Oh All Right (or Friday Open Thread 2) (from a conference no less...)

have at it... :)
JD posted in the last thread something which deserves further discussion, and pardon my lack of blog talent in quoting the fellow:

"Hate to shine the sun on your funeral procession, but you left out the most surprising bit:
Mr Simmons said, however, that there was no need to fear a recession.
He pointed out that higher oil prices meant more revenue for producing countries, which in turn would help to fuel global growth.

Ain't that something? You guys are all stressing out about depression, nuclear war etc. etc. And MATT SIMMONS says we don't even need to worry about a recession!


My initial response is that this isn't good.  It's a really, really bad thing.  I agree strongly with Matt.

Relative prices are the mechanism by which markets adjust the behavior of producers and consumers.  If these are obliterated by financial innovations like ours, we're in even bigger trouble if peak oil's really here.

If we manage to proceed to grow at a rapid clip despite high oil consumption and depletion because our financial innovations allow us to ignore the market signals, I fail to see how that's beneficial and not, well, horrific.

Oil and commodity movements this week really rattled me.  I'm starting to genuinely get worried.  Peak Oil is fine to talk about in an abstract sense, but when you're faced with what it means for your friends, world, and own survival, it's surreal and horrific.

If higher oil prices fuel global growth, and global growth creates increased demand for oil, increased demand creates higher oil prices.....
If such a feedback loop (inflationary spiral ?) really exists, the crash when it comes will be even worse than many have thought.  Along the way there will be terrific casualties among those outwith the loop.  
My thinking up till now was that as prices increase, demand would be suppressed, giving more time to implement mitigation strategies.  What Simmons describes is nightmarish in that the "movers and shakers" will continue reap ever increasing profits and have no incentive to push for behavioural change.

Surreal and Horrific.  exactly.

This is why I have always thought Simmons was an optimist.  He's a pessimist when it comes to how much oil we have left, but an optimist about the results.  Like many financial types, he thinks we'll have a rough ten years or so, then continue with the infinite-growth Ponzi scheme we call the global economy.  Or at least, he thinks this is a possibility.  

I think many of these financial types don't fully realize that natural resources are the base of the economy - and always will be.  Like those who thought the dot-com boom meant that earnings didn't matter any more, web clicks did.  It was a "new economy," not dependent on producing anything.  We all know how that turned out.  We are not going to continue the Ponzi scheme by selling each other insurance.  

I think this is actually the most pessimistic thing I've heard him say.

Let's play a thought experiment. I'll leave the forex out because it's actually kinda irrelevant in this case due to the pegs.  This is a little complex, so bear with me.

  1.  U.S. Consumer desperately wants gas.  He's already pawned all the watches he owns, so he resorts to puttin' the gas on the credit card.  Plenty of anecdotes about this so far.  Some bank somewhere finances the purchase, and he's in debt, but now he can go fast.

  2.  Purchase made, the money flows to somewhere in the oil producing country's coffers.  These countries almost all peg their currencies to the dollar, so there's no counterbalance here.

  3.  They gotta do something with the dollars.  They can either buy American goods -- and you know how popular Dress Barn is in Saudi Arabia, except we don't even make the stuff in there -- or American securities, mostly stock and bonds.  They can exchange it for another currency, i.e. euros, but then the person who just bought the dollars from them has the same dilemma and solutions.  Someone, and usually the oil producers, choose to buy stock and bonds instead, usually through London custodial accounts because of various geopolitical nonsense.

  4.  The purchase of the securities finances the American economy.  When I buy a bond from you, you're given dollars now for a future I.O.U. to deliver dollars.  The Americans are given their dollars back, to buy   Credit card debt actually works this way too, through the miracle called securitization: issuing banks will aggregate the debt of a bunch of consumers and sell it off.  Foreign financers may purchase these securities directly, essentially writing off the credit card debt of consumers in exchange for more I.O.U.'s, or they may buy more conservative things which just frees up other money for credit card debt.

  5.  The bank that extended you the credit in whatever form originally now has money and debt on its books.  Because we have a fractional reserve banking system, they can make many loans to consumers against this money.  The amount of money grows.

  6.  U.S. Consumer desperately wants gas.  He's already pawned all the watches he owns, so he resorts to puttin' the gas on the credit card.  He can go deeper into debt because the banks are desperate to make more loans due to all the cash on their books, and he can go fast again.

Normally there would be a check or balance here somewhere, but there may be no positive feedback due to our sophisticated financial situation.  Currencies are supposed to adjust to make oil more expensive, but they're pegged.  The economy's supposed to slow down.  The banks are supposed to get less eager to let someone go deeper into debt, but they don't actually own this debt; the purchaser of the securitized credit card loans does.  We're supposed to stop going into debt, but we're Americans, damn it.  The security purchaser buys a CDS to insure themselves, and away we go.

