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The Oil-Drenched Black Swan, Part 4: The Head-Fake Disruption Ahead

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Add these factors up and we conclude there is no visible price limit on oil after supply falters.

I've been discussing the concept of an Oil Head-Fake since 2008, most recently in The Oil Head-Fake: The Illusion that Lower Oil Prices Are Positive (September 29, 2014)
 

Oil: One Last Head-Fake? (May 9, 2008)

The basic idea is straightforward: as global demand slackens, oil producers are incapable of reducing supply due to their dependence on oil revenues. This leads to oversupply which further depresses prices, to the point that marginal wells are shut off and costly exploration-development projects are shelved.
 
This process is far from orderly, as the low prices destabilize oil-dependent governments and regions. Geopolitical turmoil is only half the story; the immense mountain of debt that's been built on the collateral of oil collapses as cash-starved borrowers default on bonds and loans. This meltdown of oil-based debt then destabilizes an increasingly fragile global financial system.
 
Supply can be turned off easily enough, but it can't be expanded as easily. Costly deepwater wells that were shelved in the price bust can be restarted, but it takes many years to bring these hyper-expensive projects online.
 
Meanwhile, existing production declines without constant injections of capital and expertise. Contrary to popular conception that oil flows for decades without having to do anything other than poke a hole in the ground, oil fields need huge investments of capital to maintain high production: carbon dioxide or water must be injected into the wells, and so on.
 
So even if fields are kept online through the price bust, their production will decline as capital spending dries up.
 
The end result of the price bust is impaired supply: impaired by depletion, impaired by reduced investment, impaired by the collapse of oil-based debt.
 
Even if demand only remains constant, the price of oil will rise as supply falls. And with several billion people aspiring to the energy-intensive middle-class lifestyle of the developed world, we can anticipate global demand rising even if it stagnates in the developed world.
 
The price drop is a head-fake: it doesn't usher in a new era of permanently cheap oil. Rather, it unleashes dynamics that impair supply on multiple levels: geophysical, geopolitical, demographic and financial.
 
When supply cannot be jacked up to meet demand, prices will rise. As I have noted before, demand is somewhat elastic in the developed world--business meetings can be done online, vacations can be postponed, car pools can reduce single-driver trips, and so on.
 
In the developing world, the entrepreneur who uses his motorcycle to earn his livelihood doesn't have an alternative; if the price of a liter of fuel doubles, he has no choice but to pay it.
 
In other words, as the number of people who depend on oil rises, the elasticity of demand declines accordingly. Higher prices may not reduce demand in the way conventional economic models expect.
 
The oil-exporting nations have introduced another disruptive dynamic: fuel subsidies for their domestic markets. These fuel subsidies are political bribes to the citizenry chafing under the poverty and powerlessness of life in oil-financed kleptocracies.
 
Simple supply and demand dictates the destabilizing result of these generous subsidies: the cheap fuel is squandered and demand soars. Many of the nations that heavily subsidize fuel are facing the evaporation of their oil exports as domestic demand absorbs more of their total production.
 
This dynamic will force kleptocracies into a double-bind: if they end the subsidies, they face destabilizing domestic unrest. If they continue the subsidies, they lose their oil exports and income needed to service their debt, fund their welfare states and armed forces.
 
Either way, the kleptocracies implode, and in the resulting turmoil capital investment in their oil production will plummet, further reducing supply.
 
Add these factors up and we conclude there is no visible price limit on oil after supply falters. If I need two liters of petrol to make money for food today, I will pay whatever it takes. $200/barrel oil is no impediment because I need those few liters to earn my livelihood.
 
When oil prices move high enough that alternatives are clearly bargains, then demand will face headwinds. But all the alternatives require capital, and if not capital, then credit, and that is precisely what will be impaired by the collapse of the global credit engine as the oil head-fake and various asset bubbles implode.
 

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Thu, 12/04/2014 - 09:20 | 5516156 HandyCrapper
HandyCrapper's picture

So time to buy oil stocks?

Thu, 12/04/2014 - 11:36 | 5516582 LFMayor
LFMayor's picture

Rice, dry beans, pool shock and nagants?

Thu, 12/04/2014 - 09:21 | 5516158 negative rates
negative rates's picture

As long as it gets us to the EOW, were good.

Thu, 12/04/2014 - 09:25 | 5516168 Last of the Mid...
Last of the Middle Class's picture

This has been done many times, what else is new?

Thu, 12/04/2014 - 10:02 | 5516287 duo
duo's picture

I had a Mazda 626 back in 1986 that got 44 MPG on the highway.  Now 40 MPG is a big deal.  What happened?  North Sea and Alaskan oil.  People were used to 0-60 times in the 10 second range back thn and if you wanted an SUV, you bought a Jeep Wagoneer or early 4Runner.

The North Sea and Alaskan oil was burned in the tailpipes of 6000 lb SUVs as demand rose to match supply.  Now no-one will buy an econobox if it doesn't do 0-60 in under 8 seconds, and they weigh 1000 lbs more due to safety rules (so that small cars can survive being hit by SUVs).

Thu, 12/04/2014 - 11:39 | 5516595 LFMayor
LFMayor's picture

thank those eco-tards and thoughtful betas who grew up calling their helicopter mothers by their first name.

There are better people than you and me, people who use two first names that KNOW what's better for us.  That's who you can thank, too.

Thu, 12/04/2014 - 09:25 | 5516172 MalteseFalcon
MalteseFalcon's picture

I completely disagree with this analysis as it does not address the manipulation of oil prices by the banks since 2009 nor does it address declining USA gasoline demand since 2005 in the USA nor does it address the beginning of the age of electric cars.

The demand for oil is only going to continue to decrease.  Oil is never going to hit $200/barrel in today's $$.

The age of oil is over.

