Look across the water to the Continent(s) and see the collision between the obsolete ‘Politics of More’ and the natural economics of less. Remember, the idea behind modern politics is that the various publics (and their bosses) are entitled to live beyond their means. It is the responsibility of government to provide or else … a new
collection of big-business lackeys government is installed.
Up until the turn of the millennium, the job of all governments has been to make resources available at lowest cost to giant business cartels and to lightly manage the prosperity that resulted, making certain that those at the bottom of the economic food chain were not over-supplied. The expression of this idea can be found in every kind of government including the dictatorships, monarchies and republics, constitutional and otherwise: all of these are prosperity governments. The politics in all their variety functioned more or less because there were always more resources to exploit: apparent resource growth and accompanying gross domestic product was able to race ahead of populations and their TV-driven expectations. Indeed, the only governments today suited to any degree to the hard school of less would be those of North Korea and Myanmar, not exactly the sorts of regimes we free citizens of the modern world would prefer to live under.
In 2012, resource availability has stopped increasing. That this is so is evidenced by the ongoing failure of prosperity governments to gain traction on their economic problems: Japan is in as much difficulty as Belarus as is Argentina. What the economists choose not to understand is that attempts to amplify growth accelerate depletion of the resources needed to support the growth at the same time: one such resource is credit. The establishment is not content to dig its own grave but frantically digs countless graves all over the place. The outcome of the process is to undermine legitimacy and the idea of ‘effective management’ itself. In place of Myanmar there is Somalia or Yemen, failed shadow-states hovering at the edge of utter ruin. This alternative is likewise not exactly representative of the sort of regime we would embrace if given a choice. Because of denial and refusal to accept the reality of resource depletion and act accordingly the effect is that we have no choice.
So begins not so much an age of revolution but of Revolving Futile Governments, each more pathetic/insane than the last, all promising what cannot be delivered. Like Oliver Twist in Dickens’ comedy, the beggar nations of the world line up at the empty soup kitchen looking for a ‘more’ that has vanished.
Here is Basket Case Number One:
Figure 1: it’s hard not to look at this chart from Jonathan Callahan’s Energy Export Databrowser and feel the pain of ordinary Egyptians. After all, none of them asked to be born. The huddled masses of Egypt yearning to breathe auto-induced smog are running up against the hard realities of fossil fuel depletion and voracious demand from well-positioned (ruthless) competitors. What emerges is a non-government-by-quagmire approach that leads to economic collapse and social upheaval then war. It is hard to imagine a better representation of peak oil on a chart than this. While Egyptian consumption is steadily increasing, Egyptian ability to pay for this consumption is steadily decreasing. At some point Egypt is unable to finance itself, then what?
Egypt must import food: the choice becomes what to feed, hungry mouths or empty gas tanks? Knowing the human race, the default answer is the gas tanks. Government after government will be thrown into the fire in search of one that can make the car manufacturers happy. Meanwhile, food can be had from international relief agencies by showing a few starving Egyptian children on television. More likely is for Egypt to be forced to trade both its petroleum supply and discretionary consumption to others for sustenance. A destitute Egypt will exist on international beggary, a handful of curious tourists and diminishing tolls from the Suez Canal. Why diminished? Because international shipping is another fossil fuel dependency, that is certain to shrink.
One way or the other, Egypt will live within its means. It will do so by choice, otherwise Egypt’s population- and fuel problems will solve themselves. Not something to look forward to.
Figure 2: Neither Mazama Science nor BP have data on Syrian petroleum consumption but it probably doesn’t matter. Looking at this chart it is easy to see why there is an all-out war underway. By destroying Syria’s consumption infrastructure and impoverishing its citizens all of its 375,000 barrels per day of production can be exported to the United States.
There are already rumors of NATO commando operations in Syria. Like Egypt, Syria is a place that has little to offer the rest of the world besides petroleum. It can gain food for its huddled, bombed-out masses by selling its reserves cheaply to Western bidders. Having its auto fleet crushed by tanks and blasted by artillery makes it easy. If the food trade comes up short, more can be had from international relief agencies by showing a few starving Syrian children on television.
Figure 3: Greece had new elections over the weekend to little effect. Both fuel consumption and imports are declining sharply, there are more declines to come. What fuel Greece can ultimately afford is what it can gain by way of its own non-petroleum output. The amount of fuel consumption a tourist and agrarian economy can afford is likely to be tiny, similar to the level of the 1960s.
At the beginning of the industrial period, there were few countries capable of living beyond their own countries’ resource limitations. Now all countries feel entitled to do so, restive populations demand it. This is a poisonous and self-destructive dynamic. Huddled masses look to America and the great European powers and demand an equal place/moment in the Sun. There are millions of young people willing to face machine gun bullets for the right to a flat screen television or a Toyota. This is a contest that is outside the collective imagination of the West. What pulls on Greece are the needs of the greater powers to continue to live beyond their means and the violent ambitions of the lesser nations to do so.
Physics says nothing, depletion accelerates place under the pressure of expanded demand. If fuel cannot be had from the ground it will be stolen from others. This is the brutal economics of less. Consider Greece: it cannot borrow because of the weight of its current indebtedness and the futility/stupidity of its leadership. It cannot borrow, therefor it cannot industrialize or ‘become competitive’. Destroy the Greek economy and its fuel demand is exportable.
