http://kunstler.com/clusterfuck-nation/dark-dynamics/
Dark Dynamics
What the world is witnessing, without actually paying much attention, is the death of our debt-based economy — that is, borrowing the means to thrive in the now from a future that can’t really furnish it anymore. The illusion that the future would always provide was a legacy of the cheap energy era. That era ended in 2005. The basic promise is broken and with it the premise for living as we had been. The energy available today, especially oil, is no longer cheap enough to run the industrial economies designed to run on it. Any way that you look at the dynamic, Modernity loses.
With oil under $50 a barrel, and gasoline under $3 a gallon (back east), the public apparently thinks that the Peak Oil story is dead and gone. But when it costs $75 a barrel to pull the stuff out of the ground, and the stuff only sells for $47 a barrel, the oil companies’ business model doesn’t really work. The shale oil companies especially have been gaming the system by issuing bonds that pay relatively high interest rates in an investment climate where almost nothing else offers enough yield to live on, especially for pension funds and insurance companies. Two little upward bumps this year in the price of oil toward the $50 range prompted a wish that the good old days of high-priced oil were coming back, that the oil business would be profitable again.
The trouble is that high oil prices — say, over $100 a barrel, as it was in 2014 — crush advanced economies, so that demand for oil crashes, and with it productive activity. Without productivity, the debts issued by companies (and even governments) don’t get repaid. There really is no “sweet spot” in this energy cost equation.
A lot of wishful thinkers would like to believe that you can run contemporary life on something beside oil. But the usual “solutions,” solar and wind energy, don’t pencil out, especially when you consider that the hardware for running them — the photovoltaics, charge controllers, batteries, turbines, and blades, can’t be mass-produced and distributed without the very fossil fuels they are supposed to replace.
These matters add up to the essential quandary of our time. It has expressed itself in falling standards of living for what used to be the middle class, most particularly in the USA. European countries have tried to work around this problem with their rigid bureaucracies for keeping those already employed from losing their jobs. In France, Spain, and Italy, this has only made it much harder for people under 30 to get a job. The jobs picture for millennials in the USA is not much better, though there’s no structural job-protection for their elders who are still working here. They live in abject fear of termination by the HR ghouls of the big corporations.
Sooner or later the younger generation will explode in rage at the system and there is no telling what the result will be. We’re already seeing it in the black ghettos, where decades of accrued social dysfunction make the anomie and purposelessness — of young men especially — much worse. The newer loser class of people who once had good jobs and now have poor prospects of ever getting them back gets swept up in the mania for their incoherent champion, Trump, who shows no sign of understanding the essential quandary of our time. The tragedy of Trumpism is that the man so poorly represents a large group of Americans with genuine woes and grievances. And the larger tragedy of our country these days is that events did not prompt better leaders to step forward.
The explanation may be that people who actually understand the dark dynamics spinning out are rather pessimistic about our ability to carry on under the familiar disposition of things. Hillary represents the forces in our national life that want to pretend that nothing is wrong, that all the splendid rackets of the day — Federal Reserve interventions, corporate debt-fueled stock buybacks, military log-rolling, medical racketeering, the college loan Ponzi, pension fund levitation, primary dealer bank interest rate arbitrage, agribiz Frankenfood proliferation — can just grind along like some old riverboat banger engine keeping the garbage barge of American life afloat. Thus, Hillary is shaping up to be the patsy of the century, likely to preside, if elected, over the biggest blowup of established arrangements that world has ever seen.
The debt problem alone is absolutely certain to express itself in at least three major ways: the crash of equity markets, the collapse of the bond markets, and the loss of faith in the value and meaning of whatever money you’re using. Any of those events would turn the economic life of the linked advanced economies upside down. Any of them could occur during the 2016 US election season.
Monday, August 22, 2016
Monday, August 15, 2016
SC136-7
http://www.resilience.org/stories/2016-08-15/is-the-oil-industry-dying
Is the Oil Industry Dying?
The ‘peak oil’ controversy is staging a come-back as the industry confronts higher costs—and low prices
Talking about “peak oil” can feel very last decade. In fact, the question is still current. Petroleum markets are so glutted and prices are so low that most industry commenters think any worry about future oil supplies is pointless. However, the glut and price dip are hardly indications of a healthy industry; instead, they are symptoms of an increasing inability to match production cost, supply, and demand in a way that’s profitable for producers but affordable for society. Is this what peak oil looks like?
Aside from forecasts regarding the timing of the inevitable moment when petroleum production would max out (yes, many of those forecasts proved premature), the peak oil discussion more importantly highlighted three key insights, all of them as valid now as ever:
1. Oil is essential to the modern world. Energy is what enables us to do anything and everything, and oil is currently the world’s primary energy source. But oil’s role in society is even more crucial than that sentence might suggest. Nearly 95 percent of global transport is oil-powered, and if trucks, trains, and ships were to stop running the global economy would grind to a halt almost instantly. Even electricity (which is the other main energy pillar of commerce and daily life) depends on oil: coal mining, transport, and processing depend on oil; much the same is true for natural gas, uranium, and the components of solar panels and wind turbines.
2. Oil is hard to substitute. A colleague, the energy analyst David Fridley, and I recently finished a year-long inquiry into details of the necessary and inevitable transition from fossil fuels to renewable sources of energy. While lots of sunshine and wind are available, not all the ways we use energy will be easy to adapt to renewable electricity. Some of the biggest challenges we identified are in the transport sector. Electric cars are certainly feasible (more are on the road every year), but batteries alone can’t power heavy trucks, container ships, and large airplanes.
There are other possibilities (including biofuels and hydrogen-based fuels made using electricity), but these are likely to be much more expensive and will require large energy inputs for their ongoing production. Moreover, transitioning to them will take major investment and infrastructure build-out occurring over two or more decades.
3. Depletion of oil (and of other non-renewable resources) tends to follow the low-hanging fruit principle. Humanity has been extracting oil on an industrial scale for 150 years now. At first, all it took was identifying places where petroleum was seeping to the ground surface, then digging a shallow well. Today, globally, millions of old conventional oil wells lie depleted and abandoned. The primary remaining prospects for production include heavy oil (which requires expensive processing); bitumen (which must be mined or steam-extracted); tight oil (produced from low-permeability source rocks, which requires hydrofracturing and horizontal drilling, with typical wells showing a rapid decline in output); deepwater oil (which entails high drilling and infrastructure costs); or arctic oil (which has so far mostly proven cost-prohibitive). All of these options entail rapidly growing environmental costs and risks.
It’s that third point that helps explain the disturbing recent evolution of the petroleum world. Most industry analysts focus on oil prices, and it’s clear on this score that the market has gone seriously weird in recent years. In 2001, petroleum sold for about $20 a barrel, a price that sat well within a fairly narrow band of highs and lows that had bounded price for roughly 20 years following the politically generated oil shocks of the 1970s. But, by the summer of 2008, the price had ascended to the unprecedented, dizzying altitude of $147; then (following the cratering of the global economy) it plummeted to $37. Following that, prices gradually recovered to around $100, where they remained for nearly three years before sliding again, starting in mid-2014, to the high $20s, from which they have partially rebounded to today’s approximately $40.
The recent highs (above $100) are incomprehensible, until we recognize that the oil industry’s costs of production have skyrocketed in the past decade. Throughout the first decade-and-a-half of the new century, demand for oil was growing rapidly in Asia. Normally, the industry would have simply ramped up its supplies of conventional crude to satisfy the needs of new car buyers in China and India. But output of conventional oil topped out in 2005; all the new supply growth since then has been from hard-to-reach or low-grade resources. Producers didn’t resort to these until demand outstripped supply, raising prices and justifying the far higher rates of investment that are required per unit of new production. But that meant that, henceforth high prices would have to continue if producers were to turn a profit.
When oil was selling for $100 per barrel, many tight oil projects in the United States were nevertheless only marginally profitable or were actually money losers; still, with interest rates at historic lows and plenty of investment capital sloshing around the financial industry, drillers had no trouble finding operating capital (David Hughes of Post Carbon Institute was one of the few analysts who questioned the durability of the “shale gale,” on the basis of meticulous well-by-well analysis). The result of cascading investment was a ferocious spate of drilling and fracking that drove levels of U.S. oil production sharply upward, overwhelming global markets. The amount of oil in storage ballooned. That’s the main reason prices collapsed in mid-2014—along with Saudi Arabia’s insistence on continuing to pump crude at maximum rates in order to help drive the upstart American shale-oil producers out of business. The Saudi gambit mostly succeeded: Small-to-medium-sized U.S. producers are now gasping for air, and, as their massive debts come due over the next few months, a wave of bankruptcies and buyouts seems fairly inevitable. Meanwhile, in the continental U.S., oil production has dropped by 800,000 barrels a day.
Indeed, the entire petroleum business is currently in deep trouble. Countries that rely on crude oil export revenues are facing enormous budget deficits, and in some cases are having trouble maintaining basic services to their people.
The worst instance is Venezuela, where hunger is rampant. But hard times have also fallen on Nigeria, the Middle Eastern monarchies, Russia, and even Canada to some degree. The oil majors (Exxon, Shell, Chevron, etc.) are still somewhat profitable because a significant portion of their output still comes from older, giant oilfields; but a large and increasing segment of their remaining profits now goes toward debt servicing. And their existing oil reserves are not being replaced with new discoveries.