Thu, 12/04/2014 - 09:36 | 5516208 firstdivision
firstdivision's picture

Wait til the banks and CB's start to burn the stuff to reduce supply.  They'll get it to whatever price they want, and that price is what benifits their financal positions. 

Thu, 12/04/2014 - 14:07 | 5517237 MalteseFalcon
MalteseFalcon's picture

I completely agree that this is a political problem and not a technological or economic problem. 

The internal combustion engine is over a century old. 

Anyone unfamiliar with the history of the intternal combustion engine should consider reading Edwin Black's " Internal Combustion: How Corporations and Governments Addicted the World to Oil and Derailed the Alternatives"

Thu, 12/04/2014 - 09:46 | 5516238 FeralSerf
FeralSerf's picture

From the quick down-votes that you received, it appears you may have struck a nerve.

Thu, 12/04/2014 - 12:03 | 5516698 Hugh_Jorgan
Hugh_Jorgan's picture

Nope, just the fact that being as we are on the brink of a global economic meltdown, without a truly viable alternative for the transportation and plastics industries, oil is here to stay for at least our lifetimes.

Thu, 12/04/2014 - 12:35 | 5516828 MalteseFalcon
MalteseFalcon's picture

Get your head out of your ass, Hugh!!

Nissan Leaf $21,500 126/MPGe

http://www.nissanusa.com/electric-cars/leaf/?dcp=ppn.63023882.&dcc=0.240...

Volkswagen eGolf $33,500  126/MPGe

http://www.vw.com/content/vwcom/en/models/e-golf.html?cid=ssem_GWooKeXo_...

Toyota RAV SUV$49,800  103/MPGe

http://www.toyota.com/rav4ev/#!/Welcome

KIA Soul EV $26,200 120/MPGe

http://www.kia.com/us/en/content/ev-faqs/welcome

There's more, but even Hugh is smart enough to get the message.

Thu, 12/04/2014 - 12:53 | 5516905 FeralSerf
FeralSerf's picture

Oil as an energy source is only here to stay if it is relatively cheap. Its cost, relative to its competing resources (coal and whale oil) plus the invention of internal combustion engines was the reason for its dominance in the early 1900s. When it consumes too large a fraction of global GDP, something else will replace it. Electricity does not NEED to be generated from the burning of oil.

It MUST be affordable if its going to survive in the marketplace, even if it means a large scale die-off of humanity (which would make it cheaper as well). I can EASILY get by with less than half the oil consumption I currently use, and I will if it gets too expensive. I suspect many others can as well. I waste it because it's cheap.

Much of America's transport system could be electrified, much like the rest of the world is, if necessary. Rail transport fueled by oil is unnecessary. Large private cars are a luxury for most people.

Americans will need to tighten their belts in the future. Burger flippers don't make enough to own and fuel an SUV and live indoors, eat and buy Obamacare as well.

Thu, 12/04/2014 - 09:45 | 5516240 jpintx
jpintx's picture

Well, there is certainly a lot of upside for electric cars.......they presently comprise 1/10 of one percent of the US auto fleet.  If they are the wave of the future, they are at the droplet stage as of today, and don't seem to be gaining very fast.

 

And oh by the way, if the plug in electric is going to replace the gasoine powered fleet, you will have to double the current production of electricity to replace the energy provided by the 366,000,000 gallons of gasoline currently burned daily in the USA.  No small task.

Thu, 12/04/2014 - 10:22 | 5516349 Pool Shark
Pool Shark's picture

 

 

You'll have to more than double the production of electricity owing to voltage drop over transmission lines. Electricity is far less efficient to transport than is oil...

Thu, 12/04/2014 - 10:51 | 5516414 McCormick No. 9
McCormick No. 9's picture

Just to confirm, here is an efficiency breakdown of electricity:

Efficiency of Steam turbine,brand new (prime mover for electrical generator), and generator combo: 35% 65% of heat energy wasted.

Transmission line efficiency 94% (6% loss)

Miscellaneous infrastructure efficiency (transformers, smaller power lines to end users, substations, etc) 95% (5% loss)

Efficiency of end user device varies from 2% for incandescent light bulb to 90% for earth magnet electric motor.

If the front end energy cost of producing and distributing raw fuel (coal, nat gas, uranium) is factored in, as  much as another 10% loss in effciency can be obtained.

Total average efficiency for electricity to end user: 3%, plus or minus 2%.

Without some sort of zero-point energy device (none has passed the youtube video stage and into actual production), such as Tesla technology, Schauberger repulsine, etc, electricicty is too inefficient to ever be a widespread energy source. Bottom line, with electricity, there has to be a rime mover that runs on some other kind of energy. The mythical zero-point energy solves this problem, but of course, it doesn't actually exist.

 

 

Thu, 12/04/2014 - 12:13 | 5516749 Matt
Matt's picture

Percents of percents.

Coal has an ERoEI of 80:1.

So your steam turbine gives you 35% of the energy, and you lose 10% between transmission and infrastructure, which takes you down to 31.5% of the energy arriving at the house. Then your device is, lets say 50% as an inbetween of 2 and 90, so you are getting about 15% of the energy from the coal to do useful work with the electric device in your house. 15% of 80 is still an ERoEI of 12:1, so not too shabby.

The first big step is if you can make more efficient use of the heat in the power plant, and then if you can make use of the waste heat, such as having a central hot water system and providing the entire city with hot water for use and for heating in winter. This used to be a big thing, and there are still some cities that still have this, although the age of abundant energy has caused society to move away from such efficencies in favour of conveniences. 

Thu, 12/04/2014 - 13:22 | 5517047 StarfishPrime
StarfishPrime's picture

Your numbers and end result don't match:

 

  • Electric car - 0.35*0.94*0.95*0.9*0.9 = 25% efficiency from coal to electric motor
  • Incandescent - 0.35*0.94*0.95*0.02*0.9 = 0.6% efficiency from coal to incandescent bulb

 

I am also curious how you ended up with a -2% efficiency figure.

