The Race To Collapse

As readers of this blog know, I have long regarded the return of economic crisis as an inevitability (because the core energy and no-growth predicament facing the Western world wasn’t solved in 2008-9 but merely kicked further down the road by increasing debt and printing money). It looks like 2012 will be the crunch year, as a series of inter-related crises are rapidly converging: (1) The European sovereign debt crisis; (2) The continuation of the chronic US inability to balance its books, and of instability in the Middle East; (3) The probable onset of serious declines in global oil production, as new oil megaprojects are no longer able to compensate for accelerating decline from existing fields; (4) heightened risks of a war with Iran, as the narrow window opens between the start of US delivery of the next-generation bunker buster MOP (from November 2011) and the culmination of the Iranian nuclear weapons program and its hardening against air strikes (next year or two).

The European debt crisis dominates headlines, with the Anglo-Saxon media crowing about the lazy, shiftless Meds (as opposed to the diligent and careful Germans) and blaming socialism for their problems. This of course has a number of flaws within it. Greeks work the most hours in the EU – 2000 per year, relative to 1300 in Germany. And the only major EU nations without huge debt and fiscal problems are the Scandinavians, who are about as “socialist” as one gets nowadays.

But this is all sidestepping the fact that debt and fiscal crisis afflict the entire Western world, and it is just that – due to the special political weaknesses of the Eurozone – have manifested first and foremost in Greece, Italy, and Spain. However, a look at the actual statistics reveals that even the “serious” countries are in a great deal of trouble. For instance, in 2010 both the US and Britain had bigger primary deficits (cyclically adjusted) than “basketcase” Greece, whereas Italy’s was actually positive! The Meds’ total net government debt is larger, but on the other hand, if even France is beginning to experience perturbations – a country whose fiscal balances are better in every way than Britain’s or America’s – then it surely cannot be long before the crows come home to roost in the Anglo-Saxon world.

The fiscal crisis

Below are two tables that would be very informative for discussions about the crisis, as they overturn many of the lazy myths and tropes populating the discourse.


Though the US position looks salvageable because of the positive GDP growth less cost of finance indicator (suggesting that its ability to pay back its debts are growing faster than the debts themselves), I am not convinced of the reliability of that indicator. First, it assumes fast growth – growth that has yet to materialize despite massive fiscal and monetary stimulus since 2008. Second, it assumes that interest rates on Treasuries will remain low – but that assumes a US that is becoming rapidly indebted and making signals it is going to inflate it away remains an investor safe heaven. It shows zero ability to make a credible commitment to eliminating the budget deficit, which is only going to be compounded as the baby boomers start retiring.


This chart from Michael Pollaro shows that in some respects the US position is actually worse than those of the PIGS in aggregate. For every $60 it received in revenue, it spends $100, and it would take almost 6 years for the US to repay its debt if the entire budget was devoted to it. In contrast, the average PIGS figure is $78 in revenue for every $100 in spending, and it would take them only 2 years of their combined budgets to repay their debts.

The position of Britain is very weak. It’s economy, and especially its budget, is highly reliant on the City of London. The tanking of the financial system has resulted in zero growth (GDP is still about 5% below peak 2007 levels) and chronically high budget deficits at around 10% of GDP, and the prospect of a second recession with pull the figures even further into the red. Nor has a weaker pound stimulated an export based recovery. Britain’s big trump card is that its bonds have very high average numbers of years to maturity, so refinancing will be easier even if its rates were to suddenly lurch upwards. Now its still over-extended and will probably go bankrupt within this decade, but probably later than the Meds or even the US.

Germany has a strong position, with only a modest budget deficit and reasonable levels of debt. Overall, it is net global creditor, with a net international investment position of 37% of GDP. But this presents another problem. Quite a lot of that is in the forms of loans to and assets held by its banks in the stricken Med region. A meltdown there would send the value of these assets plummeting, necessitating massive bailouts that could in turn threaten even Germany’s solvency. Hence, a possible reason for the recent poor sales of German government bonds.

Despite chronic budget deficits and an astronomic public debt of 220% of GDP, I actually think that Japan may be the country in the least danger in the medium-term future. 95% of its government debt is domestic, largely to Japanese corporations, which lend to the government for social spending in exchange for the understanding that tax rates will be held low. But those same banks and corporations are flush with cash: Japan’s net international investment position is an impressive 56% of GDP. In a way, it’s just a different method of financing a welfare state. It’s still probably unsustainable – domestic investors too may dry up, especially as the Japanese population continues to age and begins to spend rather than save – but I’d wager less so than the US or most of Europe.

Fiscally secure nations include China, Latin America, Scandinavia, and Russia. China has problems with various non-performing loans and municipal over-indebtedness, granted, but these weaknesses are largely mitigated by its phenomenal growth rate and a net international investment position of 36% of GDP. Latin America and Scandinavia tend to have responsible fiscal management and adequate growth rates.

Russia has globally low levels of government debt, its citizens likewise have low debt levels (a feature more of its underdeveloped credit system, granted), and an international net investment position of 17% of GDP. Though the budget deficit is currently balanced thanks to high oil prices, a significant drop can take them into the red very quickly and deeply; however, this is NOT a problem because it is a near certainty that on average oil prices in the next decade will remain high and rise further. What IS a problem is that Russia is a “high-beta” economy, highly affected by developments elsewhere – in 2008, its recession was deeper than in any major Western economy (though compared to them it also had the strongest recovery). The primary reason was the sharp cut-off in Western credit to Russian banks and corporations, resulting in multiple refinancing crises. Today, this problem is less acute, with the Russian banks and corporations having learnt that such dependence may be a problem – nonetheless, a huge sovereign debt crisis in the West can still give Russia a very sharp knock in the short-term.

The exergy crisis

This brings us to another side of the issue: peak oil. Oil reserves are depleting, and global production – after being on a plateau from 2005 to today – will probably begin to consistently fall from 2012 as oil megaprojects sharply fall off. Furthermore, a war with Iran, and its possible capability to blockade the Strait of Hormuz for some time, may cause an extremely disruptive spike in world oil prices, as 25% of world oil supplies transit through the Persian Gulf. On the other hand, China is right now entering the mass automobile age, with the numbers of cars sold per year overtaking the US in 2010. So we will see a rise in demand from China and other emerging markets.

But this is not all. As discussed on other posts in the blog, e.g. here, here, economic growth in general is crucially dependent on net energy availability and the efficiency with which it is converted into useful work. Both indicators have slowed to a crawl, and quite soon the former may well go into reverse. Furthermore, the reality of open global markets with limited global energy supplies means that countries will be more and more competitively bidding for the high-EROEI energy sources that remain (primarily, oil). The US in particular is highly dependent on oil to power its service-based economy, but it simply cannot afford oil to the same degree as can China (see this excellent Oil Drum post A Brief Economic Explanation of Peak Oil for an explanation). This means that the economic pie is now limited, and growth in one place (above all, China) is now to the detriment of growth in other already high-income places (the US, and the less efficient parts of Europe). For a limited time, this issue can be bypassed by the accumulation of debt in the high-income countries – much of which, it should be noted, is loaned out from China and the oil exporters. But poor countries lending to maintain rich country living standards is bizarre at face value, and it is unsustainable in the long-run.

