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Tipping Point: Near-Term Systemic Implications Of Peak Oil


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This is an important, new, general article from The Oil Drum.

Some snippets about the financial side:

• Credit forms the basis of our monetary system, and is the unifying embedded structure of the global economy. In a growing economy debt and interest can be repaid, in a declining economy not even the principle can be paid back. In other words, reduced energy flows cannot maintain the economic production to service debt. Real debt outstanding in the world is not repayable, new credit will almost vanish.

• Our localized needs and welfare have become ever-more dependent upon hyper-integrated globalised supply-chains. One pillar of their system-wide functioning is monetary confidence and bank intermediation. Money in our economies is backed by debt and holds no intrinsic value; deflation and hyper-inflation risks will make monetary stability impossible to maintain. In addition, the banking system as a whole must become insolvent as their assets (loans) cannot be realised, they are also at risk from failing infrastructure.

A failure of this pillar will collapse world trade. Our 'local' globalised economies will fracture for there is virtually nothing produced in developed countries that can be considered truly indigenous. The more complex the systems and inputs we rely upon, the more globalised they are, and the more we are at risk from a complete systemic collapse.

<snip>

• We argue that one of the principle initial drivers of the collapse process will be growing visible action about peak oil. It is expected that investors will attempt to extract themselves from ‘virtual assets’ such as bond, equities, and cash and convert them into ‘real’ assets before the system collapses. But the nominal value of virtual assets vastly exceeds the real assets likely to be available. Confirmation of the peak oil idea (by official action), fear, and market decline will drive a positive feedback in financial markets.

That article is a summary of a whole 55-page pdf linked at the top of the article.

http://www.theoildrum.com/node/6309

The author posted this graph in the comments.

Unconstrained%20demand.png

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Guest Steve Cook

This is an important, new, general article from The Oil Drum.

Some snippets about the financial side:

That article is a summary of a whole 55-page pdf linked at the top of the article.

http://www.theoildrum.com/node/6309

The author posted this graph in the comments.

Unconstrained%20demand.png

The crisis of the last two years is the only the beginning of the above process

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The crisis of the last two years is the only the beginning of the above process

Yes.

I think the financial and economic crisis would have happened anyway due to all the financial bubbles. But oil production was flat for a few years while demand increased from Asia. So inevitably the price went up, for a few months in 2008 over $100. Then the crisis really began in autumn 2008.

So I think the timing was due to the high all price which was caused by the inability to ramp up demand as the oil price rose. The low oil price after the price crash of 2008 to early 2009 caused many oil projects to be suspended or cancelled. So production cannot be ramped up quickly and the price has crept up again to over $80. And remember that production is always running just to keep up with depletion of existing wells.

That graph may not be far off the mark. If so, we are where the blue line turns red and the "gap" becomes increasingly significant.

I found the comment about a run from paper assets to real assets interesting.

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Globalists often miss an important point...

You have to pay a Chinese worker $10 to produce 1 tonne of steel.

You have to pay a European or American worker $100 to produce 1 tonne of steel.

It takes 1 barrel of oil to ship a tonne of steel from China to the West.

What happens when oil reaches $90 a barrel?

;)

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I notice many western oil companies getting weak willed and too afraid to invest large amounts of money in oil production as well. That move down to 35$ really scared them and put them into play it safe mode. I made a small fortune buying double long oil etf at 35-40$, and selling it a few months later for near double the price.

I was especially sad to hear Shell getting weak willed about its tar sands development. When it had been the one western player to go 'all in' for the tar sands as the price of oil was ramping up.

I believe there is plenty of oil if the market is willing to sustainably pay like 80$ a barrel. But below 40$ a barrel oil for all is gone. And that has to have huge economic ramifications. Because energy is built into everything, everything that we buy and consume. Heck even driving to consume something, the cost of driving there becomes a significant factor.

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Globalists often miss an important point...

You have to pay a Chinese worker $10 to produce 1 tonne of steel.

You have to pay a European or American worker $100 to produce 1 tonne of steel.

It takes 1 barrel of oil to ship a tonne of steel from China to the West.

What happens when oil reaches $90 a barrel?

;)

the chinese already produce all our steel...