There are quite a few places around the world that use the heat energy from the burning fuel which up the initial efficiency to around 60%, which changes the above figures to 43% for the electric car and 1.0% for the bulb.

Compare 43% to the average internal combustion engine - thermodynamic limit of 37%. In reality around 25%. Subtract the "energy cost of producing and distributing fuel" and you're below the electric car efficiency using your own numbers.

Thu, 12/04/2014 - 14:48 | 5517368 froze25
froze25's picture

You do have free energy but its not zero point.  It is using carefully placed magnets that create cirular motion, there is a bit more to it but you can look at the patent with an electrical engineer and figure that out for yourself.  Here a link to a demonstration by the inventer Muammer Yildiz of the motor at Delft University.  http://youtu.be/mHW6b1aFPfU His world Patent can be found here http://www.rexresearch.com/yildiz/yildiz.htm This link shows some nice still images of the motor taken apart.  http://youtu.be/GdBWA77wfHU.  Also there are plenty of people that have been able to create linar motion using magnetic gates to push a object forward on a track as well but this is by far the best one that can create circular motion.

Fri, 12/05/2014 - 12:01 | 5520666 Matt
Matt's picture

You should invest all your money in his company, you're going to be so rich.

Thu, 12/04/2014 - 12:07 | 5516722 Hugh_Jorgan
Hugh_Jorgan's picture

It isn't just production, it's the expensive infrastructure. Our grid can barely keep up with demand in high population areas NOW. Imagine every American vehicle trying to recharge during peak A/C season.

Thu, 12/04/2014 - 13:42 | 5517114 MalteseFalcon
MalteseFalcon's picture

"You'll have to more than double the production of electricity owing to voltage drop over transmission lines. Electricity is far less efficient to transport than is oil..."

The "Grid" is inefficient, expensive to maintain, antiquated, and a HUGE security risk.

The production of electricity must be completely decentralized.

Thu, 12/04/2014 - 14:49 | 5517385 froze25
froze25's picture

The use of High frequency, High votage pulsed DC has been shown to increase distrubution effecency quiet a bit.  Telsla already figured this out but its starting to make it on the market now.

Thu, 12/04/2014 - 13:03 | 5516973 MalteseFalcon
MalteseFalcon's picture

Electric cars have made up a small percent of the fleet because they haven't been marketed until now.  By now I mean right now.  See my reply to "Hugh" above for the newly available models.  Hybrids caught on quickly, so will electrics.

Yeah electric power will have to ramp up.  Most of the car charging will be done at night off-peak.  This country used to be "up" for large tasks.  I think it still is.

Thu, 12/04/2014 - 09:53 | 5516257 TheMerryPrankster
TheMerryPrankster's picture

Electric cars are built using Oil, the metal the batteries, the tires, the seats, the glass, the copper. Electric cars are powered with electricity made possible and often generated with oil or gas.

I don't think you are qualified to comment on this analysis since you think electric cars are magic that appear from nothing and use no oil.

Thu, 12/04/2014 - 10:14 | 5516322 shovelhead
shovelhead's picture

And,

Another budding Nostradamoid bites the dust.

The age of oil is over when they find a source of energy that can match or beat the work power contained in a gallon of gas.

That's a pretty tall order not likely to happen tomorrow.

 

Thu, 12/04/2014 - 13:12 | 5517018 MalteseFalcon
MalteseFalcon's picture

The Nissan Leaf is already on the road and several car manufacturers are introducing models this coming year. 

Does the work power of electricity match a gallon of gas?  It's irrelevant.  The electric car is reliable and affordable, it exists and in 2015 it's taking to America's roads.

Thu, 12/04/2014 - 13:07 | 5517000 MalteseFalcon
MalteseFalcon's picture

Electric cars will use no more oil being manufactured than gas models.  The savings are in the operation of electric cars which use no gasoline and very little lubricating oil.

The only qualifications needed to be an "expert" on this is are reading and logic skills.

Thu, 12/04/2014 - 10:08 | 5516307 SmallerGovNow2
SmallerGovNow2's picture

MF... "The age of oil is over."

Only if we all go back to the stone age.  90% of EVERYTHING you touch is tied to petro-chem.  Plastics, rubber tires, the entire airline industry, agriculture, no my short sighted friend, the age of oil will NEVER be over unless and until 7 billion people are nuked into the stone age...

Thu, 12/04/2014 - 10:40 | 5516388 Citxmech
Citxmech's picture

The Oil Age = civilization as we know it.  What's the alternative? - something that has the volume/btus to sustain current consumption. . .  Coal?  That would basically be a move back to steam power.

Thu, 12/04/2014 - 13:14 | 5517030 MalteseFalcon
MalteseFalcon's picture

LOL. There are no steam powered cars on the drawing board!

Thu, 12/04/2014 - 14:51 | 5517393 froze25
froze25's picture

The fact that a magnet can stick to a refrigerator indefinatly exerting force greater than gravity proves there is other means to get mechanical energy than we are lead to believe.

Thu, 12/04/2014 - 11:05 | 5516459 Matt
Matt's picture

Bit of hyperbole there. Renaissance at worst. Natural rubber can be used in place of synthentic rubber. Agriculture will just be more labour intensive.

Barring, of course, a sudden violent collapse and the spent fuel ponds burning up. 

Thu, 12/04/2014 - 11:57 | 5516674 _disengage_
_disengage_'s picture

"Agriculture will just be more labour intensive."

Permaculture really helps with a more distributed food production (think horticultural culture versus agricultural). Not that it isn't more labor intensive, but Permaculture is the epitome of "work smart, not hard".

