucks; and a used Prius is only slightly more expensive than other low-MPG vehicles.
If my small business has a $1000 transportation budget, and suddenly the price is $2000, I go out of business if I can’t pass the cost on. Unlike General Motors or G.E., I get no bail out.
Ah...now I understand the problem: you're getting hit very personally.
So, let me ask: if the price of fuel goes up, can you buy a more fuel efficient pickup or truck (maybe used)? Could you convert to natural gas? I have a neighbor with a family-run trucking business: they're starting to convert to NG.
If the price of fuel doubles, won't your competitors get hit with the same problem?
It’s not personal, strictly business ; ) I really am able to separate my individual fate from that of society at large. My business is music and it is affecting every musician I know. I am not touring, but I have friends that do and a change in fuel prices can wipe out all profits for the whole tour. I have been localizing what I do and getting by, no complaints. But we are on the plateau of global production and when production starts to go down that is when things may get rough. If things hold together economically, as you expect, than adjustments to all business models will be made. I was just trying to show a real example of the challenges that are facing people who operate on a shoe string budget. And that is a large segment of society.
No question, coping with higher fuel prices is harder on people working/living on a shoe string budget. Of course, everything is harder for people in that situation.
But, playing games with the currency, does get people employed, and the economy doing more than it would if left to its own devices. Quit doing that, either because the method was unsustainable, or a political faction that believes its wrong gets in power, and you get a major economic contraction. In a growing economy, we could probably play such games indefinitely. But in a stalled, or shrinking economy, its not clear if thats the case.
I agree, had we stayed on the gold standard, I think we would probably have had much more instability and suffering. The current economic system has proved rather resilient.
Creating money through debt does pump up demand for goods. For example, if people without savings are offered loans at low interest rates, it does raise the demand for new cars and other high valued goods. Because it raises the demand more new cars, more cars are manufactured and transported to their new locations, and the prices for commodities like steel and oil are a bit higher than they otherwise would be.
It is the fact that prices for commodities are higher because of greater demand that allows more physical resources to be extracted from the ground. It does affect the outcome.
GDP is a measure of goods and services produced, without consideration of how much debt was created to produce that gross amount. Without growth in debt, it is hard to believe that GDP would grow much if at all.
Creating money through debt does pump up demand for goods
Sure. But, it doesn't magically create energy from nothing. The idea that debt somehow substitutes for energy is...puzzling.
Well debt obviously does not create energy. The borrowing occurs to pay for things no longer affordable because of increased energy prices. Picture a great industrial nation where the taxes paid for the running of the government and society. Then when the price of energy that ran the industrial giant greatly increased, the country went into debt to cover the difference. Instead of closing the giant car plants when they went bankrupt, they just gave them billions of dollars. When taxes no longer could pay for running the state, they just borrowed money. When the Corporate earnings did not rise fast enough, they paid less taxes and found cheaper labor. Any added cost that would not let the country function like it did in the golden age, was put on the national credit card. Over simplistic, but that is the gist of the theory.
Ah. So, you're really thinking of the debt incurred by oil importers, paying for their imports. You're thinking of debt owed by the US to Saudi Arabia, for example.
If you think of this on a global level, it's a wash: US income goes down, but Saudi income goes up.
Ah, I guess you are incapable of understanding how oil higher oil prices ripple through the whole economy. There is no point in further debate.
Of course they ripple.
The point: for every person who pays more for their fuel, there's another person who is getting paid for the fuel they are selling. There are many impacts, many winners and losers, but the overall impact on the world is a wash. If a country isn't an importer, then the impact isn't nearly as large as it would be if the country were a net importer.
Remember, this conversation started with debt. Some people go into debt to pay for fuel (though the smart ones don't - they find ways to sharply cut their fuel bill), but they do so because of larger payments to...someone else, who's income is increasing.
Maybe Maine suffers, but Texas and N Dakota do better. Russia is happy, Spain not so much. The world as a whole is...ok.
Of course, higher oil prices caused by production limits are a problem - they create an economic headwind, because people have to spend time and money finding ways to do what they need to with less oil. But, that's not TEOTWAWKI. If people have to switch from a Tahoe to a Prius, they'll adjust.
Reading my previous post it came off rude, sorry about that. We just disagree on the effect of the ripple. I think the world is not fine. The loss of CHEAP energy will put people out of work and cause others to starve. Energy producers will need to burn up their profits on diminishing returns. You do believe in peak oil don’t you? Time will tell who is right.
No matter where our debate started, it boils down to this: I think the modern global economic system was built to run on CHEAP energy. EXPENSIVE energy will not be viable for a system built for cheap energy. If you could convince me otherwise you might alter my viewpoint.
Cheers
First, both the US and other developed countries got that way with "moderately expensive" energy, not cheap energy. Oil and electricity have been cheap in the US in the post-WWII period, but energy was rather higher in years before that: coal and electricity cost much more, adjusted for inflation. The US, and other countries, succeeded quite well in growing strongly even when energy was much more expensive, whether it was coal or oil.
Wind power is quite affordable (if perhaps not quite as dirt cheap as US post-WWII oil and electricity prices), scalable, high-E-ROI, etc, etc. So are nuclear, and solar even if they aren't quite as cheap at the moment (coal is also plentiful and cheap, unfortunately), so I see no reason to expect energy to ever be more than "moderately expensive".
