Peak Oil Ass-Backwards: Fractional-Reserve Banking, Meet Peak Oil [part 1/3]

If the ongoing crash of oil prices over the past year – and now the stock market crashes of last week – have continuously taught me one thing, that would be that I've got very little clue regarding the economic implications of peak oil. To explain this I'll have to take a circuitous, roundabout route here, but if you've been as afflicted as I've been then you might find the following a bit illuminating.

This is a companion discussion topic for the original entry at

Wouldn’t the source about demand destruction you’re taking about be this?


Well, better late then never. The ability to learn has its own value, even if you haven’t quite got all the pieces yet.

Are you familiar with the resource pyramid, and how long run prices tend to revolve around the marginal cost of production?

In a sense I’d guess that you’re right, but I say “guess” since I never followed the Oil Drum and so am not aware of who was discussing this there and/or who it originated with. On top of that, although I did read a few articles by Gail a year or so ago, I haven’t done so since. That being said, I did hear her speak twice at two Age of Limits conferences, but if she mentioned deflating prices (and I can only guess that she did), it must have gone right over my head. Not to any fault of hers, but due to my steadfast expectation for inflating prices.

Thanks for keeping the faith! Believe it or not, when I was a kid I was actually tested (by the school board) and sent to another school for kids who learned faster. PACE it was called – Program for the Academic Creative Extension. Shows how much they knew though. They should have instead stuck me on the small bus with all the “special” students!

Resource pyramid and marginal cost of production? I am familiar with EROEI.

EROEI is no more relevant to oil and gas professionals, or the oil industry in general, than the chemical composition of the dirt on the surface of Pluto is to you. No well, field, project, basin, play or offshore platform has ever been given the go/no go decision based on EROEI.

For some reason certain academics find it interesting, for example Charles Hall used net drilling yield and net energy circa 1981 to predict the end of drilling in the United States by the year 2000. The paper was probably actually written slightly earlier right about global peak oil production in 1979, resource scarcity was quite the rage back then as well. Charlie popped up again decades later when the next claimed global peak oil livened up the next generation of neo-malthusians.

In either case the resource pyramid concept is easy, as you move down within it, you open up more volume than the slice above. As technology improves, and economies of scale come your way, the price of that additional resource ends up being lower than it once was, pressuring the price on not only the marginal cost of production within a slice, but as we have seen with shale oil, it can even pressure the marginal cost of production in slices above, i.e. conventional oil produced by NOCs.

That EROEI is of no relevance to oil and gas professionals nor the oil industry in general (as you say) comes as little surprise to me. What matters is meeting their debt obligations and servicing all those junk bonds at all costs. They don’t want to pop the bubble and spoil the party after all, do they?

“More volume,” “technology improving,” “economies of scale”… are we close to reaching the creamy nougat of fossil fuels at Earth’s core?

“Furthermore, it is because banks create the principal and not the interest that there is never enough money in existence to pay off all the debts plus the interest.”

This is pretending that the money paid in interest just disappears and is never used again. The interest is the banks profit. Why would they not use it? They wanted it to spend it in the first place. So when they spend it, and they will, it goes back into the economy where it can be used once more to pay interest on a loan or make other purchases.

This also ignores government debt which leaves (in the case of the US) trillions of dollars available for use.

Well yeah, that interest (the banks’ profit for doing nothing but conjure money out of thin air) will get used, but that’s inconsequential as the dirty deed has already been done: the debt treadmill has been created, and must now perpetuate, requiring ever-expanding growth.

And about government debt, where do governments get that money from? Answer: the banks, and they must pay interest on it. Reason being, governments gave the money creation rights to banks centuries ago. The only money that governments do create is the physical bills and coins, but which is a very small portion of the money supply (the other end of the 95% I was talking about).

Companies exist to create value for shareholders. Some of them don’t survive obviously. For those who don’t invest in individual stocks, it shouldn’t be of much concern to them at all. And any geoscientist can tell you that the earths core is hardly creamy nugget. Is that really the kind of nonsense they teach in the Canadian school systems nowadays? You need to find better teachers.

It is a problem for those who claim to know anything about resource scarcity of course, you are aware of the technically recoverable resource sizes of things like methane hydrates, aren’t you?

No, as far as I know creamy nougat is not the kind of stuff Canadian teachers espouse, although like most other people in the world they do behave as if there aren’t any limits. That being said, creamy nougat IS what you essentially proclaim. How come you avoided answering my question from my previous post questioning what year or decade or century or millennium you think oil levels will peak?

Methane hydrates, sure. But what’s their EROEI going to be? And what energy source are we going to use to get at them? Creamy nougat?

I don’t think you need so many words nor terms like “demand destruction”. Instead classical supply and demand analysis is the right framework. (I regularly get rebuttals from people on the Internet that supply and demand don’t work, but they do…from porn to potatoes. And various complications such as cartels, imperfect cartels, future arbitrage, full cycle cost including capital, versus variable cost…all are covered.)

No, I don’t think that supply and demand analysis works here. To a certain degree it works on the upswing when resources are increasing, but now that they’re decreasing things are going all wonky. Because of high extraction costs consumers are getting tapped out, and so business is going down for producers. With prices dropping, the mainstream media by default think that the problem is due to too much supply – the supposed oil glut. This “supply and demand” thing should now be renamed to “high-priced oil and demand destruction.”