Lower Oil Prices - Not a Good Sign!

Are lower oil prices good news? Not really, if it means the world is sinking into recession.

We know from recent past experience and from common sense that higher oil prices are a drag on oil importing economies, because if more $$$ are spent on the same amount of oil, there is less to spend on discretionary goods and services. In addition, oil money sent to oil exporting countries is likely to be spent within those economies, rather than being reinvested in the oil importing country that the funds came from.

Figure 1. A rough calculation of expenditure (in 2011$) associated with oil imports or exports, based on 2012 BP Statistical Review data, for three areas of the world: the Former Soviet Union (FSU), the sum of EU-27, United States, and Japan, and the Remainder of the World. (Negative values are revenue from exports.)

A rough calculation based on 2012 BP Statistical Review data indicates that the combination of the EU-27, the United States, and Japan spent a little over $1 trillion dollars in oil imports in 2011–roughly the same amount as in 2008. Governments have been running up huge deficits and have been keeping interest rates very low to cover up this damage, but it is hard to make this strategy work. The deficit soon becomes unmanageable, as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) countries in Europe have recently been recently been discovering. The US government is facing automatic spending cuts, as of January 2, 2013, because of its continuing deficits.

Furthermore, lower interest rates aren’t entirely beneficial. With low interest rates, pension funds need much larger employer contributions, if they are to make good on their promises. Retirees who depend on interest income to supplement their Social Security checks find themselves with less income. The lower interest rates don’t necessarily have a huge stimulatory impact on the economy, either, if buyers don’t have sufficient discretionary income to buy the additional services that new investment might provide.

Below the fold, we will discuss what is really happening with oil prices, and consider reasons why lower oil prices may be a signal that the world is again headed for deep recession.

Oil Supply is Not Rising Enough

The big issue is that oil supply is not rising enough–and hasn’t been for a long time.

Figure 2. Actual and fitted oil consumption, based on BP 2012 Statistical Review. Fitted trend value of 2.0% is based on 1983 to 1989 actual data; fitted trend value of 1.6% is based on 1993 to 2005 actual data.

When oil supply doesn’t rise fast enough, there are two opposite effects that can take place:

Figure 3. West Texas Intermediate (WTI) and Brent oil prices, in US dollars, based on weekly average spot prices from the US Energy Information Administration.

(1) The most common effect is that prices will go higher. This can be seen in the upward trend in prices in the last eight years.

(2) The other effect is that prices can drop quite sharply, as they did in late 2008. This happens when parts of the world are entering recession, and their demand is decreasing.

It seems to me that this second effect may be happening this time around, as well. The down-leg we are seeing in the prices may have farther to go, as the recession plays out.

One Problem Area: PIIGS Oil Consumption is Declining

If we look at three-year average growth rates for the PIIGS, we find that there is a close correlation between oil growth, energy growth, and GDP growth. Furthermore, in recent years, a growth (or drop) in energy use seems to proceed a growth (or drop) in GDP. Not all of this energy is oil, but for the PIIGS countries, even natural gas is a relatively high-priced import. Recently, oil consumption has been declining sharply, which could imply further economic contraction.

Figure 4. A comparison of average three-year growth rates on three bases: GDP, oil consumption, and total energy consumption. GDP from USDA Research Real GDP database; oil and energy consumption from BP’s 2012 Statistical Review.

Furthermore, data from the Joint Organizations Data Initiative (JODI) shows that recent PIIGS oil demand is down even more. Comparing oil demand for February-April 2012 with February-April 2011, demand is down by 10% for the five PIIGS countries combined. This would suggest that these countries are sliding more deeply into recession.

US Oil Consumption Is Also Shrinking

US oil consumption is also shrinking.

Figure 5. US average consumption of petroleum products, during the months January to April, based on data of the US Energy Information Administration.

US oil consumption shrank by 3.2%, comparing the first four months of 2012 with a similar period of 2011. This is concerning, because based on Figure 5, it looks much like a repeat of the pattern that took place in the 2005 to 2009 time period. Oil consumption was stable during the period 2005 through 2007, then dropped in early 2008 by an amount not too different from the decrease in oil consumption from 2011 to 2012. The bigger step-down in oil consumption came in 2009, after oil prices dropped, and the follow-on effects (reduced credit availability, layoffs) had started. Now oil consumption has been relatively stable in 2009 to 2011, but there has been a step down in consumption in 2012, similar to the step-down in early 2008.

If Oil Prices Stay Down, or Drop Further, Not All Oil is Economic

Oil prices make a difference in a company’s willingness to drill new wells. For example, oil sands production in Canada is quoted as being not economic below $80 barrel, and the West Texas Intermediate price is below that level today. In most instances, existing production will be continued, but new production will be stopped. There are quite a few other types of oil extraction elsewhere (for example, arctic extraction, new very small fields, very deep oil wells, steam extraction outside Canada) that may not be economic at lower prices.

Saudi Arabia makes frequent statements about offering its production to keep prices down, but if a person looks at production patterns in the past few years, they have been highest when oil prices have been highest. Production has dropped as oil prices drop. So a rational person might conclude that oil wells which cannot be operated continuously (of which there are some in Saudi Arabia) tend to be operated when prices are highest, and turned off when prices are lower, thus maximizing profits. As oil prices drop this time around, we can expect Saudi Arabia and others to find excuses to save production until prices are higher.

Countries exporting oil depend on the revenue from the sale of oil, plus taxes on this revenue, to help support country budgets. As oil prices drop, governments find themselves with less money to fund promised public welfare programs. This dynamic can cause lower oil prices to lead to political instability in some oil exporting nations.

Thus, any drop in oil prices tends to be self-correcting, but not until oil production drops, prices of other commodities drop, and many workers have been laid off from work. We saw in 2008-2009 that this kind of recession can be very disruptive.

What’s Ahead?

We can’t know for certain, but the big issue is chain reactions, as one problem causes other problems around the globe. We are dealing with an interconnected international economy. If countries are in financial difficulty, their banks are likely to be downgraded as well. Other banks hold debt of the bank, or of the country in difficulty, or derivates relating to a possible default of the country or bank. If default occurs, these other banks may be affected as well. Thus one default may start a chain of defaults.

Banks that are facing difficulty (inadequate capital, poor ratings), are likely to become more selective in their lending. This makes it even more difficult for small businesses to obtain loans, and may lead to layoffs.

A country which appears to be near default is likely to face higher interest rates, making its cost of borrowing higher. The higher interest costs, by themselves, push the country closer to default.

One of the issues with high oil prices is that the higher prices, especially among oil importers, give rise to a kind of systemic risk that affects many kinds of businesses simultaneously. High oil prices tend to do several things at once: lower the real growth rate, make it more difficult to repay loans, and increase the unemployment rate. All of these issues make it more difficult for governments to function, because governments play a back up role. If workers are laid off from work, governments are expected to compensate laid-off workers at the same time they are collecting less in taxes and bailing out distressed banks. This type of systemic risk leads to the possibility of multiple government failures.

Promises of Future Oil Capacity Growth Aren’t Very Helpful

We keep reading articles claiming that world oil production will grow by some large amount by some future date. One of the latest of these is by Harvard Kennedy School researcher (and former oil company executive) Leonardo Maugeri, called Oil: The Next Revolution. According to the report, “Oil production capacity is surging in the United States and several other countries at such a fast pace that global oil output capacity is likely to grow by nearly 20 percent by 2020, which could prompt a plunge or even a collapse in oil prices”.

Even if the forecast were true (which I am doubtful), the problem is that this is simply too late. We have been having oil supply problems for quite some time–since the 1970s. The rate of oil supply growth keeps ratcheting downward, and the world keeps trying to adapt, with recessions to show for its efforts. (James Hamilton has shown that 10 out of 11 recent recessions were associated with oil price spikes.)

We don’t have time to wait until 2020 to see whether the supposed additional capacity (and production) will actually materialize. We have a problem right now. The downturn in oil prices and the reduction in demand in the US and PIIGS is looking more and more like the current oil price spike (of 2011 and early 2012) may give rise to yet another recession. Based on our experience in 2008-2009, and our difficulties since then, this recession may be severe.

This post originally appeared on Our Finite World.

Sure, lower oil prices eventually mean lower oil production. Higher oil prices mean more oil production and more carbon emissions. Help!

What we need is energy supplies (of the right type--liquids) that are cheap to produce, say $20 barrel, and do not pollute the atmosphere. We haven't found any such things yet. Producing a substitute that is even higher priced than oil is counter-productive, especially if it is imported as well.

"What we need is energy supplies (of the right type--liquids) that are cheap to produce..."