The fact that energy pre-WWII was a much higher portion of GDP means that it was a much heavier burden on the economy. If wind and solar are a little more expensive, that means that the wind/solar sector has to be a little larger than otherwise to power the rest of the economy. This analysis suggests that this is not a big deal: that sector would still be a much smaller portion of the economy than pre-WWII.
Second, fossil fuels aren't nearly as cheap as they seem. Pollution is an unrecognized, external cost. So are the military costs we're seeing currently of roughly $500B per year. Those pollution costs aren't sustainable (especially CO2), but unfortunately the military costs probably are (in fact, many corporate interests are quite comfortable with them...). Moving away from oil and other fossil fuels will actually be much cheaper in the long-run than BAU.
Finally, let's assume that Business As Usual involved spending about 5% of our economic activity (perhaps measured by GDP) acquiring energy. If the cost of acquiring energy doubles, then we have to dedicate another 5% to that activity. GDP might go down by 5% quickly, in case we'd have a deep recession. Or, it might happen over time - if it took 10 years, then we'd see a reduction in economic growth of .5% per year, for 10 years. After that transition was complete, economic growth would continue. So, a reduction in "net energy" has a significant impact, but it's not TEOTWAWKI.
The saudis, arguably, use their oil money much less productively than it would have been used had it stayed in the pockets of importing nations' consumers. So it's not a complete wash.
How do you mean?
If consumption moves from consumers in the OECD to those in OPEC, that seems like a wash.
If OPEC producers actually invest some of it in capital projects, that may be better. Unless, of course, it's hotels in Dubai...
KSA spends as many dollars on its military as Germany does. However, Germany has an 8 times larger GDP.
KSA wastes a lot of its revenues on subsidies to projects that are not economically viable (deadweight losses) and on the elite's luxury consumption. To the extent that the little Saudi consumer gets money to spend freely, this is in effect often a subsidy to not work very productively, or even not at all.
hhmm. It would be interesting to see a quantitative analysis, by country, of utility.
Still, even if the utility of KSA GDP is low, the recycling doesn't lower GDP, which is the conventional measurement.
But statistically, abundant resources in poor countries tends to hamper growth since it creates more socialism and worse corruption. So it does lower GDP as a secondary effect. I agree that the first order effect, ie the immediate transfer, does not.
That would suggest that affluent oil-importers have a responsibility to help exporters avoid corruption by reducing their imports.
I'm actually not being ironic...
Yes, because those reforms have totally been implemented in the US.
We've only seen a 17% reduction, because those reforms have not been fully implemented.
If they were, we'd get a 50% reduction and completely eliminate oil imports.
Just wanted to succintly mention about this argument that Europeans travel more by train due to higher expanditure on oil products, that this may no prove to remain so true in the near future, at least in France.
In France, the SNCF (the historical national railroad company)has had for several years the not so appreciated habit to continuously rise its fares. The SNCF has done multiple investments in the past decade and is struggling to keep its cash flow.
Also, it is mandated to develop and upkeep the railroads, which is very expansive here.
The end result is that a single ticket without any reduction has become a luxury for numerous people. There is a variety of discount programms, aimed to different groups such as students, the elderly, or professionnals who commute everyday by train. For example, for the young under the age of 25, you can get 25% to 50% discount in the whole country, IF you reserve well before your trip. This programm is very popular here. There are also regional administrations that subsidize discounts for students only on their parent home-studying city route.
But, when you are 26 or no more a student, and travel not on a daily basis to commute to your job, taking the train has become a luxury here. 120 euros to have a 2x250km to Paris for 3 days is not really a bargain when you have no job. You can still lurk on some specialized sites to buy cancelled reservations, but a non-planned trip is a pain to your wallet ! Thus, car-pooling have become very popular in the youth, and anyway you have better chances to have an interesting discussion with one driver than with 150 passengers !
Back quite a few years ago, hitch-hiking was very common in the United States. People would stand by the side of the road with their arm and thumb extended, and it was a signal that the person wanted a ride. College students "thumbed" rides a lot. Trucks would often pick up passengers, when they were traveling long distances.
I understand that in Cuba, a rule was make that a driver was required to pick up a passenger, if there was space available in his car, and he was going in the right direction.
If there were enough trust, this would be the way to make transportation affordable again. With the intermixing of peoples from around the world, and all of the drug use, it is hard to make this approach work now.
I hitch hiked the other day-- and I'm a 63 year old white guy.
Got picked up in minutes.
It was in Marin, and on a sleepy road.
My bus only went so far, so I stuck out the thumb.
I hitchhiked and hopped freight trains for a couple of years in the '70s; went coast to coast twice and met some extraordinary folks. Some of the western states had stations at freeway entrances where drivers could pickup riders (kept folks from wandering the interstates). The trick was to not look like a bum. I also had a big cardboard thumb that seemed to get folks' attention, and a sign with my destination on it. I once made it from El Paso, TX to Sandy Springs, GA with only two rides; both folks driving coast to coast alone and needing someone to share the driving (and perhaps some good company).
As for the drug thing, there was plenty of that in the '70s. A hitchhiker with a good bag of weed could always get were he/she was wanting to go ;-) I never felt threatened once in all of those miles (excepting a few really bad drivers).
