Goldman On Why The Fed Can't Have Its Low Unemployment, And Eat Cheap Oil Too

Tyler Durden's picture

Jan Hatzius' economic team finally comes out with a report that bears presenting as it aptly discloses one of the core conundrums facing the Fed: you can have low unemployment (eventually... courtesy of many years of ZIRP and QE in an environment of "fiscal adjustment", or Goldman's term for Congressional "austerity"), or you can have low gas prices. But you can't have both. To wit: "The combination of tight energy markets and high unemployment poses a dilemma for monetary policy. If policy is kept easy to boost growth, unemployment will decline but the oil market is at risk of overheating. But if policy is tightened to confront the pressure from higher oil prices on (headline) inflation, unemployment is likely to remain  far above desirable levels for a long time to come." And while the price of gas can be (very briefly) controlled by various volatility enhancing margin moves by the exchanges (which for those confused are nothing but self-reinforcing loops - increased vol leading to a margin hike, leads to more vol, leading to more margin hikes, etc). Too bad the CME can't just lower margin on unemployment to -100%. But it can't. Which is why very soon the Fed will be forced to admit to the whole world that "ultimately, a return to equilibrium in both the oil and labor market is likely to require an increase in the real price of oil. In theory, policymakers could react to this by  targeting either a combination of temporarily higher headline inflation with stable core inflation, or stable headline with lower—and in an extreme case negative—core inflation."  And here Goldman throws a stunner: when debating the implications for fiscal policy (we all know what monetary policy will look like: QE 3 through N), the firm proposes the following: "one complement to a low interest rate policy could be a higher energy tax. If one believes that higher real energy prices will be needed in coming years, an energy tax would promote that shift and also capture some of the surplus that would otherwise have gone to foreign producers." Is the government about to unleash some EPS destruction in the E&P and refining space? It appears Goldman has already given the green light which is really all it takes.

Full Hatzius/Tilton note:

Monetary Policy When Oil Is Scarce

  • The combination of tight energy markets and high unemployment poses a dilemma for monetary policy. If policy is kept easy to boost growth, unemployment will decline but the oil market is at risk of overheating. But if policy is tightened to confront the pressure from higher oil prices on (headline) inflation, unemployment is likely to remain far above desirable levels for a long time to come.
  • Ultimately, a return to equilibrium in both the oil and labor market is likely to require an increase in the real price of oil. In theory, policymakers could react to this by targeting either a combination of temporarily higher headline inflation with stable core inflation, or stable headline with lower—and in an extreme case negative—core inflation.
  • The higher headline/stable core combination is likely to be much less painful for economic activity. Moreover, if long-term inflation expectations remain stable, the “sacrifice ratio”—the ultimate output loss needed to bring inflation back down—after real oil prices have reached equilibrium levels is likely to be negligible. Should inflation become embedded in higher inflation expectations, the sacrifice ratio would increase and tighter monetary policy may become unavoidable—but we see no evidence for this so far.
  • One common objection against a low interest rate policy in response to a rising oil price is that it will shift the real income distribution from lower- to higher-income households. However, the employment opportunities of lower-income workers are far more sensitive to overall labor market  performance, which is likely to be significantly stronger under a low interest rate policy.

I. Monetary Policy When Oil Is Scarce

Crude oil prices have eased over the past few weeks, as our commodity strategy team had anticipated. The July Brent crude future stands at $110/barrel as of this writing, down $15 from the late April peak. Likewise, gasoline prices have fallen about 40c/gallon.

But that does not mean that the threat from higher oil prices to economic activity and inflation is behind us. For one thing, prices remain significantly higher than they were six months earlier, and our analysis still suggests a negative impact on growth in the next couple of quarters even if prices stay near current levels. Moreover, the fundamental story of increased oil scarcity is unchanged, and our commodity strategists now see distinct upside risks to their current forecast of $120/barrel for Brent crude by late 2012. So the impact of scarcer oil and higher oil prices on
economic activity remains at the top of our list of worries.

