Peak Babies, Not Oil

Patrick Cox writing for Tech Digest:

Much of my career has been spent refuting this or that doomsday scenario. From peak oil to overpopulation, I’ve been on the other side of the hysteria and often vilified for it. In the last few days, however, a Wall Street Journal headline told us that “Oil Prices Tumble Amid Global Supply Glut.” Also, a LiveScience story told us that “US Birth Rate Hits All-Time Low.”

Neither one of these headlines should surprise anybody. The math behind both of these stories has been clear for a very long time. Neither peak oil nor overpopulation fears were based on actual science. This, of course, raises questions about our species’ susceptibility to periodic Chicken Little hysteria. I have no explanation for this innate tendency, but it’s been evident for thousands of years.

In the modern cautionary tale, first published in the Anglosphere in the mid-1800s, it’s a chicken that cries that the sky is falling. Ancient Buddhists from India and Tibet told the same basic story, but the central character was an alarmist rabbit. That version was spread into Africa and then via the slave trade into America where the oral version was recorded by Joel Chandler Harris in his Uncle Remus books. What sets it apart from the older versions is that Brother Rabbit starts the panic but never actually falls for it himself. I’m reminded of some current global warming activists who fly in private jets and live in estates with carbon footprints bigger than small towns.

This isn’t to say, however, that we have nothing to worry about. In the immortal words of Henry Saint Clair Fredericks (stage name Taj Mahal), “If you ain’t scared, you ain’t right.”

So I’m not exactly scared, but there are things that concern me. The oil glut isn’t one of them, but historically low birthrates do have enormous implications for investors. The last available data, compiled in 2013 by the CDC, show 62.5 births per 1,000 women aged 15 to 44 in the US. That’s down 10 percent from 2007, which was already below replacement rate. In 2008, the US birthrate was 2.08 births per woman, below the 2.1 level needed to replace the population. Today, we are seeing the lowest recorded American birthrate since government started keeping track in 1909. New Zealand, Australia, and Canada are even significantly lower.

In and of itself, a sub-replacement birthrate isn’t necessarily a problem. The problem is that our ruling elite seem totally unaware that it’s happening. Routinely, in fact, we hear from certain politicians that overpopulation remains a pressing problem even as populations throughout the West are shrinking. The same trends, by the way, are already obvious in Asia and Africa where populations continue to increase primarily because people are living longer. Real demographers know that the world population is on track to contracting, and perhaps quite dramatically.

Once again, I recognize that there are upsides to reduced populations. The problem, however, is that so many government policies are still based on the assumption that every generation will be larger than the last. Growing populations are great in many ways. First of all, more young people entering the work force creates demand for all kinds of goods and services. It grows GDP and therefore tax revenues. The simplest way to achieve economic growth is, in fact, to grow the population.

While this is glaringly obvious, it’s remarkable how many economists miss this elephant in the room when talking about countries such as Japan, where economic problems have mirrored the country’s falling population. Last year, the Japanese population shrank by about a quarter million people.

Japan has the highest life expectancy and oldest population in the world, and the older Japanese people expect that the promises made in the past to help support the aged will be honored. It’s not at all clear to me that those promises can be kept, at least as things now stand.

As I’ve written many times, there were about 17 workers per retired person in the United States when I was born in the middle of the last century. Today, the ratio is less than three to one, and getting worse. Already, 30 cents out of every tax dollar collected in America flows to the aged, but much of that money is being borrowed. In effect, the bill for caring for the aged is being sent to future taxpayers, despite the fact that there will be fewer young workers and more aged people to support. This arrangement is not only unsustainable, it’s unethical. In my opinion, the older, wealthier population should help the younger, less wealthy part of the population, the reverse of the current situation.

Every time I’ve written this over the last 30 years or so, I’ve been attacked by people who claim that I’m a fearmonger and that we have plenty of money to support the aged. Today, however, we’re $17 trillion in debt and still borrowing. The current administration doesn’t even acknowledge that the problem exists, so it’s getting harder and harder to make that case.

We need to face the fact that things are going to get worse before they get better. I have little doubt, however, that we will eventually adjust to the new reality. We’ll see policymakers wake up to the new demographics, as they are in Japan, sooner than most of us think. Other countries are also facing facts and are devising solutions. I particularly like the spirit that some Danes are showing in their efforts to counter the country’s low fertility rate. Japan, however, is leading the way in terms of enabling technological solutions through regulatory reform.

The Japanese government understands that the old model is doomed and is actively looking for ways to increase the national work force. There are two obvious ways to do that. One is to bring more women, who have not traditionally worked to the same extent as Japanese men, into the work force. More working women means economic growth and more funds to support an aging population. The other, more long-term solution is to increase birthrates to grow the national work force.

The problem is that the two strategies counteract one another. Japanese women who work have lower birthrates than those who do not. Therefore, the only remaining solution is to extend health spans and working careers, increasing incomes and tax revenues while reducing medical expenses.

There are several ways that the Japanese are working to do this. The most important is the recently accomplished elimination of phase 2 and phase 3 clinical trials for stem cell therapies. The second is in the field of dietary supplements and nutraceuticals.

Japanese regulators exercise less direct control over the market but provide more solid, peer-reviewed information for consumers and healthcare providers. Recently, for example, the Japanese government issued a patent to Terra Biological for oxaloacetate (trade name benaGene) for use in “life extension.” Oxaloacetate is one of the NAD+ precursors that I take based on recent research. I also take the NAD+ precursor, nicotinamide riboside (trade name Niagen).

In general, Japan is leading the way in efforts to encourage new anti-aging therapies. In the next few years, I anticipate that Japan will continue to lower regulatory barriers for new biotechnologies. This is very unlike America’s FDA, which doesn’t yet recognize anti-aging or life extension as a legitimate therapeutic target.

The current regulatory environment in the US will change, however, because it has to. The only question is how soon it happens.

Fortunately, there is a growing chorus of rational voices in the US. I would recommend that everybody download and read Why Population Aging Matters: A Global Perspective. This relatively brief presentation was written by the National Institute on Aging (NIA), part of the National Institutes of Health. On its website, the NIA states bluntly:

The world is on the brink of a demographic milestone. Since the beginning of recorded history, young children have outnumbered their elders. In about five years’ time, however, the number of people aged 65 or older will outnumber children under age 5. Driven by falling fertility rates and remarkable increases in life expectancy, population aging will continue, even accelerate. The number of people aged 65 or older is projected to grow from an estimated 524 million in 2010 to nearly 1.5 billion in 2050, with most of the increase in developing countries.

The interesting thing about that quote is that it was written in 2007, which means that this historic change has already come to pass. Back then, the authors warned:

Some governments have begun to plan for the long term, but most have not. The window of opportunity for reform is closing fast as the pace of population aging accelerates. While Europe currently has four people of working age for every older person, it will have only two workers per older person by 2050. In some countries the share of gross domestic product devoted to social insurance for older people is expected to more than double in upcoming years. Countries therefore have only a few years to intensify efforts before demographic effects come to bear.

More than a few years have passed since this report was written and nothing has really changed politically in the US, though the rate of demographic change and the pace of scientific progress, which is pushing out lifespans, have accelerated. Things will, therefore, get worse. The dynamics behind crippling governmental debt internationally are growing.

There are upsides to this totally predictable situation though. One is that we can anticipate many of the outcomes and devise ways of profiting from them. This is why I focus on disruptive biotechnologies that can significantly lower healthcare costs while extending health spans and careers. These biotechnologies provide the only real solution for the demographic transformation, except for the Danish solution mentioned above. I find it fascinating, by the way, that the revolution in biotechnology is happening exactly at the point in history when it’s needed.

Another significant benefit that will accrue from this convergence of forces is that many of us will be able to take advantage of these breakthrough discoveries. I’m incredibly excited about the emergence of growth hormone-releasing hormone (GHRH) vaccine which has been used widely in animals, where it seemingly rejuvenates and extends lives. Endothelial precursor therapy has similarly been shown in animals to rejuvenate cardiovascular systems. Hopefully soon, we’ll see brown adipose tissue transplantation curing obesity, diabetes and cholesterol problems. There are, however, significant benefits from recently discovered over-the-counter products.

Whenever I talk to el jefe, señor Mauldin, these days, it seems most of our conversations center on our workouts. Both of us work out and lift weights, as we have for much of our lives. Both of us, however, are making gains that we’ve never seen before. One of the Mauldin Economics executives told me recently that he’d never seen John look so good before, that his arms and shoulders are bigger than they’ve ever been.

I probably shouldn’t claim that I look good, but I can say that I’ve also put on a surprising amount of muscle in the last year. That’s not how it’s supposed to work. Both John and I are in our 60s. I work out less than I did than in my 30s, but I’m suddenly lifting much more weight and have more muscle mass than ever. John’s experience is the same.

My only explanation is biotechnology. The NAD⁺ precursors that I mentioned above have been shown in animals to rejuvenate muscle tissue so I’m not surprised to see the effects in humans. I also credit anatabine citrate, though it is at least temporarily unavailable. I’m expecting word on that front soon.

Also, I’m a devoted user of the AVAcore thermogenic device. Recently, a major research organization presented evidence that it may be able to prevent the damage caused by overheating in athletes, but one of the investigating scientists mentioned, as an aside, that it also accelerates training results dramatically. Neither I nor Mauldin Economics have any interest in this privately held company, but I’m evangelical about the benefits, especially to older people. The stronger you are, the lower your risk of disease and mortality.

I realize that the current price of the device is high for many people, but I understand that the company is going to do some sort of crowd-sourcing project in the near future, probably Indiegogo, to fund a much more affordable product. I’ll let you know about the project when I have more information.