Any way you look at it, the industry faces a grim future. Even if prices go up, there is no guarantee of recovery: Investors may be shy to rush back to oil since they have no assurance that a price rout won’t recur in months or years. After all, when prices are high enough to generate profits (which is very high indeed these days), they are also high enough to destroy demand—which is also vulnerable to recessions, the growth of the electric vehicle market, and meaningful climate policy. It’s simply unclear whether the global economy can consistently support an oil price that’s sufficiently robust to pay the industry to extract and refine the kinds of resources that remain.
Again, most oil commentators look at all of this through a purely economic lens. But it may be helpful to think more in terms of thermodynamics. Oil, after all, is primarily useful as a source of energy. And it takes energy to get energy (it takes energy to drill an oil well, for example). Energy profits from oil extraction activities were once enormous, and those energy profits got spread throughout society, wherever oil was used. Now, petroleum’s energy profitability is falling fast.
Oil production past and present. On the left is a 1902 "gusher" while on the right is an aerial view of tar sands production in Alberta, Canada. Sources: Wikimedia Commons. Tar sands image via shutterstock. Reproduced on Resilience.org with permission.
For example, while conventional oil wells 50 years ago often had a hundred-to-one energy payback, today’s bitumen production in Canada shows an energy-return-on-energy-invested (EROEI) ratio of between 3:1 and 5:1. This declining energy profitability is why it’s now so hard to produce oil at a financial profit, and also why—even when oil supplies are still expanding—they don’t fuel as much economic growth throughout the economy.
Since oil is the key energy source of modern civilization, the effective EROEI of society as a whole can be said to be declining. It might not be far from the mark to suggest that we are witnessing the early stages of the thermodynamic failure of global industrial society. An earlier phase of the process manifested in the financial crash of 2008; when that occurred, governments and central banks responded by deploying easy money (massive debt, low interest rates) to prop up the system, and this temporarily masked society’s dwindling EROEI. Debt can accomplish this over the short run: Money is effectively a marker for energy, and we can borrow and spend money now on costly energy with the promise that we will pay for it later (hence the massive build-up of debt in the oil industry). But if cheaper-to-produce energy and higher prices don’t emerge soon, those debts will eventually become transparently unrepayable. Hence what is inherently an energy crisis can appear to most observers to be a debt crisis.
The problem of eroding energy profitability is hard to deal with partly because the decline is happening so fast. If we had a couple of decades to prepare for falling thermodynamic efficiency, there are things we could do to soften the blow. That’s what the peak oil discussion was all about: It was an effort to warn society ahead of time. Once the dynamic of declining energy profitability really gets rolling, adaptation becomes much more difficult. Oil no longer provides as much of a stimulus to the economy, which just can’t grow as it did before, and this in turn sets in motion a self-reinforcing feedback loop of stagnating or falling labor productivity, falling wages, falling consumption, reduced ability to repay debt, failure to invest in future energy productivity, falling energy supplies, falling tax revenues, and so on. How long can debt continue to substitute for energy before the next traumatic phase of this feedback process begins in earnest? That’s anybody’s guess, but our time-window for action is likely months or years, not decades....
Is the Oil Industry Dying?
The ‘peak oil’ controversy is staging a come-back as the industry confronts higher costs—and low prices
Talking about “peak oil” can feel very last decade. In fact, the question is still current. Petroleum markets are so glutted and prices are so low that most industry commenters think any worry about future oil supplies is pointless. However, the glut and price dip are hardly indications of a healthy industry; instead, they are symptoms of an increasing inability to match production cost, supply, and demand in a way that’s profitable for producers but affordable for society. Is this what peak oil looks like?
Aside from forecasts regarding the timing of the inevitable moment when petroleum production would max out (yes, many of those forecasts proved premature), the peak oil discussion more importantly highlighted three key insights, all of them as valid now as ever:
1. Oil is essential to the modern world. Energy is what enables us to do anything and everything, and oil is currently the world’s primary energy source. But oil’s role in society is even more crucial than that sentence might suggest. Nearly 95 percent of global transport is oil-powered, and if trucks, trains, and ships were to stop running the global economy would grind to a halt almost instantly. Even electricity (which is the other main energy pillar of commerce and daily life) depends on oil: coal mining, transport, and processing depend on oil; much the same is true for natural gas, uranium, and the components of solar panels and wind turbines.
2. Oil is hard to substitute. A colleague, the energy analyst David Fridley, and I recently finished a year-long inquiry into details of the necessary and inevitable transition from fossil fuels to renewable sources of energy. While lots of sunshine and wind are available, not all the ways we use energy will be easy to adapt to renewable electricity. Some of the biggest challenges we identified are in the transport sector. Electric cars are certainly feasible (more are on the road every year), but batteries alone can’t power heavy trucks, container ships, and large airplanes.
There are other possibilities (including biofuels and hydrogen-based fuels made using electricity), but these are likely to be much more expensive and will require large energy inputs for their ongoing production. Moreover, transitioning to them will take major investment and infrastructure build-out occurring over two or more decades.
3. Depletion of oil (and of other non-renewable resources) tends to follow the low-hanging fruit principle. Humanity has been extracting oil on an industrial scale for 150 years now. At first, all it took was identifying places where petroleum was seeping to the ground surface, then digging a shallow well. Today, globally, millions of old conventional oil wells lie depleted and abandoned. The primary remaining prospects for production include heavy oil (which requires expensive processing); bitumen (which must be mined or steam-extracted); tight oil (produced from low-permeability source rocks, which requires hydrofracturing and horizontal drilling, with typical wells showing a rapid decline in output); deepwater oil (which entails high drilling and infrastructure costs); or arctic oil (which has so far mostly proven cost-prohibitive). All of these options entail rapidly growing environmental costs and risks.
It’s that third point that helps explain the disturbing recent evolution of the petroleum world. Most industry analysts focus on oil prices, and it’s clear on this score that the market has gone seriously weird in recent years. In 2001, petroleum sold for about $20 a barrel, a price that sat well within a fairly narrow band of highs and lows that had bounded price for roughly 20 years following the politically generated oil shocks of the 1970s. But, by the summer of 2008, the price had ascended to the unprecedented, dizzying altitude of $147; then (following the cratering of the global economy) it plummeted to $37. Following that, prices gradually recovered to around $100, where they remained for nearly three years before sliding again, starting in mid-2014, to the high $20s, from which they have partially rebounded to today’s approximately $40.
The recent highs (above $100) are incomprehensible, until we recognize that the oil industry’s costs of production have skyrocketed in the past decade. Throughout the first decade-and-a-half of the new century, demand for oil was growing rapidly in Asia. Normally, the industry would have simply ramped up its supplies of conventional crude to satisfy the needs of new car buyers in China and India. But output of conventional oil topped out in 2005; all the new supply growth since then has been from hard-to-reach or low-grade resources. Producers didn’t resort to these until demand outstripped supply, raising prices and justifying the far higher rates of investment that are required per unit of new production. But that meant that, henceforth high prices would have to continue if producers were to turn a profit.
When oil was selling for $100 per barrel, many tight oil projects in the United States were nevertheless only marginally profitable or were actually money losers; still, with interest rates at historic lows and plenty of investment capital sloshing around the financial industry, drillers had no trouble finding operating capital (David Hughes of Post Carbon Institute was one of the few analysts who questioned the durability of the “shale gale,” on the basis of meticulous well-by-well analysis). The result of cascading investment was a ferocious spate of drilling and fracking that drove levels of U.S. oil production sharply upward, overwhelming global markets. The amount of oil in storage ballooned. That’s the main reason prices collapsed in mid-2014—along with Saudi Arabia’s insistence on continuing to pump crude at maximum rates in order to help drive the upstart American shale-oil producers out of business. The Saudi gambit mostly succeeded: Small-to-medium-sized U.S. producers are now gasping for air, and, as their massive debts come due over the next few months, a wave of bankruptcies and buyouts seems fairly inevitable. Meanwhile, in the continental U.S., oil production has dropped by 800,000 barrels a day.
Indeed, the entire petroleum business is currently in deep trouble. Countries that rely on crude oil export revenues are facing enormous budget deficits, and in some cases are having trouble maintaining basic services to their people.
The worst instance is Venezuela, where hunger is rampant. But hard times have also fallen on Nigeria, the Middle Eastern monarchies, Russia, and even Canada to some degree. The oil majors (Exxon, Shell, Chevron, etc.) are still somewhat profitable because a significant portion of their output still comes from older, giant oilfields; but a large and increasing segment of their remaining profits now goes toward debt servicing. And their existing oil reserves are not being replaced with new discoveries.
Any way you look at it, the industry faces a grim future. Even if prices go up, there is no guarantee of recovery: Investors may be shy to rush back to oil since they have no assurance that a price rout won’t recur in months or years. After all, when prices are high enough to generate profits (which is very high indeed these days), they are also high enough to destroy demand—which is also vulnerable to recessions, the growth of the electric vehicle market, and meaningful climate policy. It’s simply unclear whether the global economy can consistently support an oil price that’s sufficiently robust to pay the industry to extract and refine the kinds of resources that remain.
Again, most oil commentators look at all of this through a purely economic lens. But it may be helpful to think more in terms of thermodynamics. Oil, after all, is primarily useful as a source of energy. And it takes energy to get energy (it takes energy to drill an oil well, for example). Energy profits from oil extraction activities were once enormous, and those energy profits got spread throughout society, wherever oil was used. Now, petroleum’s energy profitability is falling fast.