This means that even as things get dramatically worse from a supply/demand standpoint, the normal checks on consumption such as, oh, price, don't exist in America.  America's the consumer for a world that doesn't have any demand of its own, so everyone's happy to see us walk in the door itching for another hit of oil, not just the oil producers.  We use it to buy cheap Chinese goods at Wal-Mart, after all.

If it weren't for this positive feedback, the money drained from the U.S. economy might've been enough to already slow our consumption.  So with these constraints, how do things end?  3 possibilities.

  1.  The dollar collapses under all this weight, dramatically increasing the price of gas, killing the owners of the securities and U.S. debt, and putting the U.S. economy on its back;
  2.  Consumers look at their monthly income, and say, "This is nuts.  I can't keep driving to work to drive because I'm losing money in the process."  They stop going so deep into debt, and they start to gradually pay off their debt.  The U.S. enters a seriously unpleasant recession, as would those who rely on us to consume their oil and baubles, but things start to adjust.  This is the most optimistic scenario.
  3.  Lenders get kinda nervous when their best customer keeps walking through the door, so they begin to demand more and more collateral and interest for their loans.  There's a great saying:  "If you owe the bank $1,000 and you can't pay, you're in trouble.  If you owe the bank $10,000,000 and you can't pay, the bank's in trouble."  They haven't done this yet, but if they do, interest rates in America would go up, the economy would get worse, and the U.S. dollar would probably come under severe speculative attack if we tried to keep short-term rates low.  See scenario 1.
Errata: negative feedback, not positive feedback.  Also, our bank -- vast tracts of the world -- is already in deep &#@&.  They know it.  Read between the lines of the many public quotes.  There's no pleasant way out, so they're avoiding cataclysm for awhile by giving us more money in hopes that, well, "then a miracle happens" and we pay them back somehow, despite that making the fallout just a little bit worse in the end.  Alternative and fairly likely ending to story #3 would be other investors step in to buy our debt instead because the world is desperate for yield of any sort in today's flat returns world, at which point scenario #1 still happens.
They are continuing to lend in hope of your scenario #2 to take place. They are assured by the continuing tightening of the monetary policy in the recent years and all hold thumbs for that promised "soft lending".

But if the internal US forces which are naturally resisting this scenario, overcome the pressure from outside all bets are off... e.g. it would be enough in May/September the FED to miss the IR rise and all the heaven could break lose.

Actually, there are at least three perfectly reasonable interpretations that don't require that Matt Simmons not understand the importance of natural resources in the economy.  

Simmons could be pointing out that world growth will continue, and rising oil prices won't lead to a world-wide synchronized recession.  I don't know where he was when he said that, but in the context of the discussion it sounds like this was part of his remarks in Ireland.  It's plausible that high oil prices could cause a recession in the US but not in Ireland.

Explanation two could be that instead of recession, the US/developed world will have stagflation.  Sure, plenty of people will experience 'personal' recessions, but the economy as a whole will move along sufficiently to still show growth.  We've seen this happen in the 70's, so it's certainly possible.

Third, we could have outright inflation.  Note that I'm referring to a general increase in prices (Austrian school followers are free to cringe now!).  

It seems to me that which route various national economies choose depends on the steering of their central banks.  So, if for example the Fed chooses to stop raising interest rates to slow the collapse of the housing bubble, increasing oil prices may cause inflation/stagflation with no recession.  Since the last battle was a close brush with deflation, Simmons may simply be saying that IHHO the Fed is more likely to direct the USS Titanic toward inflation this time.

Very good point about financial types. What I have noticed is that there is a big split in thinking between those who have been educated in engineering or the sciences vs. those who have not.

With a few exceptions, such as those who post on TOD, lawyers just don't "get it," and neither do people educated in social sciences or [in most cases] the humanities.

People who never took the hard science classes in high school and college rarely can think and understand fundamentals as most scientists can. Psychologists see every thing as problems of individual personalities, political scientists keep blathering about polls and public opinion and so on, the sociologists are all worried about the usual issues and do not perceive the end of the oil era as being especially important compared to their pet peeves, and many journalists are gullible to the point of actually believing the crap in the government handouts.

Also, I wonder if you have noticed what I have: The engineers are gloomier than the physicists, chemists, biologists, etc.

I find it hard to have serious discussions with most economists these days, because in general--despite being very bright people--they simply do not have the education in science that would, for example, reveal the total fallacy of comparing the transition from whale oil to kerosene to the problems we now face.

An engineer should remember which roles oil (and natural gas) is specifically used for, and look for solutions to resulting price/shortage problems.

I think the gloomier folks fall into a oil == energy trap, and ("petrocollapse") think think all energy sources will go off the same cliff (think Indians and buffalo).

It ain't necessarily so....
"Psychologists see every thing as problems of individual personalities, political scientists keep blathering about polls and public opinion and so on, the sociologists are all worried about the usual issues and do not perceive the end of the oil era as being especially important compared to their pet peeves."

