When Denial Becomes Toxic

Nobody likes bad news:

Bad news: the US government says it wants to eliminate medical care for the non-rich, eliminate the Department of Education and cut back the EPA, privatize Social Security and Medicare, repeal the Affordable Care Act … one way or the other, the Feds realize the game is up and are looking to repudiate their obligations, beginning with those to their own citizens. By invoking a bizarre combination of public rage- plus politics-as-usual, the managers hope nobody notices …



Noun – English

Failure to fulfill an obligation, especially to repay a loan or appear in a court of law.
“it will have to restructure its debts to avoid default”
synonyms: nonpayment, failure to pay, bad debt
“the incidence of defaults on loans”

The strategy is to watch what the managers DO while discounting everything they SAY. The US is defaulting but it’s hard to parse out behind the bullish frenzy on Wall Street and the non-stop circus in the media. Financial default is certain but the current market participants have put it out of mind, preferring instead the fabulous promises … that the US will cull out and expel job-stealing migrants and replace them with robots; build a trillion dollars worth of highways and bridges for the self-driving cars; re-create the Original Maginot Line along the US-Mexican border, cut taxes for corporations and the well-to-do while bailing out the military contractors. Little, if any of this, is likely to happen, the country long-ago passed the point of affordable grandiose gestures. None offer much in the way of returns; they are monuments to nostalgia, waste for its own sake and institutional denial taken to its toxic conclusion.

If we did not supply our own credit along with a large fraction of our resources, we would be Turkey, looking to invade Mexico to steal their tacos.

The US began to paint itself into a corner before the nation was founded. When the UK became the world’s credit provider at the turn of the 18th century, colonists jumped eagerly onto the bandwagon, borrowing from London bankers with both hands. They were English after all, why not? The proceeds served to finance removal of the natives- then the stripping of the countryside of anything that could be sold. Obligations to repay were expected to fall onto ‘others’ including Europeans who had not yet made their way to the New World and African slaves.

The colonists quickly learned that once on the credit bandwagon there was no stepping off: that a revolution might sever political ties but not alter the relationship between lender and client, nor would it end the mutual dependence of each upon the other. In the face of diminishing returns, the only way to meet maturing obligations and pay interest was to borrow the necessary funds; to continually add more debt … which has compounded exponentially over the intervening decades to the hundreds of trillions owed collectively by Americans today. To insure that obligations are met the government both borrows and spends in the citizens’ place.

Even as governments promise to cease borrowing they cannot; every penny the government spends acts to service the private sector’s debts as well as its own. Far from being productive, industrial economies cannot pay their own way, they require subsidy, all of it borrowed. The need for subsidy expands along with the debts taken on and the cost of debt service. This in turn leads to ever-increasing expenditures, vast national projects such as highway systems, dams, canals, power grids, telecommunication, wars, social safety nets and space programs … Maginot Lines and tax cuts and bailouts. Only governments can borrow at this scale.

Only governments can ‘bleed red ink’ perpetually and not go out of business! Economies are finite, for one firm- or others to run surpluses (make profits) other firms must run deficits. The private sector is possessed of a singular constraint; by the iron law of capitalism firms cannot run deficits for long and remain in business. The compounding of business failures over time would wipe out the economy entirely unless there is a ‘special’ kind of firm that can run deficits continuously and not fail. This, then is a primary function of the public sector: to borrow at a loss and by so doing enable credit to expand; to put funds into the economy, to guarantee the profits of firms and tycoons, to roll over debts as they mature and service the rest as long as possible.

Yet there is an end to it: when the entire borrowing capacity of the economy is consumed by debt service the process implodes; no funds are available to put into the economy or anywhere else. This is the real ‘Minsky Moment’; afterwards, comes the debacle … or ‘reset’, when the debts are not paid and the bankers are presumably hanged from lampposts.

Money is debt; more reasonably money is a promise to borrow forever: default occurs when borrowing slows for any reason, if it stops the economy collapses.

Less borrowing is what is taking place under everyone’s nose. More to the point, a mismatch between the massive borrowing of tycoons and firms versus the dribbles allowed to the hoi-polloi whose loans are needed to retire those of their betters. Less borrowing => liquidating the Department of Education and the EPA … liquidating Social Security and Medicare …

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

— Andrew Mellon

Past US defaults have served to increase liquidity and reduce liabilities, they were currency adjustments. Expensive forms of money were swapped out for less costly versions. For example, in 1933, the US abandoned the gold standard and replaced specie with depreciated paper and credit. That — and the bank deposit guarantee — short-circuited the deflationary doom loop that had taken hold in the US after the stock market crash of 1929. The policy also stiffed creditors who expected loans to be repaid with gold. As it was, the creditors were repaid in paper, this turned out to be a small penalty: had the gold standard remained in force the creditors were unlikely to have been repaid at all. The US defaulted modestly in order to avoid the banker-driven Minsky Moment and the total wipe out of credit.

In 1965 silver coinage was replaced with base-metal composites and the public scarcely noticed. In 1971, the Bretton Woods Agreement was abandoned after the Treasury ended international redemption of dollars for bullion. The bad money drove out the good: gold was replaced with credit, the dollar was allowed to float freely against other major currencies. What followed the end of Bretton Woods was a ten-year period of uncertainty, energy crises, recession and high inflation … followed by crushing high interest rates and a second severe recession. By 1982 the pain of default had faded; Reaganomics took hold, there were new cheap oil supplies from Alaska and the North Sea. A credit expansion commenced not just in the US but in Europe and Asia that has continued up to the present.

The aim behind these actions was to eliminate the scarcity premium attached to hard currency and to end the arbitrage between it and bank money; to streamline the exchange of commercial credit worldwide, to jettison money possessed with intrinsic value and replace it with abstractions available in unlimited quantity. Default allowed the US to become the world’s greatest manufacturer of credit, which in turn allowed Americans to gain a bounty of goods and resources from around the world in exchange for empty promises borrowed from Wall Street at interest … promises the resource- sellers themselves would have to make good at some point in the indefinite future!

At the same time, our post- Bretton Woods money would always be worth less than commerce … there would be no incentive to hold it. Buy! Buy! Buy: over the short term, the outcome was an increase in world commerce and spending with borrowed money = more GDP growth which itself was- and is an indirect measure of the increase in the money supply.