Oil Scarcity Complicates Policy

We have argued repeatedly that there is still ample slack in the world economy. Despite rapid growth that has brought output near potential in many emerging markets, more sluggish recoveries in developed economies have kept the global output gap in the neighborhood of 3%.

Nowhere is slack more visible than in the US labor market. At present, the US unemployment rate stands at 9%, the highest level since the early  1980s other than the last couple of years. Moreover, the evidence suggests that most of the increase in the unemployment is due to cyclical  weakness in the economy rather than “mismatch” between the available workers and the available jobs.

At the aggregate level, the US capital stock also seems relatively ample. Vacancies in the residential and commercial real estate sector are high, and utilization in most of the service sector also remains below average. Exhibit 1 illustrates a series of capacity measures in different sectors of the economy, with the right-hand column expressing these in a normalized format (standard deviations from average).

However, capacity in some areas is a lot more strained. Most significantly, the global oil market is very tight. Exhibit 2 shows the estimates from  our commodity strategy team on the actual production and production capacity of crude petroleum worldwide. They estimate that effective spare  capacity will be exhausted at some point in 2012 (depending to a large extent on the availability of Libyan supply).

Exhibit 3 shows how unusual  the current combination of low (US) labor utilization and high (global) oil utilization is by historical standards. For comparison purposes, we express the US labor gap and effective spare capacity in oil production in standard deviations relative to their historical averages. The US labor gap is two standard deviations below the historical average while oil capacity utilization is one standard deviation above the historical average.

This stark contrast in resource utilization between different factors of production is problematic from the perspective of US policymakers. If policy is kept easy and this translates into above-trend growth, the labor gap will shrink but the oil market will overheat. This could put severe upward pressure on (headline) inflation and therefore downward pressure on real income, especially among lower- and middle-income households. But if policy is tightened to confront the inflationary pressure, unemployment could remain far above desirable levels for a long time to come.

The low rate of growth in oil supply is likely to exacerbate this tension in coming years. Our commodity strategists expect oil production capacity to grow only about 1% per year (see Exhibit 4). Meanwhile, the growth rate of “oil productivity”— dollars of real GDP per barrel of oil—has averaged about 2% over the long term (Exhibit 5). If these trends continue, then the supply of oil can support a global growth pace of only about 3% without generating upward pressure on oil prices. For global growth of better than 4%—consistent with our forecasts and the “consensus” outlook—oil productivity and/or oil production need to accelerate. The most plausible reason for either to occur would be an increase in real oil prices, as the charts make clear.


A “Crude” Framework for Policy Tradeoffs

We illustrate US policymakers’ dilemma schematically in Exhibit 6, which shows the equilibrium—defined as a normal level of capacity utilization—in the labor and oil markets as a function of the price of oil and the real interest rate.

Schedule L denotes equilibrium in the labor market, i.e. full employment. It slopes downward because a higher real interest rate needs to be offset by a decline in oil prices for overall economic activity to stay unchanged, and thus for full employment to be maintained. Points to the right of  schedule L indicate a slack labor market (because of too-tight monetary policy and/or too-high oil prices), while points to the left indicate a tight labor market.

Schedule O denotes equilibrium in the oil market. It also slopes downward, again because a higher real  interest rate needs to be offset by a decline in oil prices for full oil utilization to be maintained. Crucially, however, the slope of schedule O is steeper  than that of schedule L. In other words, a given increase in oil prices has a larger effect on oil utilization than on labor utilization. The reason is that higher oil prices not only lower the overall level of economic activity but also induce some degree of substitution away from oil use and toward other factors of production.

