The Bumpy Road Down

18 12 2017

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IrvMills

Irv Mills

The term “bumpy road down” refers to the cyclic pattern of crash and partial recovery that I believe will characterize the rest of the age of scarcity and make for a slow step by step collapse, rather than a single hard and fast crash. Indeed, that is where the “step-by-step” in the title of this series of posts comes from. And yes, many of the individual steps down will happen quite quickly and seem quite harsh. But it will likely take many steps and many decades before we can say collapse is essentially complete, and between those steps down there will (in many areas) be long periods when things are stable or even actually improving somewhat.

The fast collapse is a favourite trope of collapse fiction and makes for some exciting stories, in which stalwart heroes defend their group from hungry hordes and evil strong men. And if the story happens in the U.S. the characters get to do their best to stop a whole lot of ammunition from going stale. But it seems to me that in most parts of the world things will progress quite differently when disaster strikes. Indeed there is a branch of sociology which studies how people and societies respond to disaster, and it has identified a set of incorrect beliefs, known as “the disaster mythology” that much of the general public holds on the subject. In particular, the expectation of looting, mass panic and violence is not borne out in really. Here are some further links on the subject: 1234.

Dysfunctional as today’s world may seem to many of us, it is working fairly well for those who are in power. They have a great deal invested in maintaining the “status quo”, and in making sure that whatever changes do happen don’t have any great effect on them. They also have a lot of resources to bring to bear on pursuing those ends, and a lot of avenues to go down before they run out of alternatives.

The other 80% of us, who are just along for the ride so to speak, still rely on industrial society for the necessities of life. We are hardly self sufficient at all, dependent on “the system” to a degree that is unprecedented in mankind’s history and prehistory. As unhappy as we may be with the way things are at present, it’s hard to imagine collapse without a certain amount of trepidation. Denial is a very common response to this situation.

Some of us, though, aren’t very good at denial. Even if we only follow the news on North American TV, which largely ignores the rest of the world, we’ve seen lots of disturbing events in the last year or two and it is hard not to wonder if they are leading up to something serious. Many people in the “collapse sphere” are predicting a major disturbance in the next few years, and some think that this will be the one that takes us down—all the way.

I definitely agree that something is about to happen, but I don’t think it is going be the last straw. Just one more step along the way.

As always, I am directing this mainly to those who are not highly “collapse aware”, so a closer look at what’s going on and what this next big bump might look like would seem to be a good idea. And of course I am making generalizations in what follows. As always, things will vary a good bit between different areas and at different times, and all of this will affect people of the various social classes differently. Also beware that I am not an economist, just a layman who has been watching the field with keen interest for some time. What follows is a summary of what I have learned, in a field where there is lots of disagreement and where the experts themselves have been wrong again and again.

Despite all the optimistic talk about renewable energy, we are still dependent on fossil fuels for around 87% of our energy needs, and those needs are largely ones that cannot be met by anything other than fossil fuels, especially oil. While it is true that fossil fuels are far from running out, the amount of surplus energy they deliver (the EROEI—”energy returned on energy invested”) has declined to the point where it no longer supports robust economic growth. Indeed, since the 1990s, real economic growth has largely stopped. What limited growth we are seeing is based on debt, rather than an abundance of surplus energy. And various adjustments to the way GDP is calculated have made the situation seem less serious that it really is.

Because of the growth situation, investors looking for good returns on their money have been hard pressed to find any and so have turned to riskier investments, which has resulted in speculative bubbles and subsequent crashes. The thing about bubbles is they are based on trust. Trust in some sort of investment that in saner times would be recognized for the risky proposition it really is. But always there comes a day when the risk becomes obvious, people rush to get out, and the bubble crashes.

The dot com bubble was the first to burst in this century, and the real estate bubble in the US was the next, leading to the crash of 2008.

After 2008 many governments borrowed money to bailout financial institutions (banks) which were in danger of failing, since that failure would have had a very negative effect on the rest of the economy. To control the cost of that borrowing and stimulate the economy, they lowered interest rates. These low interest rates have made it possible to use debt as a temporary replacement for surplus energy as the driver of the economy. Unfortunately this is pretty inefficient—it takes several dollars of debt to create a dollar’s worth of growth, and the result has been debt increasing to totally unprecedented levels.

Meanwhile, much of the ill advised risk taking in the financial industry that led to the crash in 2008 has continued on unabated. You may wonder why responsible governments didn’t enact regulations to stop that sort of thing. And indeed they did, to a limited extent. I suspect, though, that really effective regulations would have stopped growth cold, and no one was willing to accept the negative results of that. Better to let things to go on as they are, leaving future governments to worry about the consequences.

So, in 2017 we are deep into what might be called a “debt bubble.” It relies on trust that interest rates will remain low and that any day now there will be a return to robust growth so that we can all make some money and pay off our debts. Those are risky propositions, to say the least.

On top of that, low interest rates have made it much more of a challenge for pension funds to raise enough money to meet their obligations, a vital concern for retired baby boomers like myself.

Those same low interest rates have made it possible for many non-viable or barely viable businesses to continuing operating on borrowed money, where under more normal circumstances they would have been forced out of business. This makes for a weaker economy, not a stronger one.

Here in Canada we still have a real estate bubble going on, especially in cities like Toronto, Calgary and Vancouver, and that despite recent government efforts to cool the real estate market by making it more difficult to get a mortgage, and by applying a tax on foreign real estate investors.

And over the last year that have been a long list of natural disasters which have increased the financial stress on governments, insurance companies and even re-insurance companies (who insure the insurance companies themselves).

The more conventional economists have come to think that all this is a normal situation and that it can just keep on keeping on. But there are others who think that this will lead to a crash of even greater magnitude that 2008. And many kollapsniks think this crash will mean the end of industrial civilization.