Using animals to plow fields with natural activities (pigs/chickens). Putting chickens and "smelly" herbs under fruit trees to deal with fallen fruit and break pest cycles. Chickens with cows break parasite cycles. A goat with your cows will control thistle. A few simple example of orchestrating nature instead of dominating it.

Thu, 12/04/2014 - 12:48 | 5516890 Matt
Matt's picture

I know people treat permaculture like its some hip new science, but really, other than perhaps implementing the scientific method, I have not seen very much in permaculture that is substantially different from pre-fossil fuel based agriculture.

The Babylonians had the Hanging Gardens, the Incas had the Floating Gardens, the Aztecs had fish growing in the canals between the farming strips. Polyculture versus crop rotation versus leaving fields fallow certain years, so much is just old stuff being re-discovered rather than anything truly new and revolutionary. 

I expect 50% of all labour to be farming (fishing, foraging, hunting, etc), whether that be 50% of the people 100% of the time, or 100% of the people 50% of the time. 

Thu, 12/04/2014 - 13:27 | 5517059 MalteseFalcon
MalteseFalcon's picture

40% of oil is tied up in transportation.  Take that out and the oil industry, and America's foreign policy, look very different.

The action in markets takes place at the margin.  The revolution in transportation will keep the price of oil and it's relevance, far further down then where it has been in the past 40 years.

But opinions vary, feel free to stay as fully invested in oil as you like.

Thu, 12/04/2014 - 09:26 | 5516178 Salah
Salah's picture

Missed 1 immutable element and its profound effect: TIME

Plus, Neptune in Pisces until 2026 = oil & gas found everywhere, by everybody...bar none

Thu, 12/04/2014 - 10:09 | 5516305 TheMerryPrankster
TheMerryPrankster's picture

you failed to notice your head is in Uranus.

Thu, 12/04/2014 - 11:41 | 5516606 LFMayor
LFMayor's picture

Dude!  that's one for the ages, right there! +1000

Thu, 12/04/2014 - 09:27 | 5516180 McCormick No. 9
McCormick No. 9's picture

The red line on that graph has Hubbert's name all over it...PEAK OIL BITCHEZ!

Thu, 12/04/2014 - 11:09 | 5516477 McCormick No. 9
McCormick No. 9's picture

Maybe I was downvoted because of my use of the old-school term "bitchez". But no-one wants to prove that peak oil is NOT true.

The planet is lousy with hydrocarbons, but those hydrcarbons are presently unobtainable with our current technological base and financial systems.

So, I am happy to qualify my statement and say "peak CHEAP oil, bitchez!" Same diff. The apple at the top of the tree is not yours. Google Tantalus.

The author of this article is right- this will be a head fake. The shale oil ponzi will collapse. The middle east will descend further into chaos. Supply will crater. Oil will spike again, and cause further debt-overhang carnage causing demand to plunge farther on debt deleveraging deflationary pressures. This wil send oil prices falling, but not low enough to spark a return to normalcy. In fact, the bottom of this current price plunge (I know oil prices are impossible to predict, but here goes) will be around 65-75/bbl, several times higher than the lows of the late 90's. So, what we'll see is a ratcheting effect, with oil prices surging higher than ever, and then falling rapidly, (but not to meet previous lows) and then jumping up even higher than before. Each side of the ratchet will be bad for the global economy- the down ratchet squeezes supply and makes expensive oil hard to produce, driving prices higher, and the price spike slams demand, making it even harder to maintain a stable price needed to produce expensive oil.

I'm waiting for the bond yield spike that will trail this price drop with enough time-lag to cause Krugman to completely miss the cause/effect linkage. But I dropped out of high school to go scrape lead paint off of boat hulls. What would my heavy-metal corroded mind know?

So, I say it is peak oil. if you don't like it, I've got your peak oil hangin' right here bitchez.

Thu, 12/04/2014 - 09:29 | 5516184 AdvancingTime
AdvancingTime's picture

 To all the people who think the worlds surging population will not become a problem because of new energy sources I say, wake up! Anyone with even the slightest mechanical knowledge will tell you that solar panels, wind mills and such take a lot of energy to build and often are maintenance intense.

Both these complicated systems have a short lifespan and require a great deal of energy to be expended in just keeping them up and running. Carry no illusions the days of cheap energy are behind us and not only has the low hanging fruit been picked it has been eaten. Sadly, if we look back we will see much of this energy was allowed to go to waste. The article below looks into the cost of failing to plan long-term and questions if collectively mankind is incompetent.  

http://brucewilds.blogspot.com/2014/12/does-peter-principle-apply-to-mankind.html

Thu, 12/04/2014 - 09:57 | 5516267 TheMerryPrankster
TheMerryPrankster's picture

not incomptent, insane, bloody fucking mad. hence war, greed and avarice are now our major economic policy and rule of governance. Humanity is suicidal and may just get its wish if it stays on the current course.

Thu, 12/04/2014 - 10:05 | 5516296 SmallerGovNow2
SmallerGovNow2's picture

Spot on Bruce.  I did my own experiment with four 200 watt solar panels, a four battery 24 volt bank, controllers, wiring, breakers, etc...  $4,000 later (and i did all the work for "free") and i can BARELY run the freezer in my garage around the clock. 

Thu, 12/04/2014 - 09:30 | 5516185 TrumpXVI
TrumpXVI's picture

I think it is probably true that there will be another price shock upwards, but the idea that there will be no upper limit to price is preposterous.  People cannot pay more for oil than they earn.  There is no point in paying more for gas than you earn in your paycheck.

Thu, 12/04/2014 - 11:07 | 5516471 waterwitch
waterwitch's picture

EROEI can't be ignored either.

