Scorecard …



Triangle of Doom 050114

Figure 1: Funnel of Doom (by TFC Charts, click on for big): As we near the end of the auto age we twist in agony, first one way, then the other to avoid our fate, which is to walk everywhere we need to go. Problems are emerging everywhere, not simply car-dependent US and EU; Russia attempts to rattle the saber so as to force fuel prices higher. The outcome: Russia’s foreign exchange collateral flees the country, (Ambrose Evans-Pritchard):

The European Central Bank says capital flight from Russia since the Ukraine crisis erupted may be four times higher than admitted by the Kremlin, a clear sign that sanctions pressure is inflicting serious damage on the Russian economy.

Mario Draghi, the ECB’s president, said the outflows from Russia have been large enough over recent weeks to push up the euro exchange rate, complicating monetary policy for the ECB.

“We had very significant outflows that have been estimated by some to be in the order of €160bn out of Russia,” he said, without specifying where the information came from.

This is equivalent to $222bn. It is the highest figure suggested so far by a senior official with access to confidential data. The Russian finance ministry said outflows had been just $51bn in the first quarter, though the total has almost certainly risen since then.

“Draghi’s figure is a huge amount. If this is correct, it shows that Russia is in much more trouble than people think,” said Tim Ash, from Standard Bank. “This is the same scale of outflows we saw in late 2008 after the Lehman crisis.”

Russia needs higher prices so that its oil extraction industry can meet its skyrocketing costs. Putin, like the rest of us, has reached the neck-line of the Triangle of Doom, the pointy-end of the gangplank where there is negligible room to maneuver, where the conventional solutions — such as threats of war to inflate the oil prices — don’t work any more.

There is almost nothing Putin can actually do: he certainly cannot escape the triangle. He dares not risk a conflict with Europe as that would entail Europeans deciding to do without Russian petroleum and gas; this would cause prices to drop, the opposite of what Putin intends. He also dares not risk an outright war with Ukraine that Russia might is certain to lose. He dares not risk a credit embargo, although the market voting with its feet amounts to the same thing. Putin pretends … he cannot control his own destiny.

He cannot afford to build a larger, more threatening army, nor could he use one if he had it. Russia would have to borrow more from London and Frankfurt. Armies like cars are non-remunerative. Anything Putin could gain in a war would be worth less that what his army would cost!

Despite the whoopla and armored brigades, the crude price is holding steady. The best evidence of the oil peak is the inability of the threat of wars in an oil producing- regions to inflate the price. It means the customers cannot borrow any more; they are broke. Under the circumstances, something has to give, if the oil price cannot jump (w/ more funds proportionately flowing to Russian energy companies), the ability of ordinary Russians to buy fuel with roubles must plummet. This is underway right now: Russia’s national account is deleveraging, foreign currency collateral is flying out of the country as fast as Russians can get their hands (computers) on it. To some degree, Russia = Cyprus.

A reason for the flight of funds out of Russia and the other BRICs is the fact of their dependence upon overseas loans in the first place. Countries like Russia and China are desperate to industrialize, to ‘get rich quick’ and damn the consequences. Managers never look to see whether industrialization is appropriate or even possible in their countries, they improvise using whatever comes to hand, relying on funds borrowed from overseas. These outside creditors are both capricious and untouchable; they act with impunity, lending- or withholding funds as the spirit moves them, when there is a better deal elsewhere or after they have assembled short positions in the borrowers’ assets. There is nothing the borrowers can do to control the lenders or protect themselves from the unpleasant consequences when the credit tides turn.

Because there is shrinking (forex) collateral relative to claims against it the Russian rouble is underwater. Like a bank in the midst of a run, the Russians won’t stand aside and watch foreign exchange fly out the window leaving the rouble effectively worthless. Interest rates in Russia will jump. If this doesn’t work there will be capital controls, effectively ‘closing the bank’ … but also cutting off Russian domestic credit — and Putin’s nose to spite his face.

Russia Sector Credit Flows

Figure 2: The Russian economy and finance is basically a money-laundering scheme that directs the returns from energy sales to tycoons. Funds flow from EU and UK banks by way of fuel customers to Gazprom and the Bank of Russia. Some funds are held as currency reserves, the rest flow to tycoons’ overseas accounts where they are used to purchase luxury real estate, yachts, artworks, gold and other easily exchangeable goods … The Bank of Russia uses overseas currency as collateral for rouble loans, refunding the roubles to commercial banks, thence into the Russian economy. See ‘Debtonomics; Currency Crisis’ for an explanation of how the process works.

Russia lacks the ability to produce needed organic credit, it lacks infrastructure including strong banks, a freely tradeable currency, goodwill and the rule of law; instead there are weak banks, a rouble that circulates little outside of Russia, absence of trust and arbitrary rule by Putin. Because Russian credit is no good the country requires overseas loans from European lenders acting indirectly through Russia’s energy customers.

Industrial modernity requires a credit subsidy to function. A constant flow of new funds into Russia from overseas is necessary as the leakage to tycoon safe-havens is a collateral drain with an accompanying reduction in rouble purchasing power. If Russia holds onto its collateral the tycoons are starved of funds. The alternative is for the Bank of Russia to make unsecured loans to its commercial bank clients in an attempt to ‘make good purchasing power losses with volume’. The outcome is there is no lender of last resort and bank runs … which are underway right now.

Unsecured rouble lending by Bank of Russia is indicated by red-outlined arrow. Weak Russian banks are unable to distribute their own losses into the Russian economy, attempts to force such losses results is a vicious cycle- black market currency arbitrage leading to hyperinflation as in Argentina, Venezuela, Belarus, Iran and previously in Russia, itself. Citizens and speculators use whatever local currency they can get their hands on to ‘purchase’ the desired hard currency heedless of the affect on the exchange/inflation rate as indicated by the black-outlined arrow.

The ground rules are changing under the Russians’ feet; it is possible their foolishness will by itself trigger the exact crisis they are desperate to avoid. Events that signal major economic turning points can be hard to identify as they occur; the background accompaniment tends to be rising borrowing costs that are added to already-bankrupting fuel costs.