Some commentators expect this crash to take the form of a rash of debt defaults by governments who can no longer carry the debt loads they have built up. And a similar wave of bankruptcies of those shaky businesses I was just talking about, when they finally get to the point where they can no longer hold on. Tim Morgan, one of my favourite economists (who is certainly aware of the possibility of collapse), speculates that this bubble may burst in a different way than those of the past, with the collapse of one or more currencies. He points to the British pound as a prime candidate for the first to go and thinks that the U.S. dollar may follow it.

Other experts I’ve asked say that while the U.S government does have huge debts, they are not so large in comparison to the size of its economy—an economy that is strong enough that trust in it is unlikely to fail. I am not so sure. Much of the strength of the U.S. dollar comes from the fact that all trading of oil is done in it. If you want to buy oil then you need U.S. dollars, so the demand for them is always high. But a number of countries who are not allies of the US have proposed abandoning this system, suggesting that they are willing to accept other currencies for their oil. If this were to happen on a large scale it would significantly weaken the US dollar.

But it takes some sort of unusual event to start a crash like this, to initiate the loss of trust. And that brings us back to the fossil fuel industry.

While the falling EROEIs of fossil fuels have hurt economic growth, it is a mistake to think that those fuels are not still the life blood of our civilization. The success of modern industry is based on the productivity boost provided by cheap energy. The price of oil, for many years, was a fraction of its worth in terms of what could be made with the energy embodied in that oil. But when the price of energy goes up, it reduces the profitability of industry, often leading to a recession.

The oil prices I quote here are for Brent crude, just to keep things simple. In fact, oil trades at a dizzying variety of different prices, depending on where it comes from and its quality, among other things. If you look back over the history of recessions since the 1950s it is interesting to note almost all of them were preceded by a spike in the price of oil. In the summer of 2008 the price of oil, which had been going up for several years, topped out just before the crash at almost $140 per barrel.

After the crash, the economy slowed down significantly, and the price of oil dropped to around $30 per barrel due to falling demand. Starting in mid-2009 the economy began to recover and the price of oil increased to over $100. This appeared to be a straight forward case of supply and demand—an indication that the supply of oil was barely keeping up and suppliers were being forced to turn to more expensive sources of oil to meet the demand.

Then in mid 2014 something surprising happened— the price of oil and many other bulk commodities began to go down. By early 2016 the price of oil was under $40/barrel, and it stayed in the range between $40 and $60 until quite recently when it edged up over $60.

All kinds of ideas have been put forth as to why this drop in the price of oil happened, many of them contradictory. It is my thought that two things have been happening. First, demand destruction—a slowing down of the world economy caused by high energy prices. Second, a temporary increase in the supply of oil, mainly from fracking in the continental US and tapping of unconventional oil—tar sands in Canada, heavy oil in Venezuela, and deep offshore oil in various place around the world, that were suddenly profitable when the price was around $100 per barrel.

Whatever is the cause, it is clear that we have had a surplus of oil for the last few years, and this has kept the price down. OPEC discussed limiting supply to force the price back up, but very little came of it, even though the lower price was severely hurting the economies of the OPEC nations.

In the short run, lower oil prices have had a beneficial effect on economic growth. But unfortunately, the big oil companies were making so little profit that they couldn’t afford to invest much in oil discovery.

Regardless of what you may think of the idea of “peak oil” on a global basis, it is a simple fact that the output of any individual oil field declines as it ages. Exploration for new oil aims to match that natural decline with new discoveries. For conventional oil, that has not happened since 1963 and by the start of this century this was becoming a problem. A problem that likely had something to do with the run up of oil prices prior to 2008.

Following 2008, higher prices and improved technology (like fracking and the syncrude process for getting oil out of the tar sands) made more oil accessible. But with the current lower prices, that is no longer the case. Furthermore the wells opened up by fracking are proving to have very high decline rates.

So it seems that sometime in the next year or two, the decline rate of the world’s oil fields will have eaten up the surplus of oil. Discovery of new oil fields doesn’t happen overnight, so there will be a crunch in oil supply. Not that there will be no oil available, but oil suppliers will be hard pressed to keep up with the demand and the price will spike upward. There may even be shortages of some petroleum products until those higher prices pull demand back to match the available supply.

It seems very likely that such a spike in the price of oil will touch off a loss of trust leading to a recession of such severity as to make 2008 look minor.

In my next post in this series I’ll look at how that recession—might as well call it a crash—might proceed and what will likely be done to mitigate its effects.

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More on money and the economy………

11 11 2017

Articles that, as far as I am concerned, confirm my desire to print local money are coming into my newsfeed thick and fast. This latest one, from the consciousness of sheep, claims the UK economy is as good as finished…….

I don’t agree with everything in it, but bear with me…..

This article also ties in with the looming oil problems. Of course, with the North Sea oil fields depleting in double digits figures, and the UK being as good as out of coal and gas, it’s no wonder an English website would be expressing concern. Make no mistake though, with Australia importing well over 90% of all its liquid fuel requirements, we are in no better shape, really….

“Inflation” says the author “results in the appearance of rising prices; but is actually the devaluation of money.” In my opinion, this is one of the biggest mistakes of economics. Money has no value. It’s for trading and spending. When we sold our house a couple of years ago, we were suddenly the owners of $400,000 instead of a house. Were we rich? I don’t think so…….  not until we spent it on a farm, a couple of utes, a bunch of tools, building materials, livestock, soil improvers, earthworks, concrete…… and now most of the money is gone, I feel richer than ever, because I have the things I need to face our uncertain future. No I’ll take that back, the future is certain, it will be bad…!

There are, however, other reasons for rising prices [than money printing].  And unlike monetary inflation, these are self-correcting.  For example, global oil prices have begun to break out of the $40-$60 “goldilocks” band in which consumers and energy companies can just about keep their heads above water.  Most economists believe this to be dangerously inflationary.  Indeed, almost all previous recessions are the result of monetary tightening (usually by raising interest rates) in response to an upward spike in oil prices.  Since oil is used to manufacture and/or transport every item that we buy, if the price of oil increases, then the price of everything else must increase too.

