How Increased Inefficiency Explains Falling Oil Prices

Tyler Durden's picture

Submitted by Gail Tverberg via Our Finite World blog,

Since about 2001, several sectors of the economy have become increasingly inefficient, in the sense that it takes more resources to produce a given output, such as 1000 barrels of oil. I believe that this growing inefficiency explains both slowing world economic growth and the sharp recent drop in prices of many commodities, including oil.

The mechanism at work is what I would call the crowding out effect. As more resources are required for the increasingly inefficient sectors of the economy, fewer resources are available to the rest of the economy. As a result, wages stagnate or decline. Central banks find it necessary lower interest rates, to keep the economy going.

Unfortunately, with stagnant or lower wages, consumers find that goods from the increasingly inefficiently sectors are increasingly unaffordable, especially if prices rise to cover the resource requirements of these inefficient sectors. For most periods in the past, commodities prices have stayed close to the cost of production (at least for the “marginal producer”). What we seem to be seeing recently is a drop in price to what consumers can afford for some of these increasingly unaffordable sectors. Unless this situation can be turned around quickly, the whole system risks collapse.

Increasingly Inefficient Sectors of the Economy 

We can think of several increasingly inefficient sectors of the economy:

Oil. The problem with oil is that much of the easy (and thus, cheap) to extract oil is gone. There seems to be a great deal of expensive-to-extract oil available. Some of it is deep under the sea, even under salt layers. Some of it is very heavy and needs to be “steamed” out. Some of it requires “fracking.” The extra extraction steps require the use of more human labor and more physical resources (oil and gas, metal pipes, fresh water), but output rises by very little. Liquid extenders to oil, such as biofuels and coal-to-liquid operations, also tend to be heavy resource users, further exacerbating the problem of the rising cost of production for liquid fuels.

I have described the problem behind rising costs as increasing inefficiency of production. The technical name for our problem is diminishing returns. This situation occurs when increased investment offers ever-smaller returns. Diminishing returns tends to occur to some extent whenever resources of any kind are extracted from the ground. If the extent of diminishing returns is small enough, total costs can be kept flat with technological advances. Our problem now is that diminishing returns have grown to such an extent that technological advances are no longer keeping pace. As a result, the cost of producing many types of goods and services is growing faster than wages.

Fresh Water. This is another increasingly inefficient sector of the economy, in terms of the amount of fresh water that can be produced with a given amount of resource investment. In some places deeper wells are needed; in others, desalination plants. Water from deeper wells may need additional treatment to remove the harmful minerals and radiation found in water from deeper wells.

As a result of the extra investment required, the price of fresh water is rising in many parts of the world. The higher cost is often justified as necessary to encourage conservation of a scarce resource. But from the point of view of the buyer, what is happening is an increasing price for the same product, or diminishing returns.

Grid Electricity. The price of grid electricity has been rising faster than inflation in many parts of the world for a variety of reasons. If nuclear plants are planned, they are being made in ways that are hopefully safer, but are more expensive. Adding solar PV and offshore wind is expensive, especially when grid changes to accommodate them are considered as well. Functioning plants of various kinds (coal, nuclear) are being replaced with other generation because of pollution problems (CO2) or feared pollution problems (radiation). The cost of producing electricity then rises because the cost of electricity from a fully depreciated plant of any kind is extremely low. Building any kind of new facility, no matter how theoretically efficient over, say, the next 40 years, requires physical resources and people’s time, in the current time period.

As these changes are made, the amount of grid electricity output does not rise very much compared to the resources and human labor required in the current period. The user experiences a higher cost for the same product. From the perspective of the user’s pocketbook, the result looks like diminishing returns.

Metals and Other Minerals. In the same manner as oil, we extract the easiest (and cheapest) to extract minerals first. These minerals include metals and other substances such as uranium, lithium, and rare earth minerals. Part of the problem is that ores of lower concentration must be used, leading to a need to move larger amounts of extraneous material that later must be disposed of. These ores may be found deeper in the ground or in more remote locations, adding to extraction costs. Furthermore, oil is generally used in the extraction of these minerals. As the cost of oil cost rises, this adds to the cost of mineral extraction, making minerals increasingly unaffordable.  

