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Page added on September 24, 2016
Why lower gasoline prices begin the end of the world oil age.
Traditional economics teaches that increasing cost caused by the declining supply of an essential commodity will be supported by fewer wealthy consumers. Further reflection and twenty-twenty hindsight shows what actually occurred in the past decade while the world consumed another 300 billion barrels of oil (about one-fourth of the total 1.2 trillion barrels used to date in the entire oil age).
Let’s start with thirteen poorly understood facts: (The numbered figures are from the attached power-point summary of the book, The End of Fossil Energy, 5’th ed.)
- In 2015 Americans motored to a new record high of 3.148 trillion miles. Lower gasoline prices enabled this increase after a long period of increasing price and stable mileage since Americans first exceeded 3.0 trillion miles in 2007 (ref: USA Today, page 1, March 3, 2016, from the Federal Highway Administration).
- American gasoline consumption’s share of this profligate use of the most convenient form of finite fossil fuel remained stable for the last ten years at about 3.5 billion barrels of oil per year (see Figure 11). This is the same as all the oil used by China or Western Europe (see Figure 4). Total U.S. oil consumption is twice as much used just for gasoline at over 7 billion barrels per year. Americans use one-fourth of the world’s oil with only four percent of the population.
- Another fact quantifying this gross anomaly is the per capita average of 22 barrels of oil per person of oil per person per year consumed by every single American. This is more than seven times the world average, exclusive of the U.S., of 3 barrels per person per year (see Figure 3). Gasoline consumption alone in the U.S. is 11 barrels per person per year. Anyone who questions this egregious rate of consumption needs only to drive on one of our congested or grid-locked urban highways. Think of every vehicle-trip, coming or going, frivolous or not, as another nail in the coffin of the short industrial age.
- During the first half of the oil age, until 2005, world extraction of oil increased to match and satisfy steadily increasing demand with little change in price. U.S. and world economic growth, food production, and population continued in direct proportion to oil availability (see Figures 5 and 6).
- Then, beginning in 2005, the price of oil began to increase sharply as a peaking of the annual world extraction rate could no longer supply the steady increase in demand. The term, “Peak Oil”, as long predicted by M. King Hubbert, became popular. World oil supply leveled off in the near term, especially as major conventional sources like the North Sea, Mexico, and the North Slope began to taper. At that time, oil availability was expected to begin to decline, with dire shortages by 2010. It didn’t happen. “Peak Oil was dead”.
- Instead, for the next ten years the dominant world consumer bloc, U.S. gasoline customers, went deeply into debt to continue supporting the mobile lifestyle that Americans take for granted. A good example is the interstate highway system that is the ubiquitous backbone of American mobility and suburban culture. The U.S. military-industrial complex ensured that adequate world oil continued moving in our direction, especially if middle east suppliers wavered geopolitically.
- For a typical family of four using an average of eleven (42 gallon) barrels per person per year just for gasoline, eleven barrels per person amounts to 1,850 gallons of gasoline per family. When gasoline reached $3.00 per gallon, $5,500 of the family budget was spent to provide the prodigious quantity of energy to maintain an historically unprecedented mobile lifestyle. Less was left for mainstream domestic manufacturing, job growth, and commerce as diminished discretionary spending was accommodated by discount stores and foreign goods made by workers living on 3 barrels of oil per person per year as in China.
- With one family breadwinner bringing home $15,000 per year from an eight-dollar an hour job, welfare, or social security check, the average expense of $5,500, just for gasoline, as well as other oil-related expenses, became more and more difficult. The result was exploding consumer debt; for instance, a trillion dollars for credit card charges, a trillion dollars for automobile loans, and 1.3 trillion dollars for student loans. In some parts of the country, two tanks of fuel oil at $2.50 per gallon added another $1,250 to the already strained family budget.
- In the same ten year period, beginning in 2005, the increased cost of gasoline, supported by continued desperate American consumption, subsidized ever-more costly methods of non-conventional oil extraction such as horizontal “fracking”, deep off shore, tar-sands oil and remote polar sources (see Figure 12).
