2016: Oil Limits & The End Of The Debt Supercycle

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Submitted by Gail Tverberg via Our Finite World blog,

What is ahead for 2016? Most people don’t realize how tightly the following are linked:

  1. Growth in debt
  2. Growth in the economy
  3. Growth in cheap-to-extract energy supplies
  4. Inflation in the cost of producing commodities
  5. Growth in asset prices, such as the price of shares of stock and of farmland
  6. Growth in wages of non-elite workers
  7. Population growth

It looks to me as though this linkage is about to cause a very substantial disruption to the economy, as oil limits, as well as other energy limits, cause a rapid shift from the benevolent version of the economic supercycle to the portion of the economic supercycle reflecting contraction. Many people have talked about Peak Oil, the Limits to Growth, and the Debt Supercycle without realizing that the underlying problem is really the same–the fact the we are reaching the limits of a finite world.

There are actually a number of different kinds of limits to a finite world, all leading toward the rising cost of commodity production. I will discuss these in more detail later. In the past, the contraction phase of the supercycle seems to have been caused primarily by too high population relative to resources. This time, depleting fossil fuels–particularly oil–plays a major role. Other limits contributing to the end of the current debt supercycle include rising pollution and depletion of resources other than fossil fuels.

The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.

I expect that the particular problem we are likely to reach in 2016 is limits to oil storage. This may happen at different times for crude oil and the various types of refined products. As storage fills, prices can be expected to drop to a very low level–less than $10 per barrel for crude oil, and correspondingly low prices for the various types of oil products, such as gasoline, diesel, and asphalt. We can then expect to face a problem with debt defaults, failing banks, and failing governments (especially of oil exporters).

The idea of a bounce back to new higher oil prices seems exceedingly unlikely, in part because of the huge overhang of supply in storage, which owners will want to sell, keeping supply high for a long time. Furthermore, the underlying cause of the problem is the failure of wages of non-elite workers to rise rapidly enough to keep up with the rising cost of commodity production, particularly oil production. Because of falling inflation-adjusted wages, non-elite workers are becoming increasingly unable to afford the output of the economic system. As non-elite workers cut back on their purchases of goods, the economy tends to contract rather than expand. Efficiencies of scale are lost, and debt becomes increasingly difficult to repay with interest.  The whole system tends to collapse.

How the Economic Growth Supercycle Works, in an Ideal Situation

In an ideal situation, growth in debt tends to stimulate the economy. The availability of debt makes the purchase of high-priced goods such as factories, homes, cars, and trucks more affordable. All of these high-priced goods require the use of commodities, including energy products and metals. Thus, growing debt tends to add to the demand for commodities, and helps keep their prices higher than the cost of production, making it profitable to produce these commodities. The availability of profits encourages the extraction of an ever-greater quantity of energy supplies and other commodities.

The growing quantity of energy supplies made possible by this profitability can be used to leverage human labor to an ever-greater extent, so that workers become increasingly productive. For example, energy supplies help build roads, trucks, and machines used in factories, making workers more productive. As a result, wages tend to rise, reflecting the greater productivity of workers in the context of these new investments. Businesses find that demand for their goods and services grows because of the growing wages of workers, and governments find that they can collect increasing tax revenue. The arrangement of repaying debt with interest tends to work well in this situation. GDP grows sufficiently rapidly that the ratio of debt to GDP stays relatively flat.

Over time, the cost of commodity production tends to rise for several reasons:

  1. Population tends to grow over time, so the quantity of agricultural land available per person tends to fall. Higher-priced techniques (such as irrigation, better seeds, fertilizer, pesticides, herbicides) are required to increase production per acre. Similarly, rising population gives rise to a need to produce fresh water using increasingly high-priced techniques, such as desalination.
  2. Businesses tend to extract the least expensive fuels such as oil, coal, natural gas, and uranium first. They later move on to more expensive to extract fuels, when the less-expensive fuels are depleted. For example, Figure 1 shows the sharp increase in the cost of oil extraction that took place about 1999.
    Figure 1. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is "Compound Annual Growth Rate."

    Figure 1. Figure by Steve Kopits of Westwood Douglas showing the trend in per-barrel capital expenditures for oil exploration and production. CAGR is “Compound Annual Growth Rate.”

  3. Pollution tends to become an increasing problem because the least polluting commodity sources are used first. When mitigations such as substituting renewables for fossil fuels are used, they tend to be more expensive than the products they are replacing. The leads to the higher cost of final products.
  4. Overuse of resources other than fuels becomes a problem, leading to problems such as the higher cost of producing metals, deforestation, depleted fish stocks, and eroded topsoil. Some workarounds are available, but these tend to add costs as well.