How to survive the coming storm?

From the investment perspective: Keep assets in US dollars, but only those that can be sold off at relatively short notice.

Though dangerous in the short-term, China, Russia, and some countries in Eastern Europe are very good long-term plays. In particular, buying in at the depths of crisis can pay huge dividends in the future. A good bet right now: property in Bulgaria and Minsk.

Natural resources are another excellent long-term play (including gold – a good bet in a time of instability). However, it is probably not a good time to buy in right now, as there is the risk of a sharp (but short) fall once the economic deterioration gathers critical pace.

If you have the means to be an independent financial speculator, try out US CDS. The US will probably never formally default – controlling its own currency, at the most, it will do so via inflation – however, the perceived risk of default WILL be reflected in those instruments. Don’t bet the farm on it, as they’re high risk, but do consider setting aside 10% of your investment poll into this or similar instruments, as the returns have the potential to be mindbogglingly high.

The other two BRIC’s, India and Brazil, I am not so certain of because their low human capital precludes very fast growth.

In terms of specific sectors in the long-term, probably the best bets are IT and medicine because the entire world is aging, and when people are unemployed, they will spend their time on Facebook and playing video games.

Perhaps I’ll have another post on the other aspects of how to keep afloat in the coming era of turbulence. Keep an eye out for it.

Reread S/O posts about the return of geopolitics to Europe and my decade forecast and piece on future superpowers, and continue reading this blog as it is ahead of so many issues well before they started becoming conventional wisdom.


  1. georgesdelatour says:
    • The article does not reflect that the product of the Alberta oil sands is heavy crude with a high sulfur content and API gravity. It is generally less desirable – and far less valuable – than Iraqi light sweet crude, for example, and I doubt the USA has altogether given up hope of one day controlling those huge deposits so temptingly close to the surface. Still, Canada does have a lot of it (51% of all known remaining “accessible” , if references can be believed).

      This reference

      is interesting to me for a couple of reasons. One, it suggests damage caused to the environment has dropped dramatically in recent years with the advent of new technology. Two, it suggests that for every two jobs the oil sands industry creates in Canada, one is created in the U.S. Three, it suggests the USA is already regarding Canadian output as belonging to the USA and an intrinsic part of domestic energy policy.

      Of course Canada doesn’t get the oil out of the ground just to admire its colour – it wants to sell it, and America is a reliable customer who pays on time, so I should stop playing the reluctant virgin on that score. Taking the optimistic view just for once, what if the claims are true, and that environmental damage is being steadily reduced by emerging technology? Or are any gains immediately wiped out by the scale of new exploration?

      It’s difficult to trust anything that originates with the energy industry, since their track record suggests they will lie with impunity and cover up damaging statistics until the situation is irreversible. Then they come clean with a brash grin, say “We’re all in this together, and we have to work together to fix it”, and sit back on their piles of cash while everyone pulls together to clean up their mess.

  2. I’m too had considered the debt situation as inevitably leading to some kind of breakdown. I’m ashamed as European that this apparently will be provoked by the Old Continent first because of the bone-headed and cruel design of the eurozone. Effectively, according to the German plans, EMU does not mean a common currency for Europe but an apatride (stateless) currency and central bank which, far from giving Europeans advantages equivalent to those granted by the U.S. dollar, renders sovereign states completely at the mercy of the financial market’s instability and self-fulfilling prophecies.

    If I could voice an optimistic dissent, I think we can at least say that *solutions exist* to the debt crisis in Europe if the right policies are taken. Total backing by the ECB of European government bonds (especially of those countries in primary surplus) to drive down interest rates. Deficits would be dramatically reduced and any moderate devaluation of the euro would greatly help exports, aiding growth.

    Of course, there is the possibility that vested interests in both Europe and North America (the Germans & Capital/conservative ideologues respectively) make any reform attempt impossible, leading to some sort of collapse. Speaking for Europe, I think reform is possible. The chorus of economists (Roubini, Eichengreen, DeLong, Krugman..) and nations (France, Poland, UK, Russia..) calling for ECB intervention is becoming ever-louder. More to the point, virtually all eurozone countries are finding themselves unable to sell their debt now, including Germany ( And, as Der Spiegel points out (,1518,799059,00.html), German finances are barely better than the eurozone average and if deficits are manageable in the immediate, this is only because markets have chosen to lend to the country at low interest rates. Should this change, as it may be already, Germany may well change its tune.

    • alexander mercouris says:

      Dear Craig,

      Let me take a more pessimistic view of the Eurozone debt crisis. It is absolutely true that the demands coming from assorted governments and economists is that Germany should “allow” the European Central Bank to provide “unlimited” assistance to states in current danger of default essentially by either giving a guarantee or by buying their bonds. What these calls persistently ignore is that since it is Germany that would have to re capitalise the European Central Bank in the event that anything were to go wrong with the bond buying programme what these calls ultimately amount to is a demand that Germany via the European Central Bank assume liability for the public debt of the entire Eurozone. Given the size of the Eurozone’s public debt were Germany to do this it would do so at the price of calling into question its own solvency.

      Germany has a strong economy but it is not Hercules. Its GDP is somewhere around 20% of the EU’s and though it has the biggest economy in the Eurozone it does not overshadow it. Your comment reproduces an article in Der Spiegel that makes the point that Germany already has a public debt to GDP ratio of more than 80% (I believe the figure is 84%) and is already running a primary budget deficit, which is already likely to grow. Demanding that Germany via the European Central Bank should single handedly take on and solve the problems of the entire Eurozone even at the risk of its own bankruptcy is quite simply unreasonable.

      • I’m not sure the ECB would ever need to be “recapitalised” as it can always print more money. What you’re saying regarding Germany – and it’s fiscal house is NOT markedly better than the eurozone average – is like saying the Fed’s buying of U.S. bonds might one day mean the U.S. government would have to recapitalize it… It’s all a bit circular don’t you think?

        • Alexander Mercouris says:

          Dear Craig,
          This is a major point. The US Federal Reserve and the Bank of England can print money because behind them stand the US Treasury and the British Treasury. If printing money begins to cause alarm about the monetary stability of either the US or Britain the US and British Treasuries can at least in theory step in to bring the situation under control eg by raising taxes, cutting spending or whatever. There is no eurozone Finance or Treasury Department, no eurozone government and the eurozone does not raise taxes. If the ECB were to switch on the printing press it would be functioning in an institutional void with no backstop behind it if things were to go wrong. In practice it would turn to its shareholders for support. Its biggest shareholder at around 18% is the German Bundesbank. As everyone knows it would in fact be the Bundesbank and ultimately the German government that would again have to step in if anything were to go wrong. Demanding that the ECB print money (or “quantitative easing”) as it is now called is therefore simply another device for getting the Germans to backstop Eurozone public debt though the risks become ever greater.