GDP = an indirect measure of the increase of unsecured lending at the bottom of our difficulties. Our ongoing default is much different from prior currency modifications. There is the arbitrage between the dollar and other currencies, there is also collateral inadequacy, diminished returns on credit and the failure of credibility of those in charge of it. Our default is serious business, a reaction to the erosion of our national balance sheet, the longer term consequence of an economy built around non-productive waste. The US is following the same road as Greece, the difference is timing and the relative toxicity of denial. The can-kicking, key man propping strategies, the manipulations and plots have all failed. What’s left is to pretend … and to send in the flaming elephants.

Figure 1: Unlike the equity markets, oil market is sputtering. Millions of bullish contracts @ WTI futures and the oil price is stuck below $60/barrel; (TFC Charts, click for big) Bad news: the oil industry’s customer base is broke and cannot afford expensive petroleum.

More bad news: expensive petroleum is the only variety we have left. An oil price sufficient to satisfy the cash flow demands of the drilling industry and allow the extraction of the needed volumes is far out of reach. We have built our economy around the waste of cheap resources, fuel is a loss leader for expensive real estate and automobiles. Even a moderately higher ‘low price’ is enough to torpedo our non-remunerative, credit dependent, chest-bursting puss-bag of an economy.

For oil prices to rise, there must be someone able or willing take on the final costs. While the major media endlessly serves up the ‘rebalancing’ meme and its lies about the utopia to come, not one word is spared for the hapless end-users whose borrowing keeps the entire enterprise afloat. Customers cannot generate their own wealth, they are tapped out => less borrowing => default.

End users’ failure is no accident. Policy makers since 2008 have worked hard to repress them, particularly those in developing countries. Monetary policy — including QEn almost everywhere — has seen countries beggaring their neighbors in an endless round-robin, in the attempt to depreciate their currencies and gain the export advantage. The robin also rises: you have to know something is seriously wrong when you are unable to fail no matter how hard you try! In the currency war, everybody loses: depreciation pushes every citizen in a country toward poverty by degrees. The citizens borrow less => oil prices decline => less funds available to retire driller loans => banks become insolvent along with the entire oil industry … everybody loses!

The oil market prices both oil AND dollars. Both sides of the dollar-oil market are caught up in tightening positive feedback loops. When customers can only afford a modest price for fuel, how much reserves at that particular price are available? Not much because humans have been burning cheap oil for 150+ years and the cheap stuff is long gone! Meanwhile, lower oil prices mean the dollar is worth more. More costly dollars => hoarding => less borrowing (it costs too much in real terms) => default. This is nominal, of course but we all live and work in a nominal economy: if quantities did not matter there would be no billionaires.

With industrial output becoming more a product of machines and vanishing petroleum, the ability of labor to do much of anything other than ‘consume or die trying’ is shriveling. There are millions of professional economists in this world but few- if any of them concern themselves with the absence of economic return on consumption.

Oil price is now the channel by which credit breakdown propagates itself though the economy, (Quartz):

In an announcement today, Exxon said it had written down its proven oil reserves by a massive 19.3%, a stinging reduction to what is a primary measure of any oil company’s value. As of the end of 2016, Exxon had 20 billion barrels in proven reserves, compared with 24.8 billion a year earlier. This includes the erasure of all 3.5 billion barrels of Exxon’s proven oil sands reserves at Canada’s Kearl field. Last year’s low oil prices made it uneconomical to drill at Kearl, which had been at the core of Exxon’s growth strategy.

It’s uneconomical for Exxon because it is uneconomical for Exxon’s customers, soon enough uneconomical for Exxon’s shareholders. Exxon will survive as an independent firm only as long as its lower cost, conventional oilfields continue to be drained; only as long as there are banks willing/able to lend to it.

More cracks in the edifice of denial, from last September’s research report by (HSBC):

– Oil demand is still growing by ~1 million barrels per day every year, and no central scenarios that we recently assessed see oil demand peaking before 2040.

– 81% of world liquids production is already in decline (excluding future redevelopments).

– In our view a sensible range for average decline rate on post-peak production is 5-7%, equivalent to around 3-4.5 mbd of lost production every year.

– By 2040, this means the world could need to replace over 4 times the current crude oil output of Saudi Arabia (>40mbd), just to keep output flat.

Anyone paying attention to petroleum subjects over the past few decades has seen this before, but almost never in the mainstream. Instead, there is endless public relations blither about fracking, technology, efficiency and an ‘energy revolution’ which is proving to be too costly for the consumption economy to afford.

In this report, we look at the theory and practise of decline rates. We have reviewed several academic studies on declines, notably, the IEA study from the 2008 and 2013 editions of its annual World Energy Outlook and the University of Uppsala (Sweden) papers published in 2009 and 2013. The IEA and Uppsala studies were based on the analysis of over 1,600 fields (covering two-thirds of global oil production) and just under 900 fields respectively – large enough to be statistically significant.

How quickly is production declining?

The studies we have compiled (IEA and Uppsala) coincidentally appear to agree on a ~6.2% average post-peak decline rate. Decline rates are higher for offshore fields and smaller fields, reaching 12% or more for deepwater fields and for fields of less than 100mbbls. The chart below shows the IEA’s average post-peak decline rate calculations for various field categories and sizes:

Anything like 5% or above is a kick in the pants. Since ’08 increases have been meager but increases nevertheless. Even so there is the stumble into delinquency and default. It is hard to imagine the status quo shrugging off reduced fuel availability at any percent much less the declines suggested in this report. No wonder the bosses are panicking; they are passengers on the Titanic throwing deck chairs overboard and setting lifeboats on fire. They cannot think of anything else to do: panic, blame others and lie about everything.