As long as the cost of commodity production is rising only slowly, its increasing cost is benevolent. This increase in cost adds to inflation in the price of goods and helps inflate away prior debt, so that debt is easier to pay. It also leads to asset inflation, making the use of debt seem to be a worthwhile approach to finance future economic growth, including the growth of energy supplies. The whole system seems to work as an economic growth pump, with the rising wages of non-elite workers pushing the growth pump along.

The Big “Oops” Comes when the Price of Commodities Starts Rising Faster than Wages of Non-Elite Workers

Clearly the wages of non-elite workers need to be rising faster than commodity prices in order to push the economic growth pump along. The economic pump effect is lost when the wages of non-elite workers start falling, relative to the price of commodities. This tends to happen when the cost of commodity production begins rising rapidly, as it did for oil after 1999 (Figure 1).

The loss of the economic pump effect occurs because the rising cost of oil (or electricity, or food, or other energy products) forces workers to cut back on discretionary expenditures. This is what happened in the 2003 to 2008 period as oil prices spiked and other energy prices rose sharply. (See my article Oil Supply Limits and the Continuing Financial Crisis.) Non-elite workers found it increasingly difficult to afford expensive products such as homes, cars, and washing machines. Housing prices dropped. Debt growth slowed, leading to a sharp drop in oil prices and other commodity prices.

Figure 2. World oil supply and prices based on EIA data.

Figure 2. World oil supply and prices based on EIA data.

It was somewhat possible to “fix” low oil prices through the use of Quantitative Easing (QE) and the growth of debt at very low interest rates, after 2008. In fact, these very low interest rates are what encouraged the very rapid growth in the production of US crude oil, natural gas liquids, and biofuels.

Now, debt is reaching limits. Both the US and China have (in a sense) “taken their foot off the economic debt accelerator.” It doesn’t seem to make sense to encourage more use of debt, because recent very low interest rates have encouraged unwise investments. In China, more factories and homes have been built than the market can absorb. In the US, oil “liquids” production rose faster than it could be absorbed by the world market when prices were over $100 per barrel. This led to the big price drop. If it were possible to produce the additional oil for a very low price, say $20 per barrel, the world economy could probably absorb it. Such a low selling price doesn’t really “work” because of the high cost of production.

Debt is important because it can help an economy grow, as long as the total amount of debt does not become unmanageable. Thus, for a time, growing debt can offset the adverse impact of the rising cost of energy products. We know that oil prices began to rise sharply in the 1970s, and in fact other energy prices rose as well.

Figure 4. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Figure 3. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Looking at debt growth, we find that it rose rapidly, starting about the time oil prices started spiking. Former Director of the Office of Management and Budget, David Stockman, talks about “The Distastrous 40-Year Debt Supercycle,” which he believes is now ending.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

In recent years, we have been reaching a situation where commodity prices have been rising faster than the wages of non-elite workers. Jobs that are available tend to be low-paid service jobs. Young people find it necessary to stay in school longer. They also find it necessary to delay marriage and postpone buying a car and home. All of these issues contribute to the falling wages of non-elite workers. Some of these individuals are, in fact, getting zero wages, because they are in school longer. Individuals who retire or voluntarily leave the work force further add to the problem of wages no longer rising sufficiently to afford the output of the system.

The US government has recently decided to raise interest rates. This further reduces the buying power of non-elite workers. We have a situation where the “economic growth pump,” created through the use of a rising quantity of cheap energy products plus rising debt, is disappearing. While homes, cars, and vacation travel are available, an increasing share of the population cannot afford them. This tends to lead to a situation where commodity prices fall below the cost of production for a wide range of types of commodities, making the production of commodities unprofitable. In such a situation, a person expects companies to cut back on production. Many defaults may occur.

China has acted as a major growth pump for the world for the last 15 years, since it joined the World Trade Organization in 2001. China’s growth is now slowing, and can be expected to slow further. Its growth was financed by a huge increase in debt. Paying back this debt is likely to be a problem.

Figure 5. Author's illustration of problem we are now encountering.

Figure 5. Author’s illustration of problem we are now encountering.

Thus, we seem to be coming to the contraction portion of the debt supercycle. This is frightening, because if debt is contracting, asset prices (such as stock prices and the price of land) are likely to fall. Banks are likely to fail, unless they can transfer their problems to others–owners of the bank or even those with bank deposits. Governments will be affected as well, because it will become more expensive to borrow money, and because it becomes more difficult to obtain revenue through taxation. Many governments may fail as well for that reason.