 
Oil Price Volume 050814(1)
 

Figure 3: Chart by ‘Political Economist’ by way of Ron Patterson’s ‘Peak Oil Barrel’, (Click on for big). A record of cumulative crude- and condensate (C&C) since 1965 with prices in constant 2012 dollars (from BP Statistical Review).

Notice that the bulk of C&C extraction cost less than US$40 per barrel; prior to 1973, the inflation adjusted cost was less than US$20.

Back of the envelope calculations give the following quantities at different price levels:

  • Less than $40/barrel (2012 dollars) = 73,175 million metric tons since 1965.
  • Less than $60/barrel (more than $41) = 23,050 million metric tons. It’s likely that oil in the sub-$60/barrel price categories has been completely exhausted, all that remains is petroleum and near- petroleum substances that are more costly to extract.
  • Less than $80/barrel (more than $61) = 20,200 million metric tons.
  • Less than $100/barrel (more than $81) = 35,300 million tons. roughly 12,000 million MT of this crude was extracted during the period of Middle East wars that occurred during the 1970s and early 1980s.

Without the wars and their affect on transport, it is likely that crude price would have remained $40/barrel or less ($16/barrel in 1972); there was no shortage of petroleum in the ground and demand was inelastic. Higher rates of consumption at lower prices would have brought forward the onset of depletion-related difficulties that we are facing now. Critics of Hubbert linearization point out that it does not adjust for changes in oilfield technology. It also cannot adjust for above-ground interruptions in the consumption regime: the various Middle East conflicts in the seventies and eighties put off the world oil extraction peak by about ten years.

The question mark in figure 3 represents what crude are we going to use going forward? Peak oil analysts insist that the production plateau does not mean ‘running out of oil’. It is hard to see it meaning anything else when the only petroleum our economy can afford has already been burned up.

The suggestion that similar amounts of fuel will be available after extraction peak as before is not borne out by cost/volume analysis. The lower-priced, sub- $60/barrel fuels have been exhausted; lower price made fuel a loss-leader for the burgeoning automobile industry; the consequence of low prices was a world filled with cars and accelerating rates of depletion. Lower costs reflected the ready accessibility of pre-2000 crudes: volumes were easy to extract from large, conventional onshore- or shallow-water offshore formations. Going ‘up’ the extraction rate curve was affordable with relatively little credit being required, the external costs were easily pushed into the future.

The fuels we have today are not the same fuels we used to build out our consumption infrastructure. We have cleverly trapped ourselves: we must support higher prices because there are no low-priced fuels available. At the same time, our waste-infrastructure does not offer returns that would support the higher prices! We either bankrupt ourselves with loans from criminals to support our lifestyles or learn to do without.

 

Crude oil prices 1861-2012

 

Figure 4: oil price chart from BP. Nominal prices from the end of the 19th century to 1973 were less than $10/barrel; from the 1978-82 period to the late 1990s the nominal crude price did not reach US$40/barrel. Nominal wages during this period were also very low. Fast forward to the present; wages have been stagnant since the late-1990s while cost of fuel has jumped in both nominal and real terms by over 500%.

What is emerging from background noise is current business practices offer the prospect of geometrically expanded costs for credit and fuel access … without end. Automobile waste was a losing proposition at $15 per barrel, genius is not required to imagine how poisonous $95 per barrel is to the same enterprise. Our economy does not meet its ordinary expenses by way of cash flow, we are insolvent. We are able to ‘fake it’ for a little while; this is because finance is willing to lend … until we are undone by the absence of real returns and our refusal to face reality.

 
Gas Buddy 042914
 

Figure 5: Enter American Dream- killing four dollar gasoline; the heat map from GasBuddy.com. (Click on for big.) Fuel industry costs emerge in wealthy California where residents are better able to stump up for fuel; in lesser parts of the world, folks address the structural fuel constraints by not buying.

Californians create the constraints the same time they battle its effects by destroying every bit of gasoline they buy! They are trapped like the Russians. If they continue to drive they push the cost of gasoline to the level where demand is ‘effected’ and the price cannot be met, where consumers begin to vanish. At the same time, Californians cannot afford to stop driving, they have invested too much in the process. Aside from speculating in real estate, the entire economy of the state — as well as the rest of the developed world — revolves around buying and using cars for everything.

 
Vehicle Miles Traveled 042914
 

Figure 6: Vehicle Miles Traveled by way of the St. Louis Fed: Americans by right should be driving 3.6 trillion miles this year but are stuck in reverse. Sadly, less driving has little effect on the fuel price, there needs to be far less driving and less fuel waste, this would reduce prices further but would bankrupt oil drillers at the same time.

China finds itself perched at the end of the same triangular gangplank as the Russians, (New York Times):

China Flexes Its Muscles in Dispute With Vietnam

Jane Perlez and Rick Gladstone

BEIJING — China’s escalating dispute with Vietnam over contested waters in the South China Sea sent new shudders through Asia on Thursday as China demanded the withdrawal of Vietnamese ships near a giant Chinese drilling rig and for the first time acknowledged its vessels had blasted the Vietnamese flotilla with water cannons in recent days.

While China characterized the use of water cannons as a form of restraint, it punctuated the increasingly muscular stance by the Chinese toward a growing number of Asian neighbors who fear they are vulnerable to bullying by China and its increasingly powerful military. The latest back-and-forth in the dispute with Vietnam — the most serious in the South China Sea in years — sent the Vietnamese stock market plunging on Thursday and elicited concern from a top American diplomat who was visiting Hanoi.

Political and economic historians said the China-Vietnam tensions signaled a hardening position by the Chinese over what they regard as their “core interest” in claiming sovereignty over a vastly widened swath of coastal waters that stretch from the Philippines and Indonesia north to Japan. In Chinese parlance, they say, “core interest” means there is no room for compromise.