A couple of years later (@1978) I drove my microbus from LA to Tampa with hitchhikers paying all of the fuel costs. At one point there were 7 of us; quite the party rolling into Florida.
With the intermixing of peoples from around the world, and all of the drug use, it is hard to make this approach work now.
It would be hard to overcome people's fears, but not because of real danger. TPTB have brainwashed everyone about "stranger danger".
Some of us grew up with a mother who constantly forbade us to hichhike, because as we know all cars are driven by child rapists and serial killers.
But then, that woman also worries that I will get mugged on my solo summer hikes in the woodlands...
To be precise SNCF is now splitted in two (since 1997) between the rails network part (RFF, Réseau ferré de France) and SNCF as a train operator amongst others, even if not a true open market right now.
Otherwise for me all these current discount programmes structures and associated limitations are way too complicated, much better done in Holland for instance (not to mention the web site being way too "gimmicky")
Europe could get friendlier with shale frac'ing and certainly put some downward pressure on gas prices(and help oil prices via NG liquids). France for instance could reconsider it's ban. The technology is available and working across the Pond. Hire some Yanks if need be to get things started.
http://www.economist.com/node/21540256
I agree that fracking to obtain natural gas is a possibility, and in fact that is likely to be one of the few options available within the Eurozone for fuel (besides cutting down forests, or building wind turbines or buying solar PV panels).
Shale gas (shown as "gas shales") is way down low in the "quality" of natural gas, but there seems to be a lot of it. This is a diagram I showed in an earlier natural gas post I wrote:
If options for finding local fuel were as few as they seem to be, I think I could be persuaded to "go for it." But I can fully understand why residents would be concerned about pollution issues. When we start getting down to the bottom of the resource triangle for pretty much every kind of fuel, we find ourselves with a collection of very bad choices available.
For some the choice will soon be "Frac or freeze!" it will be as blunt as that.
I've said to my mgmt that when Europe freezes as Russia shuts the valves, we'll sell them gas tech. Until then, Australia, China, and India are better marketing targets.
When we start getting down to the bottom of the resource triangle ...
I'd like to see a more comprehensive study of production costs for gas shale. Yes we see the escalating costs per producing well from the early reports. But there are more factors. Dry holes go almost to zero with frack jobs in shale compared to traditional. What's the cost savings in avoiding all those, all the finance loss, the occasional bankruptcy. With the large, unprecedented volume of shale fracking, are the operators not finding any significant costs of scale?
But I can fully understand why residents would be concerned about pollution issues.
Justified concerns?
Falstaff – All good questions. Wish I had all the good answers. First, as far as the increased activity providing scale savings the truth is just the opposite. In theory it costs no more per well to drill/frac one than 50. In reality the increased number of wells have driven per well costs up…way up. Consider the cost of the drill rigs. When times are slow and rigs are sitting in the yards waiting for work you can pick one up for $20,000/day. Get a lot of rigs working the same trend and you get put on a waiting list and pay as much as $40,000 per day…or more. And that applies to every other component used to drill/frac/produce a well. And it goes beyond actual drilling activities. I know a fellow who had 5 acres of land with several metal buildings on it. Put it on the market some years ago for $250,000…not a single nibble. Then the Eagle Ford play exploded right under his land. Service companies were desperate to expand facilities in the trend. He gave one of those companies a 5 year no cut lease for $500,000 PER YEAR. Timing is everything, eh?
Shale gas profit is a tough metric. Some of the best returns in the Eagle Ford was made by companies that didn’t a single well. They sold tens of thousands acres of mineral leases they bought for $100/ac and then flipped them for as much as $25,000/ac. Again, timing is key. Also every trend has sweet spots and sour spots. Get most of your leases in a sweet spot and you can make 3X the profits as a company that gets some doggy leases. And then there’s how each company applies the same technology: some do it well…others not so much.
And then there’s the ugly side of the game: principal players and promoters. Company A spends their own money and collects the profits. Company B doesn’t spend a penny of their money but drills with investor money and gets a cut of the proceeds. Guess which company tends to make more profitable wells? About 30 years ago I watched a promoter drill 18 wildcats with 100% of the capex coming from other investing companies…including my incompetent management. The promoter drilled 18 drill holes…not one producible well. And they made millions. In every hot play there are promoters and lots of “stupid money” from investors. And yes, “stupid money” is the real term we use in the oil patch…we all know exactly what it means.
And one last complication: public oil companies and how they judge “profit”. The management of pubcos strive to satisfy their shareholders. That’s how they keep their jobs and make fat bonuses. And the shareholders almost universally demand increased share prices. And Wall Street typically values a pubco by their efforts to increase their booked reserve volume more than their profit margins. So if a pubco can drill a lot of marginally profitable wells but add a lot of reserves to their books their stock price goes up. An extreme case in which I was a key player: drilled 4 horizontal wells that increased company production rate by 400% but actually lost money. Didn’t even increase booked reserves…just accelerated the recovery. Didn’t matter: Wall Street ran the stock up from $0.75 to $3.50 per share. And yes, in several years the company filed bankruptcy and disappeared.
Thus is why it very difficult for even us insiders to offer a very accurate picture of profitability. Other than it's never as good as folks outside the oil patch think it is.
In reality the increased number of wells have driven per well costs up…way up.