Atmospheric pollution isn't the only downside to abundant, affordable liquid fuels, regardless of their source. Our exploitation of the environment, largely enabled by transportation fuels and other energy sources is far more systemic and permanent than financial markets, industrial enterprises, and annual trips to the beach. Solving our liquid fuels predicament will only extend our destructive and disfunctional relationship to our planet, our ability to overpopulate, deplete numerous other finite resources, and render our biosphere uninhabitable for higher lifeforms.

Our over-arching predicament is not an abundance (or lack of) clean energy sources. It's how we use them. Solving that dilemma is paramount; all that matters, long term.

What we need most is fewer people.

Exactly. If we had only, say, half a billion people, Peak Oil would not even rank in the top 10 problems facing humanity. Renewables could easily replace FFs, and we'd have scads of time to make the transition. We could also eradicate poverty completely, and wars over resources could become a barbaric relic of a past age. Of course this would go against millennia of religion/magical thinking, and undermine the near absolute control the .1% have over the current global political and economic system, so won't happen anytime soon.

Have to agree that population restraint would go a long way toward solving most of the problems we're facing.

A pipedream. You need a better educated workforce(especially for girls) for that, a higher standard of living for people to get comfortable. And that requires tons of energy and resources that we don't have. Not to mention something as simple as water. If the rest of the world got the West's meat consumption habits, we would have extreme water shortage immediately. And China's fascination with meat has already begun in earnest.

Still, the world has seen collapsing birthrates across some countries, but it's not close enough. India, Africa and parts of Asia will still increase at high rates and show no signs of stopping or even being capable of implementing China's old child policy(which requires an extremely compliant population and a very effective police state, which is very rare in combination. Most undemocratic police states are very inefficient and the population isn't very compliant at all. China's an outlier in this regard and it's too late to implement the policies anyway, it should have been made 30 years ago).

Its possible to reduce fertility without drastically increasing median wealth, e.g. Kerala in India, but its very difficult. Every society naturally evolves traditions which balances fertility with mortality to ensure stability, but these traditions are related to morality, marriage, etc. and are very strong. So the death rate declines sharply but people continue aspiring to, for example, 6 children (a common figure for desired family size I see in poorer nations) for generations. My theory is growth and development, moving to the city etc. disrupts those traditions allowing a rapid transition to a lower fertility level within a couple of generations.

I was in Kerala last year. What happened there to reduce fertility rates?

I agree, but completely impossible to implement as 95% of the worlds population dont see the predicament of overpopulation, most of those who dont are also poor people. Its also common through religion and family beliefs that you should "populate the earth" with as many children as possible. Many religions still preach this as the more children you have, the more people you can "spread the word of god". I dont know about you, but I dont subscribe to an apolyptic god, which is surely the outcome of overpopulation.

The sad truth is that the only god around is the constraints of physical laws so like any species of bacteria growing beyond it means its going to collapse at one point. Its sad and cruel to say it but when I see pictures of poor underfed children in the third world I cant help but feeling its mother nature just regulating the population. By helping these people without training them in the problem of overpopulation you are just throwing petrol on the fire.

I am also afraid that what it takes to truly regulate population is a dictator (perhaps an elected one?) that can enforce a world law about consumption and population. But the whole "regulate population" and "regulate consumption" is complete opposites with the two trends in human nature: consume consume consume, give birth, give birth, give birth.

Someone has called me a "socialist pig" on some of my youtube comments, and I guess I believe that you need a governmental system that is controlling people more than a free market will ever allow. Just like banks need to be controlled so they dont conjure up papers of value based on ridiculous assumptions about growth. I also subscribe to a simpler world, one with less selection, more standardization, as it will allow a more moderate speed of change/evolution than the complete freedom has given us. Its again a socialist thought that I always get very strong reactions to. But I simply cant see us "free marketing" ourselves out of this predicament.

I am afraid most people think that if we had only been half a billion people on the planet we could all be enjoying a continued super consumption western society without having to worry too much about peak this and that... at least within our generation and the next... For a sustainable alternative I think we need to be more brutal about admitting that the western lifestyle is flawed, the economy is flawed, religious belief about "having many children and spread the word" is flawed. I also think it requires educated knowledge about the physical world around us and have more belief in that the physical world is our constraints and no matter how much praying or sacrifice to your gods will conjure more oil in the ground or make people wiser. Although I do subscribe to religious leaders who preach the predicaments as they lie so clear before our eyes - I also think they will be able to change the minds of more people than those who pray to the money-and-consumption-god.

We can only hope that as energy and resources become scarcer, we dont go crazy and start wars, but knowingly accept that we brought this upon ourselves. Although many deniers will no doubtly be screaming and kicking, feeling that everyone else around them is to blame for their problems.

Someone has called me a "socialist pig" on some of my youtube comments,

Johncl, could you give us a link to your youtube videos. I would like to watch a few of them. Thanks,

Ron P.

I am sorry but I meant my comments on other videos about the problem of overpopulation and peak resource extraction. It seems that very few are able to accept that this problem is so big that it takes drastic measures. Most people I talk to either dont see any problem at all (they complain more about activists making noise) or think any transition will be smooth or a forced change that is accepted as a better choice. I am not so sure the majority of western people living the life today are able to accept lower living standards and probably more socialism in order to control and distribute the resources available to us.

Here in Norway we recently had an uproar among car owners that diesel cars had so much emissions that certain cities would have to ban diesel cars. And this came just a few years after the government here said diesel cars were good because they had less CO2 emissions (in spite of huge evidence of NOX emissions which are even worse locally). Naturally people didnt really think for themselves but just followed the tax systems and bought the biggest engine they could get that was cheapest... a diesel car, often a SUV like one. We used to make jokes about Americans buying these huge cars, wondering why they need those big hunks of metal to bring their kids to kindergarden - but I can make the same joke about the average Norwegian which is just as clueless. Its basically a question of price and the available money (and Norway still havent seen the big housing bubble they are in, an average house has gone up 3 times in value on a span of 7 years).

I sincerely hope that in time people will accept the facts surfacing soon as certain resources become less available due to depletion, and are able to elect leaders to guide ourselves into a better future. But at the same time I am afraid we will see mass death from hunger and all sorts of crisis and wars in the poorer countries - I just cant see the western society being able to tell that our big consumption has led the world into a state where the poor will have to regulate their birth rate. Most likely we will see mass immigration into western countries wherever they are allowed (at the same time governments might want to limit this greatly due to having enough problem feeding their own people).

I wish I could be more optimistic about it, so I often turn to people like Chris Martenson which has a more subtle view on the predicament and our way out of it. :)

I wrote a post on Our Finite World about what went wrong with human population overshoot. Human Population Overshoot: What went wrong? It wasn't what I expected.

This is an earlier post on that doesn't sound like it is related, but it is. European Debt Crisis and Sustainability.

There is only a direct relationship between oil prices and economic well-being so long as
wasteful energy patterns remain the same, the prime resource energy wasters being Wars and Auto Addiction. The PIIGS and the US have significantly different oil dependencies.
The EU has a much more developed passenger Rail and Green Transit system which allows alternate passenger transportation without the waste of Oil and resources of Auto Addiction.
Where the EU is deficient is in freight Rail but they are way ahead of the US in terms of bicycling (almost zero oil usage or greenhouse emissions), walkable communities and of course lightrail, buses, and high speed Rail.
During WW II the US quadrupled intercity Rail, intercity bus, regional and local transit ridership saving huge amounts of oil, rubber, metals, and all the other resources devoured by the Auto Addiction goliath. The EU should be investing in freight Rail and continuing
to transition away from Auto Addiction even more. The US needs to fully operate its existing Transit systems which are largely idle and then restore Rails all over the US as well as providing bike paths, sidewalks and transit oriented development back to Main Streets from Autocentric Malls.
If another 100 million Americans waste thousands of household dollars and precious resources for still more cars, we pave over green space for more highway lanes and parking lots, is this really desirable economic growth? I don't think so.
The US Auto industry had to be placed on artificial life support after 2008 as peak cars were reached about 2005 (interestingly preceding Peak Oil) and the Auto Addiction industry
accounts for probably 20-25% of the US economy. But it cannot be placed on artificial support forever. Asphalt prices have quadrupled and will continue to rise as oil prices
rise. As James Kunstler gleefully pointed out a few years ago, Michigan, the epicenter of
US Auto Addiction, was forced to stop paving many rural roads and let them return to gravel due to their fiscal crisis. Of course Minneapolis had its bridge collapse.
The US Auto behemoth is not sustainable. It was propped up by Federal bailouts in 2009 along with the "cash for clunkers" subsidy, now the $7500 electric car subsidy and primarily sub-prime Auto loans which were deliberately excluded from the increased credit requirements of other loans.
We do NOT need more Wars, Auto Addiction or other earth wasting consumption.
We DO need a Green Transition reducing usage, reuse and recycling.
Here is a good example of the fallacy of economic growth as currently measured.
I have installed energy efficient windows, a 97% efficient new natural gas furnace and new insulation which have saved me 40% on my former natural gas usage. How is this counted in the economic ledgers? Going forward I will be using 40% less natural gas. Does this mean
GDP has shrunk by a comparable amount? I will be just as warm as ever but has the economy shrunk as I no longer have to pay for the same comfort levels? Many measures would say so.
Thus the Teabag Republicans are right in one sense - just think of all the jobs being created by the Colorado wildfires for firefighters fighting the fires, clearing away the rubble, rebuilding burned out husks of homes. But is this really any sort of
economic "growth" or improvement in anyones lives or the Environment? Absolutely not!
It is what Naomi Klein called "Disaster Capitalism" at its most extreme - destroy the Environment and then profit off the destruction. But in reality a lot of people's lives are worse off, the Earth is ravaged, it is not at all clear how such a path can be sustainable and not lead to a true collapse of Ecology and civilization.