          I have to say that I am frankly troubled with the glib way some economists and policy makers talk about these monetary experiments. Quite apart from its inflationary effect printing money is an inherently dangerous idea. Even in countries like the US and Britain where there are strong institutional structures and where the currencies are old and well established it carries risks. In the eurozone the risks are much greater.

          • The ECB wouldn’t need extra money as they just print it. What you do get is possible inflation but that doesn’t only rest on Germany but every user of Euro’s.

            • Alexander Mercouris says:

              Dear Charly,

              The idea that a central bank can simply print as much money as it needs is a dangerous myth. I cannot in a short comment discuss this in detail. However if it were literally true governments would not need to raise taxes at all as the central bank could simply print all the money that was needed! As for saying that the only effect would be inflationary this is true but begs the question: how much inflation is one prepared to risk? There is ample historical evidence showing how things can get completely out of control and how difficult it is to bring them back under control when this happens. In countries like the US and Britain where insitutional structures are strong and the currency is well established (the British currency is the world’s oldest and has existed for over a thousand years) the risks are minimal. In the eurozone where the insitutional structures are weak or non existent and where the currency has existed for just 10 years and confidence in it is weak the risks are much greater.

              • It isn’t a dangerous myth. It is simply true but you will pay for it with inflation, which can be seen as a tax.

                ps Using Britain as an example for a strong currency is a bit peculiar as it is a country known for using inflation to pay for its debt. If there were still Lira i would rate it higher that the British pound, especially when you consider the situation the UK is in at the moment. It is highly indebted, has a big current account deficit and a big deficit. Add the fact that two of its biggest foreign currency earners (oil and bank) are not doing particularly well and you can only say bye bye worthless pounds

              • Alexander Mercouris says:

                Dear Charly,

                The point is how high is the inflation you are prepared to risk? The rate of inflation is not something that can be easily foreseen much less plan for. As for hyperinflation it almost invariably comes as a surprise.

                As for Britain it is true that it has had a highish inflation history since World War II. However it has never experienced a period of total currency collapse as has been true of every other country on the European continent. The fact that stirling has existed and retained value for so long means that it requires a serious effort of the imagination to conceive of a situation where it has no value at all. The same is emphatically not true of the euro which until 10 or so years ago did not even exist.

              • hyperinflation doesn’t come as a surprise but when you try to pay foreign debt with local currency. Something that can’t be done. If you don’t try to pay foreign debt you can’t get into a situation in which you have hyper inflation. But you can have high inflation.

                With respect to what what the inflation rate should be: Between 2 and 4%. As you can’t really foresee inflation and deflation is bad to.

                ps When did the swiss franc collapse? As i’m to lazy to look it up so i will not ask it for some other countries.

              • Alex, I’m not sure to what extent history and “reputational capital” still plays a role in today’s world.

                Information travels much faster, and there is much more of it (allowing investors to make more informed choices and much more quickly). And the current situation, in which the UK structural deficit is at around -7%/-8% of GDP, is simply unprecedented probably since WW2 (when there was an entirely different environment and conditions), and the third highest of all the major countries after the US and Japan. Government debt is at around 80%, but rises to about 150% once you include the financial interventions. And unlike the US, the UK is facing near-zero growth, and unlike Japan, it isn’t balanced out by a positive net international investment position.

                Complacency always tends to come before major crises (which only become “inevitable” in retrospect). Case in point: the EU. As late as 2008, anyone suggesting Italy could be on the brink of bankruptcy within the next five years would have been labeled a nutter. Even a year ago it would have been considered extremely unlikely. Now, it is becoming conventional wisdom, with commentators overdoing themselves to come up with half-assed narratives to “explain” it: Mediterranean laziness and shiftlessness, Berlusconi’s bunga bunga parties, tada tada.

              • an 7% – 8% structured deficit with such a low inflation is unheard of. Only during total war, which i can’t see as permanently, were deficits higher.

              • Alexander Mercouris says:

                Dear Anatoly,

                I should make it clear that I consider the situation in Britain absolutely awful and I agree completely with the view you have expressed about it in your post. For what it’s worth I ought to say that I have been endlessly making this point to everyone with whom I have discussed Britain’s economic prospects since the 1980s.

                Incidentally I would just make two points about Britain, which are relevant when they come to Russia:

                1. Britain had the benefit in the 1980s and 1990s of an oil bonanza, which it squandered on unsustainable consumer and credit booms. The subject is never talked about. I very well remember how the whole subject of North Sea oil stopped being talked about in the mid 1980s when the economic “success” of the period started to be attributed to the supposed supply side reforms of the Thatcher government. This contrasts sharply with Russia where not only are energy resources being husbanded and used intelligently to build up reserves and such like but where worries about over dependence on energy exports is a daily theme.

                2. If you lived in Britain today (you are lucky that you don’t!) you would know that the big story here is to “rebalance” the economy away from the financial sector by building up manufacturing industry. One heard none of that a few years ago when it is now admitted the British economy was over dependent on the financial sector. However one did hear endless lectures about Russia’s need to diversify. Of course Britain still claims to be a modern “developed” country though its financial system is bust, its budget is in disastrous deficit and though it runs a permanent trade deficit. Russia by contrast with a budget surplus, huge reserves, insignificant public debt and a large trade surplus. Britain also has a AAA credit rating whilst Russia’s rating in just above junk bond.

                The points I was making were not intended to suggest that Britain’s position is better than it is. It goes without saying that Britain does not have anything like the sort of advantages that the US has and which I discussed in my exchanges with Ryan. Rather my points about Britain were simply intended to show why quantitative easing in the eurozone is dangerous. I was making the point that because stirling has been around for a long time people are more accustomed to use it than the euro and that because Britain is a functioning state the Bank of England does not function in the sort of institutional void that the ECB does.

  3. Russia is a “high-beta” economy

    There are differing technical definitions regarding how many words overall or how many words in a row must be copied directly from a source for it to constitute plagiarism. To avoid this problem, it is recommended that students footnote any reference or similarity–whether copied directly, or paraphrased, or partly paraphrased and partly copied–to a source that they consult. Consulting other sources and making use of ideas presented therein is acceptable and even desirable scholarly conduct, but academic honesty entails that the student makes the reader fully aware that, and to what degree they have used other sources to craft their own text. Any conceptual material taken from another source, no matter how trivial, must be cited.

    • Good for me I’m not writing for SFSU then!

      • Is that your idea of a witty retort, or you just don’t get it? Okay, I’ll say it explicitly. The sentence “Russia is a high-beta economy” is suspect enough to trigger a plagiarism alert, and a quick google check confirms that you have indeed stolen it from the Streetwise Professor. Poor, junior, very poor.

