The Good Old Days (These Are)

You can't always get what you want

     -The Rolling Stones

Everything

All the time

     - The Eagles (Life in the fast lane)

Greetings and Happy Independence Day

        The fourth of July is a great day for political speeches.  Clinton, Sanders and Trump are promising that they can turn back the clock, and return the country to the good old days.  For interesting take on the politics of nostalgia see here  The good old days of high wage jobs, of high consumption.   But they fail to note what made that possible - cheap oil.     And the days of cheap oil are going fast.

       Art Berman has an interesting article in Oilprice:   Why we can expect crippling higher oil prices in the near future  .    .  Berman dryly notes:

"Those who want to make America great again recall the economic prosperity of 1987 to 1999 (Reagan-Bush-Clinton years) when real oil prices averaged only $33 per barrel."

       Today the price is $48, but over the longer term, its actually been much higher.   

"Since 2009, oil has never been more expensive. The average price in real May 2016 dollars is $83 per barrel, the highest in history (Figure 10). This average includes the year of low oil prices in 2009 after The Financial Crisis and the two years since the mid-2014 oil-price collapse.

"Even during the period of the oil shocks from 1974 to 1986, real oil prices were far lower, averaging $68 per barrel.

      (But even with these historically high prices, oil companies are having difficulty breaking even.  See  Oil bankruptcies spike 379%  (CNN)   One third of oil companies could go bankrupt this year (Fortune))

        Berman concludes we have arrived at "peak cheap oil", This is the peak that has real significance to our "normal" way of life.

"Those who believe that Peak Oil is a failed observation do not understand that it was never about running out of oil. Peak Oil was always about running out of cheap oil. That is an indisputable fact."

         In this environment, the producers take on debt waiting for the price to rise, while consumers take on debt waiting for it to fall.

 

"Like a disease, the high cost of energy and debt, its corollary, have drained the life from our global economy over the last several decades. The economic benefits anticipated from lower oil prices after the price collapse did not materialize because prices never stayed low enough for long enough.

"The economic problems that lead up to the 2008 Financial Collapse included high oil prices from 2000 through 2008. The massive new debt that was incurred to remedy that crisis as well as even higher oil prices have thwarted a recovery.

See also this article;  Oil - Interest Rates and Debt

Will higher prices bring on another oil glut?  Berman doesn;t think so He says:

"Many talk hopefully about renewed drilling now that oil prices are near $50 per barrel. I doubt that prices will stay at $50 but will, instead, follow the 2015-2016 pattern of cyclicity. Prices should trend higher but I don’t expect a major shift to new drilling or a return to the peak production rates of 2014 and early 2015. The industry is wounded and will not heal for many years if ever.

Tight oil may have bought us a few years of abundance but the resulting over-supply, debt and prolonged period of prices below the cost of production have exacted a terrible cost. Under-investment, a damaged service sector, weak oil company balance sheets and a decimated work force practically ensure cripplingly higher prices a few years in the future.

        Berman is not alone.  Wood Macenzie, notes that oil companies are spending less, and that last year there discoveries lagged, only replacing 75% of the inventory sold.  see here

       So where do we go from here?    The result so far anemic growth in the economy,  or if GNP growth is adjusted for inflation, we are already in a recession.   see here    

      Richard Heinberg and David Fridley have put out a useful book Our Renewable Future, which addresses  this situation as well as a number of others.  It is worth a look.   (Happily the book is available in an online format)  They note that part of the solution for the end of cheap oil will be found in electric vehicles, but only part.   Electric car sales have been growing rapidly, and could conceivably replace ICE vehicles in that sector.

"There are currently roughly 750,000 road-legal electric vehicles (EVs) globally, and the rate of growth in the market is a spectacular 76 percent annually.[5] The United States has seen a growth rate of 69 percent annually, with about 300,000 vehicles now running on batteries.[6] At this growth rate (roughly a doubling every year), the EV market in the United States could grow to equal the size of the current auto fleet in just a decade—though almost no one expects that to happen, as about half the gasoline-powered cars now in service will still be operational in ten years, and the vast majority of automobiles still being sold have conventional combustion engines."

But, so far consumers seems to be going in the opposite direction,  see this:     American Drivers Regain Appetite for Gas Guzzlers (NYT)

"The single most effective action that most Americans can take to help reduce the dangerous emissions that cause climate change? Buy a more fuel-efficient car.

But consumers are heading in the opposite direction. They have rekindled their love of bigger cars, pickup trucks and sport utility vehicles, favoring them over small cars, hybrids and electric vehicles, which are considered crucial to helping slow global warming.

