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.

On Why Things Appear (sort of) Normal

Assuming I’m not in denial (which I admit might be possible given the underlying genetic basis of denial which makes it difficult to detect denial in yourself) I like to think that I belong to a small group of people that understand what is going on in the world.

Despite this understanding I was completely wrong in predicting the global economy would collapse before today.  I think I understand why I was wrong but I do catch myself from time to time marveling at how well the wheels have stayed on since the 2008 crash.

It is wonderful reading someone like Tim Morgan who with a few words explains clearly why we have delayed the day of reckoning.

https://surplusenergyeconomics.wordpress.com/2017/04/19/94-spring-has-sprunga-leak/

…there’s a big difference between reasonable optimism and outright delusion, and the latter, it seems, has been taking a big hold over many of those whose job it is to forecast our economic weather.

In 2016, global GDP grew by 3.4%, adding $3.9tn to GDP. Where debt is concerned, we do not yet have comprehensive data for the whole of the year, but we do know that world debt increased by over $11.4tn in the first three quarters of 2016.

In that nine-month period, governments borrowed more than $5.5tn, households $2.3tn, and non-financial businesses $3.5tn. That stacks up to $3.90 of borrowing for each $1 of reported growth, even if we assume that prudence reigned supreme, such that nobody borrowed at all in the three months running up to Christmas.

To be sure, we cannot make a one-for-one comparison between borrowing and growth. But we do know that a lot of this credit expansion went into consumption expenditures, not least because that’s what governments spend most of their money on. The calculations made by SEEDS suggest that, stripped of the spending of borrowed money, reported growth of 3.4% falls to an underlying level of just 1.2% – and even that probably makes some pretty generous judgments on the validity of a very big pile of borrowing.

Nor is that all – because debt is not the only hostage that current practices are handing to posterity. Debt, though it adds to the burdens of futurity, can at least be managed, if we let inflation accelerate, essentially bilking lenders by paying them back in devalued money.

This cannot work with other forms of futurity, most obviously pensions, where the same inflation that devalues debt simultaneously increases the burden of future payments, not just of pension commitments but also of welfare. It should come as no surprise whatsoever that pension deficits are continuing to widen alarmingly.

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.

Monkeys Throwing Darts

The depth and breadth of denial on almost every topic of significance is staggering.

I have a tough time watching the news now. Every single story is distorted. No one acknowledges what is actually happening.

It’s especially interesting listening to economists discuss why there is so little economic growth. They speculate on anything and everything except the truth. Monkeys throwing darts at the wall would be more effective.

Inherited denial of reality is the most likely explanation because even monkeys should randomly land on the truth once in a while, but economists never do.

Their profession is a disgrace and should be banned from universities.

http://www.econtalk.org/archives/2017/03/crafts_garicano.html

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