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The Oil Head-Fake: The Illusion that Lower Oil Prices Are Positive
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The essence of the Oil Head-Fake Dynamic is the inevitable drop in oil price due to global recession will trigger disruption of the global oil supply chain.
I've described the dynamic of structural imbalances of supply and demand leading to lower prices for crude oil as the Oil Head-Fake: high global production (supply) continues while demand declines due to global recession, and the resulting imbalance of supply and demand triggers a major decline in price. But this drop is not positive; it's a temporary response that triggers a variety of disruptive consequences.
There's nothing fancy about a basic supply-demand pricing model; if the world is awash in crude oil and demand slides, price will eventually follow.
Everywhere I Look, I See Cheap Oil (May 12, 2010)
The interesting parts of the Oil Head-Fake Dynamic arise from the supply side, not the demand side. Demand for oil is famously inelastic, meaning that easy substitutes are not readily available, and the primacy of oil in the global economy insures a steady demand.
Yes, natural gas can be substituted for vehicles that have been converted to burn natural gas, coal can be converted into liquid fuels, gasoline/diesel vehicles can be scrapped and replaced with electric vehicles--but all of these substitutes require reworking not just the vehicles but the entire infrastructure of extracting and delivering liquid fuels (or sufficient quantities of electricity) to substitute for oil.
Even with natural gas production soaring due to the fracking revolution (a rise in production many doubt is sustainable), there isn't enough natural gas being extracted to substitute for oil, except at the margins: the fuel being replaced with natural gas is coal.
While the Nazi war machine famously ran (at least partly) on liquified coal, fabricating enough plants to liquify coal in quantities large enough to substitute the new coal-based fuel for oil-derived fuels is non-trivial.
As for using electricity, all the electricity generated by alternative-energy sources such as solar and wind amount to a few percentage points of total energy consumption in the U.S. The percentage is higher in other nations (for example, Germany), but substituting alt-energy for oil-based fuels is not practical without massive, sustained capital investment in new energy production, delivery and distribution infrastructure.
Despite the relative inelasticity of oil demand, a significant percentage of oil consumption is discretionary: tourism is discretionary, and so are many single-passenger commutes. Keeping the lights on all night in empty buildings is discretionary. Some percentage of military training is discretionary. Driving every day to run one errand when all five errands per week could be accomplished in one trip is discretionary. Much of business travel is discretionary. Driving to a restaurant when a meal could be prepared at home is discretionary. Shopping for non-essentials is discretionary.
When jobs are lost and budgets are slashed, discretionary demand for oil craters.
The ebb and flow of discretionary demand is known as the business cycle of expansion and recession. Though the business cycle is considered the natural order of all economies, the current crop of Central Planners is convinced that their powers enable them to eliminate the business cycle, i.e. recessions are no longer a necessary feature of the credit cycle and everyone can enjoy permanent expansion of consumption, debt and risk.
History suggests the omnipotence of central banks is illusory, and their hubris will be rewarded with a recession that breaks the back of their interventions.
Even if you believe in the omnipotence of central banks, statistical reversion to the mean suggests recessions (declines in discretionary demand) have not been eliminated--they've just been pushed forward.
Several emerging features of the oil supply story complicate the supply-demand pricing model. In the classic model, as demand drops, price follows, and at some point it's no longer profitable for high-cost producers to continue pumping oil. As a result, they cap their wells, cease extracting oil, and eventually supply drops to match demand and price stabilizes.
When demand recovers, price follows, and marginal production is brought back on line to meet rising demand. Price stabilizes as supply rises to meet demand.
So far so good, but as noted above, oil is not a commodity that can be replaced with a substitute, except at the margins.
Oil has another peculiarity: it isn't distributed evenly around the world. Some nations-states have large reserves, others essentially none. Those with large reserves export some of their production to those with little or no oil.
Those nations with abundant oil often suffer from The Resource Curse:--due to the extraordinary wealth generated by their oil, the rest of their economy atrophies and their political/social structure is distorted by the oil wealth.