The U. S. Oil Storage Problem

Oil prices began falling in the middle of 2014, so we might expect oil storage problems to start about that time, but this is not exactly the case. Supplies of US crude oil in storage didn’t start rising until about the end of 2014.

Figure 6. US crude oil in storage, excluding SPR, based on EIA data.

Figure 6. US crude oil in storage, excluding Strategic Petroleum Reserve, based on EIA data.

Once crude oil supplies started rising rapidly, they increased by about 90 million barrels between December 2014 and April 2015. After April 2015, supplies dipped again, suggesting that there is some seasonality to the growing crude oil supply. The most “dangerous” time for rapidly rising amounts added to storage would seem to be between December 31 and April 30. According to the EIA, maximum crude oil storage is 551 million barrels of crude oil (considering all storage facilities). Adding another 90 million barrels of oil (similar to the run-up between Dec. 2014 and April 2015) would put the total over the 551 million barrel crude oil capacity.

Cushing, Oklahoma, is the largest storage area for crude oil. According to the EIA, maximum working storage for the facility is 73 million barrels. Oil storage at Cushing since oil prices started declining is shown in Figure 7.

Figure 7. Crude oil stored at Cushing between June 27, 2014, and June 1, 2016. based on EIA data.

Figure 7. Quantity of crude oil stored at Cushing between June 27, 2014, and June 1, 2016, based on EIA data.

Clearly the same kind of run up in oil storage that occurred between December and April one year ago cannot all be stored at Cushing, if maximum working capacity is only 73 million barrels, and the amount currently in storage is 64 million barrels.

Another way of storing oil is as finished products. Here, the run-up in storage began earlier (starting in mid-2014) and stabilized at about 65 million barrels per day above the prior year, by January 2015.  Clearly, if companies can do some pre-planning, they would prefer not to refine products for which there is little market. They would rather store unneeded oil as crude, rather than as refined products.

Figure 7. Total Oil Products in Storage, based on EIA data.

Figure 8. Total Oil Products in Storage, based on EIA data.

EIA indicates that the total capacity for oil products is 1,549 million barrels. Thus, in theory, the amount of oil products stored can be increased by as much as 700 million barrels, assuming that the products needing to be stored and the locations where storage are available match up exactly. In practice, the amount of additional storage available is probably quite a bit less than 700 million barrels because of mismatch problems.

In theory, if companies can be persuaded to refine more products than they can sell, the amount of products that can be stored can rise significantly. Even in this case, the amount of storage is not unlimited. Even if the full 700 million barrels of storage for crude oil products is available, this corresponds to less than one million barrels a day for two years, or two million barrels a day for one year. Thus, products storage could easily be filled as well, if demand remains low.

At this point, we don’t have the mismatch between oil production and consumption fixed. In fact, both Iraq and Iran would like to increase their production, adding to the production/consumption mismatch. China’s economy seems to be stalling, keeping its oil consumption from rising as quickly as in the past, and further adding to the supply/demand mismatch problem. Figure 9 shows an approximation to our mismatch problem. As far as I can tell, the problem is still getting worse, not better.

Figure 1. Total liquids oil production and consumption, based on a combination of BP and EIA data.

Figure 9. Total liquids oil production and consumption, based on a combination of BP and EIA data.

There has been a lot of talk about the United States reducing its production, but the impact so far has been small, based on data from EIA’s International Energy Statistics and its December 2015 Monthly Energy Review.

Figure 10. US quarterly oil liquids production data, based on EIA data.

Figure 10. US quarterly oil liquids production data, based on EIA’s International Energy Statistics and Monthly Energy Review.

Based on information through November from EIA’s Monthly Energy Review, total liquids production for the US for the year 2015 will be over 800,000 barrels per day higher than it was for 2014. This increase is likely greater than the increase in production by either Saudi Arabia or Iraq. Perhaps in 2016, oil production of the US will start decreasing, but so far, increases in biofuels and natural gas liquids are partly offsetting recent reductions in crude oil production. Also, even when companies are forced into bankruptcy, oil production does not necessarily stop because of the potential value of the oil to new owners.

Figure 11 shows that very high stocks of oil were a problem, way back in the 1920s. There were other similarities to today’s problems as well, including a deflating debt bubble and low commodity prices. Thus, we should not be too surprised by high oil stocks now, when oil prices are low.

Figure 2. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure produced by EIA. Figure by EIA.

Figure 11. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure by EIA.