Thu, 12/04/2014 - 09:30 | 5516187 konputa
konputa's picture

How very peak oil. The Fischer-Tropsch process was developed by zee evil Germans back in 1925. Have there been no innovations in chemistry since? I'm beginning to think oil isn't as scarce as we're told. Two things we have a hell of a lot of on this blue marble are water and CO2.

 

Thu, 12/04/2014 - 10:01 | 5516284 SmallerGovNow2
SmallerGovNow2's picture

A lot of CO2?  You mean representing a mere 0.04% of the atmoshpere that is "a lot"??

Thu, 12/04/2014 - 11:12 | 5516484 Matt
Matt's picture

Well, let's see. The atmosphere weighs about 5.15×1018 kg, which is about 5 Billion megatons, or 5 Quadrillion tons. 0.04% of that would be about 20 million megatons, or 20 trillion tons, or 400 Quadrillion pounds. I'm not sure if that is a lot, but it sounds like a huge amount, especially when compared to steel, coal, oil or other resources.

Thu, 12/04/2014 - 10:02 | 5516285 TheMerryPrankster
TheMerryPrankster's picture

You do know Fischer-tropsch requires energy not magic to work, don't you?

Oil is the primary source of energy that defines modern civilization and differentiates modernity from say the Roman Empire or any past civilization.

One barrel of oil is the equivalent of 50 slaves as the father of the atomic submarine used to say.

Thu, 12/04/2014 - 10:35 | 5516376 shovelhead
shovelhead's picture

I like this example of the power trapped in a gallon of gas.

Drive your car until 1 gallon is used and then push the car back to it's starting point.

Even the dimmist minds can grasp this concept of latent energy.

Thu, 12/04/2014 - 11:13 | 5516492 secretargentman
secretargentman's picture

Drive it uphill. :-)

Thu, 12/04/2014 - 11:17 | 5516509 Matt
Matt's picture

Look how amazingly inefficient that is!

The work achieved is that you, the human, moved 60 miles in an hour.

The car is maybe 25% efficient, and you moved a ton of steel 60 miles in an hour, just to safely move yourself that distance!

If you rode a bicycle, that trip would take you about 3 hours, if you cycle regularly. So yes, there is an immense amount of energy in gasoline, but 75% is wasted in combustion and transmission, and you have to move a ton of steel just to make use of that energy. 

Thu, 12/04/2014 - 11:43 | 5516618 LFMayor
LFMayor's picture

No.   It weighs so fucking much because of "safety regulations".  that and a little common sense, but as of late the common sense has been taking a backseat.

you can put a chainsaw engine on a skateboard and do 60mph.  YMMV.  

Thu, 12/04/2014 - 11:55 | 5516666 Matt
Matt's picture

It is not just regulations. People have a preference for safety, and since most people have big cars, most people choose big cars in order to survive crashes with the other big cars. Otherwise, people would choose to ride motorcycles to save fuel.

The limits on how light you can go while safely traveling 60 miles per hour are probably fairly limited.

Once fuel prices get high enough, I hope traveling 30 miles per hour comes into vogue so that much lighter vehicles can be used safely. 

Thu, 12/04/2014 - 13:49 | 5517163 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

May I intro the Shindazor, 36cc's, I recommend Kevlar Underwear @14,000 rpm she screams.....

50:1 mix >115 miles per gallon.

Thu, 12/04/2014 - 11:58 | 5516684 jwoop66
jwoop66's picture

That is one of the most pointless "points" i've read in a while.    Actually, I don't know whether it is specious or just pointless.  

 

So...

Because, as you claim, 75% of the gas is "wasted" in moving your thousand pound conveyance and yourself 60 miles in one hour, does that mean it is a pointless exercise or pointless product?    Should it not be done, should oil not be used, because, as you say it is 75% inefficient?   

 

Because it is not perfect, it is pointless(meaningless)?

 

At what efficiency ratio would you give credence to this product?   

 

Or are you one of those progs that would just rather have the 50 slaves that are equivalent?   and of course gas for you...

Thu, 12/04/2014 - 12:56 | 5516941 Matt
Matt's picture

The original poster was trying to demonstrate the immense amount of energy in a gallon of gasoline.

The total energy in a stored form is not the only thing that matters. Efficiency also matters. Efficiency in converting the stored energy into useful energy, and how that energy is used.

Also, I feel that due to humanity's low time preference, resources are severely discounted. The belief in endless growth and limitless supplies of oil have contributed to massive misallocations of scarce resources.

Thu, 12/04/2014 - 18:02 | 5518185 jwoop66
jwoop66's picture

One more question?...

What moves a person and a one thousand pound conveyance, sixty miles in one hour, more efficiently than gasoline(oil)? All factors considered, of course.

Fri, 12/05/2014 - 12:00 | 5520656 Matt
Matt's picture

An electric car charged by a coal power plant.

Note a car is actually more like 2000 to 3000 pounds.

Why travel so fast? The mass is necessary for the safety of surviving crashes at such high speeds, combined with needing to survive collisions with all the other heavy vehicles.

Traveling at half the speed, we could have 500 pound cars with half the air drag and half the rolling resistance, maybe ten times more efficient. We'll see what we end up with, since it will happen one way or the other eventually.

Thu, 12/11/2014 - 12:50 | 5540539 jwoop66
jwoop66's picture

How many hours does it take to charge that electric car? You're gonna have to subtract that time everytime you recharge. VERY inefficient. Hope you dont need to get places in a hurry.

 

Not to mention the fact that the folks concerned with "efficiency" don't like coal, and will do whatever is necessary(legisation, sabatoge etc) to inhibit its use.

 

Aside from both of those, I seriously doubt that generating power at one location, then transmitting it possibly(probably) miles away in to different mediums and finally to the conveyance itself, and THEN transforming it to kinetic mechanical energy would be more efficient than direct use of internal combustion.     

Thu, 12/11/2014 - 12:54 | 5540555 jwoop66
jwoop66's picture

oh!  Why travel so fast, you ask?    Silly question.  

