By Art Berman: Oil Prices Lower Forever? Hard Times In a Failing Global Economy

Art Berman is an oil industry expert worth listening to. I missed this Forbes article he published in July 2016. Thanks to Alice Friedemann for reviving it.

This is one of the better summaries I’ve read on the history of, and relationship between, energy and the economy.

Economic growth, without unsustainable and dangerous debt, is no longer possible. I explored the implications of no growth in this essay.

Berman wisely concludes by saying our best course of action is to face the beast.

Facing the beast would require us to break through our inherited denial of reality.

I wish but I do not expect.

http://energyskeptic.com/2017/art-berman-oil-prices-lower-forever-hard-times-in-a-failing-global-economy/

oil-prices-in-2016-dollars-1950-2016-1024x694

Energy is the economy. Energy resources are the reserve account behind currency. The economy can grow as long as there is surplus affordable energy in that account. The economy stops growing when the cost of energy production becomes unaffordable. It is irrelevant that oil companies can make a profit at unaffordable prices.

Energy underlies and connects everything. We need energy to make things, transport and sell things and to transport ourselves so that we can work and spend. We need it to run our computers, our homes and our businesses. It takes energy to heat, cool, cook and communicate. In fact, it is impossible to think of anything in our lives that does not rely on energy.

When energy costs are low, the costs of doing business are correspondingly low. When energy prices are high, it is difficult to make a profit because the underlying costs of manufacture and distribution are high. This is particularly true in a global economy that requires substantial transport of raw materials, goods and services.

And this is precisely the problem with the almost universally held belief that technology will make all things possible, including making a finite resource like oil infinite. Technology has a cost that its evangelists forget to mention.

The reality is that technology allows us to extract tight oil from non-reservoir rock at almost 3 times the cost of high-quality reservoirs in the past. The truth is that we have no high-quality reservoirs left with sufficient reserves to move the needle on the high global appetite for oil. The consequence is that to keep consuming and producing as we always have will inevitably cost a lot more money. This is basic thermodynamics and not a pessimistic opinion about technology.

Renewable energy will be increasingly part of the landscape but its enthusiasts are also magical thinkers.

In 2015, renewables accounted for only 3% of U.S. primary energy consumption. No matter the costs nor determination to convert from fossil to renewable energy, a transition of this magnitude is unlikely in less than decades.

Solar PV and wind provide much lower net energy than fossil fuels and have limited application for transport–the primary use of energy– without lengthy and costly equipment replacement. The daunting investment cost becomes critically problematic in a deteriorating economy.  Although proponents of renewable energy point to falling costs, more than half of all solar panels used in the U.S. are from China where cheap manufacturing is financed by unsustainable debt.

The future for oil prices and the global economy is frightening. I don’t know what beast slouches toward Bethlehem but I am willing to bet that it does not include growth.The best path forward is to face the beast. Acknowledge the problem, stop looking for improbable solutions that allow us live like energy is still cheap, and find ways to live better with less.

By Tim Morgan: The Prosperity Equation

Tim Morgan offers another fresh and intelligent insight into world affairs.

It seems a modest decrease in prosperity of about 6% may explain much of the political chaos in the world.

Imagine what may happen when our global debt bubble bursts and we have a significant drop in prosperity.

https://surplusenergyeconomics.wordpress.com/2017/04/14/93-the-prosperity-equation/

Fig. 1: Prosperity per capita, 2016 vs 2006

prosperityjpg_page1

This gets us to a definition of prosperity, something mentioned here before but so important that it bears repetition. Prosperity is “discretionary” income.

Surplus energy economics provides unique insights into prosperity because the trend cost of energy is the principle driver of non-discretionary costs. The cost of essentials is massively linked to the cost of energy. Fuel, power and light are themselves significant components of the non-discretionary spend. But energy also drives the cost of water, minerals, food and the various manufactured goods which need to be acquired and replaced over time.

 

That the average Chinese person saw his prosperity increase by “only” 58% over a decade remains pretty impressive. But the same adjustments, when applied to less vibrant economies, have some very adverse implications for prosperity.