Advanced Education of Would-Be Workers. If 20% of the work force needs college educations, it makes sense to provide 20% of young people workers with college educations. If the percentage of workers requiring college educations rises to 30%, it makes sense to provide 30% of young people with college educations. Small percentages of more advanced degree recipients are needed as well.

Instead of following a common sense approach of educating only the number of workers who need a given amount of education with that amount of education, in the United States we have gotten onto a treadmill of encouraging increasing numbers of young people to pursue bachelors, masters, and Ph.D. degrees. To make matters worse, universities have established requirements that faculty do more research and less teaching, whether or not research in a particular field can be expected to benefit the economy to any significant extent. To accommodate this research-intensive approach, a layer of deans is added to work on obtaining funding for research. In addition, students are often provided more comfortable dorms with private rooms and private baths, adding costs to obtaining advanced education but not really enhancing future job prospects.

All of this produces an incredibly expensive higher education system, with costs way out of proportion to the increased wages a student can expect to earn from attending the university. Students are expected to pay for much of the cost of this system through debt to be paid back after graduation (or after dropping out). In some ways, the system might be viewed as an extremely expensive system of sorting out would-be job applicants, with widget makers with a college degree or master’s degree viewed more favorably than ones without, even if there is little use for an advanced degree in that particular job.

US Medical System. The US Medical system is particularly affected by the trend toward more advanced degrees. This approach results in a system where patients need to visit a variety of specialists to handle fairly common ailments, such as a broken arm or dementia in old age. To compensate for the high cost of their advanced education, specialists charge high fees. Hospitals have a large number of testing instruments at their disposal and use them whenever there is even slight justification.

Health outcomes in the US are remarkably bad compared to other developed countries, based on a study by the US Institute of Medicine called U.S. Health in International Perspective: Shorter Lives, Poorer Health.

Figure 1-6 Female life expectancy at birth

According to this study, the US is falling farther and farther behind other developed countries in terms of health outcomes and life expectancy, despite healthcare spending that is more than twice as expensive as that of some other developed countries.

The higher cost is not entirely the fault of the healthcare system. The food production system provides food that is increasingly processed (so is convenient), but is not well adapted to our bodily needs. Food portions tend to be oversized, raising profits for fast food companies, but adversely affecting health of consumers. Transportation is set up in ways that deprive us of the exercise we need. Also, part of the reason for the adverse health outcomes is the fact that not all people are covered by health coverage, even with the recent addition of Obamacare.

Regardless of whose “fault” the problem is, the healthcare sector is becoming increasingly inefficient. In some sense, we are reaching diminishing returns here as well.

Effects of Inefficient Sectors on Business Operations

Businesses have a number of costs of operation. Unless wages are rising, they can’t easily raise prices without losing customers. So if costs rise in one area of their operations, they tend to try to cut costs in other areas of operations to offset this rise. This is the crowding out principle at work.

Among the sectors described above as having increasingly inefficient operations, the ones that directly affect businesses are

  • Oil
  • Fresh water
  • Electricity
  • Metals and other minerals
  • Healthcare

Areas where costs can be cut to make up for rising costs in the above areas include:

Lower interest rates. If interest rates are low, this reduces expenses for businesses. It also makes customers more able to tolerate higher costs of say, automobiles and houses and education, because the “monthly payment” can still appear reasonable, even if total cost rises. Lower interest rates help reduce needed government taxes as well, further helping both businesses and consumers. Because of these multiple favorable effects, it is not surprising that central banks have been lowering interest rates in recent years.

Reduced wages for workers. Wages often constitute a major share of a business’s costs. If the cost of oil or electricity or health insurance rises, a common work-around seems to be to transfer jobs to parts of the world where wage costs are lower. If energy costs are also lower in the alternative part of the world, this increases the attractiveness of moving jobs. Another work-around is computerization of job functions, using computers to replace jobs formerly done by workers. In fact, simply the possibility of sending work elsewhere or of computerization tends to hold wages down.