Oil production past and present. On the left is a 1902 "gusher" while on the right is an aerial view of tar sands production in Alberta, Canada. Sources: Wikimedia Commons. Tar sands image via shutterstock. Reproduced on Resilience.org with permission.
For example, while conventional oil wells 50 years ago often had a hundred-to-one energy payback, today’s bitumen production in Canada shows an energy-return-on-energy-invested (EROEI) ratio of between 3:1 and 5:1. This declining energy profitability is why it’s now so hard to produce oil at a financial profit, and also why—even when oil supplies are still expanding—they don’t fuel as much economic growth throughout the economy.
Since oil is the key energy source of modern civilization, the effective EROEI of society as a whole can be said to be declining. It might not be far from the mark to suggest that we are witnessing the early stages of the thermodynamic failure of global industrial society. An earlier phase of the process manifested in the financial crash of 2008; when that occurred, governments and central banks responded by deploying easy money (massive debt, low interest rates) to prop up the system, and this temporarily masked society’s dwindling EROEI. Debt can accomplish this over the short run: Money is effectively a marker for energy, and we can borrow and spend money now on costly energy with the promise that we will pay for it later (hence the massive build-up of debt in the oil industry). But if cheaper-to-produce energy and higher prices don’t emerge soon, those debts will eventually become transparently unrepayable. Hence what is inherently an energy crisis can appear to most observers to be a debt crisis.
The problem of eroding energy profitability is hard to deal with partly because the decline is happening so fast. If we had a couple of decades to prepare for falling thermodynamic efficiency, there are things we could do to soften the blow. That’s what the peak oil discussion was all about: It was an effort to warn society ahead of time. Once the dynamic of declining energy profitability really gets rolling, adaptation becomes much more difficult. Oil no longer provides as much of a stimulus to the economy, which just can’t grow as it did before, and this in turn sets in motion a self-reinforcing feedback loop of stagnating or falling labor productivity, falling wages, falling consumption, reduced ability to repay debt, failure to invest in future energy productivity, falling energy supplies, falling tax revenues, and so on. How long can debt continue to substitute for energy before the next traumatic phase of this feedback process begins in earnest? That’s anybody’s guess, but our time-window for action is likely months or years, not decades....
SC136-6
http://www.globalresearch.ca/how-long-can-economic-reality-be-ignored/5540538
How Long Can Economic Reality Be Ignored?
Trump and Clinton have come out with the obligatory “economic plans.” Neither them nor their advisors, have any idea about what really needs to be done, but this is of no concern to the media.
The presstitutes operate according to “pay and say.” They say what they are paid to say and that is whatever serves the corporations and the government. This means that the presstitutes like Hitlery’s economic plan and do not like Trump’s.
Yesterday I listened to the NPR presstitutes say how Trump pretends to be in favor of free trade but really is against it, because he is against all the free trade agreements such as NAFTA, the Trans-Pacific and Trans-Atlantic partnerships. The presstitutes don’t know that these are not trade agreements. NAFTA is a “give away American jobs” agreement, and the so-called partnerships give away the sovereignty of countries in order to award global corporations immunity from laws.
As I have reported on many occasions, the Oligarchs’ government lies to us about everything, including economic statistics. For example, we are told that we have been enjoying an economic recovery since June, 2009, that we are more or less at full emploment with an unemployment rate of 5% or less, and that there is no inflation. We are told this despite the facts that the “recovery” is based on the under-reporting of the inflation rate, the unemployment rate is 23%, and inflation is high.
GDP is measured in current prices. If GDP rises 3% this year over last year, the output of real goods and services might have risen 3% or prices might have gone up by 3% or real output might have dropped but is masked by price increases. To know what really happened the nominal GDP number has to be deflated by the amount of inflation.
In times past we could get a reasonable idea of how the economy was doing, because the measure of inflation was reasonable. That is no longer the case. Various “reforms” have taken inflation out of the measures of inflation. For example, if the price of an item in the inflation index goes up, the item is taken out and a cheaper item put in its place. Alternatively, the price rise is called a “quality improvement” and not counted as a price rise.
In other words, by defining inflation away, price increases are transformed into an increase in real output.
The same thing happens to the measure of unemployment. Unemployment simply isn’t counted by the reported unemployment rate. No matter how long and hard an unemployed person has looked for a job, if that person hasn’t job hunted in the past four weeks the person is not considered to be unemployed. This is how the unemployment rate is said to be 5% when the labor-force participation rate has collapsed, half of American 25-year-olds live with their parents, and more Americans age 24-34 live with parents than independently.
Finanial reporters never inquire why government statistics are designed to provide an incorrect picture of the economy. Anyone who purchases food, clothing, visits a hardware store, and pays repair bills and utility bills knows that there is a lot of inflation. Consider prescription drugs. AARP reports that the annual cost of prescription drugs used by retirees has risen from $5,571 in 2006 to $11,341 in 2013, but their incomes have not kept up. Indeed, the main reason for “reforming” the measurement of inflation was to eliminate COLA adjustments to Social Security benefits.
https://www.rt.com/usa/334004-drug-prices-doubled-years/
Charles Hugh Smith has come up with a clever way of estimating the real rate of inflation—the Burrito Index. From 2001 to 2016 the cost of a burrito has risen 160 percent from $2.50 to $6.50. During these 15 years the officially measured rate of inflation is 35 percent.
And it is not only burritos. The cost of higher education has risen 137% since 2000. The Milliman Medical Index shows medical costs to have risen far above official inflation from 2005 to 2016. The costs of medical insurance, trash collection, you name it, are dramatically higher than the official rate of inflation.
Food, tuiton and medical costs are major outlays for households. Add zero interest on savings to the problem of coping with major cost increases when real incomes are stagnant and falling. For example, grandparents cannot help grandchildren with their student loan debt when zero interest rates force grandparents to draw down their savings in order to supplement essentially frozen Social Security benefits during a time of high inflation. Savings are being taken out of the economy. Many families exist by paying only the minimum payment on their credit card balance, which means that their debt grows monthly.
Real economists, if there were any, looking at the real economic picture would see an economy collapsing into widespread debt deflation and impoverishment. Debt deflation is when consumers after they service their debts have no discretionary income left with which to drive the economy with purchases.
The reason that Americans have no income from their savings is that public authorities put the welfare of a handful of “banks too big to fail” above the welfare of the American people. The enormous liquidity created by the Federal Reserve has gone into the financial system where it has driven up the prices of financial instruments. There has been a stock market recovery but not an economic recovery.
In the past liquidity implied economic growth. When the Federal Reserve loosened monetary policy, the increase in consumer demand caused an increase in the output of goods and services. Stock prices would rise anticipating higher profits. But in recent years financial markets have not been driven by fundamentals, which are adverse, but by the liquidity that the Federal Reserve has pumped into the banking system in order to save a handful of over-sized banks and insurance giant AIG, all of which should have been allowed to fail.
The liquidity had to go somewhere and it went into the prices of stocks and bonds, causing a tremendous asset inflation.
What sense does it make to have zero interest rates when high inflation is eating away the real value of money? What sense does it make to have high price/earnings ratios when the consumer market cannot expand? What sense does it make to have a stable dollar when the Federal Reserve has created far more dollars than the economy has created goods and services? What sense does it make to undermine the financial condition of pension funds and insurance companies with zero interest rates, leaving them with no fixed income hedge against the stock market?
It makes no sense. We are in a trap in which collapse seems the only way out. If interest rates reflected the real rate of inflation, the hundreds of trillions of dollars in derivatives would blow up, the stock market would collapse, unemployment could not be hidden with under-measurement, budget deficits would rise. What would public authorities do?
When crisis hits, what happens to corporations that used profits and borrowed money, that is, debt, to buy back their own stocks in order to keep the price high and, thereby, executive bonuses high and shareholders happy and disinclined to support takeovers? Chaos and its companion Fear take over from Contentment. Hell breaks loose.
Is more money printed? Does the money find its way into consumer prices? Do we experience simultaneously massive inflation and massive unemployment?
Don’t expect the presstitutes, the politicians, or Wall Street to confront any of these questions.
When the crisis occurs, it will be blamed on Russia or China.
How Long Can Economic Reality Be Ignored?
Trump and Clinton have come out with the obligatory “economic plans.” Neither them nor their advisors, have any idea about what really needs to be done, but this is of no concern to the media.
The presstitutes operate according to “pay and say.” They say what they are paid to say and that is whatever serves the corporations and the government. This means that the presstitutes like Hitlery’s economic plan and do not like Trump’s.
Yesterday I listened to the NPR presstitutes say how Trump pretends to be in favor of free trade but really is against it, because he is against all the free trade agreements such as NAFTA, the Trans-Pacific and Trans-Atlantic partnerships. The presstitutes don’t know that these are not trade agreements. NAFTA is a “give away American jobs” agreement, and the so-called partnerships give away the sovereignty of countries in order to award global corporations immunity from laws.
As I have reported on many occasions, the Oligarchs’ government lies to us about everything, including economic statistics. For example, we are told that we have been enjoying an economic recovery since June, 2009, that we are more or less at full emploment with an unemployment rate of 5% or less, and that there is no inflation. We are told this despite the facts that the “recovery” is based on the under-reporting of the inflation rate, the unemployment rate is 23%, and inflation is high.
GDP is measured in current prices. If GDP rises 3% this year over last year, the output of real goods and services might have risen 3% or prices might have gone up by 3% or real output might have dropped but is masked by price increases. To know what really happened the nominal GDP number has to be deflated by the amount of inflation.