Egypt, Libya et al.: Demographics, the Oil Curse and Post-Colonial Karma (February 24, 2011)
The atrophying of the non-oil economy and endemic corruption driven by oil wealth lead to societies and economies with few opportunities. The despots, monarchies and other Elites reaping the oil wealth keep a lid on this simmering social unrest with welfare. As their populations of non-Elites have exploded, the costs of placating the restive masses with social welfare have also exploded higher.
Domestic consumption of oil has also soared, along with population and as a result of subsidies that keep the cost of petrol absurdly low. What is nearly free is inevitably squandered, and with no price discipline, consumption has skyrocketed in oil exporting nations.
Another peculiarity is the easy-to-get oil was extracted first. This makes sense in terms of cost-benefit, and the inevitable result is the oil that's left is more difficult to extract and process. This means the cost of producing a barrel of oil has risen from $1/barrel in the good old days to $40 or more in many exporting nations.
Add in graft, waste, distribution costs, taxes to fund social welfare programs, etc., and the break-even price for oil exporters is much higher than the production costs alone.
This sets up a contradictory set of requirements for oil exporters: oil exporters can only maintain their social spending and keep the regime afloat if oil prices stay elevated. When global recession guts demand and the price of oil tumbles, the exporter regimes are at risk of collapse if they can't maintain social welfare spending.
The only way to offset lower prices is to pump more oil, which paradoxically pushes prices lower. This is a double-bind: if they cut production in the hopes that prices will stabilize, this enables their competitors to keep production high: prices won't decline. But if they pump more to compensate, prices also decline.
Higher production costs mean any serious price decline makes production unprofitable at a higher threshold. Where it might have taken a decline to $40/barrel to squeeze marginal producers out, now the threshold might be closer to $60/barrel.
This means even modest declines in price soon trigger production cuts as marginal wells are capped and exploration/development of costly reserves are put on hold.
But since the supergiant oil fields responsible for most of the global production are in exporting nations, the dynamic of maintaining social control and regime stability outweighs declines in marginal production.
This set up a price decline spiral as marginal production is taken offline but supply doesn't drop along with demand. The Resource Curse establishes a positive feedback loop: in the classic model, the feedback is negative: demand drops, price and supply follow, and price stabilizes as supply reaches equilibrium with demand.
But the Resource Curse is positive feedback: the lower price declines, the greater the need to compensate for lower revenues with higher production.
Meanwhile, the more price drops, the more marginal (costly) production is taken offline. This sets up the ideal conditions for a positive feedback on price: when demand recovers, supply will never be able to catch up.
It doesn't take much imagination to discern a tipping point in oil revenues: once price declines enough that social welfare programs cannot be funded, some exporting nation regimes will be toppled by domestic instability. Others may become vulnerable to external forces. The point here is that production generally suffers mightily when regimes collapse and the Status Quo is disrupted.
Another peculiarity is that as the easy-to-get oil is depleted, the need for financial and human capital investment soars. It requires billions of dollars and vast expertise to maintain production, and exporting nations have typically made the choice to devote their scarce capital to social welfare and feathering the beds of Elites rather than investing billions of dollars to maintain their production capacity.
Add these dynamics up and we get a supply chain that is vulnerable to price declines and depletion of the cheap, easy-to-get oil. If supply is disrupted on multiple fronts--social, economic, physical--it will be incapable or rising to meet recovering demand after the forest-fire of global recession clears out the deadwood.
This sets up a new pricing dynamic: demand rises but supply does not, and prices continue higher without respite or any intrinsic limit. As I have noted before, a motorcycle deliveryman in India or China will pay $10/gallon for fuel because he only needs a few liters to conduct his business. The energy/price threshold of the American household with two gas-guzzling vehicles is considerably less resilient and adaptive: below a high level of consumption, the household ceases to function, and above a relatively low price, the household also ceases to function.
The essence of the Oil Head-Fake Dynamic is the inevitable drop in oil price resulting from a sharp decline in demand (i.e. global recession) will trigger disruption of the global oil supply chain that will eventually push prices higher than most currently think possible.
Of related interest:
Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?
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Lecture to the writer:
Demand is Infinite
Supply is scarce
This is why economics exist.
No such thing as "supply/demand law".