Many people overlook the problems today because the US economy tends to be doing better than that of the rest of the world. The oil storage problem is really a world problem, however, reflecting a combination of low demand growth (caused by low wage growth and lack of debt growth, as the world economy hits limits) continuing supply growth (related to very low interest rates making all kinds of investment appear profitable and new production from Iraq and, in the near future, Iran). Storage on ships is increasingly being filled up and storage in Western Europe is 97% filled. Thus, the US is quite likely to see a growing need for oil storage in the year ahead, partly because there are few other places to put the oil, and partly because the gap between supply and demand has not yet been fixed.

What is Ahead for 2016?

  1. Problems with a slowing world economy are likely to become more pronounced, as China’s growth problems continue, and as other commodity-producing countries such as Brazil, South Africa, and Australia experience recession. There may be rapid shifts in currencies, as countries attempt to devalue their currencies, to try to gain an advantage in world markets. Saudi Arabia may decide to devalue its currency, to get more benefit from the oil it sells.
  2. Oil storage seems likely to become a problem sometime in 2016. In fact, if the run-up in oil supply is heavily front-ended to the December to April period, similar to what happened a year ago, lack of crude oil storage space could become a problem within the next three months. Oil prices could fall to $10 or below. We know that for natural gas and electricity, prices often fall below zero when the ability of the system to absorb more supply disappears. It is not clear the oil prices can fall below zero, but they can certainly fall very low. Even if we can somehow manage to escape the problem of running out of crude oil storage capacity in 2016, we could encounter storage problems of some type in 2017 or 2018.
  3. Falling oil prices are likely to cause numerous problems. One is debt defaults, both for oil companies and for companies making products used by the oil industry. Another is layoffs in the oil industry. Another problem is negative inflation rates, making debt harder to repay. Still another issue is falling asset prices, such as stock prices and prices of land used to produce commodities. Part of the reason for the fall in price has to do with the falling price of the commodities produced. Also, sovereign wealth funds will need to sell securities, to have money to keep their economies going. The sale of these securities will put downward pressure on stock and bond prices.
  4. Debt defaults are likely to cause major problems in 2016. As noted in the introduction, we seem to be approaching the unwinding of a debt supercycle. We can expect one company after another to fail because of low commodity prices. The problems of these failing companies can be expected to spread to the economy as a whole. Failing companies will lay off workers, reducing the quantity of wages available to buy goods made with commodities. Debt will not be fully repaid, causing problems for banks, insurance companies, and pension funds. Even electricity companies may be affected, if their suppliers go bankrupt and their customers become less able to pay their bills.
  5. Governments of some oil exporters may collapse or be overthrown, if prices fall to a low level. The resulting disruption of oil exports may be welcomed, if storage is becoming an increased problem.
  6. It is not clear that the complete unwind will take place in 2016, but a major piece of this unwind could take place in 2016, especially if crude oil storage fills up, pushing oil prices to less than $10 per barrel.
  7. Whether or not oil storage fills up, oil prices are likely to remain very low, as the result of rising supply, barely rising demand, and no one willing to take steps to try to fix the problem. Everyone seems to think that someone else (Saudi Arabia?) can or should fix the problem. In fact, the problem is too large for Saudi Arabia to fix. The United States could in theory fix the current oil supply problem by taxing its own oil production at a confiscatory tax rate, but this seems exceedingly unlikely. Closing existing oil production before it is forced to close would guarantee future dependency on oil imports. A more likely approach would be to tax imported oil, to keep the amount imported down to a manageable level. This approach would likely cause the ire of oil exporters.
  8. The many problems of 2016 (including rapid moves in currencies, falling commodity prices, and loan defaults) are likely to cause large payouts of derivatives, potentially leading to the bankruptcies of financial institutions, as they did in 2008. To prevent such bankruptcies, most governments plan to move as much of the losses related to derivatives and debt defaults to private parties as possible. It is possible that this approach will lead to depositors losing what appear to be insured bank deposits. At first, any such losses will likely be limited to amounts in excess of FDIC insurance limits. As the crisis spreads, losses could spread to other deposits. Deposits of employers may be affected as well, leading to difficulty in paying employees.
  9. All in all, 2016 looks likely to be a much worse year than 2008 from a financial perspective. The problems will look similar to those that might have happened in 2008, but didn’t thanks to government intervention. This time, governments appear to be mostly out of approaches to fix the problems.
  10. Two years ago, I put together the chart shown as Figure 12. It shows the production of all energy products declining rapidly after 2015. I see no reason why this forecast should be changed. Once the debt supercycle starts its contraction phase, we can expect a major reduction in both the demand and supply of all kinds of energy products.
Figure 4. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 12. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Conclusion

We are certainly entering a worrying period. We have not really understood how the economy works, so we have tended to assume we could fix one or another part of the problem. The underlying problem seems to be a problem of physics. The economy is a dissipative structure, a type of self-organizing system that forms in thermodynamically open systems. As such, it requires energy to grow. Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. Thus all economies have finite lifetimes, just as humans, animals, plants, and hurricanes do. We are in the unfortunate position of observing the end of our economy’s lifetime.