Speaking as a political scientist, many in the social sciences are acutely aware of peak oil, dollar hegemony, and the tenuous nature of the current system.   I come to TOD for geological and engineering insight, but frequently find that political discussions both domestic and international are pretty simplistic and misinformed.  Understanding and addressing these issues will require the input of all disciplines.

I agree that engineers and geologists and some others who post on TOD are often naive (or just plain nuts or totally ignorant) when it comes to political or social or economic issues.

Also, I agree that some social scientists (but very few) truly understand physics and other hard scientists.

Politcal scientists often do understand Hardin's Tragedy of the Commons concept, and that can give them an insight lacking to most. BTW, in my experience sociologists generally do NOT understand or accept the tragedy of the commons--and its implications.

Stimulating analysis of response by professinal background. Our educations, especially that in graduate school, seem to leave imprints on our approach to the world that can be altered only with difficulty.

Economists (Sailorman excepted?) seem to believe deeply in the substitutibiliy of resources as availability/cost change, and we have centuries of specious examples like whale oil to kerosine. A more relevant example may be Easter Island's collapse fromf the exhaustion of timber, which ended access to ocean protein  and trade and allowed erosion to destroy their agriculture.

Lawyers (Chuck Schumer) seem to value victory over truth, believing that words trump reality.

I don't have sufficient data on engineers vs. physicists, and little at all on chemists. I find society as a whole is poorly educated about science, and thus has been rejecting the evidence for global warming and man's contribution to it. The anti-science diatribes of the religious right don't support accepting science. The Bush administration's editing of NASA and land management reports to fit their preferred business conclusions, of course, are a faith-based denial of what we wish weren't true.

I think the differences in education leading to different world views are marked as early in the eleventh grade. Through the 10th grade most bright students take math (of some kind) because they have to and also have to take biology, which is often offered (if somewhat watered down) in the 10th grade. Now, what happens in the eleventh and twelfth grades?

A few, a very few kids take the hard math, chemistry, honors physics options. Most kids take the easy, the nonquantitative way.

Unless you've had chemistry and physics some calculus in high school, the chances that you will remedy these deficiencis in college are very slim. When I was in the MBA in finance program at U.C. Berkeley, every one of my profs was brilliant--millionaires and multimillionaires, every single one of them. They could all think quantitatively--but not a single one of them had what I would call even a moderately adequate science background. Possibly none of them understood or could explain the laws of thermodynamics, and all (or almost all) of them had been brainwashed by the economists to believe in the infinite ability of markets to find good substitutes for what we might be running out of in the way of resources.

Not all economists are ignorant of science, but the great majority are. On the other hand, economic historians--who often have a lot of knowledge of the history of technology and some of the history of science--do tend to understand the kinds of things we talk about on TOD quite well. Believe it or not, many (possibly most) economists despise economic historians and do not talk to them--partly because of different vocabularies, but mostly because "economics" has way more prestige than "economic history," which is viewed as a branch of the despised discipline of history.

Acadademicians mostly do not talk to people outside of their own particular departments, and this parochialism leads to invincible ignorance in all to many cases.

It also appears here that many misunderstand the difference between scientists and engineers.

Just because something is "scientifically" plausible does not mean it is engineering wise do-able.

Engineers have to deal with the messiness of the real world as opposed to the mathematical beauty of scientific theory. In the real world, signals have noise. In the real world, memory cells get hit with soft errors. In the real world, entropy rules. In the real world, materials have frailties and economic costs. So when people dream about how "they will find some other technical way of doing this" --i.e. converting coal to liquid fuel-- they are really barking up a fictious tree in a nonexistent forest. Humanity has been incredibly lucky in some respects because of the ease with which some technologies (i.e. computer chips) can be practiced. That luck is not going to appear everywhere.

Exactly right! The difference between scientific feasibility and engineering feasibility is enormous, and engineering feasibility is not business (market) feasibility. Some solutions simply don't scale, and even when they do, the time required is long and the resources required are orders of magnitude greater than for scientific demonstrations.

I recall the average length of time between a structural materials science breakthrough (metal matrix composities, carbon-carbon composites) and engineering application was measured in decades (plural).

This is the concern I raised, and which Sailorman sneered at, with respect to proposals to pour billions more into fusion research. We know so little about the scientific feasibility (it does work on the sun) that we have no idea whether a solution, even if possible, would have undesirable side effects (e.g., intolerable radioactivity of proximate materials) or how long it might take or what or how much resources such a solution might require. Not something on which to bet your mortgage payment.

I did not sneer at your concerns in regard to the problems with developing fusion energy.

My main points were

  1. If it could be made to work, then the benefits would be huge enough to justify an outlay of $100 trillion over a period of forty years.
  2. No qualified physicist that I know of has stated that fusion power cannot be made to work.
  3. Rationally, using the Laplace criterion of 50:50 probability, it makes sense to give fusion a shot even if there is a 50% chance that it fails after another forty years and $100 of trying.