So, cheap oil means abundant energy which means good life
Expensive oil, means shortage of energy, means manual labor, which means miserable life
End of Lecture
"The illusion that lower oil prices are sustainable" --fixed.
Haven't you heard about the "labor of love" concept?
Glad I went long sharecropping years ago.
Peak Oil is nothing but gibberish by TPTB. Why does Zero Hedge support such baloney.
Even the Bible Belt followeres think God will supply all they need on earth. There is some truth to that.
The earth lives and actually makes oil as a byproduct of decay. Hello Peak Oil junkers. Get another life.
You have bled enough from us sheeple with this garbage thinking. You have killed the world economy.
The WSJ had a decent article this week end.
A tow truck company is converting its fleet of 24, F650s to nat gas. Gasoline equivalent price $1.77 - gasoline displaced - equivalent to 700 Nissan leaf electrics. This is where the conversion is taking place, in small scale commercial users, and the eventual effect is huge.
If it were that easy, they would have done it already
What happens in a car crash?
http://www.afdc.energy.gov/vehicles/natural_gas_after_accident.html
It's very easy compared to hybrids or electric vehicles.
The catch is, you have to have a place to fill up with natty. Ideal for fleet vehicles, taxis, buses, etc.
UPS and Fed Ex are already well along on the shift.
CNG is definitely gaining ground as motor fuel. As a result, many fueling stations are popping up around the country.
http://www.afdc.energy.gov/fuels/natural_gas_locations.html
Seems to me x amount of energy stored in any fuel onboard will have the same BTU value burn in an accident.
I'm starting to think the whole idea of "FOSSIL FUELs" is a lie. We are talking "Hydrocarbons" here. Water and Carbon for christ sake...it's everywhere.
H2O + CARBON + ??? = PROFIT!!!
The ??? in your equation is a big amount of energy. And the tricky question is: Where and how you get it?
So the peak-oilers are somewhat right, the wasting lifestyle of the west fueled by the cheap oil bonanza have to end. Question is: When and how?
Cuba showed a way out.
??? = STAR
I know we went over this many times before, but try to keep up Rocker,
EROEI
The problem with the whole arguement about Peak Oil is that it centers around how much oil does or does not exist and what can or cannot be produced. It should be about how much it costs to recover. Yes, there is alot out there, and there will be more if you can wait a long, long time...The key is to understand Energy Returned on Energy Invested (EROEI) Historicaly, Saudi Oil costs from $1-$2 per barrel to produce light, sweet crude, the most desireable and least costly oil to process, whereas Shale Oil comes in at about $100 per barrel including capital costs for heavy sour crude, which is very expensive to process. And don't forget the 1-5 barrels of fresh water needed for each barrel produced.
So let go of all your Socio-Politcal baggage and objectively ask yourself "Will a 5000% to 10,000% rise in production cost in any commodity have an effect on market price?"
It's math. Math does not care if you are a conservative or a liberal. It doesn't care if you are American or Iranian. It doesn't care if you spend your time online or in the library trying to learn something new, or if you do it just to reinforce what your emotions tell you must be the truth. Math just... "is".
EROEI is the most important basic concept,
http://ourfiniteworld.com/tag/eroei/
However, that is qualified by how EROEI manifests through militarism, i.e., the maximum power delivery in the form of destruction, whose consequences then determine who survived to control future production.
The development of all natural resources was much more complicated than the mere mathematics of ordinary economics, because the bigger picture included the operations of the human murder systems, which are what finally control the monetary systems, that supervise the economics of the development of natural resources.
Crucial historical battles and wars were like watershed events that determined the future developments. The effects of murder systems ripple out far beyond their own immediate realities manifested on their battlefields. But nevertheless, the short-term successes of producing destruction end up being the main factors that control how subsequent productive activities are channeled. The successes achieved through military conflicts can multiply many times during the subsequent historical development.
A couple of the basic concept of how general energy systems operate apply to human systems in peculiar ways, due to the human systems being based on deliberately denying and suppressing those perspectives. ONE, the most labile components control the system. TWO, systems follow their own path of least action, or least resistance.