Costs haven't risen....prices have. Now, for the buyer a higher price is equal to a higher cost, but for society, not so much. And, of course, when vendors catch up with demand then prices will fall.
Nick - Perhaps I didn't say that clear enough. The boom in a trend like the Eagle Ford greatly increases the cost of drilling wells in the play...not the cost of oil to the refiners. Just a rough guess but I would say the cost of drilling the same EF well today is at least 50% greater than 4 or 5 years ago. Same length, same number of fracs, etc. Even impacts companies not drilling in the trend but nearby. A year ago I had to bring an oil patch cement truck 300 mies from La. because there were none available in SE Texas. Normally I could have gotten one just 40 miles away. I paid more to have that cement delivered than the value of the cement itself. Regardless how much profit the operators are/aren't making in the Eagle Ford the service companies are making $billions.
Yes, we're agreeing.
Fundamental costs haven't risen, but operators are paying a scarcity premium. That has raised the prices paid to suppliers, who are having a great time.
Eventually, new suppliers should move in and existing suppliers should expand, and the premium should disappear.
I recently came across some information about huge natural gas finds and prospects for both oil and gas under the Mediterranean. There was a large gas find off Isreal in Nov-Dec last year.
http://www.financialsense.com/contributors/william-engdahl/the-coming-st...
Has anyone here looked into this?
William Engdahl is a controversial reporter.
http://en.wikipedia.org/wiki/F._William_Engdahl
Also read carefully - "smaller oil discovery" - "preliminary estimates"
"Greece’s Energean Oil & Gas began increased investment into drilling in the offshore waters after a successful smaller oil discovery in 2009. Major geological surveys were made. Preliminary estimates now are that total offshore oil in Greek waters exceeds 22 billion barrels in the Ionian Sea off western Greece and some 4 billion barrels in the northern..."
Engdahl is an abiotic oil guy, no need to say much more about him at this site.
An estimated 250 million barrels is the number given for the three blocks put out to bid (offers by July 2). Every link I hit on 22 billion barrels of Greek Oil went right back to Engdahl.
All this seems a little scary to me. When I look at these charts I can imagine this may be the future of the USA. If oil prices keep rising fast on Europe it will take away money that could be used to increase conservation or develop renewables. If things get too tight, the only answer I can see is credit. Europe must borrow to get out from under oil. It seems clear the US should be moving towards a transition while our energy prices are relatively lower- I am afraid we will be caught on the oil escalator (with a shopping cart) before that happens.
Credit doesn't "work" when things keep getting worse and worse. In fact, that is the reason for all of the debt defaults. It is hard to fix a debt problem with more debt.
Gail - Speaking of which, since you're the bean counter, maybe you can explain this logic. On NPR yesterday some "expert" economist was offering the good news: folks were beginning to borrow more money. Thus they would be spending more and that would help the economy. Similar to a comment I heard long ago that it would bad for the economy if folks started saving more money. So the magic formula for a healthy economy is smaller savings and more debt?
Granted there are times when borrowing makes sense. But not always. The housing bubble may have been a great plus for the economy when it was booming. But...
Savings are bad when they don't match actual investment (capital expenditures).
When savings are excessive, the money just stagnates in the banks.
Money is nothing more than the faith that you place in those pieces of paper with "magic" symbols on them.
Money never "stagnates" in the banks as once within the banking system (as opposed to your pocket)it becomes nothing more than digits on a balance sheet.
Sure it does.
If I choose to not consume, and instead try to "save" by putting money in the bank, I've slowed down the economy by choosing not to consume. If no one takes my place, then people who make stuff start getting laid off, etc.
Without looking this up, top of the head, the savings rate in the U.S. post WWII was in the 6 to 8% range. I remember reading in the last 8 years however that the savings rate went to 2, then 1 and zero and eventually U.S. households had a negative savings rate. We can look back at ~1973 era average earnings and the decline from then. Then the wife went to work but households could still not keep up. Either with the Jones' or whatever so we eventually went to a zero or even negative savings rate. (Gee, as I type I can hear Fred Thompson offering reverse mortgages on the TV)
As far as a return to normal savings rates being bad for the economy it is called the Paradox of Thrift. If everyone gets religion at the same time then demand collapses.
What the economists want is people to buy more goods and services (whether or not they really have the income to pay for them), because when that happens, there will be a need to manufacture more cars, or furniture, or widgets Because additional goods are being purchased, there will be a need for more people to make these goods. Therefore, employment will rise and GDP will rise. If people save more money, this is perceived as bad, because they are not spending money that might raise demand for some goods or services.
A post I read yesterday by Jim Quinn at the Burning Platform provided data showing that for quite a while, there were so many debt defaults that the amount of charge-offs by banks was exceeding the increase in new loans made, so the amount of debt outstanding was shrinking (for consumer loans).
Quinn's assertion is that this situation has changed, but not in a good way. With today's low interest rates, auto lenders are willing to give low-interest loans to people who barely qualify. People are being offered furniture with no payment required for four years. All of this loose lending is leading to the situation where more new loans are being added than are being charged off as debt. His feeling was that this growth in lending is a new sort of sub-prime bubble that is forming, I don't know whether the loans have been properly underwritten. I do know that there are an awfully lot of young people with very low paying jobs, who really cannot afford very much, but who will take something that is offered as a deal that is too good to pass up--and of course, this does push up spending on goods and services.