I have shown that, in fact, US wages tend to stagnate when oil prices are above $40 or $50 per barrel. This result is as we would expect, if high oil prices tend to crowd out wages.

Figure 2. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Figure 2. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Transfer of more health care costs to workers. Businesses can cut their costs by moving part of healthcare costs to workers, either through higher deductibles or through higher monthly payments for coverage. This approach has a similar effect as a wage cut.

Lower taxes on businesses. Government provided services can be paid for either by taxes on businesses or by taxes on workers. Many of these services benefit both businesses and workers, so the split as to how these taxes should be collected is not obvious. Businesses, especially international businesses, have the option of moving to locations with more favorable tax laws. The trend in recent years has been toward lower taxes on business revenue, shifting a greater share of taxes to wage earners. Higher taxes on wage earners also acts very similarly to a reduction in wages.

More debt. This is different kind of work-around for higher costs. Instead of reduced expenses, it provides increased revenue for businesses. This revenue is borrowed from a future period, with the promise that it will be repaid with interest. The use of more debt is especially prevalent in the sectors of the economy that are increasingly inefficient. For example, adding new desalination plants is enabled by more debt. Adding more renewable energy and more nuclear plants is enabled by more debt. The increasing the cost of higher education is enabled by more debt. Adding such debt is enabled by the lower interest rates mentioned above.

Effect on Wage Earners of Economy’s Growing Inefficiency

Wage earners find themselves caught in a world with growing inefficiency in many sectors. Their wages are not rising very much, except in a few occupations requiring very high education.

Wage earners find themselves increasingly squeezed. They take out big student loans, only to discover that they really cannot pay them back without deferring buying a home and having a family. Thus the housing industry stagnates. The need for new home furnishing drops as well. Births drop below the “replacement rate.” Young people forego buying cars, because they don’t have good-paying jobs. In fact, many are trying to go to school and work at a low-paid part-time job to support themselves. These jobs do not pay high enough wages to afford a car, so oil use tends to decline.

With wage levels low, women find that it does not make financial sense to join the paid work force if they have children, because the cost of transportation and child care is too high, relative to the wages of, say, a teacher–a job that requires a college education. The situation is similar if an elderly relative or handicapped adult child needs care. As a result, work force participation levels drop. This change started to occur about 2001 in the US.

Figure 3. US Number Employed / Population, where US Number Employed is Total Non-Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. (This includes children and others not usually in the labor force.) 2012 is a partial year estimate.

Figure 3. US Number Employed / Population, where US Number Employed is Total Non-Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. (This includes children and others not usually in the labor force.) 2012 is a partial year estimate.

The Effect of Diminishing Returns (and Crowding Out) on Debt

As the economy becomes less efficient, there are clearly multiple impacts on debt:

  • Both businesses and individuals need more debt, because they become less able to purchase the increasingly costly devices they are being asked to purchase (new cars, new factories, new oil extraction facilities requiring significant investment)
  • For businesses, the returns on this debt are falling in terms of output measured in units such as barrels of oil or kilowatt hours of electricity; it is only if ever-higher prices for the output can be charged that the debt can be repaid.
  • For citizens, wages are becoming less able to cover the cost of needed goods. This both increases the need for debt, and makes debt increasingly difficult to repay.
  • Diminishing returns leads to lower economic growth. It is only if interest rates can be kept very low that debt can possibly be repaid. At some point, required interest rates turn negative.

As long as an economy is expanding, it makes financial sense to “borrow from the future”.

Figure 4. Author's image of an expanding economy.

Figure 4. Author’s image of an expanding economy.

It even makes sense to pay back the debt with interest, because with the growth, there is a reasonable possibility that even with interest, the amount available in the future period will still be increasing, even net of a debt payment.