Who ever said that worthwhile things were quick or cheap or easy or certain to work?
What makes you think that there is a 50:50 chance?

Where did you see me say it can't be made to work?

I don't know of anyone who can predit technology 40 years into the future.

In fact, I agree you didn't sneer at my suggestion; you made it an ad hominem attack on me.

I apologize sincerely for anything you may have perceived as an ad hominem attack. Of course "ad hominem" is a type of fallacy that I try very hard to avoid, and again, if I failed, then I'm sorry.

What I try to do is to vigorously attack what I think is fallacious reasoning (and NOT the person putting forth the line of reasoning).

The Laplace criterion says that when you do not have any good basis to predict odds from two possibilities, then go with 50:50.

Of the nuclear engineers I know (only four or five--one is mechanical now), most think that fusion can be made to work and none was outright negative--but all emphaized the huge expense and practical problems. Of the high-energy physicists I've known (more than one hundred, mostly working at Laurance Radiation Lab and Livermore, some of whom worked for decades on thermonuclear energy development) there is a consensus that thermonuclear energy will eventually be made to work, but there is disagreement as to how much progress in basic research (if any) needs to be done.

For forty years high-energy physics research has been starved for funds. No wonder we have made little progress in getting toward practical applications of thermonuclear energy.

BTW, many engineers in 1900 were sure that powered flight could not work. Many engineers on the Manhatten Project flat out gave up on problems that were then promptly solved by physicists.

Were I going on a sailing cruise, I'd rather have engineers as crew, because they are cautious and check everything and know about Murphy's Law, and they are wonderfully ingenious about fixing stuff. Were I to be on a race, I'd rather have physicists for crew, because they are ready to think outside the box and take gambles that may pay off--or may fail bigtime.

Currently, I think we are in a race.

when in a hurry, and only having time to skim threads, I always learn from your posts Don. Ahoy.
Thanks for the apology. I might have raised my objection when it happened a month or so ago, but I wasn't reading for a while.

If we're looking for good solutions, we all need to be careful about our reasoning, and to refrain from misrepresenting and from attacking each other.

Don't confuse "high energy physics," almost all of which is "elementary particle" kind of research with fusion research. The former has no possibility of contributing to successful fusion power, or much of anything else. (In fact, that was the domain of my own doctoral and early post-doctoral years of research, but I realized I wanted to study more tangible areas.)

I haven't been following fusiion research recently. There's a laser implosion version pursued mostly at LBL, I think, and there's various versions of magnetic confinement pursued in many locations. They all have huge EROEI problems, as well as scaling problems. My expectation is that it will take a very long time, an inderminately long time, to solve these and many associated materials problems. If resources were unlimited, sure, go for it. But it's not only oil that's in limited supply. (We probably do have a surplus of physicists relative to market demand, actually. (mild irony intended))

Erratum I should have said Lawrence Radiation Lab, not LBL (Lawrence Berkely Lab). Yes, the guys with the big lasers think it will work, and they shouldn't be taking the money if they didn't think so. That's laser implosion; I don't believe LRL does magnetic confinement.
In all this I wonder where I fit.  BS Physics (Minor Math), Masters of Accounting then Chemical Engineering with a BioMed emphasis.  Also read Machevelli in high school, took a tough Roman History course (where I got an A and think that I "got it" vis-a-vis the Romans), and an ongoing interest in social sciences & economics.
"respect to proposals to pour billions more into fusion research. "

Hell, we have poured hundreds of billions into trying to free Iraq, and everybody in power knew that was never going to happen, even before 1 dollar was spent.  Fusion is a much better bet, plus the money (at least some of it) would go to scientists and engineers instead of slimy defense contractors.

Amen to that.
Economics without history is nothing but a cargo cult.
It's a good thing we aren't at peak coal then, isn't it?

(The "Ponzi" thing is overworked.  Mr. Ponzi had nothing but promises.  To say that our CAT scanners, internet access, wind turbines, etc. are empty "Ponzi" promises is absurd.)

For those who are wondering, you can quote something by setting "Comment formatting" to AutoFormat or HTML Formatted and putting <blockquote> (exactly as shown) at the start, and </blockquote> at the end ... like this:

<blockquote> Hate to shine the sun on your funeral procession, but you left out the most surprising bit: Mr Simmons said, however, that there was no need to fear a recession. He pointed out that higher oil prices meant more revenue for producing countries, which in turn would help to fuel global growth. </blockquote>

Which looks like this ...

Hate to shine the sun on your funeral procession, but you left out the most surprising bit: Mr Simmons said, however, that there was no need to fear a recession. He pointed out that higher oil prices meant more revenue for producing countries, which in turn would help to fuel global growth.

Share and enjoy!