In times past we could get a reasonable idea of how the economy was doing, because the measure of inflation was reasonable. That is no longer the case. Various “reforms” have taken inflation out of the measures of inflation. For example, if the price of an item in the inflation index goes up, the item is taken out and a cheaper item put in its place. Alternatively, the price rise is called a “quality improvement” and not counted as a price rise.
In other words, by defining inflation away, price increases are transformed into an increase in real output.
The same thing happens to the measure of unemployment. Unemployment simply isn’t counted by the reported unemployment rate. No matter how long and hard an unemployed person has looked for a job, if that person hasn’t job hunted in the past four weeks the person is not considered to be unemployed. This is how the unemployment rate is said to be 5% when the labor-force participation rate has collapsed, half of American 25-year-olds live with their parents, and more Americans age 24-34 live with parents than independently.
Finanial reporters never inquire why government statistics are designed to provide an incorrect picture of the economy. Anyone who purchases food, clothing, visits a hardware store, and pays repair bills and utility bills knows that there is a lot of inflation. Consider prescription drugs. AARP reports that the annual cost of prescription drugs used by retirees has risen from $5,571 in 2006 to $11,341 in 2013, but their incomes have not kept up. Indeed, the main reason for “reforming” the measurement of inflation was to eliminate COLA adjustments to Social Security benefits.
https://www.rt.com/usa/334004-drug-prices-doubled-years/
Charles Hugh Smith has come up with a clever way of estimating the real rate of inflation—the Burrito Index. From 2001 to 2016 the cost of a burrito has risen 160 percent from $2.50 to $6.50. During these 15 years the officially measured rate of inflation is 35 percent.
And it is not only burritos. The cost of higher education has risen 137% since 2000. The Milliman Medical Index shows medical costs to have risen far above official inflation from 2005 to 2016. The costs of medical insurance, trash collection, you name it, are dramatically higher than the official rate of inflation.
Food, tuiton and medical costs are major outlays for households. Add zero interest on savings to the problem of coping with major cost increases when real incomes are stagnant and falling. For example, grandparents cannot help grandchildren with their student loan debt when zero interest rates force grandparents to draw down their savings in order to supplement essentially frozen Social Security benefits during a time of high inflation. Savings are being taken out of the economy. Many families exist by paying only the minimum payment on their credit card balance, which means that their debt grows monthly.
Real economists, if there were any, looking at the real economic picture would see an economy collapsing into widespread debt deflation and impoverishment. Debt deflation is when consumers after they service their debts have no discretionary income left with which to drive the economy with purchases.
The reason that Americans have no income from their savings is that public authorities put the welfare of a handful of “banks too big to fail” above the welfare of the American people. The enormous liquidity created by the Federal Reserve has gone into the financial system where it has driven up the prices of financial instruments. There has been a stock market recovery but not an economic recovery.
In the past liquidity implied economic growth. When the Federal Reserve loosened monetary policy, the increase in consumer demand caused an increase in the output of goods and services. Stock prices would rise anticipating higher profits. But in recent years financial markets have not been driven by fundamentals, which are adverse, but by the liquidity that the Federal Reserve has pumped into the banking system in order to save a handful of over-sized banks and insurance giant AIG, all of which should have been allowed to fail.
The liquidity had to go somewhere and it went into the prices of stocks and bonds, causing a tremendous asset inflation.
What sense does it make to have zero interest rates when high inflation is eating away the real value of money? What sense does it make to have high price/earnings ratios when the consumer market cannot expand? What sense does it make to have a stable dollar when the Federal Reserve has created far more dollars than the economy has created goods and services? What sense does it make to undermine the financial condition of pension funds and insurance companies with zero interest rates, leaving them with no fixed income hedge against the stock market?
It makes no sense. We are in a trap in which collapse seems the only way out. If interest rates reflected the real rate of inflation, the hundreds of trillions of dollars in derivatives would blow up, the stock market would collapse, unemployment could not be hidden with under-measurement, budget deficits would rise. What would public authorities do?
When crisis hits, what happens to corporations that used profits and borrowed money, that is, debt, to buy back their own stocks in order to keep the price high and, thereby, executive bonuses high and shareholders happy and disinclined to support takeovers? Chaos and its companion Fear take over from Contentment. Hell breaks loose.
Is more money printed? Does the money find its way into consumer prices? Do we experience simultaneously massive inflation and massive unemployment?
Don’t expect the presstitutes, the politicians, or Wall Street to confront any of these questions.
When the crisis occurs, it will be blamed on Russia or China.
Wednesday, August 10, 2016
SC136-5
https://srsroccoreport.com/the-coming-breakdown-of-u-s-global-markets-explained-what-most-analysts-missed/
THE COMING BREAKDOWN OF U.S. & GLOBAL MARKETS EXPLAINED… What Most Analysts Miss
..........The Collapsing EROI Is Destroying Everything In Its Path & Quickly
Americans used to enjoy a much better standard of living when it only took one person in the family to provide the income. This was during the late 1940’s, 1950’s and early 1960’s. However, the situation started to change in the 1970’s.
Not only do both spouses have to earn a living to make it today, health care and college education are becoming unaffordable. I remember back in the 1980’s that most health plans had full coverage with little or no premium. Basically, your health care was free, and all you had to do was pay a small deductible when you went to the doctor. Now, more and more Americans can only afford catastrophic coverage, for an expensive monthly premium with a high deductible.
Many believe this is all due to the corrupt insurance, healthcare and pharmaceutical companies. While they are partly the blame, the majority of the reason is due to the rapidly falling EROI. Furthermore, the falling EROI is making higher degrees of education less affordable to the public.
Before I get into the details here, let me explain the EROI. The EROI stands for Energy Returned On Invested. Basically, its how much profitable energy you get in return from what amount of energy was invested (burned). The EROI has been a guiding principle for humans going back thousands of years when we were hunter gatherers.
Here are some simple EROI for human food production:
Hunter Gatherer = 10/1
Simple Human Farming = 5/1
Human & Animal Farming = 1-2/1
High Tech Modern Food System = 1/10
Data from Thomas Lough/ Energy Efficiencies (EROI) of food procurement strategies/ (page 4)
A typical hunter gatherer only burned 1 calorie of energy to acquire 10 calories of food. You will notice that a hunter gatherer was 100 times more efficient in food production (gathering) than our modern high-tech food system that devours 10 calories of energy to provide 1 calorie of food on the dinner plate.
Our modern food system can waste so much energy growing, harvesting, processing and delivering food because of the high EROI of oil we have enjoyed in the past. Unfortunately, the rapidly falling EROI of U.S. and Global oil will cause serious trouble for food production going forward.
Why the Falling EROI is Causing Havoc To Our Modern Way Of Life
In a recent three-part article by Louis Arnoux, Some Reflections On The Twilight Of The Oil Age, the following chart was posted about the importance of a high EROI for our modern society:
Different-EROI-FIgures
I am going to simply the chart above.
EROI 3/1 = Transportation System: Roads, Bridges & Trucks only.
EROI 10/1 = Transportation System, Agriculture, minimal Health Care & Education.
EROI 20/1 = Transportation System, Agriculture, Basic Living, Health Care & Education along with basic consumer goods
EROI 30/1 = Transportation System, Agriculture, Prosperous Living, Heath Care & Education with advanced consumer goods.
The important thing to understand from these EROI guidelines, is that a minimum value for a modern society is 20/1. For citizens of an advanced society to enjoy a prosperous living, the EROI of energy needs to be closer to the 30/1 ratio.
Well, if we look at the chart below, the U.S. oil and gas industry EROI fell below 30/1 46 years ago (after 1970):
U.S.-Public-Debt-vs-U.S.-OIl-Gas-EROI
You will notice two important trends in the chart above. When the U.S. EROI was higher than 30/1 prior to 1970, U.S. public debt did not increase all the much. However, this changed after 1970 as the EROI continued to decline, public debt increased in an exponential fashion.
We must remember, to sustain a transportation system with agriculture and minimal health care and education, we must have at least an EROI of 10/1. Well, with U.S. shale oil production that comes in at an EROI of 5/1 (or less), we can no longer afford the basic necessities. Of course, we still have other higher EROI forms of oil production as well as higher imported EROI oil from foreign countries, but these are rapidly falling as well.
Typical Bakken Shale Oil Well
Here is another chart showing the rapidly falling EROI from Louis Arnoux’s article linked above:
Falliing-EROI-Levels
As we can see from the chart above, the Global Energy EROI continues to fall below the 10/1 level which only offers a minimum viability for our industrialized world. Thus, the more low quality tar sands, shale oil and other unconventional oil supplies we bring into the mix, the less the overall EROI.
This is the reason why there is so much debt in the world today. We are trying to enjoy the same standard of living as we had a few decades ago, but we can’t as the EROI is falling below our basic minimum requirements. So to counter the falling EROI, we add more debt to bring on expensive energy that for a short period allows us to continue BAU – Business As Usual.
NOTE: The Solar EROI of 30/1 in the chart above, is one figure that does not represent the true value of solar. This is where we have to distinguish between good and bad analysis. I will get into more detail on this in future articles.
Unfortunately, the massive amount of debt in the system is becoming unsustainable. This is why we are seeing many countries going to zero or negative interest rates. Furthermore, the amount of global bonds with negative rates are increasing at a stunning pace. In just the past six months, global bonds with negative rates have doubled to $13.5 trillion.