        • Not intentionally. I do read SWP, so the phrase must have seeped in. But in any case the use of the term “high-beta” (including as applied to Russia) is hardly unique to him.

          • As usual, Petey provides zero information, seeking only nits to pick.

            • In peter’s defense, he is a nuclear physicist, and they are pretty strict about their quotes (not to mention obsessive-compulsive). In their scientific monographs they are not even allowed to use the expression “speedy neutrino” without supplying a footnote, otherwise it is considered plagiarism.

          • Not intentionally.

            Makes no difference now. Once you admit that a piece of your post “must have seeped in” from somewhere, you must add a suitable reference. Quickly. Until you do, you’re a plagiarist, plain and simple.

            • But peter, you are a plagiarist too! Your phrase “makes no difference” was stolen from a Canadian punk band. And your phrase “plain and simple” was stolen from an Amish furniture store. Shame on you!

              • Oooooo….and the oversize floppy white gauntlet is thrown down by emerging funnyman yalensis, who catapulted himself into the front rank of bloggocomics in one inspired riposte! I hope Peter laughed as hard as I did when he skewered me with that “Putin Fangirl” website gag, because that is some funny shit, my friend.

  4. georgesdelatour says:

    Reflecting on this article, doesn’t it tend to confirm Tyler Cowen’s theory, in “The Great Stagnation”? Germany may look better than the US/UK/PIGS, and Scandinavia better than Germany. So good policies really matter. But even the Scandinavian countries aren’t’ seeing the really high growth rates of the BRICs and the CIVETS. Clearly, most of the high growth in the world is catch up growth.

    Here’s Cowen giving an “easy listening” version of his thesis”

  5. Alexander Mercouris says:

    Dear Anatoly,

    Well done as always on an excellent post.

    Could I ask a question? Your post discusses at length peak oil. Here in Britain we have recently been flooded with articles and commentary assuring us that the problem does not exist because of the supposedly unlimited quantities of shale gas that have now been found together with the technology to extract it. Your post says nothing about shale gas. Though the literature on the subject of shale gas is immense it also tends to be written either by enthusiasts or alternatively by people whose concerns are overwhelmingly environmental. Very few provide any actual numbers. I have found it incredibly difficult to find any posts or articles that deal in numbers. What is the situation with shale gas? Is shale gas really a game changer?

    • First, shale gas is about natural gas, so does not affect the basic mechanism outlined in the chart on this post about the immediate link between peak oil and financial crisis.

      The problem with shale gas is that, apart from the environmental problems, which are quite real and have led it to being outright banned in France – the cocktail of chemicals it seeps into the ground, methane leaks, causes earthquakes, the calculations that it may emit as much CO2 as coal – it also seems to have a pretty low EROEI (certainly far lower than conventional natural gas), barely yielding more energy than the energy expended to produce it according to some calculations.

      As I see it, production of shale gas is mostly “subsidized” by other, higher-EROEI energy sources via debt (most shale gas producers are in the red). This article is a useful antidote to some of the rosy-eyed rhetoric.

      • alexander mercouris says:

        Thanks Anatoly. Very helpful.

      • Earthquakes are scary business. This piece discusses whether hydro-fracking caused the Oklahoma quake earlier this month. Article concludes that it did not, although scientists do concede that fracking can irritate old fault lines and possibly cause tremors.

        • Shale gas has been a known resource for a long time, and some form of production has been around for at least a hundred years; it’s far from new. What’s new is all the excitement about how it could neutralize Russia’s energy clout in the natural-gas market with neverending supplies of cheap energy. And at present, with present available technology and recovery methods, that is bullshit of the purest measure. I remember a commenter who called himself Ron, on the late great La Russophobe; no matter what the subject, he would use it for a springboard to whoop triumphantly about how shale gas was going to be a game-changer that would send those dirty Russians scurrying for shelter. A lovely dream for Russophobes – but only that, I’m afraid.

          I have an excellent (electronic link) professional reference paper on the subject, but it’s in my bookmarks on another computer; I’ll post it when I have access to it. It uses a term with which Anatoly is intimately familiar; EROEI – Energy Returned On Energy Invested. Generally speaking, a recovery process that costs more than you can sell the product for is not profitable, and must soon be abandoned unless it’s the pet project of some eccentric billionaire, who might keep it going for a couple of years. National subsidies, too, might make a slight difference. But again, generally speaking, shale-gas extraction requires the fracturing of a couple of tons of shale for every barrel of shale oil extracted. Some technological estimates put it near the break-even level today, and some “plays” such as the Barnett Shale have been making a good bit of money for some time (although there’s little information available on how much they’ve had to spend for operating costs). But there have been dozens of shale plays which started up with high hopes, only to be struck dead by the Law of Diminishing Returns. At present, shale oil/shale gas are no competition for their natural hydrocarbon counterparts. As recently as 15 years ago, Canada effectively ceased western natural-gas exploration, because it cost more to get it out of the ground than we could get for it. That’s not because it was expensive to recover – it was simply so plentiful and cheap: we supplied something like 180% of our own needs from known reserves. Then California – after several years of drought – converted its electrical plants to natural gas from hydroelectric, and that was the end of cheap gas on the west coast. But we could sell it as fast as we could recover it.

          Shale gas is in the same category as “green” energy when compared with existing natural gas and oil – it’ll attract significant broad interest when it’s competitive with those sources in terms of profitability and ease of recovery. Right now, not even close.

          • Regarding “shale oil”, there is really no such thing. The few locations such as the Bakken formation are cases of oil seeping from other reservoirs. Normal shale hydrocarbon deposits are kerogens. These require cooking to be processed into oil. Unlike the bitumen deposits in Alberta or Venezuela, kerogens are utterly uneconomical to extract; they take more energy to upgrade than they are worth (maybe with cheap nuclear power they can be economically accessible).

            Fraking natural gas is all the rage, but you don’t get something for nothing. A bit of reality techno cornucopians always forget about. Shale gas is tight gas with low volumes due to small pore space in the rock matrix. This is why it is hard to extract and why a typical frakked gas well lasts a much shorter time than conventional gas wells. You have to “drill” like crazy to extract shale gas, which takes energy and money.

            I think that when the environmental issues are brought up you get the typical drone losing attention. It should be made clear to the masses that this game is a short lived diversion that only slightly delays the decline of the fossil fuel production.

  6. Anatoly,

    I have been following your website for some time because of your spot-on coverage and analysis of the Russian demographic situation. Unfortunately, I think your analysis regarding the U.S. fiscal situation is very flawed though it is accurate regarding all of the other countries in the chart. The problem with your analysis is that assumes that a country’s fiscal situation is only tied to its income (GDP) — hence your focus on deficit/GDP and debt/GDP. This is like determining the creditworthiness of an individual borrower by looking only at at his debt or deficit versus his gross income. If the borrower is running a large cash flow deficit and already has a large debt but has enormous assets which dwarf the deficit and debt, they would be considered creditworthy.

