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Page added on August 5, 2016
The End Of A Trend: Oil Prices And Economic Growth
It used to be that when it came to the world economy, oil prices and economic growth were more like distant cousins who disliked each other rather than a happily married couple always seen nuzzling together in public. The received wisdom was that low oil prices are good for the overall economy even if they are bad for the oil industry and for countries that are heavily dependent on oil for their revenues.
That’s what many believed when suggesting that even though high oil prices and an attendant oil boom had underpinned economic recovery in the United States after the 2008 financial crash, low oil prices would now somehow on balance deliver even more recovery. And, low prices would also benefit the rest of the world as well.
Nowadays, as the oil price dips into the low $40 range again and economic growth weakens simultaneously, we must re-evaluate. U.S. economic growth declined significantly after oil prices began to fall in 2014. Only last week, U.S. growth for the second quarter of 2016 came in at 1.2 percent (annualized), less than half the forecast of 2.5 percent. First quarter growth was revised down to 0.8 percent from a previous estimate of 1.1 percent. That’s down significantly from a peak of 5 percent growth for the third quarter of 2014, the last quarter during which the price of oil was over $100 per barrel.
World economic growth instead of speeding up, slowed down slightly from 2.6 percent in 2014 to 2.5 percent in 2015 according to the World Bank.
There are many reasons for the subpar growth of the world economy since the Great Recession. Record average daily prices for oil four years running from 2011 through 2014 helped sap the world economy of its strength by siphoning funds from the non-energy economy.
Of the other causes, chief of among them is the heavy buildup of private and public debt which may be hindering growth by siphoning funds from consumption and investment into debt service. In the first quarter of this year, U.S. credit growth was $644.9 billion. U.S. gross domestic product growth was $64.7 billion. It took $10 of credit growth for every $1 of GDP growth. There was a time long, long ago when the ratio was 1 to 1.
China’s credit growth had been running twice its GDP growth through the end of last year. (I don’t have dollar or yuan amounts.)
Debt isn’t necessarily a bad thing if one uses it to invest in something that will produce goods or services rather than merely to consume. But much of our debt creation has been exactly for consumption. That isn’t particularly bad either if we as individuals, nations or a world society can afford to service that debt. But there is a level we cannot afford and it stunts growth. To get a better understanding of how too much debt is affecting economic growth around the world, listen to economist Steve Keen explain why debt matters and how the rate of credit creation affects growth. You may need to watch it twice before you get the “aha” moment.
But let’s look further now into the relationship between debt and energy to find out more about why oil prices seem much more correlated to the health of the overall economy than they used to be.
First, oil remains the central energy source for the world economy, especially critical as transportation fuel. It provides 33 percent of total energy according to the BP Statistical Review of World Energy.
Second, our desperation for additional sources of oil led to a debt-fueled boom in the United States, debt used by drilling companies to reach deep shale deposits and release oil found in them through a new version of hydraulic fracturing called high-volume slickwater hydraulic fracturing.
It turns out that the low oil prices of today make these deposits largely unprofitable and production has been falling. Many of the high-flying drillers during the boom are now in or headed for bankruptcy.
Debt, it must be remembered, is simply a way to bring what would be future consumption into the present. We have brought energy consumption from the future into the present with debt through the fracking boom in the United States and to a certain extent the boom in oil sands in Canada. And, we’ve shifted consumption of so many other natural resources and finished goods from the future to the present through the vast expansion of private and public debt.
Still, we are faced with slower world economic growth than in the past despite our herculean financial efforts. The simple explanation is that cheap energy was the cornerstone of growth of the industrial economy. As long as that energy was cheap, we could grow at a relatively rapid pace. Once it becomes expensive, growth must decline for most sectors of the economy as more and more resources are sent to the energy sector.
By this logic then, today’s low prices should be providing substantial stimulus to the global economy. Why are we not feeling it? The short answer would be that the debt we built up procuring expensive energy during a period of high and rising energy prices over the last 15 years is holding back economic growth. We are experiencing the hangover.
The hangover manifests itself as slow growth which is a reflection of the difficulty consumers are having maintaining their growth in spending in a high-debt world. That means everything is less affordable at the margin, and this has led to a creeping slowdown in the world economy.
Now, here’s the kicker. If we as a global society can no longer afford high-priced oil–and that’s what’s left to get out of the ground–then as long as oil remains the central energy component of our economy, we will be trapped in a low- or no-growth economy where oil prices can’t rise high enough to make new drilling in high-cost deposits profitable; and, when prices do rise, they simply squeeze the life out of economic growth and send the economy back into a stall or near stall. (Gail Tverberg has explained this phenomenon in detail on her blog, Our Finite World.)
Far from a sign of good things for the economy as whole, recently declining oil prices now tend to indicate a weakening economy that was already in a weak state. It turns out that the oil price and the economy are now in a very tight relationship, and we are going to be seeing them together a lot for a long time to come. But I don’t think their marriage will be the happy one I alluded to at the beginning of this piece.
