[Observerbrb]

Or better said, caused by plunging oil prices.

I think this analysis is spot on, and I also think that it is really interesting since it reaches the same conclusion than shortonoil's Etp model. I would like to read your opinions about it. This is the article:

"Part of the current frenzy about energy prices is the insistence on a petroleum ‘glut’. According to conventional wisdom, there is simply so much excess crude on the markets there is nowhere for oil prices to go but down.

The reasons given for the excess crude are many: Saudi intransigence, a Saudi-US geopolitical contest (price war) with Russia/Iran, pesky futures’ market speculators … because/in spite of the president, because/in spite of the governments energy (non)policy … because of clear and concise leadership from Congress. Excess crude is the incredible free enterprise system working its magic! There is a glut of crude because Americans are incredibly clever and hard-working, because they are too fat/not fat enough … because they take too many drugs/not enough drugs, are red (blue); because our brilliant technology has permanently solved the problem of shortages so that our greatest challenge is to manage the onrushing, cornucopian abundance …

Keep in mind, a glut or the appearance of one makes sense at the oil extraction peak, after all, what is a ‘peak’ but the period of the greatest rate of extraction? There cannot be more petroleum available any time than at a peak. All that remains is for consumption to sort itself out; our brilliant-as-technology marketplaces will take care of that by themselves. Glut = cheaper crude! It’s morning in America, again!

That’s can’t be what’s happening … there has to be some mistake. What goes down must go up, right? If prices drop too far the entire extraction industry will go out of business, that the prices have crashed indicates half the industry is already out of business, it just doesn’t know which half it is yet.


The increase in petroleum volume isn’t necessarily a blessing as the energy content of the newer fuels is no greater than that of smaller volumes seven- or eight years ago. The increased volumes cost more to extract, transport and process so the net-energy yield is less. Regarding conventional crude, the likelihood is that the output peak occurred in 2005.

Every single one of the billions of barrels indicated on this chart have been burned up for nothing. This is the topic that is never discussed, never even acknowledged; our incredible permanently extinguished oil. There are literally zero returns for the precious capital we have burned, nothing to show but junk. This is the collateral for all of our (borrowed) ‘money’ … and the reason why we have financial ‘difficulties’. The dollar and other currencies are backed by fraud, used cars and smog.

Given that the world is at some sort of peak right now, what happens afterward? Because the world has not experienced a peak of existential magnitude before, we tend to make assumptions about what to expect. One assumption is that technology will provide substitutes, higher prices will allow extraction of deeper, harder to extract reserves. In this line of thinking, nothing really changes because extracting crude oil and using it has always been a costly endeavor, it will be a little more costly but manageable.

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

(...)

Low prices will hammer what remains of the UK’s petroleum industry which is almost entirely offshore. This version of the Seneca Curve will leave Britons more dependent upon imports … and an increasingly shaky pound. Worst-case scenario would have UK looking to buy hard to find dollars at any price in order to gain fuel; conservation taking the form of a bitter and cruel comeuppance.

(...)

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


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

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

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

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

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

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

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

Source: http://www.economic-undertow.com/ - The article contains more charts and valuable data...

[AndyA]

but stawks are at all time highs! I think if you wanted to borrow money for an enterprise you would get it, which was not the case when there was an actual credit crunch.

[Peak_Yeast]

The danish media supports the idea that there is a credit crunch underway.

The danish farmers (specializing in pigs and milk production) are hurting severely from low prices on their products - which has been reduced further recently because of the russian trade embargoes.

Also since the farmers have large loans which were of a type where you only pay interest for the first 10 years - and the 10 year period is over there is a double-whammy ready for them.

10% of all farms are estimated to go bankrupt in 2015 from the steep rise in their debt obligations, low profitability as well as the previous several years of mediocre earnings (which started in 2008) that has eaten away their savings.

This is a crisis that is so large that it is expected that the government will have to give and guarantee those 10% farm loans. The banks has already signaled that they are ready to slaughter everyone that doesnt make profits and payments.
(article in danish)
http://finans.dk/finans/erhverv/ECE7306 ... andbruget/

Also: The greek crisis is igniting again. Their stock market is plummeting after the failed election of the president.

http://www.vox.com/2014/12/29/7460125/g ... -scheduled

[americandream]

Globalisation of capital will bring increased volatility as competition destroys the post colonial era with its advantageous spin off for Western workers. Volatility simply underpins consolidation as wealth becomes increasingly concentrated in the hands of a minority.

[americandream]

deflation

Yup.

[penury]

I have found that most Americans I know only want to celebrate low gas pump prices and never wish to consider the greater ramifications. Its party time.;

[Observerbrb]

They have hoped to base the "recovery" after the crisis in an expensive oil that (as it seems now to be evident) can not be paid.

The oil price correction is logic (which is not logical is how they have inflated the commodities market, with the intention of extracting more and more, regardless of the cost of producing them), since we cannot afford a so expensive oil (financing the extraction of expensive oil, copper or iron has detracted resources elsewhere from the non-energetic part of the economy, which happens to be ultimately the responsible for paying for its use); the "only" problem that I see is how this situation will take into bankruptcy companies that were created to extract expensive oil (and expensive iron, and expensive copper, etc, etc), something which will cause cascading effects on the rest of the economy (for example, rising real interest rates).