Point A approximates the current situation. The oil market is in (uneasy) equilibrium but the labor market is clearly well below full employment.  Labor market weakness gives the Fed an incentive to lower real interest rates—e.g., by keeping the funds rate lower for longer than generally expected or, more radically, by returning to quantitative easing. Over time, schedule O is likely to shift up to O’ if our commodity strategists’ view of the supply trend is correct. This increases the equilibrium oil price and, at a given real interest rate, the labor shortfall (point B). An easy monetary policy could help bring the labor market back to equilibrium over time (point C) but at the cost of even more upward pressure on oil  prices and headline inflation. So what should policymakers do?

Core Deflation Is a Very Painful Way of Raising Real Oil Prices

Ultimately, the only way to bring both the labor market and the oil market into equilibrium is likely to be through a further increase in the real oil price. This would presumably increase oil supply by making exploration and production more attractive, and reduce oil demand by increasing energy efficiency.

Real oil prices can increase in one of two ways. Either the nominal price of oil rises, or the nominal price of everything else declines. Put differently, policymakers could react to oil scarcity either by accommodating higher headline inflation for a time while trying to keep core inflation on target, or focus on keeping headline inflation at target while pushing core inflation much lower. Neither path is particularly pleasant, since a relative increase in energy prices implies lower living standards for energy consumers. The question for policymakers is then how to minimize the costs of the adjustment in relative prices.

As long as long-term inflation expectations remain stable, there is a strong case for facilitating the adjustment via temporarily higher headline  inflation instead of lower core inflation. If inflation expectations are stable, the “sacrifice ratio”—the output cost of bringing inflation back down to  the target—after oil prices have reached their equilibrium level is likely to be quite low. In contrast, a policy that focused on keeping headline inflation at or below 2% would almost certainly be very painful. This is because of downward price rigidities that make it costly in terms of output losses to push core inflation or wage growth too close to—let alone below—zero.

If higher headline inflation gets embedded in longterm inflation expectations and higher nominal wage growth, however, the cost of a loose policy rises significantly. This is because the “sacrifice ratio” for bringing inflation back down again would then increase substantially.

Fortunately, there is little sign that the oil price increases to date have led to a serious increase in inflation expectations. This is shown in Exhibit 7, which plots two key measures of long-term inflation expectations: the 5-year forward breakeven inflation rate discounted in the Treasury bond market and the 4-9 year 1-year forward inflation expectation of consumers according to the University of Michigan consumer sentiment survey. Both measures are close to their averages over the past decade.

Our conclusion is close to the bottom line from our analysis using our version of the so-called Taylor rule. This says that in the anchored inflation
expectations regime of the past 25 years, increases in oil prices are more likely to lead to a cut in the funds rate—i.e. an attempt by Fed officials to loosen financial conditions—than to a hike.

Implications of Low Rates for the Income Distribution

One common objection against a low-interest rate policy in response to a rising oil price is that it will shift the real income distribution from lower-  to higher-income consumers [our emphasis]. And on the face of it, there is some evidence for this contention. According to the
Labor Department, the bottom 20% of the income distribution devote 4.6% of their total spending to gasoline purchases, against 3.5% for the top 20%. This implies that a 10% increase in gasoline prices cuts about 0.1% more from the real income of lower-income households than higher-income ones.

However, it is important to evaluate the effects of low rates not only via the impact on oil prices but also via the impact on the labor market. This is because the costs of keeping unemployment higher for longer—or in terms of Exhibit 6, staying at point A or B rather than moving to point C—disproportionately fall on lower-income workers. Exhibit 8 suggests that an extra 1 percentage point of unemployment among college graduates implies about 3 points of extra unemployment among those with less than a highschool education. Because their fortunes are so sensitive to overall labor market developments, we estimate that it takes a drop of only about 0.1 percentage point in the aggregate unemployment rate to offset the impact of a 10% rise in oil prices on the income distribution.

This suggests that the commonly heard argument that lower-income workers as a whole are hurt by a policy of keeping interest rates low in the  face of higher oil prices is somewhat misleading. With no change in jobs or wages, higher oil prices clearly do hurt real incomes—more so for the typical lower-income household. But insofar as lower rates bring about labor market improvement, this will lead to significant gains in real income for a subset of households drawn disproportionately from the lower end of the income distribution.