23 Comments on "The End Of A Trend: Oil Prices And Economic Growth"
penury on Fri, 5th Aug 2016 9:44 am
Short version: people have no money, people cannot purchase goods, factories close, oil use falls, repeat. hope for things to improve, lie about things, repeat as necessary we have an election coming.
marmico on Fri, 5th Aug 2016 10:13 am
people have no money, people cannot purchase goods
You are a fuctard. Gasoline is a nondurable good and it is cheap, cheap, cheap in the post-WWII era.
https://fred.stlouisfed.org/graph/?g=3QNb
makati1 on Fri, 5th Aug 2016 10:27 am
Penury, you are correct. Everything possible will be done to keep the appearance that the economy is doing well until the election is over. If the market tanks before November 8th, the Dems will lose.
Apneaman on Fri, 5th Aug 2016 10:54 am
marmi, throwing up yet another fed chart like you’re holding a cross up to a vampire? That’s over little boy. Almost no one has any faith in any institution anymore, so spare everyone. What are your thoughts on Trump? Maybe like AGW you don’t have any? If there’s not a fed chart or graph you have no opinion eh?. That there are tens of millions who don’t even like Trump but are considering voting for him should tell you something about loss of faith in the system. Anyone but Hillary means anything but the system and it’s corrupt institutions. Fuck the fed and all the rest of em.
marmico on Fri, 5th Aug 2016 11:01 am
Starting to worry that Vancouver real estate is going to crash before mommy dies are ya! Spare everyone with your middle aged disability basement apartment lifestyle.
You will be hallucinating about Duncan’s Olduvai Gorge until you are deposited in an urn.
Cloud9 on Fri, 5th Aug 2016 11:02 am
Opinions are like belly buttons everyone has one. On the subject of oil production there has been a substantial bit of study on what happens to developed fields. All of them tend to follow a bell curve in production. When you come to realize that every oil well ever developed has followed this same curve of production, you then begin to realize that each of these wells is a small model predicting overall production.
This paper by Bob Lloyd, University of Otago Physics Department, is a good overview. http://www.otago.ac.nz/sustainability/docs/end-of-oil-energy-trust-verision.pdf
marmico on Fri, 5th Aug 2016 11:21 am
Opinions are like belly buttons everyone has one.
A 69 year chart of gasoline spending relative to wages, after tax income and total spending is not an opinion.
It’s data not tribal affiliation meme.
Apneaman on Fri, 5th Aug 2016 11:41 am
marmi, why worry about the inevitable? There is not going to be any Olduvai Gorge for anyone. Just a permanent exit from the world stage. One more evolutionary dead end, but first we get to go through collapse of techno industrial civilization.
Only a blind man can’t see it unwinding.
Now Collapsing Flint Suspends Trash Pick-up: “Stench of Rotting Garbage Permeating Streets”
http://fiscalpost.com/2016/08/now-collapsing-flint-suspends-trash-pick-up-stench-of-rotting-garbage-permeating-streets/
In Flood-Ravaged Ellicott City, Millions of Gallons of Sewage Flowing Into Patapsco River
https://weather.com/news/news/broken-sewer-line-ellicott-city-sewage-river
Hell on Alaska’s Formerly Frozen Highways
A critical artery is threatened by thawing permafrost.
http://www.bloomberg.com/news/features/2016-08-02/the-alaskan-highway-is-literally-melting
It falls apart marmi. As I write pieces are falling off. Do you have a fred chart showing how much better our collapse is compared to 1965’s Joe Sixpack’s collapse?
marmico on Fri, 5th Aug 2016 11:53 am
Off yourself. You might as well. You know that your mommy has willed the property to the Cat Society. You and the dickhead futilist can hold hands in solidarity with Bardi’s Seneca Cliff happening in 2017, noon on the summer solstice, is it.
Good riddance. You might get a write up in the media. Two disabled middle aged low income fuctards saved the world. Two less bushels of grain.
Boat on Fri, 5th Aug 2016 12:16 pm
Cloud9 on Fri, 5th Aug 2016 11:02 am
“When you come to realize that every oil well ever developed has followed this same curve of production, you then begin to realize that each of these wells is a small model predicting overall production.”
There are many areas where they estimate 50-80 percent of oil is still left in the ground where old wells exist. One report cited 47,000 wells that fit that profile.
They take an old well and use multi stage horizontal drilling. Some of these wells are producing more than the origional well. When it comes to oil and some areas the bell curve no longer applies.
Apneaman on Fri, 5th Aug 2016 12:26 pm
marmi, I get paid 24/7 365 days a year asleep or awake. I’m a Hongcouver landlord. You’re in what? stripper wells? It’s gotta crash almost all the way before I stop getting paid and it will before I get reeeeel old. You on the other hand…
PracticalMaina on Fri, 5th Aug 2016 12:29 pm
Boat I would think the well you are describing would lose its production rate very quickly do to pressure going quickly in the large surface area of multiple horizontal drills in an already partially depleted area.
marmico on Fri, 5th Aug 2016 12:50 pm
I’m a Hongcouver landlord
What, just a hop, skip and a jump after tending to The Turdburger’s gardens in the Atlanta suburbs. Being white bread you hopped on the back of the pick up before the brown bread Latinos. Was it the Piedmont, Tilly Mill or Cumberland Home Depot day labor location? ROTFLMFAO.