    The U.S. has assets which are likely worth hundreds of trillions dollars considering all of its temperate land, natural resources, exclusive economic zone, and high tech dominance. It also is separated by two oceans from most of the world’s population and has a military strength which isn’t even remotely matched, so assets in the U.S. are much safer physically than anywhere else (why else would other countries store their gold reserves in the U.S.). The U.S. Federal Reserve can continue printing money to cover deficits for decades with only the moderate inflation we are seeing now because those dollars are subsumed into a much bigger asset base. The market intuitively understands this which is why, in any crisis, money flows into U.S. Treasuries because the principal will always be repaid which is not the case for countries which can only print very limited money before seeing massive inflation.

  7. Alexander Mercouris says:

    Dear Ryan,

    I think you are basically making a valid point and it is one that one often hears. It explains why the US is able to engage in monetary experiments such as quantitative easing without running the same sort of risks that other countries do. However this view does carry dangers. However big the asset base (and who can estimate how big the US asset base actually is?) if one simply carries on piling on debt the point must come sooner or later when the debt overwhelms it. The situation is analogous to that of a European aristocrat who owns vast lands and many properties and whose income from those lands and properties is high but who has mortgaged them all to the hilt because he cannot live within his income. Ultimately his credit will disappear however extensive his original asset base might have been.

    I would just add that because of the effect of interest all other things being equal after a certain point debt multiplies at a quickening pace whilst an economy that is taking on debt always suffers from the temptation to inflate the value of its assets in order to make borrowing easier. Both trends have been visible in the US. Having said this the US has not reached the point of no return for the reasons you give. There is still time to put things right. Will it happen though?

    • Alexander,

      Yes, there is some theoretical point at which the U.S.could run up so much debt that it could overwhelm a fixed asset base but I thinks it is unlikely anytime soon. I think it is just as possible that U.S. asset value will grow faster than U.S. debt.

      As you said, no one knows for sure what the value of the U.S. asset base is. On the radio recently, I heard someone from Stratfor (the consulting firm) say that they have estimated it at between $60 trillion and $300 trillion. Obviously, a wide range, but even taking the lower estimate, it dwarfs the U.S. national debt. Also, you have to consider that the value of the U.S. asset base is not fixed but steadily grows over time as the U.S. economy grows. The enormous amount of undeveloped, quality, temperate land in the United States means that you can always expand economic activity and population into areas where land in cheap and there are very few political obstacles to growth.

      • Asset value is only useful in relation to what kind of debt. For instance in the case of Iceland and its possible debt due to Icesave etc. As it is foreign debt it can only be paid for by exports and assets that are interesting for foreigners to use (real use, not finacial use) . This is also the reason why Iceland will default on that promise to pay the Icesave debt because it is simply to big for Iceland to be repaid by exports + assets interesting for foreigners. Most of the asset base in the US is simply not of use for foreigners so lending from foreigners can get ugly really fast.

        About enormous amount of undeveloped, quality, temperate land. Who cares, money is mostly earned in cities. If it wasn’t for food production most land would be a total black hole. The big problem with America is in fact that the population is to spread out.

        • Alexander Mercouris says:

          Dear Ryan,

          Of course the asset base will grow as the economy grows. As I said I think you are making a valid point. The US still possesses reserves and strengths that no other economy for the moment can match. My simple point is that that is not a reason for complacency of which I am afraid I think there is too much in evidence.

          One further point I would make is of course the obvious one (which I think is the one also being made by Charly) that not all of the US’s asset base is realisable. Let us suppose that the US were to face a credit crisis. It would not in that case be in a position simply to sell off the prairies, Manhattan, silicon valley and the oil fields of Texas to meet its financial obligations whatever the notional value of these assets might be.

          • Alexander and Charly,

            See my reply to Below Freezing for more detail, but both of you are under the impression that the U.S. would have to sell assets to realize its value. This is just wrong. All the U.S. has to do to pay off its debts (and has been doing to pay off its debt) is to simply print money and allow the money to be subsumed into the much larger asset base without massive inflation as would happen in densely populated Europe.

            Charly, you specifically state that “Most of the asset base in the US is simply not of use for foreigners so lending from foreigners can get ugly really fast.” Why then haven’t foreigners “gotten ugly” with the U.S. for decades of running large deficits? How many times have the doomsday prediction of foreigners abandoning U.S. Treasuries been proven wrong? Even during the U.S. financial crisis in 2008, people flocked to U.S. Treasuries because of the asset value. What is your explanation of this?

            • Alexander Mercouris says:

              Dear Ryan,

              We come back to the idea of unlimited money printing backed by assets which cannot be realised.

              As I said up to a point I agree with you. The US can print money to a much greater degree than any other economy. Certainly it can do so to a much greater extent than can any individual European economy or the eurozone taken as a whole. There is however a limit to how far this process can be taken even in a country as large and rich as the US. If you forgive me for saying so too many Americans now and in the recent past seem to act on the illusion that because their country’s resources are immense there is no actual limit to them.

              Incidentally I disagree with the view that the recent experiments by the Federal Reserve Board have had no significant inflationary consequences. In my opinion they have played a by no means insignificant role in the significant rise in food, oil and commodity prices. I understand that this is widely disputed within the US including by such people as Paul Krugman but from what I have been told this is also the widespread view of most of the people who actually work in the markets that trade in these goods.

              • Alexander,

                I don’t think we actually disagree by that much. I think the problem is that you have refuted two points that I didn’t quite make.

                First, I certainly do believe that there would be massive negative consequences from “unlimited money printing”. If the Fed were to suddenly print $50 trillion, it certainly would lead to massive inflation. The point I made is that the U.S. can and has met its budget deficits with a level of money printing (a few trillion over the past few years) that is very small relative to its asset base so we only get moderate inflation not hyperinflation.

                You also say, “Incidentally I disagree with the view that the recent experiments by the Federal Reserve Board have had no significant inflationary consequences.” I think if you closely read my earlier posts, I am clear that the money printing has led to “moderate inflation” which would certainly qualify as “significant inflationary consequences” given that we had a zero inflation rate when the money printing started. The point I am trying to make is that this is not hyperinflation as would be the case if the Eurozone were to try something similar.

                I am not at all a fan of Paul Krugman who incorrectly did predict that there would be no significant inflationary consequences. I am also not a fan of running budget deficits and then monetizing them through money printing (as Krugman wants to continue to do). I would rather not run a budget deficit. My point is that the current U.S. policy won’t lead to a disaster as it has in Europe.

              • Alexander Mercouris says:

                Dear Ryan,

                You are right when you say that we do not disagree on that much. The difference between us is I am more cautious. I think we can leave it at that.

              • The Eurozone has no current account deficit and no debt in foreign currency so i don’t see hyperinflation happening.