Figure 5. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 5. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

If we think of interest being paid to what is sometimes called the rentier class (that is banks, insurance companies, pension plans, and rich individuals), then it is the rentier class that is being squeezed by the increased inefficiency that is leading to slow economic growth. In some cases, interest rates are even turning negative, reflecting the poor prospects for the economy. Of course, with negative interest rates, we cannot expect a whole lot of investment–people would rather keep money under their beds than invest it at a negative rate of return.

Crowding Out of Oil Usage

World oil consumption has been essentially flat since 1983 on a per-capita basis. Most people have not noticed this change, because world per capita energy consumption has been rising for many years, helping to raise standards of living around the world.1

Figure 7. World per capita oil and total energy consumption, based on BP Statistical Review of World Energy 2014 data.

Figure 6. World per capita oil and total energy consumption, based on BP Statistical Review of World Energy 2014 data.

The issue we are concerned about in this post is the squeezing out phenomenon, as it relates to oil. As we noted above, there are a number of industries that are becoming less and less efficient, including oil, electricity, metal and minerals, fresh water, higher education, and the medical system. Because of this issue, these sectors are using an  increasing share of the world’s oil supply, when direct and indirect usage are included.2

We don’t know exactly how much oil is being devoted to the six increasingly inefficient sectors described in this post, but we do know that the oil consumption per capita devoted to uses other than these six sectors must be falling, because the total is flat. Examples of sectors being crowded out are restaurants, hotels, news media, home building, computer manufacturing, vacation travel, lawn care, and most of the general economy.

The problem with increased inefficiency has been especially acute since 2001, as evidenced by falling employment ratios (Figure 3) and rising oil and commodity prices since that date. In Figure 7, we show two possible trajectories of oil available to the rest of society, net of use by these increasingly inefficient sectors.

FIgure 7. World per capita oil consumption, and two possible trajectories of per capita oil supply available to the rest of the economy, selected by author.

Figure 7. World per capita oil consumption based on BP Statistical Review of World Energy oil data, and two possible trajectories of per capita oil supply available to the rest of the economy, selected by author.

It is very difficult for the sectors that are getting crowded out by the increasingly inefficient sectors to grow, despite growing energy usage other than oil. Oil has many specialized uses. Even if total energy use grows, it cannot make up for uses where oil is specifically needed, such as operating a diesel truck or operating road paving equipment. Thus costs to say, the newspaper industry, are higher if oil prices are higher, but the disposable income citizens have available to spend on newspapers is lower, resulting in the crowding out phenomenon.

Conclusion

We are dealing with a networked economy, which I have represented in the past as this child’s toy:

Figure 6. Dome constructed using Leonardo Sticks

Figure 7. Dome constructed using Leonardo Sticks

All parts of our economy are interconnected. If parts of the economy is becoming increasingly inefficient, more than the cost of production in these parts of the economy are affected; other parts of the economy are affected as well, including wages, debt levels, and interest rates.

Wages are especially being crowded out, because the total amount of goods and services available for purchase in the world economy is growing more slowly. This is not intuitively obvious, unless a person stops to realize that if the world economy is growing more slowly, or actually shrinking, it is producing less. Each worker gets a share of this shrinking output, so it is reasonable to expect inflation-adjusted wages to be stagnating or declining, since a stagnating or declining collection of goods and services is all a person can expect.

At some point, something has to “give”. One thing we have seen recently is a sudden drop in oil prices that does not represent a sudden drop in the cost of extraction. Instead, it reflects the fact that current wages are not high enough to pay today’s high cost of oil extraction. There is getting to be a difference between

  • The full cost of oil extraction, including governmental services needed to keep the country’s economy functioning well enough for this extraction to continue, and
  • The amount the economy can afford, considering both wages and the increase (or decrease) in debt for the economy.

This situation is not simply affecting oil; it is also affecting other commodity prices as well. Clearly we cannot continue indefinitely on this trajectory. Something has to give. So far, what we have seen is a drop in oil prices and other commodity prices to levels that are likely to seriously disrupt production. How this will all play out is worrisome, if a person understands the dynamics behind what is happening.

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VyseLegendaire's picture

Glad to see another good post from Gail. 

MalteseFalcon's picture

Gail is just another "peak oiler" from the oil drum. 