In human terms point ONE means that human civilizations are controlled by the people who are the most deceitful and destructive. Point TWO means that human civilizations' path of least resistance is their path of least morality. Those ideas both apply to how petroleum resources were actually developed, and continue to manifest. Those ideas are that basically valid concept of EROEI, manifesting through militarism, or the murder systems, which back up the monetary systems, and therefore, are actually what control the political economy.
People who tend to want to believe in the rationality of the market, and the idealized versions of how economics operates, then tend to deliberately ignore the ways that everything they are talking about was originally created by all private property being claims backed by coercion, within which context money was measurement backed by murder. A genuine understanding of political economy should include that within the human ecology. The debt controls over the development of natural resources are NOT within some isolated system of economic rationality, but rather, ARE within a much more paradoxical context of death controls, which were successful by operating through the maximum possible deceits about themselves.
A couple of little examples of how distorted the supposed "rationality" of economic developments have been are the episodes of alcohol prohibition, and pot prohibition. Ethanol is the most important, fundamental chemical in organic chemistry. However, during crucial periods of industrial development, it was criminalized. Similarly, hemp is the single best plant for food, fiber, fun and medicine, but it too was almost completely criminalized for a very long time. Both of those events were due to the background of the funding of the political processes, and that funding in turn traces back to the deeper history of the application of the methods of organized crime to the political processes, in order to achieve the implementation of systems of legalized lies, backed by legalized violence, which would benefit those who promoted that, through their ability to dominate the funding of various aspects of the political processes.
Basically, real economics actually operates inside ecology. The real EROEI is therefore much BIGGER than what superficial models of economic "rationality" indicate, because the real systems were developed due to ways that the covert and/or deceitful murder systems enabled the kinds of money systems which depended upon that to dominate economic developments with systems of enforced frauds.
As one of the perplexing side-effects of the ways that successful militarism was based on backing up deceits with destruction, which was the foundation upon which was built a political economy based on enforced frauds, the individual ideologies of people are strange amalgams of organized lies. One of the first rules of ideologies are that people rationalize the ways that they make a living. I would broaden that to say that people indulge in the presumptions which justify their indulgences.
Since the basic foundations of human history were that civilizations were forged in the crucible of conflicts, with warfare selecting for the development of the surviving War Kings to create the organizations that later became sovereign states, whose powers were covertly captured by the Fraud Kings applying the methods of organized crime to dominate the political processes, in order to establish integrated systems of legalized lies, backed by legalized violence, that overall context of human realities being systems of organized lies and robbery has simultaneously enabled myriad variants of individuals to believe in their own kinds of personal bullshit, inside of the context that their civilization as a whole was dominated by its biggest bullies' bullshit social stories.
By and large, I find that none of the featured articles on Zero Hedge consistently address the ways that money is measurement backed by murder. Those articles that do somewhat address that tend to continue to compartmentalize that, rather than regard the phenomena as integrated systems. Similarly, while some of the comments posted on Zero Hedge below those articles are often more insightful than the original articles, many comments appear to be to be goofy manifestations of the ways that some individuals indulge in the presumptions which justify their indulgences.
Of course, inside of a society which is almost totally dominated by the biggest bullies' bullshit social stories, it makes perverse sense that there is a wide variety of individuals promoting their own idiosyncratic bullshit, which tends to be based on deliberate ignorance and denial of basic facts about the natural environment in which human beings have as their habitat. In a society operating debt slavery systems, which have generated debt insanity numbers, which are tending towards provoking death insanities as the consequences, it makes perverse sense that there are people who indulge in idiosyncratic sets of presumptions which enable them to continue to personally indulge in following through on their own personal paths of indulgent least morality.
Since civilization as a whole is controlled by enforced frauds, there are plenty of individuals who are able to operate within that context with their own kinds of matching sets of compartmentalized enforced frauds regarding how they think about the world, which enables them to continue to indulge in their habituated behavior. The discussion of human energy systems necessarily develops through realities which are systems of organized lies operating robberies, which paradoxically were socially successful from having been able to do that. That manifests not only through the overall systems as a whole, but also fractally through the individuals who idiosyncratically participate inside of those systems. Therefore, the basic discussion of human energy systems often manifests deliberate ignorance, as often seen in the featured articles on Zero Hedge, as well as even more so in some of the range of comments upon those articles.