Awesome, thanks.  I'd be very appreciative if someone could add more to the "read more about it" information for AutoFormat.  I looked there, but didn't know you could mix autoformat and HTML formatted stuff -- that's great.
Yesterday I read an article about the increase in the number of American millionaires.  The most interesting part was a move away from American stock markets to foreign markets, commodities, and income property. To a certain extent the profits of foreign manufacturers are coming back to the US economy. I doubt if it's enough to prevent increasing unemployment in the US since so little of the investments create jobs in America.
IMO investors who have moved from the US stock market to foreign markets, commodities and income properties have made the proverbial jump from the frying pan into the fire.
If they moved five, four, three, two, or one years ago, they made money.
Investors who got in and out of those markets have made money, but many have got in and stayed there on the assumption that those bull markets are a long-term phenomenon. Relative values change all the time, and it doesn't make sense to chase momentum late in the trend (ie near maximum bullish consensus).

I would argue that a bear market in all those assets is right around the corner, probably led by a deflationary crash of the housing market (leading eventually to a crash of the money supply IMO). I would expect real estate to go illiquid very quickly, leaving investors who hung on for even greater profits with no way out. Commodities would be much less prone to that sort of trap, but investors would still lose money as an economy falling flat on its face knocks the supports from beneath purchasing power and therefore prices (at least temporarily).

I would consider various energy-related commodities for security of personal supply reasons, but not as an investment for most of the duration of an economic depression. Buying near the end of a depression (ie when even the perennial optimists have capitulated and the overwhelming consensus is that things can only get worse) would be a different story entirely. The same arguement would go for real estate.

Well, we have seen similar things before, but here is another demonstration of the perhaps an unwillingness to consider the oil situation a little deeper. A local news channel ran a poll and the results were overwhelming:

What do you believe is the real reason for the high cost of gasoline?

Supply is low.          26      (4%)
High consumer demand.   88      (12%)
Oil companies like the profits they are making.          
                        510     (72%)
I don't know.           22      (3%)
Other.                  66      (9%)


It was actually a reader submitted poll from the psuedonym OCRUO, standing for "oil companies ripping us off". Probably not completely impartial.

Follow the link for voter comments. They are about what you'd expect ... greed, big oil, gouging, curse you Bush/Clinton/liberals/environmentalists/fill-in-the-blank.

I don't know if it necessary to analyze this too deeply, but it is kind of a bummer.

There is a recurring "thread," if you will, here on TOD, which has to do with amazement at the stupidity and cluelessness of the American, and occasionally, the UK or some other nation, when confronted with this issue.  I'd say, when I'm not agape at the utter obtuseness of average Joe, that this is the "landscape" we find ourselves in. As the oil prices skyrocket, we should see more of this landscape come into focus. It is scary stuff indeed.

Yes, but it all leads to simple message.  

Stick it to Exxon: conserve fuel.

Might even fit on a bumper sticker.

Unfortunately, you've reached a different punchline than most of humanity and a now-famous chain letter, which advises boycott instead.  We'll see how that goes first, I guess.
Ever seen a bumber sticker effectively displayed on a bicycle? Me neither!
It is, indeed, scary.
"Man prefers to believe what he prefers to be true."
Francis Bacon

"Faced with the choice between changing one's mind, and proving that there is no need to do so, almost everybody gets busy on the proof."
John Kenneth Galbraith

Unfortunately, the Democrats seem to be seizing on the resentment of high prices demagogically rather than looking at the unpopular idea of changing our "non-negotiable" lifestyle.

Well sure - where would the average Joe have found out about the real problem, and in a forceful enough way to make him believe it?

The Democrats are just using it to try to get back in power - gee, let's all act shocked!

I blame the dinosaurs.  If only they'da stuck around longer and shat in the weeds for a few million extra years.
Nah, that would just make the peak a little higher and a little later, and the downslope would be more painful.

We needed those dinosaurs to practice permaculture. Use the Swedish toilets ... fertilize their next crop of weeds with the compost.

And don't get caught downwind when the meteor hits. <G>

The problem is that those results aren't mutually exclusive. I can assure you the oil companies like the money they are making. But that doesn't mean it isn't because of very tight supplies and high demand.


Good point

You could pick anyone of the first 3 answers and it could mean the same thing.

Would you rather have

A dollar bill?

A clean new crisp dollar bill?

Or 4 quarters?

We know that 90% would say I want a new dollar bill!. But it doesn't mean much.

I wouldn't be too mad at the average Joe American.  Think about where you were before you became "peak aware."  Before you knew about Hubbert, depletion, checked all the PO websites every day, and followed every bit of news about oil religiously.  People have to find an explanation for the phenomena of high oil prices that works within their understanding of the world and PO is currently outside of that understanding.  I would blame the politicisns though for not explaining it to them, but it seems that PO is outside the understanding of the vast majority of politicians as well
I were before becomming peak oil aware following most of the news in my country regarding the state of our electricity infrastructure, the investment trends and the issues around nuclear power and global warming. I might however be slightly off the local average...

