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[Jun 27, 2009] Why Your World Is About to Get a Whole Lot Smaller by Jeff Rubin

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What do subprime mortgages, Atlantic salmon dinners, SUVs and globalization have in common?

They all depend on cheap oil. And in a world of dwindling oil supplies and steadily mounting demand around the world, there is no such thing as cheap oil. Oil might be less expensive in the middle of a recession, but it will never be cheap again.

Take away cheap oil, and the global economy is getting the shock of its life.

From the ageing oilfields of Saudi Arabia and the United States to the Canadian tar sands, from the shopping malls of Dubai to the shuttered auto plants of North America and Europe, from the made-in-China products on the shelves of the Wal-Mart down the road to the collapse of Wall Street giants, everything is connected to the price of oil.

Interest rates, carbon trading, inflation, farmers' markets and the wave of trade protectionism washing up all over the world in the wake of various economic stimulus and bailout packages – they all hinge on the new realities of a world where demand for oil eventually outstrips supply.

According to maverick economist Jeff Rubin, there will be no energy bailout. The global economy has suffered oil crises in the past, but this time around the rules have changed. And that means the future is not going to be a continuation of the past. For generations we have built wealth by burning more and more oil. Our cars, our homes, our whole world has been getting bigger in the cheap-oil era. Now it is about to get smaller.

There will be winners as well as losers as the age of globalization comes to an end. The auto industry will never recover from this oil-induced recession, but other manufacturers will be opening up mothballed factories. Distance will soon cost money, and so will burning carbon – both will bring long-lost jobs back home. We may not see the kind of economic growth that globalization has brought, but local economies will be revitalized, as will our cities and neighborhoods.

Whether we like it or not, our world is about to get a whole lot smaller.

About the Author
Jeff Rubin was the Chief Economist at CIBC World Markets for almost twenty years. He was one of the first economists to accurately predict soaring oil prices back in 2000 and is now one of the world's most sought after energy experts. He lives in Toronto.

Jeff Rubin Expect Oil Prices to Rise Dramatically and Globalization to End -- Seeking Alpha

Jeff Rubin was on CNBC today talking the end of globalization. Jeff and I had a run-in a few years ago which I will turn into a post here sometime. Anyway, Jeff is a smart and interesting energy economist, so anything he says on oil is worth paying attention to.

[Jun 29, 2008] Energy as a share of nominal consumer spending

Just to put things in perspective. This is through the first quarter so it does not reflect the last pop in energy prices.

It is now 6.6% as compared to a low of 4.2% at the double bottom and the 1970s low of 6.2%.
The peak was 9.3%.

***** [Jun 29, 2008] Envisioning a world of $200-a-barrel oil - Los Angeles Times

Although white-collar workers may be able to telecommute, they could also take a serious financial hit because soaring energy prices tend to wreak havoc on the stock market. The explosion of 401(k) plans and similar retirement accounts in the last few decades -- and the decline of traditional pensions with guaranteed payouts -- have tied workers' financial futures more closely to stocks than they were during the 1970s oil shocks. A prolonged Wall Street downturn could mean a no-frills retirement, or none at all.

[Jun 28, 2008] Ethanol and food prices

Angry Bear It is my understanding that the major byproduct of ethanol is distillers grains that are used as feed for cattle, hogs and chicken with essentially the same nutritional value as feed grains that have not had ethanol distilled out of them. All distilling ethanol does is remove the starch from the food grains and leaves the protein, etc, that animals need to grow.

.... I ran across a very good article by Richard Perrin at the University of Nebraska on Ethanol and Food Prices

Food prices in the U.S. rose dramatically in 2007 and early 2008. Given the integration of the world markets for foodstuffs, prices increased around the world as well, leading to riots in a number of countries in early 2008. The popular press has tended to attribute these food price increases to demand for corn by the ethanol industry. Grain prices are one determinant of food prices, but they constitute less than 5% of food costs in the U.S.(a higher percentage elsewhere.) This paper focuses on the likely relationship between ethanol and food prices, ignoring the potential role of other important contributors. It finds that ethanol is responsible for no more than 30-40% of the grain price increases of the last 18 months. Food prices in the US increased about 16% over the last five years,7% over the past 18 months, but rising grain prices have contributed only about a 3% cost increase over these periods. It is reasonable to conclude that ethanol is responsible for increases in US food prices about 1% in the last two years – a relatively small proportion of actual of U.S. food price increases. In food-insecure areas of the world, however, the impact of ethanol on food prices has been higher, perhaps as much as a 15% increase, simply because the typical food basket in those areas contains more direct grain consumption.

so I sent him an email with my question and he was nice enough to respond with this:

You are right. One-third of the corn processed for ethanol is expelled as distillers grains and solubles (DGS.) (One third is ethanol, one-third CO2.) DGS has slightly higher feed value than corn when it's fed to ruminants (I have a publication with an animal scientist on this issue, if you become deeply interested, and could direct you to some others.) Since DGS can be directly substituted for corn, putting a ton of corn into an ethanol plant really only extracts 2/3 ton from the animal feed supply, so it would have been reasonable for me to assert that ethanol has accounted for only 30% of new net withdrawals of the world's coarse grains since 2000 (rather than 40%.) China, Sub Saharan Africa, and South America are each responsible for about 15%.

So the standard treatment of ethanol in the press and blog is significantly misleading.


Reading the brochures on the subject from various land grant universities in corn country suggest that distillers grain can be used for 10-20% of the feed volume for beef, pork or poultry. So the analysis is more complicated. For example, if corn was 50% of the feed volume before, ethanol-related demand has resulted in a doubling of corn prices, and distillers grain is free but can only replace less than half the corn in the diet, then the total cost of feeding the livestock has still increased.

As others have pointed out, corn starches are the starting point for large quantities of other ingredients that are heavily used -- eg, corn syrups for sweeteners -- and distillers grains are worthless for those applications.
Michael Cain | 06.28.08


Food is one of the most energy intensive sectors of the economy. I trying to remember this from the 1970s, but it ranks about fourth or fifth after energy, chemicals and transportation.
spencer | 06.28.08


wish I could give you numbers. We raise steers on our small pasture. They are supposed to be grass eaters, as someone noted above. The guy we buy our boys from has a racket he loves. His herd is grass fed but he hauls off the mash left from a small microbrewery that moved to town. It is free to him and a deal for the brewery because it is waste. He does agree his cows grow bigger eating this mash. ps he's a veterinarian.

A question I think is appropriate to your inquiry is how much mash is recycled like this. I think the point of view you're arguing with states the grain is taken OUT of the feed chain.

Sorry, I'm contributing what I know, but now you have 2 unknown numbers-how much beef you can grow with mash and how much mash is recycled as feed. What does Anheuser Busch do with their mash?
Laurie | 06.28.08


According to the University of Minnesota some 8 million metric tonnes of distillers grain were used in 2006 and it could reach 10 to 14 million metric tonnes within a few years. It has become a very big deal in the relevant markets..
spencer | 06.28.08


***Rather the Department of Agriculture and/or Bush Administration argument that ethanol production plays an insignificant role in the current run up in food prices is correct.*** Spencer

First of all, it's the Bush administration, so the odds on bet is that they are dead wrong.

Second, The Law Of Conservation of Energy and Kirchoff's Laws analogs (basically, what goes in must come out) have not been repealed. Every calorie/kilocalorie/BTU/Joule that ends up in ethanol does not end up fueling livestock or people.

A little quick Googling tells me that a bushel of corn contains 314000 BTU and will generate 2.16 gallons of ethanol with 84000 BTU each. That says that assuming no waste heat or anything (unlikely), the most energy that can be contained in the unconverted waste from ethanol production is 314000 - 2.16*84000 = 132560 BTU. Further, the stuff that gets converted into Ethanol is presumably the stuff that is easy to handle -- fructose and starch. I can't imagine that cows don't process those as efficiently as omnivores like ... well ... us. So the 132560 BTU probably contains a relatively high percentage of stuff so indigestable that not even a cow can break it down.

Conclusion: The idea that the waste from ethanol production is anywhere near as nutritious as the corn that goes in sounds pretty unlikely.

BTW, the economics of corn look to be quite complex. More complex than I want to tackle. But my bet would be that the idea that ethanol is not a significant contributor to the run up in food prices strikes me as likely being a crock.
vtcodger | 06.28.08

[Jun 27, 2008] The Impact of $200 Oil

The LA Times has a story on the impact of $200 oil: Envisioning a world of $200-a-barrel oil. The story discusses some possible impacts of higher oil prices on consumer behavior, transportation, trade and the workplace (more telecommuting, fewer work days, etc.)

On housing:

As for the ... beleaguered housing market, prices are falling faster in areas requiring long commutes -- such as Lancaster and Palmdale -- than in neighborhoods closer to job centers.

Sky-high gas prices "would basically reorient society to where proximity would be more valuable," said Tom Gilligan, finance professor at USC.

For trade:
"To put things in perspective, today's extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America," said Rubin of CIBC World Markets. "At $200 per barrel, the tariff equivalent rate will rise to 15%."
All the same arguments have been made for $140 oil...

[Jun 22, 2008] High oil prices ? Weak dollar ? Blame Bush By MARTIN FROST

"The immediate cause of rising oil prices is the weak dollar. "
6/10/08 |

Few issues focus the public's attention on politics like the price of gasoline. It keeps going up, the public wants relief, and politicians are held accountable for not fixing the situation. Yet to solve the problem, you first need to know the cause of the illness.

Why do gasoline prices keep going up? Is it because Congress and President Bush have not fashioned energy policies to reduce our dependence on foreign oil? Clearly that's part of the answer. Our government can do more to reduce demand and increase supply through conservation, auto fuel efficiency standards, tax breaks and subsidies for development of alternative energy sources, and incentives to drill more in the U.S.

But that's not the entire story.

The immediate cause of rising oil prices is the weak dollar. Oil-producing countries are requiring more dollars to purchase the same barrel of oil because the dollar is worth less today than it was a few years ago. Anyone who travels abroad knows about the weak dollar. In 2000, it took $1 to purchase one euro.