We also need many orders of magnitude fewer consumers, otherwise known as people...if we continue on our current trajectory of continued population growth then pretty much everything else becomes moot!

Edit: I see you think the same as I do.


I'd say, to get off this silly roller coaster, we need energy supplies that aren't carbon, limited, or extraction-based.

Or bring back the silly carousel ala "Logan's Run". http://en.wikipedia.org/wiki/Logan's_Run

...the world is post apocalyptic and people now live inside a huge domed city and are unaware of the world outside, believing it to be a barren, poisonous environment. [...] The age of death is 30, and instead of reporting to a Sleepshop, citizens must take part in a ritual called "Carrousel" in which they are vaporized with the chance of being "renewed"

Does the "US Petroleum Consumption" chart include US military consumption?

If so, can military activity be subtracted to show true continental domestic usage?

I don't know how BP calculates its numbers. Even if US military consumption were 5% of US consumption (which I don't think it is) and it were subtracted, it wouldn't make a whole lot of difference to the conclusions.

That makes it a shade under 2% of US consumption.

I think that the overall 2% reported is only fuels and lubricants, not the use for plastics, etc., fertilizers and energy value of food for feeding soldiers, etc., that is included in total US consumption.

A better guage may be military %-age of GDP. And, my guess would be that actual percentage going to military would be a good bit higher than that. IMHO.


You are probably right about the overall amount, including that embedded in food, clothing, and vacation trips the soldiers take (paid for with their earnings).

One point I didn't make is that when oil (and gasoline) prices drop, interest in fuel efficiency drops. I just received an e-mail saying that the average fuel economy of cars sold in June was down by 0.1 MPG compared to May, attributed to the lower price of gasoline. See Transportation Research Institute data.

Well at this point recession isn't a bad thing for our species any more than going on a diet is a bad thing for the morbidly obese. Economic slowdown may be a more plausible way of ratcheting down our species' energy metabolism than green treaties nobody will abide by.

I miss TOD's "campfire"; I think it would be fun to talk about ways of intentionally steering the world economy into immediate deep recession... for starters.

I agree about the Campfire discussions; found them useful, though discussions about methods for, and the benefits of, crashing the economy would certainly be considered subversive by some, if not downright terroristic. I've been accused at times of "not being a team player" :-0

That said, finding ways to not support a wasteful, destructive economy has become quite a hobby for some of us ;-)

Well I suppose the comments section for Gail's excellent post isn't the place to get into it, though I think it should be a good fit for the "and our future" part of the ostensible TOD mission.

I have utterly no doubt that anything useful which might be done to actually ratchet down our war on our descendants & the planet would seem like terrorism to someone. I just can't buy into the premise that the burden of argument should be on those who advocate NOT screwing up the world.

Minimizing personal impact is a good thing - but wholly insufficient to the context IMO. If the house next door is burning, choosing to not throw gasoline on it is good... but choosing to spray water on it is better.


I miss TOD's "campfire"; I think it would be fun to talk about ways of intentionally steering the world economy into immediate deep recession... for starters.

Couldn't agree more, on both of those points!

Well at this point recession isn't a bad thing for our species any more than going on a diet is a bad thing for the morbidly obese.

No, it doesn't work that way. It would if, during a recession, everyone cut back on their consumption equally. But those with jobs don't cut back much, if any. It is those who lose their jobs who cut their consumption the most. And if they are out of a job for very long, and have children, this can be very damaging for their health.

So a recession is very bad for a few people but not so bad at all for other folks.

Ron P.

As I say, I think it'd be interesting to discuss. A fiscal depression might arguably lower the species' exosomatic metabolic rate as one of its effects. There would be other more complex effects, certainly. Of course, when looking at our species' overall energy use and emissions, egalitarian-distribution concerns are not necessarily relevant, as important as they may be to us personally.

By slowing infrastructure build-out, the total CO2 emissions might be affected; for instance, getting financing for expensive fossil-fuel projects with lower EROEI might be more difficult.

I know you agree that eventually we'll have far worse than depression; so ameliorating the severity of the eventual dieoff, and the level of degradation of the earth's carrying capacity, is worth looking at. Managed economic slowdowns are arguably tools which could and should be used, much as governments are now manipulating economies in the opposite way to maintain what they call "growth".

There is probably no such thing as a "standard" recession or depression, those words refer imperfectly to complex states of evolving systems. My conjecture is that proactively slowing economies down is at least as good an idea as manipulating them to perpetuate overshoot.


I have read (OK it's anecdotal) that garbage volume in Athens is down 32%. I think that exactly what you speculate about bringing about----a managed fiscal depression----is actually being brought about by leaders who all secretly (an open secret) know that the world has basically attained its carrying capacity. Yet the young still want to start families, and everyone wants to consume, so how to manage it?

You--a political leader---shake your head and cry "So Sorry!! We're just briefly Bankrupt! Now we're really really trying to get growth going again! Soon growth WILL be here again!"

It's a kind of theater, a farce, a comedy, and a melodrama, all at once, staged for everyone's benefit.

Everyone knows what is going on----the cupboard is bare.

But no one can say it openly: that would be telling!

But it does work. Everyone says, grumbling, "Oh well then, in that case, since it can't be helped..." They ratchet down their expectations, and they are nicer to people.

I cannot help but think that our society is not patient enough to gently put the brakes on. Some will, and may have already, jump on the brakes or swirve hard to avoid the collision.
Perhaps this is called war. It is emminent. That will lower the population and may push us back so far that those new leaders will learn and apply hard rules. I cannot see anything good coming out of this recession or from the impulse reactions of our leaders.
"Benevolent Dictator" is an oxy-moron.

I am not convinced that any massive spate of war is imminent. However, it is very likely there will be series of new wars to fill in the gaps from a winding down of Iraq and Afghanistan (business is business)...but if you think that wars, even a significantly enhanced level of wars, will put a dent in our population growth/level, I think any such war deaths will be most insignificant to the overarching population trends.

A pandemic? The Spanish Flu had what, a 2% overall mortality rate? Another blip on the overarching march of the teeming masses of humanity. I figure that after war and/or pandemic deaths the birth rate would just spike anyway for a while.

Short of an all-out nuclear exchange (rather unlikely)...the only other war actions that would put an appreciable dent in the World population would be an all-out exchange between two second-tier nuclear states...studies have projected global deaths in the decade following such an event on the order of ~ 1B...possibly...even that significant dent may very well be overwhelmed by increased birth rates so that the World population may very well end up where it was to begin with after a remarkably short time...albeit at a much lower per-capita economic level.

I have come to think that humanity may expand to between 9-11B by 2050-2070, and then oscillate around a plateau with combinations of boughts of increased mortality combined with boughts of increased birthrates...

The outcome I describe will likely not be pleasant...teeming masses of humans scraping by in a resource-depleted, polluted, hot World.

If there is a problem with sewage /clean drinking water, it seems like population could go down pretty quickly in parts of the world.

I, quite honestly, am rather surprised that we have 7B people and counting up to ~ 9-11B with the poor water sanitation standards that currently exist, and if fact have existed for a long time, in certain rather populous parts of the World. Vicious circle...high mortality begets high birthrates?

If so, this does not seem to bode well for a reduced population in the future...that is to say, the worse things get, perhaps the higher the birthate will go, reversing current trends.

Welcome to the 'Lagos-Favella-World', circa 2070+, if not sooner.

I think it would be fun to talk about ways of intentionally steering the world economy into immediate deep recession... for starters.

"Good" things come to those who wait, though one should be careful with wishes.

Yes, it'll eventually happen, but I guess I think passivity is over-rated. If it's inevitable anyhow, and waiting for it will cause the planet and our species permanent harm, then...

Lotus-eating is well and good, but at some point we really should start acting like adult, sapient beings and take some responsibility.

Some of the decline in the U.S. petroleum usage has been low-hanging fruit. And that secular decline begun at the onset of the recession. So it's hard to completely seperate it from the economic and forced decline. But the secular decline is minor.