The "peak oil" scam is falling apart at the seams. 

Arguments get re-tooled to fit the current circumstances, but Gail and her ilk didn't see cheap oil coming and really don't understand it because of their "peak oil" mind lock.

Stuck on Zero's picture

Gail stated pretty straightforward information.  It all makes sense ...  we're in a Tainter collapse.

 

WmMcK's picture

Tainter asshole, tainter pussy -- somewhere in between.

Oh, you mean Joe Tainter, sorry.

Jstanley011's picture

Complexity actually produces resilience. Knock out a node, and the more complex and dispersed the network, the more easily it will adapt compared to a simple and centralized network. Which will explain why the collapse of oil prices will hit Russia far harder than Texas.

SHRAGS's picture

.

Complexity actually produces resilience

That's a general statment, but is it alway true?   Have you considered the concept of peak complexity?

Jstanley011's picture

Did you hear about the woman born without a cerebellum?

“…[T]he functional compensation with the remaining brain tissue is remarkable,” the authors of the case study note in their report. “In our case, complete absence of the cerebellum results in only mild to moderate motor deficiency.” They added: “dysarthria [difficulty speaking] and ataxia [coordination problems], although clearly present, were less than would be expected in completely [sic] absence of the cerebellum.”

MalteseFalcon's picture

You wonder how the minority of intelligent American people fall for all the nonsense and then an article like this appears. Gail and her ilk are still living in the 1970s.  It is a comfortable and reassuring place where new facts need not intrude.  Time stands still for them.  Actual and potential advances in technology 'need not apply'. Their arguments are warmed over puke commissioned (at least indirectly) by oil companies from academics.  The whole argument is a syllogism.  It is eloquently phrased and backed by reams and reams of irrelevant 'facts', expired 'facts', non-'facts' and missing 'facts'.  It is a 'honey pot' where normally intelligent people wander in and turn stupid.

 

knukles's picture

Global warming, war on terror, electric cars, Teflon pans, bottled water, iStuff, low power Christmas tree lights, soy sauce from Wisconsin, community organizers organizing, religion of peace, Angelina Jollie's mastectomy, donkey milk and the end of fluoridation, but to name a few.
Let alone a plunging world economy.
Global Liquidity Trap.
All sorts of good shit.
Oh, and Bearnaise Sauce and Dark Chocolate covered potato chip candy bars.

Hohum's picture

http://cci-reanalyzer.org/DailySummary/

ZHers, look at this every day for six months or so.

Jack Burton's picture

+100 Very insightful post!  The modern world exploded in prosperity and growth at the exact time oceans of cheap oil flooded into the world economies! No matter what Frackers say about oceans of oil in the shale deposits, it costs a fortune to get it out. And thus the real economy sends more capital into oil extraction, leaving less capital for other economic growth.

A well thought out article.

"There seems to be a great deal of expensive-to-extract oil available."

Bush Baby's picture

The real death spiral in the oil industry will come when the capacity and recharging issues of batteries for electric cars are resolved. Besides Tesla , a lot of the big automotive companies are getting on the electric car band wagon.

Looks like not a matter of if , but when.

 

In the meantime , low oil prices looks like the best play to hold off the electric car onslaught, higher oil prices will hasten it.

MalteseFalcon's picture

Hybrid cars started the fall in gasoline demand in the US, since 2005.  Electric cars will only accelerate it.

The Nissan Leaf is here and it is reliable and affordable.  Several car makers are rolling out electric models in 2015.  China, of course, is ahead of the US in this area, so there goes Chinese demand for gasoline.

Did Gail include any of this in her syllogistic analysis?  I doubt it.

MalteseFalcon's picture

No. The cat is out of the bag and they cannot stop China.

The age of the electric car is here.  Don't leave it out of any amateuristic global analysis.

kaiserhoff's picture

Inefficiency = Government

ejmoosa's picture

Government is the sand in the transmission box of the global economy.

There are simply no economies of scale experienced once government gets involved.

Otherwise, the Federal Government would be more efficient than State governments, and the State Governments more efficient than local governments.