 

Time is money, dude(ette).    It is the most precious commodity we have, as they say.    If I have a weekend off, I might want to walk twenty miles, but if I have to go to work, I'd rather navigate that twenty miles in twenty minutes. 

 

Any day of the damn week.

 

You?

 

How long have you been in the efficiency game anyway?  

Thu, 12/11/2014 - 12:59 | 5540574 jwoop66
jwoop66's picture

Correction:

 

 

I should have said folks concerned with energy consumption; NOT efficiency, would cause the aforementioned problems. 

 

apologies.

 

and whatnot...

 

 

Thu, 12/04/2014 - 10:47 | 5516399 Citxmech
Citxmech's picture

Coal into gasoline?  Do the math - EROI's a bitch.  Pretty soon just maintaining the plateau in production is going to sap any real investment capital remaining in the system (if there's even any right now - hence the printing). 

Thu, 12/04/2014 - 11:28 | 5516549 Matt
Matt's picture

Well, let's see, using wikipedia:
http://en.wikipedia.org/wiki/Energy_returned_on_energy_invested

Coal has an ERoEI of 80:1, while oil has an ERoEI of 20:1.

Fischer-Tropsch process for GTL is about 60% efficient:

http://en.wikipedia.org/wiki/Fischer%E2%80%93Tropsch_process

Giving an ERoEI of 48:1, so ignoring capital costs, it would be twice as efficent to turn coal into automobile fuel then to extract and refine oil, based on average USA coal and oil efficiencies. Keep in mind that is ERoEI for average crude oil, not including refinery loses. Comparing GTL capital costs and maintenance to oil refinery would be interesting, although of course the oil refineries already exist and the GTL plants are just being made.

Thu, 12/04/2014 - 13:34 | 5517085 MalteseFalcon
MalteseFalcon's picture

Zee evil Germans are also dumping nuclear and developing renewable energy.  Damn zee evil Germans with their technology.

Thu, 12/04/2014 - 09:32 | 5516194 AdvancingTime
AdvancingTime's picture

When financial problems occur in the energy sector it is often accompanied by political instability and sometimes her ugly sister war. As a rule the economy loves stability, bottom-line dropping oil prices means more risk for an already shaky world economy. All this is being complicated by the recently strong dollar.  The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy. 

When a strong shift in currencies occurs someone usually gets hurt and this can lead to bankruptcy, default, or contagion. A great deal of the shadow banking world overlaps and falls into the grey world of derivatives.  The total derivatives market has grown to a massive size. It includes hundreds of trillions of dollars in over-the-counter non-reported agreements and private contracts and is estimated to be over 20 times larger than the global economy. Everyone paying attention knows that even a slight problem in a market this size could collapse the whole economic system. The article below delves deeper into the problems caused by falling oil prices. 

http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html

Thu, 12/04/2014 - 09:51 | 5516249 Oldwood
Oldwood's picture

I'm not sure what the economy loves but profiteer speculators love instability, and they create as much of it as their wicked little minds can produce. This is a giant chessboard with lots of moving pieces but anyone is a fool to think that this is just simple commerce or economics. The players are in it to win over the long run. I have lived long enough to watch this energy game played out numerous times...prices run up, massive malinvestment in alternatives that just as suddenly evaporate when the supply spigot is opened and prices drop like a rock. Huge amounts of money are wasted and ultimately most of it in the form of debt that continues to compound with time. We have invested untold amounts of treasure and lives to create this beloved stability to only see it wash away the next time a player makes their move.

But do not think this doesn't play out to larger consequences than we have yet seen. The price of oil will ultimately be defined by the provider, as is stated in this piece, demand is inelastic. Will will have oil, just like we will have our food and water, at whatever price is demanded. What we fail to see is that these providers are creating a market of dependency. What was once a luxury is now a necessity. The constant undersupply then oversupply should make this obvious but instead it tends to numb us to price fluxuations. $2 one day, $4 the next, always under the assumption it will go lower again and holding our breath till it does, but seemingly oblivious to the real message...we will pay whatever it costs....and they know it. Cheap oil will change our habits again. More fuel inefficient pickups and SUVs, bigger houses and so on. When the price doubles, we will pay. Does the drug pusher really give a shit about his patrons? Just keep them on the string.

Thu, 12/04/2014 - 09:34 | 5516203 firstdivision
firstdivision's picture

You can put up all the pretty graphs, show all your data, and validate your calculations, but it is all for naught.  The American public is too stupid to understand the concept of limited resources and cost pass throughs, and too short of an attention span to understand the price moves.  They see the price per gallon on their commute to work and assume that is the price it will remain forever, until their commute the next day.  Wash, rinse, repeat.

Thu, 12/04/2014 - 09:36 | 5516210 junction
junction's picture

The assumption here is that oil is sold based on fair market dynamics.  Wrong! The price of oil should have been $65 a barrel, not $100 a barrel.  Just as the LIBOR rate, the price of gold and silver and any other commodity you care to think of, the price of oil is fixed by the banksters and the big players in the market.  For oil, OPEC calls the shots (including telling their manservant Obama to go to war against Libya and Syria).  Once the shale oil boom goes bust, the price of oil will go right up permanently. 

Thu, 12/04/2014 - 11:41 | 5516602 Matt
Matt's picture

"The basic idea is straightforward: as global demand slackens, oil producers are incapable of reducing supply due to their dependence on oil revenues. This leads to oversupply which further depresses prices"

This is assuming oil producers operate as cannabalistic capitalists that compete until the weakest are destroyed. If everybody falls in line to the Saudis and they behave as a properly functioning cartel once more, the results could be lower production and higher prices. 

Thu, 12/04/2014 - 09:38 | 5516216 Ignatius
Ignatius's picture

#2 diesel at the Chevron in my neighborhood is $3.31/gal.  The upstart new competitor is $2.99 !!

