The Great … ?

Triangle of Doom 080114

Triángulo de la Muerte, August 2014 edition. Chart by TFC, click on it for big. Oil prices in world markets fail to jump when oil producing countries engage in open warfare. Right up to the Libya crisis, bloodshed in the oil patch was always good for a ten- to twenty dollar ramp in the price of each new barrel of oil. Now, oil price is the dog that refuses to bark.

Organized bloodletting is underway in oil states Iraq, Nigeria, South Sudan, Yemen, Syria and Libya; nearby Russia, Saudi Arabia, Iran and Kuwait. Even as the bullets fly the prices crawl sideways on fuel markets. Absent a flood of new oil the only possible explanation is that the world’s oil consumers are experiencing financial difficulties.

The vicious cycle emerges from the chart: high fuel prices adversely affect credit provision as vulnerable firms are compromised. Due to high prices, the marginal debtor hesitates to borrow or is unable to repay; creditors are unwilling to lend outside of self-driven finance market pyramid schemes. Reduced credit provision leads to declining bid for petroleum supplies; drillers lack the credit to meet their own costs, fuel supplies are constrained which leads to higher real fuel prices. Debtors and drillers chase their tails; wash, rinse and repeat in a self-amplifying cycle that ends when credit runs out.

The answer to the question, “how high is too high?” is, “it’s a lot lower than you think!” As credit vanishes, fuel prices drift out of reach. When the prices decline, the ability to meet them declines faster. In our haste to consume, our success has created a perverse and poisonous meta-environment where every outcome — to consume or not consume — is fatal. The entire fuel waste infrastructure of the United States and its imitators has been built assuming sub- $20/barrel crude oil into perpetuity: the freeways, tract houses, shopping malls, our massive tower-cities and a billion automobiles. Within this context, $105/barrel oil strands the entire developed- and developing world. Meanwhile, ‘use’ of the fuel does not pay for the fuel, nor does it pay for the junk; our fuel is simply wasted for entertainment purposes only. What must pay is debt and lots of it: since World War Two hundreds of trillions of dollars worth.

The dynamic is ‘energy deflation’, it is very similar to Irving Fisher’s ‘debt deflation’, there is the same positive feedback mechanism. With debt deflation, the more the borrowers repay, the more in real terms they owe because repayment removes funds from circulation. The vanishing supply of circulating money continually becomes more expensive, a ‘scarcity premium’ appends itself to the marketplace cost of funds. If the borrowers do not repay, then the assets become liabilities that the lenders themselves must retire … which they are unable to do for the same reason as the borrowers.

With energy deflation, when the customer conserves — whether by accident or on purpose, it makes no difference — the remaining petroleum becomes more costly to extract in real terms. A scarcity premium attaches itself to the real cost of extraction for each new barrel of oil; the result is fewer available barrels as the scarcity premium per-barrel increases. At some point increase in nominal price is insufficient to exceed the scarcity premium. Energy deflation undermines a pillar of conventional reasoning: that at some price oil supply is always available.

Ironically, ‘use’ of each barrel of oil results in the same increased scarcity premium as conservation. Use puts oil out of reach by destroying it where conservation keeps the oil in the ground. At the point where oilfield flows diminish, every barrel out of the ground increases the cost of extracting all the remaining barrels. This is the reverse of how process works leading up to the peak; where each new barrel extracted makes more oil available to extract. By attempting to increase petroleum flows to 90 million barrels per day and more, we undermine the economically necessary process of increasing petroleum flows: we aren’t simply shooting ourselves in the foot, we are cutting off our feet with a chain saw and blowing them up with dynamite!

Conservation is a decline in consumption and vice-versa; prices decline due to simple supply and demand. However, the system extraction costs don’t follow into decline because these are fundamentally thermodynamic in nature. As such, these costs are fixed regardless of what we do; when we conserve, unit extraction costs expand faster than any market price reductions that are to be had by decreasing demand. This cycle is also self-amplifying: when fuel becomes unavailable due to its unaffordability it tends to remain so indefinitely. Fuel shortages cannot make the oil user wealthier or more credit worthy, the driller does not become wealthier by way of reduced production, either. We can see this process underway right now as oil companies spend more borrowed funds to gain diminished returns in the form of less petroleum at higher per-barrel cost.

The entire ‘waste fuel- borrow against the process’ enterprise is bankrupt. Even at 90+ million barrels of petroleum-like substances per day, we humans cannot burn enough to pay for tomorrow’s extraction of petroleum; that is, we are unable to borrow sufficient amounts to enable us to extract more. The fuel burning process is insufficient as collateral. What passes for ‘good collateral’ is inflated finance industry assets; claims against fuel that we cannot destroy enough of, fast enough.

The debt-deflation dynamic can, and likely will operate alongside energy deflation and amplify it: conservation is both the natural outcome of scarcity at the same time it is evidence that scarcity exists. As this incredible dynamic spools itself out under everyone’s nose, very few seem to be paying attention. Maybe they don’t want to;

How the term, ‘Finance Crisis’ appears over time on Google Trends … These charts track percentages so that all searches are rendered more or less the same way, with the absence of searches being zero, the maximum number being one hundred.

There doesn’t seem to be a lot of interest in something that is taking place right now under everyone’s nose. Maybe finance crisis is called something else like ‘Cute Kittens’ or ‘Green Balloons’:

Color me crazy, but maybe there is something to this … how many times the term ‘green balloons’ appears on Google Trends. It is possible there is a paradigmatic sleight of hands underway that nobody is aware of. Pay careful attention to the next appearance by the Federal Reserve Chairman before Congress and note how often she mentions ‘green balloons’.

Here is the Googler interest in Peak Oil:

The triumph of public relations and advertising over discernible reality: peak oil is background noise, the ‘wall of worry’ that every bull market is required to climb to reach every greater heights, ‘Dow, 36,000′.

… guys like me were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. “That’s not the way the world really works anymore.” He continued “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality -— judiciously, as you will -— we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors … and you, all of you, will be left to just study what we do.”

                    — Ron Suskind quoting Karl Rove

The dependency upon credit for physical output is not always clear. It isn’t simply energy return on energy invested (EROEI) but ‘Energy Return On Credit Financed Energy Investment’: another link in the chain, ‘EROCFEI’. Emerging from the murk of misunderstanding and denial is the outline … of a precipitous drop in petroleum and other fossil fuel extraction in the event of a (fuel price-driven) credit ‘event’. A shortage of credit would close otherwise functioning extraction enterprises, the downstream consequences of no fuel would feed back toward the credit providers and from them toward extraction enterprises. Right now there is no strategy in place to manage this sort of crisis because there is no discussion about it … instead, we have created our own reality.