 

new game's picture

well, not true as krugman style stimulas is dolla for dolla less bang for buck after 4 trillion...

just sayin...

cornflakesdisease's picture

Yes but the governments are controlled by the big businesses that control the global economy.

Cheduba's picture

And how are all of these inefficiencies in every imaginable aspect of life solved? Decentralization!

duo's picture

Zero efficiency = financialization

Bush Baby's picture

This is the reverse argument but similar conclusion reached by a growing number who feel that upcoming increases in productivity through automation and artificial intelligence will finally reach the point where they destroy more jobs than they create, resulting in a downward spiral of demand due to decreased wages and wealth becoming concentrated in the hands of too few.

http://www.technologyreview.com/featuredstory/515926/how-technology-is-d...

 

Cloud9.5's picture

Kaiser you are correct.  If you want something to devolve into a Byzantine labyrinth of minutia turn it over to government.  As government grows, it crowds out all other social and economic activity.

Radical Marijuana's picture

kaiserhoff:

Government is the biggest form of organized crime, controlled by the best organized gang of criminals. That has worked fantastically well in the short-term for the biggest gangsters, the banksters and their buddies. Social engineering works! However, in order to understand that one has to understand that the oldest and best developed form of social engineering was warfare.

People who blame governments for being ineffective, inefficient, or incompetent, are missing the point. They are presuming there was stupidity because that is what it superficially looked like. The Federal Reserve Board, for example, has accomplished totally the opposite to everything it publicly stated was its purposes. The Fed was an excellent example of professional liars and immaculate hypocrites successfully operating systems of organized lies and robberies, against mainstream morons who were brainwashed to believe in the bullshit of the biggest bullies.

Gail Tverberg does good analysis, and has been consistently presenting insightful predictions for the couple of years that I have been aware of her work. However, she too believes too much in the Hanlon's Razor view of these phenomena, that what actually happens must have been some kind of mistake, rather than due to an evil ulterior agenda being successfully implemented.

I recommend listening to this 10 minute audio recording to get the facts into proper perspective, regarding how and why governments are the biggest form of organized crime, controlled by the best organized gangsters, the banksters, which have dominated the petroleum industry throughout its history:

Energy & Banking Criminal Racketeering

 

A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small “inside” group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many.

--- Smedley Butler

In order to understand governments better, one has to think about the chronic political problems inherent in the nature of human life, and how the history of civilization developed the most expedient sets of solutions to those problems. Everyone has some power to rob, and power to kill to back up that power to rob. Governments assembled and channeled those powers, which were directed by those who were the best at doing that. Those who blame governments or banksters for the existence of the problems are WRONG. The chronic political problems always existed. The bankster controlled governments were the most expedient sets of solutions to those problems.

By and large, those who blame governments, or the banksters, never provide better resolutions to the chronic political problems, because that would actually take better death controls, in order to back up better debt controls. Rather, more people prefer to indulge in false fundamental dichotomies, and the related impossible ideals, as their preferred bogus "solutions" to the problems.

If one is serious about the real situation, then the only realistic resolutions to the problems that governments are the biggest form of organized crime, controlled by the best organized gang of criminals, are better organized crime, controlled by better organized gangs of criminals. The reasons are the chronic political problems inherent in the nature of human life, which must be resolved somehow. Furthermore, facing those facts also explains how and why we continue to actually resolve those problems in the most expedient ways possible, which is our path of least resistance, or the human path of least morality.

In my view, people who think governments are simply inefficient, or incompetent are  not examining the social facts enough to perceive what has been really happening. People who blame governments tend to be reactionary revolutionaries, whose indulgence in impossible ideals enables them to feel better, despite that those impossible ideals always actually make the opposite happen in the real world. The existing situation is that almost all successful politicians are the banksters' puppets, who are voted for by enough of the masses of muppets, who can be fooled enough of the time. That is the real way that we are resolving our real problems, through systems of legalized lies, backed by legalized violence, operating through the maximum possible deceits and frauds. Those were extremely successful, in the short-term, at making a tiny minority more and more fantastically wealthy and powerful, while the vast majority of people were reduced to Zombie Sheeple, who were being fleeced to exhaustion, while being set up to be slaughtered.