Why are we seeing such a rapid and volatile change in the markets recently? It’s due to rapidly falling EROI and oil price.
The Coming Oil Pearl Harbor Will Destroy The World’s Oil Industry
Very few people understand just how quickly the U.S. and world oil industries are disintegrating. This chart is from Louis Arnoux’s Part 2 of the article linked above:
EROI-Oil-Pearl-Harbor
Louis along with the work of the oil engineers at the Hill’s Group, suggest that oil prices will not rise going forward, rather they will continue to fall. This goes against the economic principle of Supply & Demand, but according to their studies on how thermodynamics impacts the oil price, they forecast a continued lower oil price.
According to Louis Arnoux:
In brief, the GIW (Global Industrialized World) has been living on ever growing total debt since around the time net energy from oil per head peaked in the early 1970s. The 2007-08 crisis was a warning shot. Since 2012, we have entered the last stage of this sad saga – when the OI began to use more energy (one should talk in fact of exergy) within its own productions chains than what it delivers to the GIW. From this point onwards retrieving the present financial fiat system is no longer doable.
This 2012 point marked a radical shift in price drivers.[1] Figure 4 (shown above) combines the analyses of TGH (The Hills Group) and mine. In late 2014 I saw the beginning of the oil price crash as a signal of a radar screen. Being well aware that EROIs for oil and gas combined had already passed below the minimum threshold of 10:1, I understood that this crash was different from previous ones: prices were on their way right down to the floor. I then realised what TGH had anticipated this trend months earlier, that their analysis was robust and was being corroborated by the market there and then.
Their forecast of continued lower oil prices is due to a “Thermodynamic Collapse” of net energy. The Hill’s Group put together this chart forecasting the oil price to reach $11.76 by 2020:
Hills-Group-Oil-Price
The Hill’s Group is an association of consulting oil engineers and professional project managers headed by B. W. Hill. If you want to read their technical explanation as to how they arrive at this price forecast, you can click on the following link: The Energy Factor- Part 4.
This is by far the most important paragraph from that analysis:
The Maximum Consumer Price curve is curtailed at 2020 at $11.76/ barrel. At this point petroleum will no longer be acting as a significant energy source for the economy. Its only function will be as an energy carrier for other sources. Production will continue as long as producers can realize the lifting costs at existing fields. E&D expenditures, and field maintenance costs will have been curtailed. All production from that point forward will be from legacy fields only. The economic impact that will result from the energy lost to the general economy is beyond the scope of this report.
Basically, what the Hill’s Group is saying here, things will become pretty ugly by 2020. Thus, this will negatively impact the United States much worse than either the Main Stream or Alternative precious metals analysts realize. Here are two more quotes from the Hill’s Group posted from my previous article:
1) Within 10 years the Oil Industry as we know it will have disintegrated
2) B.W. Hill considers that within 10 years the number of petrol stations in the US will have shrunk by 75%…
I would imagine very few, if any, Americans understand the dire consequences presented by the analysis here. If we thought the Great Depression during the 1930’s was bad… this would be several orders of magnitude worse. Why? Because a lot of people living in the cities who couldn’t find a job during the Great Depression could move to the country and live with family. At least they could have a place to stay and have something to eat. This is no longer possible… only a small fraction of the population could do this today.
Furthermore, the United States was able to pull itself out of the Great Depression because it only had just begun to tap into its massive cheap oil reserves. Oil production in the United States continued to increase for the next four decades. This is no longer possible, as U.S. oil production is likely to collapse over the next decade.
That being said, are we to assume that Louis Arnoux and the Hill’s Group are correct in their analysis and forecasts? Of course, it would be prudent to be skeptical and realize that there is a possibility that their analysis may be wrong, or off on the timing.
However, if we look around at the markets today, things are changing at a RAPID & VOLATILE PACE. As I mentioned, to see global bonds with negative rates double to $13 trillion in the past six months is a WARNING SIGN that situation is rapidly getting out of hand.
In addition, we see more and more evidence of how unsustainable the financial system has become.
Increasing number of underfunded Pension Plans
Massive Student Debt with no possibility of being repaid
Record amount of Large companies borrowing money a low-interest rates to buy back stock and pay dividends
Increasing number of Health Providers exiting the Obama Healthcare system leaving millions without basic catastrophic insurance
High paying manufacturing jobs lost only to be replaced by inferior waitress and retail service jobs.
The list can go on and on. People need to realize that even though the politicians in the U.S. Govt and Corporations are committing fraud by lining their pockets, the overwhelming reason for the collapse of the American Standard of Living is due to the falling EROI.
It’s that simple.
The Rapidly Falling EROI and Oil Price Is Gutting The U.S. Oil Industry
This next chart says it all. The top three U.S. oil companies, ExxonMobil, Chevron and ConocoPhillips cleared a hefty $16.3 billion after CAPEX and dividends were paid during the first half of 2011:
Top-3-U.S.-Oil-Companies-Free-Cash-Flow-Minus-Dividends
I arrived at that figure by taking these three companies Cash from Operations and then deducted Capital Expenditures (CAPEX) and Dividends. Now, if we look at the same figure five years later, these three U.S. oil companies are in the HOLE for $18.1 billion. What a change in five years… aye?
Watch for these oil companies to start cutting their dividends in a big way. Matter-a-fact, ConocoPhillips already cut their dividend by a third from $0.74 a share down to a lousy $0.25.
Furthermore, the total U.S. Energy Sector now has a whopping $370 billion worth of debt. I am being a broken record here, but let’s take a look at this chart which shows their ballooning INTEREST ON DEBT:
U.S.-Energy-Sector-Interest-Payments-On-Debt-%
In the first quarter of 2016, the U.S. Energy Sector paid 86% of their operating profits just to pay the interest on their debt. If oil prices continue to remain lower (or even lower), this won’t be sustainable for long.
Here is a chart from YahooFinance showing the U.S. Energy Sector interest on debt. As we can see in 2016, the chart line shoots up towards the heavens as the U.S. Energy Sector paid 86% of their operating income just to service the interest on the debt:
U.S.-Oil-Sector-Interest-On-Debt-YahooFinance
What it so important to understand about this chart is the difference between 1998 and Q1 2016. In 1998, the price of oil had fallen to a low of $14.50. However, the U.S. Energy Sector interest on debt only jumped to 25% of their operating income. In the first quarter of 2016, the price of oil was more than double at $33.5o a barrel, but the U.S. Energy Sector’s interest on their debt surged to 86% of their operating income.
Why the big surge in interest payments on debt with a doubling of the oil price since 1998??? That’s correct, it’s due to THE RAPIDLY FALLING EROI.
Now, if the Hill’s Group is correct in their forecast that they see a “Thermodynamic Collapse” of oil prices to $11.76 by 2020, what the hell will this do to the U.S. Energy Sector??
Correct… IT WILL TOTALLY GUT IT.
Which is why, they made this quote in their report:
Within 10 years the Oil Industry as we know it will have disintegrated
Unfortunately, this information will reach the masses after it’s too late. Moreover, the majority of precious metals investors will likely remain in the dark because they continue to wear HORSE BLINDERS. Unless an article is about the U.S. Economy, debt, manipulation or gold and silver, precious metals investors have no desire to read about energy.
How Will The Rapidly Collapsing EROI Impact The U.S. & Global Markets??
The important thing to understand about this information is that the situation will likely unfold in a way that is extremely hard to predict. However, we can make some common sense assumptions:
The Standard Investing Practice of putting 95-99% of one’s wealth in Stocks, Bonds & Real Estate will be DEAD FOREVER.
Entire sections of cities and suburbs will experience a 75%+ decline in economic activity. This will destroy the value of most forms of Real Estate.
No longer will investors be concerned about earning a YIELD or GROWING their wealth. Instead, investors will protecting wealth as best they can.
Big Investors such as Warren Buffet will watch as their wealth evaporate, never to return.
Whole Service Industries & Employment Careers will disintegrate. Watch as Restaurants and Retail stores close doors by the thousands forever.
The Highly Complex Supply Chain System that delivers goods will breakdown considerably. Trade will move to more regional or local systems.
There are so many more things that could be added to that list, but you all get the point here. Things will start to fall apart more rapidly over the next few years.
Physical Precious Metals Will Offer Much Better Options In The Future Than Most Assets Today
The reason physical gold and silver will offer much better options for the individual going forward is due to the STORE OF WEALTH characteristic of the precious metals. As I have stated in several articles and interviews, Stocks, Bonds & Real Estate are CLAIMS OF FUTURE ECONOMIC ACTIVITY. They are not stores of wealth like GOLD & SILVER.
While it’s true that Real Estate has been viewed as a store of wealth in the past, this was only due to the increasing cheap supply of energy, especially oil. A home, warehouse or commercial building only has value if it there is economic activity to support its use.
As the EROI continues to fall, along with oil production, economic activity will evaporate making it impossible for the owners to pay their mortgage or rent for these buildings. As economic plummets further, the whole system disintegrates. And along with it, the value of most real estate.
As the world begins to wake up to the ramifications of the rapidly falling EROI, investors will move into gold and silver to protect wealth. Only 1% of the world’s investors own precious metals. This will be like musical chairs. However, there will only be 2 chairs with 100 people.
Gold and silver will act as two of the very few LIQUID ASSETS in the future that can be used for trade or to purchase larger items such as businesses or real estate. Bonds will no longer work on a large-scale as they need a growing energy supply to function and to provide a yield.
