JTRoberts recently made an important and insightful observation which I paraphrase and elaborate here.
Oil is a non-renewable resource that we extract from the earth. Oil companies are motivated by profit so they start with low-cost reservoirs and as those deplete they move to increasingly higher cost sources like water injection, offshore, tar sands, and fracking.
All economic activity depends on energy, as the laws of thermodynamics explain, and as the near perfect correlation between wealth and energy consumption confirms.
Oil is the keystone energy because oil is required to extract or capture all other forms of energy including food, coal, natural gas, wood, solar, wind, nuclear, and hydroelectric energy.
The cost of oil can be viewed as a tax on economic activity. Our economy is configured to operate profitably on about $20 per barrel oil. We have already captured most feasible energy efficiency gains making it difficult for our economy to operate profitably on oil over $20.
Thus, as the cost of extraction due to depletion of low-cost reserves pushes the price of oil above $20, the difference must be made up with debt.
At today’s $70 oil, which we burn about 96 million barrels per day, that works out to 96 * 365 * ($70-$20) = $1.8 trillion, which as predicted, is about the rate that global debt is increasing.
If you believe we have many years of oil left, then you must also believe that debt can continue to increase much faster than our income for many years without consequence on the value of money.
Money has value because we have confidence that the debt which creates our money will be repaid with interest, which can only occur when the economy grows, which can only occur when the quantity of energy we burn grows, which due to continually increasing extraction costs, can only occur when debt grows faster than the economy, which at some point will erode our confidence, which will reduce the value of money, which will reduce the amount of energy we can afford to burn, which will reduce economic activity, which will further erode our confidence in the value of money.
Do you see our energy and climate predicament?
Do you see why our leaders deny we have a problem?
Do you see why the longer we deny the problem the worse the outcome will be?
Additional Thoughts (30-Jul-2018)
Most people do not think we have an imminent oil problem because they’ve read in the news that there is 50 years or more of unconventional oil left to extract. While probably true, this fact is misleading.
What does it mean to say oil is depleted?
Depleted does not mean that all the oil is gone. Depleted means that all the oil we can afford to extract and purchase is gone. Big difference.
To be a little more precise, depleted is the point at which the cost to extract oil exceeds the price that our economy can pay and still grow.
Today we are paying the price and achieving a little growth, but it is taking a lot of debt at a very low interest rate to do so, and each year it takes more debt.
The ability of our global debt-backed fractional reserve monetary system to function (i.e. not collapse), and the high standard of living we enjoy, and the high capital things we invest in like modern infrastructure and technology, all fundamentally depend on economic growth. If growth stops our system will collapse, and our monetary system will have to be replaced with a different design, such as an asset-backed full reserve system, which will mean much lower standards of living, and much less availability of many things we currently take for granted.
I wrote an essay on economic growth which I recommend you read because many people think they know why we want economic growth but in fact don’t know the main and much more important reason.
So what evidence exists that oil is getting close to being depleted?
- Our economy in aggregate is losing money. Debt is growing much faster than the economy. It now takes over $3 of debt to generate $1 of growth. This is not sustainable. A sustainable economy invests $1 of debt to create more than $1 of growth, as we did prior to 1970. It’s important to note that this state of affairs exists despite the interest rate (i.e. the cost of money) being historically low (in some cases zero). It’s also important to note that this is a global phenomenon. So we can’t blame bad leaders, or the political system, or the culture. Every country in the world is growing their debt in an unsustainable manner, or wants to. The common denominator is energy which is the most important thing that drives every economy in the world. And the price of energy has been trending up for 5 decades simultaneous with our debt.
- The US central bank is starting to increase interest rates for their money that the world uses to buy oil. There are many different ways to interpret this action. My own speculation is they are worried about confidence in their money and want to maintain or strengthen its purchasing power for oil. Looking through the other side of the lens, this is the same as saying the Fed wants to lower the price of oil because they are worried about inflation since oil is required to make almost everything. If the price of oil drops, the supply of oil will drop.
- Most companies that extract high-cost oil are struggling. For example, the majority of US fracking companies are losing money.
- Countries that are highly dependent on profits from their high-cost oil reserves are struggling. For example, Venezuela with the largest unconventional oil reserves in the word seems to be collapsing.
- Countries with large low-cost reserves are behaving oddly for countries that used to be fantastically wealthy. For example, Saudi Arabia has implemented aggressive austerity and wanted to sell a portion of their state oil company to raise money. They’ve recently backed off from this sale, possibly because it would have required them to submit to an independent audit of their remaining reserves, which some smart people speculate are much lower than stated.
- War-like behavior is increasing towards countries that have large low-cost oil reserves and that are not viewed as close friends. For example, Russia and Iran.
- Weak countries that lack the ability to borrow US$ needed to buy oil are struggling.
- Our central banks, economists, and politicians appear to have no clue about what is causing our persistent global economic problems. I speculate this is a combination of the fact that they’ve never needed to understand thermodynamics until now, and the fact that they deny unpleasant realities as explained by Varki’s MORT theory. I do find it very telling that not one senior leader anywhere in the world has spoken publicly about this issue. A few must understand our predicament and they must be terrified.