Chinese saber rattling is no different from the Russians. The desire is to reflate the economy and push prices higher, to forestall deflation or ship it overseas to its trading partners. This endeavor is certain to fail, like Russia viz Ukraine, China dares not risk a war with violent and militaristic Vietnam which has been the graveyard of Chinese ambitions for centuries.

Like Russia, China is dependent upon Western (dollar) credit. Collateral for China credit and its currency (RMB) is trillions of US dollars, euros, yen and sterling. When overseas credit flows out of China, RMB purchasing power evaporates. Unlike Russia, China has strong banks, tens of trillions of bank system losses have been distributed into the Chinese economy in the form of worthless infrastructure, all that remains is for the extent of these losses to be revealed as the credit tides flow out.

China is dependent upon the solvency of its biggest customer and credit provider, the US. As the Land of the Free becomes the Land of Out of Reach, so does China at a remove. China also goes broke for reasons its own. One is the government’s ‘Tapering Error’; it must reduce the flow of RMB credit and face the inevitable consequences. The alternative course is to continue with credit expansion which offers sharply diminished returns. Credit shrinkage will remove a large part of World fuel- resource demand along with support for petroleum drillers.

China is overdue for an ordinary inventory-driven business-cycle recession, not having experienced such a slowdown since the country began to modernize during the mid-1980s. China also faces what Richard Koo calls a ‘balance sheet recession’. China’s finance losses overhang the economy, these reside uneasily as ‘assets’ on China’s ledgers. Deleveraging reveals assets as worthless, which causes further deleveraging which in turn reveals more losses in a vicious cycle. China has little in the way of effective tools to manage this sort of thing: it is at the end of a long regime of very easy credit. Since 2008, there has been a ‘money dump’ by SOE (state-owned enterprise) banks and shadow- ‘loan shark’ banks. Once enough foreign exchange collateral flees there is likely no more easy credit to be had. China’s currency will be underwater, essentially worthless.

The land of 1.2 billion faces an agricultural emergency. As much as seventy-percent of China’s land and water contaminated with metals and mining waste, toxic chemicals and fertilizers; pesticides, sewage runoff and pharmaceuticals, fuel, smog components, soot and radionuclides (mostly from coal burning). This leaves out agricultural land and watershed areas surrendered to urbanization, desertification plus the over-draw from aquifers. This takes place within the context of global warming, driven to a large degree by aggressive Chinese industrialization and massive fossil fuel waste.

China is also subject to dollar-preference, the desire to hold dollars because of what can be obtained with them relative to what can be had with other currencies or by way of barter; the eagerness of locals to trade local currencies to gain dollars at any price; the ‘currency war’.

Russia claims it can offset losses in the West with trade gains from China. This is nonsense; Russian managers don’t understand that China is just as dependent upon Western credit and flows of funds as Russia, itself.

Our fuel system exists to support the automobile industry and all its dependencies. Take away the autos and there is a vanishingly small need for petroleum, the reverse is also true: take away or diminish the fuel system and the autos are stranded along with all the frivolous junk that has been put into service to rationalize universal auto use. None of these bits of junk pay for themselves; what is occurring in Russia and China and their trading partners is the necessary coming-to-grips with both credit- and resource limits. Malthus was right; machines multiply until the outstrip their supply of ‘food’; the outcome is catastrophe, coming to a freeway or strip mall near you.

49 thoughts on “Scorecard …

  1. Reverse Engineer

    “Take away the autos and there is a vanishingly small need for petroleum”-SfV

    Take away and replace with…what?

    Homo Sapiens has had some form of transportation other than foot since we stopped living as H-Gs. Horses got domesticated, wheels invented, you had to have some means to move the grain out of the fields and into the warehouses.

    How long would it take to breed up the horses and oxen necessary just to move food around, forget any other transportation uses? If you did breed up enough to service 350M people in Amerika, how would you feed all of them?

    Then there is the issue of electricity. Without the heavy equipment used to mine so much coal, how would you dig it up and move it around to the electric plants? How would you maintain the miles of electrical cable and restring the wires every time you get a big wind blow through town?

    So the loss of the fuel to run the carz means the loss of electricity too, and with that loss you kiss goodbye all modernity, including the sewage treatment plants and water pumping stations and elevators the skyscraper filled cities need to function.

    Now you might say well, if we just eleminated passenger carz but kept the trucks and tractors and heavy equipment around, the remaining Oil would last a lot longer. Except then using so much less Oil, it becomes uneconomic to maintain the refineries and drilling rigs that cost a fortune to maintain. You also could not maintain the miles of roadway the trucks and heavy equipment need to ship the food and coal around, or to access the miles of electrical cable either.

    The bottom line here is that you can’t jump out of the car because there is no replacement for it given the infrastructure we built and the society that developed around it. When you are finally forced to abandon it on the highway, the whole rest of the system comes crashing down around it.

    To make a transition to a local paradigm now would demand building an entire new infrastructure where people basically grow their own food within walking distance of where they live and eat the food. Is there credit and energy enough to build such an infrastructure? Maybe, but the political will is not there to do it, the Tycoons who run the political show have too much invested in keeping the current system running.

    So it is left to communities of people to start doing this for themselves now, before the system breaks down completely. Most people will not do this in time, and the consequences of that are essentially terminal.

    RE

    1. steve from virginia Post author

      “The bottom line here is that you can’t jump out of the car because there is no replacement for it given the infrastructure we built and the society that developed around it. When you are finally forced to abandon it on the highway, the whole rest of the system comes crashing down around it.”

      We made a mistake then doubled down on it. Humans have made this sort of mistake before and will likely do so again.

      As far as the system crashing down: it is supported artificially. Fast or slow it has to go, this is simple entropy.

      “To make a transition to a local paradigm now would demand building an entire new infrastructure where people basically grow their own food within walking distance of where they live and eat the food.”

      That’s what yr great-grandparents did; a hundred years ago half of Americans lived and worked on farms and ranches, they lived close to food. They also lived close to shelter and what they wore, they entertained each other and themselves, they had diverse means to do so without ‘canned’ diversions and the multi-national robbers that have taken over the processes today. Yr greats managed to survive, future people will survive as well. Certainly nothing like today, but nothing is guaranteed in this life except one day you wake up dead.