But the price of oil is not increasing in response to money printing.  Rather, it is the result of declining inventories which point to a global shortage of oil early in 2018 – traders are currently bidding up the price on futures contracts to guarantee access to sufficient oil to meet anticipated demand.  Since oil is considered “inelastic” (we have little choice but to pay for it) the assumption is that rising wholesale prices will be passed on to consumers, causing general inflation.  Frank Shostak from the Mises Institute challenges this assumption:

“Whether the asking price set by producers is going to be realized in the market place, however, hinges on whether or not consumers will accept those prices. Consumers dictate whether the price set by producers is ‘right’.  On this Mises wrote, ‘The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They determine precisely what should be produced, in what quality, and in what quantities.’

“If consumers don’t have the money to support the prices asked by producers then the prices asked cannot be realized.”

And the result is a recession/depression……. Shostak further argues that in this case:

“If the price of oil goes up and if people continue to use the same amount of oil as before, then this means that people are now forced to allocate more money for oil. If people’s money stock remains unchanged then this means that less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come off.”

Clearly there is a difference between something as ubiquitous as oil and those other goods and services that must fall in price unless more money is printed into existence.  The difference is this; each of us has a series of “non-discretionary” purchases that we have little or no choice but to make every month.  These include:

  • Rent/mortgage payments
  • Utility bills
  • Debt interest
  • Council tax
  • Food
  • Transport
  • Telephone/broadband

In addition, we make various “discretionary” purchases of goods and services that we want rather than need.  These include pretty much everything else that we buy, including:

  • TV subscriptions
  • Cinema
  • Eating out
  • Going to the pub
  • Music downloads/subscriptions
  • Electrical equipment
  • Clothes
  • Home furnishings

Oddly enough…..  I have nothing to do with that last list! Am I already out of discretionary spending power…?

If the cost of living rises without appropriate increases in people’s access to money, then we as individuals do what governments are trying to do to the economy as a whole – we cut back on everything that we consider discretionary.  In this way, the rising price of oil – and electricity -does not result in generalised inflation; it merely redistributes our spending across the economy. Just ask the retail sector how well it’s doing at the moment….. When I recently replaced my freezer for a bigger one, I went to Gumtree, not Hardly Normal, and the perfectly functioning small freezer will be sold to pay for it.

This is of course where ‘free money’ from the community, to only be spent in the community really comes in handy. It allows people to buy their essentials, when locally made, without spending the government money, thus allowing the real stuff to be spent on energy and taxes and other stuff created in the Matrix.

Make no mistake, one day soon, the ONLY economy left will be our local economies.

The articles continues…….

Another mistake made by economists and politicians is the belief that rising prices will generate political pressure for additional public spending and for wage increases across the economy.  Indeed, one of the greatest economic mysteries of our age is why apparently full employment has failed to translate into rising wages.  The obvious answer, of course, is that working people have traded employment for low wages.

There is good reason for this.  Since 2010, government attempts to run a budget surplus have sucked money out of the economy.  Public spending and social security payments (the two ways new government money enter the economy) have been savagely cut.  If government refuses to spend new money into the economy, only the banks can.  But since 2008 the banks have stubbornly refused to spend money into the “real economy,” preferring instead to pump up asset bubbles that add no new value to the wider economy.  Only those working people fortunate enough to get a foot on the housing ladder get to benefit from this; but even they can see the illusion – a house may have risen in price since it was bought… but it is still the same house; no commensurate additional value has been added.  The same is true for bubbles in bonds, shares, cryptocurrencies, luxury property, collectibles and fine art.

“Full employment”? The writer seems unaware of the manipulation of statistics regarding employment… don’t know if the UK suffers from the same problem, but here in Australia, anyone working just one hour a week is no longer considered unemployed! A remarkable nmber of people ‘on the dole’ actually work, they are merely underemployed, but not counted.

And the way governments have stopped spending in vain attempts to reach budget surpluses is truly baffling. As is of course the tsunami of privatizations going on all over the world. This wealth transfer is the biggest con the planet has ever seen…

Economically, people are responding to this in the only way they can.  The working poor – increasingly dependent upon in-work benefits and foodbanks – have not only cut their discretionary spending; they have been eating into their supposedly non-discretionary spending too.  As Jamie Doward in the Guardian reports:

“More than a third of people who earn less than the “real living wage” have reported regularly skipping meals to save money…  A poll carried out for the Living Wage Foundation also found that more than a third of people earning less than this had topped up their monthly income with a credit card or loan in the last year, while more than one in five reported using a payday loan to cover essentials. More than half – 55% – had declined a social invitation due to lack of money, and just over half had borrowed money from a friend or relative.”

As I’ve said in past posts on this issue, if you don’t have access to money, you simply have to borrow it. Credit card debt in Australia accounts for a full quarter of all private debt, and when you have to pay extortionary interest rates on those, it limits your spending power even more.

Things look grim in the UK it seems….

Cat Rutter Pooley in the Financial Times reports that:

“In-store sales of non-food items fell 2.9 per cent over the three months to October and 2.1 per cent in the past year — the worst performance since the BRC started compiling the data in January 2012. Clothing sales were particularly hard hit, according to the report, with unseasonably warm weather holding down purchases. Online sales growth was also lacklustre, at less than half the pace of the three- and 12-month averages.”

This latter point is particularly important because until now economists and politicians have peddled the myth that high street sales were falling because consumers were buying online.  The reality is that they are falling because – with the exception of food – we are not buying anymore.  The news of the fall in high street shopping comes just a day after the British Beer and Pub Association reported a massive fall in the sale of beer.  On the same day, energy company SSE threatened to shut down its energy supply business as a result of falling profits.  Back in December last year, we reported a similar shift in purchasing behaviour as people cut back on personal hygiene products.