The bosses panic while the rest sleepwalk toward the television. The HSBC report is nothing new, but what of it? Since the beginning, when the first European staggered out of a rowboat onto the Virginia shore, our people have embraced ignorance; living in denial about our debts, about our relationship to others here before us, about the Europeans and our non-European ‘laborers’ we imported; we’re in denial about resources and our limitless greed and rapaciousness, our business folly and waste; in denial about our relations to other nations and what these peoples mean (and don’t mean) to us; in denial about our interrelationship- and absolute dependency upon a complex web of living organisms making up our life support system; also our relationship with reality and how that reality has transferred whole to our entertainments while it is stripped, pounded, genetically modified, cut, drilled and sold to nothingness on the installment plan outside our front doors …

The imaginary intergalactic spacecraft in our movies are remarkably real; denial has been given the gloss of a high art like public relations or maybe a replacement for it. Underneath the glossy exterior is disease. As in the movies, we invent our monsters, make them real and give them power over ourselves then set them loose to do what they will and we laugh … a kind of perverse last chance at something or other we cannot put a finger on. We’ve been practicing our lies for too long: there are consequences, the lies become poisonous from over use, the monsters we have made of ourselves.

89 thoughts on “When Denial Becomes Toxic

  1. Volvo740...

    Great stuff Steve! We must be very very near the peak now. Of course per person we peaked long ago… None of that matters to the ‘economists’. Efficiency gains. Younger people shun cars. Prefers bike riding. Uber. Whatever. They are probably less likely to find a good paying job, and more likely to live at home for a few more years. It’s that simple.

    Aleklett has sent a copy of his newest book to all congressmen in Sweden. But everybody is in Denial. Aleklett too! He is a high price / oil scarcity person and in that world there will be oil production for a long time to come, and the coming decline will be enough to rescue the planet – in his opinion. Hirsch said/believed that ‘we will electrify everything’. Sweden is a vast and sometimes cold place. You really can’t live in rural Sweden and not have a car, or someone has to come by car to you and deliver food. I wonder how the electrified truck (like a tram) project turned out… Or the 1001 large wind turbines that were to be built in the north and send power to the south. 1 built so far.

    Just back from Roatan I can tell there are 0 EVs on the road. That goes for outboards also. It seems like most economic activity revolves around moving something. Either the tourist, the food for the tourist, the water (no pipes for drinking water), or some other material. Tons of US money flowing in, still begging. I helped a guy get his car fixed and we cut back insulation from the main battery cable, and re-attached. His car had about 400,000 miles on it. Patched together. A good cab ride – 35 USD – and he could maybe feed his family for up to a week. Pretty desperate on the one hand. Pretty good life – for now – on the other. One observation: Empty beach hotels in prime locations…


    Volvo is phasing out combustion engines. All of it. The thing is, once you cut driving to the absolute essentials, the combustion engine becomes even more superior than it already is. It doesn’t wear much when it’s not in use. Batteries – not so good. But the reality is that there will be almost no demand for new cars. There exist plenty old cars already and despite the fact that the quality has gone down – they weren’t able to bring the quality down fast enough. That’s why they are called ‘durable goods’. Maybe the EPA could pull cars older than 8 years, but that flies a bit contrary to Trumps deregulation philosophy.

    This 5-6% YoY decline will come. I don’t know if we will get true stats, but give it a few years and we should be able to observe ourselves.

    So what to do? It seems like the US strategy is to destroy demand in producing countries so more can be exported (ELM). I suspect something bad will happen in Saudi Arabia and the the US will ‘have to help’.

    1. ellenanderson

      Hmm – I guess I missed that movie.
      “Medieval usury and the commercialization of feudal bonds”
      By Hartmut Kreikebaum, Hartwig Bechte, Theodor Ellinger, Shael Herman
      Compares Roman law, French law and English common law. Asceticism vs commercialism. I know that prohibitions against lending at interest go back to the beginnings of civilization. The trouble I have with talking about this and trying to figure out how to get it into the context of a rational discussion is that the anti-semite bots come out of the woodwork (speaking of woodwork) which leads me to shut my mouth. Once (if) people really get talking about these things and understanding the consequences of debt based systems there will be no going back. The whole of western civilization has been involved in creating this mess and now the beneficiaries (8 guys?) think they can take it all. Maybe they can.

  2. Bachs_bitch

    I can’t help but wince at the alt media’s Trumphoria. Suddenly, all the problems they have pointed out have become either superficial or solvable in the near future. Why? Well, because Trump will deport immigrants and create jobs. That the cynosure of this surge in optimism is centered around a 70 year old man who has spent his life being what would have been known in previous ages as a libertine, is undeniable proof that denial has become toxic.

    Regardless of the existence reptialians/deep state/Zionists/Illuminati/Fabian society/any or all of these, Trump is attacking liberal denial with right wing denial, i.e., jobs, small government and meritocracy can solve our problems. I guess after 8 years of liberals hitting the high of denial, it’s the other side’s turn.

    Alt right smugness is no less disgusting than mainstream liberal smugness. The question is when this wave of optimism and hero worship will peak. Probably about as long as its liberal counterpart, i.e., it’ll still be around 8 years from now!

  3. Eeyores enigma

    >50 to 1 return from FFs
    >10 to 1 return on debt

    This is what made the world “great”.

    Now its;
    <10 to 1 on FFs
    <1 to 1 on debt (any return on debt is a loss on someone elses)

    Not so great.

  4. Creedon

    So Ellen, who are the 8 guys? It looks to me as if we are going to be hitting many triangles of doom over the next year or so, starting with the French elections, May 7th.

  5. Ken Barrows

    Today’s stories about huge ExxonMobil investments to come seem very calculated (more so than usual) to me. $20B invested in the Gulf? For how many barrels? And the customers remain broke.

    1. steve from virginia Post author

      A big chunk if that spending is for an ethylene plant that may- or may not be built. Another big chunk involves converting an LNG import terminal to allow export. The rest could be considered ordinary maintenance spread out over ten years. The output besides ethylene is lubricants; both are bagatelles compared to the motor fuel business.

      Natural gas business keeps announcing new finds. If we would just hold onto the gas we would have some sort of transition fuel

      1. Volvo740...

        Isn’t the problem the same with nat gas? Drillers insolvent. Price of the product too low? Etc.

        Also, what would we transition to?

        More likely it’s just going to slowly (or not so slowly) grind to a halt. In such a world the ability to pay for nat gas would be low also.

        Many have argued that the economy can’t shrink (or even stay at the same size). It has to grow or collapse. This is due to the ‘interest’ that ‘doesn’t exist’?

        If it collapses, could it collapse at some manageable rate like 1% per year? Or it’s going to mirror the 5-6% that oil will do to us?