      There is no alternative; sustainability programs are simply PR designed to allow folks to feel good about the status-quo and themselves in it. The Triangle of Doom is not flexible, it cannot be bargained with. When fuel supplies are constrained the cars will go.

    2. Mister Roboto

      And let us not forget that industrial agriculture is very petroleum/ fossil-fuel dependent. I wonder how many disciples of progress who praise the so-called Green Revolution realize that it now takes ten calories of energy to make one calorie of food? And it was right on the heels of the GR that the world population shot up from 3.2 billion in 1964 to about 6.5 billion in 2004? (Author Daniel Quinn called this phenomenon “the food race”.) Talk about pushing the system way the hell past the point of diminishing returns!

  2. Reverse Engineer

    “That’s what yr great-grandparents did; a hundred years ago half of Americans lived and worked on farms and ranches, they lived close to food. They also lived close to shelter and what they wore, they entertained each other and themselves, they had diverse means to do so without ‘canned’ diversions and the multi-national robbers that have taken over the processes today. Yr greats managed to survive, future people will survive as well. Certainly nothing like today, but nothing is guaranteed in this life except one day you wake up dead. “-SfV

    When our GGPs were alive, there were a good deal fewer of them walking the earth. There also were a good deal more Horses per Capita Homo Sapiens.

    We can’t return to the way they lived without a massive population knockdown. Call our GGP era around 1880-1900, global population was <2B, and they HAD the systems in place that supported that population. Pull out the Carz without the replacement systems, you are most certainly looking at an undershoot below 1B.

    I agree with you there will be survivors, I am not in the camp with Guy McPherson calling for Near Term Human Extinction as the inevitable consequence. However, I suspect the numbers will be quite small, and it’s quite difficult to imagine how you bring down a population size from 7B to even 2B without VAST political conflagration, aka WAR.

    The inevitable wars have their own consequences, and then there are those 400 or more Fuk-U-Shimas waiting to happen.

    Whoever is left after this will have a hell of a rebuilding job ahead of them.

    RE

    1. steve from virginia Post author

      RE, this sort of thing is going to occur whether we make changes or not. The limitation is what we can afford; we cannot afford to waste resources even when we cannot afford to … to not waste the very same resources! Thus = piquancy of the Triangle d’Doom. It’s a triangle, a convergence of adverse trends.

      Our biggest problem is simple thermodynamics; we refuse to accept that entropy exists or that it affects us. We humans are getting a rude awakening. There is no natural law that insists on large, continuing human populations any more than there are laws requiring on large, continuing surpluses of anything else. Everything is subject to the First Law including us. We’re a small bit of a very large puzzle, we can adapt; if we are smart we can manage our descent, if you will. Sans-management = descent will take place, whether we like it or not.

      Think of what is taking place right now as a kind of test, one to see if we can control ourselves and our various contradictory urges. If we succeed, it can only be on our own terms. What those terms are specifically are unknown and frankly, unimportant because our failure would be on nature’s terms, we will join the other 99% of all life-forms on Planet Earth that have exited without a trace …

      1. Reverse Engineer

        ” if we are smart we can manage our descent”-SfV

        In this context, “managing descent” means managing the die off of a minimum of 5 Billion people. How do you manage something like that?

        On an entropic level, this is bound to be chaotic and unmanageable. Every action you could take has negative blowback to it. Ditch all the Carz and tell everybody in suburbia to start permaculture gardening their 1/4 acre plots? This is a sort of distributed Pol Pot kind of idea and probably would have similar results.

        Billions of people is inherently unmanageable. The only way it has been managed is to throw gobs of energy at the entropy problem. Without the energy, entropy takes over.

        The only way to survive it is to get out of the way as much as you can and work together with a tribe of people on developing self sufficiency. You’ll still need a lot of luck though to make it through the Zero Point.

        The gross economics of the monetary system is pretty much a waste of time these days to try to come up with fixes for it, as you have noted many times economic systems manage SURPLUS, they don’t manage DEFICIT. If stuff is not there for people to buy, it doesn’t matter what kind of money you use.

        On the gross level, probably the only thing that sorta works is Rationing and a Command Economy. To do either though, you need a strong functioning Goobermint, which about nobody has anymore. The clowns that make up these ruling bodies bicker endlessly and are corrupt to beat the band.

        So, you get conservation by other means, the system inevitably crashes and chaos ensues. See Ukraine.

        Coming Soon to a Theatre Near You.

        RE

  3. Reverse Engineer

    Editing, adding material and turning this one into a new Daily Rant called End of Carz. 🙂

    Will come up after the next one, Peak Credit.

    Steve Part II still languishing on Monsta’s Computer. Hopefully he gets that one ready this week some time also.

    RE

  4. Tagio

    Steve,
    Just listened to your last podcast on the Diner again. Really well done! Looking forward to Part 2.
    I was very intrigued with your notion that economies really only know how to handle surplus and that once they hit a constraint they can’t substitute their way out of they decline to a level where there is still some surplus and the costs associated with managing that surplus can be allocated to third parties. Sounds to me like an apt description of what happened after the 2008 crash. Tens of millions of Americans were jettisoned from the economy, are now basically permanently unemployable on a full-time basis, the ranks of people on food stamps soared, etc.

    The question I have, which I don’t suppose anyone can answer but I’d love to hear your considered speculation if you are so inclined, is: How many such “steps down” are the energy industry, credit industry & economy capable of making before the scale is too small to support further oil and gas drilling and delivery? I know this is just another “timing of collapse” question but I am human all too human and I can’t help but wonder how much time, realistically, there is left to prepare for the phase transition. I interpret your Triangle of Doom as a map of the timing of the next inflection point (with a much bigger fallout than 2008), not as the absolute End of the Petroleum Era, but I am inclined to believe (what I think is RE’s position) that we will all experience a fairly abrupt end to the era and not a more gradual decline punctuated with step-function like declines that stretches out over decades, which seems to be the JMG/ Archdruid position, although his descriptions of collapse are sufficiently vague that its hard to tell.