You know things are bad when beer sales are falling…! If ever there was an argument to be made for self sufficiency, this does the job. I make 90% of the alcohol I drink (and it isn’t much, believe me… my wife gave me a bottle of Scotch when I left Queensland for good two years ago, and the bottle was only recently emptied..); and I am finally growing more and more of my own food, even selling excess produce I cannot eat fast enough myself…  Nicole Foss’ deflationary spiral sounds like it’s started, and while no one is saying so yet, I think it’s on in Australia too.

The one consolation is that when Britain’s poor have finally cut their spending to the bone, and a swathe of businesses have been forced into bankruptcy, it is the rich who are going to face the biggest losses.  The Positive Money campaign highlights the Bank of England/Treasury dilemma:

“The Bank of England faces its current predicament thanks to an ongoing failure to think beyond a limited, orthodox form of the central bank’s role. By keeping rates low, it risks inflating asset bubbles even further. But with incomes so weak, now is the wrong time to raise them.”

This lesson will only be learned retrospectively.  Once it becomes apparent that millions of British workers are not going to be repaying their debts, banks will crash.  Once it becomes apparent that British workers cannot provide the government with the tax income to pay back its borrowing, the bond market will crash.  Ironically, JPMorgan has already christened the coming collapse; as Joe Ciolli at Business Insider reported last month:

“JPMorgan has already coined a nickname for the next financial meltdown.  And while the firm isn’t sure exactly when the so-called Great Liquidity Crisis will strike, it figures that tensions will start to ratchet up in 2018…”

And I thought 2020 would be crunch time…….. how often can I be called an optimist..??

When the time comes, Britain will be particularly badly hit because our economy has been all but hollowed out.  The supposed “wealth” that makes up a large part of our GDP comes from the movement of precisely the asset classes that the coming Great Liquidity Crisis will render worthless.  The difference compared to 2008 is that this time around the banks are too big to save and individual central banks and governments are too small to save them.

Limits to growth, limits everywhere….. and nobody’s acknowledging it.

 





2017: The Year When the World Economy Starts Coming Apart

20 01 2017

Conclusion

The situation is indeed very concerning. Many things could set off a crisis:

  • Rising energy prices of any kind (hurting energy importers), or energy prices that don’t rise (leading to financial problems or collapse of exporters)
  • Rising interest rates.
  • Defaulting debt, indirectly the result of slow/negative economic growth and rising interest rates.
  • International organizations with less and less influence, or that fall apart completely.
  • Fast changes in relativities of currencies, leading to defaults on derivatives.
  • Collapsing banks, as debt defaults rise.
  • Falling asset prices (homes, farms, commercial buildings, stocks and bonds) as interest rates rise, leading to many debt defaults.

FOLLOWING ON from my last post exposing HSBC’s forecast of a peak oil caused economic collapse, along comes this piece from Gail Tverberg predicting it may all start this year…….

Most of this article is a rehash of things she’s said before all consolidated in one lengthy essay, and some of them were published here before. It’s becoming increasingly difficult to not recognise all our ducks are lining up on the wall…….

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Some people would argue that 2016 was the year that the world economy started to come apart, with the passage of Brexit and the election of Donald Trump. Whether or not the “coming apart” process started in 2016, in my opinion we are going to see many more steps in this direction in 2017. Let me explain a few of the things I see.

[1] Many economies have collapsed in the past. The world economy is very close to the turning point where collapse starts in earnest.  

Figure 1

The history of previous civilizations rising and eventually collapsing is well documented.(See, for example, Secular Cycles.)

To start a new cycle, a group of people would find a new way of doing things that allowed more food and energy production (for instance, they might add irrigation, or cut down trees for more land for agriculture). For a while, the economy would expand, but eventually a mismatch would arise between resources and population. Either resources would fall too low (perhaps because of erosion or salt deposits in the soil), or population would rise too high relative to resources, or both.

Even as resources per capita began falling, economies would continue to have overhead expenses, such as the need to pay high-level officials and to fund armies. These overhead costs could not easily be reduced, and might, in fact, grow as the government attempted to work around problems. Collapse occurred because, as resources per capita fell (for example, farms shrank in size), theearnings of workers tended to fall. At the same time, the need for taxes to cover what I am calling overhead expenses tended to grow. Tax rates became too high for workers to earn an adequate living, net of taxes. In some cases, workers succumbed to epidemics because of poor diets. Or governments would collapse, from lack of adequate tax revenue to support them.

Our current economy seems to be following a similar pattern. We first used fossil fuels to allow the population to expand, starting about 1800. Things went fairly well until the 1970s, when oil prices started to spike. Several workarounds (globalization, lower interest rates, and more use of debt) allowed the economy to continue to grow. The period since 1970 might be considered a period of “stagflation.” Now the world economy is growing especially slowly. At the same time, we find ourselves with “overhead” that continues to grow (for example, payments to retirees, and repayment of debt with interest). The pattern of past civilizations suggests that our civilization could also collapse.

Historically, economies have taken many years to collapse; I show a range of 20 to 50 years in Figure 1. We really don’t know if collapse would take that long now. Today, we are dependent on an international financial system, an international trade system, electricity, and the availability of oil to make our vehicles operate. It would seem as if this time collapse could come much more quickly.

With the world economy this close to collapse, some individual countries are even closer to collapse. This is why we can expect to see sharp downturns in the fortunes of some countries. If contagion is not too much of a problem, other countries may continue to do fairly well, even as individual small countries fail.

[2] Figures to be released in 2017 and future years are likely to show that the peak in world coal consumption occurred in 2014. This is important, because it means that countries that depend heavily on coal, such as China and India, can expect to see much slower economic growth, and more financial difficulties.

While reports of international coal production for 2016 are not yet available, news articles and individual country data strongly suggest that world coal production is past its peak. The IEA also reports a substantial drop in coal production for 2016.

Figure 2. World coal consumption. Information through 2015 based on BP 2016 Statistical Review of World Energy data. Estimates for China, US, and India are based on partial year data and news reports. 2016 amount for "other" estimated based on recent trends.