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Globalists often miss an important point...

You have to pay a Chinese worker $10 to produce 1 tonne of steel.

You have to pay a European or American worker $100 to produce 1 tonne of steel.

It takes 1 barrel of oil to ship a tonne of steel from China to the West.

What happens when oil reaches $90 a barrel?

;)

Depends if you have already shut down or sold off all your steel making facilities!

Also depends on whether you have decent access to raw materials.

China is busy buying up. all sorts of reserves.

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Globalists often miss an important point...

You have to pay a Chinese worker $10 to produce 1 tonne of steel.

You have to pay a European or American worker $100 to produce 1 tonne of steel.

It takes 1 barrel of oil to ship a tonne of steel from China to the West.

What happens when oil reaches $90 a barrel?

;)

we get in even more debt to pay the Chinese man rather than to actually bother to do it ourselves!

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the nominal value of virtual assets vastly exceeds the real assets likely to be available.

Well all this means is that the price of real assets will rise.

Depends if you have already shut down or sold off all your steel making facilities!

Why do people think globalisation can only go one way? If the Chinese can build new steel plants, so can we.

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I think oil consumption is more flexible than people realise.

During the fuel protests everybody in the office still got to work.

The roads were nearly empty yet even the biggest petrolhead bore managed to find some alternative way to get in.

People and markets can adapt very quickly.

You are right, personal PETROL consumption is quite elastic.

Agricultural fertiliser, and industrial hydrocarbon use is much less so.

We can easily soak up short sharp shocks of price increases or lack of supply, but should oil reach $150+ for any sustained period then we will see the real impact.

Bear in mind that it has been asserted that the global oil reserves have been consistently overstated (due to the bass-ackward OPEC quota system), so this could all happen much sooner than even the doomiest peak oiler could imagine.

Jim

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Well all this means is that the price of real assets will rise.

Why do people think globalisation can only go one way? If the Chinese can build new steel plants, so can we.

Sure we can. I don't know the average plan/design/build cycle for a major steel plant, but I would guess it would be at least 5 years.

Plus more importantly, just how many barrels of oil do you think are required to build the steel plant. Because we no longer have the local infrastructure we (the West) have put all of our hope in a JIT, globalised supply structure... and for a few decades it really worked well (for us). Now those pesky orientals and africans aspire to to the same standard of living and we have, and we wonder why the system is faltering.

Jim

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I think oil consumption is more flexible than people realise.

During the fuel protests everybody in the office still got to work.

The roads were nearly empty yet even the biggest petrolhead bore managed to find some alternative way to get in.

People and markets can adapt very quickly.

It takes 10 calorie of oil to make 1 calorie of food.

You have probably just burnt a litre of oil this morning, eating your breakfast, using the computer and brushing your teeth.

Every part of our life is dependent upon oil.

The price of oil goes up, and the price of everything goes up. It pushes our debt-based, ponzi-schem economy to destruction. It obliterates just in time, centralized food systems. It will cause choas like you have never seen before.

Remember the petrol strike was only for a few days. Had it been for a few weeks then boy would you really have noticed the difference.

There would have been no food, no water, no electricity.

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I'd also add another trend that goes along with higher oil prices is western nations intentionally driving up the price of energy for their citizens. Again that has to lead to a smaller economy, than otherwise projected.

Yes, they are - but that's because they are hoping that people will start conserving/adapting. Otherwise we would indeed get a larger economy in the short term, followed by a more catastrophic crash when supply shocks hit home. Price volatility has undermined efforts to adapt to reduced supply, and not just by reducing efforts to exploit reserves that are only "viable" at $80+ a barrel. ("Viable" in the sense of devoting so much of our resources to extracting and refining the stuff that we're financially too knackered to enjoy p!ssing it against the wall in the orgy of decadent "consumerism" that constitutes everyday life in modern Western societies.)

It is increasingly likely that by the time we realise we have burnt the readily-available fossil fuels that would have given us the resources to build a more sustainable infrastructure we will find that adaptation will be, well, catastrophic.

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I think oil consumption is more flexible than people realise.

During the fuel protests everybody in the office still got to work.

The roads were nearly empty yet even the biggest petrolhead bore managed to find some alternative way to get in.