    1. steve from virginia Post author

      Hi Tagio,

      Timing is obviously everything, it’s hard to see what can happen when the outcomes resemble N-body problems. There are simply too many variables and uncertainties. Likely strategy will be the powerful pushing more costs to others. This is the story in Ukraine … citizens there unable to accept any others’ costs, particularly not Russia’s or the EU’s = stalemate.

      This discussion is also lurking bouncing around Ron Patterson’s site: http://peakoilbarrel.com/

      1. Roland

        If you look at the charts posted at the site Steve mentioned, you’ll notice the huge upswing in US oil production the past three odd years. When that peaks and begins to decline rapidly, we’ll have the actual “crisis” and reset that was denied in 2008. Eric Jensen over at itulip may be able to add to what steve is saying here. I enjoy both sites immensely.

    2. Reverse Engineer

      “Just listened to your last podcast on the Diner again. Really well done! Looking forward to Part 2.”

      Steve Part I is now at almost 400 Listens and 36 Downloads! 🙂

      Monsta is back in the saddle and we hope to have Part II ready this weekend.

      Steve could up his numbers & listenership considerably if he would do some PLUGGING.

      RE

  5. Tagio

    Roland,

    Thanks, I checked those out, and see what you mean, that makes sense. I believe you are right, barring any terrible missteps with the financial system or geopolitics that trigger an an earlier implosion. The Ukraine seems to be a wild card, but I find it hard to believe that, crazy as the U.S. is, they will let that bring the whole house of cards down.

  6. Ken Barrows

    Bakken oil statistics (March 2014 v March 2013)
    About 6M more barrels produced year over year (about 200K per day)
    1770 more wells (at 6M per well) is about $10 B

    At $100 per barrel, $600M more dollars for $10B in investment. Where do I sign up to throw away my money?

  7. KevinCobley

    This is an accurate article in describing the reality of energy supply.
    It’s quite clear that supply in the international market is very tight despite the MSM articles saying otherwise, prices are not falling.
    A number of commentators whose sites that I read also share the same view. I had reached the conclusions that are in this many years ago.
    However the numbers of commentators that have the opinion that a price of $4 U.S. per gallon is some sort of point where economic collapse would occur and at levels of say $6-$8 doomsday would occur.
    This is not so, much higher prices can be sustained in the long term and lower levels of consumption and high levels of “pain” (if that’s what using less fuel means) would be the result.
    I would remind the writer (I live in Australia) prices in Sydney are around $5.45US per gallon and have been much higher than the $4 US disaster scenario for more than 10 years, similarly in the UK prices are around $8.75 US per gallon, the UK is still “sort of economically afloat” there is no “doomsday”, prices in the UK have been at very high levels for over 20 years. In other parts of Europe prices are much higher than the UK price and have been so for decades.
    The US will certainly have much higher prices, the available supply of Oil on the world market is no longer growing and there is no question that trust in the US dollar will fail at some point in time in the near future. The US will be force to buy Oil with a greater share of foreign currencies hence the price will be forced up in the US.
    But the US can gear it self to use much less Oil and will forced into that situation, but even $10 per gallon is no disaster, in fact it’s extraordinarily cheap and almost free at that price. A gallon at $10 will get and SUV 20 miles try hiring a bunch of guys to push your car 20 miles and see how much it costs.

    1. steve from virginia Post author

      ” … commentators that have the opinion that a price of $4 U.S. per gallon is some sort of point where economic collapse would occur and at levels of say $6-$8 doomsday would occur. This is not so … “

      Meanwhile; “trust in the US dollar will fail … The US will be force to buy Oil with a greater share of foreign currencies.”

       
      🙂
       
      Nominal price increases in the future are assumed, there is little or nothing to justify them. Inflationary bias is simply that. Nominal prices change for all sorts of reasons. What matters is the ability of customers to meet the drillers’ needs, whatever they might be … and to to do so while not gaining anything by way of destroying the drillers’ products … doing so with loans, instead.

      Drillers’ claims have a basis in physical reality because crude is a resource, it is capital. Customers’ claims against wealth are garbage: a fantasy that insists that consumption — simple waste — is ‘productive’ and that capital destruction is some sort of economic ‘good’. Once you start to question that — when you understand that waste is not productive of anything — then the utility of money is called into question (because money is the residue of destroyed capital rather than capital, itself.)

      Because of geology and prior economic ‘success’ in exhausting prior, accessible supplies, claims of oil company drillers must increase relative to those of the customers. Otherwise, there is no oil for customers to waste. The drillers basically are bankrupting their customers even as the customers are continually accelerating the process. Customers do not earn anything by ‘using’ fuel, they cannot. The thermodynamic ‘tax’ is too high. Customers simply entertain themselves, taking on greater amounts of loans in order to do so.

      Affordability follows EROI (Hall).

      $4/gallon in California matters when it is scarce elsewhere in the US. Since 2008 that price level is associated with national recessions/slowdowns … of course, the Californians can afford to pay more! The US is the world’s marginal consumer of manufactured goods; any hesitancy on the part of US retail customers to buy these goods — buying fuel instead or not buying anything — causes a ripple affect that reaches a wide range of suppliers (China), moreso than similar allocation occurring in UK or another small country. The current prices for fuel are high but not a crisis peak; the outcome isn’t outright collapse but rather a slow bleeding process as drillers ruin their customers a tankful at a time.

      Keep in mind, nominal prices across borders does not reflect purchasing power which always tends toward parity (enforced by arbitrage).

  8. Reverse Engineer

    To me, the issue is straightforward.

    Oil companies still have access to credit because they are owned by the same people who produce the credit, the TBTF Banks. So they keep drilling, losing more money all the time.

    The Konsumers however are basically cut off from credit to buy the stuff, particularly in places like Greece and Italy. The price can’t ever rise much higher, because that will just cause more folks to stop buying it, and more places to be cut off from further credit to buy it.