In the United States, growth of 14.6% in GDP translates into a decrease of 7.0% in prosperity, which might go a long way to help explain why Donald Trump was able to wrest the White House out of the clutches of the political establishment.

In Britain, GDP growth of 12.2% translates into a slump of 13.8% in prosperity, which might likewise help explain “Brexit”. Italian prosperity fell by 9.7% between 2006 and 2016 – a worse fall than any other country except Britain – which no doubt influenced the resounding voter rejection of Matteo Renzi’s reform proposals.

More positively, personal prosperity over that decade increased by 48% in India, 18% in Russia and 12% in Poland.

It’s impossible to say whether the 6.6% ten-year deterioration in French prosperity will be enough to oust the establishment from power – but a not-dissimilar deterioration (of 7%) was followed by the election of Mr Trump, whilst Italy’s 9.7% decline was more than enough to see off Mr Renzi.

If France does elect Ms Le Pen or Mr Mélenchon, the consequences could be drastic – and not just for France herself.

By Ted Trainer: Your Oil Wake Up Call

A very nice summary of our predicament, and what should but won’t be done, because of denial.

https://damnthematrix.wordpress.com/2017/04/08/your-oil-wake-up-call/

ALMOST NO ONE has the slightest grasp of the oil crunch that will hit them, probably within a decade. When it does it will literally mean the end of the world as we know it. Here is an outline of what recent publications are telling us. Nobody will, of course, take any notice.

 

There is now considerable effort going into working out the relationships between these factors, ie. deteriorating energy EROI, economic stagnation, and debt. The situation is not at all clear. Some see EROI as already being the direct and major cause of a terminal economic breakdown, others think at present more important causal factors are increasing inequality, ecological costs, aging populations and slowing productivity.

Whatever the actual causal mix is, it is difficult to avoid the conclusion that within at best a decade deteriorating EROI is going to be a major cause of enormous disruption.

 

So, the noose tightens around the brainless, taken for granted ideology that drives consumer-capitalist society and that cannot be even thought about, let alone dealt with.

We are far beyond the levels of production and consumption that can be sustained or that all people could ever rise to. We haven’t noticed because the grossly unjust global economy delivers most of the world’s dwindling resource wealth to the few who live in rich countries. Well, the party is now getting close to being over.

You don’t much like this message? Have a go at proving that it’s mistaken. Nar, better to just ignore it as before.

 

If the foregoing account is more or less right, then there is only one conceivable way out. That is to face up to transition to lifestyles and systems that enable a good quality of life for all on extremely low per capita resource use rates, with no interest in getting richer or pursuing economic growth.

There is no other way to defuse the problems now threatening to eliminate us, the resource depletion, the ecological destruction, the deprivation of several billion in the Third World, the resource wars and the deterioration in our quality of life.

By Jim Quinn: Stupid is as Stupid Does

Jim Quinn summarizes the insane stock market.  While Quinn does not discuss the underlying thermodynamic cause of low growth, he does a good job of explaining how we responded to low growth, and why we will experience a lot more pain than we needed to suffer.

https://www.theburningplatform.com/2017/04/04/stupid-is-as-stupid-does/

sp-500-buybacks-versus-stock-index

In March of 2009, at the height of the financial crisis, Fed overnight interest rates were at an emergency level of .25%. Eight years later after a “tremendous” economic recovery, Fed overnight interest rates are still at an emergency level of .75%. Ten year Treasuries were 2.9% in March 2009 and are currently 2.3%. If this was a true economic recovery, would rates be at these levels?

 

The truth is, this entire bull market has been generated through financial engineering. A critical thinking individual, which eliminates all CNBC bimbos/talking heads and Ivy League educated Federal Reserve schmucks, might ask how reported corporate earnings per share since 2009 have risen by 221% when corporate revenues have only risen by 28%. That’s quite a feat – creating fake earnings without increasing revenue. It’s easy when you implement a three pronged scheme to manufacture a phony economic and stock market recovery.

Step one was to “temporarily” repeal FASB Rule 157 in March 2009 so banks could value their toxic real estate assets at whatever price they chose. Mark to fantasy versus mark to market allowed the criminal Wall Street banks to generate billions in fake profits. Step two was for the Federal Reserve to buy $3 trillion of toxic worthless assets from the criminal Wall Street banks at 100 cents on the dollar and stick them on their own insolvent balance sheet.