One of the reasons that I love the AVAcore device so much is that it perfectly demonstrates the unexpected and dramatic nature of emerging biotechnologies. The notion that exercise capacity and recovery could be dramatically improved by normalizing core body temperature is so unexpected, I’m still in awe over the science and the impact on my health.

It is, however, only the tip of the iceberg. As Japan is demonstrating, an aging population not only wants but demands access to the scientific breakthroughs that can significantly extend health spans. Just as Japan’s regulatory system is bending to the will of its aging population, America’s regulators will be forced to come around.

John and I talk a lot about assisting in that process, and I’ll have more information about that in the future. If you’d like to help in this effort, I suspect there are ways to do so. As it stands, our portfolio contains technologies that I believe will have dramatic impacts on some of the greatest threats to health and longer lives, including Alzheimer’s, cancers, fibrosis, diabetes, and other major diseases. A reformed regulatory system would accelerate therapies to market, which will improve and save lives. It will also allow more of us to live and invest longer.

From the TransTech Digest Research Team:

As Patrick explains above, new biotechnologies will not only extend and improve lives, they will also save the global economy from the implications of a shrinking population. Workers able to stay healthy and remain active in their careers will, quite simply, reduce overall medical spending and lead to an expansion of tax revenues over time.

Today’s transformational technologies—more than perhaps any set of advances the world has ever seen—hold the potential to increase the wealth and the health of all persons in all countries, regardless of their age. Where only a few decades ago many observers saw science fiction, breakthrough research today is working to create previously unfathomable new realities.

You can participate in this process of science fiction becoming science fact in the pages of Patrick’s Transformational Technology Alert. Each month, Patrick profiles a new publicly traded company and shows you the part it plays in the technology revolution ahead. Click here to start a risk-free trial subscription to Transformational Technology Alert today.Sincerely,
Patrick Cox
Patrick Cox
Editor, Transformational Technology Alert

Mauldin Economics

Source: http://www.mauldineconomics.com/tech/tech-digest/peak-babies-not-oil

Millennials Aren’t Cheap, They’re Broke

Lynn Parramore writes for AlterNet

Pundits lament that young people are not buying cars and houses.

 Millennials, that perennial favorite topic of pundits, are back in the news. This time they’ve been dubbed the “Cheapest Generation” in a recent piece in the Atlantic Monthly.

Fair assessment? Or fairly out to lunch?  Photo Credit: Shutterstock.com

“Millennials,” announce the authors, “have turned against both cars and houses in dramatic and historic fashion.” Among the many reasons given for this curious circumstance are new mobile technologies “enabling a different kind of consumption” and patterns of re-urbanization.

The authors do allow that “the Great  Recession is responsible for some of the decline” in purchasing. But they worry that young folks just don’t seem to want to spend as lavishly as their parents did, which is a problem because since the end of World War II, new cars and houses have powered the American economy. “Millennials may have lost interest in both,” they warn. They’re more interested in their smartphones than a new ride or a phat pad.

Here’s another thought: they’re broke. Granted, that’s not as sexy for magazine writers to talk about as sussing out cultural and demographic trends. But it’s awfully hard to buy a house or a car when any of the following apply:

  • You are in student debt up to your eyeballs.
  • You can’t find a job.
  • When you do find a job, that job is insecure, low-wage, with few to no benefits.

A company called Revolution, which examines consumer behavior, came out with a report October 13 that the authors of the Atlantic Monthly piece might have consulted before labeling millennials cheap:

“[The report] revealed key motivations behind why millennials are buying fewer cars. And, contrary to many of the reasons cited in hundreds of articles and reports, the bottom line is clear —they don’t have enough money to buy vehicles due to the continuing weak economy.”

Eureka!

The Great Recession amplified the unemployment and poor jobs and crap wages, but the tale began around the time millennials were born in the 1980s, when Reagan convinced much of America that laissez faire capitalism was the ticket to good times. That was true for a tiny portion of the country, which may now be observed buying McMansions and yachts. But pretty much everyone else, from the middle class on down, got screwed, and the screws are tightening every day.

Millennials have never seen a world in which union-bashing, outsourcing, shareholder value ideology, crap temp jobs, stagnant wages, and growing inequality were not the norm. Most millennials did not go to college, and if they have a high school diploma, it’s worth less than it was than for any generation that came before. Many of the college-educated started out getting exploited as unpaid interns, then didn’t get the jobs they were promised, and subsequently found themselves struggling for one gig after another with plummeting hopes of forging a meaningful career.

Yet pundits are constantly exploring the choices these young people are making as if there is some great mystery to be divined. They aren’t getting married! They’re still living at home with their parents! It must be because they are lazy, or immature, or indecisive, or turning away from consumption for ideological reasons.

No, they just don’t have any money. And money is what you need to do stuff like get married and set up your own household and buy expensive items.

True, you may lose some interest in things you can’t afford to buy and redirect your attention and efforts to stuff that is more attainable. So you think about sharing an apartment instead of a buying a house, or sharing a Zipcar instead of buying your own snazzy new automobile. But these decisions may have a lot more to do with the fact that you just can’t afford what your parents had at your age than some grand urge to live with a small footprint or not to be a spendthrift.

To be young is to be selfish and want things for yourself. It’s hard to imagine that the majority of young people are saying, “No, I don’t think I’ll opt for my own apartment, but rather deal with noisy roommates because really I’m just kind of cheap/environmentally conscious/more interested in downloading apps on my smartphone.” They may be looking for things besides cars and houses to make them happy, and maybe that’s not a bad development in many ways, but it probably isn’t because they are so fundamentally different than generations past. They are simply trying to deal with the raw deal that has been handed to them as best they can. Some pundits describe this as a pragmatic response to the “new economy.” You might also call it trying to survive. Let’s examine what they’re up against.

  • Millennials have the highest unemployment rate of any generation.
  • They have more student loan debt than Gen Xers and Boomers did at their age.
  • More millennials live in poverty than previous generations did at the same stage of life.
  • They make up 61 percent of Americans making minimum wage.
  • Having entered the workforce during an economic downturn, the effects on their future wages will likely be permanent, even if the economy bounces back.

Millennials need decent jobs. They need the power to bargain with employers. They need health insurance that does not suck. They need student debt forgiveness. They need investment in America’s infrastructure. Given that policy in America is currently dictated by the desires of the one percent, which has gotten control of much our political system, they probably aren’t going to get these things anytime soon.

But there are 80 million of them. That’s 25 percent of the U.S. population, and if they could organize themselves, they would be a powerful force to take on the forces that would deprive them of a decent future.

Lynn Parramore is an AlterNet senior editor. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of “Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture.” She received her Ph.D. in English and cultural theory from NYU. She is the director of AlterNet’s New Economic Dialogue Project. Follow her on Twitter @LynnParramore.

Source: http://www.alternet.org/economy/millennials-arent-cheap-theyre-broke

 

Which Global Hegemon Is on Shifting Sands?

Charles Hugh Smith writing for OfTwoMinds

Given that all the leading candidates for Global Hegemon are hastening down paths of self-destruction, perhaps there will be no global hegemon dominating the 21st century.

Which nation with aspirations of global dominance (i.e. hegemony) has these attributes?

1. The nation’s recent prosperity is based on a vast expansion of credit.

2. The nation has 100+ million obese/diabetic citizens.

3. The citizens have little say over central government policies that favor cronies.

4. The nation faces demographic headwinds as the number of people in the workforce declines and the number of retirees balloons.

5. Large regions of the nation suffer from chronic water shortages.

So, which Global Hegemon Is on shifting sands? Hmm, sounds like the U.S. is a match so far…. Let’s add a few more attributes:

6. The nation’s credit expansion has relied on a largely unregulated shadow banking system.

7. The nation is in the midst of an unprecedented housing bubble.

This could still be the U.S., but America’s unprecedented housing bubble popped in 2006–the current bubble is a mere echo bubble. Let’s add a few more attributes:

8. The nation is beset with unprecedented “external” environmental costs as a result of rapid and largely unregulated industrialization.

9. The nation suffers from large-scale desertification.

10. Over half the nation’s monied Elites have either left the nation or plan to leave and transfer their financial wealth overseas.

The only nation with aspirations of global hegemony that fits all these attributes is China. The conventional China Story holds that the 21st century will be China’s century, much like the 20th century was America’s.

But this story overlooks the vast demographic, health, environmental and financial problems built into China’s land, people, and Central-Planning systems of finance and governance.

Consider two charts drawn from John Hampson’s recent overview of Problems in China:

China’s shadow banking system, which provided the majority of the credit that fueled the current expansion, is imploding:

Not coincidentally, China’s unprecedented housing bubble is also imploding:

China’s system allows only a limited number of options for savings and investment; other than bank accounts that have lost money when real inflation is accounted for, the primary option available to households is real estate. As a consequence, an enormous percentage of the nation’s household wealth has been sunk into empty apartments which act as “savings.”

But a physical flat in a high-rise building is not a financial asset like a savings account: it is a physical object that degrades with time and whose value is set by supply, demand and the availability and cost of credit.

If the building is not maintained properly, elevators break down, pipes start leaking and fixtures corrode, and the value of an unmaintained building drops to zero in terms of habitability within a decade or so.

100 million apartments become an enormous mal-investment of one-time wealth as they slowly become uninhabitable due to poor construction and/or maintenance.

China has been building infrastructure at a break-neck pace for 30 years, and this has created the mindset that almost every structure will be torn down and replaced with something grander every 20 years or so.

As a result of this mindset, very few structures are maintained. Why bother if it will be torn down and replaced a few years down the road?

But tens of millions of apartments cannot replaced every decade or two.

In effect, China has squandered its one-time wealth generated by rapid industrialization, and absorbed the still-uncounted environmental and health costs of this industrialization that must be paid in shortened lives, higher healthcare costs and environmental cleanups for decades to come.