    It’s the Capitulation Point that remains in question, when the TBTF Banks will stop doing the Junk Bond issues to keep these Drillers Drilling, because they can’t pay their bills.

    Given that Bloomberg is starting to write about it, one suspects capitulation is not that far down the pipeline here.

    RE

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    1. Reverse Engineer

      I accidentally put up the widget for Part III instead of Part II of the Steve Podcast. Oops.

      I now added the Part II Widget so both are up.

      RE

      1. Reverse Engineer

        Part 3 has 159 Listens so far. Part 2 is lagging with 64 because I got it up much later.

        RE

  10. dolph

    I was a bit disappointed to hear RE and Steve argue over details. I mean, anybody can do that.

    But, nevertheless thanks for the podcast, some interesting things to think about.

  11. Tagio

    Steve,
    I was interested in your statement that when we hit the Triangle of Doom inflection point, we don’t really know what will happen but that the establishment will have 6 weeks to 6 months to cobble something together to keep the game going for a while longer. Your comments re: the Soviet command economy approach to managing continued energy production was revelatory to me and offered food for thought – i.e., that the government will just pull resources away from various portions of the economy (“austerity” or outright rationing) to fund energy production to preserve the government itself and to continue favored sectors of the economy.

    While the end seems both nigh and clear, I guess no one can see how it will all play out, or the timing of it. It seems we are essentially at the Triangle of Doom inflection “point” now (perhaps more aptly a small “border region”, within which we all oscillate for awhile before experiencing a rapid phase transition, much as water stays at 212 degrees F for awhile before changing into steam). It seems there is a good chance we will stay in this border region as long as ponzi investment schemes and other credit games can continue to mask reality, and that the real terror will be experienced once the credibility supporting these schemes fails and/or the dollar loses its petrodollar status.

    My takeaway from your dicussion with Monsta and RE is that the question will then be whether a smaller more “austere” economy can be patched together at sufficient scale and social stability (foodstamps!) to continue production of the remaining reserves that are the least costly to obtain (the ones that are most expensive being abandonned), and I guess no one can tell, but it seems to me your comments re: the command economy are perhaps most prescient in this regard as to what to expect. (Although the current crop of US “leaders” seems so cluesless and incompetent that I am not sure that they could pull this off, even assuming it were “technically” feasible.)

    Looking forward to your promised expose of the significance of Piketty. Cheers!

    1. steve from virginia Post author

      I am working over Piketty right now. I should be finished with him before he falls into well-deserved obscurity.

      When an economy encounters shortages it stops until its state of activity declines to where there are surpluses w/ costs to distribute. Our problem is our past success at exhausting resource surpluses. What remains is a surplus of (hungry) people and (hungry) cars, the cost burden does not lighten.

      1. Jb

        “…activity declines to where there are surpluses w/ costs to distribute.”

        Costs borne by savings or more debt, I presume. Without savings or more debt, the surpluses rot in the fields. Isn’t this the classic ‘farmers dumping milk in the ditches’ scenario? The cash disappears and the costs cannot be borne by anybody within walking distance.

        “..the cost burden does not lighten.”

        Leaving one option: commercial production ceases until…(see above). I suppose small family farms will do their best to feed themselves, not eat the seed corn. For the rest of us, it will mean living day to day, looking for the next lottery ticket.

        My thanks to RE, Monsta, and Steve for the three part podcast. I completely agree with Steve’s point in Part III that we did not need encouragement to build the infrastructure necessary for our individual ‘jackpots’ in Levittown. Twenty million people left the cities, bought cars, homes, televisions, refrigerators, lawnmovers and everything else that could be mass produced after WWII.

        http://www.statemuseumpa.org/levittown/one/b.html

      2. steve from virginia Post author

        A problem is that someone has to be able to bear the costs. People are overloaded with tycoons’ costs right now and those won’t vanish even after a crisis.

        We’ve put ourselves into a diabolical position …

  12. Reverse Engineer

    A command economy really is about the only thing imaginable that could work for a while. In a sense we already have one, the way it is commanded is by pitching more money at stupid IPOs and covering the bottom end by pitching out food stamps.

    When real fuel shortages begin, there will have to be some sort of Rationing beyond just price. It is however certain to be mismanaged and thoroughly corrupt in administration.

    Far as the sparring Steve and I did in Part III, its a friendly difference of opinion on the nature of the military and how the carz economy developed. Seems to be playing well enough with the listeners, that part is now up to 225 Listens with 27 Downloads. 🙂

    RE

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  14. christiangustafson

    Sorry to steer the conversation back to the original topic — books 😉 — but it was a little disconcerting last night to gather up my purchases from a local bookstore that is now closing.

    Even as a loyal fan and customer, I’m really only worth a few hundred dollars to the shop, spread over several years. Meanwhile they have rent and the light bill, labor, oh, and they have to find these little treasures for me.

    It’s a wonder that they lasted as long as they did. I don’t know how most small biz can stay alive these days.

    1. Jb

      We had two stores announce their closing last week: an independent grocer that carries local produce and an independent seafood market. Both had been around for decades. A sign of the times.

  15. Jb

    The Mighty Orlov suggests the Fed is the secret buyer via Belgium at the 40 minute mark:

    http://cluborlov.blogspot.com/2014/05/interview-on-signs-of-times-radioradio.html

    And Rune Likvern comes out with a new post suggesting that the CBs have ‘bent’ the 2nd Law temporarily to off-set the financial effects of depletion:

    http://fractionalflow.com/2014/05/20/central-banks-balance-sheets-interest-rates-and-the-oil-price/#more-788

    Faith will soon be lost in ‘Belgium.’ Depletion will make a comeback in 2015. ‘Someone must bear the costs’…so what’s next – Taylor Greenbacks?

    1. steve from virginia Post author

      Issuing greenbacks would set off a mortal conflict between the government and the banks who have obtained the monopoly over money creation. Bankers hold the country hostage — too big to jail — and the government has been co-opted by them. Congress is a creature of the banks, Obama is no Andrew Jackson.