People and markets can adapt very quickly.

Yes, most people can reduce their oil consumption quite easily because they waste a lot.

Reduced consumption has already occurred (in First World countries) due to recession and higher unemployment. But it has knock-on effects to the rest of the economy. As petrol prices go up people spend more on petrol (even if they cut down a bit) and therefore spend less on other things hurting other businesses.

The biggest problem in America is that apart from in a few older cities it is nigh on impossible to live without a car. The exburbs and long commuting distances made necessary gasoline consumption that much higher and the high gasoline prices probably sealed the HPC in America which is probably over half done now.

In the longer term the real problem is that after peak oil the annual supplies of oil will continue to drop year after year without end. It isn't just a one-off 10% or 20% or 30% drop. It will be a trend of a few percent down a year every year indefinitely (probably with some up-and-down zigzagging around the trend).

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It takes 10 calorie of oil to make 1 calorie of food.

You have probably just burnt a litre of oil this morning, eating your breakfast, using the computer and brushing your teeth.

Every part of our life is dependent upon oil.

The price of oil goes up, and the price of everything goes up. It pushes our debt-based, ponzi-schem economy to destruction. It obliterates just in time, centralized food systems. It will cause choas like you have never seen before.

Remember the petrol strike was only for a few days. Had it been for a few weeks then boy would you really have noticed the difference.

There would have been no food, no water, no electricity.

Agreed that food is the big one that people don't realise is oil-dependant.

But even there there is plenty of scope. 30% food thrown away. Meat-eating is very inefficient.

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Credit forms the basis of our monetary system, and is the unifying embedded structure of the global economy. In a growing economy debt and interest can be repaid, in a declining economy not even the principle can be paid back. In other words, reduced energy flows cannot maintain the economic production to service debt.

I replied to the above in a comment at the oildrum to this effect:

This part is a little short-sighted. Preparations are already being made for universal banking, which is a precusrsor to the elimination of cash from the economy. Once there is no longer any cash, withdrawl of financial assets from the network of financial intermediation we call banking will not be possible.

Once this is the case, a declining economy will lead to losses of bank assets which will be passed onto savers of financial assets - savers. A negative nominal interest rate will emerge that corresponds to the decline of the economy, whether for peak oil or demographic reasons.

Before you rush to shout 'hyperinfation, repudiation' consider that in the above scenario the money supply is shrinking, thus offsetting the effect of the negative interest rate to a greater or lesser extent. So a -3% nominal rate could represent a +1.5% real interest rate for example. The reality is the original paragraph above considers the future in terms of the old money+credit economy of 1700-1985, not the reality of the pure information/credit economy we now have. In the latter case there is no cause for concern over what are in reality 'imagined' constraints such as unrepayable debt or a 0% bound on nominal interest rates.

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I replied to the above in a comment at the oildrum to this effect:

This part is a little short-sighted. Preparations are already being made for universal banking, which is a precusrsor to the elimination of cash from the economy. Once there is no longer any cash, withdrawl of financial assets from the network of financial intermediation we call banking will not be possible.

Once this is the case, a declining economy will lead to losses of bank assets which will be passed onto savers of financial assets - savers. A negative nominal interest rate will emerge that corresponds to the decline of the economy, whether for peak oil or demographic reasons.

Before you rush to shout 'hyperinfation, repudiation' consider that in the above scenario the money supply is shrinking, thus offsetting the effect of the negative interest rate to a greater or lesser extent. So a -3% nominal rate could represent a +1.5% real interest rate for example. The reality is the original paragraph above considers the future in terms of the old money+credit economy of 1700-1985, not the reality of the pure information/credit economy we now have. In the latter case there is no cause for concern over what are in reality 'imagined' constraints such as unrepayable debt or a 0% bound on nominal interest rates.

People can still exchange digital cash for real assets like farmland, gold etc. So if people favour real assets over digital or paper promises high inflation of those assets could occur.

People can lose faith in digital cash just like they can lose it in paper money.

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Globalists often miss an important point...

You have to pay a Chinese worker $10 to produce 1 tonne of steel.

You have to pay a European or American worker $100 to produce 1 tonne of steel.