Where do you think Bond yields came from? That’s correct… GROWING ENERGY SUPPLIES. With falling energy supplies, Bonds just don’t work all that well.
The Majority Of Analysis Will Become Totally Meaningless In The Future
We will continue to see analysts putting out forecasts based on information and data that is totally meaningless going forward. Unless an analyst understands the energy information presented in this article, all forecasts will be totally worthless.
For example, Kevin Weiner of Monetary Metals puts out analysis showing the supposed abundance or tightness of the gold and silver market due to the “Basis & Cobasis”, as well as other factors. He recently wrote an article stating that the price of silver was over-inflated by $3 due to the basis and relative abundance of the metal.
This actually maybe true (IN THE SHORT-TERM) as many investors wanting to pocket profits have sold back into the secondary market silver they purchased at much lower prices. Furthermore, economic activity is heading south, which means lower consumption of silver for industrial purposes. Lastly, India who was making record imports of silver last year, has seen a huge drop in the silver imports the first five months of 2016.
This could translate to more silver being abundant currently. HOWEVER, most humans do not live for weeks, months or a few years. We live on average for 7-8 decades. I have never stated that owning silver is for the SHORT TERM.
That being said, the rapidly failing EROI will turn the U.S. and World on its knees within the decade…. if we agree with the analysis by the Hill’s Group. Folks, the 2008 collapse of the U.S. Investment Banking and Housing Industry was eight years ago. While it seems like it was yesterday, eight years have come and gone in a blink of an eye.
The Fed and Central Banks have pushed in a massive amount of liquidity and along with zero interest rates to keep the falling EROI at bay. Unfortunately, the FORCES OF GRAVITY will finally overwhelm the system as Central Bankers can’t create cheap oil out of thin air.
I will be altering my analysis going forward as certain topics aren’t as important anymore. We need to look at how this ENERGY DYNAMIC is changing and how it is impacting the U.S. and Global Markets going forward.
Lastly, some readers will be highly skeptical of the information presented in this article. That is a good thing. However, those who believe that alternatives such as Free Energy Technology, Solar, Wind or etc, will be our SILVER ENERGY BULLET… they won’t. I will discusses this in detail in future articles.
THE COMING BREAKDOWN OF U.S. & GLOBAL MARKETS EXPLAINED… What Most Analysts Miss
..........The Collapsing EROI Is Destroying Everything In Its Path & Quickly
Americans used to enjoy a much better standard of living when it only took one person in the family to provide the income. This was during the late 1940’s, 1950’s and early 1960’s. However, the situation started to change in the 1970’s.
Not only do both spouses have to earn a living to make it today, health care and college education are becoming unaffordable. I remember back in the 1980’s that most health plans had full coverage with little or no premium. Basically, your health care was free, and all you had to do was pay a small deductible when you went to the doctor. Now, more and more Americans can only afford catastrophic coverage, for an expensive monthly premium with a high deductible.
Many believe this is all due to the corrupt insurance, healthcare and pharmaceutical companies. While they are partly the blame, the majority of the reason is due to the rapidly falling EROI. Furthermore, the falling EROI is making higher degrees of education less affordable to the public.
Before I get into the details here, let me explain the EROI. The EROI stands for Energy Returned On Invested. Basically, its how much profitable energy you get in return from what amount of energy was invested (burned). The EROI has been a guiding principle for humans going back thousands of years when we were hunter gatherers.
Here are some simple EROI for human food production:
Hunter Gatherer = 10/1
Simple Human Farming = 5/1
Human & Animal Farming = 1-2/1
High Tech Modern Food System = 1/10
Data from Thomas Lough/ Energy Efficiencies (EROI) of food procurement strategies/ (page 4)
A typical hunter gatherer only burned 1 calorie of energy to acquire 10 calories of food. You will notice that a hunter gatherer was 100 times more efficient in food production (gathering) than our modern high-tech food system that devours 10 calories of energy to provide 1 calorie of food on the dinner plate.
Our modern food system can waste so much energy growing, harvesting, processing and delivering food because of the high EROI of oil we have enjoyed in the past. Unfortunately, the rapidly falling EROI of U.S. and Global oil will cause serious trouble for food production going forward.
Why the Falling EROI is Causing Havoc To Our Modern Way Of Life
In a recent three-part article by Louis Arnoux, Some Reflections On The Twilight Of The Oil Age, the following chart was posted about the importance of a high EROI for our modern society:
Different-EROI-FIgures
I am going to simply the chart above.
EROI 3/1 = Transportation System: Roads, Bridges & Trucks only.
EROI 10/1 = Transportation System, Agriculture, minimal Health Care & Education.
EROI 20/1 = Transportation System, Agriculture, Basic Living, Health Care & Education along with basic consumer goods
EROI 30/1 = Transportation System, Agriculture, Prosperous Living, Heath Care & Education with advanced consumer goods.
The important thing to understand from these EROI guidelines, is that a minimum value for a modern society is 20/1. For citizens of an advanced society to enjoy a prosperous living, the EROI of energy needs to be closer to the 30/1 ratio.
Well, if we look at the chart below, the U.S. oil and gas industry EROI fell below 30/1 46 years ago (after 1970):
U.S.-Public-Debt-vs-U.S.-OIl-Gas-EROI
You will notice two important trends in the chart above. When the U.S. EROI was higher than 30/1 prior to 1970, U.S. public debt did not increase all the much. However, this changed after 1970 as the EROI continued to decline, public debt increased in an exponential fashion.
We must remember, to sustain a transportation system with agriculture and minimal health care and education, we must have at least an EROI of 10/1. Well, with U.S. shale oil production that comes in at an EROI of 5/1 (or less), we can no longer afford the basic necessities. Of course, we still have other higher EROI forms of oil production as well as higher imported EROI oil from foreign countries, but these are rapidly falling as well.
Typical Bakken Shale Oil Well
Here is another chart showing the rapidly falling EROI from Louis Arnoux’s article linked above:
Falliing-EROI-Levels
As we can see from the chart above, the Global Energy EROI continues to fall below the 10/1 level which only offers a minimum viability for our industrialized world. Thus, the more low quality tar sands, shale oil and other unconventional oil supplies we bring into the mix, the less the overall EROI.
This is the reason why there is so much debt in the world today. We are trying to enjoy the same standard of living as we had a few decades ago, but we can’t as the EROI is falling below our basic minimum requirements. So to counter the falling EROI, we add more debt to bring on expensive energy that for a short period allows us to continue BAU – Business As Usual.
NOTE: The Solar EROI of 30/1 in the chart above, is one figure that does not represent the true value of solar. This is where we have to distinguish between good and bad analysis. I will get into more detail on this in future articles.
Unfortunately, the massive amount of debt in the system is becoming unsustainable. This is why we are seeing many countries going to zero or negative interest rates. Furthermore, the amount of global bonds with negative rates are increasing at a stunning pace. In just the past six months, global bonds with negative rates have doubled to $13.5 trillion.
Why are we seeing such a rapid and volatile change in the markets recently? It’s due to rapidly falling EROI and oil price.
The Coming Oil Pearl Harbor Will Destroy The World’s Oil Industry
Very few people understand just how quickly the U.S. and world oil industries are disintegrating. This chart is from Louis Arnoux’s Part 2 of the article linked above:
EROI-Oil-Pearl-Harbor
Louis along with the work of the oil engineers at the Hill’s Group, suggest that oil prices will not rise going forward, rather they will continue to fall. This goes against the economic principle of Supply & Demand, but according to their studies on how thermodynamics impacts the oil price, they forecast a continued lower oil price.
According to Louis Arnoux:
In brief, the GIW (Global Industrialized World) has been living on ever growing total debt since around the time net energy from oil per head peaked in the early 1970s. The 2007-08 crisis was a warning shot. Since 2012, we have entered the last stage of this sad saga – when the OI began to use more energy (one should talk in fact of exergy) within its own productions chains than what it delivers to the GIW. From this point onwards retrieving the present financial fiat system is no longer doable.
This 2012 point marked a radical shift in price drivers.[1] Figure 4 (shown above) combines the analyses of TGH (The Hills Group) and mine. In late 2014 I saw the beginning of the oil price crash as a signal of a radar screen. Being well aware that EROIs for oil and gas combined had already passed below the minimum threshold of 10:1, I understood that this crash was different from previous ones: prices were on their way right down to the floor. I then realised what TGH had anticipated this trend months earlier, that their analysis was robust and was being corroborated by the market there and then.
Their forecast of continued lower oil prices is due to a “Thermodynamic Collapse” of net energy. The Hill’s Group put together this chart forecasting the oil price to reach $11.76 by 2020:
Hills-Group-Oil-Price
The Hill’s Group is an association of consulting oil engineers and professional project managers headed by B. W. Hill. If you want to read their technical explanation as to how they arrive at this price forecast, you can click on the following link: The Energy Factor- Part 4.
This is by far the most important paragraph from that analysis:
The Maximum Consumer Price curve is curtailed at 2020 at $11.76/ barrel. At this point petroleum will no longer be acting as a significant energy source for the economy. Its only function will be as an energy carrier for other sources. Production will continue as long as producers can realize the lifting costs at existing fields. E&D expenditures, and field maintenance costs will have been curtailed. All production from that point forward will be from legacy fields only. The economic impact that will result from the energy lost to the general economy is beyond the scope of this report.