Most energy research to date has focused on the Second Law of Thermodynamics. While this is a contributing problem, this is really not the proximate cause of the impending collapse. The Second Law of Thermodynamics operates in thermodynamically closed systems, which is not precisely the issue here.

We know that historically collapses have tended to take many years. This collapse may take place more rapidly because today’s economy is dependent on international supply chains, electricity, and liquid fuels–things that previous economies were not dependent on.

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Thu, 01/07/2016 - 22:43 | 7015031 hedgeless_horseman
hedgeless_horseman's picture

 

 

I expect that the particular problem we are likely to reach in 2016 is limits to oil storage.

They are building new storage tanks on the Houston Ship Channel faster than I can count.

Thu, 01/07/2016 - 22:57 | 7015114 Arrowflinger
Arrowflinger's picture

So MOAR wii mean less!

Thu, 01/07/2016 - 23:28 | 7015229 jeff montanye
jeff montanye's picture

in some cases less will mean less, it would seem

the graph of commodity prices and costs seems unlikely.  if the prices of commodities fall, why would costs unrelated to scarcity not follow?  poorer deposits to develop would raise prices to an extent, obviously, but all the other inputs should fall in price and offset this to a considerable degree, imo.

Thu, 01/07/2016 - 23:43 | 7015283 BKbroiler
BKbroiler's picture

From now on, less is more.  Less house, less car, less stuff.  People will be brought down to reality kicking and screaming.  Time to take the medicine.

Sat, 01/09/2016 - 07:11 | 7020931 Lore
Lore's picture

How does the author distinguish between "non-elite" and "elite" workers? Is she singling out executives and management within a given sector, or just the broad division between skilled and unskilled labor?  The average wage for the Alberta petroleum industry in 2014 was CAD$120,000.00 per annum. Is she saying they should earn more?  The entire operating cost structure seems way out of proportion to real value, especially given her thesis that oil and gas prices will drag bottom for several years.

For all the focus on Limits to Growth (the original model for which left a lot to be desired), one bubble deserving of more attention is that of Big Government (including Big Banking, for reasons that ought to be self-evident).  Governmental "elites" are weaving unprecedented lies and false flags (e.g., "Sustainable Development" [of Big Government]) in an attempt to prolong massive, unsustainable, unproductive layers of modern society. If there is to be resurgence of productive economies and a return to prosperity, something needs to be done about Big Government. The alternative is to allow Big Government to encroach upon productive economies to an extent unheard of previously, a kind of super-Big Brother. 

Thu, 01/07/2016 - 22:59 | 7015120 EINSILVERGUY
EINSILVERGUY's picture

hedgeless,

where is the occuring? Pasadena? Texas City? Port Arthur. I live in Houston but haven't seen any evidence of this

k

Thu, 01/07/2016 - 23:02 | 7015125 hedgeless_horseman
hedgeless_horseman's picture

 

 

You clearly haven't driven on Beltway 8 East from 45 up to 10 for quite a while.  

Thu, 01/07/2016 - 23:19 | 7015188 Totentänzerlied
Totentänzerlied's picture

"They are building new storage tanks on the Houston Ship Channel faster than I can count."

Good thing all the world's petroleum liquids are located near Texas!

The "supply glut" meme was evolved to make people cease thinking and desist from any further thought.

Fri, 01/08/2016 - 00:16 | 7015406 NoPension
NoPension's picture

Great article.

Fri, 01/08/2016 - 07:44 | 7015995 Escrava Isaura
Escrava Isaura's picture

 

 

Gail will be proved exactly right.

 

 

Thu, 01/07/2016 - 22:43 | 7015038 nscholten
nscholten's picture

Shit.  We don't even need all that oil and other energy products if the facist system would ever allow the implementation of more efficient energy solutions that surely exist. 

And no, I did not read the article but "nice pics".

Fri, 01/08/2016 - 07:04 | 7015954 MalteseFalcon
MalteseFalcon's picture

After pulling the plug on electric vehicles TPTB had a rethink.