So far this year, nearly 75 percent of the people who have traded in a hybrid or electric car to a dealer have replaced it with an all-gas car, an 18 percent jump from 2015, according to Edmunds.com, a car shopping and research site.

Trucking is a more serious problem.  Heinberg and Fridley point out that

"While a large majority of vehicles on the road are used to move people, 99.9 percent of the total weight being transported on US roads (not counting the vehicles themselves) is goods that we consume.[12] But large, heavy vehicles such as trucks, tractors, and cargo ships require batteries too heavy to be practical in most instances, particularly if they are traveling long distances. "

See also  Where are the Electric Trucks ?   

You may have seen that Nickolas Motors is taking pre orders on its "soon to be released" battery powered semi, which some have suggested "proves" that an electric long haul trucks are in our future

But at this point, no one knows whether this idea can really be built as advertised

Here is one analysis from the Institute of Electrical and Electronics Engineers:

“As you might expect from a startup, all of this stuff sounds pretty great. But we’re obligated to point out that there are a lot of grand plans but little in the way of execution. Furthermore, this level of hype always makes us vaguely suspicious, especially when the one number that we can actually fact check, the preorder amount, is at best confusing and at worst deceptive. That “$2.3 billion in presales” refers to 7,000(ish) deposits to reserve a truck worth approximately $375,000. But each deposit is a fully refundable $1,500—not the full $375,000—meaning that Nikola Motors has received slightly over $10 million. It’s a significant amount of money, but that $2.3 billion isn’t really meaningful at this point. Nikola Motors says that it will unveil the Nikola One prototype on 2 December in Salt Lake City, Utah. And if it’s everything Nikola Motors says it is (or even mostly everything), we’ll certainly be impressed. Technology like this could be an enormous benefit for the trucking industry. However, as with all things that seem just a little bit too good, we’ll be reserving our judgement and excitement until Nikola manages to deliver on its promises.”

      For a reflection on the importance of trucking see When Trucks Stop Running
         As most people know most of the remaining "cheap oil" is located in the Middle East.  So as you watch "the bombs bursting in air"  and the flyovers of the Blue Angels, you might want to reflect on what happened after the last oil crisis. see here   

"...the 1980 Carter doctrine, which states “the overwhelming dependence of the Western democracies on oil supplies from the Middle East…[any] attempt by an outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”

Since then we’ve invaded, occupied, or bombed Iran (1980, 1987–1988); Libya (1981, 1986, 1989, 2011); Lebanon (1983); Kuwait (1991); Iraq (1991–2011, 2014–present); Somalia (1992–1993, 2007-present); Saudi Arabia (1991, 1996); Afghanistan (1998, 2001–present); Sudan (1998); Yemen (2000; 2002-present); Pakistan (2004-present); and now Syria.

Have a safe holiday.

Truckin'

I said let those truckers roll
    -C W Wall (Convoy)
.

We've got truckers on the CB

Richard Pryor on the Video

      - Jackson Brown (Stay) 

[Important Notice :    The Society for the Study of Runaway Trains is sponsoring two community fora at the West Valley Community Center in Willamina dealing with emergency preparedness.  This Thursday the 18th will be a showing of "Unprepared",  the OPB show on earthquakes.  On the 25th , emergency personnel will give presentations and answer questions]

Greetings

       Thanks to just in time delivery, and small pantries, we are considered to be be " nine meals from anarchy" .   If the trucks aren't rolling by three days after an emergency things get difficult.

       The "big one" will certainly make it difficult to keep those trucks rolling, but it's worth remembering in that the big one is not the only event that could have an effect.   A quick look through the newspaper shows us some of the potential hazards.   Suppose the truckers get sick, or their a areas under quarantine.  see 12 diseases Climate Change will make worse  Suppose the electric grid suffers some sort of hiccup, and the oil pumps don't works.  see US unprepared for cyber attack on grid;   Solar flare could knock out grid for months  Or suppose the mid east falls into war related chaos, and exports are curtailed.  see NATO member Turkey warns Russia in Syria .   

       But, let's just focus on oil supplies for now.   Oil supply disruptions can cause other disruptions. Some of your may remember the "truckers strikes" in the 1970's , when a oil supplies were curtailed and rationing was imposed.   Interestingly in 1973 the US was importing 35% of its oil,  Today it imports 43%

       Last week, the price went below $30.    How can that happen?   At that price most energy companies are loosing money.   Some of them are going broke  ( see some-bankrupt-oil-and-gas-drillers-can-t-give-their-assets-away).   Some of their banks may also be taking a hit.   

       Even Saudi Arabia, whose cost of production is among the lowest, is in trouble.    Oil revenues no longer cover their expenditures, so they are dipping into savings.   At the rate they are going, they'll be broke by   in five years, They are talking about an idea to sell their assets via an IPO.    