Implications of (and for) Fiscal Policy

Policymakers’ range of options for dealing with underemployment is limited not only by the tight oil market, but also by government finances, which are on an unsustainable path. The US requires a large fiscal adjustment which will impose a meaningful drag on growth in coming years and exacerbate the shortfall in labor demand.

In this context, one complement to a low interest rate policy could be a higher energy tax. If one believes that higher real energy prices will be  needed in coming years, an energy tax would promote that shift and also capture some of the surplus that would otherwise have gone to foreign producers. (In the first quarter, US household spending on energy goods, mostly gasoline, was $70bn higher than the 2010 average—a run rate of 0.5% of GDP.) Higher energy taxes could either be offset by reductions to other taxes, or used to help reduce the federal deficit. In any case, whether it occurs through energy taxes, other taxes, or spending cuts, fiscal adjustment will only reinforce the case for a long period of easy monetary policy.

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Captain Benny's picture

Man and I thought the Fed ate iPads!  Thats just gross eating oil too!

In all seriousness though, I do think the scarcity of oil is a fundamental game changer for humanity.  I cannot imagine the destruction that humanity must see in the next fifty years.  Its either we destroy the earth and suck it dry of natural resources or we destroy the population and make things self-sustaining once again.  I fear we and humanity will do both.  I chose not to bring a child into this world for that reason.  Let the uneducated proletariat breed and bring their children into the destruction my generation's parents and forefathers have caused.  My generation as a whole will continue kicking the can down the road, so to say... I can't say that I'm too proud of my generation either.

Derpin USA's picture

I can't wait until the world is full of even more uneducated, drooling tards. Would you like EXTRA BIGASS FRIES?

Captain Benny's picture

The idea of getting a handjob at Starbucks sounds pretty cool.  I can't believe you like money too.  We should hang out.

ibjamming's picture

Then WHY do we make the stupid laws that allow them to breed unfettered?  We're ENCOURAGING them to breed like rabbits...I don't get it...why?  For the votes?  They sure as hell don't pay any appreciable taxes.

EnglishMajor's picture

Is not every dime spent on a food stamp or social program adding to GDP?  What about prisons?

Are you sure we havn't tried to acquire some form of immune deficiency for third world population control?

sun tzu's picture

Is not every dime spent on a food stamp or social program adding to GDP?  What about prisons?

In that case, the government should just mail out checks for $1 million to every American so we can boost GDP.

Dejean Splicer's picture

"the scarcity of oil is a fundamental game changer for humanity."



NewThor's picture


There are unicorns in the middle of the planet who eat magma

and poop out oil. As long as those unicorns never die off, the world

will always have an unlimited supply of oil.

What could be safer and smarter than sucking trillions upon trillions

of cubic feet out of the middle of the planet???



Dejean Splicer's picture

Yes you're right. Everyone panic! There is no more oil!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!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Let's ratchet up the price. Shall we Dipshit?

NewThor's picture

You realize there is a difference between "Peak Oil" and "No Oil"?

Right right?

Yes, false scarcity leads to bigger profit margins, but I'm going to 

bet on the fact that Earth's oil can is less than half-way full.

I think your writing style would be more awesome if you lead with an insult,

put an insult in the middle, then and insult near the end

and finish with a Hiaku.

Captain Benny's picture

Exactly! Some of us aren't so short sighted as that guy to think that there will be plenty of oil many generations into the future.  Some of humanity truly does care about the long term survival and thriving of life on this planet and oil may in fact be necessary for many years to make a transition away from oil dependence.  We've only been sucking the tit of mother nature for a few years and we've nearly sucked her breast dry... It takes millions of years to replenish...

DebtBasedCurrency's picture

So climate change is human caused and not solar related also?