Gail - Reading the various points and counterpoints the disconnect finally hit me. A number of valid arguments IMHO that doing X will benefit the economy. But that doesn't mean it's good in general for all segments of the population. Great for the economy when Joe6pack buys a $40,000 V8 pickup. Of course when he loses his job it's not so great for the family. The truck either goes back or the family moves into it. But Ford made some money. The salesman made a nice commission that he adds to his nest egg so he can put down 3% on that McMansion he's been dreaming about for years. And eventually the builder makes a nice profit and his guys make a pay day. Good for the economy and everyone. Oh, wait, not everyone. J6P and his wife/4 kids are living out of their PU. BTW: the Ford salesman lost his job too and defaulted on his mortgage. When they took his house back and sold it for less than the other McMansions in the neighborhood those folks lost much if not all of their home equity.
A little dark but reminds me of the proven method of a point man on patrol. Really works out well for the squad...not so much for the point man though. Today we have millions hurting thanks to their efforts to boost the economy in past years. Benefited many companies, banks, etc. All that's left to do know is for GR to count the body bags and offer a silent prayer of thanks that it was them and not us.
The day had to come: the Rock is channeling -- Marx.
boy - Groucho or Harpo?
. If people save more money, this is perceived as bad, because they are not spending money that might raise demand for some goods or services.
With all due respect, I wish you'd take a little time and learn some basic macro-economics.
Economists don't dislike savings, they just dislike savings that aren't being recycled as investments. If everyone is trying to save, and no one is making the capital investments, then consumers are foregoing consumption without the benefit of investments to actually get a longterm benefit from that sacrifice. Instead, producers of goods and services are thrown out of work, and just sit around idle, doing no one any good.
Is it really hard to fix a debt problem with more debt?
I used to think so...now I am not so sure.
Just print more and more and more money. Pile it into the banks or whatever and fill up and refill up accounts that seem to be so-called "bad-loans". Eventually it comes out into the economy (the banks will spend it, out of desperation) where people are in need of it.
Each time this printing occurs, it goes throughthe economy with less force than before, it has less and less impact. But aren't the debts removed...?
There might be runaway inflation later, but then we can worry about that later.
Maybe we can burn the new money for heat for our homes, and to run our cars. If not, I think the scheme will fail.
This brings up a good point. We spend a lot of pixels talking about the debt hangover, and how QE has pumped a whole lot of new billions into our money supply.
There are two ways I know of to reduce the money supply. One is to pay back debts, in which case the money disappears under our fractional banking system. The other is to default on debts, which also makes the money disappear. The only functional difference is whether the borrower or the lender gets the short end of the stick. So if the borrowers physically can't produce enough to pay back the loan... looks like the lenders get shafted.
What I'm not seeing is how that brings down the economy. Yes, consumption was pulled forward... and then some stuff with smoke and mirrors... and ba-da-bingo, the debts are gone and we're back to consuming.
So a bunch of folks get shafted and perhaps that chokes off new lending. The government has already proven they're willing to spread around freshly minted dollars like water. Current policy heavily favors the lenders, but I suspect that could change in a hurry if it becomes obvious that's what is necessary for survival. Sure our political leaders are cozy with the 1% but they value themselves above all.
I hear talk about how that will cause people to lose faith in the currency. But that literally is the only game in town, and I believe people will keep playing. It's not like there are a whole lot of alternatives for the average business or family. As a strategy to keep the wheels turning, debt default seems to work nearly as well as paying it back. Bad for business - sure. But where does the collapse part happen?
My second question relates to falling EROEI. When I break down my priorities what I need is food, water, shelter, clothing, and income to make those things happen. So if the general economy needs ever fewer workers, and the energy E&P needs ever more workers, isn't that at least a partial solution? If E&P related businesses were, say, 50% of all economic activity, so what? It gives workers something to do. As long as there is enough left over to buy food at the end of the day. I may snivel that I can't afford a new car, but in truth having a job is a far higher priority. I know that society is not currently set up that way, but it's physically possible isn't it? To a limit of about 4:1, I know.
What some seem to miss is that all the "printing of money" does very little to stimulate an economy when interest rates are very low. Why are interest rates so low? Businesses don't want to borrow and banks don't want to lend (true from late 2008 to the present). If the federal government borrows (at what are currently historically low interest rates) and lends it to state governments (at very low interest rates) or simply spends it directly on infrastucture (maybe railroads, light rail and High voltage DC Transmission lines) it will create demand and get folks working. We could follow Reagan's plan and beef up our military, if that's the only way to get both parties to agree, though maybe a 50-50 split of nuclear power and "green" infrastucture would work. Tightening our belts gets us nowhere as a society, it is fine for individuals, but if the government joins in we are sunk. Remember what Reagan did, he claimed he was for balanced budgets and then ran up the biggest post WW2 deficit in history, until Bush 43 and then Obama surpassed him.
Its the other way round. The US is paying world prices, which are a bit higher than they otherwise would be due to obstruction of Canadian supply.
The thing which bounces around with the WTI discount to Brent is the crack spread, not the mid West gas price. Its cheaper, because for reasons unconnected to Canadian supply, it always has been.
What proportion of the population in the US is on food stamps? And in Germany?
Which countries are actually doing something about getting entitlements under control?