Today, it takes close to $1.60 to purchase a euro. A Canadian dollar is now worth the same as a U.S. dollar, whereas eight years ago it was worth considerably less than an American dollar.

And why do we have a weak dollar?

You can start with the economic policies followed by the Bush administration. During Bush's 7½ years in office, we have maintained large trade deficits with the rest of the world and run up large domestic budget deficits to pay for our misadventure in Iraq and large tax cuts for the wealthy. Also, according to a monograph recently issued by the Center for American Progress, the Federal Reserve's low-interest policy has caused a 14 percent decline in the value of the dollar since last September.

The center estimates that "nearly 40 percent of the increased price American consumers are paying for oil is attributable to the weak dollar," even after factoring in the effects of increased global demand from countries such as China.

So what are we to do?

First, the public should demand that Congress pass comprehensive energy policy that adequately addresses both the demand side and the supply side of the issue. Republicans controlled both Congress and the executive branch for most of the first six years of the Bush presidency, and yet nothing was done. So you can't just blame the Democrats for lack of action on the legislative front - even though pre-1995 Democratic Congresses didn't take significant action, either.

Secondicies that shore up the value of the dollar rather than run up big trade and budget deficits. Foreign producers will continue to raise the price of oil as long as the value of the dollar continues to drop. It was Democratic President Bill Clinton who last balanced the federal budget, and it may take another Democratic president to do this again.

Some may want to beat up on Congress for not acting more boldly now on energy policy. But don't forget it's "the man behind the curtain" and his Republican allies in Congress who pursued economic policies that have devastated the value of the U.S. dollar. When the history of this disastrous administration is written, the weak dollar should join the war in Iraq and Hurricane Katrina on the list of the effects of abysmal policy failures.

Martin Frost represented the Dallas-Fort Worth area in Congress from 1979 to 2005. He rose to caucus chairman and head of the Democratic Congressional Campaign Committee. He is now an attorney with Polsinelli Shalton Flanigan Suelthaus in Washington and serves as president of America Votes, a grass-roots voter mobilization and education effort.

[Jun 20, 2008] Economist's View Calvo Exploding Commodity Prices, Lax Monetary Policy, and Sovereign Wealth Funds

Storage Cost is Zero says...

"But allocating into less liquid, unfamiliar categories of assets is slow work if you want to do it well. Perhaps current oil revenues outstrip oil producers' capacity to find good investment opportunities, and they view oil-in-the-ground as a better second-best asset than dollars in the bank."

Storage costs for leaving oil in the ground is essentially zero. From the point of view of a national oil company, why trade a depleting asset for paper that will just be inflated away? Pump just enough to meet current needs, and what can be efficiently invested in inflation hedges.

[Jun 17, 2008] The world gets bigger - Paul Krugman - Op-Ed Columnist - New York Times Blog

Transportation costs will redefine globalization...

Now, the fuel price increase doesn't have that large an effect - at least not yet. But a very back-of-the envelope calculation using CIBC estimates of the fuel cost effect gives me a 17% contraction in trade if oil prices stay at current levels for a long time.

Business travel will also be affected. Via Felix Salmon, airlines are starting to cut long-distance nonstops.


Perhaps this is a salutary brake on some aspects of excessive globalization. Chasing low labor costs at the expense of national self-sufficiency is not good. I have been wondering when the Army is going to start importing their tanks and heavy weapons from China and Russia. We have lost a lot of manufacturing, and part of that which remains has shown itself very slow to adapt to realities: eg. GM making SUVs and gas guzzlers while killing their first electric car.
Closing SUV plants by US automakers is a great result and might eventually affect the people who decided that fuel efficiency does not matter to them since they can afford it at any price.
Will Congress increase the CAFE levels soon?
Will nuclear energy come back for the US so we can generate 80% of our power with it, like France?
Will people learn or will prejudice and false and fearful information still rule the day?

I find higher fuel prices a good effect to wake up people and government. We must increase that effect by taking away all lawmakers government vehicles and gasoline credit cards. They should feel the pain and let it affect their thinking.

- Posted by Gunther St

[Jun 16, 2008] Why higher prices are here to stay - MSN Money

Don't expect to see any drop in the prices you pay at the pump -- or at the grocery store or anywhere else -- from any decline in the price of commodities. The price of gas at the pump actually climbed to a new high at $3.983 a gallon last week, according to automobile club AAA, even as the price of oil was falling. (And it kept on climbing, to $4 a gallon, on June 8 after a two-day rally in crude oil prices.)

You can expect the same from other commodities that have tumbled in price. Consumer prices will stay high even as commodity costs come down. Wheat prices are down. From a record $13.95 a bushel on Feb. 27, the most actively traded contract on the Chicago Board of Trade had dropped 42% to $7.78 a bushel on June 5. The prices of most other commodities -- well, except for corn, which has soared as heavy rains have held up planting -- have tumbled in recent weeks. See any drop in the price of bread or in a meal at your favorite restaurant?

[Jun 16, 2008] Oil shock is not coming, it is under way Lee J. Miller

June 16 | Bloomberg

Gazprom Aims for $1 Trillion Club on $250 Oil: Chart of the Day

OAO Gazprom Chief Executive Officer Alexei Miller made two forecasts last week that, if they come true, indicate more pain for consumers and a boon for Russia's government.

Oil will reach $250 a barrel ``in the foreseeable future,'' about 85 percent more than the current price, he said at a strategy briefing in Deauville, France, adding that the market value of state-run Gazprom will triple to $1 trillion as early as 2015.

Gazprom wouldn't be the first to reach the latter milestone. PetroChina Co. became the world's first trillion-dollar company on Nov. 5, when Class-A shares tripled on their Shanghai trading debut. PetroChina has since plunged 62 percent.

The chart of the day shows the market capitalization of the top three energy companies by value, Exxon Mobil Corp., PetroChina and Gazprom, since Jan. 23, 2006, when the Russian company began trading on the Micex Stock Exchange. Exxon's day-end peak was $527.2 billion on Oct. 18. The chart also shows the price of crude oil.

``These staggering figures may have been a shock tactic to stress one of the key themes of the day -- that Europe should accept a growing role for Gazprom,'' Morgan Stanley said in a report on June 11. Miller's comments ``seemed to us less a formal prediction than a point to highlight that oil and gas markets were undergoing structural changes,'' the report said.

To contact the reporter on this story: Lee J. Miller in Bangkok at [email protected]

[Jun 16, 2008] $140 oil

June 6, 2008

Jim Hamilton is right: this looks like a major oil shock. At $140, oil would be twice its average level in 2006.

$140 oil for the rest of the year implies an average oil price for 2008 of around $120 (maybe a bit higher)

Concretely, a rough calculation would suggest that this implies that the US will spend about $250 billion more on oil imports this year than last year. I don't quite see how the US trade deficit can improve in the face of that kind of shock.

[Jun 13, 2008] Hayward and Butler on speculation in oil markets

The Mess That Greenspan Made

There are two new views today on who to blame (or who not to blame) for the recent run up in oil prices that has galvanized the country and the world, citizens across the globe prodding their lawmakers to take action, to do something - anything - to stop energy prices from rising.

In conjunction with the release of their Statistical Review of World Energy, BP chief executive Tony Hayward characterizes the blaming of speculators for pushing crude oil prices higher as "a myth".

He says it all comes down to supply and demand - too much demand and too little supply.

According to the annual review, total production fell by 130,000 barrels per day last year paced by production cuts of 350,000 barrels a day by OPEC. This was a decline of 0.1 percent, the first drop in production since 2002.

[Jun 13, 2008] OPEC wants to talk about oil prices

This story is just in from the AFP (Agence France-Presse) - the June 22nd meeting in Saudi Arabia to discuss record-high oil prices is to be at the "head-of-state" level and Wall Street investment banks and hedge funds are invited too.
OPEC Secretary General Badri would not be drawn on which heads of state would attend the one-day gathering announced by Saudi Arabia on Tuesday, which was less than a week after the price of crude struck a record high 139.12 dollars a barrel.

The Organization of Petroleum Exporting Countries (OPEC) maintains that the oil market is well supplied and that current prices do not reflect market fundamentals of supply and demand.
"The price has nothing to do with a shortage of oil. There's a lot of oil on the market. It's because of speculation and OPEC cannot control speculation," he added.

If the oil market was well supplied, it would produce more than is consumed (which is not the case) and, as for the role of speculators, would there really be any sort of market without speculators?

That's their purpose - to set the market price.

From Wikipedia:

When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.

Japan - Fundamentals Warrant Oil Only at $60 a Barrel

Reader Michael e-mailed us this story from Platts. Note that by Japanese standards, this is an unusually pointed discussion:

Japan's vice minister for economy, trade and industry, Takao Kitabata, said Monday that current oil market fundamentals only supported a crude price of $60/barrel, less than half current levels.

Speaking to reporters, Kitabata said current oil prices could not be explained by fundamentals and blamed speculative funds for pushing up prices, according to a transcript of his press conference in Tokyo...

"About three weeks ago Goldman Sachs said crude oil prices would exceed $140/b, and prices shot up by $10/b from levels of around $120/b. Then Morgan Stanley said oil prices would reach $150/b during the driving season by US independence day [July 4]," Kitabata told reporters.

"Oil prices rose to above $130/b after the Goldman Sachs announcement, but retreated to $120/b levels after the US Commodity Futures Trading Commission's announced investigation."

"However, prices have risen by $10/b after Morgan Stanley's announcement," Kitabata added. "I said [three weeks ago] that it was hard for us to define the cause [of high oil prices], however I must express anger [over the movements]."

The vice minister said the rise of oil prices above levels than can be explained by fundamentals would lead to oil-producing countries receiving more money than they need for their exports, while at the same time hurting consuming countries, especially developing countries without their own oil production.

"We believe producing countries' economies will function if oil prices hover more or less at $60/b," Kitabata said. "Despite the weakening of the US dollar, we believe Saudi Arabia's [economy will function] if oil prices are at $45/b and Kuwait's [economy will function] if oil prices are at $55/b," Kitabata added.

When asked why energy ministers from the G8 -- the US, Japan, Canada, the UK, France, Germany, Italy and Russia -- failed to have sufficient discussion at their July 7-8 meeting on the link between high oil prices and flows of money from investment funds into the oil market, Kitabata argued that the ministers had had "spirited discussion on the matter."