Peak oil has changed the details of my personal priorities and it is an intresting new issue for me but it has not changed my life or what I hope to accomplish.

The piece of the pussle I miss most right now is good historical data and accounts of personal experiences from the oil chocks in the 70:ties.

My favorite editorial cartoon on the subject shows a muscle-bound American, filling up a huge SUV, veins popping in his forehead, yelling, "If I could find out who is responsible for these gas prices I'd wring his neck!"
More bad news: PEAK MIND.

Today's (Fri) WSJ Science Journal informs us that mental exercise fails to postpone mental decline. The decline is greater after the exercise stops, putting you back where you would have been.

It's kind of like drilling more wells -- there's only so much there. Another analogy: drooling may be the mental equivalent of flaring -- this would be confirmed if neurons were found in drool.

Bottom line: pre-peak TODders, linearize while ye may.

Please keep any replies short and simple.

Does reading TOD count as "mental exercise"?
If it is considered being a "mental couch potato", I have been in a decline for close to a year.
Since my response to Keithster100 is buried deep in that other thread, and I spent a few minutes working on it, I shall repost it here:

Oil and natural gas are fundamental to our lives because they were always cheap and easy to use. As these resources become more expensive due to scarcity, we have an opportunity to use replacements. These replacements vary from country to country but here are the ones in the country I know best, the USA:

Yet both oil and natural gas are major inputs into the ethanol process. Almost every ethanol plant in the U.S. is heavily dependent upon natural gas. As it becomes more expensive, so does ethanol. Switch to coal, you say? That will take capital and time, and will mean ethanol loses its "green" distinction. I imagine there will be even more people coming out against ethanol when it helps accelerate global warming.

Ethanol already displaces ~3% of gas in the US but this can easily double every few years.

I checked the link, and didn't see the calculations. Can you reproduce them here? First of all, at 4 billion gallons a year, that is 1.85% of the energy value of our annual gasoline consumption. Furthermore, a tremendous amount of natural gas was consumed in the making of ethanol. As I showed in this essay:


It takes 6 gallons of ethanol to net the energy content in 1 gallon of gasoline because of all the energy lost in making it. Similar calculations have shown the same:


So, in reality, 4 billion gallons of ethanol nets to about creation of the energy value of 0.5% of our annual gasoline consumption. Furthermore, if we used the entire ethanol crop for ethanol, it could displace about 6% of our nation's gasoline consumption:


You say it is heavily subsidized? So are oil and gas, the difference is ethanol is getting cheaper to make and oil and gas are getting more expensive

If oil and gas are subsidized, then those subsidies benefit ethanol as well. Ethanol benefits from direct subsidies and corn subsidies also. I have calculated that ethanol is subsidized at the rate of $4.00 to displace 1 gallon of gasoline. The zfacts post above says it is over $7.87 when the corn subsidies are added in. No other alternative energy source comes close to this level of pork.

That's probably enough for now.


Thanks for the information about ethonal and its true costs. Here in Iowa, most politicians are jumping all over the ethanol bandwagon without really understanding its costs..

I'll forward this information on to each of the governors campaigns to see their reactions..

Typo alert:

Furthermore, if we used the entire ethanol crop for ethanol, it could displace about 6% of our nation's gasoline consumption:

Should of course read "entire corn crop".


As me old chemistry professor once said, and I believe it's still true, even at current prices: "The cheapest way to make ethanol is to take ethylene from the petrochemical industry, and catalytically add the elements of water."

You bypass all those messy steps with the tractor, and fermentation, and the distillery.

I thought people here would be interested in some of these links coming out of Canada this week.

#1:  TD economists warn of commodity price "correction"... down to $55 by the end of 2006,  "a level which the authors say is still $10 US a barrel higher than market fundamentals would predict."

So they in other words they think that 50% of the current price is pure speculation on "geopolitical" events?  Hmm..

#2:  The G7 wants more oil production to increase... and right now please!  And at the same time, everyone else should decrease their consumption.

#3:  Canada's Finance Minister says "Canada is doing it's part" to increase oil supply.

Flaherty said he expects "some upward pressure on prices for some time to come," while noting investments in the Alberta oil sands will hit some $96 billion over the next 10 years.
Production is expected to rise from 1.2 million barrels a day to three million by 2020.

3 million barrels per day by 2020.  The question is, who's going to get the majority of that oil.. the "old" friends or "new" friends?

#1:  TD economists warn of commodity price "correction"... down to $55 by the end of 2006,  "a level which the authors say is still $10 US a barrel higher than market fundamentals would predict."

So they in other words they think that 50% of the current price is pure speculation on "geopolitical" events?  Hmm..