The PIIGS are doing badly because they ran entitlement schemes that cost more than they could take in taxes and expected other countries to go on paying for them indefinitely. Its the US and OPEC that's the closer match to them than the eurozone.
The PIIGS did not run entitlement schemes they could not pay for, with the exception of Greece.
Italy's primary budget - i.e. before interest payments on the debt - was in surpluse. There was more in tax revenue than was being spent on social programmes. As a result total debt decreased from 120% in 1997 to 100% in 2007. Then US bankers blew the world's economy up and GDP shrank so much the debt returned to 120%.
Spain was operating a surplus including payments on the debt, which was at 35% of GDP in 2007, among the lowest in Europe.
Portugal was inbetween, not doing worse than France or Germany, and Ireland was the bloody Celtic Tiger, the neo-liberal darling with the soundest economic policies in Europe. Conservative think tanks were telling the continent how we should follow the Irish model, not the socialist Scandinavian one.
See how that worked out. The fiscally responsible Norther European states all have welfare states considerably larger than the Mediterranean countries. Italy does not even have unemployment benefits.
Let's not fall for the false narrative of out of control welfare states, which is a lie concocted by the same people responsible for the crash to gut the remaining social democratic institutions and pocket more wealth for themselves.
The welfare schemes are going to hit all of the countries that started them, especially as the population gets older. There is only so much you can tax the young people to pay for the older folks, and others who are not working.
In Europe, we're already seeing the retirement age being raised in many countries, these changes were nothing to do with the current economic situation but were more to do with the simple fact that so many people are living for much longer.
I suspect that within a decade or so "pensions" will only be available for those who are unable to work due to age related illnesses rather than simply because they have reached a certain age. That is assuming there will be any work at all.
To make matters worse, within the next 10 years there is a reasonable chance of life extension treatments. For example, stem cells may repair organs, etc. Imagine the mess if life expectancy increases by 5 years.. I guess the system will go broke, or we'll have to delay retirement.
In the US, many state and local govt pensions are based on an 8% return assumption - totally wrong in our current environment of near zero interest rates.
I have not been in the pension actuarial business, but I have seen this kind of thing from a distance. At one time, interest rate assumptions for pensions were as much as 10% per year. The view was that if bonds were not earning enough, investments could be made is the stock market, and the stock market returns would raise the average.
Pensions everywhere have been funded assuming fairly high interest rates. (US Social Security and many other government programs are different--they pretty much take money from today's wage-earners and pay it to today's pensioners.) Once funding is started assuming a high rate of return, it is hard to add enough funding later to provide the kind of payout people are expecting.
Most of the information there about Italy is at odds with the facts. Italy has been running large deficits for the past several decades (at least), on top of what was already a large debt, while the economy grew slowly and per person not at all.
o Prior to the interest rate spike on Italian debt, separating out interest payments from the budget did not change Italy's fiscal picture, but attempts to discard responsibility for unsustainable debt created by similar deficit spending in the past.
o Italy's central government has been running heavy deficits back at least to 1995. It is only in recent months that the budget has gone into primary (no interest) budget surplus, thanks to Monti's government.
o Consequently Italian debt in absolute terms increased significantly over that time, not decreased, every year back at least that far.
o In terms relative to the economy, Italian debt did decrease from 130% of GDP in 1998 to 105% GDP in 2007, but this was because the economy grew slightly in this period (~1.5%), not because the government ever retired any debt.
o Per person, the Italian economy has had little or no growth since '97, with GDP per person in '10 the same as it was in '99. This is a critical point for a discussion on per person social spending.
o Given many countries like Germany and the Nordics are doing well, it is quite a leap to say "US bankers" are responsible for Italy's woes and not Berlusconi et al.
Hypnos - thank you for setting the record straight. Those zombies are hell to kill but keep at it.
Governments need to pay interest. Its not whether a country can pay balance a budget without paying interest thats important to the government solvency, its whether it can balance a budget when its not being charged a risk premium.
Its pensions that are the main problem, not unemployment benefits. Money paid to those who would work if they could is generally a good investment. Its the developing squeeze from money paid to those who have been promised they don't have to do any more work thats causing problems.
A government that can take 50% of GDP in taxation, can afford to run a bigger welfare programme than one the can only take 25%. Expenditure 50% income 50%, happiness but expenditure 26% income 25% misery.
US retirees are relying on foreigners loaning the US government the funds to pay their pensions and medical care. What happens to the US when its lenders decide there is a genuine risk of default, rather than assuming its too big to fail?
So basically the US is benefiting due to oil & gas being stranded and unable to be sold on the world market. Basically accidental protectionism. So if other countries adopt protectionist measures they too will benefit in a similar manner. I wonder if any other countries have noticed?
I suppose that one could look at globalism in a similar way. At what point does being connected to the global market become more of a hindrance than a benefit?
burg - I think logistical problems might be more apt than protectionism. The Midwest refiners are more than glad to benefit from the situation but they didn't cause it. Similar to the NG situation in the US: logistically can't ship NG around the world as easily as crude oil. US consumers are benefiting greatly while Asia consumers are paying a lot for imported LNG. I wouldn't hesitate to sell some of my NG to Japan for half of what they are paying for LNG. Unfortunately there's no pipeline from me to them. Again, logistics and not protectionism.
