Comfort on a Razor’s Edge

You know you are in trouble when the only comfortable place is a razor’s edge.

When oil prices are rising we can soon expect trouble from reduced economic growth and inflation.

When oil prices are falling we can soon expect trouble from a slowing economy and deflation; and we can also expect oil shortages a few years out because investing in new oil production becomes unprofitable and most of our existing wells now deplete quickly.

Q: Why is it so important that the economy grows?

A: Most people mistakenly believe growth is important because it makes us a little more wealthy in the future. The real reason growth is important is that it makes us much more wealthy today.

Q: We never used to worry about a little inflation or deflation. What’s changed?

A: Total global debt has grown to over $250,000,000,000,000 (250 thousand billion dollars) and it’s consuming more and more of our income for interest payments.

Inflation causes interest rates to rise which makes it more difficult to service the debt.

Deflation removes money from the economy which makes it more difficult to service the debt given that interest rates are already as low as they can go.

Q: Why has debt become a problem?

A: Debt is growing much faster than our income. We must now borrow about $5 for every $1 of GDP growth.

Q: We used to achieve $1 of growth with less than $1 of debt. What’s changed?

A: We burned all the cheap oil which caused the price of oil to increase which forces us to borrow more money to maintain our lifestyles.

Q: Why do our lifestyles depend on the price of oil?

A: Our comfortable lives are made possible by a growing GDP. Most of our GDP is produced with machines, and energy is the food of machines. As the price of energy goes up, we can’t afford to feed our machines as much, and they produce less.

US crude oil posts longest losing streak in over 34 years, falling for 10th day

  • Oil prices fall for a 10th consecutive session, sinking U.S. crude futures deeper into bear market territory and wiping out the benchmark’s gains for the year.
  • Crude futures fell for a fifth straight week on growing output from key producers and a deteriorating outlook for oil demand deepen.
  • Signs that OPEC and several other oil producers including Russia could soon cut output have not put a floor under the market.

5 thoughts on “Comfort on a Razor’s Edge”

  1. “These are the findings of a new paper by Nida Çakır Melek from the Kansas City Fed, which points to a radical change in the way oil prices operate on the wider economy following the growth of US shale oil after 2005. They are also in line with the thoughts of peak oil theorists like Richard Heinberg and Gail Tverberg, who argue that following peak conventional oil production in 2005, the oil market broke out of the “Goldilocks zone” in which oil producers can make a profit without triggering a recession.

    Prior to 2005, new investment was most responsive to oil supply shocks. Today, investment is driven by highly volatile demand shocks of the kind that saw the oil price drop from above $100 per barrel to less than $35 per barrel between 2014 and 2016. Nor is this limited to oil industry investment. The oil industry is now a large enough player in the US to impact capital investment across the entire economy.”


  2. Gail Tverberg with a refined view of what’s going on.

    “The fact that inflation-adjusted oil prices are now much higher than they were in the 1940s to 1960s is a sign that for oil, the contest between diminishing returns and efficiency has basically been won by diminishing returns for over 40 years.”

    “It makes no sense for oil prices to rise endlessly, for what is inherently growing inefficiency. Endlessly rising prices for oil would be similar to paying a human laborer more and more for building widgets, during a time that that laborer becomes increasingly disabled. If the number of widgets that the worker can produce in one hour decreases by 50%, logically that worker’s wages should fall by 50%, not rise to make up for his/her growing inefficiency.”

    “At this point, world growth in energy consumption per capita seems to be falling again. We are also starting to see evidence of some of the same problems associated with earlier collapses: growing wage disparity, growing debt bubbles, and increasingly war-like behavior by world leaders. We should be aware that today’s low oil prices, together with these other symptoms of economic distress, may be pointing to yet another collapse scenario on the horizon.”

    “The issues we should truly be concerned about are Collapse, as encountered by many economies previously. If Collapse occurs, it seems likely to cut off production of many commodities, including oil and much of the food supply, indirectly because of low prices.”


  3. Gail Tverberg here makes a persuasive case that we have reached the limits to growth predicted by Meadows et al in 1972 and that the wild oscillations we are seeing are to be expected as the economy changes direction from growing to shrinking.

    Gail points out that while the 1972 model has been remarkably accurate at predicting when growth will stop, we should not rely on it to predict how the future will unfold because the model did not include the effect of debt.

    In my view, this means it is likely that reality will be much worse than the model predicts, because debt steepens the downslope of our Seneca curves.

    Gail concludes that we should expect a severe (and mostly permanent) recession to begin this year or next, and based on our history, war will likely follow.

    2019: World Economy Is Reaching Growth Limits; Expect Low Oil Prices, Financial Turbulence


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