I don't know about 50%, but a lot of the money driving prices higher is a speculative rush to get into the market. I think prices will correct back down $10-15 by the end of the year, presuming no war with Iran. When I hear people who don't know anything about oil jumping into the market, I am reminded of the great rush into tech stocks. This is somewhat of a different situation, in that there is a supply/demand problem at the moment. But the speculators are really pushing the price.


I've always been puzzled by the idea that speculators affect the end price.

Assuming no trader would like to be responsible for supplying or receiving 42,000 gallons of gasoline, the close price of the last day of a contract's trading should approximate what a real seller and real consumer would have made the deal for in a perfect market.  If it doesn't, a trader loses a lot of money.

Seems to me that speculators just take advantage of the market being sticky and imperfect.  Do you have any suggestion for how speculation would increase the price, in this light?

There is a lot of money flowing into the commodities markets, and particularly oil. Agreed? Do you also agree that this money will cause prices to spiral upward? In the same way, if everyone wants to jump into the same stock or the same sector, they are going to drive prices higher.

Now, the close price of the last day will be affected by the close price of the previous day, and the one before that, right? If those prices have been driven higher due to a lot of money flowing into the market, they are going to affect the closing price. I am not going to sell my contract on the closing day for $60 if it was going for $70 on the previous day - even if the buyer is going to take delivery.

If there were only real buyers and real sellers here, then there would be far fewer dollars chasing these prices higher. Yeah, I can see where speculation affects closing prices.


That's a very strong case.  You could further suggest that contango in this case isn't so much bullish for underlying demand, but instead a symptom of speculation.

I'd argue for the devil by saying that commodities are fundamentally different from stocks because they're regularly consumed and destroyed by purchasers.  You're lucky if a company ever buys back and tears up shares it issues.

If holders of contracts chose instead to accept delivery and wait until they could find someone to grab their CLN06 at $70 instead of $60, that'd just exacerbate a supply glut that was created by speculation.  Given the immense size and liquidity of the oil markets, I'd imagine that'd unwind soon.

Another point I'd make is that trading in late-month contracts(e.g. CLZ12) is pretty thin, and is lower than forward months.  The market doesn't fully buy peak oil yet, and is thus not profiting from it.

Frankly, we won't know until this period is in the rear view mirror -- and with any luck, we'll be moving forward, so it'll disappear.  If contango lasts for more than 12 months, I'm ready to freak.

I don't think it's meaningful to compare the present flow of money into oil stocks to the great rush into tech stocks in the late 90s. With the 90s techs, you had stocks drowning in red ink being valued by their future earnings at preposterous price/sales ratios whereas now with the oils, you have stocks drowning in current cash flows with vastly below market average price/earnings and price/sales valuations (despite vastly higher than average revenue and earnings growth rates) and the majority of Wall Street analyst opinion saying oil is going down to mid 50s in a year or two. These stocks are hardly the grossly overvalued tech bubble cases where overhyped stocks were climbing on "air". With the techs, you had the classic boom/bust market mechanics doing their thing and bringing a huge new supply of technology solutions to the market whereas with peakoil, there will be no huge new supply of easy oil coming from Mars.
Like I said, there are certainly significant elements of difference. And I do think a lot of oil company stocks are undervalued. But there is a speculative element right now in the price of oil itself. The comparison is money flowing into investments they don't understand very well simply because they are performing well at the moment.


There is indeed a lot of mindless money being tossed into all things oil now. It's called momentum investing, and they simply jump on whatever train has some speed without trying to figure out how far it will go or why. You will always have this spastic element in the markets and it is why all large scale, worthwhile bull markets have sharp corrections. But trying to time and predict these short term movements is usually no better than just holding on for the big ride. Figuring out the fear or speculation premium on oil right now, or ever, is really pointless. There will always be a geopolitical premium on the remaining oil. If all the Arabs' mood was turned to being sweet, amiable, and tolerant and Chavez made Venezeula the 51st state, oil would be pegged $X cheaper. And such sweetness and price would last maybe 2 nanoseconds. The fact of the matter is that all stocks, commodities, everything traded in a free market never really trades at exactly what the current monetary fundamentals say it should. It's always the current money valuation +/- this and that "speculation" about the outlook. The experts who are now saying oil will go down to $55 in a year once the "speculations" are cleaned up are the same ones who, in mid '05 with oil at $45, were saying this "spike" over $40 would end and oil would be $35 now. They were wrong then and they are probably wrong now.
$96 billion over ten years - wow.  All that money for what amounts to measly 120,000 bpd annual increases in production capacity?  All those billions and billions, in other words, for added amounts of oil that will be negligible in stemming the 3%,5%,8% worldwide annual decline rates in conventional oil that we will soon be facing?
It hardly makes any sense for me either. 96 billion for 1.2 mln.bpd translates into 80K per bpd. If we compare that to electricity - this would be the equivelent of $1140 per kilowatt - with the implicit fallacy that I am comparing a primary energy source (oil) with a much higher quality output product (electricity).