        I know. Many questions…

  6. Creedon

    VIA money printing we have already pushed off the day of reckoning a long way. The great oil glut of 2017 doesn’t seem to be causing the global economy to grow by leaps and bounds.

  7. ellenanderson

    @Steve I have been thinking about the difference between default and breaking the social contract. Is there is difference? Why did the ancients call a ‘debt default’ a ‘jubilee’ do you think? Possibly to put a positive face on it though it must have been a very unpleasant event for some. Renouncing the odious debt that enslaves the world may, in the long run, save us from destroying the planet.

    Right now the bankers and so-called corporate persons are in charge of the process because they have bought governments all over the world. It looks as though they plan to shift all of their losses onto the masses of taxpayers, which is to say, ‘the people.’ But politicians throughout history have known that won’t work. “You can conquer with bayonets but you can’t sit on them.”

    What does it mean to say that you must not (cannot) break the social compact even while you default on debts? Can you even talk about the existence of a social contract without the corporate trolls calling you a socialist (very bad word) or worse?

    BTW – oil is down today.

    1. steve from virginia Post author

      Yes and no. Social contract is a promise just like a debt. Reneging on the social contract is a ‘stealth’ default but the process is the same as non-payment of a debt, basically.

      The establishment believes it can get away with it because they have done so in the past (and they don’t have a choice but they only want to scare some of the horses).

      : )

      1. steve from virginia Post author

        They’ve done that already.

        Staying of of the mental hospital is a revolutionary act!

  8. Creedon

    When the debt goes away, the oil goes away, the social contract goes away, all our wealth goes away, eventually many of the 7 billion people on earth go away. That’s why the peak oil community is so fascinated because it is such a big event and it will not be fun for anyone. By the way Ellen Eric Cline has a new book out. A plug for RE, his latest post on peak oil is very good. It looks like the oil industry is headed toward a crises.

  9. Creedon

    javascript:X(59) This link from Steve’s last post tells us all we need to know about what is happening with oil. The bankers must continue to issue debt, to keep producing oil or admit that they are bankrupt, which they are not going to do. Shortonoil recently said that 115 dollars a barrel are needed to produce oil for what it costs. Current price 48 dollar/barrel and dropping with a massive glut of oil on the market. A fire sale is not really going to solve the problem. The money in the pockets of those at the pumps is dwindling, no matter the cost.

    1. Volvo740...

      I’ve come to the conclusion that there is no hope when it comes to climate change. Ice melt is under way, and the Arctic will have a brief blue ocean event within 3 years. After that, the summer window of no ice will widen. They guys who understand this better than I do say this changes the reflectivity enough to act as a substantial amount of CO2 all on its own. And that’s 1 feedback loop. There are others.

      The only way people will give up heating, lighting, travel and cooling and all the other ‘comforts’ that come with energy use is that they can’t afford it any more. That’s it. Collapse of ecosystems doesn’t even seem to be on the radar. Acifidication? Can’t spell it. Never heard of it. Probably fake news.

    2. steve from virginia Post author

      Add ocean shipping, jet travel, industrial agriculture all together and the combined money- and non-money costs run away. All of these endeavors are unproductive to one degree or another, but nobody knows how to stop.

  10. Creedon

    Re: The Etp Model, Q & A Pt. 9

    Postby shortonoil » Tue 14 Mar 2017, 18:02:34
    “In a way we are already subsidizing oil massively.”

    It is the point where some sector of the industry goes cash flow negative. We have always assumed that it would be the extraction portion. That may or may not be the case; if either the refining or distribution portion run out of money to operate, the entire industry would shut down on short notice.

    The bottom of that curve was assumed to be the average lifting cost. Below that point it would drain companies coffers to extract oil. Most firms couldn’t continue for more than a month or so, if that. If this takes place as the Shadow Government is draining the US Treasury of cash, as they are doing at the present, even the government would be helpless to intercede. The elite now struggling for power in the world’s capitals don’t have a clue as to what they are doing!

    They could easily destroy what they are attempting to control. They are too wrapped up in their hubris, and self aggrandizement to believe that they are about to be trumped by the forces of nature. As the old saying goes; “nothing fails like success”.

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    1. steve from virginia Post author

      I figure it has cost the extraction industry more than $2 trillion every year since 2014 to finance itself: that is two trillion above what it gains on sales, two trillion each year that somehow must be borrowed by the industry itself. The customers are unable to cover that amount; it is too large and the end- users are broke and going broker!

      Two trillion is a lot of money but the math is easy and the calculations are straightforward. Total barrels-per-day X ($115 – current price) X 365 = ??? The assumption is break-even price is $115/barrel.

      This astounding debt burden does not fall evenly as some countries (w/ nationalized oil companies like Saudi Aramco) have lower drilling costs and don’t need to add costly distribution infrastructure so they can break even at the $50/barrel market price. But the drillers of expensive plays are being devoured by by both lifting- and credit costs; offshore, oil sand, LTO and arctic, they only survive because of forbearance on the part of lenders: no loans = no oil. It’s possible the US government is making unofficial loan guarantees to the banks … then again maybe not.

      The low cost drillers have additional overheads that must be added to their lifting costs. Petro-states have few additional ways to gain hard currency: what is made in Saudi Arabia or Nigeria besides oil and terrorists? Other than the US and UK, none of these states are credit providers. They must meet all their national expenses with oil sales and the borrowing of their customers: add another $90 or more per barrel in general expenditures to the $40 per barrel lifting cost in Saudi Arabia, Iran and elsewhere.

      Keep in mind the consumption side has always been subsidized massively so that credit cost has to be added to the increasing subsidy on the drilling side. Now the credit costs are galloping out of control … rising costs are why the US is at the threshold of default.

      The US = oil extraction, distribution and driving … and nothing else.

  11. Creedon

    Steve, the Wall Street Journal this morning had a chart up showing the dollar currently losing value on their dollar index chart. This would seem to fly in the face of everything being said in recent times and certainly in the face of rising interest rates. Do you see this as a temporary blip or a new trend that we don’t seem to understand.

    1. steve from virginia Post author

      It’s hard to tell. I’ll be the first to admit there could be a trend I don’t understand.