[Jun 08, 2008] - Companies - Transport - Soaring shipping costs fuel inflation

By David Oakley and Robert Wright in London

Published: June 8 2008 19:38 | Last updated: June 8 2008 19:38. The cost of renting ships that transport key raw materials such as iron ore and coal have risen to all-time highs and put further pressures on inflation and the global economy.

With oil at record levels, food prices at highs and warnings from central bankers over inflation risks, it is another danger signal for companies and consumers as price pressures force up overheads and jeopardise growth.

The cost of renting a Capesize ship, used to transport iron ore and coal, rose to $233,988 a day at the end of last week – a near 200 per cent jump since the start of the year when the cost stood at $80,000.

[Jun 7, 2008] Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers

Suburbia houses prices (and the current way of life) depend on the price of gas. Commuting time cost is one thing but financial hit for those who commute 50 miles each way in SUV or track is now very real. Spending $1000 a month on gas for a family of two is not that exiting. That means houses in this areas has additional decelllerator. Any lifestyle dependent on low gas prices is becoming uneconomical. For those that own a home in a remote location this must be like a depression.
"At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical,'' says Mark Zandi, chief economist at Moody's ...

The lifestyle of the exurban commuter may be one casualty.

Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.

``It was drive until you qualify'' for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. ``You can't do that anymore. Your cost of transportation will spike too much.''


[May 30, 2008] Oil price mocks fuel realities by F William Engdahl

The US government's Energy Information Administration (EIA) concluded in its most recent monthly Short Term Energy Outlook report that US oil demand is expected to decline by 190,000 barrels per day (b/d) this year. That is mainly owing to the deepening economic recession. <

Chinese consumption, the EIA says, far from exploding, is expected to increase this year by only 400,000 barrels a day. That is hardly the "surging oil demand" blamed on China in the media. Last year, China imported 3.2 million barrels per day, and its estimated usage was around 7 million b/d total. The US, by contrast, consumes around 20.7 million b/d. <

That means the key oil-consuming nation, the US, is experiencing a significant drop in demand. China, which consumes only a third of the oil the US does, will see a minor rise in import demand compared with the total daily world oil output of some 84 million barrels, less than half of one percent of total demand.

OPEC has its 2008 global oil demand growth forecast unchanged at 1.2 million barrels per day (mm bpd), as slowing economic growth in the industrialized world is offset by slightly growing consumption in developing nations. OPEC predicts that global oil demand in 2008 will average 87 million bpd, largely unchanged from its previous estimate. Demand from China, the Middle East, India and Latin America is forecast to be stronger, but the European Union and North American demand will be lower. <

So the world's largest oil consumer faces a sharp decline in consumption, a decline that will worsen as the housing and related economic effects of the US securitization crisis in finance de-leverages. The price in normal open or transparent markets should presumably be falling not rising. No supply crisis justifies the way the world's oil is being priced today.

[May 30, 2008] US-made oil disaster has mileage

In response to the collapse of the credit and speculation boom, the Fed has set a deliberate re-inflationary objective in order to reverse falling asset prices. It has aggressively resumed its expansionary monetary policy since August 2007, cutting the federal funds rate from 5.25% to 2% with a consequent faster expansion of money supply, resulting in a rapidly depreciating dollar and disrupting stability in commodity markets, propelling oil prices from US$65 to $135 per barrel. <

A depreciating dollar and rising oil prices have gone hand-in-hand. Oil prices are quoted in dollars; a falling dollar results in an increasing dollar price for oil. Given a falling dollar, oil producers and others with surplus dollars are reluctant to store their wealth in dollars but instead are diversifying into other currencies, largely the euro and the yen, again putting further pressure on the dollar and again driving up oil prices; or in some cases producers cut back output as they are reluctant to hold more dollars. <

The reluctance of oil producers to expand oil output is best illustrated by Saudi Arabia's recent lukewarm response to US pressure for increased oil production. As inflationary expectations have become firmly rooted, oil and food producers know they can generate more revenues by restraining supply. This vicious circle is all but obvious to anyone whose head is above water. Yet, it has somehow seems to have escaped the Fed's radar in Washington. <

In large part because of the Fed's actions above and more specifically because of low or negative real interest rates, a falling dollar, economic uncertainty and volatility, investors and speculators have exacerbated market conditions. With low or negative real interest rates and a depreciating dollar, investors have been reluctant to accumulate dollar-denominated assets. <

Commodities, especially oil, have afforded them a good hedge. Speculators, understanding fully the weaknesses of the Fed's current policy and its imminent consequences on oil and natural gas markets, have seen an opportunity to profit from the prevailing policy stance. This added demand of investors and speculators has also fueled the oil market, but to what extent nobody can tell for sure. <

Mystery of missing output
In most markets, rising prices can be expected to encourage more output or supplies, albeit sometimes with a lag. Why has this not happened in the oil and natural gas markets? First and foremost, oil is not a commodity such as shoes. It takes anywhere from about three to 10 years to develop an oil field and bring the oil to market, depending on the location and other characteristics of the field. <

Second, given low oil prices from the mid-1980s until the late 1990s, there was little incentive to develop new fields. As a result the level of excess capacity to produce oil has been low. So when markets are tight, as they are today, there is little additional production that can come on line quickly. Making matters worse, the small excess capacity that exists today, on the order of 500,000-1,000,000 barrels per day (mbd) and in the range of 1% of daily global consumption of about 87 mbd, is all in members of the Organization of Petroleum Exporting Countries (largely in Saudi Arabia). <

But the real issue that seems to have escaped all these oil analysts is the overriding reason why additions to oil supplies (and the capacity to produce more oil) have been so small in recent years? This can be laid at the door of the White House; the George W Bush administration and its predecessors have caused the current supply shortage through their policy stance towards the Persian Gulf region and especially towards Iran and Iraq.

[May 29, 2008] Pain at the Pump It's a Dollar Crisis, Not an Oil Crisis - Seeking Alpha

"The reality is that after years of reckless consumption and dollar debasement, Americans are now being priced out of the very markets over which they formerly held unchallenged title."
By Peter D. Schiff

It's unfortunate that the U.S. Supreme Court, in its ruling last week that U.S. currency is unfair to the blind, did not make the next logical step and declare it unfair to everyone who buys gasoline.

In their search for explanations as to why oil has surged past $130 per barrel, Washington, Wall Street and the financial media are as clueless as cavemen after a freak summer snowstorm. Despite the head-scratching, the blame game is nevertheless in full force.

Speculators and big oil companies are being trotted out as scapegoats, and increased margin requirements and taxes on windfall profits and futures trading have been mentioned as appropriate sanctions. It should be clear that this is pure farce, and that no one understands what is actually happening.

The reality is that after years of reckless consumption and dollar debasement, Americans are now being priced out of the very markets over which they formerly held unchallenged title. As more affluent foreigners consume more of the resources and products they previously exported to us, Americans are being forced to cut back. The rising dollar-based price of gasoline is simply an illustration of this global trend.

Poorly concealed behind contrived government statistics, the signs of America's falling standard of living are everywhere; all one has to do is look. We are unloading our SUVs for less-desirable compacts, and are paying more to fly on crowded planes (where we pay to check luggage and dine only on what we bring onboard). We now buy our lattes from McDonald's Corp. (MCD) or not at all, and we increasingly forego dining out, trips to the mall and vacations - just so we can scrape together enough to fill our gas tanks and kitchen pantries, pay taxes and insurance, or make credit card, mortgage or car payments.

The collective belt tightening is simply the down payment on the U.S. government's massive bailout of Wall Street investment banks and mortgage lenders. As the U.S. Federal Reserve creates money to buy bad mortgages and other shaky securities held by banks and brokerage firms, the value of the savings and wages of everyone on Main Street will continue to fall. As a result, the costs of products previously taken for granted have begun to bite.

The various housing bills and stimulus packages now passing through Congress will add significantly to the staggering final price tag. In the end, the "free lunch" currently being dished out by Washington will be the most expensive meal ever served. The cost will be borne by ordinary Americans citizens every time they open their wallets. And $4 gasoline is just the beginning.

For all the talk of increased global demand, few seem to understand from where it actually comes. The surge in global demand is both a function of the increased purchasing power of foreign currencies and the fact that foreigners are choosing to spend more of their incomes themselves.

In other words, former Fed Chairman Alan Greenspan's famous "global savings glut" is turning into a global consumption binge, with Americans unable to crash the party. This trend will only get worse as the dollar-denominated price of just about everything that is either imported, or capable of being exported, goes through the roof.

We can look for scapegoats all we want, but the simple fact is Americans are going to have to get used to a much lower standard of living. Those who have been putting all the food on our tables are finally pulling up chairs and are serving themselves.

[May 24, 2008] Time to do something about oil by Martin Hutchinson

Hat tip to Mish's Global Economic Trend Analysis (Rising Oil Price Brings Out Nut Case Solutions )

Operation Iraqi Freedom has been a smashing success, and only appalling Wilsonian wimpiness in the US government has prevented the United States from taking full advantage of it. Iraq's known oil reserves have been increased by about 100 billion barrels since the invasion, as competent US oil companies have been free to explore for new oil employing techniques more advanced than the 40-year-old dowsing sticks used by Saddam's oil operation. At today's oil price of $130, less a generous $20 for drilling and extraction, those additional reserves have a value of $11 trillion – approximately 10 times the most alarmist estimate of the cost of the war to date.<

The problem is that the US did not secure itself a proper royalty on the new oil finds (even 10% would have been worthwhile -- $1.1 trillion over the next few decades.) Nor did it ensure, by setting up a privatized oil company and a trust fund for the Iraqi people diverting oil revenues from the Iraqi government, that the new oil finds would be exploited in an efficient manner and the supplies directed properly into the world oil market. Any future invasion of an oil producing country should avoid these two mistakes and thus make itself self-financing.<

The obvious place to invade is Venezuela (even if current estimates of Venezuelan and Saudi reserves are wrong and there is in reality more oil in Saudi Arabia that could be unlocked if ExxonMobil and the boys were given free rein, the Saudis are nominally our allies, so an invasion would be considered unsporting by world opinion.) Since the 1.8 trillion barrels of Venezuelan oil deposits consist largely of the Orinoco tar sands, a Venezuelan oil-related invasion would impose an additional requirement: to keep the environmentalists away, in order that reserves could be exploited with maximum efficiency.<

... ... ...<

In summary, a sharp rise in US and world interest rates is the best way to solve the problem of spiraling energy and commodity prices, which will probably not solve itself. If that doesn't work or is "politically impossible" it's time to prepare the 82nd Airborne for jungle warfare in the Orinoco Basin.