Here is the ‘Niewe Colonialism’: there are no conquistadors or eccentric explorers with ZZ Top beards, pith helmets and leggings, instead there are suave Frankfurt bankers saying, “Nein” behind Bauhaus desks in fashionable offices, strings pulled by shark counterparts on Wall Street. As Greece unravels, its future is Somalia … or Syria. Meanwhile, food can always be had from international relief agencies by showing a few starving Greek children on television.
Figure 4: Spain has little in the way of petroleum resources, it has massive demand and declining means to meet that demand. It’s one-and-a-half million barrel per day petroleum consumption is a great prize. If consumption in Spain can be crushed, those barrels can be exported to the United States. Unlike the US, Spain cannot borrow in its own currency but must use ‘euros’ that are foreign to all users. Spain can be put into bankruptcy by its finance lenders refusing to lend. Without funds, Spain’s quasi-industrial economy falls apart … and is.
Spain has a new-ish government that flails, certain there are more governments to come through the revolving door. The endgame here is a country free of automobiles, unable to afford fuel. If the hungry inhabitants want fuel they will have to steal some from other European countries. Meanwhile, Chinese will drive using Spain’s fuel.
Figure 5: from here, France looks like the Bakken with less snow and better restaurants. Cutting French consumption to zero will send two million barrels of Russian and Saudi crude to the US. Now that France has a Red Socialist boss there is good excuse to cut off the credit spigot and bankrupt the entire country. In a year or so the frustrated French will be happy to trade their gasoline allotments to Wall Street — discretely, of course — for the means to bail out their own banking executives.
Keep in mind, if nothing changes in France, the outcome is French bankruptcy and a car-free France. Chances are, this is going to happen rather sooner than later as the ability of France to finance living large beyond its energy means evaporates. Of all the European energy deadbeats, France is the most vulnerable. Not only are its debts largest, its banks more exposed to bad loans, it is after Germany the most leveraged to the automobile. France needs no help to fail.
Figure 6: like the other countries, Italy’s consumption of petroleum has been shrinking. The cause is not conservation but national bankruptcy. Italy, Spain and France are the low-hanging fruit in the contest to steal fossil fuel demand from other nations. While Italy has some fuel production, there is not enough to support its bloated debt- and auto dependence. When push comes to shove there is little the Italians can do but wring their hands as their domestic demand for fuel sails away.
Keep in mind, if policy remains unchanged there will be more business- and national failures. The outcome is fuel prices that drop below what it costs to bring the fuel to market. There are more shortages, diminished demand and falling credit availability in a vicious cycle: this is resource deflation.
Marginal oil production costs are heading towards $100/barrel
Kate Mackenzie (FTalphaville)
Bernstein’s energy analysts have looked at the upstream costs for the 50 biggest listed oil producers and found that — surprise, surprise — “the era of cheap oil is over”:
Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.
While we see near term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production.
This is important because, as Bernstein analyst Neil Beveridge and colleagues note, the cost of producing marginal barrels of oil plays a big role in determining oil prices.
Analysts fail to notice what happens when the buying public is broke and cannot afford the high price of $120. What about too broke to afford $50? The same thing as if the price to bring new oil to market is $5,000! The oil stays in the ground until someone can pony up the cash. Without oil, the economy falters due to shortages and the price becomes even less affordable.
If the price is lowered from $5,000 to $3 per barrel, there is oil only if it costs less than $3 to get that barrel out of the ground. With oil harder to get in out of the way places, the cost is likely to be $3.01 … or much more. That leaves the crude where it sleeps until someone can offer equal worth for it. With returns on its use non-existent, real worth becomes more difficult to obtain. Stealing demand from others becomes more appealing than prospecting for unaffordable crude: the stolen demand represents oil in hand.
From the same article:
A wonderful post showing again that the price of oil is driven not be novel and arcane factors, such as speculation and financialization, but by geology, supply and demand, and the economics of extraction. The cost to deliver the marginal barrel in the post 2005 era, when global oil production stalled out, is crucially important. At bottom, the global market for oil does quite a good job at price discovery, taking in all of the various important factors. The market is quite aware of the decline in spare capacity, and these marginal costs. How much production does the world lose now, should oil fall to $75 a barrel? I can’t quantify, but it would surely lose a large chunk of future production at those levels as myriad projects would be shelved.
I note also the anger expressed in the comment section to Kate’s previous post about Peak Oil. The end of cheap oil, and the ceiling it creates on global supply of oil through a confluence of geology and economics, is a complex picture to digest and over the years I’ve come to understand that emotions run highest when people realize its very difficult to understand. However, let’s recall this was all predicted years ago: the limits on supply, the decline in flow rates, the terminal stage of Big Oil companies as they could no longer replace reserves, the explosion in finding and development costs, and the pressure on profit margins to the extraction industry. And finally, the problem of affordability.
My colleague Chris Nelder has called the tightening range between the high cost to develop the marginal barrel and the affordability of that barrel to society as the “Narrow Ledge.” That’s where we are right now. And based on the research cited in this post, the ledge is getting tighter still.
When fuel supplies are constrained, the only source of new fuel supply is the demand of other countries. That narrow ledge is sure to become a very contentious place as the cruel economies of less are played out.