Wish I could pre-pay 500 gallons.

Thu, 12/04/2014 - 09:40 | 5516222 FeralSerf
FeralSerf's picture

The other energy black swan may be focus fusion and/or LENR.

http://focusfusion.org/index.php/site/category/C36/

http://lenr-canr.org/

Thu, 12/04/2014 - 10:35 | 5516223 nohweh
nohweh's picture

According to Steven Greer,the oil "industry" has been doomed since Roswell,and the industrialists involved have planned accordingly. Now their plans will become evident. See below link at 3mins20.

 

https://www.youtube.com/watch?v=ifq0BHivado

Thu, 12/04/2014 - 09:42 | 5516231 orangegeek
orangegeek's picture

demand is fading, not rising

Thu, 12/04/2014 - 09:45 | 5516239 Panem et Circus
Panem et Circus's picture

nothing cures low prices quite like low prices...

Thu, 12/04/2014 - 10:06 | 5516298 Snoopy the Economist
Snoopy the Economist's picture

That's nice but what is the timeline on this oil recovery? When does he think the global depression will end - gubmints haven't even acknowledged the start of them yet but that is somewhat redundant. I don't see a global recovery for quite some time.

 

Also, as wages continue to decrease then the number of people that will be forced to quit their jobs and go on the dole will increase as gas prices increase - can you really afford to drive to work if you only make $10/hr?

 

 

Thu, 12/04/2014 - 11:30 | 5516562 Matt
Matt's picture

"what is the timeline on this oil recovery? When does he think the global depression will end"
I don't think he thinks it is cyclical, I think he may be one of those "society is going to collapse" folks. 

Thu, 12/04/2014 - 10:09 | 5516306 UndergroundPost
UndergroundPost's picture

Saudi King is a PENIS...

and his princes are little pricks...

They are the problem

Thu, 12/04/2014 - 10:54 | 5516429 geekz_rule
geekz_rule's picture

sa royal family.. ya.. zionist tools as well.. dont buy the hype man..

Thu, 12/04/2014 - 10:17 | 5516333 Pairadimes
Pairadimes's picture

No commodities will be permanently cheap (in dollars, gold is another matter) given inflationary central bank behaviors.

Thu, 12/04/2014 - 10:38 | 5516383 Money_for_Nothing
Money_for_Nothing's picture

The fallacy in this analysis is that it is an extrapolation. At the extremes past rules fail. All we know is that we are going through a tense and trying time. New institutions and new leaders will come into being. Most likely by harsh means. Old institutions will wither and die. There is no sure investment other than Prayer. Pray for health, wealth and happiness. For yourself and those around you.

Thu, 12/04/2014 - 10:54 | 5516425 TrulyStupid
TrulyStupid's picture

The protestant work ethic used to be... Work for health wealth and happiness...

Now its reduced to prayer...to whom? 

Prayer: an activity that has a very poor track record of returning value.

Thu, 12/04/2014 - 11:35 | 5516585 Matt
Matt's picture

Go check out the Amish, Mennonites, etc. They are mostly the same, although it seems they have fallen to the temptations of oil. Hopefully they maintain the skills and livestock to farm without if need be.

Thu, 12/04/2014 - 10:40 | 5516389 FreeNewEnergy
FreeNewEnergy's picture

Thanks for the analysis, CHS, and I hope your blog is doing well, traffic-wise.

You left out of your equations a few items, though, which I believe have varying degrees of importance in terms of the price of oil and gasoline.

  • Innovation
  • global deflation (good for another 2-3 years at least)
  • stagnation
  • declining birth rates
  • conservation
  • alternative fuels and/or power
  • opting out of the fiat-banker, fractional reserve system
  • gold
  • silver
  • abiotic oil (go ahead, peak oilers, do some research)
  • corruption
  • abuse
  • manipulation
  • fuck if I know; there are probably over 100 more variables

Generally, I think you're full of crap. Oil at $50-60 a barrel for two years would be great for US consumers and businesses, who need a break. I don't think there's any arguing with the fact that less money spent on getting from point A to point B means more money spent on anything else, including food, clothes, stuff, PMs, and, here's the clincher, SAVINGS.

Wouldn't it be great if Americans (and counterparts in Europe and Asia) took the money saved on fuel for two years and invested in PMs? New World Order, indeed.

All of the scary shit the media throws at us is complete bullshit. For example, the NSA. There are over 300 million people in the US. How many agents would NSA need to track/monitor all of them in real time?

Seriously, the government is in the terrorism business, and the completely captured media is their conduit for the spread of FUD (fear, uncertainty, doubt). The USA is still prosperous to a very large degree. Anybody who has the desire can still start a business and make money. Of course, it's a competitive environment, so some will succeed while others fail. And then there are black markets...

Thu, 12/04/2014 - 10:45 | 5516395 Ms No
Ms No's picture

I couldn't agree more with this article, although, I can see an scenario where this occurs twice.   The big headfake would occur after everything collapses.  This one could be rather short lived out of necessity, possibly only taking as little as 3-9 months.

We can complain about the corruption of it all, which is more than justified, or we can profit off of it.  This oil boom provided even idiots such as myself investment opportunities in 50 different directions that were the equivalent to shooting apples in a barrel.  I think it would be more than wise to at least entertain this theory. 

Thu, 12/04/2014 - 10:46 | 5516398 RaceToTheBottom
RaceToTheBottom's picture

Analysis of data from the 50s to 2009 is not relevant to the future.  Money concentration mean the peons and serfs will have less money to spend on cars and oil.  That is the governing factor, at least in the uS.  Countries moving up tot he middle class will definitly increase usage...