      OK, so this can't go on.   Either the price will rise to a point where extractors can cover costs, or some of them will stop extracting.    In the past we have generally had  enough "cheap oil" to power the economy, and to give the oil industry  enough profit to keep drilling.      Currently oil companies are slashing investment.      In the longer term this could lead to supply problems and a sharp rise in oil prices. See e.g. Why crude prices could hit $130 in 2017

         Which brings us to trucks.  And to a new book  by Alice Friedemann, " When Trucks Stop Running So Does Civilization.  Energy and The Future of Transportation.  Ms Friedemann operates the blog "Energy Skeptic, which contains a tremendous wealth of information about our energy situation.  

      The higher price for diesel  would be a problem for the trucking industry which was  designed for and  built on cheap oil.   She says

>> "It is almost impossible to exaggerate the importance of our transportation system. Take a deep breath and think about this: the United States is locked-into $1.11 trillion dollars of transportation vehicles supported by $4.62 trillion of transportation infrastructure comprising 12 % of all the wealth in the nation (U.S. Commerce 2012). Ships, locomotives, and trucks with diesel engines can last up to 40 years and travel a million miles. It would take decades to replace them.  ( p 37)

>>     "Currently, the nation relies on a fleet of ten million trucks. Phasing over to a non-oil diesel fuel would require modifying this fleet as well as the fuel distribution system that feeds 160,000 service stations. Even if this were technically feasible, how much time, money, and energy would it take do this, or, alternatively, to build an electrified transportation system with millions of miles of overhead wires for trucks and locomotives  ( p 29)

 In this book, she reviews the alternatives, starting with bio fuels, hydrogen, and electricity, none of which are currently  feasible. .  Even expansion of rail traffic is problematic, due to the expense and lack of capital.    The real only alternative is converting trucks to  natural gas.   Which means major retro fitting of existing trucks. An expensive prospect  that may not pay for itself over the life of the truck...

         Clearly, we can expect some changes.   As oil becomes more expensive, so will everything else.  Because everything that travels, travels thanks to oil.

          So, the next time you see a trucker, give him ( or her) a wave!   She may be carrying tomorrow's dinner.

        And you might also give a thought to your local foodshed.  It might come in handy.

Saved By Seneca?

The farms of Ohio
had been replaced by shopping malls
and Muzak filled the air
From Seneca to Cuyahoga Falls 

     -The Pretenders

The scheme of a life
Written in the wind

     -Patty Smith  (Seneca)

Greetings

          So, we come to a fork in the road .  On one path, we all get together are start to reduce our high energy life styles voluntarily.  On another, we continue to grow in size and affluence  and burn up everything until there is nothing left to burn.   A third option is that we leave resources in the ground, but only  because of some outside limitation. 

         Could this outside limitation  be a resource limit such as peak oil?    Under that scenario, we would still continue to burn things as long as we could, but that once the fuel supply peaked we would burn less and less.  Ugo Bardi takes a look at this scenario here.   Even assuming a fossil fuel peak in the relatively near future, he finds that if the decline follows the "Hubbert curve", we would still be produce enough CO2 to raise the temperatures to dangerous levels.  He says:

 "In short, even if we follow a "peaking" trajectory in the production of fossil fuels, we are going to emit around twice as much carbon dioxide as what some people (probably optimistically) consider to be the "safe" limit."

            According to Bardi, only a "Seneca curve" could achieve a slowdown in CO2 steep enough to miss 2 degrees.

  "A Seneca shaped production curve would considerably reduce the amount of fossil carbon that can be burned in the future. Tentatively, if the collapse were to start within the next 10 years and it were to cut off more than half of the potential coal production, then, we could remain within the estimates of the 2 deg. C limit, hoping that it could be enough. Hubbert can't save the ecosystem, but Seneca could (maybe). 

  In order for this to happen we would need to see 1) a peak in oil use in the near future, and 2) a steep decline from then on.

      Bardi suggest that a Seneca collapse could occur in the event of a self reinforcing economic disruption.  This theme has been explored by Gail Tverberg in her blog, Our Finitle World.   A good summary of her position is provided here.   She paints a scenario where the price of producing oil continues to rise, while the price the economy can afford does not.   There is no  "Goldilocks" price which which work for both consumers and producers..

          So, what price do producers need?   Here , Tverberg , uses data from Kopits presentations, illustrating that the privately held oil companies,  on average, need a price of $120 / barrel to "break even", where break even means " achieve positive cash flow under current capex and dividend programs"  .   A similar chart shows a " break even " for OPEC countries of $100, where "break even"  "includes tax requirements by parent countries".    (Nice graphic here ) This last phrase is somewhat opaque,but I think it means the taxes paid to support the generous welfare programs in those countries.  