Remember that the U.S. unemployment level is artifical.
If you discount the fact of the boomer demographics, the decline in the labor force is about 70 % people simply dropping out. If you take this into considering, U.S. unemployment nationally is around 10.5 %, which is not far away from where the Eurozone average is.

And that place is, as we know, in recession. The U.S. has a stagnation problem instead. And that is shown in the chart above.


The above is the U.S employment-to-population ratio.
It might look bad but in fact it's even worse than it looks, since in the 1980s, women were entering the workforce in record numbers. So a better measure would actually be to look only at men's employment-to-population ratio and it's in fact even worse. But I am too lazy right now to find a decent graph of that, but I can say, having looked at the data, that it has not been as bad for men in America since at least 70 years. And back then the country was on a secular ascendancy, which isn't the case anymore.

Why the employment-to-population ratio? The chart above removes much of the artifical methodology in the headline unemployment rate(often masked by people dropping out) and just looks at how many people in the population are employed age 16 and above. Do note that the stagnation began under Bush, as the 'recovery' never reached the previous levels in 2007 as it was in the year 2000. And then it just completely crashed and never recovered. At all.

What you have since 2008 is nothing even close to a recovery, which is why petroleum usage in the U.S. is where it is and likely to remain subdued. And that may be good for the rest of the world, but you can't have these kinds of condtions where growth is 1.7 to 1.9 % per year. That will inevitably mean that more and more people will struggle as real disposable incomes fall, college and health care costs rises. In the end, you'll get pols promising stimulus/tax cuts or whatnot and that means that America will have to consume more oil AND petroleum products in general. And where will that come from? OECD, as Darwininan showed before, is in a large secular decline and China and India keep growing their apetite.

There's a limit to how much the West can cut back on economic growth before the population rebels. Greece has elected communists and neo-Nazis to their parliament. Economic stagnation breeds extremism at the polls. And that in of itself is a danger many overlook. You can't just 'manage' a stagnation forever, if there's no end in sight. You get more and more volatile politics with a rise of demagogues.

Should the unemployment numbers also be adjusted for the relatively large number of people who have retired early?

By that I don't mean the involuntary retirements but the relatively large number of people who have been able, because of generous job benefits, to retire at 55 or even 50 with generous salary and medical benefits.

Leiten: Stuart Staniford blog post on the Male Employment/Population Ratio

Should I count myself "lucky" that I live in the U.S. and not Europe? Here the odds of a full scale old-school populist rebellion look slim-to-none. The plutocracy has bought every politician and media outlet and has surveillance technology George Orwell never dreamed of. The .1% here will not even tolerate anyone shining a light in their general direction, much less mounting a credible challenge to the status quo.

The right wing corporate media cartel here has brainwashed most Americans into thinking that any misfortune that befalls them is due to gay people, minorities, liberals, atheists, scientists or "feminazis" (i.e., women who use birth control or think for themselves). If that weren't bad enough, our small token opposition media has convinced the dwindling number of liberals that infinite growth is possible and propping up a cruel, unjust for-profit sick care system was actually "reform" and a big "victory" for ordinary citizens.

Since I belong to some of the likely scapegoat target groups (liberal, nonreligious, pro-science), I'll probably have to go into hiding once the corn-pone Nazis take over here (hat tip @Kunstler).

Yea verily.

Harm, there is no liberal party here. Only the right of center party and the far far far right party (f3r for short). I once heard that if a party goes far enough to the right they meet the far left, though I have never seen it happen.

I understand there is an empty cave in Bora Bora for rent... it's former tenant probably regretted moving out.


Check out Ron Paul, the only anti-war, anti-imperialist, pro-freedom of speech candidate on the scene!

Unless it is on the intertubes where he wants you to have to pay pro-rata for freedom of speech.


Or just move abroad. There are kinds of interesting countries where you might be able to find more freedom from corporate influence and "manufactured consent". Yes, moving abroad is a kind of "hiding" I suppose, a good kind, and effective.

There is a need for new political party (parties) in America.

The existing two parties are obsolete, lost in the past. Both are growth parties with no more growth to be had, they are exhausted, too wedded to business as usual. Both parties are naked fund-raising vehicles. Both parties are devoid of ideas they have nothing to offer but nostalgia: for Joe Hill and the New Deal on one side, for Reagan and a lily-white, shopping-mall utopia that never existed on the other.

A new party would attract the disaffected in both the Tea Party- and the Occupy movements. Without a new organization, there is no organizational-conceptual framework that can support candidates other than the usual big-business stooges.

Note what happened in Wisconsin during the Walker recall: the same Democratic hack that lost to Walker in the previous general election was defeated by Walker in the recall election. The Democratic hack was a stooge of big business (municipal unions) interests: a 'Republican-lite'.

I've been promoting the idea of a new political party running candidates in all elections in all jurisdictions ... not just for president.

– End corruption!

– No more ‘business as usual’.

– An American party, not one of multinational corporations or overseas interests.

– ‘Reality Based Policy’.

– Accountability for all: no more bailouts, Ponzi schemes or free-lunches.

– No millionaire candidates or funders.

In Italy, an independent group called 'Movimento Cinque Estella' (The 5-Star Movement) uses a similar platform to gain rapidly on established parties. Most candidates are young people. The candidates refuse to indenture themselves to big-business interests.

Having a 'responibility party' would solve the credibility problems that the major parties have created for themselves. The establishment promotes continuing irresponsibility as a civic virtue, then uses (abstruse) economic theory to justify it ('Too Big to Fail', 'Paradox of thrift', 'liquidity traps', 'austerity', etc.). Irresponsibility is the central ideology of the parties: "American way of life is non-negotiable."

A responsibility party would also short-circuit the extremists groups that promote violence. All it would take is a few people to get the ball rolling ...

There's a limit to how much the West can cut back on economic growth before the population rebels. Greece has elected communists and neo-Nazis to their parliament. Economic stagnation breeds extremism at the polls. And that in of itself is a danger many overlook. You can't just 'manage' a stagnation forever, if there's no end in sight. You get more and more volatile politics with a rise of demagogues.

The West (middle class) has already shown an incredible ability to 'take it' with policies that have them accepting diminishing returns in favor of the top .1 skyrocketing oppulance. Ray Bradbury often wrote about the future with warnings, like Fahrenheit 451, in which the populace are kept under control via prescription drugs, big screen TV's and reality tv shows. He nailed that prediction. People are too busy watching TV, eating junk food and popping pills to notice their getting the shaft. I'm sure there is a lot of room to push that even farther, as they belly up to the bar to vote against their best interests with Romney, the next super-champion prez of the top .1 percentile.

For example, oil sands production in Canada is quoted as being not economic below $80 barrel, and the West Texas Intermediate price is below that level today.

I just thought I'd check that against company statements by the three biggest oil sands producers:

Suncor Energy reports 2012 first quarter results

Cash operating costs for Oil Sands (excluding Syncrude) increased to $38.10 per barrel in the first quarter of 2012, compared to $35.45 per barrel in the first quarter of 2011. The increase in cash operating costs per barrel is primarily a reflection of lower bitumen production volumes from mining and extraction operations as a result of the Upgrader 2 outage.

Canadian Oil Sands divvies up 17% more as $23 syncrude discount evaporates

Operating expenses in the first quarter of 2012 decreased by a significant 17 per cent to $321 million, or $32.68 per barrel, from $387 million, or $35.53 per barrel, in the same period of 2011. The decline primarily reflects decreased purchased energy costs due to lower natural gas prices in 2012 and reduced expense for Syncrude's long-term incentive plans.

Shell sees low cost expansion in Canada’s oil sands

Shell plans a series of debottlenecking operations that will add new production at a cost of less than $50 per barrel.

So, be aware that when you see highball oil sands production cost estimates in the MSM in the range of $80/barrel, that these do not represent the costs of the existing oil sands operators, which are typically half as high.

I think the issue is not current production costs but, considering development costs, what is the bottom price that enables new production?

I think, per Shell's statement, that the marginal cost of new production would be about $50 per barrel.

Mind you, at $50/bbl, the investors would be somewhat unenthusiastic, and only a few new projects would move forward. At $80/bbl, they would be lined up to build new projects (which they are).

There are really two different costs that have been bandied about in the previous discussion.

The operating costs that were first put forward of around $38/bbl are the variable cost of production. They include costs that are directly attributable to production, but not overhead, capital expenditures etc. If prices go below this cost then production would be shut down at existing operations.

Total costs include all of the other overhead and capital expenditures. I've seen estimates as high as $80/bbl for the total costs of production, but generally total production costs for the tar sands are calculated to be bit less.

If prices fall below the total cost, but stay above the variable cost for a long period of time (at a guess a minimum of 6 months) capital investments in new production and possibly needed repairs will be postponed or canceled and production will gradually start to fall off.