However, as is normal on Zero Hedge, most people who comment upon that situation will NOT bother to think harder and deeper about how and why that situation developed to actually exist. Instead, silly, superficial government bashing is the norm ...

justmy2cents's picture

This article is bollocks pure and simple. All inefficiencies are quickly exploited by keen eyed capitalists offerering a faster or cheaper alternative so over time (boom or bust) things inevitably become more NOT less efficient.

Hohum's picture

justmy2cents,

got a link or is your comment worth...2 cents or fewer.

 

 

justmy2cents's picture

So my post is wrong? How exactly please explain?

Hohum's picture

jM2c,

You're making an assumption.  You think capitalists create net energy (output/input); they don't.  They borrow their way to fortune.  It's not capitalism's fault--no system can do it.  We're takers--face it.

ejmoosa's picture

This is utter bullshit.  

Capitalists satisfy demand.  They do so at a profit or go broke.

Take away every dollar that can be borrowed, and you would still find capitalists out there busting their asses to satisfy demand.

But you definetely might be a taker...

justmy2cents's picture

Thank you ejmoosa my point exactly.

Cloud9.5's picture

You may be right but I suspect the decline in prices is resulting from the same phenomenon that caused prices to crash in 2008.  Demand destruction.

surf0766's picture

We became very efficient in the past 6 weeks.  Asswipe

knukles's picture

Yeah, uh.... my sarcastic cynical post above was a feeble attempt to say that exactly that.
Thank you
All of a sudden, we became energy whatever.

surf0766's picture

Nope you got it.. Just venting

Oilcrashing's picture

The system is on the verge of the abyss. We have a lethal situation that is evolving by itself (not caused by Obama itself, the CIA, Saudis, Putin or the Venezuelans, they cannot do anything to reverse it now, it's pure geology, thermodynamics and economy): The fact that oil reserves are increasing harder to extract, and the fact that we have to invest more and more to recover the same amount of oil (thus getting less net energy) is causing a credit crunch in the economy. The true scope of this is yet to be seen, but we are now witnessing how it unfolds. 

http://makewealthhistory.org/2014/12/16/break-even-points-for-oil-producers/

It is very well explained in this site: http://www.economic-undertow.com/

"If prices drop too far the entire extraction industry will go out of business, that the prices have crashed indicates half the industry is already out of business, it just doesn’t know which half it is yet.

The increase in petroleum volume isn’t necessarily a blessing as the energy content of the newer fuels is no greater than that of smaller volumes seven- or eight years ago. The increased volumes cost more to extract, transport and process so the net-energy yield is less.

The plunging price of crude oil does not reflect the cost of extracting it or finding substitutes but rather the paucity of return on its use. This is sensible because returns are what are supposed to pay for extraction- plus a profit. What pays instead are sub-prime loans made against promises of bottomless production rather than actual remunerative use. The highest and best use for crude oil and related goods has been as subjects in a Wall Street finance shell game which is undone by the crash in crude prices …

With world-wide financial repression and the propping up of key-men everywhere, any energy crisis initially will not take familiar forms: gas lines, rationing and highway speed restrictions. Instead, the crisis will emerge as a credit crunch which is underway right now. Credit is being systematically revealed as worthless, leaving the fuel industry to provide for those elements of the fuel-use economy that can pay for themselves. This amounts to a very small fraction of current ‘use’ which is mostly for entertainment and pleasure.

It is hard to see how prices can rise in real terms from here.

Purchasing power rests more with the tycoons. Given enough deflationary medicine and tycoons will be just as broke as the rest of us. Purchasing power is the equivalent relationship between a good that is exchanged and what is gained for it: one is always worth the other; otherwise the exchange does not occur. Capital is non-renewable resources, it is the ultimate good, the basis of all ‘production'; as capital is depleted or diminished for whatever reason, so is purchasing power.

