To understand why it is irrational to expect oil prices to increase in the face of depletion, consider the analogy of human aging. Aging entails progressively depleting strength similar to what is going on with natural resource extraction. Imagine a man doing manual labor. In his prime he is good at it, but as he grows old his productivity obviously declines, and so does his earning power in most cases. It would be delusional to expect a 90-year-old man to be paid more per hour for hard physical labor than a 20-year-old. Yet bizarrely, this is what we expect from oil. We expect oil to be worth more as it becomes scarcer and harder to extract and returns less and less net energy on our investments. I used to believe so myself before I got into the peak oil scene, but now I see how foolish this entire line of reasoning is. High oil prices will not save us from peak oil. On the contrary, too low oil prices will be the proximate cause of peak oil, and it is happening now.
To take the analogy further, consider a workforce of aging workers, with less and less vigorous young men to replace them. Attempting to power industrial civilization on shale oil and tar sands and the like -- or renewable energy, for that matter -- would be equivalent to expecting 90-year-olds to do all the work, and be paid more for it than we used to pay men in their primes. It is impossible, and things fall apart. Unfortunately, this is our immediate fate.
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Thanks! A very good analogy. As I've not seen it before I guess you came up with it yourselves.
For me I've since your last post joined the wildernists. As there's no hope to save industrial civilization, it's better to make the best of it. To turn doomsday into salvation.
Also, when joining the wildernists you are on the winning party. And who doesn't want to be a winner?
Here are our principles:
http://www.thewildernist.org/blogs/hg/2015/03/statement-of-principles/
If 90-year-old men were the only ones available, yes, they would be paid more, even for less work. Don't you think? That's the classical effect of a monopoly: it reduces the supply and increases the prices while social welfare decreases. It's Econ 101.
Øyvind,
Yes, I came up with the analogy myself. I agree there is something to be said for being on the winning side, and it certainly makes sense to accept what is inevitable anyway, but I am not quite ready to embrace collapse yet. Especially since the "winners" will mostly be dead...
Ardegas,
No, I don't think it works that way for an essential resource which underpins the entire economy, such as oil, or manual labor when the economy is reliant on that. If the resource gets depleted too much, the effect feeds back into the economy and weakens it so there will be less demand and the price goes down. The social welfare has already been decreasing for several years now due to diminishing returns from oil, while wealth is getting more concentrated, though that is mostly imaginary paper wealth. Eventually you get to the point where there is a lack of affordability in the market at the price needed to sustain oil production, and that is what we are facing now.
Yes, to be both a winner and a survivor can be a problem. But at least, you won the case.
Yes, the wealth of the very rich is just imaginary, as Tverberg points out:
"The advantage of tipping most of the wealth toward the very rich is that they tend to spend very little of it. If it all were taxed away, and distributed to the poor, they would try to actually spend the wealth. The catch is that this wouldn’t actually result in the huge amount of goods needed to fill the needs of the less wealthy. There isn’t enough oil being extracted to build all of the cars and houses that the new-found wealth would buy (plus pay the wages of all of the people needed to build these things).
I am not a student of thermodynamics, but intuitively what you say this makes sense to me. These presentations are at this point are still in draft form, and the “Overview of the Networked Economy” in particular is short, so could be added to. The thermodynamics behind this change in wealth distribution would be an interesting addition." - Gail Tverberg
http://ourfiniteworld.com/2015/02/25/role-of-wages-of-the-common-worker-in-oil-prices-collapse/#comment-54173
Before I read this I believed all money were set in production. But there's actually just a fragment of the money that is used to produce goods.
Those who want to share the wealth of the very rich will be disappointed if they succeed.
Yes, that is one thing Gail has taught me as well. The world pretty much operates on a pay-as-you-go basis, meaning there is no real reserve wealth stored anywhere that can be redistributed to the poor. All the goods and services produced in any given year are also consumed right away, and there is not much excess production capacity anywhere. Saving money in the bank or stock market is an illusion, and so is the wealth of billionaires beyond what they immediately consume. They merely own claims on future production which cannot exist when the cheap oil stops flowing and the market is unable to pay for expensive oil.
According to former Norwegian oil minister Ola Borten Moe, it seems like Norway has hardly reach the middle ages of a strong man:
http://www.nrk.no/norge/eksstatsrad-spar-norsk-oljefest-i-mange-tiar-1.12274642
Further he thinks people like Gail Tverberg better go home to have a rest and some sleep.