There has been no hint of a slowdown in capital expenditures so it is clear that the total cost of production is well below current prices.

But a key thing is not quite clear: are you and Gail both discussing the same "not economic"? It's hysteretic; there's the "not economic" in an expansion phase, and the other "not economic" in a contraction phase. The first includes all-in replacement costs such as capital equipment and site preparation, while the second only includes "operating" costs, i.e. marginal cost while the capital is being run down. Which is the sort of thing that might tend to create instability and - fancy this - give us a boom-and-bust cycle with prices oscillating between (roughly) the two values.

Or, by analogy to beer, if we're looking short-term, the "operating" cost of taking another sip is essentially zero, but looking longer-term, we'll eventually run out unless we get a refill, which we'll actually have to pay for.

(N.B. this may be why cell phone contracts, public-transit fare schedules, etc. are so often so impenetrably byzantine. Everybody thinks they should pay just the marginal cost, and stick "the guy behind the tree" with the all-in cost, so for the marketing flacks to make it look good, the all-in cost has to be obfuscated in a complex "plan" reminiscent of Soviet bureaucracy.)

There is also the issue of whether when people talk about needing an $80 barrel rate, they really mean an $80/barrel sales price for Brent or something similar, knowing that the particular grade in question will trade at a lower price. I think that sometimes statements such as this are made with the understanding that most people talk in terms of reference to standard types of crude, since most people are not aware of how much the "discount" diluted bitumen would get to a standard grade. There is also the possibility that the bitumen could be "upgraded" to synthetic fuel oil. Then the cost of production would be higher, and the discount off a standard grade would be less.

All of the producers I quoted produce synthetic crude oil. As of the last trading close, syncrude was trading at $83.16 USD/BBL, versus WTI at $87.66 USD/BBL - a $4.50 discount. In general syncrude will trade for more or less the same price as WTI since it is about the same quality and goes into the same market.

By comparison, the price of Western Canadian Select, which is a bitumen/heavy oil blend, was trading at $59.76 - a $27.90 discount to WTI. This is the price the producers who do not have upgraders would be getting, but presumably their production costs are much less.

Most of the new oil sands projects produce non-upgraded bitumen.

Agreed. That sounds like the differential I was expecting.

If they are quoting $80 barrel, it might be that when the discounts are done, their costs are much lower to be comparable to the $80 benchmark price everyone thinks about.

I think that when they quote $80 per barrel, they mean they need WTI to be at $80 per barrel, which is to say bitumen at $50+, to make it economic to start NEW oil sands projects. The existing projects can probably produce bitumen for half that price, and upgrade it all the way to an equivalent of WTI for about $35 total cost.

If the price of WTI falls below $80, there probably won't be as many new projects as there were at higher prices, but the existing projects will continue to produce oil indefinitely - and probably expand their operations because they can do it cheaper than build a new project.

there's the "not economic" in an expansion phase, and the other "not economic" in a contraction phase.

These financial statements are for an expansion phase, which is what this is. The oil sands producers have considerably flexibility to cut costs. During the last collapse in oil prices, when prices fell to $10 per barrel, the oil sands producers managed to cut their costs to around $12 per barrel.

Most of the oil sands costs are "sunk costs", not ongoing costs. Most of the money has already been spent. They are not going to shut down their operations just because the price of oil goes down. They have deep pockets and can continue to operate at a loss for quite a long time (i.e. until prices recover).

They have deep pockets and can continue to operate at a loss for quite a long time (i.e. until prices recover).

That point touches quite nicely on what I'm confused about. Is the $38.10 per barrel (or similar) "cash operating cost" just what keeps an already-existing operation going day-to-day (like 30¢ worth of electricity to run a train), or is it a truly all-in cost covering maintenance and replacement of said operation as and when it depletes and wears out (like charging a $4 fare to pay for repairs, and for new trains, tracks, bridges, and tunnels as the old ones deteriorate, and so on, rather than just 30¢ for the electricity)?

Or is the all-in cost closer to the other, $80 per barrel, figure, inasmuch as the very term "cash operating cost" denotes, on its face, not the all-in cost, but merely a subset, a fraction? Capital-intensive systems, i.e. most of them nowadays, can't keep going indefinitely by charging prices equal to only marginal operating cost, unless there's one heckuva sugar daddy somewhere. For the system to continue or expand, somebody's got to pay the all-in cost, not just the "cash operating" subset. (And yes, as we all know from Econ 101, proper competition tends to drive prices down to the marginal cost of production, whence the financial instabilities and cyclical bankruptcies, and those ridiculously byzantine airline and utility tariffs. One thing that economic equilibrium models inherently lack is any accounting for time-dependent system behavior...)

So at least at times, the price would have to reach the all-in value - and as society tires of, or becomes less capable of, subsidizing the whole affair via cyclical bankruptcy as it does now, the price might have to reach that value more often and more consistently. (Likewise, one wonders what happens to the airline industry, which as a whole has lost a great deal of money over its history and continues to do so, should there ever be a shortage of capital-gifting fools calling themselves investors, but who really seem just to think that commercial flight is still romantic rather than merely awesomely tiresome.)

When I say they have "deep pockets", yes, they do have one heckuva sugar daddy somewhere. Suncor, for instance, is the biggest oil company in Canada and has a huge refining and marketing operation, plus a lot of conventional oil and natural gas which can subsidize the oil sands mine. They can afford to ride out long periods of low prices because other parts of their business will be making money, and they don't have a lot of debt relative to the size of their business.

The big issue with oil sands is capital costs, which are huge - a new oil sands plant is a $10 billion investment with a very long payback time. Companies are not likely build a new one when they aren't making money on the operating side, but the costs to build the existing ones are sunk costs.

The way existing plants ride out periods of low prices is to defer all their capital spending plans, and then start cutting corners on the operating side. If they have to they can get their per-barrel costs very low.

Cash operating cost is a metric primarily used by the mining industry to give them an idea of what their direct cost of production is. It generally removes non-direct costs such as interest, depreciation, amortization, taxes, royalties, etc.

Cash Operating Cost, as defined in the Gold Institute's guidance, includes mining, processing, transport and refinery costs, mine site administrative costs, movement in production inventories, by-product credits, and transfers to and from deferred stripping, where relevant.

For Suncor's definition, see Management's Discussion and Analysis

Oil Sands cash operating costs and cash operating costs per barrel are non-GAAP financial measures that adjust operating, selling and general expense for significant items that do not reflect production costs for Oil Sands that are within the company’s control or that do not directly affect routine production activities.

Suncor also removes its share of operating costs for the Syncrude mine (in addition to having its own oil sands mine, it owns a share of Syncrude's as well).

Thanks, that helps clarify who's talking about what.

The country with the highest debt-to-GDP ratio is Japan and it also has zero per cent interest rates. The countries with some of the lowest debt to GDP ratios in the "developed" world are in Europe (well, they were a few years ago), and they have the highest interest rates. The US has a similar, arguably larger, debt to GDP ratio as many of the PIIGS countries currently being eviscerated by rising interest rates, but it enjoys zero per cent interest. Why? Because Wall Street is in the US and the US won't be allowed to fall until every other country has first.

Interest rates have zero correlation with debt to GDP ratios. They are set by credit default swaps -- i.e. the derivatives market. We can't analyze the world's financial system and come to an understanding of how inflationary / deflationary cycles work based on energy alone, using a fundamental economic analysis, because that just isn't how it works. The entire financial system is the greatest ponzi scheme in the history of the world, a gigantic casino rigged by Wall Street for the purpose of stealing wealth from the middle class. Our money is created from debt and the whole system is now so manipulated that the purchasing power of money, and the prices for debt, today have zero connection to real world fundamentals. This is why, when it does finally end, it will be catastrophic and complete.

A good commentator explaining how bankers are destroying the world is Bullion Bulls Canada. He has a fairly narrow scope of commentary, focusing solely on money, as he doesn't seem to recognize how energy fits in to the economic system, but he provides the clearest picture of how the financial system works.


I would add that it is not just the middle class that will lose but every oil exporting country that has a sovereign wealth fund invested in the developed worlds debt. The implications being that the incentive to produce more oil than is needed for immediate needs may be greatly reduced.

Far from defending wall street practices, I'd like to point out though that for somebody to buy CDS (be long credit protection---> to make a bet on deteriorating credit) somebody else has to make the opposite bet i.e. be short CDS. BullionBull omits that part and says that wall street bets against some country's credit but does not talk about who then would be betting the other side (that the credit quality would be increasing).
Makes for ok reading after a couple of scotches though.


Interest rates have zero correlation with debt to GDP ratios. They are set by credit default swaps -- i.e. the derivatives market. We can't analyze the world's financial system and come to an understanding of how inflationary / deflationary cycles work based on energy alone, using a fundamental economic analysis, because that just isn't how it works.