 

Thu, 12/04/2014 - 10:49 | 5516405 skbull44
skbull44's picture

I'm reminded of what the late Mchael Ruppert predicted in the documentary Collapse more than five years ago:
"Everything is going to break down differently in different places. The best that I can do is give you some idea of some markers that are gong to come. The bumpy plateau has been described by Peak Oil activists and researchers for many, many years and it's actually happening. Basically, you come up the growth curve of oil prices and the oil prices come up until you start running out of oil, then what happens is you have to destroy demand, which is what's happening in this collapse; demand gets destroyed and oil prices fall. The price of oil drops. Then as you start recovery you start up again but then you collide again with finite oil and the rising energy prices that shuts everything down again. This is the bumpy plateau. I think it's fairly certain that the mortal blow to human industrial civilization will happen when oil prices spike again and nobody can afford to buy that oil and everything will just shut down."

http://olduvai.ca

Thu, 12/04/2014 - 11:03 | 5516442 TrulyStupid
TrulyStupid's picture

There are winners in this low price environment... India, China, Japan and all other oil importing nations, particularly India whose economy is just starting to kick into overdrive.. so everything will not shut down... the shutdowns will be selective too.

 

Don't be too surprised to see an import tax on foreign oil in the USA, to keep the price of oil high enough to avert the collapse of the junk bond market that props up the highly indebted shale oil frackers.

Thu, 12/04/2014 - 11:47 | 5516628 LFMayor
LFMayor's picture

Listen.

After sampling all these hydrocarbon luxuries, the filthy masses will become "dependant" on them.  They'll all think they're top caste.  The real fun starts when the oil gets shut off, and the luxury they "deserve" will no longer be available.

I can't wait to see a Ferguson held with 1.5 billion participants!

Thu, 12/04/2014 - 12:39 | 5516838 hungrydweller
hungrydweller's picture

Screw off with your "listen" bullshit.

Thu, 12/04/2014 - 16:54 | 5517967 LFMayor
LFMayor's picture

Don't get all mad, brah,   I'm poking fun at Bangalore Equity Whore, or whoever that little hindi brahmin fuck is.  Since this post was about India, I decided to toss that out there, because I'm With You on him fucking starting every post like I'm his goddam pariah servant.

Thu, 12/04/2014 - 11:09 | 5516480 gswifty
gswifty's picture

Article is spot on. This current price manipulation is a massive head-fake. We'll touch 60/brl then it'll be a straight shot back to a hundred. We'll look back on this time and shake our collective heads in disbelief. 

Thu, 12/04/2014 - 11:14 | 5516499 secretargentman
secretargentman's picture

If only it were easy to store oil... one could buy it at 60, store it, have one's government bomb the producers, and make a killing!

Thu, 12/04/2014 - 11:33 | 5516573 Elvis is Alive
Elvis is Alive's picture

"Even if demand only remains constant, the price of oil will rise as supply falls."

When will you Malthusian idiots wake up? Worldwide oil supply has NEVER fallen. It has always gone up. You idiots cherry pick data about declining U.S., North Sea, and Mexican production and neglect to mention how much supply has gone up in other places.

Everybody is railing on about how oil prices can't fall below certain price levels bc of break even measures. Where is it written that oil companies and oil producing nations can't lose money or run deficits?

Since mid 2008, American oil production has virtually doubled and so has the price of oil. Given those numbers, the price of oil declining was a no brainer. All that kept oil down was Libyan oil being off line and Iranian sanctions. If you add in spare capcity of those countries, we are at 4+ million bpd spare capcity. 

Even though it costs $20 per barrel to transport it to supertankers, oil in the Venezuelan tar sands can be produced for a $1 a barrel. Do you think Venezuela is more or less likely to come to the table after it defaults on its debt due to low oil prices?

One other flaw in your analysis is the greatest amount of demand in recent years has not been China or India but the OPEC countries themselves. Do you think with lower oil prices that these nations are going to use more or less crude as their economies collapse?

I personally see no way oil prices go up with the peak oil lie fading away, and I have had enough with this you don't get how hard it is to increase or maintain oil production. If oil demand stays stable, supply stays stable as do prices. That has been what has historically happened and what will happen. 

Thu, 12/04/2014 - 11:44 | 5516621 Armed Resistance
Armed Resistance's picture

Great article, and very insightful. What I don't understand is the spread between unleaded and diesel. Recently the variance has been as much as $1.20/ gallon when it normally (diesel) costs about the price of premium (.20-.30) gasoline.

I wonder if there's a non-manipulated answer for this? I suspect that they are keeping the price of diesel high so that the common guy gets relief at the pump but that it doesn't cause deflation for goods and services related to corporate trucking? Anybody have any insight?

Thu, 12/04/2014 - 12:37 | 5516831 hungrydweller
hungrydweller's picture

A huge assumption in the presentation is that there will be a resumption of the same rate of oil demand that has been occurring in the world.  I challenge the assumption based on the fact that the current global expansion is a result of massive debt increase that fueled malinvenstment and financial shenanigans which is not sustainable.  We'll need a debt jubilee before that rate of oil demand kicks in again.

Thu, 12/04/2014 - 12:54 | 5516928 TrulyStupid
TrulyStupid's picture

I think his argument is that new supply has overwhelmed global demand which has remained at a fairly constant growth rate... hence the price drop. Once exploration budgets are cut and new high cost producers are purged the result will be decreasing supply until prices rise to the point of firing up new production.

Thu, 12/04/2014 - 12:50 | 5516899 RealistDuJour
RealistDuJour's picture

Oh Zero... usually you have actual charts that throw real life numbers in... Now you resort to drawings from the back of a napkin???  Despite the premise of this whole article that oil price drop is a demand issue, (reminiscent of 2008)... If you look at ACTUAL numbers, demand is still there... the only thing that has changed is supply.

Basic economics, if demand remains and supply rises, prices drop.

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