Guest Post:Gregor Macdonald: What The End Of Cheap Oil Means

Tyler Durden's picture

Via Adam Taggart of Peak Prosperity,

On the heels of Chris' recent report clarifying the global net energy predicament, he and contributing editor Gregor Macdonald sit down to talk in depth about the broken relationship between energy costs and economic growth.

For much of the twentieth century, the developed world saw a steady march upwards in wages and living standards, due primarily to huge quantities of cheap, high-yielding liquid hydrocarbon. As we find ourselves bumping along the plateau of Peak Oil's apex, suddenly we find that "growth" is a lot harder to come by.

Of course, if you follow the news today, this is not the story you are hearing. Talk of an energy bonanza and imminent energy independence (in the U.S.) are everywhere, thanks to gas fracking and tight oil production. What is missing from the headlines is the cost side of the equation and a blindness towards future demand. 

For certain, shale gas will be a boon for the U.S. and some other countries. But very little is transported these days by gas, and there are no mega-sized infrastructure projects underway to change that anytime soon. Extraction of new tight oil plays is increasing production, but not by enough to offset other field declines elsewhere in the world, and not at the prices we were used to over the past century. The era of cheap oil is over, and these higher permanent prices act as a boot on the throat of economic growth. Hence the mired global economy we have been experiencing in recent years.

Rather than fooling ourselves with fanciful "energy independence" pablum, we should be looking hard at what kind of future we want to have now that oil is no longer cheap. And we should be asking ourselves in regards to the remaining fossil fuels we're extracting: How can we put these non-renewable BTUs to their best use, before they become expensive, too?

I think the main conversation we are not having is that wages are very unlikely to ever return to a relationship to energy costs that would make the United States economy into a happy economic story once again. In other words, this whole idea that we will restore that unique relationship of high wages and low energy prices -- that is what we are not dealing with. So by telling ourselves the story that we are producing more energy, you can clearly see the cultural impulse there. The cultural impulse is there is to suggest "See? There is a chance, there is a chance we can get the energy cost down again and then there is a chance that that wages will come up again. That relationship got very skewed and kicked into a nasty bad place over the past decade. That is very much a way of thinking about what our economic story is, why we had the crisis, and why this supposed emergence from the crisis that we have been plodding our way through the past several years, why it feels so dis-satisfactory, why it feels so insufficient in many respects.


This goes back to the Industrial Revolution. What caused a revolution in British wages? The appearance of coal in the British economy. Why is that? Because not only did you have human workers making stuff, but also, now you had coal helping you make stuff. Coal was the slave labor that you did not have to feed or shelter or clothe or house. And you could get coal to work for you and you could work for you, and you put it all together and it becomes high wages, and you get to pocket those high wages.


So this is the dream that we once enjoyed, here in the States with our cheap oil and our high wages. And since oil became less cheap, the wages have stagnated, and I just do not see how we are ever going to get back to that relationship again. Maybe we will talk about this; I do have some hope that we could stabilize the relationship in a future world, which is more weighted towards the power grid in which some manufacturing returns to the United States. But I think the main thing is – you asked the question, what is the main thing we are avoiding? We are avoiding the very painful prospect  – likelihood – that we will not be able to return to high wages, low prices, cheap energy.


As you point out, one of the cruel things that we left in the wake of our higher rate of growth and our cheap energy era and our high wage era was the debt. We left a tremendous amount of debt. Of course there is the public debt, but I really think what has been governing the economy in the post-crisis era has been the intractable nature of the private debt. We have both done work on charting the course of the private debt and I am sure we would agree that there has been some deleveraging that has occurred, but it is not nearly the amount of deleveraging that the media either thinks or wishes has occurred.


When you compare private debt levels to assets in the United States, yes, we are off the peak, but we are only back to 2006 levels. Most of the people I know were worried about debt levels in 2006. So to “deleverage” back to 2006 levels is not an achievement.


This promise of greater energy supply is obviously dangling out the prospect that somehow that will translate into cheaper prices and that the debt can be serviced and possible extinguished or deleveraged. But as we are finding the process is grindingly slow, and that is a big reason why the economy is grindingly slow and just does not seem to make much progress.


These things can work for a short period in the short term, and that is what we have been doing in the last five to seven years. We have been adding either expensive or marginal sources to the liquid fuel supply, as you know. This process can be thought of as one where the older more cheap oil is continually swapped out for the more expensive, unconventional, more expensive oil, and that makes for some sort of new risks when it comes to how the global economy may slow or speed up and what it may do to oil prices.


Because what I think we are going to find, especially in resource plays like the tight oil resource plays: if price goes below what it is costing these companies to extract this oil, it is actually going to be quite easy for these companies to simply stop drilling; to just stop adding additional wells. Because if you look at the actual mechanics by which wells are currently being added, they are added on a highly discretionary basis. They go in, they produce a lot of oil for a short period of time, and then they go into steep decline.