In general, the larger the borrower, the lower his cost of credit. For it to be otherwise, there would have been no expansion of gigantic firms as the cost of their expansion would be unaffordable.

The credit 'ladder' looks like this:

- Individual borrows $500 from Payday lender = 3,800% interest with prison for non-payment.

- Individual borrows $1000 from pawn shop = 120% with loss of collateral for non-payment.

- Individual borrows $10k from credit card company = 30% with credit rating 'hit' for non-payment.

- Individual borrows $30k from bank for car loan = 8% with credit rating hit PLUS loss of collateral for non-payment.

- Family borrows $300k from government-guaranteed lender for house = 4.5% with loss of house and credit for non-payment.

- Business borrows $300m from bond market for stock purchase, money goes entirely to 'owner' = 3% interest with loss of credit rating and business bankruptcy for default. Owner keeps the $300m: see 'Mitt Romney/Bain Capital'.

- Government borrows $300bn from bond market for kickbacks and favors to cronies = 1.3% interest with more loans to come to roll over the amounts due, plus interest. Insiders get re-elected over and over, country eventually is insolvent.

Interest rates are always subject to some form of price-fixing ('bond vigilantes', 'Libor manipulation', central bank 'easing/QE') however petroleum mass-consumption has shifted the credit-cost of money toward the petroleum-cost of it. Interest rates don't 'work' as before, central banks are irrelevent except where rates are punishingly high (as in Europe). The underlying meme is complex: the shift from endogenous to exogenous 'money'.

Presumably, Wall Street has instituted a credit embargo of Europe (as it did in Latin America in the 1980s and in S.E. Asia in the 1990s) so as to steal the Continent's petroleum consumption (which is exportable). Petro consumption in Europe is 15 mbpd, 10 mbpd exported to the US represents the discovery of another Saudi Arabia. Don't think for one minute that US establishment isn't conniving enough to take the required steps to make this sort of thing happen.

In Europe, the sovereign and large-bank borrowers assumed they were large enough to insure low-cost credit for themselves into perpetuity. Boy, were they wrong!

Is Germany large enough? How about China? We are all going to find out what happens when the credit rules are changed.

The system has to change pretty quickly--I am not quite sure if it is defaults (for example by Greece) that start the ball rolling, or the LIBOR scandal or what.

It is pretty clear there is way too much debt to be paid back in almost every part of the globe. Some of this is government debt; most of it is other kinds of debt.

A)One person's debt is another person's asset...ergo, as debt defaults assets evaporate.
B) Private and public debt are fundamentally different.



You might think of me as a conspiracy nut, but I think this whole economic disaster was deliberately triggered by our government through the FED. Interest rates were suddenly quintupled right after the 2004 real estate boom triggered by the previous drop of 2001, catching lots of people with their pants down. With so much outstanding debt, liar's loans covered by credit default swaps and guaranteed by those with assets insufficient to cover losses, this "pulling the rug out from under them" was guaranteed to upset the whole apple cart.

I believe this was deliberately engineered to have the following effects:

1) Worldwide recession due to USD being used as reserve currency. Plunging the world into economic chaos will kill off the demand side of oil, bringing its price down, so that our governments sanctions on Iran will have sharper teeth. The demand for oil seems like the demand for chairs in a meeting. 101 people, 100 chairs, big problem - another chair is of great value. But if there were 99 people, one chair is in the way and has little value. This rate hike allowed us to kick a few people out of the meeting so their chairs become surplus.

2) The economic train wreck would happen on the next President's watch... counting on the next President to not have the foggiest idea of whats going on. I haven't seen much evidence he has a clue.

We are in a war of sorts, and use whatever tools we can still control. We can no longer control the world through our industrial output, or food, but the world still honors our paper, so we use that.

I wonder how much of this "endless amounts of Bakken oil" is a smokescreen to undermine perception of the true value of oil. My take is oil is about to become a currency and traded as such, with a share of oil rights commanding more prestige in the market than a US Dollar. A collapsed dollar will always have one use ... paying tax with it.

Thanks for posting this article.In my opinion 80$ for oil sand is econmomical number. Oil sands is usually profitable up to 60$ per barrel. Also, if you take SAGD in to account then they are making a good profit because of low gas price. Though I am not aware of current SAGD operation breakdown cost. Will appreciate if some one share report for breakdown cost for various process.

Comparitive graph of break down cost will help a lot.


As I mentioned above, I think the $80 barrel rate (which is one I was told, when I visited the Oil Sands), may be the corresponding rate for a benchmark that people are familiar with, knowing that oil sands oil will trade lower, because of the difference in the amount of refining needed.


You mention the PIIGS countries, Ireland is one of those, despite achieving 16% of electricity demand being supplied from renewables, often reaching 48% of intantaneous penetration, Ireland is only now beginning to look seriously at transport. You state in reply to a comment,

What we need is energy supplies (of the right type--liquids) that are cheap to produce, say $20 barrel, and do not pollute the atmosphere. We haven't found any such things yet. Producing a substitute that is even higher priced than oil is counter-productive, especially if it is imported as well.

One of the tech's being looked at, particularly for agricultural use is NH3 production using wind energy to provide the energy, I would argue that a price of $100 a barrel for a substitute liquid fuel would be advantageous to Ireland which imports all of its oil.

Ireland has one of the best wind resources in the world, with capacity factors in excess of 40%, so the energy to produce NH3 is cheap.

If he is out there, Matt Simmons is looking down and smiling at that idea.

NH3 is not a direct substitute for gasoline or diesel. I expect that we would have to modify engines to make it work more than on a temporary basis. By the time all of the additional costs were included, it likely would be an expensive solution--for that matter, even $100 barrel oil is expensive.

Thank you for your reply, NH3 will never replace gasoline but maybe diesel, only minor engine modifications are required, although the energy density is not as high as diesel.

One of the negative feedbacks you mentioned which should be considered, especially in European countries, is that governments depend heavily on fuel taxes for income, in 2009 the Irish government received 15% of its gross income from taxes on oil products, as oil demand decreases this income must be made up from other sources, which in turn depress the economy further.

Presumably governments could find something else to base the tax revenue on besides diesel--miles driven, for example, or something totally unrelated to transportation.

People will be poorer, as all these things happen. The problem that government may have trouble collecting enough revenue, regardless of the base.

I can't stand that PIIGS acronym.

We are in desperate need of an extremely unflattering or even downright insulting acronym for Northern European countries when their economies begin to falter.......

I'd like to buy a vowel...

Northern European countries suffer from a lack of vowels. The only I can think of is something involving GAS.

Translate to Hebrew; no vowels required ;-/

Looking at the "scandinavian" countries Sweden, Norway, Denmark and Finland (only Sweden and Norway are actually in Scandinavia) I fink the FNDS is the best. When we go down, we will need FuNDS to work it out.
Try to make a better one your self if you can.


There was a similar story on Yahoo! finance a few weeks ago. It basically said ~"Don't celebrate oil prices going down since they may be indicating a coming recession."

And that may be true if the markets are making an accurate prediction on such an issue. But I don't think that is intentional. I'd guess it is more that they are reading all these stories about the Bakken Bonanza, decreased consumption, Saudi increasing output, Chinese slow-down, European slow-down, and Iran sabre-rattling dropping out of the headlines.

But . . . they net effect may be the same. Some of those things are indicators of a recession (decreased consumption, Chinese & European slow-down). So they may be accurate predicting a recession even if it was unintentional.

I see that the news today is of another weak month of job growth. That makes three in a row. Even if our strange way of counting unemployment doesn't indicate a problem, perhaps the oil price signals a problem.

Chart is from above linked CNN article, saying that 125,000 new jobs are needed each month to keep up with population growth.

Chart is from above linked CNN article, saying that 125,000 new jobs are needed each month to keep up with population growth.

Perhaps the U.S. could become a net exporter of "discouraged workers". This would not only take care of the jobs problem, but would reduce expenditures on unemployment insurance and food stamps, and surely improve our foreign trade deficit. Now... all we need to do is find a country that actually wants "discouraged workers".


If we were rich enough, we could build pyramids or cathedrals or put up stone monuments with the discouraged workers.