Step three was breathing life into failing corporations with unnecessarily  low interest rates. The Fed’s 0% interest rates allowed Wall Street banks to generate billions in risk free profits by depositing reserves at the Fed. ZIRP also allowed insolvent financial firms, underwater real estate developers and zombie retailers to refinance their massive levels of debt at ridiculously low interest rates – eliminating the market clearing creative destruction that happens in free markets. Corporations also used off-balance sheet shenanigans to suppress leverage levels and boost earnings.

Lastly, S&P 500 companies embraced the benefits of globalization by off-shoring millions of jobs to slave labor camps in the Far East, drastically reducing their cost structures and boosting earnings. These same corporations used the BLS fake inflation data as the reason to suppress wage increases for their employees at a 2% level, further boosting earnings. As a humorous aside, executive pay and bonuses advanced at double digit rates.

 

So all the pieces are in place for an epic stock market crash, along with a real estate and debt market crash as an added kicker. The arrogant, over-confident thirty year old MBA investment geniuses and their super computer algorithms are sure they are smarter than the next guy and will get out before it’s too late. They think there will be a clear event which will signal it’s time to go. The markets are so overvalued, so dependent on the Fed, and so propped up by massive amounts of leverage, they will topple under their own weight at any moment. Central bankers, Wall Street bankers, politicians, pundits, experts, and the stupid lemmings will be shocked by this truly unexpected development.

Data reported in the last week will be the gasoline thrown on the fire when this market starts to burn, turning it into a towering inferno. Margin debt has reached an all-time high, as supremely confident investors (aka speculators) know the trend is their friend. They have borrowed over $500 billion against their stock portfolios to buy some more Snapchat, Tesla, Amazon, Facebook, Google and Apple. The previous peaks of $400 billion to $425 billion in 2000 and 2007 have been far surpassed. What happened after those previous peaks? I forget. I’m sure this time will be different. A CNBC bimbo spokesmodel told me so.

By Gail Tverberg: Why Energy-Economy Models Produce Overly Optimistic Indications

Gail Tverberg’s essay today provides an excellent summary of why collapse of civilization is inevitable and not too far in the future.

I remain fascinated by how almost all experts, leaders, and citizens deny what is going on.

https://ourfiniteworld.com/2017/03/29/why-energy-economy-models-produce-overly-optimistic-indications

Here are a few key ideas from the essay:

Producers and consumers of energy products are both important

  • Energy prices can be too high for consumers
  • Energy prices can be too low for producers

Both problems are equally important

  • World economy cannot operate without both being satisfied
  • Either a too low or a too high price is a problem

4-price-problem-only-appears-near-limit

We often hear about “Supply and Demand.” A better name for “demand” might be “amount affordable.”

The situation we have now is very much like a Ponzi Scheme. We need to keep adding more debt to keep wages and commodity prices high enough. At the same time, interest rates need to stay very low, to keep payments manageable, and keep the whole system from collapsing.

The balance sheets of insurance companies, banks, and pension plans include much debt. If these institutions are to make good on their promises to those with bank accounts, insurance policies, and pension plans, it is necessary for this debt to be repaid with interest. Back many years ago, debt jubilees were often given to selected debtors. These are out of the question now, because banks, insurance companies, and pension plans depend upon the future payments that this debt represents.

Growing debt is one of the waste outputs. Since we voluntarily seek out debt, we think of debt as an input. But if we think about the situation, debt is really is an adverse output. Required interest payments tend to pull funds out of the system that could otherwise be used to pay workers. Also, the rising use of debt tends to concentrate the ownership of “tools” among the already wealthy. Debt can grow for a while, but it has limits, because of the adverse impacts it creates for the economy.

Growing wage disparity occurs because of the increased specialization required by ever-rising use of tools and technology. Some people receive the benefit of advanced education and learning to use tools such as computers; others receive much less benefit. As a result, their wages lag behind. Wage disparity is another limit of the system. If a large share of the workers cannot afford to buy the output of the economy, “demand” falls too low, and commodity prices tend to fall.