The reason why coal production is dropping is because of low prices, low profitability for producers, and gluts indicating oversupply. Also, comparisons of coal prices with natural gas prices are inducing switching from coal to natural gas. The problem, as we will see later, is that natural gas prices are also artificially low, compared to the cost of production, So the switch is being made to a different type of fossil fuel, also with an unsustainably low price.

Prices for coal in China have recently risen again, thanks to the closing of a large number of unprofitable coal mines, and a mandatory reduction in hours for other coal mines. Even though prices have risen, production may not rise to match the new prices. One article reports:

. . . coal companies are reportedly reluctant to increase output as a majority of the country’s mines are still losing money and it will take time to recoup losses incurred in recent years.

Also, a person can imagine that it might be difficult to obtain financing, if coal prices have only “sort of” recovered.

I wrote last year about the possibility that coal production was peaking. This is one chart I showed, with data through 2015. Coal is the second most utilized fuel in the world. If its production begins declining, it will be difficult to offset the loss of its use with increased use of other types of fuels.

Figure 3. World per capita energy consumption by fuel, based on BP 2016 SRWE.

[3] If we assume that coal supplies will continue to shrink, and other production will grow moderately, we can expect total energy consumption to be approximately flat in 2017. 

Figure 5. World energy consumption forecast, based on BP Statistical Review of World Energy data through 2015, and author's estimates for 2016 and 2017.

In a way, this is an optimistic assessment, because we know that efforts are underway to reduce oil production, in order to prop up prices. We are, in effect, assuming either that (a) oil prices won’t really rise, so that oil consumption will grow at a rate similar to that in the recent past or (b) while oil prices will rise significantly to help producers, consumers won’t cut back on their consumption in response to the higher prices.

[4] Because world population is rising, the forecast in Figure 4 suggests that per capita energy consumption is likely to shrink. Shrinking energy consumption per capita puts the world (or individual countries in the world) at the risk of recession.

Figure 5 shows indicated per capita energy consumption, based on Figure 4. It is clear that energy consumption per capita has already started shrinking, and is expected to shrink further. The last time that happened was in the Great Recession of 2007-2009.

Figure 5. World energy consumption per capita based on energy consumption estimates in Figure 4 and UN 2015 Medium Population Growth Forecast.

There tends to be a strong correlation between world economic growth and world energy consumption, because energy is required to transform materials into new forms, and to transport goods from one place to another.

In the recent past, the growth in GDP has tended to be a little higher than the growth in the use of energy products. One reason why GDP growth has been a percentage point or two higher than energy consumption growth is because, as economies become richer, citizens can afford to add more services to the mix of goods and services that they purchase (fancier hair cuts and more piano lessons, for example). Production of services tends to use proportionately less energy than creating goods does; as a result, a shift toward a heavier mix of services tends to lead to GDP growth rates that are somewhat higher than the growth in energy consumption.

A second reason why GDP growth has tended to be a little higher than growth in energy consumption is because devices (such as cars, trucks, air conditioners, furnaces, factory machinery) are becoming more efficient. Growth in efficiency occurs if consumers replace old inefficient devices with new more efficient devices. If consumers become less wealthy, they are likely to replace devices less frequently, leading to slower growth in efficiency. Also, as we will discuss later in this  post, recently there has been a tendency for fossil fuel prices to remain artificially low. With low prices, there is little financial incentive to replace an old inefficient device with a new, more efficient device. As a result, new purchases may be bigger, offsetting the benefit of efficiency gains (purchasing an SUV to replace a car, for example).

Thus, we cannot expect that the past pattern of GDP growing a little faster than energy consumption will continue. In fact, it is even possible that the leveraging effect will start working the “wrong” way, as low fossil fuel prices induce more fuel use, not less. Perhaps the safest assumption we can make is that GDP growth and energy consumption growth will be equal. In other words, if world energy consumption growth is 0% (as in Figure 4), world GDP growth will also be 0%. This is not something that world leaders would like at all.

The situation we are encountering today seems to be very similar to the falling resources per capita problem that seemed to push early economies toward collapse in [1]. Figure 5 above suggests that, on average, the paychecks of workers in 2017 will tend to purchase fewer goods and services than they did in 2016 and 2015. If governments need higher taxes to fund rising retiree costs and rising subsidies for “renewables,” the loss in the after-tax purchasing power of workers will be even greater than Figure 5 suggests.

[5] Because many countries are in this precarious position of falling resources per capita, we should expect to see a rise in protectionism, and the addition of new tariffs.

Clearly, governments do not want the problem of falling wages (or rather, falling goods that wages can buy) impacting their countries. So the new game becomes, “Push the problem elsewhere.”

In economic language, the world economy is becoming a “Zero-sum” game. Any gain in the production of goods and services by one country is a loss to another country. Thus, it is in each country’s interest to look out for itself. This is a major change from the shift toward globalization we have experienced in recent years. China, as a major exporter of goods, can expect to be especially affected by this changing view.

[6] China can no longer be expected to pull the world economy forward.

China’s economic growth rate is likely to be lower, for many reasons. One reason is the financial problems of coal mines, and the tendency of coal production to continue to shrink, once it starts shrinking. This happens for many reasons, one of them being the difficulty in obtaining loans for expansion, when prices still seem to be somewhat low, and the outlook for the further increases does not appear to be very good.

Another reason why China’s economic growth rate can be expected to fall is the current overbuilt situation with respect to apartment buildings, shopping malls, factories, and coal mines. As a result, there seems to be little need for new buildings and operations of these types. Another reason for slower economic growth is the growing protectionist stance of trade partners. A fourth reason is the fact that many potential buyers of the goods that China is producing are not doing very well economically (with the US being a major exception). These buyers cannot afford to increase their purchases of imports from China.

With these growing headwinds, it is quite possible that China’s total energy consumption in 2017 will shrink. If this happens, there will be downward pressure on world fossil fuel prices. Oil prices may fall, despite production cuts by OPEC and other countries.