But I suspect all countries have some form of protectionism in place. Even the US: oil/NG production from federal leases cannot be exported without approval of the govt. Every bbl of oil exported from Saudi is done with govt approval. I don't know it for a fact but the Norwigian govt probably has some similar control over their exports. In the past such controls may not have been initiated. As the worst affects of PO draw closer I would expect protectionism will become more visible.
The problem in North America is that marketers did not anticipate the way the markets would develop when prices went up. At this point the chokepoint on the transportation system is at Cushing, OK, because of US government stalling on approvals for the Keystone XL pipeline.
However companies are working on getting oil around the bottlenecks. The Seaway pipeline to the GOM is already being reversed, and the Keystone XL pipeline will be built in stages, with the first stage (Cushing to the GOM) not requiring any federal permits. The railroads are also building lots of facilities for moving oil around the pipeline bottleneck. The gap between WTI and Brent will probably go away relatively soon after they get enough transport capacity built.
Around 2013-2014, as Canadian production increases, the bottlenecks will move to the US/Canadian border because oil sands production will exceed Canadian export capacity. That will probably cause a sharp divergence between the prices of Canadian oil and WTI. The Western Canadian refineries will probably be the main beneficiaries of it, but Canadian consumers won't get any benefit because the refineries will sell all the product they can south of the 49th parallel at the same price as US refineries. Canadian governments will be among the losers because they levy higher taxes and royalties on oil production than US governments, so they won't be happy.
Countries don't actually benefit from protectionism - all it does is distort the markets and the countries with protectionist policies are losers, too. The Canadian government understands this, so it will sell its oil to other countries at high prices and promote its other energy resources domestically, notably hydroelectric power and natural gas. The current Canadian government is not into protectionism, so it will probably let Canadian gasoline prices float higher than US prices, and work on unblocking the pipeline bottlenecks that stop Canadian oil from getting to the Asian markets.
The US might promote protectionist policies, depending on how the politics play out, but you can reasonably expect that that it will not work out very well because the US simply doesn't have enough oil reserves left to play protectionist games in the international market. It is at the mercy of the oil exporting countries whether it likes it or not.
And let's not discuss military solutions - those can be expected to work out far worse than protectionist policies.
Countries don't actually benefit from protectionism - all it does is distort the markets and the countries with protectionist policies are losers, too.
That needs to be repeated a lot. Oil exporters that subsidize domestic consumption are shooting themselves in the foot, and quite badly too.
Same with importers: they're far better off taxing oil quite a bit.
One issue I noted previously is that the Gulf refineries are pretty close to full, just like the Midwest refineries. So it is not as obvious as one might think that getting more oil to the Gulf will fix the problem directly. It may be that more oil needs to be refined in other countries--China and India are countries with growing "complex" refinery capacity, that might be able to refine heavy and/or sour oil. They probably wouldn't end up sending much of the refined products back to the US, though.
Rocky - you contradict yourself. The choke point at Cushing really has nothing to do with keystone XL crossing the U.S. Canadian border (btw a Presedential permit is required for this).
It was a corporation that owned Seaway and did not reverse the flow. Finally they sold it to others who are going to reverse the flow. The part of Keystone running from Cushing to the coast does require Federal Energy Regulatory Commission (FERC) approval because it is an interstate pipeline. Anybody could have built this leg if they had wanted to which may dovetail on Rockmans assertion that big oil does not want that bottleneck opened.
The Keystone XL pipeline extension was originally one big pipeline project which would have run from east-central Alberta to the Texas Gulf Coast. TransCanada proposed it as one big project on the assumption that US approval would be more or less automatic (i.e. the US needed the oil).
After the Obama administration stalled the approval, TransCanada split it into two parts - the northern part which crosses the border, and the southern part which runs from Cushing to the Coast. This allows them to build the southern part without presidential approval because it only runs from Oklahoma to Texas. As you say, it does require US government approval, though.
The southern part is the big bottleneck because of the lack of southbound pipelines from Cushing. The Seaway pipeline, by the way, is now owned by Enbridge, another Canadian pipeline company which is TransCanada's main competitor on Canada. ConocoPhillips was blocking the reversal, but Enbridge made Conoco an offer they couldn't refuse - over $1 billion for Conoco's share of the pipeline, and is now in the process of reversing it.
Several other pipelines are also being reversed to bring WTI and North Dakota oil to the Gulf Coast. See Shell, Delek working on US Gulf crude line reversals
Even with the southern portion of the pipeline, the northern trans-border portion will become a bottleneck in the 2013-2014 time frame as Canadian oil sands production steadily increases.
I should mention that the Canadian government is seriously PO'd at the US government over the whole thing, and there are going to be some repercussions of that - mostly involving oil being diverted to China rather than the US. Historically the US has automatically approved pipeline projects to the US on security of supply grounds. The US wanted to ensure its own oil supply and didn't want Canada exploring other markets, which was always a possibility.
As the Rock noted, and as I noted up the thread (see link below), Mid-continent refiners are the primary beneficiaries of the WTI/Global Crude price spread.
http://www.theoildrum.com/node/8998#comment-878161
"Exxon Mobil Corp (NYS:XOM - News) said its 2012 oil and natural gas output would drop 3 percent from last year even as it increases spending to bring several large new projects on line, and its shares fell 1 percent."