              • Alexander Mercouris says:

                Dear Charly,

                I do not think hyperinflation will happen in the eurozone but I do think the risks are there for the reasons I have already given.

      • The World Bank estimates US national wealth at around $60 billion, down from nearly $100 billion in 2007.

        On this note, I would add that the value of the asset base highly depends on the economic situation (rising high during bubbles, plummeting during crises). It would seem that it is least useful at precisely the moments when it would be most needed.

        Furthermore, flogging much of the state-owned wealth at once will depress its aggregate value due to the suddenly increased supply. Case in point: Greece selling off its luxuriant islands to service its debt, with some now going for as low as €2 million. Sums like that are drops in a bucket as far as $100 billions’ worth of debt go.

        • Anatoly,

          The link that you provide shows that the Federal Reserve estimates household net worth at $58.5 trillion. You refer to this as national wealth of “$60 billion.” I’m not sure if you meant billion or trillion but obviously there is an enormous difference. Also, consider that this is not total national wealth as it does not include the assets of the government sector which includes 1/3 of the land in the United States and enormous onshore and offshore mineral resources. Also, I do not see where the source is for your statement that the U.S. national wealth was “$100 billion” in 2007. It is not mentioned in the link.

  8. below_freezing says:

    The low density urban planning of the US is completely unsustainable. High petrol prices would shut down the entire economy. Americans waste an unimaginable 30 minutes on the commute. That is 1 hour a day, multiplied by 365 days a year, multiplied by 200 million working Americans (well, 160 million now). It takes 1 liter of petrol, approximately, for 1 hour of driving. That is sickening waste just for the privilege of living in a slightly larger house on low density land.

    A single family dwelling is extremely energy inefficient and resource inefficient. It has low density, requires central air conditioning for each 3-5 people (as opposed to 1 central air conditioning system for 1000 people in a tower, or 1000 small air conditioning units). It requires central heat. The US literally is flushing money down the toilet with watered lawns for every home. If you or I saw someone flush money down the toilet, we’d be shocked. However, that’s what Americans do every day by watering grass.

    There is no way for the US to pay off its debt. Even confiscating all US assets overseas and whatever is movable inside the US would not repay the US debt. There is only 1 bad choice (out of myriad other terrible choices) avaliable to the US government: print money. Once the printers start, hyperinflation takes hold and the game is over.

    The game is already over, it just remains how long before the TV gets turned off. The US just issued some treasuries. Note, this was after another printoff of 3 trillion dollars. Apparently, no one is buying, yet they are trading at historical highs in price and historical lows in yield. Why would they be so highly priced when the supply is huge, the returns are awful, and no one is buying? The government is printing money to buy its own bonds to create the illusion of bond buying. This, of course, has the same effect as directly printing money.

    • Below Freezing,

      You make several points that are contradictory.

      1) You say “There is no way for the US to pay off its debt.” but you then admit in the the next sentence that the U.S. can simply print the money which would of course be paying off the debt.

      2) You say “Once the printers start, hyperinflation takes hold and the game is over.” But you note in the next paragraph that the U.S. has already been printing massive amounts of money. Where is the hyperinflation? As I noted above, the U.S. asset base is in the hundreds of trillions dollars, so printing a few trillion dollars does not cause massive inflation.

      3) You also say no one is buying U.S. Treasuries except the U.S. government. While it is true that government (Fed) buying has crowded out many new foreign purchases, foreign governments are not selling their existing holdings. How do you explain that China, Russia, and most other countries want their reserves in this supposedly worthless asset?

      • 1) printing money is not paying of the debt. It is defaulting.

        2) below is wrong with respect to hyperinflation. That only happens when you use local currency to pay of foreign debt. But high inflation is also bad. What is more is that the US has a few industries that need to be based in the market with the highest wages to be successful. Problem is that those industries (entertainment,software,research) are the exporters of the US.

        3) Those reserves give them power and who says that they can be sold. Chinese dollar holdings are so fast that disinvestment can only be done very slowly without disturbing the market.

        • Charly,

          You say “printing money is not paying of the debt. It is defaulting” You don’t offer an explanation which is unfortunate but this is simply wrong from both a legal and practical perspective.

          When someone invests in a U.S. Treasury they do so with the full understanding that the only thing they are entitled to is repayment in U.S. legal currency which allows them to buy goods and services in the United States. Whether the money is printed or not is irrelevant from a legal point of view.

          As a practical matter, there is an enormous difference between receiving payment that has been eroded by inflation and not receiving payment at all. Investors obviously understand this since they continue to view Treasuries as the safest asset in the world.

          You never really answered my question “How do you explain that China, Russia, and most other countries want their reserves in this supposedly worthless asset?” Your response first only considered China which you say wants the power of enormous reserves and doesn’t want to disturb the market. What about all of the other countries in the world who use the U.S. Treasury as their primary reserve asset? They certainly could sell without disturbing the market and are not doing so. As for China, it could easily sell at least some its reserves but it is not doing so. Indeed Chinese continues to buy new Treasuries as its net holdings are increasing even as some of its existing holdings mature.

          In an earlier post about U.S. land you say “Who cares, money is mostly earned in cities.” This is simply wrong. Most wealth is not earned in cities but rather is earned in vast metropolitan areas where most new growth comes in newly expanded exurban areas which need new land. Densely populated countries where the metro areas can not expand (like Western European countries and Japan) simply are not growing economically. Nor can they absorb money printing because it will drive up the already exorbitant land prices in their congested metropolitan areas.

          • In fact, China is buying even more Treasuries through holding companies that do not have to advertise their country of origin. They obviously want large quantities of Treasury notes for a reason, and China is known for its long game.

          • Legalistic you are absolutely right but in practical terms you are simply wrong as you get less money back than was promised.

            If it was the safest then why do the Japanese and Swiss pay less interest? You can argue that that doesn’t proof that they are safest because of other reasons but the same type of arguments can be used for the greenback. Besides bankers are not fired for being wrong but being wrong if the herd is right. If the herd is wrong than bankers won’t get the sack if they do the same thing.

            Cities is the same as metropolitan area seen from an economic perspective IMHO. And it is simply wrong to say that European and Japanese cities can’t expand. For instance Tokyo is surrounded by a sea of flat, not really productive, agricultural land.

  9. Lots of interesting comments from people who are knowledgeable in economics. I have a question that has always intrigued me, maybe somebody knows the answer: During WWII when Nazis used counterfeiters to print fake U.S. money, this was considered an attack on the U.S. Why is counterfeiting money an attack, but U.S. Treasury printing more money is a stimulus? Is it because in the latter case the government gets to decide how much to print, and where to spend? I would think that in a Keynesian system, even counterfeiting and distributing fake money could be an economic stimulus, as more cash gets into the hands of consumers??

    • Alexander Mercouris says:

      Dear Yalensis,

      A clever question!

