Tag Archives: Our Finite World

Aren’t the Falling Oil Prices Great?

Richard Ha writes:

Isn’t it great that the price of oil has dropped so low all of the sudden?!

Wait – is it??

In the short term, for maybe five years, we’re going to be pretty happy here in Hawai‘i. More tourists will travel here, food and electricity costs will drop, and we will have more consumer confidence. We’ll feel like everything’s fine.

But everything is interconnected in our big world now, and could there be any problems with such a sudden and steep drop in oil prices?

Gail Tverberg, the former insurance actuary I sometimes refer to here who is very knowledgeable about such things on a macro level – and who writes the blog Our Finite World – just wrote about this.

In her post Ten Reasons Why a Severe Drop in Oil Prices is a Problem, she writes about the big picture.

From Our Finite World:

Let me explain some of the issues:

Issue 1. If the price of oil is too low, it will simply be left in the ground.

The world badly needs oil for many purposes: to power its cars, to plant it[s] fields, to operate its oil-powered irrigation pumps, and to act as a raw material for making many kinds of products, including medicines and fabrics….

Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.

While many claims have been made that US shale drilling can be profitable at low prices, actions speak louder than words. (The problem may be a cash flow problem rather than profitability, but either problem cuts off drilling.) Reuters indicates that new oil and gas well permits tumbled by 40% in November… 

Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade. 

With low oil prices, it becomes much more difficult for shale drillers to pay back the loans they have taken out. Cash flow is much lower, and interest rates on new loans are likely much higher. The huge amount of debt that shale drillers have taken on suddenly becomes at-risk. Energy debt currently accounts for 16% of the US junk bond market, so the amount at risk is substantial.

Dropping oil prices affect international debt as well. The value of Venezuelan bonds recently fell to 51 cents on the dollar, because of the high default risk with low oil prices.  Russia’s Rosneft is also reported to be having difficulty with its loans….

Tverberg writes about some pretty extreme consequences of nearing the limits of our finite resources. I’ve said many times that I cannot disagree with her. My approach, though, is to look for workarounds for us here in Hawai‘i.

I’ve also said plenty of times that we are so lucky to have geothermal. It’s not quite “infinite,” but the Big Island will be over the geothermal “hot spot” for 500,000 to a million years, and that’s close enough.

We’ll see where all this takes us. It’s uncharted waters. On the state level, it will be good for us in the short term, but on a higher level – where Gail Tverberg operates and what she writes about – we need to pay serious attention to what’s going on. Have a look at her post. It’s important and enlightening. 

It’s been a very interesting week in terms of energy and other issues affecting the Big Island and all the rest of it. Stay tuned. I have more to say! 

Gail Tverberg on the Link Between Energy Consumption, Employment & Recession

Richard Ha writes:

In this article called The Close Tie Between Energy Consumption, Employment, and Recession, from OurFiniteWorld.comGail Tverberg says that our energy use rises and falls with employment numbers, and also that Gross Domestic Product is related to energy use: The cheaper the energy, the more one uses and conversely, the more expensive the energy, the less people use. It’s all about the cost of the energy.

The Close Tie Between Energy Consumption, Employment, and Recession

by Gail Tverberg

Posted on September 17, 2012 

…Since 1982, the number of people employed in the United States has tended to move in a similar pattern to the amount of energy consumed. When one increases (or decreases), the other tends to increase (or decrease)….

I have written recently about the close long-term relationship between energy consumption and economic growth. We know that economic growth is tied to job creation, so it stands to reason that energy consumption would be tied to job growth1. But I will have to admit that I was surprised by the closeness of the relationship for the period shown.

This close relationship is concerning, because if it holds in the future, it suggests that it will be very difficult to reduce energy consumption without a lot of unemployment. It also would seem to suggest that a shortage of energy supplies (as reflected by high prices) can lead to unemployment….

Gail Tverberg’s former career was as an insurance actuary. Her job was about pricing insurance risk. That’s a relevant set of skills to have as we move into the uncertain future.

Here in Hawai‘i, we are very fortunate: We have a robust set of alternative energy workarounds. But we do need to focus on affordable energy and proven technology to help us dodge the economic downturn bullet.

Read Gail’s whole article here.

Gail Tverberg on 2011 World Oil Production Data

A few years ago, Gail Tverberg gave a presentation here on the Big Island to the Kanaka Council. Her view of the world energy situation caused a split in its membership – some of them are now pro-geothermal, and some are still against.

The pro-geothermal group agrees with Gail that one day “the boat not going come.” Meaning that one day, all things that have oil embedded will be too expensive for the common people to afford. To people with this view, geothermal is a gift from our volcano goddess Pele.

Gail is a mathematician and former insurance actuary. She quit her job pricing risk for the insurance industry to take on a higher calling – to inform people about the implications of the world’s oil supply not keeping up with demand.

There is a parable illustrating the need for empirical evidence. It concerns scholars vigorously debating the number of teeth in a horse’s mouth. A naive young man suggests that they might resolve the question by looking in the horse’s mouth and counting them. The scholars are horrified at this outrageous suggestion. 

The common folk – the rubbah slippah folks, as I call them – have counted the teeth in the horse’s mouth, and they know that the era of cheap oil is over. In their view, a hot water heater provides a luxury sponge bath, and a clothes dryer is a luxury clothesline. The electric grid is essential for the hospital, for childbirth support, life support, analysis, computers. It doesn’t take them 10 minutes to understand that cheap, proven and no greenhouse gas emissions is good. And that geothermal is cheap and proven technology.

The price of oil was $25 per barrel in 2000, then doubled to $50 per barrel and in 2011 doubled yet again to $100 per barrel. If the price of oil, electricity and water follow the same doubling pattern, we can expect today’s $300 monthly electricity bill to rise toward $600 by 2016 and $1,200 by 2022.

But there is a great upside. If we stabilize our electricity rates by using geothermal as our primary base power, then as the price of oil continues to rise we will become more competitive to the rest of the world. And our standard of living will rise.

We need compassionate, decisive leaders who will take all of us to a safer place. Not, no can. CAN!

From Gail Tverberg’s blog Our Finite World:

What the new 2011 EIA oil supply data shows

Posted on April 9, 2012

The US Energy Information Administration (EIA) recently released full-year 2011 world oil production data. In this post, I would like show some graphs of recent data, and provide some views as to where this leads with respect to future production…. Read the rest