Few promoters of the China Hegemony-in-the-21st-century Story mention the estimated 114 million people in China with diabetes–over one third the population of the U.S.– or the roughly 500 million people in China with elevated blood-sugar levels that put them at risk of developing diabetes or related lifestyle diseases. China ‘Catastrophe’ Hits 114 Million as Diabetes Spreads.

How much of the nation’s surplus wealth will be devoted to fixing the environmental and health costs that are already visible? How much of the wealth is actually phantom wealth that will vanish as the housing bubble based on an unprecedented credit bubble pops?

The China Story based on demographics, health, environmental damage and financial Central Planning is a quite different one from the China will be the global hegemon in the 21st century story. Given that all the leading candidates for Global Hegemon are hastening down paths of self-destruction, perhaps there will be no global hegemon dominating the 21st century.

Source: http://www.oftwominds.com/blogsept14/empire-of-sand9-14.html

The U.S. Government Is Borrowing About 8 Trillion Dollars A Year

By Michael Snyder for The Economic Collapse
National Debt - Public Domain

I know that headline sounds completely outrageous.  But it is actually true.  The U.S. government is borrowing about 8 trillion dollars a year, and you are about to see the hard numbers that prove this.  When discussing the national debt, most people tend to only focus on the amount that it increases each 12 months.  And as I wrote about recently, the U.S. national debt has increased by more than a trillion dollars in fiscal year 2014.  But that does not count the huge amounts of U.S. Treasury securities that the federal government must redeem each year.  When these debt instruments hit their maturity date, the U.S. government must pay them off.  This is done by borrowing more money to pay off the previous debts.  In fiscal year 2013, redemptions of U.S. Treasury securities totaled $7,546,726,000,000 and new debt totaling $8,323,949,000,000 was issued.  The final numbers for fiscal year 2014 are likely to be significantly higher than that.So why does so much government debt come due each year?

Well, in recent years government officials figured out that they could save a lot of money on interest payments by borrowing over shorter time frames.  For example, it costs the government far more to borrow money for 10 years than it does for 1 year.  So a strategy was hatched to borrow money for very short periods of time and to keep “rolling it over” again and again and again.

This strategy has indeed saved the federal government hundreds of billions of dollars in interest payments, but it has also created a situation where the federal government must borrow about 8 trillion dollars a year just to keep up with the game.

So what happens when the rest of the world decides that it does not want to loan us 8 trillion dollars a year at ultra-low interest rates?

Well, the game will be over and we will be in a massive amount of trouble.

I am about to share with you some numbers that were originally reported by CNS News.  As you can see, far more debt is being redeemed and issued today than back during the middle part of the last decade…

2013

Redeemed: $7,546,726,000,000

Issued: $8,323,949,000,000

Increase: $777,223,000,000

2012

Redeemed: $6,804,956,000,000

Issued: $7,924,651,000,000

Increase: $1,119,695,000,000

2011

Redeemed: $7,026,617,000,000

Issued: $8,078,266,000,000

Increase: $1,051,649,000,000

2010

Redeemed: $7,206,965,000,000

Issued: $8,649,171,000,000

Increase: $1,442,206,000,000

2009

Redeemed: $7,306,512,000,000

Issued: $9,027,399,000,000

Increase: $1,720,887,000,000

2008

Redeemed: $4,898,607,000,000

Issued: $5,580,644,000,000

Increase: $682,037,000,000

2007

Redeemed: $4,402,395,000,000

Issued: $4,532,698,000,000

Increase: $130,303,000,000

2006

Redeemed: $4,297,869,000,000

Issued: $4,459,341,000,000

Increase: $161,472,000,000

The only way that this game can continue is if the U.S. government can continue to borrow gigantic piles of money at ridiculously low interest rates.

And our current standard of living greatly depends on the continuation of this game.

If something comes along and rattles this Ponzi scheme, life in America could change radically almost overnight.

In the United States today, we have a heavily socialized system that hands out checks to nearly half the population.  In fact, 49 percent of all Americans live in a home that gets direct monetary benefits from the federal government each month according to the U.S. Census Bureau.  And it is hard to believe, but Americans received more than 2 trillion dollars in benefits from the federal government last year alone.  At this point, the primary function of the federal government is taking money from some people and giving it to others.  In fact, more than 70 percent of all federal spending goes to “dependence-creating programs”, and the government runs approximately 80 different “means-tested welfare programs” right now.  But the big problem is that the government is giving out far more money than it is taking in, so it has to borrow the difference.  As long as we can continue to borrow at super low interest rates, the status quo can continue.

But a Ponzi scheme like this can only last for so long.

It has been said that when the checks stop coming in, chaos will begin in the streets of America.

The looting that took place when a technical glitch caused the EBT system to go down for a short time in some areas last year and the rioting in the streets of Ferguson, Missouri this year were both small previews of what we will see in the future.

And there is no way that we will be able to “grow” our way out of this problem.

As the Baby Boomers continue to retire, the amount of money that the federal government is handing out each year is projected to absolutely skyrocket.  Just consider the following numbers…

Back in 1965, only one out of every 50 Americans was on Medicaid.  Today, more than 70 million Americans are on Medicaid, and it is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls.

When Medicare was first established, we were told that it would cost about $12 billion a year by the time 1990 rolled around.  Instead, the federal government ended up spending $110 billion on the program in 1990, and the federal government spent approximately $600 billion on the program in 2013.

It is being projected that the number of Americans on Medicare will grow from 50.7 million in 2012 to 73.2 million in 2025.

At this point, Medicare is facing unfunded liabilities of more than 38 trillion dollars over the next 75 years.  That comes to approximately $328,404 for every single household in the United States.

In 1945, there were 42 workers for every retiree receiving Social Security benefits.  Today, that number has fallen to 2.5 workers, and if you eliminate all government workers, that leaves only 1.6 private sector workers for every retiree receiving Social Security benefits.

Right now, there are approximately 63 million Americans collecting Social Security benefits.  By 2035, that number is projected to soar to an astounding 91 million.

Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years.

The U.S. government is facing a total of 222 trillion dollars in unfunded liabilities during the years ahead.  Social Security and Medicare make up the bulk of that.

Yes, things seem somewhat stable for the moment in America today.

But the same thing could have been said about 2007.  The stock market was soaring, the economy seemed like it was rolling right along and people were generally optimistic about the future.

Then the financial crisis of 2008 erupted and it seemed like the world was going to end.

Well, the truth is that another great crisis is rapidly approaching, and we are in far worse shape financially than we were back in 2008.

Don’t get blindsided by what is ahead.  Evidence of the coming catastrophe is all around you.

Source: http://theeconomiccollapseblog.com/archives/the-u-s-government-is-borrowing-about-8-trillion-dollars-a-year

 

Energy and the Economy – Twelve Basic Principles

By Gail Tverberg

There is a standard view of energy and the economy that can briefly be summarized as follows: Economic growth can continue forever; we will learn to use less energy supplies; energy prices will rise; and the world will adapt. My view of how energy and the economy fit together is very different. It is based on the principle of reaching limits in a finite world. Let me explain the issues as I see them.

Twelve Basic Principles of Energy and the Economy

1. Economic models are no longer valid, as we start getting close to limits.

We live in a finite world. Because of this, the extraction of energy resources and of resources in general operates in a way that is not at all intuitive as we approach limits. Economists have put together models of how the economy can be expected to act based on how the economy acts when it is distant from limits. Unfortunately, these economic models are worse than useless as limits approach because modeled relationships no longer hold. For example:

(a) The assumption that oil prices will rise as the cost of extraction rises is not necessarily true. Instead, a finite world creates feedback loops that tend to keep oil prices too low because of its tight inter-connections with wages. We see this happening right now. The Telegraph reported recently, “Oil and gas company debt soars to danger levels to cover shortfall in cash.”

(b) The assumption that greater investment will lead to greater output becomes less and less true, as the easy to extract resources (including oil) become more depleted.

(c) The assumption that higher prices will lead to higher wages no longer holds, as the easy to extract resources (including oil) become more depleted.

(d) The assumption that substitution will be possible when there are shortages becomes less and less appropriate because of interconnections with the rest of the system. Particular problems include the huge investment required for such substitution, impacts on the financial system, and shortages developing simultaneously in many areas (oil, metals such as copper, rare earth metals, and fresh water, for example).

More information is available from my post, Why Standard Economic Models Don’t Work–Our Economy is a Network.

2. Energy and other physical resources are integral to the economy.

In order to make any type of goods suitable for human use, it takes resources of various sorts (often soil, water, wood, stones, metals, and/or petrochemicals), plus one or more forms of energy (human energy, animal energy, wind power, energy from flowing water, solar energy, burned wood or fossil fuels, and/or electricity). With solar energy being the most prominent one out of the lot, it also has helped in the emergence of companies like RENEW ENERGY, a leading manufacturer, which manufactures products that try to harness from the sun as much energy as they can.

Figure 1. Energy of various types is used to transform raw materials (that is resources) into finished products.
Figure 1. Energy of various types is used to transform raw materials (that is resources) into finished products.

3. As we approach limits, diminishing returns leads to growing inefficiency in production, rather than growing efficiency.

As we use resources of any sort, we use the easiest (and cheapest) to extract first. This leads to a situation of diminishing returns. In other words, as more resources are extracted, extraction becomes increasingly expensive in terms of resources required, including human and other energy requirements. These diminishing returns do not diminish in a continuous slow way. Instead, there tends to be a steep rise in costs after a long period of slowly increasing costs, as limits are approached.