I think what people do not understand is that the Bakken is not like a traditional oil field where you are developing the whole field at one time; you are really just sticking little pin pricks into the topography of the western Dakotas. It is not like a tar sands operation, in which you sink all of the steel in the ground first over a five- to six-year engineering project and then you try to get paid back for the steel that you sunk in the ground. This is more of an inch-by-inch incremental project in the Bakken.


So what it looks to me is if price goes below sufficient levels – and I currently put that if price goes below $80-$75 a barrel for any length of time – we will just lose supply much more quickly. I just do not think the market or the economy or Wall Street has gotten its head around the fact that a good chunk of our supply now is ready to go offline at the moment that price drops. And that is probably why price has been so sustainably high, because the global futures market for oil realizes that oil that you see now costs a lot more so it is not going to willing to sell you oil two years from now at $70 or $75 a barrel. It knows that the only way that $70 or $75 a barrel oil is available two years from now is if we are back into a deep recession. I mean a deep recession.

Click the play button below to listen to Chris' interview with Gregor Macdonald (48m:43s):

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Spastica Rex's picture

Oil is an infinite resource, like hot-air.

ekm's picture

Real air is infinite. Water is infinite.


Why isn't oil infinite? Why haven't we run out of coal?

the misanthrope's picture

Water is infinite ? Really ?


ekm's picture

Can you tell when the earth is going to run out of water?

Seer's picture

Did you fail high school math?

"Infinite" means that it's beyond measure.  The FACT that we have a measure of the earth and that water is contained within the earth (and its atmosphere) means that water is therefore NOT infinite. (sure, we could have a couple of ice asteroids crash into the atmosphere, but other than that FINITE is a much better description than INFINITE).

No one said that we were going to run out of water.  HOWEVER, if you think that all water is the same, well, fucking never mind!

ekm's picture

Ok, please let me know the amount of water in US gallons created since BIG BANG, since you are saying the water is measurable.

How much time do you need for the exercise? Two hours? Two days?

trav777's picture

you realize that oil is oxidized when it's burned, right?

FeralSerf's picture

Very astute of you -- peak oxygen is what we need to worry about.  Maybe if flakmeister's owners instituted an oxygen tax everything would get better.

You should write a book: "What the End of Cheap Oxygen Means."

Matt's picture

You don't think algae blooms from fertilizer run-off are a bigger factor in ocean oxygen depletion that burning fossil fuels? I mean, look at the huge dead zones off the coast of Oregon and in the Gulf of Mexico.

Seer's picture

Straw man.

The discussion has ALWAYS been about what's on PLANET EARTH.  Clearly you aren't familiar with Earth.  Interesting planet, did you now that it's a sphere? (and by very definition SPHERES HAVE A DEFINED/FINITE VOLUME)

You're a fucking clown.  Go back to harassing your mother or something, I'm pretty sure that it's about time.

Lore's picture

Squexx: "It was decided to use oil as the mechanism to control society long ago."

Not exactly. Buying and selling energy requires some medium of exchange.

"Give me control of a nation's money and I care not who makes the laws." - Mayer Amschel Rothschild

Resource scarcity is nothing new to the globalist elites.  "Green" Agenda 21 (with attendant "Global Warming" hobgoblin) was contrived as a mechanism for hijacking the grassroots movement for responsible economic stewardship and twisting it into a mechanism for good old-fashioned oligarchic feudalism. People are being brainwashed to crusade for their own destruction. A perfect example is the well-funded opposition to major pipeline projects. "Carbon Tax" is essentially protection money for the rising technocrat Carbon Mafia.

Flakmeister's picture

The avatar says "Happy"....

Should have been "Stupid" if you believe the above nonsense...


Lore's picture

What?  You've never heard of Agenda 21?  It's the parent of the Global Warming scam. Aspiring control freaks are infiltrating your local government, ostensibly to serve the interests of "sustainability." Get reading, bub:

FeralSerf's picture

Has there been any change in the total amount of earthbound carbon, hydrogen, oxygen, and nitrogen for the last billion years?  The Earth is (substantially) a closed system except for energy gain and loss.  The issue is not one of peak oil.  It is one of increasing entropy.  The use of cheap oil to enable the increase of human population by its conversion to work is a temporary expedient.  When it's no longer available something else will become popular, or human population will stop increasing.  There are always other options.  When the humans are stressed enough they will find some other way to survive and increase their population or some other species will replace them.  Natural selection rules.   Potential energy is abundant.  So too is human innovation.