      I think over the longer term the dollar is going to strengthen relative to both fuel and other currencies … but, not necessarily in a straight line. I can’t see how fuel can become less valuable except under the most extreme conditions, something like rapid & total de-industrialization or a switch to a Soviet-style command economy. The oil scarcity premium is never going to go away. Because this premium is ‘collected’ by reducing available credit the bias is toward deflation which increases currency ‘worth’.

      The question is whether this deflation is happening right now or later; whether the forex movements represent ordinary trading action or something else. Traders have learned over the years that the dollar will fluctuate with a tendency to become worth less over time. The business narrative is ‘inflation’ (weaker dollar) but I don’t agree. Increasing rates are reappearance of default risk in credit markets, not inflation. The fuel market is still deflationary in dollars => any inflation in other currencies amplifies dollar strength. In other words, a currency can only be ‘stronger’ than the dollar by being more deflationary which means not much in the way of a local economy.

      There are amplifying/conflicting relationships … between dollars vs. other currencies; dollar currency (circulating money) vs. dollar credit (bank money); dollar vs. what it buys (oil); dollar as an asset vs. other assets; dollar liabilities vs. other liabilities … etc. There is a lot of noise.

      Even some deflationists believe the dollar is going to crash like other assets. If there is a Wall Street crash, the dollar would nose-dive for a little while. Then, the banks wouldn’t lend (less bank money) and and dollars (circulating money) would disappear => assets would crash further. But, the other currencies would crash too … these currencies are ‘backed’ to some degree by dollar reserves, that is, the dollar is collateral for the other currencies. These other currencies cannot be worth more than the collateral.

      Something is always going to be needed to obtain fuel. If not dollars … what?

      1. Reverse Engineer

        “Something is always going to be needed to obtain fuel. If not dollars … what? – SfV



  12. ellenanderson

    Steve sez: “I can’t see how fuel can become less valuable except under the most extreme conditions, something like rapid & total de-industrialization or a switch to a Soviet-style command economy.”

    What about a combination of the two? The waste based private industrial machine produces too much when it is operating at full capacity and prices fall. The debt bubble has covered it up and there should be a deflation as it bursts. Since oil=dollars the dollar should be strong. But what if a US budget is passed that supports massively increased defense spending (and public lending) for military stuff while the ne0-cons provoke war everywhere? Then there are theoretically no limits to growth for a little while. Rich end users are then only the military users, everyone else is bust and subject to rationing as they fall in line behind the belligerent orange man. For awhile we are a nation of defense contractors and bankers with the central bank printing money. The Central Banks have their collateral as the spoils of war rather than which would be the whole conquered world as well as whatever tax payers are left standing. The rest of the world de-industrializes as the consumer economy fails.

    It really does look as though that is the Trump/Republican plan. I can’t imagine that this boorish behavior and crackpot adventurism could be anything but ruinous for the dollar. It looks as though a lot of people are really enthusiastic at the moment. They love a strong guy who won’t back down no matter what. They wish they could be that way too. They are looking forward to the adventure. That is how wars are started by old men who are not quite old enough to remember the last war.

    1. steve from virginia Post author

      Which is ironic because the number one product of the consumer way of life is convenience, pleasure & sex. Hard to reconcile sex w/ war except for psychopaths; it turns out hyper-masculinity is boring.

      Warfare as a strategy to trash the dollar makes instinctive sense but in the world increasingly consumed by political violence, the dollar worth seems to be holding its own … in keeping with the (relatively) low oil price. As far as spoils being collateral for anything, they have to be in hand: if they can be stolen once they can be stolen twice or thrice, stealing resources in the ground is hard. That was the lesson of the Iraq invasion.

      I suspect that every policy going forward is going to push on the oil price and put the world of hurt on drillers and their lenders which means there are really no effective policies. If we don’t like to conserve we get the Conservation by Other Means.

  13. ellenanderson

    Right RE – I meant to say that the whole conquered world will be collateral for public loans. When it is no longer possible to find a peaceful (financial) way to acquire resources to waste you just take them by force.

    1. Reverse Engineer

      It’s the meme since the beginning of the Age of Agriculture. When the money stops working, you go to the spears, or in modern times, bullets and drones.


      1. steve from virginia Post author

        What Einstein said about war; “I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”

  14. Creedon

    ://medium.com/insurge-intelligence/brace-for-the-financial-crash-of-2018-b2f81f85686b#.xc3f644ib Dollars or bullets aren’t going to buy oil when their is none.

  15. Creedon

    I don’t think that anyone really sees what is coming. I’m beginning to believe that all this attention to an increasing dollar value is a distraction. 1975; 42,348 BTUs/dollar, 2010: 6946 BTUs/dollar. In energy terms the dollar is becoming worthless.

    1. steve from virginia Post author

      It’s hard for me to disagree particularly now the establishment seems hell-bent on discrediting itself. As with so many things economic, credit is entirely the matter of perception among participants.

      Nevertheless, we are stuck with the dollar of today (and the other currencies as well): the dollar of 1975 is no longer available. This makes sense as the btus of 1975 aren’t available, either. The question is whether the credibility of the dollar itself is somehow separate from its users, or more particularly its issuers?

      Answer = Maybe. Credibility is relative, just like everything else.

      What matters is the dollar buys more btus than the other currencies. This is a big problem in countries where citizens have access to dollars (such as oil exporters or manufacturers) the people ‘buy’ the dollars by selling their own currencies to whichever fool is at hand (central bank) => the local currency is depreciated => inflation in the country => btu purchases (in local currency) fall off the table => the only way to buy fuel is to get more dollars. Even as the dollar fails in btu terms, the other currencies reach zero first.

      It makes sense that some day the dollar will be worthless due to inflation or loss of American credibility (most likely) but getting to that point will take some time. In the meantime the dollar is the cleanest dirty underwear.

      The important comparative dynamic is the worth of currency vs the worth of what currency buys. Okay, what does it buy? “Fewer btus” you say. Better question is whether currencys buy commerce or capital (non-renewable natural resources)? Currency HAS to be worth less than commerce otherwise people will hold currency and business will wither. This is what happened during the Great Depression. Money was worth more than commerce and the world’s economies devolved to arbitraging different kinds of money in order to gain gold. It reached the point were everyone was hoarding claims against gold because hoarding was more ‘productive’ than commerce, literally anything else that could be bought with the money. In a way, money/gold became a proxy for food w/ starvation as the only incentive to turn loose of currency … yes, it was that bad.

