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I Am Perplexed: Comments On The World Financial Situation And Peak Oil

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http://www.theoildrum.com/node/6542

I am perplexed; I really cannot understand how the world’s economists and commentators on the present precarious global financial situation have not come to the conclusion that must be obvious to all persons who have followed peak oil. Money is not a disembodied quantity; it is related to the real world by means of what people can exchange it for. In particular the relation between energy and money must be very tight to the extent that money pretty well must be a token for energy and therefore for oil.

Except possibly for bare land, all items of trade, food, minerals, motor cars and other consumer goods rely on energy for their manufacture, and crude oil forms the largest share of the world’s energy mix, followed by coal and gas. Thus, if we plot world energy supply against world GDP, we should get a close relationship. Oil is currently around 35% of world energy supply. Figure 1 below gives a plot of world GDP against world oil supply. The GDP figures come from economist Angus Maddison, but other sources would give similar results.

worldoldsupplyplusworldDGP.gif

Figure 1: the natural log of world oil supply and the natural log of world GDP plotted against time

The oil data comes from BP statistics (from 1967) and Realty earlier. The plots are the natural logarithm of each against time, starting around 1950 to the present. With these plots the slopes of the lines give the percentage increase per annum and these increases are shown on the plots.

There are four regions of interest on the figure, the first region is from 1950 to 1974 and the data for this time shows that the increase in world oil supply was around 7.3% p.a. compared to the increase in world GDP of around 4.6% p.a.. Or in other words, a 1% p.a. increase in oil supply produced a 0.63% p.a. increase in world GDP.

The second region of interest is the period of the 1970s oil crisis when turmoil in the Middle East hiked prices and restricted supply. During this time the world changed the relation between oil and GDP dramatically. Energy efficiency was improved and energy intensity, that is the ratio of energy use to GDP, decreased, such that in the third period, from the mid 1980s until recently, the increase in world GDP to increase in world energy supply reversed and during this time a 1.6% p.a. increase in oil supply was able to produce a 3.2% p.a. increase in GDP. That is the world GDP increased at double the oil supply increase. Now a change in the increase by a factor of two means that if we plot oil use against the square root of the world GDP the slopes should be the same on average. This plot is shown in figure 2.

OilproductionagainstsquarerootofworldGDP.gif

Figure 2: oil production in million barrels per day plotted against the square root of world GDP in constant (US$)

As can be seen, the relationship is very close except after 2005, the fourth region of interest. How can that be? World GDP still increases at 3.2% per annum until 2008, but oil production is pretty much flat. At first sight it looks as if world oil use has been decoupled from the world economy? But, what about world debt? Figure 3 shows two sets of data, one from the CIA World Fact Book (total external debt)and the other from the Economist (Magazine) Intelligence Unit (public debt), see: http://buttonwood.economist.com/content/gdc over the past decade.

Finding any data sets back in time for total external debt has proven difficult, any help would be appreciated. The CIA Fact Book data is pretty erratic in terms of what country data are available before 2005 with only a few countries in a complete set from 2003 to 2009. The data from these countries do, however, suggest debt levels accelerating after 2005: see figure 4. The data set from the Economist, for public debt only, is shown in figure 5.

Data from the International Monetary Fund gives reasonably good data for developing country debt but the data for the wealthy countries does not appear in their databases. Presumably because the wealthy countries were thought to be too big to fail! Of course some countries may have reason to hide their real position as it would be likely to affect their credit ratings and hence their economy (e.g. Greece). But with world GDP hovering around the 60 trillion level as of 2009, it is clear that world external debt is now close to world GDP and that debt will make it difficult to cope with a falling oil supply. Economists of the Keynesian variety, who are still advocating even more debt to stimulate growth, may be in for trouble. In Keynes’s time when there was an increasing supply of oil at 7.34% p.a. this could have worked, but not at the present.

worlddebt1999to2010.gif

The debt information is pretty suggestive of what is going on, and that is, the reason the world has been able to keep increasing GDP since 2005 is because it has been borrowing from the future to fund the addiction to economic growth. But this situation cannot continue without serious problems in terms of repayment. And we have imminent peak oil, with the consensus dawning that soon after 2011 oil supply is highly likely to start declining with decline rates anywhere between 2% and 8% per annum.

The 64 trillion dollar question is what will happen to world GDP? Robert Hirsh in his 2008 Energy Policy paper has suggested that GDP will decline at around the same rate as oil supply, so if oil supply declines at 4% per annum then world GDP will also decline at 4% per annum. If the current ratio is anything to go on, then 4% decline in oil may produce an 8% decline in GDP, but the situation is not likely to be symmetric or for that matter linear. With a large debt hanging around it is also likely that the world monetary system is at risk of imploding (see Gail Tverberg’s recent posts on debt repayments in a situation of decreasing wealth. http://www.theoildrum.com/node/6439).

With peak oil and large world debt coinciding it thus seems as if we are staring down the barrel of a highly non linear event and if you factor in climate change it may be a double barreled, highly non linear, pair of events.

More charts at the link.

Still it's contained and the recovery is locked in.....

More support for the notion it's purely been debt funded growth and it's about to go pop.

The world needs it's saviour back.

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For many in the richer countries, energy is still to cheap to worry about being efficient. There may be a phase then where GPD/Oil price can disconnect as efficiency increases. This could easily last a decade.

Then it all turns brown.