- Continuing with Figure 12, we see that in mid-2014 the price of oil suddenly dropped from over $80 per barrel to the $40 range. Arguably, this was triggered by the Saudis tiring of losing market share to the increasing contribution from more expensive non-conventional sources, but the potential for the price collapse was there as American purchasing power became more stressed.
- The recent sustained two-year drop in price is directly paralleled by a similar drop in U.S. and world rotary rig count (per Baker-Hughes reports). In the same time-frame, marginal, highly leveraged producers ceased to be profitable and faced bankruptcy. In future hindsight, this extended period of reduced extraction will look like the tipping point of the oil age. But instead of a classic bell-shaped Hubbert’s curve, oil extraction will be an extended plateau and a sharper cliff.
- Oil is the backbone for all other energy sources especially food, our very personal, number one ,daily necessity for life. Nothing grows without a growing supply of energy. Meanwhile, population numbers continue to increase on the premise that ever-increasing affordable energy will somehow be available when new offspring mature to become significant consumers and parents of exponentially more mouths to feed. Additional immigrants aspiring to our energy-intensive way of life also add to the growth problem, not by dire need or compassion, but simply as more numbers to consume energy and be fed.
- Economically, interest is nothing but an expectation of further growth; that is, original principal plus increased value. Our entire financial system is predicated on future expansion to support the interest. Yet without oil-based energy, growth cannot continue. For oil extraction, the promise of cheap oil is necessary to raise the substantial investment for further extraction. After two years of low prices, any remaining lending sources are becoming very scarce.
These are all reasons we have truly entered the beginning of the end of the short two-lifetime-long oil age we take for granted. Many have argued this will be the greatest crisis ever to confront modern civilization.
Since we now have passed two years of a temporary glut and low energy prices, the pendulum must soon swing the other way. The extravagant party of gasoline consumption cannot continue. Figure 9 shows several scenarios for the U.S. oil age at the egregious rate of 22 barrels per person per year, without factoring in the increased population expected in the same time frame. By no stretch of optimism can there be more than fifty billion barrels of increasingly expensive domestic oil in the U.S. that can be supported by ever-decreasing income. A quick Google search shows the U.S. far down the list of nations with recoverable oil reserves.
If we continue at our present consumption rate of seven billion barrels per year, we have only (50 divided by 7) seven years of domestic oil left in the tank. If we continue to access, as now, half of our seven billion barrels per year from non-domestic suppliers, some friendly, some not, some equally desperate to continue a tenuous relationship; we have enough domestic oil left for (50 divided by 3.5) fifteen years of business as usual. This is grade school arithmetic.
Our only hope to extend the oil party a few more years is to focus on the “elephant in the room”: gasoline consumption. National coupon gasoline rationing would equitably, rich or poor, get us out of our two-ton steel chariots and encourage a whole new way of life. Figures 13 and 14 show the positives for this plan. Even longer-term climate change would be diminished as shown in Figure 15.
Anything else: electric vehicles, magical breakthroughs, divisive wealth disparity, localized food production, bio fuels, stock markets, or political promises, cannot make a dent in the seven to fifteen year time frame we have left. Nation-wide gasoline rationing will only happen with a broad understanding of the facts and our precarious place in history. Will you help network this story? It’s up to you!
John G. Howe howe@megalink.net, September 2016
http://www.solarcarandtractor.com,
From the Wilderness’ Peak Oil Blog by Jenna Orkin
14 Comments on "Why lower gasoline prices begin the end of the world oil age."
dave thompson on Sat, 24th Sep 2016 4:10 pm
This article will be put down by most not paying attention to to problems of resource depletion. As for the rest of us we know, we are headed, down.
makati1 on Sat, 24th Sep 2016 6:00 pm
This is the best article I have read here in years, but I agree with Dave. Some will deny. The rest will say, “I told you so.” Seven to fifteen years still seems too long. One to three? We shall see.