      The reason counterfeiting by the Nazis was considered an act of war (and is always a crime when committed by anyone else) is because a country’s currency is part of its sovereign property. Unauthorised printing of a country’s money is stealing and anything bought with such false money is also stealing. As Ryan and I have discussed at length printing money whatever its stimulus effect causes if taken too far causes inflation and can in the end undermine trust in the entire currency system, which is of course what the Nazis were up to.

      By the way the Nazi counterfeiting operation in relation to the British currency was so effective that it was one reason why the Bank of England after the Second World War was forced to change its bank notes. There is a rather good BBC television drama from I think the 1980s about the whole affair.

      I hope this answers your question. However you may be amused by a quote from the Canadian JK Galbraith. He pointed out that when a fraud or emblezzment takes place both the fraudster and the person defrauded believe themselves to be in possession of the same money so that there is an actual doubling in psychic wealth.

      • Thanks for reply, Alexander. So, I guess it’s all a question of control. Each sovereign government wants total control over how much currency to print, and when to print it. I imagine this goes back to the earliest eras, when money was first invented. And I would bet you that there were clever gangs of counterfeiters even back in those days!

        • Not only control but also were the money flows to. Besides printed notes have a much greater influence.

          There is also the issue of counterfeit money itself. When there is counterfeit money in the system people have to deal with the knowledge that their perfectly good bills may be fake and thus wordless. They handle this by getting rid of the bills as fast as possible which leads to a higher velocity which is also inflationary.

  10. Hell, I never understood the whole Russophobic claim that falling gas prices in EUrope will somehow slay the Gazprom beast. They’re most likely to fall not due to Europeans suddenly fracking away, but do to the economic collapse of EUrope leaving Italians or Greeks with difficulty paying their gas bills ala Ukraine. Gazprom in that case would simply double down on Gazpromneft and pump more oil, with a possible per barrel export tax cut as an incentive.

    Exxon’s test wells in Hungary had poor results in the past several years. The jury is still very much out on Poland and the UK though PL seems more promising. France has already banned it and the Germans with their strong Green party are unlikely to approve either, with most of Germany’s proven gas locked away in Ruhr coalbeds anyway.

    So that leaves imported LNG from Qatar, at least until that Louisiana LNG facility comes online in 2013, and one terminal by itself doesn’t seem sufficient to supply EUrope, so other terminals that were once designated for imports would need to be converted for exports at great capital expenditure.

    This is what ticks me off about hardcore Russophobes. They’d rather EUropeans send massive amounts of money to a Qatari absolute monarchy that colluded in crushing Shi’a in Bhahrain and supports Islamist rebels from Libya to Syria, than see an extra euro or (more likely in the future) lira or drachma go to Russia. It’s insane. Well they love them some Al-Jazeera because despite all the carping earlier this decade it’s far more supportive of American foreign policy than other state-funded channels.

  11. I should add here that with the decline of Saudi oil fields, disappointing output from Iraq, deliberate delays in major oil pipelines from Canada, Obama admin hostility to oil fracking in the Dakotas and refusal to open up Utah’s oil shale resource on federal lands, plus ongoing sabotage of West African projects by rebels, and of course the constant war drums with Iran if not an actual war…Gazpromneft probably won’t have to worry about oil prices collapsing anytime soon. Ironic isn’t it that the same neocons who hate and fear Russia keep propping up its state budget by constant Mideast regime change and brinksmanship if not actual attacks on Iran?

    • Hi, Viktor, you make a lot of good points. I agree with your assessment of Al Jazeera. The role this Qatari propaganda tool played in the Libyan war was unbelievably sleazy. Not content with cheering on the NATO/Al Qaeda rebels, they resorted to fabricating news. Critics have pointed out several instances in which “crowd scenes” supposedly showing rebel enthusiasts, were actually filmed on a soundstage in Qatar. Some of these allegations are not completely proved, but still very likely.
      The most egregious example: one or two days before the actual invasion of Tripoli by the Belhaj Al Qaeda rebels (assisted by NATO and Qatari special ops, including a marine beach landing), Al Jazeera published a fake story that the rebel mob had already taken the center of Tripoli. Gaddafi’s son Saif blew the lid off this disinformation by holding a press conference in the middle of supposedly “occupied” Tripoli. Unfortunately, the real invasion took place shortly thereafter. The reason for the fake invasion was to demoralize the Gaddafi loyalists and cause them to flee, believing that the city had already been taken by the mob. There are links and videos showing how the fake “Green Square” created by Al Jazeera differs from the real Green Square in Tripoli. For example, this video, pay special attention to 2:15 minutes in where they show how Al Jazeera made a mistake with the maquette and did not quite get one detail correct:

  12. The western media coverage of Greece has been highly skewed. You would thing it is by far the worst of the PIIGS. But it is Ireland that takes the cake and gets almost no attention. The government debt of Ireland increased from 24.9% of the GDP in 2007 to 94.9% in 2010 growing at over 45% per year after 2009. In contrast, the growth of the Greek government debt has been much tamer: from 105% of the GDP in 2007 to 142.7% of the GDP in 2010 with the largest annual increase at 14.8% in 2009.

    I am ignoring the absurd foreign debt of Ireland because it is supposedly not all domestic debt but foreign registered debt in the Irish tax haven. I am not sure how that works or even if there is such as thing as “debt” flight. The total foreign debt burden in Ireland is over 390,000 euro per capita. In Greece it is 38,000 euro.

  13. Well I didn’t realize RT Actualidad also finds presenters easy on the eyes, perhaps fairer than their D.C. presenters…:)

  14. Kirill, the Mormons are going to put this statement to the test:

    Regarding “shale oil”, there is really no such thing. The few locations such as the Bakken formation are cases of oil seeping from other reservoirs. Normal shale hydrocarbon deposits are kerogens. These require cooking to be processed into oil. Unlike the bitumen deposits in Alberta or Venezuela, kerogens are utterly uneconomical to extract; they take more energy to upgrade than they are worth (maybe with cheap nuclear power they can be economically accessible).

    Agreed you would need portable, micro-reactors to economically cook Utah’s vast oil shale out of the ground without burning natural gas (which is how the in-situ method works in Alberta’s tar sands). No way the anti-nuke NIMBY lobby would ever allow those to be transported by rail, truck or even airlifted into Utah from wherever the micronukes get manufactured (Russsia? China? India?). But perhaps there are some extreme scenarios where oil imports from the Middle East get massively disrupted or somesuch where burning gas to cook kerogen wouldn’t seem such a waste. I don’t quite buy into S/O’s arguments that shale gas and oil are not that big of a deal. They do seem to buy us a few more decades to find some non-fossil fuel remedy for civilization.

    • Oil is extracted from the Canadian tar sands by Cyclic Steam Stimulation (CSS) and Steam-Assisted Gravity Drainage (SAGD). You might be right that the steam is made using natural gas, but the oil is not “cooked” out of the sands by burning natural gas. This has had the unfortunate consequence of killing the Athabasca and Peace Rivers; you’d be as likely to find Jimmy Hoffa in there now as you would be to find a trout.