China’s slowing economic growth is likely to make its debt problem harder to solve. We should not be too surprised if debt defaults become a more significant problem, or if the yuan falls relative to other currencies.

India, with its recent recall of high denomination currency, as well as its problems with low coal demand, is not likely to be a great deal of help aiding the world economy to grow, either. India is also a much smaller economy than China.

[7] While Item [2] talked about peak coal, there is a very significant chance that we will be hitting peak oil and peak natural gas in 2017 or 2018, as well.  

If we look at historical prices, we see that the prices of oil, coal and natural gas tend to rise and fall together.

Figure 6. Prices of oil, call and natural gas tend to rise and fall together. Prices based on 2016 Statistical Review of World Energy data.

The reason that fossil fuel prices tend to rise and fall together is because these prices are tied to “demand” for goods and services in general, such as for new homes, cars, and factories. If wages are rising rapidly, and debt is rising rapidly, it becomes easier for consumers to buy goods such as homes and cars. When this happens, there is more “demand” for the commodities used to make and operate homes and cars. Prices for commodities of many types, including fossil fuels, tend to rise, to enable more production of these items.

Of course, the reverse happens as well. If workers become poorer, or debt levels shrink, it becomes harder to buy homes and cars. In this case, commodity prices, including fossil fuel prices, tend to fall.  Thus, the problem we saw above in [2] for coal would be likely to happen for oil and natural gas, as well, because the prices of all of the fossil fuels tend to move together. In fact, we know that current oil prices are too low for oil producers. This is the reason why OPEC and other oil producers have cut back on production. Thus, the problem with overproduction for oil seems to be similar to the overproduction problem for coal, just a bit delayed in timing.

In fact, we also know that US natural gas prices have been very low for several years, suggesting another similar problem. The United States is the single largest producer of natural gas in the world. Its natural gas production hit a peak in mid 2015, and production has since begun to decline. The decline comes as a response to chronically low prices, which make it unprofitable to extract natural gas. This response sounds similar to China’s attempted solution to low coal prices.

Figure 7. US Natural Gas production based on EIA data.

The problem is fundamentally the fact that consumers cannot afford goods made using fossil fuels of any type, if prices actually rise to the level producers need, which tends to be at least five times the 1999 price level. (Note peak price levels compared to 1999 level on Figure 6.) Wages have not risen by a factor of five since 1999, so paying the prices that fossil fuel producers need for profitability and growing production is out of the question. No amount of added debt can hide this problem. (While this reference is to 1999 prices, the issue really goes back much farther, to prices before the price spikes of the 1970s.)

US natural gas producers also have plans to export natural gas to Europe and elsewhere, as liquefied natural gas (LNG). The hope, of course, is that a large amount of exports will raise US natural gas prices. Also, the hope is that Europeans will be able to afford the high-priced natural gas shipped to them. Unless someone can raise the wages of both Europeans and Americans, I would not count on LNG prices actually rising to the level needed for profitability, and staying at such a high level. Instead, they are likely to bounce up, and quickly drop back again.

[8] Unless oil prices rise very substantially, oil exporters will find themselves exhausting their financial reserves in a very short time (perhaps a year or two). Unfortunately, oil importerscannot withstand higher prices, without going into recession. 

We have a no win situation, no matter what happens. This is true with all fossil fuels, but especially with oil, because of its high cost and thus necessarily high price. If oil prices stay at the same level or go down, oil exporters cannot get enough tax revenue, and oil companies in general cannot obtain enough funds to finance the development of new wells and payment of dividends to shareholders. If oil prices do rise by a very large amount for very long, we are likely headed into another major recession, with many debt defaults.

[9] US interest rates are likely to rise in the next year or two, whether or not this result is intended by the Federal reserve.

This issue here is somewhat obscure. The issue has to do with whether the United States can find foreign buyers for its debt, often called US Treasuries, and the interest rates that the US needs to pay on this debt. If buyers are very plentiful, the interest rates paid by he US government can be quite low; if few buyers are available, interest rates must be higher.

Back when Saudi Arabia and other oil exporters were doing well financially, they often bought US Treasuries, as a way to retain the benefit of their new-found wealth, which they did not want to spend immediately. Similarly, when China was doing well as an exporter, it often bought US Treasuries, as a way retaining the wealth it gained from exports, but didn’t yet need for purchases.

When these countries bought US Treasuries, there were several beneficial results:

  • Interest rates on US Treasuries tended to stay artificially low, because there was a ready market for its debt.
  • The US could afford to import high-priced oil, because the additional debt needed to buy the oil could easily be sold (to Saudi Arabia and other oil producing nations, no less).
  • The US dollar tended to stay lower relative to other currencies, making oil more affordable to other countries than it otherwise might be.
  • Investment in countries outside the US was encouraged, because debt issued by these other countries tended to bear higher interest rates than US debt. Also, relatively low oil prices in these countries (because of the low level of the dollar) tended to make investment profitable in these countries.

The effect of these changes was somewhat similar to the US having its own special Quantitative Easing (QE) program, paid for by some of the counties with trade surpluses, instead of by its central bank. This QE substitute tended to encourage world economic growth, for the reasons mentioned above.

Once the fortunes of the countries that used to buy US Treasuries changes, the pattern of buying of US Treasuries tends to change to selling of US Treasuries. Even not purchasing the same quantity of US Treasuries as in the past becomes an adverse change, if the US has a need to keep issuing US Treasuries as in the past, or if it wants to keep rates low.

Unfortunately, losing this QE substitute tends to reverse the favorable effects noted above. One effect is that the dollar tends to ride higher relative to other currencies, making the US look richer, and other countries poorer. The “catch” is that as the other countries become poorer, it becomes harder for them to repay the debt that they took out earlier, which was denominated in US dollars.