VMR.

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Great post and a nice find.

GDP doesn't grow without energy and debt issuance doesn't work unless the promise to pay it back holds.

You canna change the laws of physics, Jim.

Edited by AvidFan

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More charts at the link.

Still it's contained and the recovery is locked in.....

More support for the notion it's purely been debt funded growth and it's about to go pop.

The world needs it's saviour back.

The link between total energy use and general prosperity is reasonably well established (and pretty obvious if you think about it)

Making energy cheap and extremely abundant should be a major goal of any government vaguely interested in improving the lot of its citizens.

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Americas best selling vehicle is (still) a Ford F250 5.4V8 pickup truck averaging 13mpg

I dont really see how them all converting to a 1.6 Ford Focus averaging 39mpg would hurt GDP. In fact it would probably help the US trade balance correct.

OK, transport only takes 20% of oil demand IIRC, but still...

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Americas best selling vehicle is (still) a Ford F250 5.4V8 pickup truck averaging 13mpg

I dont really see how them all converting to a 1.6 Ford Focus averaging 39mpg would hurt GDP. In fact it would probably help the US trade balance correct.

OK, transport only takes 20% of oil demand IIRC, but still...

More like 60%, IIRC.

That's the problem with oil - we have, in theory, many ways to make electricity (some better than others), because it's stationary in generation and use. Oil, however, produces transport fuels that can take a saloon car 1000 miles or an aircraft halfway around the world without refuelling. That's a much bigger problem to substitute out..

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Guest Steve Cook

Of course oil, gas, biofuels, wind etc. are just forms of solar energy converted for storage.

You can print a lot of money before the sun runs out.

You certainly can. However, not at the monetary equivalent rate of the energy contained in 85 million barrels per day.

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http://news.bbc.co.uk/1/hi/business/10275183.stm

Russia overtook Saudi Arabia to become the world's leading oil producer in 2009, while global oil consumption fell the most since 1982, BP has said.

According to the oil giant's latest Statistical Review of World Energy, Russia increased oil production by 1.5% in 2009, claiming a 12.9% market share.

Production in Saudi Arabia fell 10.6%, giving the country a 12% market share.

Global oil consumption fell by 1.2m barrels a day, or 1.7%, while natural gas use dropped 2.1%.

The world's oil production dropped by 2m barrels a day, or 2.6%, also the largest decline since 1982.

'Unconventional supplies'

BP also said that "global gas production declined for the first time on record", falling 2.1%.

"Production fell sharply in Russia (-12.1%) and Turkmenistan (-44.8%), driven by declining consumption - in Russia and much of the rest of Europe - and the availability in Europe of competitively priced liquefied natural gas," the report states.

The US became the world's largest gas producer, surpassing Russia, thanks to "continued expansion of unconventional supplies".

Global proven oil reserves increased by 700m barrels to 1.33 trillion barrels last year.

At the same time, the world's gas reserves grew by 2.21 trillion cubic meters to 187.49 trillion cubic meters.

Can we expect a similar decline in global GDP?

Or will the recovery drive up GDP?

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Guest Steve Cook

http://www.theoildrum.com/node/6542

More charts at the link.

Still it's contained and the recovery is locked in.....

More support for the notion it's purely been debt funded growth and it's about to go pop.

The world needs it's saviour back.

read my sig. I've been prattling on about this for years.

Money is abstracted resources

It all starts in a field or hole in the ground somewhere.

It's where it will end

Edited by Steve Cook

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I believe a head and shoulders lemon scented winter wave is forming on the W Y axis.

Should work wonders for your athsma TMT

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Great post and a nice find.

GDP doesn't grow without energy and debt issuance doesn't work unless the promise to pay it back holds.

You canna change the laws of physics, Jim.

Howdydoodee FP?

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Americas best selling vehicle is (still) a Ford F250 5.4V8 pickup truck averaging 13mpg

I dont really see how them all converting to a 1.6 Ford Focus averaging 39mpg would hurt ....

Only one in six Americans can actually fit in a Ford Focus. A typical US family of two adults and one child require a one tonne pickup for them and their weekly shopping.

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I believe a head and shoulders lemon scented winter wave is forming on the W Y axis.

I'm glad I'm not the only one who looks at charts that others have analysed, and feel like the only one who can't see the "Magic Eye" picture image. :blink:

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Only one in six Americans can actually fit in a Ford Focus. A typical US family of two adults and one child require a one tonne pickup for them and their weekly shopping.

Joking aside, there is a psychological as much as a physiological issue. I was talking to an American not of ample girth via the interweb who was bemoaning the news he'd been bumped down to a Focus by a car hire company. He was actually panicking about it. "But you don't understand, I can't drive it, I'm a big guy". 5'10", 12 stone. He thought he couldn't physically fit into a Ford Focus without having his feet sawn off at the shins. "Car dysmorphic syndrome".

Edited by Cogs

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Joking aside, there is a psychological as much as a physiological issue. I was talking to an American not of ample girth via the interweb who was bemoaning the news he'd been bumped down to a Focus by a car hire company. He was actually panicking about it. "But you don't understand, I can't drive it, I'm a big guy". 5'10", 12 stone. He thought he couldn't physically fit into a Ford Focus without having his feet sawn off at the shins. "Car dysmorphic syndrome".

Do they think a Ford Focus is the size of a dinky toy?

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  • 150 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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