Trying to run the economy on solar electricity alone (or solar plus wind plus water) is a futile exercise. One reason is that it would require massive changes to allow long-haul trucks and airplanes to operate on electricity.

Also, electricity is a high-cost energy product. Today, our economy operates on a mix of high and low cost energy products, with low cost energy products keeping the average cost down. Trying to run the economy on electricity alone is a bit like trying to run the economy using only PhDs. In theory it could be done, but it would be expensive to have PhDs waiting on tables in restaurants and delivering mail.

There is a different kind of EROEI that seems to me to be at least as likely, or more likely, to be the first limit that we will reach. That is the return that workers who are selling their labor simply as labor (without advanced education or supervisory responsibility) obtain. If these workers find that their wages drop too low, this will be a limit on the operation of the economy. Low wages will prevent these workers from buying houses and cars. If the wages of the large number of non-elite workers fall too low, commodity prices will tend to fall, and the system will tend to collapse because producers cannot make a profit at such a low price.

Biologists have been studying the return on the labor of animals for many years, because their populations tend to collapse, when animals are forced to expend too much labor in finding food. EROEI based on wages of non-elite workers would seem to be a closer parallel to the animal return on labor than fossil fuel EROEI.

We have multiple problems:

Problem 1. No dissipative structure can last forever.

Problem 2. As a dissipative structure, our economy seems to be reaching its end.

  • Partly because of slowing growth in energy consumption
  • Partly because of growing wage disparity.

Problem 3. We have ramped up recycling of debt as assets to an amazing level.

  • This debt recycling prevents debt jubilees
  • Leads to the likelihood that insurance companies, banks, and pension plans will fail, if the economy fails

Problems appear to be not far in the future:

Financial system is likely to be center of the storm

  • Most EROEI analysts miss this point

Economy cannot shrink without debt defaults

Economy doesn’t have the ability to go backward

  • Transition to using horses for transportation would be difficult

Theory says that new somewhat similar dissipative structures are likely to eventually form

  • Depends on how many can survive the coming contraction
  • Also, how depleted resources are
  • If contraction too severe, no new economy may be possible

By Tim Morgan: Chinese Whispers

china-bespoke-1-gdp-debtjpg_page1

I used to admire Chinese leadership.

Unlike our idiot lawyers and economists, the Chinese selected engineers and scientists as their leaders. I observed the Chinese tended to favor the long-term rather than the short-term, and that they made wise rather than politically correct decisions. Examples being their one child policy, low military spending, and heavy investment in hydro energy, rail, and other important infrastructure.

Now of course it is clear I was naive. The Chinese are repeating all of our mistakes, but on a larger scale. It makes no difference how leaders are educated, they will eventually succumb to the inherited behaviors common to all humans.

The main difference between us and them now is that they are “borrowing to employ” and we are “borrowing to consume”.

In his blog today Tim Morgan takes a close look at the Chinese economic miracle, or more accurately, the Chinese debt bubble.

https://surplusenergyeconomics.wordpress.com/2017/03/11/89-chinese-whispers/

Which is the world’s largest economy? Converted at market exchange rates, China ($11tn) is smaller than the United States ($18tn) but, on the PPP (purchasing power parity) basis of conversion widely regarded as superior, China (at $21tn) now takes the top spot.

In short, if the Chinese economy were to catch a cold, the world economy would be in for a bout of influenza at best, and could well face the economic equivalent of pneumonia.

The picture that emerges is quite extraordinary. Over the ten years between 2005 and 2015, GDP grew at rates of between 9% and 14% annually, not even stumbling materially during the 2009 global downturn. But debt has grown by between 17% and 35% of GDP each year, with the exception of 2009, when debt increased by 47% of GDP.

What this means is that, over a period in which reported GDP increased by RMB 40tn, debt expanded by RMB 129tn. This is a borrowing-to-growth ratio of 3.2:1, still reasonably modest by Western standards, but a far cry from past Chinese practice – back in 2005, the trailing ten-year (T10Y) ratio was only 1.67:1.