Matt's picture

The Earth loses 3 Kg per second of Hydrogen into space. that's 3Kg * 60 seconds * 60 minutes = 10,800 Kg per Hour. That's 250 tons per day. How many days are there in a billion years? Also, the rate of loss has likely declined significantly.

As for the rest of your rant, none of that has anything to do with the inevitable peak in growth of anything, including oil, in a finite frame of reference.

Seer's picture

Wow!  Thanks for some cool info!

FeralSerf's picture

". . . none of that has anything to do with the inevitable peak in growth of anything, including oil, in a finite frame of reference."

Bullshit.  Humankind has had to deal with many "peak" important stuffs in the past.   At one time he feared peak deer, for example.  His ability to adapt has allowed him to survive.   He will either adapt this time too, or he'll perish.  I predict he'll adapt.   There are technologies that could replace oil as a fuel with the next few decades that are being developed as we post.

Peak oil is a meme that has been foisted upon us by the elites to maintain control of the population.  It has worked well.  It's about time for a change.

Matt's picture

So you agree that peak oil is inevitable, and you simply hope that adaptation to another resource will occur before the decline in energy results in mass die-off. See, was it so hard to admit that?

nmewn's picture

Water composes 71% of the worlds surface. We're not going to run out of water anytime soon.

And theres this thing called desalinization. Another remarkable attribute of it all is...its reeeeecyclable! the words of Diane

Just think, you probably drank some of Genghis Khan's piss today ;-)

the misanthrope's picture

but that still doesn't make it infinite, does it? on a long enough timeline........

nmewn's picture

For your and our children...and their childrens purposes, the timeline is as infinite as it needs to be.

If we get hit by a mile long rock from space all this bickering back & forth won't be infinite either ;-)

trav777's picture

WRONG, motherfuckers.


Water is a great example for you stupid fucks to understand how we can have a peak condition and not be "running out."

We are at peak production of water from the colorado river.  We take water out of it at the same rate it goes in.  By the time the river hits the Gulf, it is barely anything.  We cannot EXTRACT water from this inexhaustible resource at a HIGHER rate.  This is PEAK SUPPLY.

Even though water is indestructible, you can achieve a peak supply rate on ANY resource.  Renewable or not.

Now, STFU.

nmewn's picture

Because you CHOOSE to live in a desert I'm supposed to do what...subsidize your sorry ass?

Go where the water is or move higher up and build a fucking cistern...fucking dumbass, quit sucking in all MY air.

ekm's picture


I like debating with SEER, but this one seems to believe in the mayan end of the world.

sessinpo's picture

Thumbs up for you ekm.


What I find interesting is that these liberal arguments they present against you are the same liberal arguments used to justify the de-population of the world.


In other words, a poster like Seer or Trav777, is saying we do not have enough water, oil, or whatever for evenyone. And various cental planners, progressives and liberals use that  thought to suggest de-population must occur.

Would Seer and others still have that view point if they were part of the de-population?

Citxmech's picture

Too bad all those Easter Islanders were Liberals.  I suppose if they were Conservatives they'd still be here living in paradise.

Limits to growth, thermodynamics, and EROEI, don't know party or ideological persuasions - they just fucking are.  And depopulation is on the menu soon as a function of population overshoot over resources- regardless of whether some faction or another wants to lubricate the process one way or another.

Yes, there are alternatives to oil, just none in the pipeline, and none that will offer the same lifestyle we're accustomed to.  Prepare accordingly.

Matt's picture

Forget liberals, shouldn't libertarians, heck even capitalists, be concerned about negative externalities? Or is that someone else's problem? Should there be a cost to someone who contaminates clean water?

Seer's picture

In order for your position to be logically valid the world could NOT be a sphere.

GET IT STRAIGHT all you math flunkies- FINITE means measurable, measurable in NUMBERS; INFINITE means non-measurable, there's a symbol for this rather than a number, FOR A REASON!

I'm a part of reality.  You can choose to believe in Skittles and unicorns all you want.  I have never proposed any "solution" because I, unlike cornucopians, believe in allowing free-will to drive things*.  Nature is what humans are OF, and Nature informs us of exactly how things work: NOWHERE is there a case where any living thing can perpetually expand.

BTW - Apparently you have failed to read my past postings which carry the pretty consistent theme of BIG = FAIL.  If I were a "central planner" type I would hardly be advocating for NO GOVERNMENT (which I have, REPEATEDLY [but only those that bother to read could have caught that]).

Thanks for playing!

Seer's picture

FINITE is still FINITE.  Can we please stop mangling this word/concept?

You're wrong on your use of the word FINITE.  But, you ARE correct in water being recyclable (same with air); though, I do not believe that a simple wave of the wand to "build a fucking cistern" is any real solution (I do have one of these, and it's for potable use - spring water; also have extensive research and design in potable rainwater collection)

nmewn's picture

Seer, you need to re-read what I said.