They have tried to hide deflation from the start of the crisis, but it is now appearing on the commodities market and is starting to infect the rest. Its effects can be compared with that of a snowball falling down a sharp slope. Once it gains traction and speed, there is nothing that can stop it. Deflationary collapse (or Hyperinflationary collapse if Central Banks resort to do stupid things) is the most probable outcome.

[Pops]

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

It is interesting how this seems to have taken hold in just the couple of months I was on the road burning diesel. There is exactly the same amount of energy in a barrel of oil today as there was last week, last month last decade.

Let me say that again, there has been no change in the energy content in a barrel of oil, I challenge anyone to prove it.

Whether it takes more energy, manpower, technology, etc to obtain it has absolutely no impact on oil's utility, only it's price and price is wholly an imaginary construct. For example, Syncrude (Canada's tar sands conglomerate) started in 1964 and spent much more energy that it returned for years or maybe decades, yet the stuff they produced burned just fine. Government subsidized the cost, just like KSA subsidizes Saudi's cost.

Net energy is a useful tool to help understand the value of petroleum or any other carrier of energy over the long term and how increased difficulty in extraction affects the economy. But realize that the value of oil is much more than simply how many BTUs it contains. The value is in the density, portability, universality, built infrastructure, feedstock value, etc, etc. Those traits make it worth exponentially more that a simplistic BTU in/out equation.

How many BTUs of cordwood would you trade for one gallon of gasoline? If you've ever been on the end of a 2 man saw you'll understand it is much greater than 1:1.

[Observerbrb]

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

It is interesting how this seems to have taken hold in just the couple of months I was on the road burning diesel. There is exactly the same amount of energy in a barrel of oil today as there was last week, last month last decade.

Let me say that again, there has been no change in the energy content in a barrel of oil, I challenge anyone to prove it.

Whether it takes more energy, manpower, technology, etc to obtain it has absolutely no impact on oil's utility, only it's price and price is wholly an imaginary construct. For example, Syncrude (Canada's tar sands conglomerate) started in 1964 and spent much more energy that it returned for years or maybe decades, yet the stuff they produced burned just fine. Government subsidized the cost, just like KSA subsidizes Saudi's cost.

And I completely agree on your point. "There has been no change in the energy content in a barrel of oil, I challenge anyone to prove it."

But that doesn't matter from an economic point of view. What completely matters is the fact that you have invest more capital to extract this barrel oil (which will deliver the same energy content anytime, anywhere). Where do you get this capital from?.

For example. The whole society decides now to invest massive amounts of capital to extract oil from an oil field. This oil will help to power the society for the years to come. Experts have found out that it will cost 1.000 dollars to extract, produce and distribute a barrel of oil.
Undeterred by this huge Price, everyone starts pouring money into this Project.

What could be the outcome?

- First, our capital is reduced, because we had to invest in the Project. Secondly, it is reduced after we start paying an incredible high amount for the oil products.
- Then, the producer realizes that no one is buying oil, so he is obliged to reduce the prices(*). The capital destruction on the consumer part was so intense, that his only option is to start selling oil at low prices, prices that are below the breakeven price of the field.
- The producer has to return the loans that have been previously issued to him by the rest of the society. Watching the collapse in prices, his only hope to mitigate the disaster is to produce more and more, which in the end causes the Price to collapse even more.

The result is that the producer is bankrupted. Society, which right now has less capital available decides to rescue the producer so he can continue providing us with this fundamental oil. But in the end this causes a massive drop in consumer affordability as capital is depleted, so the producer is obliged to reduce the prices (and go back to *).

Now, replace the 1000 USD oil field with shale oil, tar sands, north sea depleting oil fields, and deep-water oil.

Oil costs now 50 USD per barrel, and the global average breakeven of oil fields is 50 USD per barrel.(http://makewealthhistory.org/2014/12/16 ... producers/). If we don't see that we have a very BIG problem, we are lost.

[Pops]

But that doesn't matter from an economic point of view. What completely matters is the fact that you have invest more capital to extract this barrel oil (which will deliver the same energy content anytime, anywhere). Where do you get this capital from?.

No doubt higher cost energy is a problem to the economy, we got where we are today powered by cheap fossil energy. But you need to separate in your mind the cost of oil extraction, energy and otherwise, from the energy contained in whatever unit of product produced. The thing I am railing against is the sloppiness of implying the energy in a barrel (or teacup) of oil is less today than it was in some bygone time, it isn't, it's the same. Are petroleum products more expensive to produce today? yes. Do they consume more energy in the process? I'm sure they do.

But, the energy contained in a barrel of oil is still equivalent to 15,000; 20,000; even 25,000 manhours of labor (pick your authority). So at $150/bbl thats 1¢ per man-hour equivalent.

But look at the waste in the system as a whole, gasoline itself is not efficient - on a good day there is probably a 25% energy cost to produce gasoline from crude through to the pump, it isn't a 1:1 energy deal and never was. And utilizing gasoline in an ICE engine? I think I've read the theoretical max is 35% efficiency, not sure what the real world number is to jet from one red light to slam on the brakes at the next - in a jacked Ford F150 coffee cup hauler ...


You sound like a smart guy and I'm not arguing harder to extract energy is not a big problem, it is undoubtably. But, take into account the wastefulness of the entire system that throws away 80-90% of the energy in a gallon of gasoline to haul around the average overweight Americans 36 mile per day, every day, 365 days per year.

36 miles per day... at what, 5% efficiency?
I'm thinking the energy problem isn't in the upstream sector.

.