      At the same time, fuel must be worth less than commerce as well otherwise it will be hoarded. Somewhere out there in TV-land is the consumer who decides for whatever reason to become a resource hoarder. I keep hoping it’s me! That marginal hoarder is hard to find but he’s the most important character in this ongoing drama of currency worth and business ‘success’. Once he (or she) decides to make the switch the consumption regime becomes too costly to support in real (vs. abstract) terms.

      This ‘marginal man’ (or marginal woman) may have already appeared; if not, his (her) arrival is inevitable. Commerce cannibalizes itself so efforts to increase commerce are self- defeating due to resource stripping and the concomitant steady erosion of purchasing power.

      Is there going to be inflation? It would be indicated by an increase in nominal energy prices. So far every increase causes a credit ‘problem’. A price increase is the logical outcome of a shortage: a scarcity rent is added to the producer cost. Actually collecting that rent is the problem: the price remains stable- or declines instead of rising, while the customers lose the ability to meet the price. Thwarting the customers is how the scarcity rent is captured, by corralling wages and earning capacity. Customers discover their credit is inadequate or that access to credit is reduced or eliminated. Without credit the oil prices cannot rise at all, or else they rise briefly then crash. Prices have been falling in fits and starts since 2008 despite the best efforts of finance, government and central banks to prop them up … these institutions are doomed to fail as their job is to prop up the elites in finance, government and banks themselves, leaving the customers standing behind the door. They (the customers) aren’t getting richer … either in real or nominal terms, oil shortages will not improve their lot => more price deflation.

      It’s hard to see what could change our course … other than another Ghawar oil field magically appearing in the middle of Kansas.

  16. ellenanderson

    @creedon – thanks for the link. That was another good one. @Steve – something funny about wordpress today. I got a warning that my sign-in was not secure. Tried to reset my password and the link was invalid. So I signed in as usual ignoring the warning. But maybe you should check?
    Well it may be that “now the establishment seems hell-bent on discrediting itself.” I guess that the swamp is totally populated with crocodiles from Goldman Sachs. “Stop you’re hurting me” say the elephant’s children! Still it will be difficult – even for these serious establishment predators – to control a guy who likes to provoke people just for the fun of being the center of attention. I have a friend like that and things tend to fall apart around him. And then there is his sidekick, the blowsy romantic fake historian – “Ah druid, druid how great webs of sorrow……” – to contend with. Between the two of them we may yet see some of those establishment bankers searching for roofs from which to jump. Or maybe the White House will see DEFENESTRATION – a fine old political solution for unwanted establishment critters.
    If you were putting together a political platform for a new party what would be in it? Any Undertowers have suggestions?

    1. steve from virginia Post author

      UPDATE: The login warning is a new feature of Firefox and will require several hours of fiddling with the server in order to fix. Basically, I have to shift this blog over to ‘https’ rather than the simple ‘http’.

      It is indeed a WordPress issue, a consequence of the way they have set up their basic operating software. For the time being you should be okay logging in as usual, however if there is a problem I will shut down the logins for a short period.

      THANK YOU!

      I’m going to see whether I can fix it itself before shaking the tree @ WordPress …

      As always, be sure to clear your cache and cookies; most EU web-site issues are cured by doing this!

  17. Creedon

    Political platform: Build a great train system, build a good street car system in all major cities. Begin to set up small scale organic food production systems, stop providing subsidies to industrial agriculture and large corporations. Cut the military to only whats needed to defend our borders. Begin to try and rebuild a local manufacturing base. Much of government would have to go. Return the medical establishment to a pay for services system. I would be quickly run out of town on a rail.

  18. ellenanderson

    @Creedon. I ask because I am hearing a lot of Democrats, Hillary and Bernie supporters alike, saying that they will have to wait until the Republicans collapse and then they will “pick up the pieces.” That sounds like a lot of us who have been expecting financial collapse/doom for awhile. So I am asking them exactly what pieces they will reassemble. I think a lot of people may be getting ready to unplug their ears.
    So assuming that we will have been forced to conserve by other means and are heading into a resource constrained world where progress/growth/industrial capitalism are being widely questioned (unlike today) what should the platform of a third party be?
    How should we feed ourselves, will there be public or private banks, will lending at compound interest be allowed, should we try to rebuild a privately owned industrial system? I guess it would be good if people started thinking about those things. I am curious as to whether anyone is doing that. I think Steve started in on it several years ago.

  19. Creedon

    I believe that people are either totally unaware or totally, refuse to be aware of what is coming. I am a believer that a crises is coming and that the only way that people evolve is through dealing with crises. I currently believe that we will be hitting a crises that we don’t now expect by 2020. I think that most likely this current government and most likely future governments will respond to the crises through military suppression of the masses. I think that the current dollar as world reserve system will break. I also believe that by about 2030 the energy from oil will cost as much to produce as we get from it so that it will essentially be worthless. At that point the current world industrial system will be finished.
    If there was a segment of society that was willing to deal with this it would have to be different than what exists today. There are already small communities living sustainable lifestyles on the fringes of our society. There could be a more general movement toward such lifestyles, a movement back to the country and a movement back to small scale agricultural production. I currently don’t believe in political solutions or in either political party. I see both parties as parties of war and imperialism.

  20. ellenanderson

    @Creedon: How about Steve for President? We could call it The Garden Party! But we will need a platform.

      1. ellenanderson

        Yes you did. I mentioned it in my comment above. Nobody was interested. But I think its time has come. The Dems are totally done for. Time for The Garden Party. Most of the names describing potential political parties have negative connotations like Populist and Progressive. Think about all of the dumb names that are being dreamed up to trick people into thinking they are going to have fun….Peak Prosperity, Resilience.org. They make you suspicious. On the other hand it is just not possible to be a good old fashioned anarchist, or a luddite, a leveler, a digger or a peasant. (All good things that I would like to be.)
        But The Garden Party sounds even less threatening than the Tea Party. We can even be in favor of growth! All you have to do is grow one orchid or one tomato and you are a member. But you have to do that or you are out. And you have to keep it alive for a year. We should have a simple platform with a few general guidelines at first.
        Only if it would be fun. No point in doing anything that isn’t fun at this point.