Customers must buy the fuel products that allow the drillers to retire their own loans. Customers can only buy when they borrow themselves … or after their employers borrow in turn from their own customers. The cost of ongoing oil peak = fewer customers borrowing overall, they have been fired, lost their businesses, have had their wages cut or they have other more important costs to meet, like food, housing or medical care.

Every post-peak country is in the same boat. China is slowing … because Americans and Europeans are buying less Chinese-made goods with borrowed money => less purchases from Australia and other resource providers. Large swaths of the world are embroiled in conflict which is a dead- loss to all sides. There are fewer places for any bid going to come from. How are prices going to rise?

“Central banks will print money,” is the usual nonsense refrain. Central banks cannot increase purchasing power, they can only dilute it. Finance can lend but the cost of moral hazard — a kind of indirect subsidy — has risen to where even largest governments cannot bear it. More loans won’t work anyway: money flows to drillers starving customers of funds leaving nobody to retire the drillers’ loans.

At the same time, oil states need to sell as much as they can to gain what cash-flow is possible. All petroleum is high cost now b/c of the need to work over old, depleting fields. Drillers are frantic to make up their losses on volume …

There is nobody with a handle on this situation, it is running away on its own."

FredFlintstone's picture

That is one scarry muther fuken post.

JohninMK's picture

Dead right there. Tried to up arrow but it registered up and down.

ejmoosa's picture

Any scarce resource should be regulated by supply and demand, and not the government.  I am the one best qualified to determine if the gallon of fuel I purchase provides a return greater than the money I give up to acquire it.

And like any mismanaged resource, government's involvement has swung wildly in all sorts of directions.

The biggest loser of course, wil be the government.  They make more profit per gallon of fuel than any business does.

And they are doing it risk free.  

ejmoosa's picture

"As long as an economy is expanding, it makes financial sense to “borrow from the future”."

What does not make sense is to borrow more from the future than the future holds.  

So we have gotten to the future we were borrowing from five years ago, and it looks like we have a deficit on our hands.

I wonder who is going to pay for that?


Pure Evil's picture

Nobody.

That's why they keep running it up.

If the bank offered you an unlimited credit line but you only had to pay the interest you'd be there tapping it like a crack monkey with an intravenous line pushing a button.

Eventually the amount of interest you pay will be more than you can borrow, (or in this case more than the FED can safely print), and that's when you just walk away.

But, until then you'll just kick the can like everyone else.

ejmoosa's picture

I think you are wrong.  Everyone that represented today's consumption, that had to compete with the future consumption brought into todaycourtesy of easy money. has had to pay higher prices.

We've been paying too much for many things competing against people who have no credit.

Take college education, for example.  Would tuitions be so high, if not for the Federal Government?  And not everyone is doing it via financial aid.  

There's a lot of people paying for this f'd up economy.

It's just not the right people paying.

 

SHRAGS's picture

. We've been paying too much for many things competing against people who have no credit.

Yep, its been the nuclear arms race of credit, he who can borrows the most "wins".    Two or three jobs, send mums to work to pay the interest, interest rates fall ---> borrow more money, outbid everyone else.

Works right up to the point it doesn't.

silver surfer's picture

The fracking frackers fracking frackt

ThroxxOfVron's picture

Maybe too many resources are not only being misallocated to the inefficient ( .GOV ) and unproductive ( paper pushers, welfare, subsidized wonkery, global supply chaining and other negative sum cost-shifting games, etc. ); but, on overtly destructive activity such as WAR?

 

 

 

ThroxxOfVron's picture

...Please DO notice that the inefficient and the unproductive are almost always the instigators of and cheerleaders for WAR.

ejmoosa's picture

That's because war destroys excess capacity.

alexmark2013's picture
Expert: Plunging Oil $ triggering DISASTROUS CHAIN REACTION; Derivatives collapse, CDS implosions then bank failures http://investmentwatchblog.com/expert-plunging-oil-triggering-disastrous-chain-reaction-derivatives-collapse-cds-implosions-then-bank-failures/