Now, for example, Ford is committing $5 billion to change it's production from petroleum to electric; about 50% of it's production.

So it's game over for oil.

Why the rethink?  The US is getting thrown out of the middle east.

Fri, 01/08/2016 - 09:59 | 7016409 ThanksChump
ThanksChump's picture

Let's see you truck CA strawberries to NYC using electricity. Let's see you obtain steel, aluminum and lithium for a Tesla using electricity.

Make fertilizer with electricity. Insecticides. 99% of all medicines and medical equipment.

Ask me how I know you're a liberal or a neocon.

Fri, 01/08/2016 - 12:10 | 7017201 css1971
css1971's picture

NG based trucks.

http://www.volvotrucks.com/trucks/na/en-us/products/alternativefuels/cng...

Doesn't have to be oil.

Next step technologically is to replace the CNG engine with a gas turbine which generates electricity and drive the wheels using electrical power.

Fri, 01/08/2016 - 18:52 | 7019244 MalteseFalcon
MalteseFalcon's picture

Chump.  Oil can't be completely replaced.  But getting oil out of personal transportation basically cuts the guts out of the oil market.

Put the strawberries in a cooler.  Put the cooler in your trunk.  Check your GPS.  Drive west to east.

You want I should draw you some pictures?

Thu, 01/07/2016 - 22:44 | 7015047 NoDebt
NoDebt's picture

This thing called the "middle class" in the US during the 20th centruy was the ANOMALY, not the norm.  Where we are headed:  Small number of rich, large number of poor and just enough middle class to service the rich.  As it has been in most societies throughout most of human history.

Economics is a HUMAN activity and humans tend towards this paradigm again and again over thousands of years of recorded history.  Technology may change but human nature does not.

Thu, 01/07/2016 - 23:00 | 7015124 uhland62
uhland62's picture

What you describe is that Dickensian circumstances are so normal that they are inevitable. I think Dickensian circumstances are so undesirable that we should not just shrug our shoulders, even though we know we can only soften the blows. 

Thu, 01/07/2016 - 23:56 | 7015341 NoDebt
NoDebt's picture

Dickens was an optimist.

Fri, 01/08/2016 - 07:13 | 7015964 MalteseFalcon
MalteseFalcon's picture

My friend Kalashnikov begs to differ.

Thu, 01/07/2016 - 22:45 | 7015052 orez65
orez65's picture

"We have not really understood how the economy works ..."

Speak for yourself!

What is it that you don't understand about Central Bank Fraud?

Central banks falsify capital by printing false money.

It's not that we don't understand the economy, it is that we are being robbed by central banks!

Thu, 01/07/2016 - 22:49 | 7015073 hedgeless_horseman
hedgeless_horseman's picture

 

 

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

 

 

The Rothschild brothers of London writing to associates in New York, 1863.

Fri, 01/08/2016 - 06:53 | 7015944 falak pema
falak pema's picture

now that is a very "socialist" thing to point out!

Thu, 01/07/2016 - 22:58 | 7015115 RiverRoad
RiverRoad's picture

True.  I think he was mainly referring to the sheeple or perhaps to the frogs in that pot of simmering water.

Thu, 01/07/2016 - 22:52 | 7015089 TradingTroll
TradingTroll's picture
  1. I call boolsheet.  The cause of lower wages for non elite workers is technological  advances  in  computing and robotics  not resource  issues.
Thu, 01/07/2016 - 23:22 | 7015156 RiverRoad
RiverRoad's picture

Add to that the efficiency experts showing employers how to line their pockets with the salaries of the laid-off, and the utilization of foreign workers as well.  It's all of the above and undoubtedly more.  It's never just one thing.

Fri, 01/08/2016 - 00:31 | 7015452 Kiwi Pete
Kiwi Pete's picture

Add in a couple of hundred million Chinese non-elite workers willing to work for $1 a day + free trade with China and you get another valid reason for wage stagnation.

Fri, 01/08/2016 - 04:32 | 7015824 Really20
Really20's picture

Capital only multiplies the products of labor, and can't create anything by itself. Without workers to man their factories every capitalist would be stuck with worthless paper.

Thu, 01/07/2016 - 23:00 | 7015095 RiverRoad
RiverRoad's picture

If the globalist elites have been planning to create a world of low paid debt serfs then this is the feedback-loup-blowback they can expect to reap.  They can put all the $5.00 price tags on an apple they want, but in a 50 cent world, that's all they'll get.

Fri, 01/08/2016 - 03:21 | 7015777 The Merovingian
The Merovingian's picture

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Just give me the money.