      2. steve from virginia Post author

        Rooftop Garden Party?

        Or is that pushing it?

        We’ll have to work this up a bit …

    1. steve from virginia Post author


      Never had the room for an orchard. I do have an orange tree, however. (No oranges, yet … )

  21. Eeyores enigma

    There are literally billions of people around the world, both in the developed and developing that are living as if they can soon be well off and have all of the “great stuff” the world has to offer. They have zero interest in transitioning in any of the ways that we all talk about that needs to happen…less than zero.

    If anything were to happen that would make that type of fantasy thinking no longer possible to sustain it means complete and utter chaos. Even those who know about the converging constraints right now refuse to adjust. You have 99% of the population either denying it out right or saying that there is nothing that can be done anyway so party on!

  22. Creedon

    Unread postby shortonoil » Wed 22 Mar 2017, 13:55:15
    Here is a recent email that we received from Cathal Haughian that we thought to share with you. Her research is very interesting.

    “Mr Hill,
    This data seems to chime in perfectly with your 3% decline in refinery yields per year. Any thoughts?
    “Now you’re wondering why the roads aren’t all empty When the refiners realized they were going out of business they sold parts of their retail networks which explains the sharp drop offs in some states. So when we add in bulk sales for the purpose of resale the picture is not so cataclysmic. After crunching the numbers for all grades and formulations—for sales to end users and sales for the purpose of resale—between Jun 2006 and Jun 2016: The total decrease is 16.65%.
    That’s a 1.65% decrease in sales per year, minimum. But here’s the killer—refinery receipts of crude oil keeps increasing. In 2009 they received 5,261,068 thousand barrels whereas the 2015 figure was 6,004,798 barrels. That’s an increase of 1.63% in inputs per year and a decrease in sales of 1.65%. Let’s call this The Crude Oil Crunch.”

      1. Volvo740...

        There will come a time when denial becomes close to impossible, but we’re not there yet, as we’re just past peak. As an example, US car sales almost hit record high numbers last year according to their organization. But that’s US and even back in 1984 there were some killer years for car sales. Clearly we borrowed the money for the latest boom.

        In Greece however car sales are not hitting highs. https://www.statista.com/statistics/416500/ford-car-sales-in-greece/ Ford sales have gone from 15K units per year to 3.5K in 8 years. Actually collapse took just 4 years, but it never recovered.

        That doesn’t stop even the Greek trade organization from posting great news!

        “The new passenger car market rose by 13.3% in January compared to the same time period in 2016.”

        I personally think that the collapse of the car industry will be what breaks the Camel’s back, because when you add in all the suppliers, mining, shipping and fuel to support it, we’ll find that it’s simply gigantic. Same for aviation.

  23. Tagio

    And here is short’s post today:
    “How we know that the oil age is ending:

    1) There is now not a single producer on the planet replacing the reserves that they are extracting. What developed reserves that are now being removed are all that will ever exist with the present price structure.

    2) The price has declined by 52% in the last 3 years.

    3) Refinery yields have declined 32% in the last 12 years. In 2005 it required 1.08 barrels of crude to produce a barrel of finished product; in 2016 it required 1.62 barrels. As the cost of crude is 85% of a refiners operating cost the price of finished products can not increase in a market that is already massively over supplied. As yield continues to decline the price of crude must fall to compensate.

    4) World inventories of raw crude, and finished product continue to build.
    5) A review of the Profit and Loss Statements of the eight largest US producers show that the average US producer in 2016 lost money on operations.

    6) The petroleum industry has seen its asset value decline by $59 trillion since the production energy half way point was reached in 2012.

    7) In 2016 the industry did not generate enough free cash flow to pay the interest on its $2.5 trillion in debt.

    8) The thermodynamics of the process, as outlined by the Etp Model, indicate that at a production energy cost of 99,400 BTU per gallon the process must stop. In 2017 it reached 80,100 BTU per gal.



  24. Creedon

    I think that what Cathal Haughian is saying is that once the dollar as world reserve currency breaks, the Chinese with the possibility of a gold backed yuan and the Russians with a remaining reserve of cheap energy will have a bigger say in world affairs. Maybe they are preparing for that time.

  25. Volvo740...

    I interviewed a data scientist today who told me that in CA there is a cap on how much fuel a gas station can sell per month. I had never heard of this before, but I though it was interesting. So one of her jobs was to do demand forecasting so that they didn’t have to turn the pumps off for the last 3 days in the month, but also not lose revenue by selling below the limit.

    Anyone else heard of this?

      1. ellenanderson

        That looks like old news. But I must say that gas stations around here have been running out of gas from time to time. And they often run out of everything but Super. That hasn’t happened before.

        I am thinking about the US Garden party platform. How about 1) All people will have access to self-support land for living and gardening that is held outside any marketplace and cannot be forfeit to creditors. 2) All people will have access to appropriate education, technology and resources to allow them to engage in the production of food, clothing, medicine and shelter. 4) All people will be expected to engage on a regular basis on the production of food, clothing, medicine and shelter or on the care of others or of the Common. 3) There shall be no lending at compound interest of anything commonly known as money (defined as a virtual representation of a real good or service.) 4.) The household or local community shall be the the center of economic activity without concern for any efficiencies of scale that might theoretically result from industrial organization 5.) Restoration of soil, protection of clean water/air and preservation of diverse species shall shall provide the framework within which all human activities are evaluated.
        Apologies if this unleashes a torrent of trolls on your head!