[May 24, 2008] Energy Independence Is National Security

...To achieve energy independence, the U.S. needs to cut consumption of petroleum from 21 million barrels a day down to 10-11 million barrels a day (MBD), and quickly. The ignorant cheerleaders (many of whom seem to have gained elected office) are always yammering about "endless new sources of energy" but under close examination with basic high-school science, every single "miracle source" turns out to have real-world limitations.

I have covered some of these limitations in the past few months, and will mention just two (again) of the most popular "miracle cures to our need for more energy:" shale oil and coal gasification. Canada and the U.S. have hundreds of years of shale oil, tar-sand oil and King Coal, we are constantly told, yet in a peculiar oversight, nobody seems to mention that turning these hydrocarbons into liquid fuels is horrendously energy-intensive, complex and limited by physical constraints.

The best estimates by those who actually know about moving entire mountains of shale and tar sand, heating it up with vast quantities of natural gas, etc., is that total top production will reach about 2 million barrels a day--about 10% of the oil the U.S. consumes (not to mention Canada's consumption).

Gasifying coal sounds like a neato-peachy-keen "solution to our energy shortage" until you go to a vast Western strip mine and take a look at the infrastructure needed to make a paltry 2 million barrels a day. The notion that we can turn billions of tons of coal (yes, we already burn a billion tons of coal a year, and China burns 2 billion tons) into 20 million barrels of liquid fuels per day is simply absurd.

Like many of you, I think nuclear power technology has advanced (like all other technologies) since the 1960s designs which are in operation today; to dismiss nuclear power out of hand is another form of ignorance, especially when you consider the alternatives, like $300/barrel oil going to $1,000/barrel. (Yes, it could.)

But it will take years to build 100 more nuclear power plants, and they do, after all, only generate electricity, not liquid fuels. And yes, we can move to hybrid vehicles and electric tractors but those lithium-ion batteries are costly to make and replace; as the saying goes, there is no free lunch.

... ... ...

Drum roll please: here are a few obvious ways to encourage conservation and making the U.S. far more energy-efficient. I know, I know, none of these are politically viable; we'll just have to watch oil go to $300/barrel before Americans will get off their duffs and start dealing with reality. But hey, it's fun to dream:

1. start supporting basic research on efficiency and alternative energy on a much larger scale. Take a look at this chart of Federally-funded research:

Here is the source article in the San Francisco Chronicle: Dan Kammen: Clean energy and America's future.

Yes, the "marketplace" is responding with its own investments but the "low cost" of oil is driving pernicious "incentives" to rely on "cheap" coal and oil. The problem is that when these "cheap" sources of energy become expensive, they will do so very quickly, and the vaunted "marketplace" won't have time to catch up.

Let's also not forget that the vast majority of technological advances can be traced back to government-funded research, work often done in University settings (like, say, nuclear technologies, the Internet, etc.), not "market-based" investment. Even most of the miracle drugs can be traced back to government research, not the pharmaceutical industry.

2. require all electronic/electrical devices to shut off rather than remain in power wasting "standby mode." Something like 5% of the entire U.S. electrical consumption is wasted by millions of transformers and inefficient circuitry in tens of millions of TVs, stereos, computers, etc.

3. mandate another round of serious efficiency improvements in all appliances. The supposedly efficient "market" did absolutely nothing about energy efficiency until the government (yes, the "evil, can't do anything right" government) imposed efficiency standards in the wake of the 1973 and 1979 oil shocks.

4. raise the mileage standards of all vehicles to 40 miles per gallon effective next year. Please don't tell me it's impossible unless you're an engineer with Honda Motor Company, in which case I would ask you to look at your own company's vehicles from 1972.

The ICE (internal combustion engine) I know best, the basic Honda CVCC, has risen from about 85 horsepower to about 120 HP in the past two decades, with a comcomitant decline in mileage (yes, some of that increase in HP is due to technology, but there are still trade-offs) . The current crop of Honda 1800CC engines could be scaled back to 1300CC with a reduction in unnecessary horsepower and a substantial increase in mileage.

And for everyone who whines that their SUV or truck needs 200 HP, recall that a Volkswagen bus (the original hippie SUV, van and truck combined) operated quite well (albeit slowly when ascending steep grades) with a 45 HP engine that was terribly inefficient.

A standard Honda-type engine of 1300CC would very easily generate enough horsepower (when properly geared) to power non-bloated pickups. Larger vehicles would work just fine with "larger" 1800CC engines producing 125+ HP.

The only real trade-off is a loss of acceleration. Autos and trucks have gotten bigger, heavier and faster, all at the expense of efficiency and mileage. Reverse those trends and you will see immediate reductions in transportation consumption, which accounts for 2/3 of U.S. oil consumption.

... ... ...

5. lower speed limits to 65 MPH and enforce the limit. This is the easiest, most obvious way to boost mileage by 10-20%--lower speeds from 75+ MPH to 65 MPH. We'll all still get there, believe me. Just as an experiment, the last time I drove home from Los Angeles (380 miles) I drove about 65-67 MPH most of the way. I wasn't in a big hurry, thiugh it certainly seemed like everyone else was; most of the vehicles whizzing past were traveling in excess of 80 MPH. (This was at night, by the way.)

The slower pace added about 20 minutes to a 7-hour drive, but is this really the end of the world? Meanwhile, because we keep our 1998 Honda Civic properly tuned and the tires properly inflated--not exactly brain surgery--I got about 42 miles per gallon in a standard ICE production engine with 10-year old technology--more than most hybrid cars which cost much more and require hideously costly batteries.

If Honda cut the engine size and HP down a bit, I could probably get 50 MPG without any reduction in driving pleasure or convenience. And so could everyone else. And I'm 6 foot 2 inches tall, so please don't tell me you need a huge vehicle. (The guy in the video link above is 6 foot 5 inches tall.)

6. close entire streets to vehicles, creating safe, convenient bikelanes. My brother-in-law and I took a pleasant bike ride recently, in honor of his visiting us, and our 40-mile roundtrip (70 KM) ride on marked bike lanes eventually took us onto the shoulder of I-580--a freeway. I am not kidding--the bike lane merged onto the shoulder of a freeway for quite some distance. A single sign marked "share the road" with a bike logo on it denoted that the drivers whizzing past should not think the two bicyclists were insane and should be arrested. Was that part of the ride enjoyable? Do you reckon?

This is in "astoundingly environmental" California.

We all know Americans are too fat for their own good, and riding a bike is, for at least much of the year in most of the country, a convenient way to get about. (You can always put on a rain slicker like people do in other countries.) But it's only pleasant and convenient if roads are closed to cars and trucks. Yes, such closures would impose a burden on vehicles, but the time for wimpy half-measures like bike lanes on freeways and busy 4-lane roads is long past.

7. subsidize bus, train ans subway rides with a $1/gallon tax on gasoline, diesel and jet fuel. To repeat: the time for wimpy half-measures like subways and trains which cost a bloody fortune to ride is long past. If we want to modify behavior to conserve energy, then we have to make it nearly free to ride a bus, train or subway and very dear to drive a car.

Yes, you can argue about commutes and how big the West is and fairness and exurbs and all the rest, but it's really very simple: if it's nearly free to take public transport or carpool, people will do so and find some way to get to the station or pickup point. Ditto for carpools and other huge, practical, behavioral (not technological) efficiency-boosts. Even a 15 MPG SUV becomes efficient when there's six people being transported in it.

8. make building in the distant suburbs/exurbs either impossible or extremely expensive, and make building more low-rise housing in the city and inner ring essentially quick and cost-free to developers, non-profit and for-profit alike. I happen to live in a college town with population densities rivaling Hong Kong (in the south of campus area), yet there are very few buildings over three stories in height. You don't need highrises to increase density, you simply need mid-height buildings (see Paris or equivalent European cities for examples; six-story buildings create a very liveable scale.)

It's a simple idea, encouraging people to live closer to their jobs, and yet we as a nation have created all the wrong incentives: it's been dirt-cheap to build 50 miles from the city but costly and tiresome to obtain permission to tear down an obsolete structure and build a liveable moderate-density building in or near the city.

You can probably add another 8 or 16 or 24 other obvious, non-fancy ideas which would require little real sacrifice. You want sacrifice? How about no light at night? How about cold water baths? How about walking 10 miles to and from school/water/work/market? This is normal life in much of the world; just how awful will it be to have a street without cars? Is that really so unbearable? How about a car which doesn't accelerate like a race car? Is that really such an immense burden that we can't bear to give it up?

Funny, nobody thought life was miserable and awful and wretched and they had to cry themselves to sleep in 1957; have you ever driven an old American pickup truck from that era, a truck with a simple engine and wood slats in the bed? They didn't exactly accelerate like greased lightning, yet somehow (breathlessly, we ask, how? How? It's impossible!) the farmwork and building got done despite a horrible, soul-draining lack of horsepower and acceleration.

Then fine, the world will take it away from us in it's own time--which will be sooner than most of us can possibly imagine.

Extra-special bonus idea: convert all large U.S. Navy ships to nuclear power plants. The U.S. Military uses as much oil as the entire nation of Sweden; surely there are some efficiencies which could lower this stupendous consumption (along with curtailing U.S. involvement in Iraq.)

[May 24, 2008] Crude threat

Companies are now facing a squeeze. Figures from Britain this week showed that firms had pushed up their output prices by 7.5% over the previous year but this rise, while startling enough, was nowhere near sufficient to compensate them for a 23.3% gain in raw-materials prices, the biggest since 1980.