Unlike the Western economies, whose vice-of-choice is to use debt to fund consumption and inflate property markets, the Chinese bias is towards using debt for investment in capacity. In theory, capacity investment should be “self-liquidating”, because capacity increases should increase income, and thus fund the paying off of the initial debt. (This is contradistinction to consumer borrowing, which is “non-self-liquidating”).

But the self-liquidating characteristic of business investment depends on capacity expanding without depressing margins, something which happens when expansion creates major capacity surpluses. It is abundantly clear that Chinese PNFC borrowing has followed the course of excess, depressing returns in the process.

As a result, much of the Chinese business sector earns returns which appear to be well below the cost of debt capital. In this situation, an obvious remedy is to convert debt into equity. This, however, seems to have been tried, and failed, because it showed clear tendencies to crash the equity market.

The final sting in the tail of this analysis is that, if underlying GDP is a lot lower when stripped of the borrowing effect, debt ratios are correspondingly higher. On the SEEDS basis of computation, aggregate debt already stands at 385% of GDP (rather than the reported 246%), and is growing a lot more quickly than publicly available numbers indicate, adding around 43% of GDP (rather than 20%) annually.

With the export-based model faltering, and with a great deal of economic activity dependent on borrowing, China may have ceased to be the powerful engine of growth that is so customarily assumed.

By Geoffrey Chia: What you should not say in public…

Although there are no solutions to our predicament, I wrote a list of things a wise society would do here. I concluded the essay by acknowledging that our inherited denial of reality would probably prevent us from doing any of them.

Today Dr. Geoffrey Chia wrote a list of things a wise society would do and ended with a similar conclusion.

http://www.doomsteaddiner.net/blog/2017/03/01/what-you-should-not-say-in-public/

I am due to speak at the Griffith Ecocentre on 9 March and will run through the usual gamut of why things are fiendishly rotten in the state of Denmark and what to expect in the near future. “Denmark” is of course the metaphor for our besieged planetary ecosphere. It is a commentary familiar to Diners: why global warming will have consequences far worse than the mainstream population have been led to believe (but will NOT cause NTHE by 2026) and why the depletion of “easy” oil guarantees that the collapse of industrial civilisation will be complete within 20 years (a conservative estimate, based on falling EROEI and the ELM). However the fraud pervading our banks and sharemarkets will cause financial and economic collapse and the demise of our global industrial system much sooner. Not to mention all the other fun stuff ahead like mass human die-off, mass extinctions of other species, the rise of fascist extremists around the world, increasing conflicts between nations, increasing risk of global nuclear war, the possibility of pandemics etc. This is all old hat to Diners, but not to the general public. My purpose will not be misery mongering and nihilism however, but to encourage members of the audience to set up their own remote, climate resilient, off-grid homesteads to weather the coming storms. They must not look for salvation from without, but from within. Not everyone will succeed but some will.

I expect the majority will find my commentary repugnant and reject it. I expect the Q&A session will throw up the usual predictable questions such as “how can we fix these problems?” or “surely technofix A can solve problem B?” The standard answer, which Diners are familiar with, is that the issues we face are not problems for which there are solutions, but are predicaments (or conundrums) for which there are no solutions. The correct question at this late stage is not “how can we fix these problems?“, but “what can we do in anticipation of these events?“. Given the more than century long build up to these events, the sapients realise that global industrial collapse is unavoidable, as has been amply demonstrated by even the most optimistic scenarios modelled by the updated Limits to Growth analyses. We have fallen off the cliff and even though we may feel “fine” now, we will not feel so good when we inevitably and excruciatingly smash into the ground. Gravity is a bitch and there is no prospect we can invent an anti-gravity device before impact, or indeed ever.