Look, the fact is that carbon is the most abundant element in the earths crust.. are diamonds dead dinosaurs? or algea?

TPTB WANT high oil not cheap oil.

EnglishMajor's picture

Okay, as soon as oil reaches $200 or $250 a barrel, it might be economically viable to invest in the infastructure and technology necessary to produce Abiotic Oil in a sufficient enough quantity to compensate for the decline in Middle Eastern production.  I'm sure we have another 5 or 10 years.  We'll only need 100,000,000 barrels a day by then.  That's a brilliant solution.

Mactheknife's picture

The world will never run out of oil.  It will run out of oil that you can afford to buy in order to ship or fly stuff half way around the world.  What we have already run out of is 50$ oil and probably 60 & 70$ oil.  We might have some more 80$ oil left.  Rest assured that before long we will be out of 100$, then 150$ oil. That's when "Necessity is (and will be) the mother of invention."

EnglishMajor's picture

It's a simple concept.

The International Energy Agency along with numerous others agree that world oil production peaked in 2006 around 86,000,000 barrels a day.  We will never pull it out of the ground that quickly again because it no longer bubbles up out of the ground in Pennsylvania.  We have to scrape it out of sand and burn it out of rocks.  We get excited about oil that is three miles deep off the coast of Brazil.  None of that oil gets to market quickly or flows as easily to the refineries as it does in the desert a few miles from a waiting tanker.

World oil demand is expected to reach 89,000,000 barrels a day this year.

The back half of the peak is proven science.  Once we are off the plateau, expect a 2% to 4% decline in production every year.

Simple supply and demand, Dipshit.

Dejean Splicer's picture

"We will never pull it out of the ground that quickly again"

Ok, dipshit. Maybe you didn't watch the underwater cameras that were pointed at the BP wellhead in the GOM. I'll assume you did not see that evidence. Just to clue you in, the pressure was so high they couldn't cap it for months.

sun tzu's picture

You're pretty fucking stupid, aren't you? How many miles did they have to drill under the sea for that oil to come out? The deeper they have to drill, the more it costs.

TempFlashback's picture

To echo Sun's post, the fact that they were drilling that far underwater in the GoM should be a huge hint as to the current oil situation.

williambanzai7's picture

Amazing how many words and graphs are necessary for them to say what has been said here by many for months and months.

Careless Whisper's picture

The words and graphs are just part of the dog and pony show to try and make Goldman look like a legit investment bank. In my opinion they're just a bunch of wall street gangsters. How many of Goldman's clients declared bankruptcy after being sold a boatload of shitizzle?

Courtesy of Senator Levin's Report on Wall Street Crooks (page 394):


On June 18, 2007, Goldman sold $100 million worth of Timberwolf securities to an
Australian hedge fund, Basis Capital. Just 16 days later, on July 4, Goldman informed Basis Capital that the securities had lost value, and it had to post additional cash collateral to secure its CDS contract. On July 12, Goldman told Basis Capital that the value had dropped again, and still more collateral needed to be posted. In less than a month, the value of Timberwolf had fallen by
$37.5 million. Basis Capital posted the additional capital, but soon after declared bankruptcy.

Re-Discovery's picture

Yes, of course.  The cure for problems caused by government intervention is more government intervention.

The lapses in logical construction of these weekly pronouncements is staggering.

No need to discuss what happens to the rest of the economy when the price of oil increases artifically through reverse price controls, i.e. higher gas tax, increasing the rate of inflation in all gas/oil related goods, squeezing profit margins, and leading to the tried and true method of cutting costs --- layoffs.

JW n FL's picture

its just like the Voters.. they voted last time and the time before to get this exact same result.. now they cant! Yep! you guessed it! they cant wait to Vote some more... like that will change anything! ever!


But hope springs eternal! or?.. you cant fix stupid! depends on your point of view!

samsara's picture

"--- layoffs."

See my post above.

The thing that stays constant is that 84 million barrels will be pumped today that we will never see again.