         On the other side, the maximum price that can be charged without reducing demand  is probably around 5% of GDP .  Here Kopits sets that figure at $115.  (see also The First Peak Oil Recession (2009), where Kopits states that historically the US has gone into recession when oil hit 4% - which would mean a price of $92)

          So, we can see the nature of the problem.  The economy can't afford oil above  $92- $115, but on average OPEC members need only $100.  OPEC currently provides about 60% of world oil consumption.   The average IOC only needs needs $120.   Thus, about half of the producers need a price that is higher than the economy can afford.   However, this mismatch between producer and consumer does not guarantee a sharp decline.   Even though the price has slipped below " break even", producers do not immediately turn off the spigot.    This is fairly obvious given the situation during that last 18 months.    OPEC producers have tremendous cash reserves and can afford to not " break even"  for long periods.   Similarly, IOC'S may also be willing to operate at a loss for short periods of time.   It is no secret that many of the shale producers have been in this situation for a while.   They have been able to balance the books with loans, either from bankers or by selling high yield bonds.   

       In this article, Art Berman explores this situation, and suggests that the lenders will continue to participate as long as there is some hope that the price will rise in the near future.   He argues that the price will not rise until a number of producers declare bankruptcy.  At that point the lenders will recognize the risks involved and will cut off further funding.  This will create more bankruptcies, but will also help remove the surplus.  This process may be underway. See here  His judgement is that prices must first go lower, before they can rise.  Others expect the low prices to stimulate demand, which will eat up the surplus. 

       Bardi thinks that a Seneca curve could only be triggered by a world wide depression.   One might argue that the opposite is also true -energy use and economic activity track each other closely.     As for Tverberg, she doesn't rule that out.

"It looks to me as though we are heading into a deflationary depression, because the prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening. Instead, Janet Yellen is talking about raising interest rates later this year, and  we are seeing commodity prices fall further and further. Let me explain some pieces of what is happening."

         Falling commodity prices are triggering concern elsewhere as well.  Commodity prices  have fallen to a ten year low.    Sunday's New York Times reports on the resulting  layoffs in the  US industry.   

 "The fall in prices for a variety of products, including crude oil, iron ore and agricultural crops like corn and soybeans is reminiscent of the collapse of the technology boom in 2000 or the bursting of the housing bubble nearly a decade ago. And behind the pain and anxiety are headwinds blowing from China and other emerging markets, where growth is slowing and demand for the raw materials that drive the global economy has dried up."

  The IMF recently lowered its projection of world growth rates, citing falling commodity prices.    In September, Janet Yellen, head of the US Federal Reserve, cited falling commodity prices as a reason to continue its ultra low interest rate policy.

     “At a press conference following the announcement, Fed chair Janet Yellen listed off a number of reasons why the U.S.’s central bank thinks the economy is still too weak for an interest rate liftoff...... We saw a very substantial downward pressure on oil prices and commodity markets and those developments have had a significant impact on many emerging market economies that are important producers of commodities, as well as more advanced countries including Canada,” Yellen said

    It is probably  worth remembering that even the current anemic growth is being generated by an enormous amount of debt.  Although too much debt was widely seen as a contributor to the 2008 crisis  (along with high oil prices),  debt levels have continued to rise.  See here.   For a guided tour of the cities, counties, states and companies most at risk from debt see here

      To get a feeling for the debt levels of the US government in context of GNP, this chart from the fed, shows the how debt has been used to offset the fact that earning power of average Americans ,which has not increased in 40 years(see here).    Of course, since the 2008 crisis, the debt level has sky rocketed. One interesting question is what will happen when the next crisis hits?   Will the US government "double down"  and increase debts levels further? 

From to 

2015 Q2: 101.33026

Source: Federal Reserve Bank of St. Louis, US. Office of Management and Budget

(Percent of GDP)

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         I don't pretend to understand economics, so I am in no position to evaluate  the likelihood of a significant economic down turn.      This type of event would be unpleasant, and  is hardly to be wished for. .  Bardi notes:

      "But, even if that came to pass, a Seneca collapse is a major disaster in itself for humankind, so there is little to rejoice at the thought that it could save us from runaway climate change. In practice, the only hope to avoid disaster lies in taking a more active role in substituting fossils with renewables. In this way, we can force the production of fossil fuels to go down faster than it would do as an effect of gradual depletion, but without losing the energy supply we need. It is possible - it is a big effort, but we could do it if we were willing to try (see this paperby Sgouridis, Bardi and Csala for a quantitative estimate of the effort needed)"