Of course, there is a relative range of those phenomena, but nevertheless, it is clear that some comments are presenting god awful goofiness. After all, since the basic foundation of the established political economy is enforced frauds, whose basic nature is deliberately ignored or denied as much as possible, it surely does make perverse sense that an abundance of silly comments are written by some individuals indulging in the presumptions which justify their indulgences.
Radical Marijuana,
That's some heavy shit. Since I no longer indulge I do not have as many cannabinoid moments of clarity with regard to the human condition, but two quotes come to mind: "Five percent of the people think;
ten percent of the people think they think;
and the other eighty-five percent would rather die than think.” -Thomas Edison
"Everything in this dang world comes down to a dick or a dollar" - unamed friend of mine from Texas
Keep your friend from Texas... Drop the one above.
Fred Garvin, I believe Thomas Edison was right in that quote, except that those percentages have probably gotten even worse since his times to our times now, because there are scientific reasons to believe that people on average are getting stupider, while an agenda of the deliberate dumbing-down of the population has been advanced.
My Bottom line is one. The charade of Peak Oil still exist because fools believe it. Too many are billionairs for this farce.
I understand the cost of getting it arguement. But if you look at Dubai with Snow Skiing Resorts in the middle of a desert, Real
Gold bathtubs and toilets, tallest buildings, 17 finger man made white sand beach/island resorts for the uber rich, and the excess of
the most expensive cars being bought and owned by the east, one most wonder. Has someone charged just a little bit too much for
that oil. How's that for the math of excess. Afterall, most of these things were bought and paid for Americans who can only look at
the pictures and never visit or use these riches. The price Americans paid for that oil has kept them too poor to do other. There are
no poor oil men. Years ago Joe Kernen on CNBC asked the now retired CEO of Exxon if he was getting out at the top. Most do not
comprehend how much money he was paid and got for his retirement. This whole peak oil sham is based on one concept. Excess for
those who control the game. They see and test just how much money they can squeeze out or the dummies they brainwash every day.
They care not about the economies of the many, just their own bottom line. The Oil Cartel is real. Some say those riches support
the terrorist of today. Ironic isn't it. We gave our children's blood to fight for some of them and after they say we are the problem.
Our presidents kiss their ass, (hand), just so their buddies, (handlers), can stay rich and in the game. The charade surely lives on.
By the way, CNBC has done the math and reports: historically, there is more oil above the ground right now than ever. Hmmmm.
Is it put into the ground by the giants that live in hollow earth?
http://www.ourhollowearth.com/
"Peak Oil is nothing but gibberish by TPTB."
Yeah, no problems that I can see.
No, wait . . . http://www.oftwominds.com/photos2012/EROEI.jpg
Just in case it's not clear, the blue represents the amount of "spare" energy we have or surplus over that expended.
When oil was easy to get, think oil well gushers blowing in the air, there was lots of spare energy to waste on discretionary things.
As it becomes more difficult to get (represented by the cost of extraction) then the amount we have left over decreases.
We now have better equipment to find oil and if there were any giant oil fields on-shore we would have found them a long time ago.
Discoveries are trending down, and of course if you can't find it first, you can't use it.
"The earth lives and actually makes oil as a byproduct of decay." -- Yes, but at what rate dipshit? Certainly not at the 80 mbd it's being consumed.
Hey fucknut, go pray all you want for more oil and let us know how that works out for you. I will stick with the petroleum engineers.
Only one thing is certain, if you don't have calories to burn, you can't actually do shit.
Still believe that the world economy can grow indefinitely in a closed system with finite resources (not just oli)? good luck with that.
Nature (physics?) will prevail. Either humans will adapt, or die trying.
If there was a real recovery demand would be increasing. In the case of a make-believe recovery we have what we have.
Green Shoots!
Perhaps, but it remains a global market with 7+ billion people all competing for calories available for consumption. Oil remains the single best source, so plenty of demand.