Relentless,  Day by day. 

Since we are past peak,  Everyday is a day squandered.  No Long term plan being implemented.  

Good economy, bad economy.  84 million bpd gone either way.

The candle burns down.  And we, in the mean time, are doing nothing long term about the darkness.  We feel prould to scrap a little dripped wax from the sides and put it on top,  thinking that will help us.

Taking my grandaughter to the DC Zoo yesterday,  Taking the Metro Blue Line from the southern end, Onto the Red line walking to the zoo. 

We Need that simplicity to jump on a train ANYWHERE on our rail line and get to anyother city just as easily.

Mass Transit plans?  forget it.  They only TALK about bullet trains in the same manner that they talk about fusion.

ONE DAY......

Ya,  Fusion is the energy source of the future and always will be.  Same can be said about Mass transit.

Just ONE example.


NewThor's picture

There is no spoon.

So I am eating my Fruity Pebbles with my hand.

It's almost impossible to get them out from underneath my

finger nails once they've dried.


Dejean Splicer's picture

Try using your teeth and scrape them out. You'll also consume the dried feces that is caked under your nails but it will not harm your health to consume the same shit that you produce.

NewThor's picture

I'm sorry you didn't get raptured,

but why don't you fry the egg on your

face and make the best of it.

I keep my dried feces cakes in my arm pits,

and I only eat them on Canadian Frosting day.

Dejean Splicer's picture

Very clever. Can we call that peak dipshit? Or is your supply going to overwhelm our demand?

NewThor's picture

Can we be serious for a moment?

"Peak Nikola Telsa Blood" is a FUCKING POOP HOLE SCAM!!!!

There will always be a infinite supply of Nikola Tesla's blood!

Anyone who tells you other wise is a dipshit stick!

Motorhead's picture

Another tax?  Hmmm.  And how much did Goldman give to the President Barry Soetoro campaign?

JW n FL's picture

it will be a tax on the retial side only.. same as it ever was.. it is called.. or it should have been called! the stupid tax.. as it is the same ole' shit!

NewThor's picture

A better question is "How many elections will Goldman Sachs give to

the President Nobel Prize Weiner?"

moonstears's picture

Who'ld a thunk it?"According to the
Labor Department, the bottom 20% of the income distribution devote 4.6% of their total spending to gasoline purchases, against 3.5% for the top 20%. This implies that a 10% increase in gasoline prices cuts about 0.1% more from the real income of lower-income households than higher-income ones."
These figures are misleading, lower incomes are hit much harder than Labor dept suggests, surely! Look out Walmart!

Flakmeister's picture

I will get flamed and junked beyond compare for the following...

The most sane thing the US can do is to implement a carbon tax that is also applied to imports. There must be a corresponding reduction in payroll taxes to reduce the regressivity.

Why would it make sense? It would make lot of Chinese imports uncompetative. Per pound of carbon, the US is the most efficient manufacturer of steel. It would exploit the less carbon intensive NG reserves that the US posseses. It also exploits the internal lines of communication that the US possesses, an unmatched freight rail system.

A gradually phased increase in the Carbon tax would also alternatives more viable without directly subsidizing them, i.e. the market decides the winners. The government is determining the loosers not picking winners....

Arius's picture

make the chinese products uncompetitive? why? with all due respect to chuck schumer if that was the goal you dont built up china in the first place...


"but you cant have both" - try telling it to the masses...

falak pema's picture

Everything you say makes sense to me... I would love to buy you a bottle of pinot noir...that a friend I knew long time ago when we were in University, and who've I've lost from view and rediscovered forty years later, makes in California. You are the first educated and seemingly, I say it in all humility, as I don't consider myself one,intelligent american who understands energy and the 'international labor arbitrage' trap.

Kudos to you...