It will be even more difficult to maintain profit margins when consumers are under pressure. Again, higher oil prices are part of the problem. Goldman Sachs reckons that some $3 trillion of wealth was transferred from oil consumers to oil producers between 2001 and 2007 and the pace of transfer is running at $1.8 trillion a year. In general, producing countries save more, and spend less, than consuming nations. At the same time, of course, falling house prices in America, Britain, Spain and Ireland threaten to make consumers feel the pinch.

Moreover, central banks may be unable to give consumers much help. With British inflation rising faster than expected, the Bank of England may join the European Central Bank, the Bank of Japan and the Federal Reserve in keeping interest rates on hold for the foreseeable future. So far oil has been the "dog that did not bark"; but it may yet give the global economy a nasty bite.


Keith Bowers wrote:

May 18, 2008 19:35

I believe the U.S. economy is decelerating MUCH faster and MUCH more severely than 'statistics' show thus far.

High energy costs are causing draconian changes in consumer behavior. Many U.S. farmers ARE NOT planting this spring because of the extreme escalation in fertilizer and fuel prices have not been reflected yet in grain prices on the futures markets.

This dichotomy ensures a LOSS if they do plant--it costs more for fertilizer and fuel (and seed, pesticides, herbicides) , revolving credit for planting supplies is very difficult to get, so they are gonna take a year off.

This weekend, I splurged and drove almost 700 miles round trip to spend 3 days visiting my daughter. U.S. I-81 through Virginia to PA was a major portion of the route. It was absolutely EMPTY of traffic as compared to last year and 'normal times.

I estimate a drop of at least 50% in number of vehicles on the road. I was astonished at the sudden change. Gasoline costs ranged from $3.89 to $4.13, with diesel even higher. I spent some $120 on fuel. Flying was not an option, nor was mass transit. The cold,dark days of pre-oil are upon us NOW.

gwalduck wrote:

May 16, 2008 07:53

... For my part, I am concerned that central bankers think they are in control. It's all very well to dampen demand by raising interest rates, but when price rises are caused by fundamental changes in the balance of economic power - in this case from "western" consumers to commodity producers - the only thing that can happen is a fall in the "western" standard of living. Not a bad thing, really, if it reduces waste and economic arrogance along the way. We can't inflate ourselves out of this situation, even if the bankers would let us.

[May 24, 2008] Gas mileage and driving

"Kinda like if the price of food dropped by 50%, everyone would eat twice as much because we would all spend the same amount on food?... The people drive to the max now. They drive everywhere now, where else would they drive?They can reduce driving but not increase it."
I keep hearing on CNBC and reading at some blogs that if cars get better mileage that people will drive more by enough to offset the improved mileage.

I can see that people could drive more because of the savings. But to argue that reducing mileage by 20%, for example will lead to people increasing their driving by more then 20% seems like a very questionable conclusion. I'm willing to listen to an argument that increasing gas mileage would be partially offset by increased driving, but not that the responses would be more than 100%.

Does anyone have any idea of the original source or research of this belief by so many Republicans, Conservatives and Libertarians?

Is it just another Wall Street Journal editorial page finding that is too good to be true?


Libertarians want to say that, given increased fuel efficiency, to say 400 miles per tank, people will choose to live further out from city centers, their jobs, and services. If that's true, then it's a wash.

Constraints on the consumption of time make this type of response nonlinear, perhaps highly so. Doubling the efficiency may make it possible to double the driving distance at the same price; but it doesn't address the problem of greatly increased driving time.

Michael Cain | 05.23.08 - 9:49 pm |


The effect is real but small -- it's called the 'rebound effect' in fuel economy rulemaking speak. The current CAFE notice of proposed rulemaking assumes an elasticity of vehicle-miles traveled with respect to per-mile fuel cost of -0.15. So reducing fuel consumption per mile by 20% would (holding price constant) be expected to increase VMT by about 3%.
Tom Bozzo | Homepage | 05.23.08 - 10:35 pm | #


My visceral reaction (no hard data) is that these WSJ people are idiots who live in an intellectual vacuum, well apart from the real world. Here in the real world, people are trying to reduce their fuel *expenses*, not be able to drive more for the same cost. Morons.

Idaho_Spud | 05.23.08 - 10:37 pm | #


I'm not sure that mileage has improved 20%, if that is the figure mentioned. The EPA released a report on "real world" estimates which flat-lines fuel economy (or worse) from the mid-eighties. A chart and link to that report is on my blog

Furthermore, for the past 4 months or so traffic volumes have been decreasing, a link to the February Federal Highway Admin Report is also on my blog.

Leo | Homepage | 05.24.08 - 12:22 am | #


The level of ignorance required to believe this effect dominates is astounding. The largest single contributor to consumption of gas is incomes. Since incomes have risen in real terms, consumption of energy has grown. Period.
Most of the other effects are swamped by income growth. To try to look at consumption without considering income growth is absurd.

Greg | 05.24.08 - 4:29 am | #

[May 24, 2008] The Oil Drum Australia-New Zealand A Twelve-Step Plan to End Oil Addiction

It looks like all politicians who were asleep at the switch and did not prohibit usage of non-hybrid cars for personal transportation should be send for public work for the amount of time they spend sitting duck in coal mines ;-)
The Twelve Steps:

1. Stop deluding ourselves. The era of cheap, readily-available oil has ended. Prices may fluctuate, but the underlying trend is up, up, up. We have to get used to using less.

2. Demand that politicians take the issue seriously. Make it an election issue. Don't take 'we've got everything under control' as an answer.

3. Stop building new roads. They're a monumental waste of money, time and effort. They encourage, rather than ease, congestion, and besides, the growth in car travel that's used to justify them isn't going to happen anyway.

4. Divert that money and effort into measures that address the challenges of oil depletion and climate change.

5. Make a major investment in public transport. It needs to be better, faster, more comfortable, more regular, and more predictable. It needs to cater for everyone, not just peak-hour commuters - though they need a better service as well.

6. Make a major investment in broadband internet to allow more people to work from home, and change tax and business practices that discourage working from home. The more car trips we can avoid, the better.

7. Electrify transport where possible. New Zealand is well placed to use renewable electricity for transport. We should be electrifying commuter rail where it is not already electric, using light rail (trams) in cities, and looking at electrification of the main trunk line. On the other end of the scale, electric bikes and scooters can make a big difference in our cities. And electric cars show promise, though there's a lot of questions to be answered yet.

8. Don't use cars unless there's no alternative. Take the bus. Take the train. Switch to a scooter. Walk or cycle – both your wallet and your doctor will thank you.

9. Deal with other aspects of our oil dependence. Agriculture, for example, is highly dependent on oil. We're going to need to change the way we grow and distribute food. Let's get to work on that now, not wait until supermarket shelves start to empty.

10. Stockpile or manufacture vital products currently imported from overseas. When oil runs short, will that still be possible? Let's take stock now and work out what we may need to start stockpiling or making in New Zealand.

11. Think local. Ending our oil addiction isn't just up to central government, though it can play its part. Communities can work together to make themselves more resilient. Join or start a Transition Towns group in your local area.

12. Accept reality. The age of cheap oil is over. It's not coming back. As individuals and as a nation, we have to adapt.

[May 24, 2008] The Oil Drum Vinod Khosla Debunked Ethanol is NOT the Answer

Looks like Vinod Khosla is engaged is some kind ethanol propaganda that is not based on reality. As slimy as any venture capitalist he has an aura of respectability due to being one of the founders of Sun Microsystems.

The Debate Challenge

Before the debunking commences in earnest, I want to reiterate a debate challenge I made to Khosla. Following his essay at The Huffington Post entitled The Big Oil Companies Have Been Ripping Californians Off -- And Not Just at the Pump, I issued a challenge to Khosla to debate his claims. I repeat that challenge here. We can engage in a written debate (so claims can be referenced and verified) hosted at The Oil Drum, or at the venue of his choice. The focus will be on various ethanol claims that he has made. I will show that many of his claims are simply incorrect, and a lot of it is propaganda.

Debunking Selected Claims

Let's focus on some specific claims that Khosla made in his presentation, and see if they hold up to scrutiny. If they don't, then I want to ask why anyone takes his claims seriously, and why we are allowing him to influence energy policy. I want to ask those who encounter him to vigorously challenge him on his exuberant claims (and make sure he knows about the debate challenge). Because if he is wrong, and political leaders are betting that he is correct, we will be throwing good money away and wasting time while we could be going after real solutions.

During the video presentation, at the 3:50 mark Khosla makes the following claim:

Vinod Khosla: Brazil has replaced 40% of their petroleum use with ethanol already.
So, is this true? No. As I documented in the article on ethanol that I wrote for Financial Sense:
According to BP's recently released "Statistical Review of World Energy 2006", Brazil consumed 664 million barrels of oil in 2005. In 2005, Brazil produced 4.8 billion gallons of ethanol, or 114 million barrels. However, a barrel of ethanol contains approximately 3.5 million BTUs, and a barrel of oil contains approximately 6 million BTUs. Therefore, 114 million barrels of ethanol only displaced 67 million barrels of oil, around 10% of Brazil's oil consumption. In other words, Brazil's energy independence miracle was 10% ethanol and 90% domestic crude oil production.

article on ethanol in Financial Sense

According to BP's recently released "Statistical Review of World Energy 2006", Brazil consumed 664 million barrels of oil in 2005. In 2005, Brazil produced 4.8 billion gallons of ethanol, or 114 million barrels. However, a barrel of ethanol contains approximately 3.5 million BTUs, and a barrel of oil contains approximately 6 million BTUs. Therefore, 114 million barrels of ethanol only displaced 67 million barrels of oil, around 10% of Brazil's oil consumption. In other words, Brazil's energy independence miracle was 10% ethanol and 90% domestic crude oil production.

[May 23, 2008] Commodities Spike- Vote of No Confidence in Central Bankers

most investors are in denial about unpleasant truths:

1. Financial assets are far riskier than the press, the textbooks, and conventional methodologies indicate. The models that the pros use are based on assumptions that are fundamentally flawed. The dangers of the erroneous belief that financial assets are safe is now being revealed.