I've always mused that ancient civilizations had enough energy to build huge pyramids and stone structures by hand (Egypt, Mayans, Incas), something that today's equivalent on a per-capita basis would throw us over the edge financially. And they didn't even have fossil fuels back then, but they did have slaves (slaves need lots of energy too in the form of food). Since today most of us are slaves as well (we just have modern technology to make it a more comfortable slavery), this goes to show that our current financial problems have more to do with extreme wealth disparity between rich and poor than a fundamental lack of energy (as of yet ... we're getting there). I never stop getting a kick out of the right wingers who have somehow managed to convince themselves that the way to solve deficits is to decrease taxes to the rich! They believe that they create wealth by hoarding money, and that by investing it into their corrupt pet projects they will stimulate economic activity to a degree greater than the tax breaks. Just unleash the "productive" capacity of the free market! And then they argue that deregulating everything in the name of "free markets" is going to solve the problem of complete corruption of the system whereby private banks have attained ownership of the political and judicial systems. Listen to this speech from Ronald Reagan as an example of this warped interpretation of democracy:


“Those who do work are denied a fair return for their labor by a tax system which penalizes successful achievement and keeps us from maintaining full productivity. But great as our tax burden is, it has not kept pace with public spending. For decades we have piled deficit upon deficit, mortgaging our future and our children's future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals.”
“In this present crisis, government is not the solution to our problem; government is the problem.”
“From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else?”
“If we look to the answer as to why for so many years we achieved so much, prospered as no other people on Earth, it was because here in this land we unleashed the energy and individual genius of man to a greater extent than has ever been done before. Freedom and the dignity of the individual have been more available and assured here than in any other place on Earth. The price for this freedom at times has been high, but we have never been unwilling to pay that price.”
“As for the enemies of freedom, those who are potential adversaries, they will be reminded that peace is the highest aspiration of the American people. We will negotiate for it, sacrifice for it; we will not surrender for it, now or ever.”

The scary part is, as evidenced by the comments below that video, most Americans (and I include Canadians in this) still believe this garbage. That, above everything else, is why I have such a bleak view of the future because although technically we may be able to pull off a transition to renewables given our remaining fossil fuels, we won't actually do it because so few people really understand the problem. Sorry Ronny, but the "unleashed energy" you refer to came from under the ground, not from people! WTH is "productivity" Ronny? Can you answer that?

And just watch a Council of Foreign Relations talk and you'll see them all patting themselves on the back about how many trillions of $ they made, as if they "created" that wealth. Typical ruling oligarchy, complete with self-glorifying delusions of grandeur without a shred of understanding of how true wealth is generated, i.e. from taking energy and materials out of the ground and transforming them into goods. Wealth creation does not come from manipulating the monetary and financial systems to steal the fruits of other peoples' labour!

I don't think a transition to renewables is possible. There are too much part of the fossil fuel system. We are talking about a transition to doing without, like they did back when the pyramids and the cathedrals were build. We could handle the situation now too, if we had a lot fewer people.

But doesn't that view bother you? If you don't think a transition to renewables is possible then the alternative is collapse of humanity.

I think a transition is possible but it will take a lot of time, it will involve continuing to use fossil fuels for decades (if not centuries), it will involve nuclear power, and it will involve being more efficient and living with less.

The knowledge that we have does not go away with fossil fuels. When the pressure is on, we will change our ways and use the remaining resources to 'pay for' the transition to renewables. We just are not doing it yet because we don't yet sufficiently appreciate the threat. There are hundreds of years of coal we are told. At least a 100 years of natural gas! Drill here, drill now, pay less! We have to go through some serious suffering before people take it seriously. $150/barrel won't do it.

Yes, for example, FACEBOOK, people are whispering that it isn't such a great stock, the numbers of new members aren't going up, people are letting their accounts languish....
That is this thing called conservation. People (in greater and greater numbers)realize that it's wasteful to sit there uploading photos and telling the world they are hanging new curtains and their dog got his shots.

The world changes and already TV is kind of passe. I don't have one. You don't need a newspaper printed on paper. You can do with a lot less, and just focus on food, and even there, 3 balls of uncooked dough, a few green leaves, and maybe a few sweet potatoes, even raw, would keep you alive. For years.

You might not need a big-time executive job to just get these three balls of dough and 3 sweet potatoes. You definitely won't need a pool, or even maybe a car. Or even shoes.Will you need a hairbrush? How about lipstick....hmmm.

OK, so you might not live to 80 or 90. You might be weak and make it only to 65.
But life is still to be enjoyed.

There is something virtuous about people knowing how much is there, and how much they can expect---that is the sun. There is something unvirtuous about oil, such a hidden resource, rife with rumors, lies, jackpots, booms and busts. Oil is guaranteed to make you look life from an angle skewed by fear, meaningless competition, vanity, boastfulness and a sense of artificial and conceited entitlement.

But as oil drains away, indeed I believe that the firm sense that what you see is now what you get (no more $700,000 2 bedroom suburban shacks, $2000 Fendi bags) will act as a tremendous balm for people, enabling them to see materials, goods, and resources for correct valuations that will be more and more stable and more and more fair and true. And that will help to set humanity on a better track...

I am afraid I am a person who looks at the numbers and tells things the way I see them. Everything I can see says that we don't have good solutions, certainly for humanity as a whole. There may be a group of people who survive, but it is hard to see all 7 billion making it.

I don't know how much knowledge we will keep without fossil fuels. Our computerized knowledge is likely to be lost pretty quickly. Even knowledge on books disappears in 500 or 1000 years, if it isn't very well taken care of. For most of humans' existence on earth, we lived as hunter-gatherers. If we go back to being hunter gatherers, (probably not next year, but maybe 500 years from now) I expect our knowledge won't last very long.

Forward the Foundation!

If we go back to being hunter gatherers, (probably not next year, but maybe 500 years from now) I expect our knowledge won't last very long.

500 years from now! Wow, you are an optimist. I would guess more like 50 years from now. Of course we are all just guessing but I see no way we can hold out for longer than that. And we will likely go from deep overshoot to deep undershoot. The reason will be that we will strip the earth of all edible animals on the way down. There will be nothing left for the survivors.

Ron P.

You know I used to believe in the ability of renewables and technology to be able to keep humanity going forward sustainably, because technically it may be possible. But I am now appreciating that given the time frames available and the mentality of the average person and leader, and what kind of collapse would have to happen to convince them otherwise, it's just not going to happen. By the time we reach collapse to convince everyone, it's too late.

I still plan to do some calculations though to put it into perspective. Since I'm still fairly young, I envision it happening in my lifetime so I'd like to be one of the survivors. Luckily, I am good at wilderness survival and I live in a country with lots of wilderness.

I think we are in the midst of the collapse. The collapse just isn't that big of a deal and we adapt. Within a span of 10 years, the price of oil went up 5X. Yeah, that sucks. So we reallocate spending, change some behaviors, and move on. How many stories have we seen about young people driving less and not caring about cars so much? They get it intuitively. I think us older people are so used to things being as they are that we are more worried about things changing than they are.

See, I think that we will change as circumstances force us to change. We are burning up 2 mbpd less than we were a fews year back. Are people happy about it? No. Are we getting by? Yes.

As things get worse, we will be forced to adapt and the market will adjust. Solar PV is reasonably cheap right now and if FF prices go up, solar will be cheaper so people will buy them. Yes, they are intermittent so we will work on storage technologies. But lets assume we totally fail at storage . . . so we only have lots of power during daylight hours. Well, several people on TOD here live that way as is (wimbi, Ghung, etc.).

Nuclear fission will gain in popularity. Yeah, I know a lot of people won't want to hear that. But when push comes to shove, that is what the people are going to demand.

I think people will continue on after fossil fuels. Yes, things will be harder. But the technology we already have is pretty damn good . . . we just don't use it much because fossil fuels are cheaper. And we will continue innovating between now & then. So basically, we will all eventually be forced to shift from the current lifestyle to a lower standard of living that operates using renewable energy available. Well, we lived for hundreds of thousands of years before we had all this stuff, we can do it again. But this time we are armed with a massive amount of scientific and engineering knowledge. And that knowledge will never truly go away. The printing press was invented long before we started using oil & natural gas.

We are pretty tough lot when the time comes. We suffered droughts, the plague, two world-wars, etc. But we kept right on going. Will there be some suffering as fossil fuels deplete? Yes, I definitely believe so. But we will we go back to being hunter-gatherers? No. We are amazingly spoiled these days and people just don't damn appreciate it. The very poor in the USA live lives that royalty from a few hundred years ago could only dream of. If we were to all have half our standard of living go away, we would be just fine.

I know . . . lots of people probably think I'm sounding like some Julian Simon utopian. But that is not true at all. I'm not depending on any magical solution. I think we already have the solutions. With no subsidy, you can buy an EV for less than $30K (only $15K more than comparable a gas car). Yeah, the range is limited to so you can't drive to your summer cabin . . . boo-hoo. But you'll be able to drive back & forth to work, drop kids at school, go buy groceries. So if everyone did that, oil consumption would plummet massively. The remaining oil could then be allocated to the high priority stuff. So I just really don't understand the doomerism in the short term. We are not going to be all dropping dead . . . we are just going to be driving smaller cars that run on electricity, we are not going to jet off to far places for vacation, we will not eat fruit shipped in from Southern hemisphere. Look at Africa . . . they live at a much lower standard of living AND THEY ARE GROWING! So we are gonna be alright.