.5 on Sat, 24th Sep 2016 6:20 pm
He’ll show some balls, it’ll start This Wednesday pm, plan to die early.
onlooker on Sat, 24th Sep 2016 6:24 pm
“cannot make a dent in the seven to fifteen year time frame we have left. ”
This timeline coincides roughly with the timeline that Short and Hills group give. So that could be a best case scenario
Cloggie on Sat, 24th Sep 2016 6:33 pm
“Instead, for the next ten years the dominant world consumer bloc, U.S. gasoline customers, went deeply into debt to continue supporting the mobile lifestyle that Americans take for granted”
The mistake the frackers made was to enter this market too early. They should have waited till the moment the price of (depleting) conventional oil would have matched the price against which they could produce profitably. Instead they stampeded into a market and their production was so high that they crashed oil prices making a loss in the process.
There is no reason to assume that the “conventional economic laws of supply and demand” no longer are valid.
makati1 on Sat, 24th Sep 2016 7:00 pm
Cloggie, prices would never have gone high enough to make fraking profitable. The economy would have crashed first. The ability to purchase is the only factor governing how much oil is recovered/sold today. The world economy is already in a slow crash and will gain speed as time passes and the ability to print money slows.
The West, and especially America, was built on the idea of a never ending amount of cheap energy. It was designed to fail right from the start. We just are lucky enough to be at the end times and to experience its fall and to suffer the results of all of that energy/heat dumped into our world.
rockman on Sat, 24th Sep 2016 7:48 pm
So the current inflation adjusted price of gasoline is 50% higher then it was in 1998. Not a big shock given that the current oil price is about twice as high as it was around that time.
So we must be experiencing the second beginning of “the end of the world oil age.” LOL. Or maybe we can just say the “end of the world oil age” began long ago when the first bbl was produced.
makati1 on Sat, 24th Sep 2016 8:58 pm
The ability to purchase is going to end the age of oil, not lack of it in the ground. Oil is currently being bought with printed money that is fast losing value. If the consumer’s income is shrinking, as it has been for the last 40 years, the ability to continue to purchase oily products is fast being replaced with buying food, clothing and shelter. The real necessities.
rockman on Sat, 24th Sep 2016 10:21 pm
Cloggie – “The mistake the frackers made was to enter this market too early.” I appreciate your view but the PUBLIC OIL COMPANIES didn’t have much choice. I started working for a pubco 41 years ago and a fair number since then. And in every case THE pressure was to book increasing amounts of PROVED reserves. As hard as it is to believe the profit margin was always subordinate to adding reserves.
I once worked for a pubco that INTENTIONALLY reduced the net value of the company by drilling 4 horizontal wells into already producing reservoirs. It actually didn’t increase reserves 1 cubic foot of NG. But it increased company production from 10 million cf/day to 50 million cf/day. And the stock went from $0.75 to $5 per share. And no lies were told in the annual report but you did have to read it closely to know what happened. But that project was a one trick poney…we had nothing to follow up with.
The funniest irony: a Wall Street raider thought we were so f*cking smart he took control of us through a successful hostile take over. Of course I quit since there wasn’t any reason to stay…but I did come back and sucked some consulting fees out of them. And yes: the raider lost his ass.
And I’m so f*cking tired of folks saying no money was made drilling the shales. Just an estimate but well over $100 BILLION was made…free and clear. Made by the management, staff, boards of directors, service companies and EARLY stockholders. One Eagle Ford Shale company (Petrohawk) alone cleared over $10 BILLION when they sold the company in the early days of the boom. And yes: the company that bought them lost their ass. And not just $10 billion: from the day they closed that company’s stock eventually lost almost $100 BILLION in value. And most of that BEFORE oil prices fell.
But we’re not focusing on who lost how much money…been doing that for a very long time. We’re talking about the folks that made many tens of $BILLIONS drilling the shales. Unless one can appreciate that FACT they’ll never fully understand why the shales boomed. They were savvy OLD oil patch hands that LEGALLY took advantage of many greedy and ignorant investors. Old savvy oil patch hands that had lived through a number of boom/bust cycles. Old savvy oil patch hands that knew with certainty the shale boom would eventually bust…just like every other boom, without a single excerption, busted. They only uncertainty was when it was going to happen.