2. The people who control the markets (the intermediaries) have their own, and not the publics', best interest at heart. Due to the proliferation of OTC markets and the value of assets involved, they cannot be dispensed with. And the regulators lack the skill and will to ride herd on them. As Keynes remarked,

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.

We see ample evidence of that problem, yet seem to lack a way out.

So in a way, these gnawing issues do come around to Waldman's point. In times of crisis, people look to leaders for guidance. But in our prevailing doctrine of free markets, there are no leaders, just agents interacting in ways purported to produce virtuous outcomes. And the parties who ought to step into the breach fail to understand the need for that role right now. That is why an old fashioned (and very tall) banker like Volcker is so reassuring. He handled a crisis; he's not afraid to take the reins or say things are bad and changes are needed.

We are at the end of a paradigm: large scale OTC markets, lightly regulated players and instruments, dollar as reserve currency, US as the most important global economic actors. Waldman is good here:

People are losing faith in financial assets for good reason. Rather than organizing productive economies, the machinery of finance has recently functioned as an anesthetic, masking the pain while resources were mismanaged and stolen. We need a solid financial system, but confidence cannot be imposed or legislated. It will have to be earned. There has to be a plan.

But Yeats is better:
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity

[May 17, 2008] Peak Oil

Sudden Debt

What do oil sands, drilling in very deep oceans, corn ethanol and resource wars (Iraq, Afghanistan..) have in common? They are very low EROEI energy sources compared to the rapidly declining high EROEI sources (e.g. Texas and Mexico). The fact that we have to increasingly depend on them to meet demand is the surest proof that "cheap" oil is rapidly becoming a thing of the past. And this, ladies and gentlemen, is as good a definition of Peak Oil as any.

In closing, you may wish to read this article from UK's The Daily Telegraph: Oil Is Expensive Because Oil Is Scarce.

[May 17, 2008] All The Money In The World

May 14, 2008 | Sudden Debt

A friend of mine with many decades in the finance business has a saying: "If this goes on much longer they will end up with all the money in the world". He uses it to point out various cases of extreme pricing and market power, which sometimes (but not always) evolves to become a bubble. Prima facie evidence suggests that in today's environment his saying readily applies to crude oil.

Look at the chart below: at $120 per barrel, revenue from exporting crude oil and its products comes to over $1.85 trillion per year. The Middle East alone gets nearly a trillion and the former Soviet Union $300 billion - and that's before including natural gas.

Export-Import Data: BP (2006)

At current oil prices, this is by far the largest capital recycling and concentration pump in the entire history of the world. A dollar may not buy as much as it used to, but a trillion every year still buys plenty, even after liberal handouts pour epater les bourgeois. Very plenty, in fact: US and European banks, other resource companies like ore and coal miners, shipping and port operators, electricity, water and telecom providers and a host of other essential businesses. That's where all the SWF and private oil money is going, most commonly channelled through secretive private equity funds.

Obviously, the oil exporters are furiously planning for their post-Peak Oil future: sensibly, they don't want to ride camels again. And if this goes on much longer, by the time their oil wells start to decline they will own everything that matters and will be sitting - literally - atop all the money in the world.

What are the rest of us - Americans and Europeans alike - doing to plan our post-peak future? Next to nothing, is the painful answer. If a few EU nations like Germany, Denmark and Spain are attempting to face the alternative energy challenge, the US as the largest oil consumer is making a momentous mistake by its absence. Stubborn reliance on imported oil is rapidly impoverishing the nation. That sucking sound we all hear in our pockets is money vacuumed out by the oil exporters, only to come back as foreign equity ownership of everything.

The American administration is repeating the glaring mistake of the French and German armies' Russian invasion, albeit in a different context. Like arrogant generals whose prior easy victories made them blind to current harsh realities, Bush & Co. are throwing away America's post-Cold War advantage into the maws of the giant oil recirculation pump. Like Napoleon and Hitler before him, George W. Bush has failed to provide the nation with the protection of a sensible energy plan.

To make matters worse, the current monetary policy is designed solely as a bail out of a bankrupt shadow financial system. By preventing the liquidation of excessive debt that could result in a more efficient and sustainable economy, it keeps the dollar/oil recirculating pump going at full speed.

America is in the unfortunate position of being at the hands of a dogmatic incompetent and a near-sighted academic. For different reasons, both blithely believe they are right beyond doubt. One because he converses with God and the other because he trusts his econometric models with religious fervor.

But if they are wrong the price of failure is the end of Empire. That's too much to bet, by a long shot.

[May 15, 2008] Why oil isnt gold - Paul Krugman - Op-Ed Columnist - New York Times Blog

The U.S. strategic Petroleum reserve currently stockpiles 698 million barrels of oil. Bush announced last year that he intends to double this amount by 2027 to 1.5 billion. Has this become a revenue stream for the federal government? In a single day, a jump of $3 represents a $4.5 billion dollar return on investment. Oil is removed from the reserve at a much slower rate. There are hedge markets for oil, there are consumer incentive pricing to lock in an oil price at today's rate, airlines and other transportation companies are savy about these things (or they fail). Chrysler hopes to sell cars by offering a fuel-price guarantee (on the first 12,000 miles of a new car) … which Cerberus Capital Management (the new owner of Chrysler) will pay for by hedging the price. These are new players in the market … new revenue streams for private enterprise and government entities alike.

- Posted by E.L.

  • So much talk of speculators and hardly a whisper about the value of the dollar and expectations about it future. The dollar is weakening with no real end in sight. Why would you sell a barrel of oil today at the same price in dollars that you would have one year ago. You're giving the buyer a bargain, and you're a smuck.

    Keep running enormous trade deficits, a government operating with an annual deficit, and a national debt that consumes 15% of the federal governments revenue and I promise the price of oil will continue to increase even without the very real increases in global demand and the dawning realization by more and more people that peak oil has been reached and production will slowly decline.

    One, Two, Three Strikes and You're OUT!

    - Posted by Gene L Payne

  • If oil isn't gold, it soon will be; at least in terms of price, which gets us to the notion of "peak oil". It is something no one is talking about, but which Krugman alludes to in his piece (perhaps unknowingly?)"The Oil Nonbubble":

    "…a realistic view of what's happened over the past few years suggests that we're heading into an era of increasingly scarce, costly oil."

    All you need to do is a little research and crunch the numbers. For example, based on published/proven reserves, at the current rate of usage, the world has a total reserve life of 44 years (this includes everything, including Canada's oil shale deposits). Yes, that's right, 44 years. And this doesn't take into cosideration increasing demand, which is surely happening.

    To illustrate further just how fast the world is consuming oil (80 million barrels every day), calculate how long it will take to burn through the 16 billion barrels optimists claim to exist in the Arctic National Wildlife Refuge: 6 months. The US, a little longer: approx. two years.

    I'm an optimist too, but a realist. Oil will soon be gold in a world unprepared to deal with a deepening energy crisis.

    - Posted by TomV

  • Couple points.

    1. I agree that the Strategic Oil Reserve could have used a mention.

    2. As to supply and demand, has supply gone up in the last 5 years (domestic refined)? No. Has demand abated (domestic)? No. Therefore there was plenty of supply 5 years ago as the price was going up. What has changed to make now any diferent from then?

    3. Mass Transportation. Not that I need a reason to be Anti-Obama. But, if you look at his "energy plan" (cough cough) Mass transport is not a priority. "Democrats and Busing" jokes aside, this seems to be a faithful Left of Center soldier that is MIA.

    4. Oil is Gold like in it's inverse relationship to the Dollar. Dollar, Gold and Oil are essentially currencies unto themselves.

    5. I've known Paris, Paris was a friend of mine, NYC is no Paris! It makes no sense to compare European cities to the US population model because of the vast suburban landscape of the US.

    - Posted by Dredpiraterobts

  • The demand for oil, which in the U.S. is largely used for motor fuel, is not completely inelastic.

    See this weekend's USA Today where there was a series of articles about how families are coping with higher fuel prices by going car-less on the weekends and eliminating and consolidating trips requiring use of the family's cars.

    - Posted by Spiv

  • When talking about the per capita use of oil in this country, I wish we would consider how skewed these figures are because they include our enormous military machine.

    - Posted by Sherry Donaldson

  • All this talk about the price of oil, but as a consumer I purchase gasoline, not crude. If a business simply passes on their increased cost of raw materials then they do not increase their profit. But this is not what is happening. Obviously the oil companies are paying much less for their oil than what the crude futures say. So what is going on here? How much of the oil that these companies convert to gasoline comes from their well at $40 per barrel. How much from suppliers with contracted prices much less than the so called "market price." The last time I checked the quantity of oil being traded on the futures market was relatively small. The cost of refining oil to convert it to gasoline does not depend on the cost of the crude. But I read somewhere that they are now increasing their spread. I would hope Krugman or someone would address this issue of why oil companies profits are increasing. Please lets talk about gasoline prices and costs instead of just concentrating on crude prices. One of the US govt web sites confuses the issue by talking about percentages of the various components that make up the price of gasoline, ignoring that some of these costs are variable and some or not, and they shoul be changing as the cost of raw materials change. I have no expectation that Congress will address this issue as they accept the fiction that the oil company increased profits are simply due to the increased cost of crude. Something is amiss.

    - Posted by Gene Weinshenker

  • Ok, to add some final points to what everyone has said:

    1. The price of oil increased rapidly after the Iraq invasion in 2003. It seems that security costs for the Middle East have increased enormously.
    2. Contrary to what most people believe, the US gets around 70% of its gasoline from a combination of Mexico, Venezuela, Canada and Nigeria. So, while we get 30% from other nations, our real problem is with these other nations. Mexico has extreme problems with drug lords (some have referred to this problem as an outright war) and crazy weather problems, Venezuela has their current "dictator" who has just recently nationalized most of the foreign companies that are extracting its oil (Exxon, Chevron, etc.) and Nigeria has a huge problem with an uprising in the Delta region that is hampering the cost of oil.
    3. Add to the fray that the Dollar is worthless. The idea is that most nations don't use Dollars as their national currency, so the oil companies extract oil in the local national currency, sell the oil in Dollars (requiring conversion), most of the nations around the world have their own currencies, thereby selling those $s off again and the cycle continues. So yes, the Dollar value has a HUGE part to play on this issue.
    4. Gold is considered more of a luxury good. Gasoline is considered a necessity and most of the world has already proven that they are willing to pay almost anything to drive their gas driven vehicles, not to mention, the US has proven that they will drive, regardless.
    5. So, one question might pop-up, why don't for example Europeans pay less for oil since its purchased in Dollars? The reason is because most governments are using the rising oil cost to increase their tax revenues to pay for whatever they need. For example, the Netherlands made an extra 3 billion Euros on top of their expected income in 2006. They spent that money by cutting back on taxes in other areas.