      Likvern’s article is interesting thought exercise and agreeable up to a point. Fed’s response to higher prices post-2000 and ‘inflation’ scare was to increase short-term interest rates at tail end of Greenspan regime. This increase torpedoed real estate lending that gained funds from overnight money markets/shadow banking: ‘short money’. Rates fell to zero afterward but to little effect.

      Since then, central banks have demonstrated little ability to leverage outcomes. As the national ledgers contracted beginning in 2008, the central banks’ ledgers were expanded to, “maintain a high level of aggregate demand” … but this was — and is — a charade. Credit expansion occurs only when it is unsecured; central bankers cannot offer unsecured loans any more than an apple can fall upward from a tree. When the central banker offers unsecured loans there is no lender of last resort, the entire banking system is instantly insolvent (the central banker feels the need to offer unsecured loans only after the entire banking system of a country is insolvent … see, Argentina).

      Even if such a thing was somehow possible, credit is a claim against purchasing power, not purchasing power itself. This relates directly to both the amounts and forms of money/credit used to gain capital. Here, capital is resources, the means of production as well as production, itself. From the purchasing power standpoint there is no way for the central banker to succeed: he cannot expand credit because he cannot offer unsecured loans, if he does so the banking system unravels. If credit expends there is nothing to it but an expansion of worthless claims.

      Worth of money is set at gas stations around the world … not by sale of future money by central banker. The policy rate tool has become irrelevant (even if rates could fall to negative which they cannot). Meanwhile, real interest rates are relentlessly rising — this being the cost of obtaining satisfactory means of repayment.

      1. Jb

        “Obama is no Andrew Jackson.” Ah, the understatement of the week. 🙂

        Toward the end of Johnson’s prescient article, he wrote: “…the global economy continues to deteriorate, the banking system in east-central Europe collapses,”

        Was he thinking Ukraine? Pull out the gold, set up a puppet, and send in the IMF again to help destabilize the situation?

        “Pretending that Ukraine can pay this loan back or abide by tough conditions in the near future could only serve to further destablize an already precarious situation.”

        http://www.bostonglobe.com/opinion/editorials/2014/05/21/imf-steps-ukraine-but-new-loan-strategy-needed/MqYpvzbB2UgrG9Imx4lz0I/story.html

        Back to Johnson who concludes: “We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances.”

        So the Fed, er…I mean Belgium, no wait – the Fed, yeah the Fed, keeps the banks afloat while more countries are thrown under the bus and other people’s collateral is re-hypothecated until, like Orlov suggests, they run out of places to loot.

        Is it Friday yet?

      2. Ken Barrows

        I submit in the style of the SAT (when I took it in 1983):

        Andrew Jackson: Cherokee:: Obama:United States. Not to pick on BO, though. Anyone as POTUS could work in the comparison.

  16. Tagio

    Steve stated:

    “Credit expansion occurs only when it is unsecured; central bankers cannot offer unsecured loans any more than an apple can fall upward from a tree. When the central banker offers unsecured loans there is no lender of last resort, the entire banking system is instantly insolvent . . . ”

    Lol, Steve, of course the Fed, by purchasing bank toxic and other diminsihed-value “assets” at full face value, and engaging in repos as though the collateral was essentially worth face value, is already de facto issuing unsecured credit, to maintain the illusion that asset values out there are not deflating. Question is, how long can the system continue when each plays the game because each believes that all the others believe the BS? Who’s going to be the one to finally call “fire!” in the crowded theater? The rush for the exits is going to be Epic!

    1. steve from virginia Post author

      The Fed buys treasuries … which are risk free securities. It does so in order to allow banks to ‘play the spread’ on longer dated securities. These securities are the risk-equivalent of cash. The Fed lends to the government only after others have done so first; this guarantees the original lenders a (small) profit. The reason to pay par is because that is what they are worth. This in turn helps the banks gain some free money, to allow them (banks) to rebuild their own balance sheets (private banks have crap as assets not central bank). Accounting rules (FASB-157) allow banking firms to hold dubious assets in abeyance, the Fed has nothing to do with accounting rules.

      The first round of quantitative easing (QE-1) had the Fed buying mortgage backed securities from overseas banks. To do otherwise would have been ‘politically inopportune’ as many of these securities were offered under false pretenses (dubious AAA rating on subprime MBS). It was easier for the Fed to swap these for treasuries rather than have big banks — in desperate trouble at the time — make issue by issue settlements (which they wound up doing later for other mortgage-backed securities).

      The Fed has been buying treasuries (lending to the government), other central banks have also been buying their own governments’ issues (lending to their own governments). Central banks get into trouble during refunding operations: that is, lending to client banks (rather than lending to their governments).

      Keep in mind, the central banks cannot really affect outcomes, what they are left with is theater. Believe it or not, governments have no problem borrowing … everyone loves free money which is what you get when you lend to the government.

      I’ve gone through this over and over: central banks cannot make unsecured loans or even appear that they are making unsecured loans. All the other economists and analysts who say otherwise are wrong.

      This is a condition not a banking rule that can be bent or ‘adjusted’. Central banks are only tempted to make these loans when the private sector banks are in distress … when they are over-leveraged. Only a leverage-free entity can bail out over-leveraged firms … and their depositors at the same time. If a central bank makes unsecured loans it become one more highly-leveraged bank, indistinguishable from the rest and insolvent. If a central bank takes on the defective collateral of the private sector banks … the outcome is the same. In either instance => entire banking system of a country is insolvent => there is no effective lender of last resort => bank runs as depositors flee because there is no one who can guarantee the return of their deposits. This sort of thing is taking place right now in countries such as Turkey, Russia, Venezuela, Brazil, India, etc. See ‘Debtonomics; Currency Crisis’ for more information.