Want to slow down the, "recovery", raise the price of gas.
Cliffs Notes Version:
Fix oil price artificially high so that Saudi Arabia can still afford to fund and export terrorism worldwide. Check!
I have to question the 60$ oil level that was suggested in the article only as it relates to the level many oil producing countries need to see b/e fund their governments. I believe Saudi Arabia needs closer to 80$ a barrel to reach b/e. And Russia has to be higher than 60$ by now.
Cool! George Bush logged in and down-voted me!
Yeah, at least 4 times... for now.
How about "George Bush and some other retards?"
Good theory, but where are we now? Any big oil taken offline?
But, but... "Renewable Energy will save everything and everyone". I hear. ;-)
Seriously, it may reduce our need for precious Carbon fuels -- as will increased efficiency of its use -- but won't eliminate it.
In the Future... the ecosystem of Carbon Fuel Energy and Renewable Energy will be "interesting". And we will all "Live in interesting times" (per the Chinese saying), as more and more people in non-Western countries climb up the Totem-pole of "Lifestyle & Resource Consumption".
Add in some Middle East instability like a Syrian war or two and Presto OIL SHOCK
another good reason to get off oil addiction
especially, when US has plenty of natural gas
yeah, good idea ... send our $$s to countries who hate us (and fund madrassasses)
"Meanwhile, the more price drops, the more marginal (costly) production is taken offline."
Without that, we'd be up to our asses in stuff no one needs.
It almost seems as if there is a giant invisible hand steering us not to make bad economic decisions. If only the Fed would listen.
Who am I kidding? The Fed can cure all!
So low prices bad cuz willl force subsequent high prices. Scary. Perhaps it is best that a One World Gubmint dictate a stable oil price. so we can graze with minimal fear and discomfort.
Did someone put a Pod next to Charles's bed last night?
since when has demand had anything to do with oil prices?
~ 2010 JPM had a supertanker loaded with oil parked off Malta ... for no other reason than to help drive up price of oil ... and screw the US taxpayers who bailed their azzes out.
that sorta makes my point. the power brokers fuck with the whole system. it's not true consumer demand. its a fucking commodity play toy for them to manipulate the price to whatever they want.
The essence of the Oil Head-Fake Dynamic is the inevitable drop in oil price resulting from a sharp decline in demand (i.e. global recession) will trigger disruption of the global oil supply chain that will eventually push prices higher than most currently think possible.
And the shock price of oil cuts off the nascent recovery.
There fixed it for you. And otherwise know as Kunstlers conundrum.
Despite more than a doubling of average world crude oil prices from 1998 to 2000, prices remain well below the peaks seen in the early 1980’s, both on a nominal and a real (constant dollar) basis.
ftp://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2001/national_...
Consider this variant on the Simon-Ehrlich wager, in which an ecologist (Ehrlich) bet an economist (Simon) that the inflation-adjusted prices of five commodities would rise in the 1980s. (All five fell, and Ehrlich lost.) This table (below) shows historical gas prices stretching back to 1919. At 25 cents per gallon in that year, I’ll grant that you’d probably give your right arm for a time machine big enough to fit you and your Toyota Tundra. (Be sure to get your influenza inoculation before you go, however.)
http://www.freakonomics.com/wp-content/uploads/2011/05/gas.jpg
But in constant 2010 dollars, that 1919 price of gas was $3.14. True, at the moment we’re paying a bit more—about $3.96. However, keep in mind that in 1919 there were 7.58 million motor vehicles on America’s roads. Today, Americans own about 254 million vehicles. That means that gas prices have risen 26 percent since 1919, while US vehicle ownership has risen 3,250 percent. And those vehicles are being driven more intensively than their 1919 counterparts. We now drive 6,800 percent more miles per year than in 1919, while gas prices have stayed pretty much stable.
That oil price is IMHO way too low, for $4 you it will push a couple of tons or car or truck for many, many miles.
Try pushing it yourself and see how long it would take you.
I think we’re seeing a similar dynamic right now in this war on IS driven by the supply side of the oil market. In this case, the perceived problem by TPTB is the cheap oil flowing out of the IS which is destroying the cartel’s control over world oil prices. Even more dramatic than the overall oil price decline is the crushed spread between Brent and WTI. It’s the lowest it has been in years.