Figure 2. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.
Figure 2. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

One example of such steeply rising costs is the sharply rising cost of oil extraction since 2000 (about 12% per year for “upstream costs”). Another is the steep rise in costs that occurs when a community finds it must use desalination to obtain fresh water because deeper wells no longer work. Another example involves metals extraction. As the quality of the metal ore drops, the amount of waste material rises slowly at first, and then rapidly escalates as metal concentrations approaches 0%, as in Figure 2.

The sharp shift in the cost of extraction wreaks havoc with economic models based on a long period of very slowly rising costs. In a period of slowly rising costs, technological advances can easily offset the underlying rise in extraction costs, leading to falling total costs. Once limits are approached, technological advances can no longer completely offset underlying cost increases. The inflation-adjusted cost of extraction starts rising. The economy, in effect, starts becoming less and less efficient. This is in sharp contrast to lower costs and thus apparently greater efficiency experienced in earlier periods.

4. Energy consumption is integral to “holding our own” against other species.

All species reproduce in greater numbers than need to replace their parents. Natural selection determines which ones survive. Humans are part of this competition as well.

In the past 100,000 years, humans have been able to “win” this competition by harnessing external energy of various types–first burned biomass to cook food and keep warm, later trained dogs to help in hunting. The amount of energy harnessed by humans has grown over the years. The types of energy harnessed include human slaves, energy from animals of various sorts, solar energy, wind energy, water energy, burned wood and fossil fuels, and electricity from various sources.

Human population has soared, especially since the time fossil fuels began to be used, about 1800.

Figure 3. World population based on data from "Atlas of World History," McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.
Figure 3. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.

Even now, human population continues to grow (Figure 4), although the percentage rate of growth has slowed.

http://gailtheactuary.files.wordpress.com/2013/04/population.png
Figure 4. World population split between US, EU-27, and Japan, and the Rest of the World.

Because the world is finite, the greater use of resources by humans leads to lesser availability of resources by other species. There is evidence that the Sixth Mass Extinction of species started back in the days of hunter-gatherers, as their ability to use of fire to burn biomass and ability to train dogs to assist them in the hunt for food gave them an advantage over other species.

Also, because of the tight coupling of human population with growing energy consumption historically, even back to hunter-gatherer days, it is doubtful that decoupling of energy consumption and population growth can fully take place. Energy consumption is needed for such diverse tasks as growing food, producing fresh water, controlling microbes, and transporting goods.

5. We depend on a fragile self-organized economy that cannot be easily replaced.

Individual humans acting on their own have very limited ability to extract and control resources, including energy resources. The only way such control can happen is through a self-organized economy that allows people, businesses, and governments to work together on common endeavors. Development of a self-organized economy started very early, as bands of hunter-gatherers learned to work together, perhaps over shared meals of cooked food. More complex economies grew up as additional functions were added. These economies have gradually merged together to form the huge international economy we have today, including international trade and international finance.

This networked economy has a tendency to grow, in part because human population tends to grow (Item 4 above), and in part because greater complexity is required to solve problems, as an economy grows. This networked economy gradually adds more businesses and consumers, each one making choices based on prices and regulations in place at the particular time.

Figure 5. Dome constructed using Leonardo Sticks
Figure 5. Dome constructed using Leonardo Sticks

This networked economy is fragile. It can grow, but it cannot easily shrink, because the economy is constantly optimized for the circumstances at the time. As new products are developed (such as cars), support for prior approaches (such as horses, buggies and buggy whips) disappears. Systems designed for the current level of usage, such as oil pipelines or Internet infrastructure, cannot easily be changed to accommodate a much lower level of usage. This is the reason why the economy is illustrated as interconnected but hollow inside.

Another reason that the economy cannot shrink is because of the large amount of debt in place. If the economy shrinks, the number of debt defaults will soar, and many banks and insurance companies will find themselves in financial difficulty. Lack of banking and insurance services will adversely affect both local and international trade.

6. Limits of a finite world exert many pressures simultaneously on an economy.

There a number of ways an economy can reach a situation of inadequate resources for its population. While all of these may not happen at once, the combination makes the result worse than it otherwise would be.

a. Diminishing returns (that is, rising production costs as depletion sets in) for resources such as fresh water, metals, and fossil fuels.

b. Declining soil quality due to erosion, loss of mineral content, or increased soil salinity due to poor irrigation practices.

c. Rising population relative to the amount of arable land, fresh water, forest resources, mineral resources, and other resources available.

d. A need to use an increasing share of resources to combat pollution, related to resource extraction and use.

e. A need to use an increasing share of resources to maintain built infrastructure, such as roads, pipelines, electric grids, and schools.

f. A need to use an increasing share of resources to support government activities to support an increasingly complex society.

g. Declining availability of food that is traditionally hunted (such as fish, monkeys, and elephants), because an increase in human population leads to over-hunting and loss of habitat for other species.

7. Our current problems are worryingly similar to the problems experienced by earlier civilizations before they collapsed.

In the past, there have been civilizations that were confined to a limited area that grew for a while, and then collapsed once resource availability declined or population outgrew resources. Such issues led to a situation of diminishing returns, similar to the problems we are experiencing today. We know from studies of these prior civilizations how diminishing returns manifested themselves. These include:

(a) Reduced job availability and lower wages, especially for new workers joining the workforce.

(b) Spiking food costs.

(c) Growing demands on governments for services, because of (a) and (b).

(d) Declining ability of governments to collect sufficient taxes from workers who are producing less and less (because of diminishing returns) and because of this, receiving lower wages.

(e) Increased reliance on debt.

(f) Increased likelihood of resource wars, as a group with inadequate resources tries to take resources from other groups.

(g) Eventual population decline. This occurred for two reasons: As wages dropped and needed taxes rose, workers found it increasingly difficult to obtain an adequate diet. As a result, they become more susceptible to epidemics and diseases. Greater involvement in resource wars also led to higher death rates.

When collapse came, it did not come all at once. Rather a long period of growth was succeeded by a period of stagnation, before a crisis period of several years took place.

Figure 6. Shape of typical Secular Cycle, based on work of Peter Turchin and Sergey Nefedov in Secular Cycles.
Figure 6. Shape of typical Secular Cycle, based on work of Peter Turchin and Sergey Nefedov in Secular Cycles.

We began an economic growth cycle back when we began using fossil fuels to a significant extent, starting about 1800. We began a stagflation period, at least in the industrialized economies, when oil prices began to spike in the 1970s. Less industrialized countries have been able to continue growth their growth pattern longer. Our situation is likely to differ from that of early civilizations, because early civilizations were not dependent on fossil fuels. Pre-collapse skills tended to be useful post-collapse, because there was no real change in energy sources. Loss of fossil fuels would considerably change the dynamic of the outcome, because most jobs would become obsolete.

Most models put together by economists assume that the conditions of the growth period, or the growth plus stagflation period, will continue forever. Such models miss turning points.

8. Modeling underlying the book Limits to Growth shows why depletion can be expected to lead to declining economic growth. It also shows why extracting all of the resources that seem to be available is likely to be impossible.

We also know from the analysis underlying the book The Limits to Growth (by Donella Meadows and others, published in 1972) that growing demand for resources because of Items listed as 6a to 6g above will take an increasingly large share of resources produced. This dynamic makes it very difficult to produce enough additional resources so that economic growth can continue. The authors report that the behavior mode of the modeled system is overshoot and collapse.

The 1972 analysis does not model the financial system, including debt and the repayment of debt with interest. The closest it comes to economic modeling is modeling industrial capital, which it describes as factories, machines, and other physical “stuff” needed to extract resources and produce goods. It finds that inability to produce enough industrial capital is likely to be a bottleneck far before resources in the ground are exhausted.

As an example in today’s world, there seems to be a huge amount of very heavy oil that can be steamed out of the ground in many places including Canada and Venezuela. (The existence of such heavy oil is one reason the ratio of oil reserves to oil production is high.) To actually get this oil out of the ground quickly would require a huge physical investment in a very short time frame. As a practical matter, we cannot ramp up all of the physical infrastructure needed (pipelines, steaming equipment, refining equipment) without badly cutting into the resources needed to “grow” the rest of the economy. A similar problem is likely to exist if we try to ramp up world oil and gas supply using fracking.

9. Our real concern should be collapse caused by reaching limits in many ways, not the slow decline reflected in a Hubbert Curve.

One reason for being concerned about collapse is the similarity of the problems our current economy is experiencing to those of prior economies that collapsed, as discussed in Item 7. Another reason for this concern is based on the observation from physics that an economy is a dissipative structure, just as a hurricanes is, and just as a human being is. Such dissipative structures have a finite lifetime.

Concern about future collapse is very different from concern that one or another resource will decline in a symmetric Hubbert curve. The view that resources such as oil will gradually decrease in availability once 50% of the resources have been extracted reflects a best-case scenario, where a perfect replacement (both cheap and abundant) replaces the item that is depleting, so that the economy is not affected. Hubbert illustrated the kind of situation he was envisioning with the following graphic:

Figure 7. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.
Figure 7. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

10. There is a tight link between both oil consumption and total energy consumption and world economic growth.

This tight link is evident from historical data:

Figure 8. A comparison of three year average growth in world real GDP (based on USDA values in $2005$), oil supply and energy supply. Oil and energy supply are from BP Statistical Review of World Energy, 2014.
Figure 8. A comparison of three year average growth in world real GDP (based on USDA values in $2005$), oil supply and energy supply. Oil and energy supply are from BP Statistical Review of World Energy, 2014.

The link between energy and the economy comes both from the supply side and the demand side.

With respect to supply, it takes energy of many types to make goods and services of all types. This is discussed in Item 2 above.

With respect to demand,

(a) People who earn good wages (indirectly through the making of goods and services with energy products) can afford to buy products using energy.

(b) Because consumers pay taxes and buy goods and services, growth in demand from adequate wages flows through to governments and businesses as well.