Truth Has A Liberal Bias on Sun, 25th Sep 2016 12:00 am
Rock man- if 5 people make a million dollars and five people lose a million dollars then no money was made. It was just redistributed.
makati1 on Sun, 25th Sep 2016 12:16 am
Truth, yep it was redistributed from YOUR pocket to the top 0.1% like it has been doing for the last few decades. I bet you could use the money you have been robbed of by the wealthy in your lifetime. After all, they didn’t get rich by working and saving. They fuel their yachts with YOUR blood, not theirs. How many homes and yachts do YOU own?
Davy on Sun, 25th Sep 2016 7:38 am
On planet retard 5 people lose a million and 5 people make a million and the economy is hunky dori with a clean swap. Reality says otherwise and this reflects our deflating world and why reflation will be so difficult with the kind of deflation that has occurred. These imaginary effects can be catastrophic for the 5 people. This loss can be physical with real consequences that affect economic velocity. People and a community who were somehow invested in these loss making people may have together lost money. Physical activity may have shut in. Productive assets that go dormant are subject to the forces of entropy. IOW they decay quickly from lack of use and maintenance. Productive activity is redirected to non-productive financial cleanup efforts like the salvage of debt collection and bad debt realization. If these people had businesses that employed people these people may have lost jobs. These people may go into the same process causing a dominos effect of declining economic velocity which in a systematic macro sense is demand destruction. If this loss was 5 rich people losing a million at the market casino of virtual wealth then it may just be economic tokens lost but we know more often than not those economic tokens are real people or real assets. The rich may be whole but someone just got screwed.
There is no nice economic quid pro quo arrangement except in isolation with losses. It is just this kind of thinking that is an example of the divorcing of reality we have today. We mistake the abstract for the real and we look at the real abstractly. There are trade off and consequences today that mean the cake can be eaten or you can have it not both. Nothing is free and nothing changes had without loss.
The alternative is interesting also and this is what is up today. If 5 people lose significant amount of money and 5 people make significant amount of money from this loss but the 5 people that lost the money were given a refinance and in effect the loss is financially massaged away to make the 5 people whole again you again have a planet retard situation. This time the unreality is systematic and dispersed.
In effect you are taking a loss and through the moral hazard of wealth transfer you are taking away systematic risk from individuals and dispersing that risks systematically to the public. Private profit and public cost. This is unfair and goes against fundamental economic principals naturally but is done subtlety and discretely. These moral hazards tend to snowball as we see today. When consequences are ignored away by policy the results are corruption. Corruption breads corruption. Wealth transfer breeds wealth transfer just as addiction escalates. The term for an alcoholic is tolerance.
The systematic risk that was dispersed into the greater system did not magically disappear. The loss was made up somewhere with an ever so slight trade off. A zero sum game is just an exact transfer. But in real life economic transfers are not perfect because of entropy. This systematic risk in effect becomes an embedded contagion waiting for more moral hazard of the next 5 people until an event occurs and you have not 5 people losing money but 5000. Unfunded liabilities, debased currency, too-big to fail, and unrestrained welfare are a few of many embedded risks we have today.
To make matters worse the system has been corrupted by a process of moral hazard over time. This is the key element disregarded is the scale of moral hazard over time in a process. Systematically you have introduced dysfunction and systematic decay into a system and allowed it to spawn and release more and new risk. Recessions are a proper way of cleaning up systematic risk and cumulative poor decisions. When recessions are coopted by a group for their benefit the effects can be systematically destructive if a significant process and scale is involved. If that process continues like is has since 08 it may just be the end of market based capitalism and liberal democracy.
Davy on Sun, 25th Sep 2016 8:18 am
“Philippines to Host U.S. War Games After Duterte Softens Stance”
http://www.bloomberg.com/news/articles/2016-09-25/philippines-to-host-u-s-war-games-after-duterte-softens-stance
“The Philippines and the U.S. have scheduled military drills next month in the Southeast Asian nation, the U.S. embassy in Manila said, days after President Rodrigo Duterte acknowledged that his country did need American troops in the South China Sea.”
Sissyfuss on Sun, 25th Sep 2016 9:50 am
A most excellent and concise article but ominous to the core. Who is going to tell the auto industry that gasoline rationing is a needed action within the decade? Will President Trump(God, what an oxymoron!)conjoin with the banksters to keep the Ponzi stumbling along? They can’t produce enough popcorn for this circus!