      • @Mark, speaking of shale: have you ever visited the Burgess Shale in British Columbia to see all those Cambrian fossils? I have not yet gone, but it is on my bucket list. In the meantime, I hope they do not destroy the fossils by fracking the shale!

        • I’m afraid I haven’t; like many whose employment involves a good deal of travel, I am not well-traveled in my homeland. My ex-wife and I drove across the country from east to west when we moved here, but there wasn’t much time for sightseeing then and I haven’t done much of it since. I did have a job a couple of years ago that involved a lot of trips to the BC interior, but I’ve never seen the Burgess shale. Stop by when you’re crossing it off your bucket list, and I’ll go with you.

      • Your description of the process soon like cooking. I would argue that using the term cooking is the right one for speaking to the general populace.

        • Does it? All right, then, tell me something you cook by boring two big holes in it – one above the other – then pipe steam into the upper one and recover the portion you’re going to eat from the lower one. Oh, and adjust the recipe to serve 8, will you? I’m planning to have some friends over on Sunday, and I’d like to serve it.

          Natural gas is used less in oilsand recovery than previously because of its rising cost. You can use just about anything that will burn to make steam from water, although this process too has evolved considerablty from the original idea.

          • definition for to cook

            1. To prepare (food) for eating by applying heat.
            2. To prepare or treat by heating:
            3. Slang To alter or falsify so as to make a more favorable impression;

            I would use 2. with respect to the production of oil.

            • And you are certainly free to do so. But the process is extraction, not preparing or treating. Despite a small misconception regarding the extent of natural gas use, Viktor is perfectly correct that the Alberta process is “in situ”. However, the product realized does not remain there.

              Have a nice weekend.

    • It takes at least 7 years to get those nukes online and that is without even dealing with planning and getting permission, 7 years to build them. The US already produces a third of its oil consumption and the US isn’t exactly known for using oil efficiently. In those 7 years it could realistically reduce its oil consumption by 2/3

      • I strongly agree that sensible and achievable reductions in consumption together with new efficiencies would be the best way to go. Two thirds is a pretty optimistic target, but maybe you’re right, and even half that would make a big difference.

    • I would not be too sure about decades of additional oil production from non-conventional. Take the tar sands for example. These bitumen/heavy oil deposits are much, much easier and cheaper to produce than kerogen deposits in shale. But the incremental increase in the next 10 years from Canada is 150,000 barrels per day per year (total 1.5 million bod on top of the current 1.2 million bpd). According to the IEA depletion of production (not reserves) is 6.7% per year from existing fields. This translates into about 5 million bpd per year (current crude + condensate production of 75 million bpd). So non-conventional syncrude from Canada is making up just 3% of the annual production loss from conventional sources.

      This is the essential problem with non-conventional. Not the theoretical reserve size (hundreds of billions of barrels or even over a trillion) but the rate of extraction. If tar sands are so glacially slow to produce, then shale “oil” is much worse. It’s physics. Light sweet crude from Saudi Arabia flows from gushing wells that produce 100,000 bpd (historically, anyway). Tar sands are “manufactured” extraction that takes much more time, energy and money. The rate of shale “oil” manufacturing is even slower.

      So we simply will not have the case where non-conventional oil sources produce at rates enough to offset the global decline in production. With production shrinking at 5 million bpd per year and accelerating, we need to discover and produce five Saudi Arabias by 2020. This is not happening with the current discovery rate of 1/6 th of consumption and falling (about 5 billion barrels per year). The Caspian Sea basin is a good example of the sorry state of discovery. Once touted as having reserves in the hundreds of billion of barrels, only about 12 billion barrels are actually there.

      We are now at the cross-over period when discovery of new oil supplies is enough to offset declines in existing production. In the next decade we will see how screwed we are.

  15. Viktor’s known an expert who predicted the North American oil and gas revival — long before it became trendy among the author of The Prize, Daniel Yurgen. Incidentally, this expert has both Canadian and U.S. passports.

    I’d like to see S/O do a post on Thorium reactors, as they seem to be the best hope to economically revive the nuclear industry without massive state subsidies and guarantees ala Japan or France.

    • Broadly speaking, the “North American oil and gas revival” will depend heavily on the price of hydrocarbons remaining very high; I’d say above $80.00 a barrel (but that’s just a ballpark guess). I’d agree there probably is quite a significant amount of recoverable oil in the U.S. and Canada. I can’t speak for the U.S., but in Canada’s case, all the easy stuff is gone. Much of what remains lies deep under belts of stone or ice, or deep under the seabed.That’s not to say it’s beyond recovery, by any measure – but it won’t be cheap.

      Under the sort of prices that prevailed through the 70’s, we used to cap our wells if the price went below $20.00. At that point, you were probably breaking even. That seems fantastic now, but when you consider that today you could probably get a barrel of Iraqi light sweet crude out of the ground for about a fifth of that (easy peasy lemon squeezy; it’s only something like 600m down, through mostly sand and gravel), you can see that recovery costs have a powerful effect on profits. Iraqi oil is like a license to print money – North American oil is a fight to keep your costs low enough to make it profitable. It would be now, with prices high – but discovery of large reserves would ease supply worries…and inevitably depress prices.

      Technology might well offer new recovery methods, and still occasionally someone comes up with a “why didn’t somebody think of that before?” idea that is a real game-changer (like whoever thought of relocating the drive motors on a drill rig to directly behind the bit, which largely eliminates the torsion effect on the line and allows much deeper drilling). So it’s not impossible. But right now I don’t think there’s anything that will result in floods of cheap oil anytime soon.

  16. You might be a financial wizard,
    With a sack of loot,
    All I see is a slimy lizard,
    With an expensive suit,
    Go on and run your corporation,
    Go and kiss some ass,
    You might buy half of the nation,
    But you can’t buy class

    You bastards think it’s funny,
    Lyin’ and thieving all your life,
    Think all there is is money,
    Got your future strapped up tight,
    Just ‘Cos You Got The Power,
    That don’t mean you got the right

    You can take my fingers babe,
    You can take my eyes,
    You can take my past and future,
    It won’t make you wise,
    You can have me thrown in jail,
    You can steal my booze,
    You can even read my mail,
    Step on my blue suede shoes,

    You bastards must be clever,
    Got it mapped out in black and whit,
    But don’t forget you’ll never,
    Get a dog to walk upright,
    Just ‘Cos You Got The Power,
    That don’t mean you got the right

    Go on out make another deal,
    Feed your big fat face,
    Go on out and cop a feel,
    Get on somebody’s case,
    You surely would be satisfied,
    If you could have it all,
    But time ain’t on your side,
    You’re going to the wall

    You think that life’s all dollars,
    Greed and lust and spite,
    But I wasn’t born to follow,
    Like to get my sleep at night,
    Just ‘Cos You Got The Power,
    That don’t mean you got the right