Show me the Van google mappings. I will see if I can search the title ownership in the public records.
Boat on Fri, 5th Aug 2016 12:58 pm
Offshore Oil & Gas To Invest $800B Through 2025, Brazil Leads The Capex Splurge
http://oilprice.com/Latest-Energy-News/World-News/Offshore-Oil-Gas-To-Invest-800B-Through-2025-Brazil-Leads-The-Capex-Splurge.html
800 billion is not chump change. So much for the scared investor idea. So much for the idea there are no good fields to develope.
PracticalMaina on Fri, 5th Aug 2016 1:03 pm
That will go really far in deep offshore, they could afford 40 BP spill fines, good for them. THE FUTURE IS SECURE NOW!
shortonoil on Fri, 5th Aug 2016 3:16 pm
In 2015 EXXON was the only major that turned any kind of a profit, and that was down about 60% from the previous year. Most of them showed losses, and some, huge losses. By our calculations the industry will need an average of $3.9 trillion a year to keep production even with demand, which will also be falling. The price that the industry is receiving is no longer sufficient to replace the reserves that they are extracting. In 2015 the industry discovered 2 Gb of new oil, and pumped 34. With almost 60% of the world’s oil coming from less than 1% of its fields, and most of them being more than 60 years old we can expect the conclusion to the oil age to become very evident over the next few years. The industry is in serious trouble, and when it goes down the rest of the world will follow closely behind.
We are at a nexus of historical proportions, and there is no Fairy Godmother coming to the rescue!
rockman on Fri, 5th Aug 2016 4:14 pm
Cloud – “All of them tend to follow a bell curve in production. When you come to realize that every oil well ever developed has followed this same curve of production, you then begin to realize that each of these wells is a small model predicting overall production.”
By “bell curve” are you implying a more or less symmetric curve? If so the first half of your statement isn’t just wrong but very incorrect. I’ve studied many thousands of production curves of individual wells and entire fields. Symmetry was exceedingly rare. In fact, I don’t really recall but a handful that weren’t very ASSYMETRIC: high initial flow rate followed by a relatively long lower flow rate tail.
But that assymetry is lost when you combine heritage production with the results of newer and continuous drilling efforts. An extreme example would be the shale plays. Individual well production production profiles are very asymmetric…much more so the a typical conventional field. But the production trend of an entire play, such as the Eagle Ford Shale, losses much of that asymmetry BUT ONLY AS LONG AS MANY NEW WELLS ARE DRILLED.
Now that the new well count has fallen significantly notice we’re not seeing a “cliff dive” of the TREND’S production curve. That because much of the future curve will be dominated by the much larger number of heritage wells that have entered the low decline curve phase. This very asymmetric bell shaped curve of the EFS is a result of the very rapid addition of new wells as operators borrowed mucho $BILLIONS so they could drill as fast as possible to take advantage of the high oil prices which most of the oil patch knew would be short lived.
It’s easy to understand the confusion. I did a quick web search to find indidual well or field decline curves and found nothing so far. But dozens of examples of less asymmetric curves for entire trends, states, countries, regions, etc. Combining older production with new well production tends to hide the asymmetry of the real nature of production decline of individual wells and fields.
rockman on Fri, 5th Aug 2016 4:23 pm
boat – Same question for you: “bell shaped” curve = a fairly symmetric curve? Most curves of natural data I’ve seen over the last 45 years have been skewed…IOW rather asymmetric. And thus the common use of log-normal plots to display such data.
Cloud9 on Fri, 5th Aug 2016 7:59 pm
Rock I stand corrected.
Brent on Fri, 5th Aug 2016 8:38 pm
Boat-
That money is not even the oil majors that money comes from the federal reserve who just printed it saddling the rest of us with debt.
Apneaman on Fri, 5th Aug 2016 11:07 pm
marmi, sure thing, I’ll post the google mappings of our building right after you post your Social Security number here so we can all see it. Fucking retard.
Apneaman on Fri, 5th Aug 2016 11:11 pm
This your neighbourhood marmi?
Imperial Beach Braces for Rising Sea Levels
“Adapting to sea level rise requires trade-offs – and money. Imperial Beach, is one of the poorest coastal communities in Southern California, will need to decide whether to prioritize the economic benefits of tourism and beach recreation over maintaining the ecological value of beach and preserving existing flora and fauna, versus simply protecting buildings and property along the coast.”
http://www.voiceofsandiego.org/topics/science-environment/imperial-beach-braces-for-sea-level-rise/
GregT on Sat, 6th Aug 2016 1:17 am
@Boat,
“800 billion is not chump change.”
On top of the other 19 Trillion dollars in US Federal debt alone, it kind of is.