(c) Higher wages enable higher debt, and higher debt also acts to increase demand.

(d) Increased demand increases the price of the resources needed to make the product with higher demand, making more of such resources economic to extract.

11. We need a growing supply of cheap energy to maintain economic growth.

This can be seen several ways.

(a) Today, all countries compete in a world economy. If a country’s economy uses an expensive source of energy (say high-priced oil or renewables) it must compete with other countries that use cheaper fuel sources (such as coal). The high price of energy puts the country with high-cost energy at a severe competitive disadvantage, pushing the economy toward economic contraction.

(b) Part of the world’s energy consumption comes from “free” energy from the sun. This solar energy is not evenly distributed: the warm areas of the world get considerably more than the cold areas of the world. The cold areas of the world are forced to compensate for this lack of free solar energy by building more substantial buildings and heating them more. They are also more inclined to use “closed in” transportation vehicles that are more costly than say, walking or using a bicycle.

Back in pre-fossil fuel days, the warm areas of the world predominated in economic development. The cold areas of the world “surged ahead” when their own forests ran short of the wood needed to provide the heat-energy they needed, and they learned to use coal instead. The knowledge they gained about using coal for home-heating quickly transferred to the ability to use coal to provide heat for industrial purposes. Since the warm areas of the world were not yet industrialized, the coal-using countries of the North were able to surge ahead economically. The advantage of the cold industrialized countries grew as they learned to use oil and natural gas. But once oil and natural gas became expensive, and industrialization spread around the world, the warm countries regained their advantage.

(c) Wages, (non-human) energy costs, and financing costs are all major contributors to the cost of producing goods and services. When energy costs rise, the rise in energy costs puts pressure both on wages and on interest rates (since interest rates determine financing costs), because businesses need to keep the total cost of goods and services close to “flat,” if consumers are to afford them. This occurs because wages do not rise as energy prices rise. In fact, pressure to keep the total cost of goods low creates pressure to reduce wages when oil prices are high (perhaps by sending manufacturing to a lower-cost country), just as it adds pressure to keep interest rates low.

(d) If we look at historical US data, wages have tended to rise strongly (in inflation-adjusted terms) when oil prices were less than $40 to $50 barrel, but have tended to stagnate above that oil price range.

Figure 9. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.
Figure 9. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

12. Oil prices that are too low for producers should be a serious concern. Such low prices occur because oil becomes unaffordable. In the language of economists, oil demand drops too low.

A common belief is that our concern should be oil prices that are too high, and thus strangle the economy. A much bigger concern should be that oil prices will fall too low, discouraging investment. Such low oil prices also encourage civil unrest in oil exporting nations, because the governments of these nations depend on tax revenue that is available when oil prices are high to balance their budgets.

It can easily be seen that high oil prices strangle the economies of oil importers. The salaries of consumers go “less far” in buying basics such as food (which is raised and transported using oil) and transportation to work. Higher costs for basics causes consumers cut back on discretionary expenditures, such as buying new more expensive homes, buying new cars, and going out to restaurants. These cutbacks by consumers lead to job layoffs in discretionary sectors and to falling home prices. Debt defaults are likely to rise as well, because laid-off workers have difficulty paying their loans. Our experience in the 2007-2009 period shows that these impacts quickly lead to severe recession and a drop in oil prices.

The issue we are now seeing is the reverse–too low oil prices for oil producers, including oil exporters. These low oil prices are contributing to the unrest we see in the Middle East. Low oil prices also contribute to Russia’s belligerence, since it needs high oil revenues to maintain its budget.

Conclusion

We seem now to be at risk in many ways of entering into the collapse scenario experienced by many civilizations before us.

One of areas of risk is that interest rates will rise, as the Quantitative Easing and Zero Interest Rate Policies held in place since 2008 erode. These ultra-low interest rates are needed to keep products affordable, since the high cost of oil (relative to consumer salaries) has not really gone away.

Another area of risk is an increase in debt defaults. One example occurs when student loan borrowers find it impossible to repay these loans on their meager wages. Another example is China with the financing of its big recent expansion by debt. A third example is the possibility that businesses extracting resources will find it impossible to repay loans with today’s (relatively) low commodity prices.

Another area of risk is natural disasters. It takes surpluses to deal with these disasters. As we reach limits, it becomes harder to mitigate the effects of a major hurricane or earthquake.

Clearly loss of oil production because of conflict in the Middle East or in other oil producing countries is a concern.

This list is by no means exhaustive. Many economies are “near the edge” now. Recent news is that Germany has slipped into recession as well as Japan. One economy failing is likely to pull others with it.
Related Notes
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Source: http://ourfiniteworld.com/2014/08/14/energy-and-the-economy-twelve-basic-principles/

Debt: Eight Reasons This Time is Different

Gail Tverberg blogs on Our Finite World.

In today’s world, we have a huge amount of debt outstanding. Academic researchers Carmen Reinhart and Kenneth Rogoff have become famous for their book This Time is Different: Eight Centuries of Financial Folly and their earlier paper This Time is Different: A Panoramic View of Eight Centuries of Financial Crises. Their point, of course, is that the same thing happens over and over again. We can learn from past crises to solve our current problems.

Part of their story is of course correct. Governments have gotten themselves into problems with debt, time after time. This is happening again now. In fact, the same two authors recently prepared a working paper for the International Monetary Fund called Financial and Sovereign Debt Crises: Some Lessons Learned and Some Lessons Forgotten, talking about ideas such as governments inflating their way out of debt problems and pushing problems off to insurance companies and pension funds, through regulations requiring investment in certain securities.

Many seem to believe that if we worked our way out of debt problems in the past, we can do the same thing again. The same assets may have new owners, but everything will work together in the long run. Businesses will continue operating, and people will continue to have jobs. We may have to adjust monetary policy, or perhaps regulation of financial institutions, but that is about all.

I think this is where the story goes wrong. The situation we have now is very different, and far worse, than what happened in the past. We live in a much more tightly networked economy. This time, our problems are tied to the need for cheap, high quality energy products. The comfort we get from everything eventually working out in the past is false comfort.

If we look closely at the past, we see that in some cases the outcomes are not benign. There are situations where much of the population in an area died off. This die-off did not occur directly because of debt defaults. Instead, the same issues that gave rise to debt defaults, primarily diminishing returns with respect to food and other types of production, also led to die off. We are not necessarily exempt from these same kinds of problems in the future.

Why the Current Interest in Debt Levels and Interest Rates

The reason I bring up these issues is because the problem of too much world debt is now coming to the forefront. The Bank for International Settlements, which is the central bank for central banks, issued a report a week ago in which they said world debt levels are too high, and that continuing the current low interest rate policy has too many bad effects. Something needs to be done to normalize monetary policy.

Janet Yellen, Federal Reserve Chair, and Christine Lagarde, managing director or the International Monetary Fund, have also been making statements about the issue of how to fix our current economic problems (News Report; Video). There is the additional rather bizarre point that back in January, Lagarde used numerology to suggest that a major change in policy might be announced in 2014 (on July 20?), with the hope that the past “seven miserable years” can be followed by “seven strong years.” The IMF has talked in the past about using its special drawing rights (SDRs) as a sort of international currency. In this role, the SDRs could act as the world’s reserve currency, be used for issuing bonds, and be used for setting the prices of commodities such as gold and oil. Perhaps a variation on SDRs is what Lagarde has in mind.

So with this background, let’s get back to the main point of the post. How is this debt crisis, and the likely outcome, different from previous crises?

1. We live in a globalized economy. Any slip-up of a major economy would very much affect all of the other major economies.

Banks hold bonds of governments other than their own. If a major government fails to make good on its promises, it can affect other governments as well. Smaller countries, like Greece or Cyprus, can be bailed out or their problems worked around. But if the United States, or even Japan, should run into major difficulties, it would affect the world as a whole. See my post, Twelve Reasons Why Globalization is a Huge Problem.

2. Our problem now is not simply governmental debt; it is debt of many different types, affecting individuals and businesses of all kinds, as well as governments.

In the studies of historical debt by Reinhart and Rogoff, the focus is on governmental debt. Now there is much more debt, some through banks, some through bonds, and some through less traditional sources. There are also derivatives that are in some ways like debt. In particular, if there are sharp moves in interest rates, it is possible that some issuers of derivatives will find themselves in financial difficulty.

There are also promises that are in many ways like debt, but that technically aren’t guaranteed, because legislatures can change the promised benefits whenever they choose. Examples of these are our current Social Security program and Medicare benefits. Citizens depend on these programs, even if there is no promise that they will continue to exist in their current form. With all of these kinds of debt and quasi-debt, we have a much more complex situation than in the past.

3. Our economy is a self-organized system that has properties of its own, quite apart from the properties of the individual consumers, businesses, governments, and resources that make up the system. Circumstances now are such that the world economy could fail, even though this could not happen in the past.  

I recently wrote about the nature of a networked economy, in my post Why Standard Economic Models Don’t Work–Our Economy is a Network. In that post, I represented our networked economy as being somewhat like this dome that can be built with wooden sticks.

Figure 1. Dome constructed using Leonardo Sticks

Figure 1. Dome constructed using Leonardo Sticks

Years ago, when a civilization collapsed, the network of connections was not as dense as it is today. Most food was not dependent on long supply chains, and quite a bit of manufacturing was done locally. If one economy collapsed, even a fairly large one like the Weimar Republic of Germany, the rest of the world was not terribly dependent on it. Figuratively, the “hole” in the dome could mend, and over time, the economy could strengthen and go on as before. We cannot count on this situation today, however.

4. Fossil fuels (coal, oil and natural gas) available today are what enable tighter connections than in the past, and also add vulnerabilities.