Another problem, as this strange type of QE disappears, is that the interest rates that the US government needs to pay in order to issue new debt start rising. These higher rates tend to affect other rates as well, such as mortgage rates. These higher interest rates act as a drag on the economy, tending to push it toward recession.

Higher interest rates also tend to decrease the value of assets, such as homes, farms, outstanding bonds, and shares of stock. This occurs because fewer buyers can afford to buy these goods, with the new higher interest rates. As a result, stock prices can be expected to fall. Prices of homes and of commercial buildings can also be expected to fall. The value of bonds held by insurance companies and banks becomes lower, if they choose to sell these securities before maturity.

Of course, as interest rates fell after 1981, we received the benefit of falling interest rates, in the form of rising asset prices. No one ever stopped to think about how much of the gains in share prices and property values came from falling interest rates.

Figure 8. Ten year treasury interest rates, based on St. Louis Fed data.

Now, as interest rates rise, we can expect asset prices of many types to start falling, because of lower affordability when monthly payments are based on higher interest rates. This situation presents another “drag” on the economy.

In Conclusion

The situation is indeed very concerning. Many things could set off a crisis:

  • Rising energy prices of any kind (hurting energy importers), or energy prices that don’t rise (leading to financial problems or collapse of exporters)
  • Rising interest rates.
  • Defaulting debt, indirectly the result of slow/negative economic growth and rising interest rates.
  • International organizations with less and less influence, or that fall apart completely.
  • Fast changes in relativities of currencies, leading to defaults on derivatives.
  • Collapsing banks, as debt defaults rise.
  • Falling asset prices (homes, farms, commercial buildings, stocks and bonds) as interest rates rise, leading to many debt defaults.

Things don’t look too bad right now, but the underlying problems are sufficiently severe that we seem to be headed for a crisis far worse than 2008. The timing is not clear. Things could start falling apart badly in 2017, or alternatively, major problems may be delayed until 2018 or 2019. I hope political leaders can find ways to keep problems away as long as possible, perhaps with more rounds of QE. Our fundamental problem is the fact that neither high nor low energy prices are now able to keep the world economy operating as we would like it to operate. Increased debt can’t seem to fix the problem either.

The laws of physics seem to be behind economic growth. From a physics point of view, our economy is a dissipative structure. Such structures form in “open systems.” In such systems, flows of energy allow structures to temporarily self-organize and grow. Other examples of dissipative structures include ecosystems, all plants and animals, stars, and hurricanes. All of these structures constantly “dissipate” energy. They have finite life spans, before they eventually collapse. Often, new dissipative systems form, to replace previous ones that have collapsed.





This is bigger…….

17 01 2016

That was big………  but this is bigger.

Whilst I admit to not hearing it for some time, the MSM has been spreading its usual nonsense in the form of “the fundamentals” [of the economy] are spot on, there’s nothing to worry about. Which I’ve been calling for years as crap, and now there’s a chart that explains everything regarding why I feel this way.

chart says it all

(Richard Koo: The ‘struggle between markets and central banks has only just begun’, Business Insider)

Why is the economy barely growing after seven years of zero rates and easy money? Why are wages and incomes sagging when stock and bond prices have gone through the roof? Why are stocks experiencing such extreme volatility when the Fed increased rates by a mere quarter of a percent?

It’s the policy, stupid. And here’s the chart that explains exactly what the policy is.

What this chart clearly shows is that the monumental increase in money printing had almost zero effect on lending, nor did it trigger the credit expansion the Fed were hoping for…… In other words, the Fed’s insane pump-priming of the economy experiment (aka– QE) both failed to stimulate growth and put the economy back on the so called ‘path to recovery’ we’ve been told was on, but everyone else has been saying for years never happened. For all intents and purposes, the policy was a complete flop.

Mind you, had it worked, I think we would have seen massive inflation. Basically, the fundamentals went AWOL way back in 2008. And no one wants to admit to it.lifestyle_banksy-500x332

The latest news from the US is that Walmart are closing 269 stores, which will probably leave some small towns with nowhere to buy anything,  and thousands of people out of work. If you need signs that economic collapse is now well underway, look no further than that little curler…..

The upside is that we might even see CO2 emissions starting to fall.





This is big…….

13 01 2016

Saudi Arabia state-owned oil firm Aramco slated for sale as crude prices tumble

Saudi Arabia is considering selling part of the giant state-owned Aramco oil company, with at least ten times the oil reserves of Exxon Mobil. Well……..  nobody really knows, because Aramco inexplicably revised its reserves numbers upwards by a factor of almost two in 1988.  Then, even though they’ve been pumping some 10 million barrels a day from their wells, the numbers just kept on creeping up, like magic…..

SAoilreserves

But if they’re selling, someone’s starting to feel the pinch of the oil price dropping like a stone. And who will buy?  With what money?  With Royal Bank of Scotland predicting $16 a barrel, and even worse, someone on the TV news last night talking about $10 (!), who in their right mind would buy Aramco, unless it was a fire sale?

From Peak Oil Barrel:

Saudi has the world’s largest oil field, Ghawar, and it is severely depleted. This 2004 paper, Selected Features of Giant Fields, Using Maps and Histograms, has a wealth of information on the discovery and depletion of giant oil and gas fields

Do the math, this 2004 chart says Ghawar started with 97 billion barrels of oil and was, in 2004, over 81% depleted. Of course the rest of Saudi is not that depleted. They have three fields that have been producing only a few years, Khurais, Manifa and Shaybah. These three fields, along with their other old giants, have enabled Saudi to keep production between 9 and 10 million barrels a day. But it is highly likely that they are about two thirds depleted.

Then, this just hit the news this morning:

Arch Coal, the second largest mining company in the US, filed for bankruptcy on Monday.

It is another blow for the ailing fossil fuel sector, as it struggles to adapt to environmental regulations dampening demand.

US coal production fell to 900 million short tons in 2015, the Energy Information Administration revealed on Friday, a 10% decline on the previous year.