My first comment was a philosophical one, not a mathematical one and to Trav's localized boneheaded bullshit, a simple and practical one.

You may be interested in this, the cistern is off to the right of the mansion:

Floridians who chose to live along the coast made provisions for it because water wells are impractical that close to the Gulf.

Seer's picture

I an apology is required then I apologize.  That said, we need to STOP applying the subjective to the measurable: this is what propagandists do; this hides reality.

I have to run, and would like to check out your link (thanks for taking the time to post it), but I'm afraid I won't be able to check it out: if you wouldn't mind, could you drop it my way (however that would work?).  Thanks.

Seer's picture

Another person who failed simple high school math (I should have known).

INFINITE means unmeasurable.  As I noted above, we're talking water contained within this FINITE planet.  The planet is a container that can be measured, therefore anything within the planet is then FINITE (except incoming radiation and bits of cosmic debris).

"And theres this thing called desalinization."

And there's this thing called "energy."

trav777's picture

there is this thing called the water defines the maximum RATE of water consumption, despite even an INFINITE resource.

Who gives a fuck how much water there is?  ONLY THE RATE matters.  NOT the reserves.

I cannot believe there are still people on this site who can't grasp this.

Seer's picture

I'm well aware of the water cycle.

And while the "rate" matters, I am trying to defend the use of the word FINITE as pertains to the ARTICLE SUBJECT.  Thanks to a bunch of detractors we've managed to get off on the most stupid of tangents.

Reserves would matter if water wasn't recyclable.  And, there IS a case where water can be horribly polluted (lots of filtering and sterilization stuff out there, but that costs) to the point of making some water not worth treating, thereby necessitating the need to reach into the "reserves."  But I digress... water is NOT oil and oil is NOT water.

FeralSerf's picture

Oil can be converted to usable, i.e. clean, water.   So can other varieties of potential energy.  If you're thirsty enough, you might be willing to tolerate some cost increase.  If it's cheap enough you might decide to fill the swimming pool and water the lawn instead.  YAHOO = You Always Have Other Options.

michael_engineer's picture

Confucius say :

Are we not all grains of sand?

Makes me want to go to the beach.

shovelhead's picture

I thought those were The Days of Our Lives.

BobPaulson's picture

The harder concept to grasp is the thermodynamics that point to increasing energy costs to everything. The thing that is becoming scarce is not energy, but available energy. Energy is conserved, so the real unavoidable problem is the quality of what we have continues to worsen. Humans are the great accelerator of the thermodynamic slide into entropy, so basically, until we get off this rock, the more humans there are, the quicker we ruin the place (but ruined it will eventually be...

RopeADope's picture

Air is infinite? So what happened to Mars and Venus then?

michael_engineer's picture

They're in the sky, where the air is, so it's covered. It's all good.

FeralSerf's picture

Venus still has plenty of "air", much more than the earth does.  It's composition is different that the earth's.

Seer's picture

Did you even fucking read the article?

The article specifically states that yes, wells will be capped because it will be too expensive (relative to the market prices) to pump the wells.

Again, it's Peak PRODUCTION that's the issue.

Fucking never mind!  Sad that people hanging out in an economics blog cannot understand simple economics.  Never mind exponential functions or the laws of thermodynamics.

"It was decided to use oil as the mechanism to control society long ago."

Yeah, it's those other people who are responsible!  Look in the mirror.  Count yourself as one of the very few people in the world who have ever commanded the amount of power that you do (compare yourself to the BILLIONS of humans currently existing, you know, the ones who are being controlled by the oil system).

ekm's picture

If TECHNOLOGY is a problem, that is not really a problem.


Technology will be invented to extract that oil quite cheaper, if not already invented. 

Seer's picture

And when you find that pigs cannot fly?

Technology is a PROCESS.

Energy + Physical Resources + Process -> Product

Sure, technology might be invented when you cannot use it (only for use by TPTB).  But, by all means, hold out for the long-shot.  Why worry about something today when you can do so tomorrow?

trav777's picture

you fucking idiot, technology is what allowed us to increase the RATE of extraction of a finite resouce (oil field)

Seer's picture

That would be Jevons Paradox for those who would like a bit more background on what Trav is talking about.

NidStyles's picture

No one here really cares what Trav says, we just kind of wish he would go away with his angry ranting and fallacy filled posts.

Husk-Erzulie's picture

IMHO, it's just not a ZH peak oil thread without Trav.  I would be disappointed not to see him here :-)

sessinpo's picture

Do you notice how liberals have to make personal attacks and cuss in their posts? In order to try to suggest their view is right, they make it dramatic and insult who they respond to.


Wonder why?