(Then he says looking down at the display case)

How much for the gun?

Thu, 01/07/2016 - 22:54 | 7015097 Cloud9.5
Cloud9.5's picture

Remember that during the famine of the great depression, you had dairy farmers pouring out their milk because they could not sell it while city dwellers starved.  Surpluses are sometimes the consequence of a failed economic system.  Every leading indicator points to contraction.

Thu, 01/07/2016 - 23:11 | 7015161 __Usury__
__Usury__'s picture

''You basically get it.  The system has been stealing from the future at an exponential rate to sustain it's own existence.  What happens when that system no longer exists?  How do all those products get to Walmart?

For a product to get from point A to point M, through points B-L, well it's all credit based and/or indirectly credit based.

Demand is based off of stealing from the future at an exponential rate.

The bubble has been on going since our grandparent's grandparents were even a thought. ''

Mako

http://www.zerohedge.com/article/panic-buying-physical-gold-europe-threa...

Fri, 01/08/2016 - 02:44 | 7015751 scintillator9
scintillator9's picture

Another thing people forget about the last depression:

http://www.livinghistoryfarm.org/farminginthe30s/crops_17.html

.....in the late spring of 1933, the federal government carried out "emergency livestock reductions." In Nebraska, the government bought about 470,000 cattle and 438,000 pigs. Nationwide, six million hogs were purchased from desperate farmers.....

 

.....The hogs and cattle were simply killed. In Nebraska, thousands were shot and buried in deep pits.

Fri, 01/08/2016 - 08:44 | 7016107 skipjack
skipjack's picture

Good thing we have PETA - that won't be tolerated !

(do I need the /sarc tag?)

Fri, 01/08/2016 - 11:56 | 7017125 css1971
css1971's picture

And in the current one we had houses being demolished to bring back the prices.

https://www.washingtonpost.com/business/economy/banks-turn-to-demolition...

 

With a debt based and capitalist system, you can never allow supply to satisfy the demand. By definition it causes a "market crash".

The implication of this is that demand must always exceed supply. There must ALWAYS be people who can't afford the current supply. Poverty must always exist.

Thu, 01/07/2016 - 22:55 | 7015104 BennyBoy
BennyBoy's picture

In a debt based fiat system the debt supercycle always ends well!

Fri, 01/08/2016 - 11:50 | 7017074 css1971
css1971's picture

And it's always such a surprise. Who couldanode?

Thu, 01/07/2016 - 23:00 | 7015128 yogibear
yogibear's picture

Start filling up those empty oil wells again.

Gasoline ally.

Thu, 01/07/2016 - 23:17 | 7015183 itchy166
itchy166's picture

We are going to see some big production drops in the US shortly.  When the bottom fell out of the oil price last year, there were still about a years worth of wells that had been drilled but had not completed in the Bakken alone.  Although they coninued to drill at a much slower rate, it was the backlog of wells to be completed that were responsible for the production increase.  Now that they've caught up, we will start to see the full impact of high depletion rates for shale oil wells...

Thu, 01/07/2016 - 23:23 | 7015184 itchy166
itchy166's picture

Dbl post

Thu, 01/07/2016 - 23:24 | 7015214 razorthin
razorthin's picture

$10 oil makes sense only with a $500 S&P 500. Let's hope for comprehensive price discovery. Thank you China.

Fri, 01/08/2016 - 00:00 | 7015280 PrimalScream
PrimalScream's picture

The primary problem with the economy ... is the problem that was mentioned by John Hussman.  There is not enough REAL PRODUCTIVE INVESTMENT.  There are not enough Americans doing jobs that will really build an America that is stronger in the future.  And when I say stronger, I'm not talking about weapons and defense. I am talking about creating an economy that provides for the real needs of its people.  The Fed created a lot of low-interest loans.  That huge amount of money was siphoned off bythe  banks and hedge funds who used them for legalized gambling.  That's the only way to describe the short-term investment strategies (sophisticated trickery) that produce no real good with their outcomes.  The banks deliberately created a series of bloated debt cycles (bubbles) and then used them to make big profits.  They are still doing this today.  And each time one of  the bubbles crashed, a hugte amount of bad debt is created.  And then the Fed came along, bought the bad debt, and transferred it to the public.  So the average American is robbed TWICE.  First, because a huge amount of money was used for the wrong purposes. And then later, when everything went wrong, because the bad debts were transferred to the shoulders of American workers, How long can you keep this up?  answer ... NOT too long before the system fizzles and dies.  And we 're seeing that happen.