      Problem in banking is always leverage: loans in excess of collateral. Central banks simply cannot make leveraged loans of any kind. If the Fed was making leveraged loans the US would be in the grip of a very severe crisis right now instead of talking about crises in other countries. The problem in US is not central bank but private sector banking system losses already distributed into the economy … taking the form of ‘developments’; also stocks, bonds and other finance instruments, pensions, annuities and other assets held as ‘investments’ by firms and individuals. Soon enough these losses will be recognized, assets => demonstrably worthless => little the central banks can do about it.

  17. Ken Barrows

    Tagio’s comment hits home with me. The Fed may be paying “par” for its collateral, but what’s paid is much more than market value. If the Fed were paying market value in its asset purchases, why do it in the first place?

  18. Reverse Engineer

    Update on the Steve Podcasts:

    Fundamentals Part I-530 Listens
    Peak Oil Part II- 319 Listens
    Military-Carz Debate Part II- 350 Listens

    Yesterday we blew out all records on the Diner for Page Views and Soundcloud Listens, basically doubling circulation overnight. Total Listens for the day came in at 630.

    Thanks to Steve for his contribution in making that possible.

    RE

  19. Tagio

    Ah Steve, my bad. Obviously you are right, paying more to purchase assets than they are worth is not making an unsecured loan, it is just a gift of money.

    However, it looks like you agree that there is at least an “unsecured loan” risk component on the repos if/to the extent that the collateral value doesn’t really cover the loan: “Central banks get into trouble during refunding operations: that is, lending to client banks (rather than lending to their governments).” Maybe not though, because I guess the Fed could always pay par to purchase the collateral posted for the loan and then offset the purchase price it agrees to pay against the loan balance due, presto! No unsecured debt outstanding, no problem!

    1. steve from virginia Post author

      Good luck with that, seems like the gas-oil business and transmission companies are out of control. Bottom line is to make do with less, hit the companies hard in the wallet. Boycotts work, not just of energy providers but companies that depend on the providers such as utilities and manufacturers. If consumers in New England cut electricity use in half, the companies’ vulnerabilities will emerge; if manufacturers and other commercial users cut electricity and gas use by a smaller amount, much less than half, the transmission companies and drillers enter liquidation. It is the complaining while wastefully consuming energy at the same time that => surrender to the providers.

      1. ellenanderson

        The people mentioned in this article who live in Massachusetts are not wasters. They are committed conservers In general, though, when resources become obviously scarce I think that the companies will try to blame them and their activism for the shortages. Will, that work? Probably, but not in time to get the fracked gas to England!
        Yes, we have been able to have our cake and eat it too for all of my lifetime. We congratulate ourselves for cleaning up our rivers and stopping highways from going through historic districts and wetlands but mostly we just sent those unpleasant activities to China and other “developing” countries. Troubles are now coming home to roost and I do worry that all of the messengers will be shot! Who will they go for, the banksters or the activists or both or won’t it matter at all?

  20. Reverse Engineer

    “The podcast is your medium Steve!!”-EA

    Agreed! Steve is a SUPERSTAR in the making! 😀

    RE

  21. streamfortyseven

    I notice that everyone here is talking about moving people and freight by cars and by trucks. 60 years ago, this was not the case, most freight and passenger traffic went by rail. Most roads were paved with brick or gravel, sometimes oiled to keep the dust down; only in the larger cities did one see concrete or asphalt used. As a result, if you wanted to travel more than about 40 miles, you took the train. And it turns out that it’s about 20 times as energy efficient to move passengers and freight by rail than it is by cars or trucks…

  22. Karen Lynn Allen

    I find it quite interesting to watch how well behaved both WTI and Brent prices are. It’s as if they’ve read Steve’s posts about the triangle of doom, and though they want to break out of it, they can’t make themselves cross the line.

    As to California, my home state, I can in no way defend the happy motoring infrastructure that is quickly on its way to become a vast stranded asset. However, in doing some research I found some surprising statistics that contradicts the usual stereotypes about the state.

    Looking at gasoline gallons sold, both total and per capita, California peaked in total gallons sold in 2006, and on a per capita basis in 1990. The US as a whole peaked in total gasoline gallons sold in 2005, and per capita in 1990. In 1990, Californians used 1.36 gallons of gasoline per day per person, while the US on average used 1.35 gallons per day per person. But since then gasoline usage per capita has fallen faster in California than the US as whole. Ever since 1992, California has consumed less gasoline per person than the US average.

    In 2013, both California and the US as a whole consumed roughly as much gasoline as both entities did back in 1997. But on a per capita basis, in 2013 California was down to 1.01 gallons per person per day, whereas the US as a whole had only dropped to 1.10 gallons per person per day. So, as hard as it may be to believe, California uses significantly less gasoline per person than the American average. Californians also drive fewer miles per person than the American average. Admittedly since I had to compare California DOT numbers to federal DOT numbers there may be differences in methodology, but in 2011, Californians averaged 8621 VMT per person compared to the US average of 9403 VMT per person.

    Again, this does not mean California doesn’t waste vast quantities of gasoline and it doesn’t mean the state doesn’t have vast change ahead of it. But it does mean that the state is not quite the poster child of gasoline waste that I think most Americans imagine. I think we all have a lot of change ahead of us during the decade ahead.
    http://karenlynnallen.blogspot.com/2014/05/the-great-transition-welcome-to-decade.html

    1. steve from virginia Post author

      Gas prices tend to be higher in California than other parts of the country which might have something to do with it. Also, the more liberally endowed with funds have taken leave of the state, decamping to Oregon and Utah, etc. They have been replaced with Mexican immigrants who earn much less and spend little for fuel.

      Wealth in California seems to be more of the virtual kind; degrees of equity in overpriced houses; this does not translate into driving more as the highest prices seem to appear in dense communities where as many walk as drive.

      Also, even with the driving reductions, California traffic is still horrendous (just like traffic elsewhere). Folks are sick of it. Last time I was in LA … admittedly a fairly long time ago … I saw a person on a bicycle! Amazing! Getting on a bike in LA used to be a death wish … apparently, not any more. (I walked and took the bus when I was there.)

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