Flakmeister's picture

I consider myself flattered and I do have a weakness for Pinot. Partial to Burgandies though, make mine a  Charmes-Chambertain... :)

But seriously, a carbon tax is a no brainer, no cap'n trade bullshit. It rewards efficient producers and users, it weeds out the marginal. A carbon tax that allows the reduction, nay, elimination of payroll taxes is a boost for employment. It is straightforward to apply, no need for an over-reaching bureaucracy.

moonstears's picture

I disagree, Mr. Gore, but I will not junk you.

Flakmeister's picture

I don't mind disagreement, but what do you propose?

moonstears's picture

Well, at this point any tax levied goes to a junkie. I propose SOME FUCKIN' FISCAL RESTRAINT prior to any "implementation of ideas". Having said that, some things I've thought about: Semi annual National tax exempt Federal lottery(10% to the winner's home state, 40% to big brother, 50% to the winner). Maybe a look at international financial aid sent abroad? Remember the WTO loves the $$ support, but oil's thicker than dollars, do you really think that'll(carbon tax to benefit the US)last, what? 5 minutes, maybe 10 minutes, before the cartel hikes barrel prices? How many Nat Gas converter kits are available to negate instant $25 dollar a gallon gasoline?

Flakmeister's picture

Let's talk real numbers....

What fraction of the US budget is related to the securing of oil? 300 billion per year is a reasonable estimate. Maybe, just maybe, the price that the US consumer pays should reflect that hidden cost. If you want to have 2 wars, have a draft instead of funnelling money to private contractors at 7 times the cost. I don;t like the idea of "private mercenaries" playing a role in National security. Any glance at history reveals this to be a bad idea.

Fiscal responsibility, lets go...

 1) Claw back SS if mandatory IRA/401-K withdrawals exceed $75,000 pa

 1a) Raise SS/Medicare eligibility ages...

 2) Accept that Medicare cannot underwrite certain medical procedures. Sorry, but getting a quadruple bypass at 82 costing $400,000 when you paid in a total of $20,000 just doesn't cut it... 

 3) Tax rent income at a higher rate than productive captial. Encourage active capital formation.

 4) Tobin tax, to discourage short term non-productive transactions.

 5) Phase out income tax up to a certain level, replace with National Sales tax to discourage mindless consumption.

  6) Raise the cap on SS contributions currently $106,000, lower the   witholding..

  7) Eliminate corporate welfare for Big Ag, in general eliminate most Ag subsidies.

  8) Eliminate Ethanol tax credit

  9) Claw back the true cost of the financial bailout...

 10) Eliminate the hidden subsidies the trucking industry recieves. Make them pay for the damage they are responsible for. 

Just a few ideas... some better some worse...

sun tzu's picture

What will happen is that congress will raise new taxes and not cut any of the old ones. 

Do you have any experience in the tax industry? 

Flakmeister's picture

 I cannot be held responsible for the behaviour of others. If these people are the choice of the American voter, and they fail to hold them accountable, what can I do. I was requested to come up with some fiscal sanity....

The tax code has to be scrapped. There are too many provisions, loop holes, special cases, riders etc... Too many people and entities are subsidized in the tax code. It is not about who pays, it is about how those that don't pay don't....

Derpin USA's picture

The carbon tax is an excellent idea. Steering towards something is almost always bad government policy designed to help the profits of one corporation or another. Steering away, however, is just intelligent governing.

Great post.

Flakmeister's picture

I have always believed that government policies should like behave like that. It is not easy to agree on what it right and how to get there, but a consensus on what is wrong is easier to achieve. 

catch edge ghost's picture

You need to let Them achieve absolute control of the supply and distribution of energy producing natural resources, and the reserve currency with which they will be transacted, before you ask Them to dictate the affordability of using those resources.

You'll have to be patient.. let the emergers emerge.. enjoy the float for a while.. then you can happily collect the value added Utopian peace dividend ever after.

NidStyles's picture

LOL, your answer for corrupt and incompetent statism, is for more corruption and statism. Typical statist.