    - Posted by Chris

  • While Paul Krugman correctly points out that world crude oil inventories generally have stood at approximately 50 days of supply, crude oil prices as represented by the NYMEX front month contract respond to a variety of variables. These include the directional change in inventories both in days of supply and in absolute terms, which are reported weekly in the United States by the EIA. They also respond to changes in world spare production capacity and marginal costs of production, among other things.

    If inventories are the only thing which are used for crude oil price determination in this discussion and using U.S. inventories rather than world inventories as the primary metric, U.S. crude oil inventories peaked in absolute terms in the summer of 2007 at 354 million barrels. In days of supply this was 23.1 days. Using the front month NYMEX crude oil contract, crude oil prices averaged $74.15 per barrel in July 2007.

    By the end of 2007 U.S. crude oil inventories declined by 72 million barrels to 282 million barrels by January 4, 2008; based on EIA's formula, crude oil inventories in days of supply was unchanged at 18.4 days on January 4, 2008. Crude oil prices averaged $91.74 in December 2007. So far, it seems reasonable that prices would rise.

    U.S. crude oil inventories have rebounded since the beginning of the year to 313 million barrels on April 30, 2008 and 22 days of supply. Nevertheless, crude oil prices (based on the NYMEX front month contract) averaged $107.18 per barrel in April.

    U.S. gasoline inventories have exhibited similar behavior as U.S. gasoline consumption has declined sharply since the end of 2006 (see U.S. highway administration data for that).

    While more analysis is required, it appears that inventory changes have little to do with the recent rise in crude oil prices.

    Perhaps it is important to look at the large flows of dollars into commodity investment vehicles tied to commodity indices; these indices are weighted between 70% and 80% to energy.

    - Posted by Max Pyziur

  • Yeah, but…

    Gold prices are tracking fairly close to oil prices, no?

    OPEC is getting paid AS IF they were being paid in gold. Go figure!

    - Posted by Barnegat Leight

  • Re #29: People have been performing that simple calculation for decades and getting it wrong. They fail to take into account the fact that people find new oil reserves that they weren't able to find before (they also fail to take into account that if oil were really running out that prices would sky rocket, even more than now, and consumption would slow). Technological advances continually allow for finding new oil supplies. Sure, the earth has a finite supply, but it's naive to believe that we've found all of the existing reserves already. An extremely large reserve was just found in Brazil with technology that wasn't even available just a few years ago. The more realistic worry is that new oil will be increasingly expensive to extract and that as emerging countries grow richer they have more purchasing power to bid up the price of oil. But the rising cost of oil encourages the innovation of alternative energy sources naturally.

    - Posted by Dave

[May 14, 2008] charles hugh smith-archive

Looks like biofuels are not a solution. You need coal and a lot of coal to burn to produce them. We really need thermonuclear reaction-based generators to solve the problem of extinguishing of fossil fuels.

For an example of this sort of thinking, let's turn to a recent interview with Silicon Valley venture capitalist Vinod Khosla, who is justifiably renowned for his foresight and investing acumen. In this interview, he predicts $1/gallon biofuels will make oil and gasoline uncompetitive; who bother with oil when biofuel is so much cheaper?


I have no question that in 10 years, there's no way oil will be able to compete with biofuels. Even in five years. Now it will take a long time to scale biofuels, but I'm the only one in the world forecasting oil dropping in price to $35 a barrel by 2030. I'll put it on the record: Oil will not be able to compete with cellulosic biofuels.
According to Department of Energy Quick Oil Facts, the US consumes about 390 million gallons of gasoline per day. At 28 gallons of gasoline/barrel of crude that amounts to 13 million barrels of crude oil equivalent-- about 65% of the crude oil consumed by the USA (21 million barrels a day).

So even if wind, solar, geothermal, nuclear, tidal, etc. was generating all the nation's electrical power, our current lifestyle would require about 450 million gallons of gasoline or equivalent per day.

(Recall that biofuels only provide at best 85% of the energy density of gasoline, hence you need 115 gallons of biofuel to generate the same energy in 100 gallons of gasoline/petrol.)

Is it plausible that giant algae farms, switch grass, wood chips, lawn clippings, etc. can possibly generate 450 million gallons of liquid fuel a day?

And what if these enormous new industries actually require more energy than the current petroleum complex to operate? Then perhaps we'll need 500 million gallons of gasoline equivalent liquid fuels because the harvesting, cooking, distilling, refining and transporting of biofuels requires more energy than pumping, cracking and transporting petroleum products.

Away from the glow of wishful thinking, it seems there are a couple of serious problems with biofuels:
1. it requires turning over the entire U.S. arable cropland from growing food to switchgrass or what-have-you for ethanol
2. the process requires so much energy it is net-negative, i.e. requires more energy than it produces.

Let's start with an article from Scientific American: Biofuels Are Bad for Feeding People and Combating Climate Change By displacing agriculture for food-and causing more land clearing-biofuels are bad for hungry people and the environment

The studies do find some benefit from biofuels but only when planted on agricultural land too dry or degraded for food production or significant tree or plant growth and only when derived from native plants, such as a mix of prairie grasses in the U.S. Midwest. Or such fuels can be made from waste: corn stalks, leftover wood from timber production or even city garbage.

But that will not slake a significant portion of the growing thirst for transportation fuels. "If we convert every corn kernel grown today in the U.S. to ethanol we offset just 12 percent of our gasoline use," notes ecologist Jason Hill of the University of Minnesota. "The real benefit to these advanced biofuels may not be in displacement of fossil fuels but in the building up of carbon stores in the soil."

Here is the academic paper which blew the doors right off the fantasy that biofuels could replace fossil fuels in some sort of seamless transition that left all 220 million vehicles in the U.S. purring along on billions of gallons of biofuels.

I strongly recommend reading the entire 12 page paper, which is written in clear English and is supported by tables and well-sourced data. Ethanol Production Using Corn, Switchgrass, and Wood; Biodiesel Production Using Soybean and Sunflower.

Here is the summary:

Energy outputs from ethanol produced using corn, switchgrass, and wood biomass were each less than the respective fossil energy inputs. The same was true for producing biodiesel using soybeans and sunflower, however, the energy cost for producing soybean biodiesel was only slightly negative compared with ethanol production.

Findings in terms of energy outputs compared with the energy inputs were:
• Ethanol production using corn grain required 29% more fossil energy than the ethanol fuel produced.
• Ethanol production using switchgrass required 50% more fossil energy than the ethanol fuel produced.
• Ethanol production using wood biomass required 57% more fossil energy than the ethanol fuel produced.
• Biodiesel production using soybean required 27% more fossil energy than the biodiesel fuel produced (Note, the energy yield from soy oil per hectare is far lower than the ethanol yield from corn).
• Biodiesel production using sunflower required 118% more fossil energy than the biodiesel fuel produced.

Consider the consequences of these points from the report:
About 50% of the cost of producing ethanol (42c/ per l) in a large-production plant is for the corn feedstock itself (28c//l) (Table 2). The next largest input is for steam (Table 2).

Clearly, without the more than $3 billion of federal and state government subsidies each year, U.S. ethanol production would be reduced or cease, confirming the basic fact that ethanol production is uneconomical (National Center for Policy Analysis, 2002).

If the production costs of producing a liter of ethanol were added to the tax subsidies, then the total cost for a liter of ethanol would be $1.24. Because of the relatively low energy content of ethanol, 1.6 l of ethanol have the energy equivalent of 1 l of gasoline. Thus, the cost of producing an equivalent amount of ethanol to equal a liter of gasoline is $1.88 ($7.12 per gallon of gasoline), while the current cost of producing a liter of gasoline is 33c/ (USBC, 2003).

Therefore, even using Shapouri's optimistic data, to feed one automobile with ethanol, substituting only one third of the gasoline used per year, Americans would require more cropland than they need to feed themselves!

The cost per ton of switchgrass pellets ranges from $94 to $130 (Samson, Duxbury, and Mulkins, 2004). This seems to be an excellent price per ton.

However, converting switchgrass into ethanol results in a negative energy return (Table 4). The negative energy return is 50% or slightly higher than the negative energy return for corn ethanol production (Tables 2 and 4).

The cost of producing a liter of ethanol using switchgrass was 54c/ or 9c/ higher than the 45c/ per l for corn ethanol production (Tables 2 and 4). The two major energy inputs for switchgrass conversion into ethanol were steam and electricity production (Table 4).

Now perhaps it could be argued that if the U.S. scaled up alternative sources for electricity to some nearly unimaginable height, then the excess power could be converted to steam to cook and process 500 million gallons of liquid fuel a day.

But exactly what are the cost and resource inputs for this stupendous amount of energy? Thermonuclear power? Nice, but that is science fiction at the moment, not science.

Given the evidence before us, it seems completely improbable that the U.S. can produce billions of gallons of biofuels without burning stupendous quantities of imported petroleum to do so.

The cycles and the end-games are intersecting, and technological fantasies are not actually addressing the problems at hand. Energy densities will have to drop significantly, and net energy production must rise significantly (energy produced minus fossil fuels required to harvest, mine, process and transport the alternative fuel). There is precious little evidence that biofuels can be produced in such massive quantities without using equivalently massive quantities of fossil fuels.

Energy Plan Political Pandering

Whenever Congress puts together a bill attempting to find a solution to some sort of real or imagined problem, my immediate thought is that the bill do one of four things:
  • It will worsen the problem at hand
  • It will do nothing to solve the problem but instead create a new problem somewhere else
  • It will worsen the original problem and create new problems
  • In the very best case it will do nothing at all
Consider the ethanol plan. Growing corn to produce ethanol was supposed to help make us energy independent. What happened was that subsidies to grow corn (an energy wasteful process without the subsidies), did not cause gasoline prices to drop, instead it diverted food products to inefficient energy processes. This raised the price of grain which feeds livestock and corn syrup (used in practically everything as a sweetener).