On top of that, a lot of US Corporations used low rates on corporate debt to borrow and fund their own stock buybacks.  They pushed up their stock prices, but they weren't really doing anything positive to build a better future.  Same problem - no commitment to making America stronger.  The people in charge want to take their cash now, even if it wrecks this country for our kids.  So it's BS all the way around.

Oil is low (price) because the Saudis flooded the market with oil supply, at a time when industrial demand was crashing.  So supply went upwards, and demand tanked .... and you see a price crash.  The Saudis are fighting their war against Russia and Iran, not to mention a hot war in Yemen.  So they need the cash, and they fight an economic war ... by flooding the oil supply. 

Fri, 01/08/2016 - 08:20 | 7016057 Imagery
Imagery's picture

Good Analysis Primal adn I agree with one exception - the Saudi's have actually LOST Market share in all this.  THE PARTY taht has caused the GLUT in Oil Supplies are the Wholly-owned US Public TBTF WS Shale Portfolio Cos.  THEY have DOUBLED US Oil Production from about 4.5 MMBOPD to almost 10 MMBOPD with Infinite Quantities of Free Taxpayer monies.

This was all a BIG PONZI Fruad where the Capital was destroyed due to Uneconomic Negative IRRs in US Shale Oil.  The US is the HIGH COST Producer.

Oh, and Gail Tverberg is a Bankster Shill.

Other than teh above, I agree completely iwth your assessment.

Thu, 01/07/2016 - 23:46 | 7015300 Vint Slugs
Vint Slugs's picture

Every time that I see a Tverberg post I have to bite my tongue but once in a while I just have to spell out the truth:  Malthusians and neo-Malthusians such as Tverberg have been proved wrong by history - dating from 1793. 

Let's move on and consider the prospects for future technological developments, whether they are known at this moment or not, that will augment or replace petro-based energy.

Fri, 01/08/2016 - 04:16 | 7015812 Victor999
Victor999's picture

It's all a matter of timing....yes?

Fri, 01/08/2016 - 04:29 | 7015822 Really20
Really20's picture

We can't rely on a technological magic bullet to save the day. The cost of producing oil is rising dramatically while the price that the world market is willing to bear for it is falling (due to slowing economic growth worldwide). These two processes feed on each other, as higher costs of production dis-incentivize burning of energy (and thus economic growth). Sooner or later, the two lines will cross and oil will no longer be economically sustainable to produce.

To paraphrase Buckminster Fuller, the rapid growth "dating from 1793" is largely a product of humans using up "Earth's savings account" of oil, gas, coal, etc. Unless we plan ahead for the coming end of oil's viability, Earth's population and standard of living will take a serious hit.

 

 

Fri, 01/08/2016 - 11:45 | 7016806 css1971
css1971's picture

Not sure she's a malthusian. I personally also think we'll switch to a different energy source. What we do instead of dying off, is export the deaths to other species and make them extinct instead.

Another point I'll make is that all of the potential energy sources which we might use are already here, visible to all. Anything which isn't, will require 30+ years of scientific and engineering effort to put in place.

Fri, 01/08/2016 - 00:05 | 7015366 enloe creek
enloe creek's picture

Woo hoo v-10dodge 4x4 mega cab for me.... Hope I get it from a repo auction in N D

Fri, 01/08/2016 - 00:52 | 7015504 o r c k
o r c k's picture

Never thought I'd see gas at 35cents a gal. again.

Fri, 01/08/2016 - 01:28 | 7015594 Arthur
Arthur's picture
  1. Two years ago, I put together the chart shown as Figure 12. It shows the production of all energy products declining rapidly after 2015. I see no reason why this forecast should be changed. Once the debt supercycle starts its contraction phase, we can expect a major reduction in both the demand and supply of all kinds of energy products.

 

Way wrong.   There is a ton of oil in the world.  Much of it easily accessiblle with newer technology.  

The market just needs settle down and storage increase some as production moderates.  If it does oil goes up, but there are many oil dependent economies who seem willing to produce themselves into poverty.

At the end of the day it will be hard to best Suadis low production cost but can the House of Saud stand the pain?  Probably but  it will get ugly

Sat, 01/09/2016 - 06:40 | 7020951 Lore
Lore's picture

You touch an important point. Aggregate depletion curves apply only to production from mature formations. I'm reminded of a conversation with an old engineer from Calgary who said the biggest deposits are DEEP. The global depletion curve is liable to have more bumps and plateaus than this chart would suggest. That said, wherever the stuff is located, expect to find the same old groups jockeying for control, control, control.

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