· “We can’t have that”, say the elites in Saudi Arabia and oil rich Arab States, which is why they finally joined the fight against ISIS albeit in a marginal and strategic way.
· “We can’t have that”, say the large international oil companies, which have hundreds of $billions at stake in investment projects and future profits dependent on $100+ oil, not $80 or $90 oil.
· “We can’t have that”, say the military contractors, because, they’ll say anything to get another war going.
· “We like that”, say consumers, who are enjoying some of the cheapest gasoline prices they’ve seen at the pump in years.
· “Shut the fuck up Mr. Consumer”, say the first three.....who gives a shit what you want?
There are very small q99x2's coming out of the tar sands. Go solar bitchez. Long California beaches.
the perfect storm
Rising production costs, evermore fiat currency, and a cratering global economy. Smells like troube. Sustainable, renewable, and new energy sources is the only way out in the long term. Solar, wind, thorium, to name a few.
"Add in graft, waste, distribution costs, taxes to fund social welfare programs..."
Also add in the hyperinflationary input costs of all tools, machinery, and transportation of oil supported by 1,000 trillion in derivatives of leverage and you start to see why so many projects are operating on razor thin edges.
We are a very long way from discovering the true cost to extract oil while still living with a fiat currency and fractional reserve system controlled by a crony capitalist oligarchy.
I have a few issues with this article.
1) When the "great recession" hit the price of gasoline dropped to $1.90 a gallon. None of the dire predictions of the author came true.
2) While I agree there is little elasticity of demand for oil the supply is quite elastic... except for government regulation that hardens the elasticity of supply. Many coal to oil plants have been proposed but have floundered, not because the profit wasn't sufficient, but because government officials made it impossible. Carbon sciences is building a nat gas to gasoline plant in Texas, and has penned an agreement with a nat gas provider to get the necessary feed stock, but I suspect the moment it starts to drive down demand for Saudi Oil, government will step in and shut it down. All pointing to the inelasticity of demand being a government/political favor creation.
3) Before we run out of fossil fuels to burn we will run out of oxygen to burn them. This is because fossil fuels are created by photosynthesis. When the byproduct of photosynthesis, (oxygen) is released, much of it is taken up by corrosion of rocks, machinery, fauna and oceans. the result is the oxygen released when the fossil fuels were created is gone, the oxygen we breathe is new.
4) The amount of nat gas available as methane hydrates is basically inexhaustible.
and lastly...
5) we cannot discount the probability that some as yet undiscovered technology will render fossil fuels obsolete in the near future. But again, if it threatens politically favored oil producers like the Saudis, government will regulate such an invention out of existence. (If it hasn't already).
The problem with energy, is that cheap energy empowers the individual and markets to create wealth, expensive energy empowers the elite, and so energy will always be expensive. Unless we find a way to limit the power of the elite. The founders tried with our Constitution, but now that document means whatever the hell they tell us it does... and nothing more.
numapepi,
Your post is laughable. Then, when I got to the “Founding Lawyers” it became hilarious.
Do this: Don’t take my word for it. Read the “US Constitution” side by side with the “Magna Carta,” which was written 574 years earlier. It will be an eye opener about the “Founding Lawyers”.
Then, finish with "High Religiosity and Societal Dysfunction in the United States during the First Decade of the Twenty-First Century"
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QFjAA&url=http%3A%2F%2Fwww.epjournal.net%2Fwp-content%2Fuploads%2FEP08617657.pdf&ei=V0vvU9X6OobJsQT87oJ4&usg=AFQjCNFabWynDESoeK0ZMRTxTRsO7qGUUg&sig2=Z3r1r8nz5sgMAzz6kF-6Yg&bvm=bv.73231344,d.cWc
This whole article by Charles is pretty bad, unfortunately.
I have a question about this:
What happens to all the extra oil that was produced cheaply, but was never "demanded"?
Doesn't it go somewhere?
These 'About' 7 million barrels are, mostly, going to Asia.