For comparison the russians are building nuclear power stations for well under $1500 per kW! (we are building them for ~2000$) And the nukes do not require natural gas, vast amounts of water or spoiled landscapes to operate... this thing starts looking like a madness or at least pretty close to it.

For what it is worth, CNN is rerunning "We were warned" this weekend.

There is a place on CNN's website, where people give feedback on how they feel about gas prices:


There were a handful of people who seem sane, but the vast majority were whiners.

From the CNN article:

I am a law student, and I find it highly ridiculous that I now spend the bulk of the money that I have set aside for education expenditures for gas money. I live in a rural area with no public transportation. Gasoline prices here are $2.99 and have risen over 80 cents in the past month. Something must be done about this travesty now! How much longer are Americans going to sit back and take this? Imagine the statement it would make if as many as 1 million angry Americans converged on the Washington Mall or elsewhere, carrying red gas cans? Imagine the statement that would make. The government needs to act now to stabilize the economy or gas prices amid this grievous price gouging. We need price ceilings, tax breaks, or some form of government regulation. The Federal excise taxes should be temporarily suspended, and instances of price gouging investigated from the top down -- start with the CEOs. Enough is enough.
Chris Conklin, Grundy, Virginia

Egh..  I'm sure we'll be seeing late night advertisements for Chris Conklin, Personal Injury Attorney.  

The thought of a "Million Motorists March" sickens me; to link the consumptive and short-sighted mob mentality of Joe "SUV" Public with the civil rights struggle is indefensible.

Perhaps oil is the new wheat, but it begs the question; Who's the new Madame Defarge?

It's got to be confusing, though, to the avg. person being told constantly that there is no fundamental problem w/ supply.  

They are being told that it's not good for us to be dependent on foreign oil, but for geopolitical reasons (still not broaching fundamental supply restrictions).

So, if there's no problem w/ supply, what other explanation do they have besides fear of what may happen w/ ME nations, reports of enormous profits/huge tax breaks/huge CEO packages?

As others have discussed, I'm curious about how oil companies will respond to this directed hostility over this next while, when they have put aside all explanations of supply...

Glad to see you back.

Hey, we have not yet even stormed the Bastille, much less set up public executions for cable TV.

Notice that lawyers and law students tend to think exactly like the one you quoted. "I have a problem. Therefore, I will sue somebody with deep pockets or lobby to change the law to benefit myself. Life is a zero-sum game, and that means that if I'm worse off, the only possible explanation is that somebody is ripping me off."

Alternatively: "Fork their ass; I'll get MY gas!"

In other words, law school is essentially an education for sophistic rather than honest and fair-minded reasoning.

Every problem looks like a "cause of action" (a lawsuit) when your only hammer is a sheet of pleading and complaint paper. ;-)

right click and view image to see bigger

The law student's reaction is pretty typical of the "primal scream" response that we will see as Americans confront the fact that we are going to have to get back to being a nation of producers, instead of a nation of consumers.  
Some interesting comments by George Ure at www.urbansurvival.com

"The world is our shoemaker, automaker, baker, gardener, and we've lost manufacturing.  The chickens come home to roost when those countries and industries stop lending us money to live a lifestyle we didn't earn through traditional American hard work."

Maybe a "Million Motorists March" would be a good first step - after all, they'd be walking!
That is the problem....they would all probably try to drive to Washington, in their SUV's. ^_^
You might get something like the UK fuel protests in 2000 (Wikipedia entry).  They, at least initially, had pretty wide public support.
...and they're running a global warming special just before it.  The 'ole one/two punch.  Despite the failings of these presentations, it is encouraging that they are popping up in the mainstream media, as most Americans will never look any deeper.  Personally, "We were warned" has provided several opportunities to discuss the PO situation with friends et. al.  Slow as it is, there is clearly a growing PO awareness among the population.
Sometime since Katrina the US (finally) reached a tipping point on Global Warming; it's now suddenly widely understood (except by the Shrub) that the climate is changing; the change is dangerous, and much of the cause is the actions of man. We haven't reached that on peak oil, not nearly, but maybe there's hope. It is an opportunity to talk about it without being ignored as a panic monger.

Or written off as a total loon.

In reality, both of these problems should be solved together.  Trying to solve one by itself really makes no sense to me.

The concern that I have is that so many people are 'addicted' to oil, that they won't give up their 'way of life' without a fight.  If there were no such thing as peak oil, I would doubt that we would solve global warming.  Peak oil will essentially   add an economic impetus to force us to deal with the problem in one way or another.  Some of the methods to deal with peak oil will help with global warming, others will hurt.  

I am reminded of one of the "Raiders of the Lost Arc" movies where the Harrison Ford character must pick the holy grail from an array of goblets.  Some character ahead of him picks the wrong one, and dies a horrible death - the guard says "you have chosen poorly".  Harrison Ford picks the right one and the guard says "you have chosen wisely".