Perhaps you are right. No doubt, human beings are good at adapting. But I think the human population will have to be seriously downscaled, and we will no doubt have to restructure the whole of agriculture so that more of the biomass becomes nutrients for the soil with less dependence on artificial stimuli. I am also quite sure that humans can learn to be extremely conservative with their energy usage at the same time our technology uses less energy.

I like to take the example of a computer. You can buy a top of the line gaming computer which consumes 400 watts - now there is a lot of energy you need access to for using it. But there are computers running on a few watts like the Raspberry Pi - which can be used for 90% of peoples tasks. This computer you could run by winding up generator by hand. The same with televisions, a modern LED TV uses a fraction of the power than a typical cathode one, and I am quite sure serious improvements could be done there as well, perhaps with OLED. So even high tech can coexist with low energy usage in these scenarios.

Transport is the big "oil sucker" these days and there is just endless opportunities of improvement there, everything from less globalism, to reducing transportation needs. There is just an immense amount of unnecessary trips being made by the average person. If you plan your transportation needs AND use an EV you will cut down energy usage immensely. Its just a matter of accepting a new culture of energy reduction, and I can see our coming generation being able to adapt and form this new culture if we nudge them in the right direction.

But as many people have commented, our extraction rate of resources is way too high and anything finite will come to and end sooner or later no matter how much recycling you do. I think an important part of the puzzle here is to seriously reduce the amount of "things" made and our rate of replacement. Atm there is a fierce competition between companies to manufacture tons of different variations of gadgets, and many people regard these obsolete within a year. If companies were forced to think longevity and e.g. 10 year guarantees - we could perhaps enforce a slower pace of new technology, making it profitable to fix things instead of replacing it all the time. Atm the cost of fixing stuff is just completely bonkers even though the part that needs to be replaced might cost $1, simply because the guy with the knowledge to fix it take $100 an hour. This kind of capitalism culture severely hampers our ability to repair and be satisfied with stuff that works well enough instead of constantly having the latest gadget.

Yet less than four years prior to that Reagan travesty you linked to, we had a president who told the truth about North America's energy situation.


Americans couldn't handle it and elected an actor to blow smoke up their butts for eight years: "Turn up the thermostats, buy the biggest car you can and go shopping, it's morning in America!"

HARM - Actually just this morning there was such a report on NPR. In that case is was N. Korea exporting "discouraged workers" to China. Turns out with the growing Chinese economy they have began running short of workers to do the really crappy work for little pay. The Korean workers didn't sound to be much better then slaves. And of what they are paid the NK govt keeps most of it. So a great solution: more hard foreign currency and a slightly smaller population to deal with. Wonder if we could do a similar trade with Canada along those lines. I've got some deadbeat siblings I would mind sending north...way, way north.

Perhaps the U.S. could become a net exporter of "discouraged workers".

Well we used to be a big importer of them from our southern border but ever since domestic production surged, imports have slowed to a crawl.

Law of supply and demand: When supply go up, price go down. Is that broken?

There is two ways that the law of supply and demand works:

1. Supply goes up, demand stays the same, price goes down.

2. Supply stays about the same, demand goes down, price goes down.

What we are dealing with is the second of these scenarios right now.

The second scenario is not well understood. "Demand" really means the ability to pay for oil products. People who have been laid off from work lack this ability. So recession means lower "demand" and thus lower prices.

In a similar fashion, I would say one should not be very cheerful at the news of negative interest rates... zero or below hearlds depression and deflation, both quite harmful to the hoi poloi. But, Bain Capital would love it!


We keep reading articles claiming that world oil production will grow by some large amount by some future date

In May, we had the IMF calculating - on past trends - that an oil price of US180 in 2021 would be needed to get an additional 8 mb/d over this period.

IMF team warns of global economy entering uncharted territory with US$ 180 a barrel in 2021

These are the fiscal break even oil prices October 2011, also from the IMF


This is the image that Matt shows in his link (from the IMF). Thanks!

It is originally form this pdf: Middle East and Central Asia Regional Outlook

Even if we don't know exact numbers, we know that some break even oil prices aren't too far below recent prices--the high prices have been what has helped keep production up.

In some cases, the issue isn't that a country isn't profitable, it is that a particular type of extraction that may no longer profitable--for example, some types of enhanced oil recovery, which will affect wells in a number of places at the same time.

Yeah, I'd say that all those numbers are kinda made up. They are just guesses on what the various countries need to meet their government budgets, not what is needed to extract oil. So they can always cut their government budgets or borrow money (which many of them could easily do). Really now . . . it is not like those mid-East countries drilling conventional oil (and mostly just pumping oil from old fields) have extraction costs higher than the tar sands of Canada!

Since there hasn't been any news about mid east countries liquidating their sovereign wealth funds and taxing the billionaire sheiks that have been skimming money from oil sales for decades, it really looks more like crying all the way to the bank. Claiming the need for high oil prices to balance budgets and pointing the finger at potential arab spring consequences is a convenient way of providing political cover for themselves and western politicians.

Recycling of petrodollars as consumption eliminates oil-induced debt.

As government spending by oil exporters rises, and the oil price required for a balanced budget rises, so does petrodollar recycling.

If oil prices are currently at the breakeven point, oil importers aren't accumulating debt.

This is a very good thing for oil importers...

If oil prices track global GDP downwards to maintain roughly constant affordability perhaps this is another example of the phenomenon of homeostasis
I follows that the last barrel of oil will be cheap, or at least no higher than production cost. A more familiar example could be hypothermia whereby the body doesn't waste energy on shivering but simply fades to a near fatal state. It requires an outside observer to intervene such as supplying warmth.

I suggest like the frozen mountain climber the fossil fuel industry is largely incapable of recognising its own problems, in this case low prices and negative effects like CO2. The external observer in this case is TOD. The difference is that we probably lost a few patients working out the right treatment for hypothermia. In the case of the world system there is only one patient and maybe only one good chance to get it right.

I think the problem is that the cost of production of the newly developed oil is tending toward levels people can't afford. So that sets a high downside to prices, which causes a problem. This is related to declining Energy Return on Energy Invested (EROEI). There is still (theoretically) plenty of oil there. It is just of a low grade, or in such a poor location, that the cost of getting it our is higher than the benefit it will provide to society.

Gail, thanks for this insightful article. Your observation, that
"a growth (or drop) in energy use seems to proceed a growth (or drop) in GDP"
goes well in line with what I expected concerning the effect of an oil shortage for the economical system:
According to several studies rising oil prices will have their strongest effects on the poor people - be it in poor countries or the poor population of rich countries like the US. Since about 2000 this has probably aggravated in many countries, where the poor have become poorer in real terms (like in the US or in several European countries). Thus, a price rise has a quite quick and direct effect on the purchase power of the poor, which reduce their consumption of oil (including all goods that depend directly or indirectly on oil). However the effects on the overall economy may be dampened, as in many countries (e. g. the US, Britain, Ireland, Spain) investments as well as consumption were supported by credits - until it finally turned out that these credits were funamentally unsustainable, which lead to the "finance" crisis, thich popped up much later.
So you may be right that oil consumption might be a good early indicator of the overall economy.

In addition, oil money sent to oil exporting countries is likely to be spent within those economies, rather than being reinvested in the oil importing country that the funds came from.

If the oil exporting country gets new income, that has to be spent outside the country, or else it will just cause inflation (and no new consumption, as domestic industry doesn't have additional production to sell). They either have to spend it on imports, or lend it back to oil exporters.

Recycling of petrodollars as consumption eliminates oil-induced debt.

As government spending by oil exporters rises, and the oil price required for a balanced budget rises, so does petrodollar recycling.

If oil prices are currently at the breakeven point, oil importers aren't accumulating debt.

This is good news for oil exporters.
the United States, and Japan spent a little over $1 trillion dollars in oil imports in 2011–roughly the same amount as in 2008. Governments have been running up huge deficits and have been keeping interest rates very low to cover up this damage.

That doesn't really make sense.

1) OECD countries have been importing oil for a long time - only a part of these import bills are new.

2) These deficits are much larger than the import bills.

3) If oil exporters have raised their spending to pacify their citizens, then they must be importing more, and not lending to oil importers. That would raise exports, which would raise GDP and reduce deficits. That means that none (or very little) of these import bills are causing debt or deficits.
If we look at three-year average growth rates for the PIIGS, we find that there is a close correlation between oil growth, energy growth, and GDP growth.

If we look at the chart, we see that's not true. Oil consumption started falling sharply well before PIIGS economies started to contract. That suggests people and companies simply became more efficient. Recessions mean reduced economic activity which can also be expected to reduce oil consumption, so if we observe falling oil consumption we might guess that economic activity is falling, but to assume that falling oil consumption caused recession substantially later makes no sense.

In other words, oil consumption is a coincident economic indicator, not a leading indicator.