Not satisfied with such an answer, there is usually the odd tenacious audience member who attempts to pose the same question in a different manner, such as “if you were King of the world and had unlimited policy power, what would you do to tackle these predicaments?” The unstated expectation behind such a question is that a benevolent “philosopher king / ecosystems guru” can find ways to keep 7.5 billion people alive, solve climate change, find a replacement for petroleum etc, etc. Well I ain’t no King and I ain’t no Guru, but for the sake of argument, let us play along with such fantasy based wishful thinking and imagine we can enforce the following:

  1. Abolish all nation states. Demobilise all military forces everywhere and re-employ all ex-military personnel for the refurbishment and maintenance of essential domestic infrastructure, for civil defence and for disaster relief. All nuclear weapons to be dismantled, all weapons manufacturers to be eliminated.
  2. Equitable redistribution of resources, which will require that people in the rich parts of the world give up their luxuries to allow poorer people to survive. This will also require that refugees from climate ravaged and war torn parts of the world be allowed to emigrate to more climate favoured areas.
  3. Impose a moratorium on all human reproduction for the next 30 years, following which we allow only one child per couple until the global population falls to perhaps 100 million and thereafter allow only for replacement reproduction rates. Draconian? Yes, but far preferable to chaotic die-off which could trigger nuclear war.
  4. Transform the existing predatory rapacious capitalist system to a steady state ecology based economic system which penalises polluters and “closes the loop” – to treat and use all waste as a resource.
  5. Stop all unnecessary “economic” activity which will include the cessation of all fossil fuel based tourism and the entire process of globalisation. Limit activities to essential ones such as the production and distribution of food and clean fresh water and the construction and maintenance of dwellings. Localise all economic activities, although international trade in non perishable goods can still occur by use of sailing vessels.
  6. Educate everyone that the main “solution” to our looming energy shortfall must be energy efficiency and conservation, not new whizbang technowizardry such as fusion energy. Cease all fossil fuel electricity generation and change electricity provision to decentralised renewable energy systems such as solar PV for individual dwellings or microgrids. Let the central grid rot or better still, cannibalise it for materials. Pursue research to determine whether we can manufacture and maintain renewable energy generators and batteries using only renewable energy sources.
  7. Phase out all industrial scale monocrop agriculture (which is doomed anyway as fossil fuel based fertilisers, pesticides, herbicides and the petroleum to run mass agriculture will eventually become unavailable). Reduce meat and seafood consumption by more than 90%. Food security to be achieved by the establishment of hundreds of millions of local permaculture smallholdings providing a plant based diet with abundant protein from peas, beans and nuts and supplementary protein from eggs, dairy products, aquaponics and even farmed insects.

What is the likelihood of achieving even one of the above? We are, on the whole, moving in directions away from each and every one of the measures indicated above. So get real. Even if they could all be done, the following issues will remain:

  1. Additional global warming from existing GHGs in the atmosphere is already locked in place but is yet to fully manifest and will render most of the planet uninhabitable. All existing coastal cities will eventually (perhaps in 200 years) be submerged under at least 23 metres of seawater.
  2. We have no liquid transport fuel to replace “easy” oil at scale, which means that industrial civilisation as we know it is still doomed.
  3. Enforcement of the policies outlined above can only be carried out through edict and coercion. External imposition of policies on an ignorant and resistant populace will fail to address the primary underlying reason for all our planetary travails: the possession of advanced, destructive technology in the hands of a “trumped up” (pun intended) species of ape governed by their reptile brain. Cleverness without wisdom. This means that even if all the predicaments above could magically be made to vanish and we could magically reset human society and our planetary ecosphere back to, say 1950 before overshoot began in earnest, we will merely repeat the same patterns over and over again, in the absence of restraint and wisdom. Groundhog day with no hope of redemption, no matter how many times the scenario is replayed.

Semi-sapient people must abandon childish fantasy notions of what we would like happen, grow up and accept the reality of what is going to happen.

The bottom line is this, and I have said it before: the only hope for the continuation of our benighted species is that the survivors who emerge at the other end of this genetic bottleneck are truly sapient and adopt the principles of restraint (in resource consumption and reproduction) and vigorously protect any viable ecohabitats remaining (and cultivate new ones as icebound areas of the planet melt). It is possible, although by no means certain, that the impending cull of the global population may result in just such an outcome, especially if the sapient 0.01% of the population can be encouraged to save themselves NOW. The sapients should be advised not to grieve as future events unfold and they observe, from a safe distance, the morbid spectacle of billions of clueless sheeple killing each other, egged on by the 0.1% psychopathic sheeple herders who had promised to make them great again. Such is the nature of a cull.

13-Mar-2017 addition: Here is Geoffrey Chia’s talk…