Early economies relied mainly on the sun’s energy to grow food, gravity to help with irrigation, human energy and animal energy for transport and food growing, wind energy to power ships and wooden windmills, and water energy to operate water wheels. Wood was used for many purposes, including heating homes, cooking, and making charcoal to provide the heat needed to smelt metals and make glass.

In the past two hundred years we have added fossil fuels to our list of fuels. This has allowed us to make metals in quantity, as well as concrete and glass in quantity, enabling the development of much technology. The use of coal enabled the building of hydroelectric dams as well as electrical transmission lines, thus enabling widespread use of electricity. Fossil fuels enabled other modern fuels as well, including nuclear energy, and the manufacture of what we today call “renewable energy,” including today’s wind turbines and solar PV.

Of the fossil fuels, oil has been especially important. Oil is particularly good as a transport fuel, because it is easily transported and very energy dense. With the use of oil, transport by smaller vehicles such as cars, trucks and airplanes became possible, and transport by ship and by rail was improved. Such changes allowed international businesses to grow and international trade to flourish. Economies were able to grow much more rapidly than in the pre-fossil fuel era. Governments became richer and began offering education to all, paved roads, and benefits such as unemployment insurance, health care programs, and pensions for the elderly.

Thus, fossil fuels enable a very different lifestyle, and very different governments and government programs than existed prior to fossil fuels. If something were to happen to all fossil fuels, or even just oil, most businesses would have to cease operation. Governments could not collect enough taxes to continue functioning. Very few farmers would be able to produce food and transport it to market, because oil is used to transport seeds to farmers, to operate machinery, to operate irrigation equipment, to transport soil amendments, and to create herbicides and pesticides.

This situation now is very different from the past, when most food was produced using human and animal labor, and transport was often by a cart pulled by an animal. Before fossil fuels, even if governments collapsed and most people died off, the remaining people could continue growing food, gathering water, and going about their own lives. If we were to lose oil, or oil plus electricity (because oil is required to maintain electric transmission and because businesses tend to close when they are missing either oil or electricity), we would have a much harder time. Most of our jobs would disappear. Banks wouldn’t be able to operate. Our water and sewer systems would stop working. We would find it necessary to “start over,” in a very different way.

5. Because of the big role of debt today, economic growth is essential to keeping the current economic system operating. 

It is much easier to pay back debt with interest when an economy is growing than when it is shrinking, because when an economy is shrinking, people are losing their jobs. Even if only, say, 10% lose their jobs, this loss of jobs creates many loan defaults. Banks are likely to find themselves in a precarious position and are likely to cut back on lending to others, making the situation worse.

If the economy starts shrinking, businesses will also have difficulty. They have fixed costs, including rent, management salaries, and their own debt repayments. These costs tend to stay the same, even if total revenue shrinks because of an economic slowdown. Because of these problems, businesses are also likely to find it increasingly difficult to pay back their own debt in a recession. They are likely to find it necessary to lay off workers, making the recession worse.

If economic growth is very low, this lack of growth can to some extent be covered up with very low interest rates. But such very low interest rates tend to be a problem as well, because they encourage asset bubbles of many sorts, such as the current run-up in stock market prices. It is not always clear which bubbles are being run up by low interest rates, either. For example, it is quite possible that the recent run-up in US oil extraction (see Figure 4, below) is being enabled by ultra-low interest rates debt (since this is a cash-flow negative business) and by investors who a desperate for an investment that might yield a slightly higher yield than current low bond yields.

Actually, the current need for growth to prevent defaults is not all that different from the situation in the past 800 years. In Reinhardt and Rogoff’s academic paper mentioned above, the authors remark, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.” Reinhardt and Rogoff didn’t seem to understand why this occurred, however.

6. The underlying reason regarding why we are headed toward debt problems is different from in the past. We now are dependent both on oil products and electricity, two very concentrated carriers of energy, instead of the more diffuse energy types used in the past. Our problem is that these energy carriers are becoming high-cost to produce. It is these high costs (a reflection of diminishing returns) that lead to economic contraction. 

This time, in order to continue economic growth, we need a growing supply of very high-quality energy products, namely oil products and non-intermittent electricity, to support the economy that we have built. These products need to be low-priced, if customers are to afford them. Thus, it should not be surprising that economic growth in the past seems to have been driven by a combination of (1) falling prices of electricity as we learned to more efficiently produce it, and (2) continued low prices for oil.

Figure 2.  Electricity prices and electrical demand, USA 1900 - 1998 from Ayres Warr paper.

Figure 2. Electricity prices and electrical demand, USA 1900 – 1998 from Accounting for Growth, the Role of Physical Work by Robert Ayres and Benjamin Warr, Structural Change and Economic Dynamics, February, 2004).

According to Ayres and Warr (Figure 2), power stations in 1900 converted only 4% of the potential energy in coal to electricity, but by 2000, the conversion efficiency was raised to 35%. This improvement in efficiency allowed the continuing decrease in electricity prices. With lower prices, more individuals and businesses were able to afford electricity, and more technology using electricity became feasible. Cheap electricity allowed goods to be produced at prices that workers could afford, and the system tended to grow.

For oil, the price of oil remained relatively flat in inflation-adjusted terms for a very long time, even as engineers developed ever-more-efficient devices to use that oil.

Figure 3. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

Figure 3. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

We ran into our initial problems extracting oil cheaply in the early 1970s, after US oil production started to decline (Figure 4).

Figure 4. US crude oil production split between tight oil (from shale formations), Alaska, and all other, based on EIA data. Shale is from  AEO 2014 Early Release Overview.

Figure 4. US crude oil production split between tight oil (from shale formations), Alaska, and all other, based on EIA data. Shale is from AEO 2014 Early Release Overview.

Back in the 1970s, we were able to work around the price spike by bringing oil production online in several additional places, including the Alaska, the North Sea, and Mexico. Unfortunately, those areas are now declining as well. Thus, we are increasingly forced to extract oil from areas that are high priced either (a) because of  high extraction costs (such as the tight oil now being extracted in the United States) or (b) because of high indirect costs (such as the need for desalination plants and food subsidies in the Middle East). These can only be funded if oil prices are high, allowing governments to collect high levels of taxes.

There is considerable evidence that high oil prices are associated with recession. The Great Recession of 2007-2009 was associated with a huge spike in oil prices. I have written about the way high oil prices contribute to recession in a peer-reviewed article published in the journal Energy called Oil Supply Limits and the Continuing Financial Crisis. James Hamilton has shown that has shown that 10 out of 11 US recessions since World War II were associated with oil price spikes. Hamilton also showed that the effects of the oil price spike were sufficient to cause the recession of that began in late 2007.

Now the cost of oil production is high, and electricity prices have stopped falling. We read U. S. electricity prices may be going up for good, from the L. A. Times. It should be no surprise that economic growth is now a problem.

7. In historical periods, defaults were mostly associated with the transfer of ownership of various productive assets (such as land and factories) from one owner to another. Now, we are vulnerable to changes that could ultimately cut off oil and electricity, and thus bring the system down–not just transfer ownership. 

The kinds of things that could bring the system down are diverse. They include:

  • War in the Middle East that would vastly disrupt oil exports. We do not have alternative suppliers–the world would have to do without part of its supplies. We are vulnerable now, because oil exporters are getting “squeezed” by prices that have not risen substantially since 2011. This makes it harder for Middle Eastern countries to fund their budgets, making wars and civil disorder more likely.
  • A spike in oil prices, perhaps caused by a war in the Middle East, that would vastly disrupt oil exports. Oil importing countries would head back into recession, with many layoffs. Governments are in worse shape for fighting this situation than they were in 2007-2008.
  • An increase in interest rates. While Quantitative Easing and Zero Interest rate policy may not look like they are doing much, an increase in interest rates would not work well at all. With higher interest rates, governments would owe more in interest payments, so would need to raise taxes (leading to recessionary effects). The monthly payments required for buying high-priced goods (from cars, to houses, to factories) would rise, cutting back on demand, also tending to lead to recession.
  • A decrease in lending, or even a failure of debt to keep rising, would also be a problem. Janet Yellen’s recent IMF speech highlighted the possibility of using regulation to prevent excessive debt. Unfortunately, increasing debt is very much needed to keep oil prices high enough to enable extraction at today’s high cost levels. See my post The Connection Between Oil Prices, Debt Levels, and Interest Rates. If debt levels drop, we run the danger of oil prices dropping as dramatically as they did in late 2008, when lending froze up.

Figure 5. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

Figure 5. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

8. The world is now filled with a large number of people in powerful positions who mistakenly think they know answers to questions, when they really do not. The problem is that researchers tend operate in subject-matter “silos.” They build models based on their narrow understanding of a problem. These models may temporarily work, but as we reach limits in a finite world, these models produce misleading results. The users of these models do not understand the problem and make decisions based on badly flawed models.

Economists do not understand energy issues. They seem to think that their models, which ignore energy issues, are fine. All they need to do is fine-tune regulation, or tweak interest rates, and everything will be fine. Unfortunately, these economic models no longer work, as I explained in a recent post, Why Standard Economic Models Don’t Work–Our Economy is a Network.

In fact, the issue is more basic than just bad models that economists are using. The whole “peer-reviewed paper” system, with its pressure to write more peer-reviewed papers, each resting on prior peer-reviewed papers, is flawed. Models are built and used endlessly, in part because that is the way things have been done in the past. Once an approach is used frequently, everyone assumes it is correct. Models can and do have short term-predictive power, but that fact does not mean that the approach works for the long term.