Normally at this time of year, nothing much happens on economic fronts, but all this unraveling is a bit nerve wracking……  It’s easy to play up the idea that this is the beginning of the end of the fossil fuel era, yet it’s hard to say with any certainty that that’s not what’s happening…….

As I write, West Texas crude is trading at $30.50.





Richard Wolff on the coming crash…….

30 05 2015

Of course, zero mention of Limits to Growth here………





2015: what is in store?

27 12 2014

2014 is as good as over; while most people look back on the past year for world shaking events, achievements, and which celebrity got divorced, I as usual look to the future…. and 2015 could be the decisive year for Western Civilisation, not that some people ever notice mind you.

Christmas has a habit of bringing people nearer to you that you might not otherwise associate with.  Since losing faith in humanity many years ago, I’m very choosy about whom I associate with, because people more often than not just depress me with their absolute lack of foresight.  One such person who shall remain nameless proudly told me on Boxing Day about how he was going to demolish the house he’s lived in most of his life to build a two story 400 m² 6 bedroom McMansion with three phase airconditioning…… his excitement was palpable, and frankly I don’t even understand why he was showing his plans off to me, I was totally underwhelmed and it took all of my self control to not tell him what I thought of his stupid plans.  Just to make matters worse, the building company he’s planning to use is American based, so the profits won’t even stay here in Australia.  When I sarcastically mentioned that his 50 inch TV would be too small for such a house…. he agreed!  I asked him if he realised that by having three phase power he would get a triple bill, likely attached to the three service fees I would guess such a connection would entail.  It never occurred to him of course, ignorance is bliss…  Be blowed if I would pay the utility $225 a quarter even before using a single one of their electrons.  He had no idea of what I was talking about, and I can see him copping quarterly bills well in excess of $1000 in this idiotic plan.

What does this have to do with 2015?  Well folks, it’s just amazing how many of the bloggers I follow are predicting this current oil price crash is the beginning of the deflationary spiral Nicole Foss has been predicting for years….  commenting on a recent post by her writing partner Ilargi, Nicole wrote on Facebook:

We’ve been saying this would happen for a long time, that oil prices would drop as demand falls on a move into economic depression. A temporary supply glut opens up, price support evaporates, prices fall to those of the lowest cost producer and all the expensive and complex production goes out of business. No one invests in exploration or drilling or production, or probably even maintenance, for years, meaning that supply will follow demand to the downside over time. Any kind of economic recovery way down the line will then be energy supply-constrained. First financial crisis buys you time in terms of peak oil, because you burn through remaining high energy profit ratio energy sources less quickly, but then it aggravates the situation later, but collapsing supply more quickly. We are headed into a much lower energy future, and that means life is going to change.

So you see why I think my non blood relation’s timing is way off!  He of course is not the least bit interested in anything I have to say, I even discovered yesterday that he has completely disconnected me from his cyber existence, my grim readings obviously clashing with his future expectations.  Buoyed by statements like “I can’t really overcapitalise in my suburb” and “property values can only go up where I live”, he was justifying everything in his own blissfully unaware mind that life was going to change alright, only it would be for the better.  What’s a deflationary spiral he may well have asked, should he even have known to ask such a question…  And stuff his three children’s future climate too!  Ah well, you can’t save everybody, especially when they are unwilling to help themselves.

If the global economy unravels, then unemployment, underemployment, and fear will combine to reduce consumption.  Investment and GDP will decline.  The economy will deflate.  Just like the 1930s.  And Australia will not fare anywhere near as well this time as it did after GFC MkI when commodity prices were still high and Chinese demand was strong.

If the world economy deflates, fixed asset values will decline.  Rental properties are especially vulnerable.  Stagnant incomes, increasing unemployment, and credit card debt guarantee consumers will prioritize spending decisions based on urgent need: food, fuel, and then rent (or mortgage payments).  This last Christmas binge could be the last.  In periods of declining economic activity, rental property owners (houses, apartment buildings, supermarkets and so on) face potential bankruptcy because of higher vacancy rates.  It will also become increasingly difficult for rents to keep up with maintenance costs.

Meanwhile, over at Zero Hedge, Tyler Durden wrote:

One key indicator of deflation that seems to be even more worrisome to investors, however, is global commodity prices and what commodity price weakness suggests for demand. Copper fell over 12% in 2014, largely due to slumping demand in China and other industrial economies. Natural gas prices have fallen more than 12% this year. And oil prices have fallen by over 40% due to a glut of new supply and weak demand growth in many developing economies. The International Energy Agency has cut its estimates for demand for crude five times in the past six months, The Wall Street Journal reports.

The negative impact on incomes due to the decline in oil prices is a global issue, with nations such as Russia, Nigeria and Venezuela in visible financial distress.  The price of the Russian Ruble has declined in tandem with oil prices, raising concerns about whether Russia will be able to service its hard currency debt.  But the decline in oil prices is more than just a supply phenomenon.  The lack of growth in the demand for oil, coupled with rising supplies in the U.S. and elsewhere, has raised concerns about the overall health of the global economy.

We believe that the weakness in U.S. equity and debt markets stems from a more fundamental problem than concerns about future growth, namely that investors are once again starting to seriously question the disclosure from the largest banks and investment houses regarding their credit exposure to highly leveraged borrowers.  This concern is evidenced by weakness in the equity market valuations of lenders with exposure to the oil sector as well as the recent changes in the relative position of spreads in the U.S.bond markets.

Click the link below to access the full copy of the note.  Free registration is required. https://www.krollbondratings.com/show_report/1815

For an economy reliant on numbers coming from the commodity sectors (while all the other sectors are doing very poorly), Australia’s near term future looks a bit grim.  Especially as we have a government whose only economic theory is to blame the one they just replaced for all its woes and get as many people on the dole queues as fast as possible.  Then we have this:

The Dow - 1999 To The Present

Hmmmm  don’t crashes occur in seven year cycles?  Watch this space….