  26. ellenanderson

    Ivan Illich’s Energy and Equity, written in 1973, sounds more relevant every passing day. It is easy to find online and is in the public domain so far as I can see. I can easily get a pdf to be posted on this website if anyone would like it. Meanwhile here are the first few paragraphs. Remember, this was 1973 as westerners were standing in gas lines and Nixon had “gone off gold” for the final time.
    It has recently become fashionable to insist on an impending energy crisis. This euphemistic term conceals a contradiction and consecrates an illusion. It masks the contradiction implicit in the joint pursuit of equity and industrial growth. It safeguards the illusion that machine power can indefinitely take the place of manpower. To resolve this contradiction and dispel this illusion, it is urgent to clarify the reality that the language of crisis obscures: high quanta of energy degrade social relations just as inevitably as they destroy the physical milieu.
    The advocates of an energy crisis believe in and continue to propagate a peculiar vision of man. According to this notion, man is born into perpetual dependence on slaves which he must painfully learn to master. If he does not employ prisoners, then he needs machines to do most of his work. According to this doctrine, the well-being of a society can be measured by the number of years its members have gone to school and by the number of energy slaves they have thereby learned to command. This belief is common to the conflicting economic ideologies now in vogue. It is threatened by the obvious inequity, harriedness, and impotence that appear everywhere once the voracious hordes of energy slaves outnumber people by a certain proportion. The energy crisis focuses concern on the scarcity of fodder for these slaves. I prefer to ask whether free men need them.
    The energy policies adopted during the current decade will determine the range and character of social relationships a society will be able to enjoy by the year 2000. A low-energy policy allows for a wide choice of life-styles and cultures. If, on the other hand, a society opts for high energy consumption, its social relations must be dictated by technocracy and will be equally degrading whether labeled capitalist or socialist.”

  27. Creedon

    I believe the system breaks by 20 dollars a barrel and that is exactly where we are headed. The system may be breaking now. It may be happening in slow motion. There is no reason to be in a hurry.

  28. Elmar

    elmar`s global “Magic Dozen” for the twilight years: and the garden party
    1. be friendly and in good spirits, study everything in depth
    2. Self-criticize, be peaceful but fortified
    3. think small, live small, slowdown, meditate
    4. buy local, save resources
    5 be member of the garden party
    6. grow own food
    7. learn some skilled manual work
    8. cooperate with like-minded people, barter and help each other
    9. reject ideology – hang on to your intuition, avoid pied pipers
    10. avoid mass consumption and stimulus satiation
    11. fight the powers that be – but in an indirect aikido way
    12. help others to awaken from the cultural trance

    1. ellenanderson

      I love it! Suggestion for #13. Have a party in your garden at least once a month and come up with some good songs.

      Here is a techie read: I found the following in my inbox today from Decroissance Canada.
      I really like the slogan “from oil age to soil age.” There is a lot of good stuff going on in the shadow of the old system.
      People have to stop gossiping about Trump vs Putin and start having garden parties (even on their roofs or in their basements among the weeds that are under the lights) The next time they come up with one of these silly elections we will be ready for them!

  29. Eeyores enigma

    Elmar – Sure it all sounds good butttttttt!!!!

    I produce about maybe a quarter of what our three person household consumes and it is by far the hardest work I have ever done. In fact I don’t think I can do it much longer and there is no one anywhere at all interested in jumping in.

    The rest of the list boils down to pretending while living like you are poor which I have been doing for over 10 years now and is really getting old, mostly because no one is interested in any of it.

    I was a professional chef for many years so I can still pack the garden when we throw a party but I have been warned that I am not allowed to talk about anything real or everyone will leave.

    In the beginning there were lots of cohorts all of us knocking off the list you wrote and then some. Virtually all of them have moved on to other things as “collapse” never happened even though it is happening just about the way I have been saying all along. The only thing left is the “Sustainability coalition” which I finally gave up on because it is clear all anyone is interested in doing is sustaining the Sustainability coalition.

    I don’t make those recommendations on your list anymore as everyone I have has come to resent me and some have even gotten hurt financially and even physically doing it.

    All I do say is get out of debt, live simply but do live, and don’t get worked up about any of the issues in company of others even if prodded, it won’t end up well.

    Now I got to go as we had one of the ewes drop a couple lambs over night, so the fun begins.


  30. Creedon

    Thanks for the great post Eeyore. The system is obviously going to take this cycle of exploitive madness to the max. Those of us speaking for reason have no voice.

  31. Elmar


    my list is not for suvival. When BAU is over, JIT is over and we are f…..es.
    It is for my own good feeling in the twilight years. My feet are standing in both worlds!

  32. Eeyores enigma

    “My feet are standing in both worlds!”

    Me too!!! I think I just ripped the crotch of my pants doing the splits ;-}

  33. reante


    i live in the hills to the west of the central part of your valley. if you think i might be able to lighten your load on occasion, i’d be happy to try. you can reach me at reantebenatgmail.

    this is, most recently, encouragement.

    over and out.

  34. Creedon

    Thanks for the link Ken. I do not generally look at eia data. At the peak in 1970, oil was not being produced with as much debt as it currently is. It’s as if we are in an oil bubble. A shale oil bubble. It’s wall streets last gasp at creating a burgeoning world economy. As Fast Eddy over at OFW said, their backs are to the wall and they are firing with both barrels.

    1. Bachs_bitch

      I found this website about shale:

      What I can’t understand is why the shale companies are pumping like crazy when low oil prices are supposed to be bad for the economy. Is extraction so efficient/cheap that they don’t care how low it gets?

  35. Eeyores enigma

    BB – I don’t know for sure but I believe the premise is that the more producers use debt the more they simply must pump in order to service their debt. Making profit is secondary.

    1. steve from virginia Post author

      Neither Russia nor China are credit providers, both currencies are worth only what the respective governments hold in reserve … in dollars, euros, yen or sterling.

      A bigger problem: when the deals must be done, who will borrow whose currency? Will Russia lend roubles to China at interest to facilitate the purchase of Russian natural gas? Or will China offer to ‘pay’ with an nonconvertible yuan? So far that has not been determined.

  36. ellenanderson

    Stuck in bed with the influenza – quarantined! So bored I actually looked at today’s NC. May be information here that would be relevant to the Garden Party. http://www.nakedcapitalism.com/2017/04/reclaim-control-lives-economy-looms-grim.html. Has anyone read the book mentioned in this link? If so, is it any good?
    Also looked at the recently elected Dem Party leadership in my state and encountered additional evidence of the need for a new party – or several new parties.
    Hoping Reante can help Eeyore…. It is hard to farm all alone. No other peasants with whom to party and feast.

  37. Creedon

    I think that I am guilty of following the religion of ‘hard work is the answer.’ I have not been thinking in terms of culture and celebration.

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