[Apr 24, 2008] The Greenback- Toward A New Monetary Policy

As we transit to a world of resource depletion and the reversal of the Permagrowth model, what is the proper monetary and currency regime? Clearly, not the existing fiat/credit currency, which depends entirely on financing present consumption by discounting future growth that may never occur. Just as bad would be a throwback to precious metals. It would suppress economic activity without providing incentives for developing alternative energy resources.

Instead, I believe we should implement a monetary system that uses renewable, "green" energy as a benchmark. In previous posts I have called the new currency the "Greenback", an allusion to the fact that for most people nothing would change in their daily routine. Same dollars, same bank accounts, same credit cards. The monetary institutions would also be retained: the Fed and the fractional banking system. The only change - admittedly a big one - would be the rate at which money supply is allowed to expand. Let's call this rate "M green", or M(g) for short and see how it will be calculated.

To begin with, we have the following energy consumption data from the US Energy Information Administation (EIA, see chart below). The discrepancy in percentages is in the original data, but it is very minor.

Data: EIA (2006)

We see that of the total 99.4 quadrillion BTU the US consumed in 2006, 86% was produced by "black" fossil fuels, the rest from nuclear and renewable sources. Adding the last two together gives us the percentage of "green" energy. Though I hesitate to call nuclear "green", it is an indispensable energy source in transiting away from fossil fuels.

For any given period, then, the allowed growth in money supply would be calculated by this formula:

M(g) = ΔE(g)/E(b)

- ΔE(g) is the change in "green" energy consumption from the previous period, in BTU.
- E(b) is the total "black" energy consumed in the previous period, in BTU.

For example: let's say that in 2008 we consume 85 black BTU and 15 green BTU. The following year, we consume the same 85 black BTU but increase green to 17 BTU.


M(g) = (17 - 15)/85 = 0.0235 = 2.35%

i.e. broad Greenback money supply (the equivalent to M3 today) would be allowed to expand by 2.35%.

[Apr 24, 2008] Heads In The (Tar) Sands

This is a follow-up post on common sense evidence that easily accessible crude oil is in depletion and its relationship to debt and central bank policies.

I just watched a TV documentary about the Alberta tar sands and the way oil is mined by Syncrude. Some facts: When it comes to evaluating resource depletion, deeds speak louder than words. Oil isn't available for the price of a straw stuck in the sand any more. Back when "gushers" were common, easily accessible crude had EROEI of as much as 100-to-1. Saudi crude is now extracted at 10-to-1 and tar sand oil at 5-to-1. We can argue dollar prices forever, but a kilowatt is always a kilowatt. Try this simple thought experiment: instead of thinking of oil prices in dollars per barrel, reverse the point of view and think in terms of barrels per dollar. That is, price the artificial entity (dollars) in terms of the real item (oil). Do you see the difference?

As I see it, our global human society has two choices. We can keep our heads buried in the (tar) sands, perma-consuming until all we have left to bequeath our children are dregs. Or we can stop right now and start moving towards a sustainable regime. The current debt "crisis" is not only a warning sign that we have already consumed too much of our future. It is also a golden opportunity to reverse some of the excess, to un-mortgage humanity's future by letting some of the debt go bust.

In this sense, repeated bailouts by central banks (BOE is the latest addition) are profoundly wrong, misbegotten and ultimately dangerous. Speaking in thermodynamic terms, they are trying to convince us that their kilowatt is worth more than one kilowatt. They are just drilling their heads deeper into the sand, forcing us along for the ride. Unfortunately, we will have to work that much harder to dig ourselves out - assuming we will still have some food left over.


Note: A reader asked for a book recommendation on Thermoeconomics: Try "The Entropy Law and The Economic Process". It's now on the Amazon bar on the right.

[Apr 20, 2008] Economist's View Paul Krugman: Running Out of Planet to Exploit

Will increasing world demand for limited resource supplies pose a threat to world economic growth, or will technology keep peak oil and other such commodity peaks safely out in front of us?:

Running Out of Planet to Exploit by Paul Krugman, Commentary, NY Times: ...Last week, oil hit $117. It's not just oil... Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven't heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?

How you answer ... depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views.

The first is that it's mainly speculation - that investors ... at a time of low interest rates have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of

The second view is that soaring resource prices do, in fact, have a basis in fundamentals - especially rapidly growing demand from newly meat-eating, car-driving Chinese - but that given time we'll drill more wells, plant more acres, and increased supply will push prices right back down again.

The third view is that the era of cheap resources is over for good - ...we're running out of oil, running out of land to expand food production and generally running out of planet to exploit.

I find myself somewhere between the second and third views.

There are some very smart people ... who believe that we're in a commodities bubble... My problem with this view...: Where are the inventories? ...inventories of food and metals are at or near historic lows, while oil inventories are only normal.

The best argument for the second view, that the resource crunch is real but temporary, is the strong resemblance between ... now and ... the 1970s.

What Americans mostly remember about the 1970s are soaring oil prices... But there was also a severe global food crisis...

In retrospect, the commodity boom of 1972-75 was probably the result of rapid world economic growth that outpaced supplies,... bad weather and Middle Eastern conflict. Eventually, the bad luck came to an end, new land was placed under cultivation, new sources of oil were found..., and resources got cheap again.

But this time may be different: concerns about what happens when an ever-growing world economy pushes up against the limits of a finite planet ring truer now than they did in the 1970s.

For one thing, I don't expect growth in China to slow sharply anytime soon. That's a big contrast with ... the 1970s, when growth in Japan and Europe ... downshifted - and thereby took ... pressure off ... resources.

Meanwhile,... Big oil discoveries ... have become few and far between, and in the last few years oil production from new sources has ... barely ... offset declining production from established sources.

And the bad weather hitting agricultural production this time is starting to look more fundamental and permanent... Australia, in particular, is now in the 10th year of a drought that looks more and more like a long-term manifestation of climate change.

Suppose that we really are running up against global limits. What does it mean?

Even if it turns out that we're really at or near peak world oil production, that doesn't mean that one day we'll say, "Oh my God! We just ran out of oil!" and watch civilization collapse into "Mad Max" anarchy.

But rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living. And some poor countries will find themselves living dangerously close to the edge - or over it.

Don't look now, but the good times may have just stopped rolling.

[Mar 1, 2008] Petroleum Prices and GCC Spending

Calculated Risk

But could oil prices fall sharply?

Setting aside peak oil arguments for now, it's important to realize that both the supply and demand curves for oil are, in general, very steep. If there is little unused capacity, it takes time for more oil production to become available since this involves huge capital intensive projects. And, in the short term, demand is fairly inelastic over a wide range of prices; people stay with their routines and keep their same vehicle. With two steep curves (supply and demand), a small increase in quantity demanded will lead to a large increase in prices.

And, of course, the opposite is also true. A relatively small decrease in demand (or increase in supply) would cause a significant drop in price.

As the U.S. economy weakens, there is waning demand for oil in the U.S.:

According to the US Energy Information Administration's weekly inventory report, the overall consumption of oil and crude products dropped 3.2 percent in the last four weeks compared to the same period last year.
Perhaps the growth in demand in China and India (and elsewhere) will more than offset the small decline in U.S. demand. But there may be another important factor - the behavior of the GCC countries.

What if the supply-demand curve for oil has multiple equilibrium points? And what if the GCC countries have been limiting production because of the lack of other investment opportunities? The following is from a paper by Professor Krugman several years ago: The Energy Crisis Revisited

The fact that oil is an exhaustible resource means that not extracting it is a form of investment. And it is an investment that might look attractive to a national government when oil prices are high. If a country does not want to spend all of the massive flow of cash generated by a sudden price increase on consumption, it must do one of three things: engage in real investment at home, which is subject to diminishing returns; invest abroad; or "invest" by cutting oil extraction, and hence reducing supply.

[Jan 28, 2008] Time To Move On to the Next Bubble Clean Energy by Mark Braly

The U.S. economy is a bubble economy -- going from bubble to crash to the next mania -- and the new bubble is likely to be clean energy, says Wall Street insider Eric Janszen in the cover story of the February Harper's.

We've seen two bubbles, internet and housing, within a decade, writes Janszen, "each creating trillions of dollars in fake wealth."

"There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle."

Here's why Janszen thinks the necessary next bubble will be clean energy. The new bubble sector must:

1. Already be formed and growing as the previous bubble (housing) deflates. Check.

2. Have in place or in the works legislation guaranteeing investors favorable tax treatment and other protections and advantages. Check.

3. Be popular, "its name on the lips of government policymakers and journalists." Check.

4. "Support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell." Is that coming? Janszen is quite expansive in his definition of clean energy, including a massive retooling of the country's transportation and power infrastructure.

Janszen, a one time venture capitalist and serial entrepreneur, thinks the financial sector is driving the U.S. economy (and, per force, much of the global economy). The financial sector gets behind whatever new thing they think can provide the hyperinflated returns they require. And they bring to bear massive political influence, well lubricated by money, to insure whatever public policy they require.

Advocates of renewable energy might say bring on this bubble. But Janszen cautions: "Bubbles are to industries that host them what clear-cutting is to forest management. After several years of recession, the affected industry will eventually grow back, but slowly."

In an email interview I asked Janszen if a clean energy bubble was a good thing - bringing massive investment to vital new industries - or bad, leaving those industries struggling in the wreckage of the inevitable crash down the road.

"The term 'bubble' is pejorative," he replied. "The alternate title for the Harper's piece was 'The Good Bubble.' These are changes we need but lack the political ability to make due to the inertia of entrenched interests...Employment of the bubble system that was responsible for the tech and housing bubbles may be the only means available both to fight the impact of the debt deflation recession that started in Q4 2007 and also to deploy resources on the scale required."

In this scenario, the big losers will likely be the investors or taxpayers, as in the housing collapse.



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Last modified: March, 03, 2020