The problem we are running into is the fact the world is finite. Growth can’t continue indefinitely. The way that the physical world enforces the end to growth is not obvious, until we start hitting the limits. The limits are cost of production limits for oil and for our supply of stable grid electricity. (I have talked about selling prices, but selling prices are not really the limits, in themselves. It is the fact that with higher costs of production, either selling prices must go up, or profits and the ability to invest in new production must go down–that is the problem. Right now, the rising cost of production of oil is being hidden in prices that are too low for oil producers. So many assume we don’t have a problem. The issue of adequate government funding is also mixed into the price/cost of production issue.)

Models that are no longer correct fill every area of study, from actuarial models, to financial planning models, to economic models, to models forecasting future oil and gas production, to climate change models.

Some models are deceptively simple–the idea that the number of years of future production of oil (or gas or coal) can be estimated by [Amount of Resources / Current Annual Production] is a simple model. Unfortunately, this model doesn’t work, because we can never get enough investment capital to extract all of the fossil fuel that seems to be available–the price can never go high enough, and stay high enough. High prices simply bring on recession. See my post, IEA Investment Report – What is Right; What is Wrong.

In fact, it is pretty hard to find any model that continues to work, as we reach limits in a finite world. This is not intuitively obvious. If a model worked before, why wouldn’t it work now? Researchers and well-meaning leaders follow models that sort of worked in the past, but don’t really model the current situation. Thus, we have well-meaning leaders, doing their best to make things better, inadvertently making things worse. In a finite world, everything is “connected” to everything else, so things that look beneficial from one perspective can have a bad outcome viewed another way. For example, a reduction in carbon dioxide emissions from closing coal plants risks major electrical outages is New England and seems likely to raise electricity prices. Such changes push the economy toward recession, and perhaps ultimately toward collapse.

Governments are one area squeezed by higher oil and electricity costs. As governments cut back, whether these cut backs are in education, unemployment benefits, military spending, or healthcare spending, there are indirect effects on the economy as a whole. The problem is that government spending creates jobs. As government spending is cut, it pushes the economy toward contraction–even if part of today’s spending is clearly wasteful. It creates a conundrum–fixing one problem makes another problem worse.

Conclusion

We live in perilous times. We have leaders who think they know the answers but, in fact, they do not. The debt problems we face now are not just overspending problems; they are signs that we are reaching limits of a finite world. World leaders do not seem to understand this connection. It is not even clear that they understand the connection of debt problems to the need for cheap-to-produce, high-quality energy products.

World leaders are nevertheless convinced that they know the answers, based on complex, but very flawed, models. Unfortunately, actions taken based on these models have a good chance of making the situation worse rather than better. For example, trying to tie a world economy closer together, when it is already heading toward collapse, seems like a recipe for disaster.

I find Christine Lagarde’s use of numerology in her January 14, 2014 speech at the National Press Club Luncheon disturbing. Is she trying to signal some “in crowd” to make different decisions, in advance of a big IMF announcement? Or is numerology being used for prediction? Such an approach to forecasting would seem to be even worse than using models based on silos of limited understanding.

Source: http://ourfiniteworld.com/2014/07/07/debt-eight-reasons-this-time-is-different/#more-39101

World Oil Production at 3/31/2014–Where are We Headed?

Gail Tverberg blogs on Our Finite World.

The standard way to make forecasts of almost anything is to look at recent trends and assume that this trend will continue, at least for the next several years. With world oil production, the trend in oil production looks fairly benign, with the trend slightly upward (Figure 1).

Figure 1. Quarterly crude and condensate oil production, based on EIA data.

Figure 1. Quarterly crude and condensate oil production, based on EIA data.

If we look at the situation more closely, however, we see that we are dealing with an unstable situation. The top ten crude oil producing countries have a variety of problems (Figure 2). Middle Eastern producers are particularly at risk of instability, thanks to the advances of ISIS and the large number of refugees moving from one country to another.

Figure 2. Top ten crude oil and condensate producers during first quarter of 2014, based on EIA data.

Figure 2. Top ten crude oil and condensate producers during first quarter of 2014, based on EIA data.

Relatively low oil prices are part of the problem as well. The cost of producing oil is rising much more rapidly than its selling price, as discussed in my post Beginning of the End? Oil Companies Cut Back on Spending. In fact, the selling price of oil hasn’t really risen since 2011 (Figure 3), because citizens can’t afford higher oil prices with their stagnating wages.

Figure 3. Average weekly oil prices, based on EIA data.

Figure 3. Average weekly oil prices, based on EIA data.

The fact that the selling price of oil remains flat tends to lead to political instability in oil exporters because they cannot collect the taxes required to provide programs needed to pacify their people (food and fuel subsidies, water provided by desalination, jobs programs, etc.) without very high oil prices. Low oil prices also make the plight of oil exporters with declining oil production worse, including Russia, Mexico, and Venezuela.

Many people when looking at future oil supply concern themselves with the amount of reserves (or resources) remaining, or perhaps Energy Return on Energy Invested (EROEI). None of these is really the right limit, however. The limiting factor is how long our current networked economic system can hold together. There are lots of oil reserves left, and the EROEI of Middle Eastern oil is generally quite high (that is, favorable). But instability could still bring the system down. So could popping of the US oil supply bubble through higher interest rates or more stringent lending rules.

The Top Two Crude Oil Producers: Russia and Saudi Arabia

When we look at quarterly crude oil production (including condensate, using EIA data), we see that Russia’s crude oil production tends to be a lot smoother than Saudi Arabia’s (Figure 4). We also see that since the third quarter of 2006, Russia’s crude oil production tends to be higher than Saudi Arabia’s.

Figure 4.  Comparison of quarterly oil production for Russia and Saudi Arabia, based on EIA data.

Figure 4. Comparison of quarterly oil production (crude + condensate) for Russia and Saudi Arabia, based on EIA data.

Both Russia and Saudi Arabia are headed toward problems now. Russia’s Finance Minister has recently announced that its oil production has hit and peak, and is expected to fall, causing financial difficulties. In fact, if we look at monthly EIA data, we see that November 2013 is the highest month of production, and that every month of production since that date has dropped from this level. So far, the drop in oil production has been relatively small, but when an oil exporter is depending on tax revenue from oil to fund government programs, even a small drop in production (without a higher oil price) is a financial problem.

We see in Figure 4 above that Saudi Arabia’s quarterly oil production is quite erratic, compared to oil production of Russia. Part of the reason Saudi Arabia’s oil production is so erratic is that it extends the life of its fields by periodically relaxing (reducing) production from them. It also reacts to oil price changes–if the oil price is too low, as in the latter part of 2008 and in 2009, Saudi oil production drops. The tendency to jerk oil production around gives the illusion that Saudi Arabia has spare production capacity. It is doubtful at this point that it has much true spare capacity. It makes a good story, though, which news media are willing to repeat endlessly.

Saudi Arabia has not been able to raise oil exports for years (Figure 5). It gained a reputation for its oil exports back in the late 1970s and early 1980s, and has been able to rest on its laurels. Its high “proven reserves” (which have never been audited, and are doubted by many) add to the illusion that it can produce any amount it wants.

Figure 5. Comparison of Russian and Saudi Arabian oil exports, based on BP Statistical Review of World Energy 2014 data. Pre-1985 Russian amounts estimated based on Former Soviet Union amounts.

Figure 5. Comparison of Russian and Saudi Arabian oil exports, based on BP Statistical Review of World Energy 2014 data (oil production minus oil consumption). Pre-1985 Russian amounts estimated based on Former Soviet Union amounts.

In 2013, oil exports from Russia were equal to 88% of Saudi Arabian oil exports. The world is very close to being as dependent on Russian oil exports as it is on Saudi Arabian oil exports. Most people don’t realize this relationship.

The current instability of the Middle East has not hit Saudi Arabia yet, but there is increased fighting all around. Saudi Arabia is not immune to the problems of the other countries. According to BBC, there is already a hidden uprising taking place in eastern Saudi Arabia.

US Oil Production is a Bubble of Very Light Oil

The US is the world’s third largest producer of crude and condensate. Recent US crude oil production shows a “spike” in tight oil productions–that is, production using hydraulic fracturing, generally in shale formations (Figure 6).

Figure 6. US crude oil production split between tight oil (from shale formations), Alaska, and all other, based on EIA data. Shale is from  AEO 2014 Early Release Overview.

Figure 6. US crude oil production split between tight oil (from shale formations), Alaska, and all other, based on EIA data. Shale is from AEO 2014 Early Release Overview.

If we look at recent data on a quarterly basis, the trend in production also looks very favorable.

Figure 7. US Crude and condensate production by quarter, based on EIA data.

Figure 7. US Crude and condensate production by quarter, based on EIA data.

The new crude is much lighter than traditional crude. According to the Wall Street Journal, the expected split of US crude is as follows:

Figure 8. Wall Street Journal image illustrating the expected mix of US crude oil.

Figure 8. Wall Street Journal image illustrating the expected mix of US crude oil.

There are many issues with the new “oil” production:

  • The new oil production is so “light” that a portion of it is not what we use to power our cars and trucks. The very light “condensate” portion (similar to natural gas liquids) is especially a problem.
  • Oil refineries are not necessarily set up to handle crude with so much volatile materials mixed in. Such crude tends to explode, if not handled properly.
  • These very light fuels are not very flexible, the way heavier fuels are. With the use of “cracking” facilities, it is possible to make heavy oil into medium oil (for gasoline and diesel). But using very light oil products to make heavier ones is a very expensive operation, requiring “gas-to-liquid” plants.
  • Because of the rising production of very light products, the price of condensate has fallen in the last three years. If more tight oil production takes place, available prices for condensate are likely to drop even further. Because of this, it may make sense to export the “condensate” portion of tight oil to other parts of the world where prices are likely to be higher. Otherwise, it will be hard to keep the combined sales price of tight oil (crude oil + condensate) high enough to encourage more tight oil production.