Basically, what the Hill’s Group is saying here, things will become pretty ugly by 2020. Thus, this will negatively impact the United States much worse than either the Main Stream or Alternative precious metals analysts realize. Here are two more quotes from the Hill’s Group posted from my previous article:
1) Within 10 years the Oil Industry as we know it will have disintegrated
2) B.W. Hill considers that within 10 years the number of petrol stations in the US will have shrunk by 75%…
I would imagine very few, if any, Americans understand the dire consequences presented by the analysis here. If we thought the Great Depression during the 1930’s was bad… this would be several orders of magnitude worse. Why? Because a lot of people living in the cities who couldn’t find a job during the Great Depression could move to the country and live with family. At least they could have a place to stay and have something to eat. This is no longer possible… only a small fraction of the population could do this today.
Furthermore, the United States was able to pull itself out of the Great Depression because it only had just begun to tap into its massive cheap oil reserves. Oil production in the United States continued to increase for the next four decades. This is no longer possible, as U.S. oil production is likely to collapse over the next decade.
That being said, are we to assume that Louis Arnoux and the Hill’s Group are correct in their analysis and forecasts? Of course, it would be prudent to be skeptical and realize that there is a possibility that their analysis may be wrong, or off on the timing.
However, if we look around at the markets today, things are changing at a RAPID & VOLATILE PACE. As I mentioned, to see global bonds with negative rates double to $13 trillion in the past six months is a WARNING SIGN that situation is rapidly getting out of hand.
In addition, we see more and more evidence of how unsustainable the financial system has become.
Increasing number of underfunded Pension Plans
Massive Student Debt with no possibility of being repaid
Record amount of Large companies borrowing money a low-interest rates to buy back stock and pay dividends
Increasing number of Health Providers exiting the Obama Healthcare system leaving millions without basic catastrophic insurance
High paying manufacturing jobs lost only to be replaced by inferior waitress and retail service jobs.
The list can go on and on. People need to realize that even though the politicians in the U.S. Govt and Corporations are committing fraud by lining their pockets, the overwhelming reason for the collapse of the American Standard of Living is due to the falling EROI.
It’s that simple.
The Rapidly Falling EROI and Oil Price Is Gutting The U.S. Oil Industry
This next chart says it all. The top three U.S. oil companies, ExxonMobil, Chevron and ConocoPhillips cleared a hefty $16.3 billion after CAPEX and dividends were paid during the first half of 2011:
Top-3-U.S.-Oil-Companies-Free-Cash-Flow-Minus-Dividends
I arrived at that figure by taking these three companies Cash from Operations and then deducted Capital Expenditures (CAPEX) and Dividends. Now, if we look at the same figure five years later, these three U.S. oil companies are in the HOLE for $18.1 billion. What a change in five years… aye?
Watch for these oil companies to start cutting their dividends in a big way. Matter-a-fact, ConocoPhillips already cut their dividend by a third from $0.74 a share down to a lousy $0.25.
Furthermore, the total U.S. Energy Sector now has a whopping $370 billion worth of debt. I am being a broken record here, but let’s take a look at this chart which shows their ballooning INTEREST ON DEBT:
U.S.-Energy-Sector-Interest-Payments-On-Debt-%
In the first quarter of 2016, the U.S. Energy Sector paid 86% of their operating profits just to pay the interest on their debt. If oil prices continue to remain lower (or even lower), this won’t be sustainable for long.
Here is a chart from YahooFinance showing the U.S. Energy Sector interest on debt. As we can see in 2016, the chart line shoots up towards the heavens as the U.S. Energy Sector paid 86% of their operating income just to service the interest on the debt:
U.S.-Oil-Sector-Interest-On-Debt-YahooFinance
What it so important to understand about this chart is the difference between 1998 and Q1 2016. In 1998, the price of oil had fallen to a low of $14.50. However, the U.S. Energy Sector interest on debt only jumped to 25% of their operating income. In the first quarter of 2016, the price of oil was more than double at $33.5o a barrel, but the U.S. Energy Sector’s interest on their debt surged to 86% of their operating income.
Why the big surge in interest payments on debt with a doubling of the oil price since 1998??? That’s correct, it’s due to THE RAPIDLY FALLING EROI.
Now, if the Hill’s Group is correct in their forecast that they see a “Thermodynamic Collapse” of oil prices to $11.76 by 2020, what the hell will this do to the U.S. Energy Sector??
Correct… IT WILL TOTALLY GUT IT.
Which is why, they made this quote in their report:
Within 10 years the Oil Industry as we know it will have disintegrated
Unfortunately, this information will reach the masses after it’s too late. Moreover, the majority of precious metals investors will likely remain in the dark because they continue to wear HORSE BLINDERS. Unless an article is about the U.S. Economy, debt, manipulation or gold and silver, precious metals investors have no desire to read about energy.
How Will The Rapidly Collapsing EROI Impact The U.S. & Global Markets??
The important thing to understand about this information is that the situation will likely unfold in a way that is extremely hard to predict. However, we can make some common sense assumptions:
The Standard Investing Practice of putting 95-99% of one’s wealth in Stocks, Bonds & Real Estate will be DEAD FOREVER.
Entire sections of cities and suburbs will experience a 75%+ decline in economic activity. This will destroy the value of most forms of Real Estate.
No longer will investors be concerned about earning a YIELD or GROWING their wealth. Instead, investors will protecting wealth as best they can.
Big Investors such as Warren Buffet will watch as their wealth evaporate, never to return.
Whole Service Industries & Employment Careers will disintegrate. Watch as Restaurants and Retail stores close doors by the thousands forever.
The Highly Complex Supply Chain System that delivers goods will breakdown considerably. Trade will move to more regional or local systems.
There are so many more things that could be added to that list, but you all get the point here. Things will start to fall apart more rapidly over the next few years.
Physical Precious Metals Will Offer Much Better Options In The Future Than Most Assets Today
The reason physical gold and silver will offer much better options for the individual going forward is due to the STORE OF WEALTH characteristic of the precious metals. As I have stated in several articles and interviews, Stocks, Bonds & Real Estate are CLAIMS OF FUTURE ECONOMIC ACTIVITY. They are not stores of wealth like GOLD & SILVER.
While it’s true that Real Estate has been viewed as a store of wealth in the past, this was only due to the increasing cheap supply of energy, especially oil. A home, warehouse or commercial building only has value if it there is economic activity to support its use.
As the EROI continues to fall, along with oil production, economic activity will evaporate making it impossible for the owners to pay their mortgage or rent for these buildings. As economic plummets further, the whole system disintegrates. And along with it, the value of most real estate.
As the world begins to wake up to the ramifications of the rapidly falling EROI, investors will move into gold and silver to protect wealth. Only 1% of the world’s investors own precious metals. This will be like musical chairs. However, there will only be 2 chairs with 100 people.
Gold and silver will act as two of the very few LIQUID ASSETS in the future that can be used for trade or to purchase larger items such as businesses or real estate. Bonds will no longer work on a large-scale as they need a growing energy supply to function and to provide a yield.
Where do you think Bond yields came from? That’s correct… GROWING ENERGY SUPPLIES. With falling energy supplies, Bonds just don’t work all that well.
The Majority Of Analysis Will Become Totally Meaningless In The Future
We will continue to see analysts putting out forecasts based on information and data that is totally meaningless going forward. Unless an analyst understands the energy information presented in this article, all forecasts will be totally worthless.
For example, Kevin Weiner of Monetary Metals puts out analysis showing the supposed abundance or tightness of the gold and silver market due to the “Basis & Cobasis”, as well as other factors. He recently wrote an article stating that the price of silver was over-inflated by $3 due to the basis and relative abundance of the metal.
This actually maybe true (IN THE SHORT-TERM) as many investors wanting to pocket profits have sold back into the secondary market silver they purchased at much lower prices. Furthermore, economic activity is heading south, which means lower consumption of silver for industrial purposes. Lastly, India who was making record imports of silver last year, has seen a huge drop in the silver imports the first five months of 2016.
This could translate to more silver being abundant currently. HOWEVER, most humans do not live for weeks, months or a few years. We live on average for 7-8 decades. I have never stated that owning silver is for the SHORT TERM.
That being said, the rapidly failing EROI will turn the U.S. and World on its knees within the decade…. if we agree with the analysis by the Hill’s Group. Folks, the 2008 collapse of the U.S. Investment Banking and Housing Industry was eight years ago. While it seems like it was yesterday, eight years have come and gone in a blink of an eye.
The Fed and Central Banks have pushed in a massive amount of liquidity and along with zero interest rates to keep the falling EROI at bay. Unfortunately, the FORCES OF GRAVITY will finally overwhelm the system as Central Bankers can’t create cheap oil out of thin air.
I will be altering my analysis going forward as certain topics aren’t as important anymore. We need to look at how this ENERGY DYNAMIC is changing and how it is impacting the U.S. and Global Markets going forward.
Lastly, some readers will be highly skeptical of the information presented in this article. That is a good thing. However, those who believe that alternatives such as Free Energy Technology, Solar, Wind or etc, will be our SILVER ENERGY BULLET… they won’t. I will discusses this in detail in future articles.
Saturday, August 6, 2016
SC136-4
http://peakoil.com/consumption/oil-prices-and-economic-growth
The End Of A Trend: Oil Prices And Economic Growth
It used to be that when it came to the world economy, oil prices and economic growth were more like distant cousins who disliked each other rather than a happily married couple always seen nuzzling together in public. The received wisdom was that low oil prices are good for the overall economy even if they are bad for the oil industry and for countries that are heavily dependent on oil for their revenues.