However, no PO for Exxon (if all goes as planned)
"Exxon said its production of liquids would grow 2 to 3 percent annually on average through 2016, while its gas output would rise 0.5 to 1.0 percent."
http://finance.yahoo.com/news/exxon-mobil-sees-dip-oil-174654716.html
However, I believe Exxon has over promised growth in liquid fuels in the past. Also, liquids may include lower energy density liquids, so BTU growth may not match liquids growth.
Is there any realistic way to account for BTU growth in charts, stats, etc? It seems that the more PO continues the less useful liquid fuel numbers become. Right now this may not be critical, but it is not hard to see that very quickly liquid numbers will be as meaningless as "adjusted" inflation. Does anyone produce charts that incorporate liquid X BTU? Are there any out there? (or even just EROEI charts)It seems we need better information. I'm wondering what the value of liquids only charts are.
C8,
And to further complicate things, somebody pointed out that some or all of "refinery gains" may simply be due to volume, not btu gains. In other words a lower density liquid is produced - but has the same btu - hence more illusory gallons.
Doesn't refinery hydrogenation add btus?
I'd be interested in knowing too. I know that diesel is more energy dense than gasoline, and gasoline is more energy dense than natural gas liquids. I assumed that it was the carbon portion of the molecules that was essentially providing the energy when burned. If this is the case, adding more hydrogen so that longer hydrocarbon molecules could be changed to shorter ones wouldn't make any change in Btu content--it would just make smaller, less-energy dense molecules.
It all depends on where you draw your boundary.
It adds btus to what is being hydrogenated, but that hydrogen costs energy to make. If you have the hydrogen generated outside your boundary, then you will see added btus to the refined product inside. If you generate the hydrogen inside your boundary, there is a loss of btus.
If you take a fuel molecule and hydrogenate it, it will usually be exothermic, but not so exothermic that the resultant molecule has a lower fuel value. Hydrogen has a significant fuel value and adding it to a hydrocarbon molecule will add some of that fuel value.
To take an extreme case, graphite and hydrogen could be burnt separately or the graphite could be hydrogenated to methane and then burnt. You would get about 10% more from burning C + 2H2 compared to burning CH4, but you get about double the energy from burning a mole of CH4 than you get from burning a mole of C.
So, if we take natural gas and use it hydrogenate petroleum products, we really are increasing the BTU value of the petroleum products.
So, refinery gain isn't just a volume gain, it's a BTU gain.
And, a value gain, because the natural gas is low priced, and the finished petroleum products are much more valuable.
So, refinery gain isn't just a volume gain, it's a BTU gain.
It's defined as a volume gain. You can't infer the BTU gain, if any, without having a lot more information about the process. They are separate and distinct physical concepts.
Well, got any more info on the process?
No. It depends on the refinery.
Brad - Bear in mind that XOM may be including increased production/reserve base as a result of acquisition of companies/existing fields in their press releases. A year or so ago they acquired XTO and added a very big chunk of reserves to their books literally overnight. I would not have thought it possibile 6 months ago but now I wouldn't be shocked if in the next 12 months XOM (or another biggie) buys out Chesapeake. Again, that would be a huge gain for XOM but zero net change for the US.
Rockman,
Good point. I'm sure Exxon is figuring the cheapest way to add production: acquiring companies or drilling. If they fail to make their production targets they may be tempted to go the acquisition route.
My interpretation of their liquids growth projection, however, is that is organic - from projects just starting to come online.
Re: Chesapeake - the buyer will have to be convinced that the ng glut is going to end. Personally I think it will - but may take a number of years. I don't think XOM will gobble up CHK anytime soon as they are still smarting from their acquisition of XTO at a premium when ng prices were higher.
Brad - Long ago I read a report about Exxon's history from the earliest days. Some of its biggest gains were made during very bad times in the oil patch. Same ole story: the stronger buy the weak on the cheap. Not exactly what XOM did in the XTO situation.
As far as a potential CHK buyer assuming NG prices will increase anytime soon I don't know of one company making such a projection. In fact, just the opposite in general. The primary motivation would be to just pick up the cash flow cheap IMHO. In fact, very cheap if it's a 100% stock swap.
I agree about the organic aspect of reserve growth but bear in mind that every project in progress by an acquired company immediately adds to the buyer's projection. CHK has $billions of projected income on their books from future projects. The SEC allows those projections to be immediately booked by the buyer. And technically they would be put it forward as future "organic growth". And that holds even if many of those future projects are never developed. I've added dozens of future project projections to the books knowing that they would likely never be drilled. And often carried them year after year. I've seen many situations where a company didn't abandon or sell leases/production because it would require them to reduce the book value of those properties. IOW often better to keep projections that won't actually happen than take the write down. The typical plan is to take the write down during a good period thus masking the loss. Or wait for the next smuck to come along and buy the company. Then it's his problem.
You state:
1. Eurozone countries need to reduce oil usage.
2. One way to do so is for them to leave the eurozone.
3. Because outside the eurozone they are better able to compete for tourist trade and for export markets.
You've lost me there.
I agree eurozone countries need to reduce oil usage. But competing for tourist trade and export markets does not reduce oil usage. I don't see how changing your currency reduces your oil usage.
Note the eurozone's trade balance is more or less in equilibrium (9.7 bn euro surplus in 2011, -1.7 bn deficit in 2010). Hence the purchase of oil abroad is balanced with sales of goods abroad.