The other issue with “tight oil” production (that is, production from shale formations) is that its production seems to be a “bubble.”  The big increase in oil production (Figure 6) came since 2009 when oil prices were high and interest rates were very low. Cash flow from these operations tends to be negative. If interest rates should rise, or if oil prices should fall, the system is likely to hit a limit. Another potential problem is oil companies hitting borrowing limits, so that they cannot add more wells.

Without US oil production, world crude oil production would have been on a plateau since 2005.

Figure 9. World crude and condensate, excluding US  production, based on EIA data.

Figure 9. World crude and condensate, excluding US production, based on EIA data.

Canadian Oil Production

The other recent success story with respect to oil production is Canada, the world’s fifth largest producer of crude and condensate. Thanks to the oil sands, Canadian oil production has more than doubled since the beginning of 1994 (Figure 10).

Figure 10. Canadian quarterly crude oil (and condensate) production based on EIA data.

Figure 10. Canadian quarterly crude oil (and condensate) production based on EIA data.

Of course, there are environmental issues with respect to both oil from the oil sands and US tight oil. When we get to the “bottom of the barrel,” we end up with the less environmentally desirable types of oil. This is part of our current problem, and one reason why we are reaching limits.

Oil Production in China, Iraq, and Iran

In the first quarter of 2014, China was the fourth largest producer of crude oil. Iraq was sixth, and Iran was seventh (based on Figure 2 above). Let’s first look at the oil production of China and Iran.

Figure 11. China and Iran crude and condensate production by quarter based on EIA data.

Figure 11. China and Iran crude and condensate production by quarter based on EIA data.

As of 2010, Iran was the fourth largest producer of crude oil in the world. Iran has had so many sanctions against it that it is hard to figure out a base period, prior to sanctions. If we compare Iran’s first quarter 2014 oil production to its most recent high production in the second quarter of 2010, oil production is now down about 870,000 barrels a day. If sanctions are removed and warfare does not become too much of a problem, oil production could theoretically rise by about this amount.

China has relatively more stable oil production than Iran. One concern now is that China’s oil production is no longer rising very much. Oil production for the fourth quarter of 2013 is approximately tied with oil production for the fourth quarter of 2012. The most recent quarter of oil production is down a bit. It is not clear whether China will be able to maintain its current level of production, which is the reason I mention the possibility of a decline in oil production in Figure 2.

The lack of growth in China’s oil supplies may be behind its recent belligerence in dealing with Viet Nam and Japan. It is not only exporters that become disturbed when oil supplies are not to their liking. Oil importers also become disturbed, because oil supplies are vital to the economy of all nations.

Now let’s add Iraq to the oil production chart for Iran and China.

Figure 12. Quarterly crude oil and condensate production for Iran, China, and Iraq, based on EIA data.

Figure 12. Quarterly crude oil and condensate production for Iran, China, and Iraq, based on EIA data.

Thanks to improvements in oil production in Iraq, and sanctions against Iran, oil production for Iraq slightly exceeds that of Iran in the first quarter of 2014. However, given Iraq’s past instability in oil production, and its current problems with ISIS and with Kurdistan, it is hard to expect that Iraq will be a reliable oil producer in the future. In theory Iraq’s oil production can rise a few million barrels a day over the next 10 or 20 years, but we can hardly count on it.

The Oil Price Problem that Adds to Instability

Figure 13 shows my view of the mismatch between (1) the price oil producers need to extract their oil and (2) the price consumers can afford. The cost of extraction (broadly defined including taxes required by governments) keeps rising while “ability to pay” has remained flat since 2007. The inability of consumers to pay high prices for oil (because wages are not rising very much) explains why oil prices have remained relatively flat in Figure 3 (near the top of this post), even while there is fighting in the Middle East.

Figure 3. Comparison of oil price per barrel needed (Brent) with ability to pay. Amounts based on judgement of author.

Figure 13. Comparison of oil price per barrel needed by producers (Brent) with ability to pay. Amounts based on judgment of author.

When the selling price is lower than the full cost of production (including the cost of investing in new wells and paying dividends to shareholders), the tendency is to reduce production, one way or another. This reduction can be voluntarily, in the form of a publicly traded company buying back stock or selling off acreage.

Alternatively, the cutback can be involuntary, indirectly caused by political instability. This happens because oil production is typically heavily taxed in oil exporting nations. If the oil price remains too low, taxes collected tend to be too low, making it impossible to fund programs such as food and fuel subsidies, desalination plants, and jobs programs. Without adequate programs, there tend to be uprisings and civil disorder.

If a person looks closely at Figure 13, it is clear that in 2014, we are out in “Wile E. Coyote Territory.” The broadly defined cost of oil extraction (including required taxes by exporters) now exceeds the ability of consumers to pay for oil. As a result, oil prices barely spike at all, even when there are major Middle Eastern disruptions (Figure 3, above).

The reason why Wile E. Coyote situation can take place at all is because it takes a while for the mismatch between costs and prices to work its way through the system. Independent oil companies can decide to sell off acreage and buy back shares of stock but it takes a while for these actions to actually take place. Furthermore, the mismatch between needed oil prices and charged oil prices tends to get worse over time for oil exporters. This lays the groundwork for increasing dissent within these countries.

With oil prices remaining relatively flat, importers become complacent because they don’t understand what is happening.  It looks like we have no problem when, in fact, there really is a fairly big problem, lurking behind the scenes.

To make matters worse, it is becoming more and more difficult to continue Quantitative Easing, a program that tends to hold down longer-term interest rates. The expectation is that the program will be discontinued by October 2014. The reason why the price of oil has stayed as high as it has in the last several years is because of the effects of quantitative easing and ultra low interest rates. If it weren’t for these, oil prices would fall, because consumers would need to pay much more for goods bought on credit, leaving less for the purchase of oil products. See my recent post, The Connection Between Oil Prices, Debt Levels, and Interest Rates.

Figure 4. Big credit related drop in oil prices that occurred in late 2008 is now being mitigated by Quantitative Easing and very low interest rates.

Figure 14. Big credit related drop in oil prices that occurred in late 2008 is now being mitigated by Quantitative Easing and very low interest rates.

Because of the expectation that Quantitative Easing will end by October 2014 and the pressure to tighten credit conditions, my expectation is that the affordable price of oil will start dropping in late 2014, as shown in Figure 13. The growing disparity between what consumers can afford and what producers need tends to make the Wile E. Coyote overshoot condition even worse. It is likely to lead to more problems with instability in the Middle East, and a collapse of the US oil production bubble.

Conclusion

I explained earlier that we live in a networked economy, and this fact changes the way economic models work. Many people have developed models of future oil production assuming that the appropriate model is a “bell curve,” based on oil depletion rates and the inability to geologically extract more oil. Unfortunately, this isn’t the right model.

The situation is far more complex than simple geological decline models assume. There are multiple limits involved–prices needed by oil producers, prices affordable by oil importers, and prices for other products, such as water and food. Interest rates are also important. There are time lags involved between the time the Wile E. Coyote situation begins, and the actions to fix this mismatch takes place. It is this time lag that tends to make drop-offs very steep.

The fact that we are dealing with political instability means that multiple fuels are likely to be affected at once. Clearly natural gas exports from the Middle East will be affected at the same time as oil exports. Many other spillover effects are likely to happen as well. US businesses without oil will need to cut back on operations. This will lead to job layoffs and reduced electricity use. With lower electricity demand, prices for electricity as well as for coal and natural gas will tend to drop. Electricity companies will increasingly face bankruptcy, and fuel suppliers will reduce operations.

Thus, we cannot expect decline to follow a bell curve. The real model of future energy consumption crosses many disciplines at once, making the situation difficult to model.  The Reserves / Current Production model gives a vastly too high indication of future production, for a variety of reasons–rising cost of extraction because of diminishing returns, need for high prices and taxes to support the operations of exporters, and failure to consider interest rates.

The Energy Return on Energy Invested model looks at a narrowly defined ratio–usable energy acquired at the “well-head,” compared to energy expended at the “well-head” disregarding many things–including taxes, labor costs, cost of borrowing money, and required dividends to stockholders to keep the system going. All of these other items also represent an allocation of available energy. A multiplier can theoretically adjust for all of these needs, but this multiplier tends to change over time, and it tends to differ from energy source to energy source.

The EROEI ratio is probably adequate for comparing two “like products”–say tight oil produced in North Dakota vs tight oil produced in Texas, or a ten year change in North Dakota energy ratios, but it doesn’t work well when comparing dissimilar types of energy. In particular, the model tends to be very misleading when comparing an energy source that requires subsidies to an energy source that puts off huge tax revenue to support local governments.

When there are multiple limits that are being encountered, it is the financial system that brings all of the limits together. Furthermore, it is governments that are at risk of failing, if enough surplus energy is not produced. It is very difficult to build models that cross academic areas, so we tend to find models that reflect “silo” thinking of one particular academic specialty. These models can offer some insight, but it is easy to assume that they have more predictive value than they do.

Unfortunately, the limits we are reaching seem to be financial and political in nature. If these are the real limits, we seem to be not far away from the simultaneous drop in the production of many energy products. This type of limit gives a much steeper drop off than the frequently quoted symmetric “bell curve of oil production.” The shape of the drop off corresponds to (1) the type of drop off experienced by previous civilizations when they collapsed, (2) the type of drop-off I have forecast for world energy consumption, and (3) Ugo Bardi’s Seneca cliff.  The 1972 book Limits to Growth by Donella Meadows et al. says (page 125), “The behavior mode of of the system shown in figure 35 is clearly that of overshoot and collapse,” so it tends to come to the same conclusion as well.

Source: http://ourfiniteworld.com/2014/07/23/world-oil-production-at-3312014-where-are-we-headed/