That’s what many believed when suggesting that even though high oil prices and an attendant oil boom had underpinned economic recovery in the United States after the 2008 financial crash, low oil prices would now somehow on balance deliver even more recovery. And, low prices would also benefit the rest of the world as well.
Nowadays, as the oil price dips into the low $40 range again and economic growth weakens simultaneously, we must re-evaluate. U.S. economic growth declined significantly after oil prices began to fall in 2014. Only last week, U.S. growth for the second quarter of 2016 came in at 1.2 percent (annualized), less than half the forecast of 2.5 percent. First quarter growth was revised down to 0.8 percent from a previous estimate of 1.1 percent. That’s down significantly from a peak of 5 percent growth for the third quarter of 2014, the last quarter during which the price of oil was over $100 per barrel.
World economic growth instead of speeding up, slowed down slightly from 2.6 percent in 2014 to 2.5 percent in 2015 according to the World Bank.
There are many reasons for the subpar growth of the world economy since the Great Recession. Record average daily prices for oil four years running from 2011 through 2014 helped sap the world economy of its strength by siphoning funds from the non-energy economy.
Of the other causes, chief of among them is the heavy buildup of private and public debt which may be hindering growth by siphoning funds from consumption and investment into debt service. In the first quarter of this year, U.S. credit growth was $644.9 billion. U.S. gross domestic product growth was $64.7 billion. It took $10 of credit growth for every $1 of GDP growth. There was a time long, long ago when the ratio was 1 to 1.
China’s credit growth had been running twice its GDP growth through the end of last year. (I don’t have dollar or yuan amounts.)
Debt isn’t necessarily a bad thing if one uses it to invest in something that will produce goods or services rather than merely to consume. But much of our debt creation has been exactly for consumption. That isn’t particularly bad either if we as individuals, nations or a world society can afford to service that debt. But there is a level we cannot afford and it stunts growth. To get a better understanding of how too much debt is affecting economic growth around the world, listen to economist Steve Keen explain why debt matters and how the rate of credit creation affects growth. You may need to watch it twice before you get the “aha” moment.
But let’s look further now into the relationship between debt and energy to find out more about why oil prices seem much more correlated to the health of the overall economy than they used to be.
First, oil remains the central energy source for the world economy, especially critical as transportation fuel. It provides 33 percent of total energy according to the BP Statistical Review of World Energy.
Second, our desperation for additional sources of oil led to a debt-fueled boom in the United States, debt used by drilling companies to reach deep shale deposits and release oil found in them through a new version of hydraulic fracturing called high-volume slickwater hydraulic fracturing.
It turns out that the low oil prices of today make these deposits largely unprofitable and production has been falling. Many of the high-flying drillers during the boom are now in or headed for bankruptcy.
Debt, it must be remembered, is simply a way to bring what would be future consumption into the present. We have brought energy consumption from the future into the present with debt through the fracking boom in the United States and to a certain extent the boom in oil sands in Canada. And, we’ve shifted consumption of so many other natural resources and finished goods from the future to the present through the vast expansion of private and public debt.
Still, we are faced with slower world economic growth than in the past despite our herculean financial efforts. The simple explanation is that cheap energy was the cornerstone of growth of the industrial economy. As long as that energy was cheap, we could grow at a relatively rapid pace. Once it becomes expensive, growth must decline for most sectors of the economy as more and more resources are sent to the energy sector.
By this logic then, today’s low prices should be providing substantial stimulus to the global economy. Why are we not feeling it? The short answer would be that the debt we built up procuring expensive energy during a period of high and rising energy prices over the last 15 years is holding back economic growth. We are experiencing the hangover.
The hangover manifests itself as slow growth which is a reflection of the difficulty consumers are having maintaining their growth in spending in a high-debt world. That means everything is less affordable at the margin, and this has led to a creeping slowdown in the world economy.
Now, here’s the kicker. If we as a global society can no longer afford high-priced oil–and that’s what’s left to get out of the ground–then as long as oil remains the central energy component of our economy, we will be trapped in a low- or no-growth economy where oil prices can’t rise high enough to make new drilling in high-cost deposits profitable; and, when prices do rise, they simply squeeze the life out of economic growth and send the economy back into a stall or near stall. (Gail Tverberg has explained this phenomenon in detail on her blog, Our Finite World.)
Far from a sign of good things for the economy as whole, recently declining oil prices now tend to indicate a weakening economy that was already in a weak state. It turns out that the oil price and the economy are now in a very tight relationship, and we are going to be seeing them together a lot for a long time to come. But I don’t think their marriage will be the happy one I alluded to at the beginning of this piece.
The End Of A Trend: Oil Prices And Economic Growth
It used to be that when it came to the world economy, oil prices and economic growth were more like distant cousins who disliked each other rather than a happily married couple always seen nuzzling together in public. The received wisdom was that low oil prices are good for the overall economy even if they are bad for the oil industry and for countries that are heavily dependent on oil for their revenues.
That’s what many believed when suggesting that even though high oil prices and an attendant oil boom had underpinned economic recovery in the United States after the 2008 financial crash, low oil prices would now somehow on balance deliver even more recovery. And, low prices would also benefit the rest of the world as well.
Nowadays, as the oil price dips into the low $40 range again and economic growth weakens simultaneously, we must re-evaluate. U.S. economic growth declined significantly after oil prices began to fall in 2014. Only last week, U.S. growth for the second quarter of 2016 came in at 1.2 percent (annualized), less than half the forecast of 2.5 percent. First quarter growth was revised down to 0.8 percent from a previous estimate of 1.1 percent. That’s down significantly from a peak of 5 percent growth for the third quarter of 2014, the last quarter during which the price of oil was over $100 per barrel.
World economic growth instead of speeding up, slowed down slightly from 2.6 percent in 2014 to 2.5 percent in 2015 according to the World Bank.
There are many reasons for the subpar growth of the world economy since the Great Recession. Record average daily prices for oil four years running from 2011 through 2014 helped sap the world economy of its strength by siphoning funds from the non-energy economy.
Of the other causes, chief of among them is the heavy buildup of private and public debt which may be hindering growth by siphoning funds from consumption and investment into debt service. In the first quarter of this year, U.S. credit growth was $644.9 billion. U.S. gross domestic product growth was $64.7 billion. It took $10 of credit growth for every $1 of GDP growth. There was a time long, long ago when the ratio was 1 to 1.
China’s credit growth had been running twice its GDP growth through the end of last year. (I don’t have dollar or yuan amounts.)
Debt isn’t necessarily a bad thing if one uses it to invest in something that will produce goods or services rather than merely to consume. But much of our debt creation has been exactly for consumption. That isn’t particularly bad either if we as individuals, nations or a world society can afford to service that debt. But there is a level we cannot afford and it stunts growth. To get a better understanding of how too much debt is affecting economic growth around the world, listen to economist Steve Keen explain why debt matters and how the rate of credit creation affects growth. You may need to watch it twice before you get the “aha” moment.
But let’s look further now into the relationship between debt and energy to find out more about why oil prices seem much more correlated to the health of the overall economy than they used to be.
First, oil remains the central energy source for the world economy, especially critical as transportation fuel. It provides 33 percent of total energy according to the BP Statistical Review of World Energy.
Second, our desperation for additional sources of oil led to a debt-fueled boom in the United States, debt used by drilling companies to reach deep shale deposits and release oil found in them through a new version of hydraulic fracturing called high-volume slickwater hydraulic fracturing.
It turns out that the low oil prices of today make these deposits largely unprofitable and production has been falling. Many of the high-flying drillers during the boom are now in or headed for bankruptcy.
Debt, it must be remembered, is simply a way to bring what would be future consumption into the present. We have brought energy consumption from the future into the present with debt through the fracking boom in the United States and to a certain extent the boom in oil sands in Canada. And, we’ve shifted consumption of so many other natural resources and finished goods from the future to the present through the vast expansion of private and public debt.
Still, we are faced with slower world economic growth than in the past despite our herculean financial efforts. The simple explanation is that cheap energy was the cornerstone of growth of the industrial economy. As long as that energy was cheap, we could grow at a relatively rapid pace. Once it becomes expensive, growth must decline for most sectors of the economy as more and more resources are sent to the energy sector.
By this logic then, today’s low prices should be providing substantial stimulus to the global economy. Why are we not feeling it? The short answer would be that the debt we built up procuring expensive energy during a period of high and rising energy prices over the last 15 years is holding back economic growth. We are experiencing the hangover.
The hangover manifests itself as slow growth which is a reflection of the difficulty consumers are having maintaining their growth in spending in a high-debt world. That means everything is less affordable at the margin, and this has led to a creeping slowdown in the world economy.
Now, here’s the kicker. If we as a global society can no longer afford high-priced oil–and that’s what’s left to get out of the ground–then as long as oil remains the central energy component of our economy, we will be trapped in a low- or no-growth economy where oil prices can’t rise high enough to make new drilling in high-cost deposits profitable; and, when prices do rise, they simply squeeze the life out of economic growth and send the economy back into a stall or near stall. (Gail Tverberg has explained this phenomenon in detail on her blog, Our Finite World.)
Far from a sign of good things for the economy as whole, recently declining oil prices now tend to indicate a weakening economy that was already in a weak state. It turns out that the oil price and the economy are now in a very tight relationship, and we are going to be seeing them together a lot for a long time to come. But I don’t think their marriage will be the happy one I alluded to at the beginning of this piece.
Subscribe to:
Posts (Atom)