It takes 1 barrel of oil to ship a tonne of steel from China to the West.

What happens when oil reaches $90 a barrel?

;)

It costs more like sub $10 in fuel to ship a tone of steel or any bulk product from china to the EU and that is at $100 oil.

Peak oil will not stop global trade, it may stop some very very marginal products which are almost the same price anyway but not the bulk of goods.

What will stop or reduce one way trade is rising wages in the east. A chainmen will earn the same wage as a European in 20 years time if not sooner.

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It takes 10 calorie of oil to make 1 calorie of food.

You have probably just burnt a litre of oil this morning, eating your breakfast, using the computer and brushing your teeth.

Every part of our life is dependent upon oil.

The price of oil goes up, and the price of everything goes up. It pushes our debt-based, ponzi-schem economy to destruction. It obliterates just in time, centralized food systems. It will cause choas like you have never seen before.

Remember the petrol strike was only for a few days. Had it been for a few weeks then boy would you really have noticed the difference.

There would have been no food, no water, no electricity.

Not true as has been proven many times. Just scare mongering propaganda by idiots and further propagated by other idiots.

7B humans eating 100 watts = 700B watts

If it took 10j oil to make 1j food we would be using 7,000B watts (7TW) of oil on food production.

Total oil production isn’t even 7TW, it is closer to 6TW and as you know well we use oil in many other things than food so to even suggest near 100% is on food is stupid.

In reality it is certainly less than 5% of fossil fuels to make food and very likely it is less than 2% of fossil fuels in food.

That equates to less than 1j for 1j

Edited by cells
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People can still exchange digital cash for real assets like farmland, gold etc. So if people favour real assets over digital or paper promises high inflation of those assets could occur.

sure. but as I pointed out, you would only get negative nominal rates when the money supply is shrinking, so the two effects on asset prices largely cancel out, assuming of course that the interest rate is set at the right level.

or put another way, inflation targetting works fine with negative nominal rates, and any given level of CPI inflation, including +2% could be targetted by setting the appropriate nominal rate when the contraction of the money supply is taken into account.

the push towards having unique id numbers for the population and to extend universal banking to all are clear signs to my mind of preparation for this outcome.

which I feel is a good thing, because the alternative is collapse, as the oildrum article points out, and not the kind of collapse which nets you a cheap house, the kind of collapse that sees you and your kids shivering in an unlit and unheated hovel with a couple of cabbages.

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Guest DissipatedYouthIsValuable

Not true as has been proven many times. Just scare mongering propaganda by idiots and further propagated by other idiots.

7B humans eating 100 watts = 700B watts

If it took 10j oil to make 1j food we would be using 7,000B watts (7TW) of oil on food production.

Total oil production isn’t even 7TW, it is closer to 6TW and as you know well we use oil in many other things than food so to even suggest near 100% is on food is stupid.

In reality it is certainly less than 5% of fossil fuels to make food and very likely it is less than 2% of fossil fuels in food.

That equates to less than 1j for 1j

Good work.

Some of that 1KW per square metre of sunlight must be doing a bit for plant growth.

Edited by DissipatedYouthIsValuable
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Australia’s geologic survey agency has estimated the coal bed reserves at 150 trillion cubic feet — enough, the government says, to supply Queensland with power for another 1,000 years.

Or for how long if they flog it all to China? Australia and China can't both use it. Cakes, eating, having. WIGIG.

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It costs more like sub $10 in fuel to ship a tone of steel or any bulk product from china to the EU and that is at $100 oil.

Peak oil will not stop global trade, it may stop some very very marginal products which are almost the same price anyway but not the bulk of goods.

What will stop or reduce one way trade is rising wages in the east. A chainmen will earn the same wage as a European in 20 years time if not sooner.

Well, apparently

Shipping steel around the world can be expensive as there are lots of things to consider and many areas where a small error can cause long delays.

http://www.oakleysteel.co.uk/steel_plate_shipping_costs.htm

Edit: Going by the figures quoted here, where 1 Euro = 0.5% cost of shipping, fuel costs would appear to be around 50 Euro/Tonne (for a 20 Tonne load).

Edited by CokeSnortingTory
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