We'll see how well Moe will sleep in 20 years from now?
I am amazed that Gail got invited to teach at a university in China. That would not have happened here.
http://ourfiniteworld.com/2015/03/21/first-report-from-gail-in-china/
Poor students. Do we really want to tell them that we are all doomed and there is nothing we can do about it... even if it is true? I would have mixed feelings about exposing students to such a negative message.
Maybe the Chinese are more willing to face reality. Or maybe the professor who invited her didn't fully comprehend what he was getting into.
Eivind:
The global Elites have made population control/reduction one of their stated goals
http://hawaiianlibertarian.blogspot.com/2014/08/the-jaffe-memo.html
It's not surprising that they would engineer a scarcity of resources to get the public behind such a program.
If the global elites wanted to have population control, they are doing a very bad job at it. There is also no need to engineer scarcity, because we are obviously in overshoot and there will be a huge dieoff. The worst part, if Gail is right, is that there is no way to preserve industrial civilization through the coming crisis. Because our civilization is now one interdependent global network, it only takes one tipping point to bring it all down like a dome of Leonardo sticks, and if there are any survivors, they have to start at the stone age level. The notion of a global elite who is in control is basically a fantasy, and this is actually a more frightening realization than any conspiracy. There exists no group of people powerful enough to avert collapse, nor can they possibly take industrial civilization with them through the bottleneck.
We know collapse is imminent when commodity prices fall too low to encourage extraction, which is already happening. At first, this looks like a glut. Now we are told there is "too much oil" on the market, but in reality, demand is dwindling because the economy is weakened by years of expensive oil and unable to pay the price it takes to extract oil anymore. The "oil glut" actually only consists of a few days' worth of consumption, which will quickly turn around to a shortage as oil companies increasingly go out of business. When oil prices then fail to rise despite real shortages, shit hits the fan. It is also possible, and perhaps more likely according to Gail, that bankruptcies in the oil industry will trigger a financial crisis in the next year or two that takes out the entire system before we even get to the point of actual oil shortages. In that case, most people will perish without ever realizing that the crisis had anything to do with peak oil.
"I think we are kidding ourselves, to think we can keep the system going, even if the rich have every intent and desire to have such a system for themselves. The rich will see most (or all) of their wealth disappear, as it is no longer has value in the new way of doing things." - Gail Tverberg
http://ourfiniteworld.com/2015/03/09/the-oil-glut-and-low-prices-reflect-an-affordability-problem/#comment-54628
Eivind,
Lack of energy will make us poorer, no doubt about it. But that a crash will come through lower prices is not so clear to me.
Energy will always be needed. Many will not be able to afford it like the used to, but those who can afford it will raise its price when it gets more scarce.
Remember, prices are relative.
You are repeating the original fallacy that oil prices can rise arbitrarily high. Civilization would indeed not be endangered if this were true. Critical infrastructure would remain intact and the rich could still get whatever they want. But this is precisely what will not work.
The price of oil is set by the global market. When ordinary consumers are unable to keep up demand at the price needed to supply oil, prices will go down and oil producers will go bankrupt, which is starting to happen already. The rich are powerless to stop this process because there are too few of them and they don't have enough money. By the time only the rich could still theoretically afford oil, there will not be enough critical infrastructure left to have a functioning oil industry at all. It takes a civilization to have an oil industry, and oil needs to supply enough net energy to power this civilization. From a thermodynamic perspective, it is physically impossible to keep extracting oil when you have to invest more energy in its production than you can get out of it (unless another energy source could make up the deficit, in which case oil could still be extracted at an energy loss and used for liquid fuels and feedstock, but we have no such option). Due to the diminishing returns resulting from depletion, we already get too little net energy out of oil to keep the system running for much longer. Physics trumps economics and there is nothing you can do about it. Saying "prices are relative" will not negate the second law of thermodynamics.
It is even worse, because we also rely on the oil industry to provide employment and to fund governments and pensions and all sorts of financial derivatives. Low oil prices will likely lead to so such a chaos that it could bring down the entire system long before it becomes physically impossible to extract more oil. The financial system is the operating system of the economy and just as essential as the hardware, so a financial crisis could bring down the entire system all by itself. All it takes is loss of confidence that debts can be repaid, resulting in a credit crunch and broken supply lines.
Still most people I meet are full of optimism because of lower interests and rising house prices. For them there are no clouds on the sky.
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