Author Archives: dswanson

Energy, Gold, and the Currency of the Future

 

Two events, one in my personal life and the other in the global news, have brought me to the conclusion that we need and will soon return to the gold standard.

First off, I see investors pouring money into energy “technologies” that are known to be unworkable. To combat this problem, I have been working on a training course and video to teach investors about energy, energy physics, and energy products. I think it is quite conceivable that we are close to an energy revolution that will create the “Rockefellers” of renewable energy and drive technical society to new heights. The market exists, the energy exists, and the technology does not seem out of reach. Achieving this energy revolution is as simple as avoiding investments in totally unworkable energy projects and instead funding the development of energy systems that can work.

In the news, it is the growing instability of unbacked currencies that has caught my attention. It is fair on its face that unbacked exponential monetary systems eventually fail catastrophically. From an engineering point of view it is very simple. The Earth is a spheroid and the unbacked exponential monetary system creates an unbounded exponential function. Plotting these on a graphing calculator reveals that the spheroid stays on the screen and the unbounded exponential function goes off the screen.

The “off the screen” event is of course the failure of the monetary system.

Unlike bridges or aircraft systems, our current monetary systems are not designed for reliability or long term stability. They are negatively stable systems by their nature. One only needs to look at the history of hundreds of unbacked currencies to understand the final outcome of these systems.

I have been very frustrated watching the slow creep toward total failure of today’s currencies and the “investment” in energy “technologies” that are not only fully known not to work, but accelerate our energy decline. I now believe that monetary system failure and doomed energy investments stem from the same lack of understanding some basic rules of nature. Several generations of humans that have been raised without seeing the failure of an unbacked currency. This has created the situation where people now believe that money has power over nature.

This is not true.

Mankind’s ability to print money that works is a result of his success with manipulating the physical world. The reverse is not true. Money cannot be printed that will manipulate the physical world.

At this point, is appears likely that it will take a catastrophic currency failure and massive disruptions to return people to the understanding that moneys lacks power over nature and that nature has power over money.

The gold standard solves all of this. You can consult any “Gold Bug” for a run down of all of the reasons that gold always returns to money as a result of monetary failures. They are all real and true. But there is another advantage of the gold standard that is not frequently discussed. Gold ties the money to the physical world. With gold, there are no “off the screen” events. Gold by its very nature of existing in the physical world, directly ties the monetary and the physical worlds. This has implications that go far beyond what they may seem. Instead of investors needing to learn about energy, energy physics, thermodynamics, and having to speculate about technical societies’ ability to negotiate the problems that arise as the universe ages, just to understand the status of the monetary commitment on the physical world, they can just count the money.

This is indeed a good thing, and solves a lot of problems.

As the instability of today’s monetary systems continues to present itself and crisis ensue, it should be very comforting to all of us that there is a way forward that will eventually solve not only the problems we are seeing with failing monetary systems, but will also help us get to a workable energy future.

What is the future of Ammonia as a fuel?

When considering future energy systems, it is very important to separate energy from fuel.

One of the characteristics of petroleum (oil) that makes it a perfect product is the
fact that it is both a “Primary Energy Source” and a “Fuel.” While in the context of
petroleum, these can be considered the same thing, future energy production
and fuel systems require that primary energy sources and fuels be understood as
two different things. This is due to the fact that there are no replacements waiting in the
wings that offer both properties.

Industrial mankind’s largest challenge at this point is replacing the large quantity of energy that
is currently provided by petroleum. Replacing oil as a fuel is also a serious problem, in large
part because the primary energy problem is so serious. If the primary energy problem is “solved,” many fuel solutions are available.

Combining carbon dioxide removed from air and hydrogen split from water using a Fischer–Tropsch like process could produce high quality diesel fuel essentially from air and water. Unfortunately, this process is so energy intense that it is not really considered a viable solution. And it is considered unlikely that we will come up with a primary source of energy so plentiful to make it viable.

So although this system is not viable, it does demonstrate that the most difficult challenge facing Industrial Man is replacing the energy that currently is obtained from fossil fuels.

Because the energy sources available to replace fossil fuel are of lower density and higher cost than fossil fuel, the energy efficiency of the fuel is also very important. Energy efficiency of fuel in this context refers to how much additional energy must be used to obtain, manufacture, use, and dispose of the fuel and its ingredients.

The most useful fuels are hydrocarbon fuel or fuels that are made from hydrogen and carbon. The hydrogen provides the large quantities of energy that are desirable in a fuel, while the carbon provides the storage and handling characteristics that make a fuel like diesel, jet, gasoline, and alcohols so desirable.

Carbon represents two serious challenges in regard to its future use as an ingredient in fuels.

1. Obtaining it:

Obtaining the clean carbon that is necessary to manufacture large quantities
of hydrocarbon fuels is not a trivial task. This is often overlooked as
carbon in the form of CO2 (carbon dioxide) is considered a pollutant at
nearly all points that it is emitted. But closer examination reveals some
problems.

  • Location:  Is the carbon source stationary or moving? Since we are usually talking about a gas, capturing and transporting it is expensive.
  • Cleanliness:  Most processes require clean carbon. If the source produces dirty carbon, cleaning it up can be a very energy intensive and financially expensive proposition.
  • Timeliness: Is the primary energy available at the same times as all of the other ingredients of the fuel? If not, what is the energy and financial costs of the storage?

2. Disposing of it:

What is the cost of disposing of it? Carbon is increasingly being implicated as a pollutant. This status means that the cost of using it as a component of fuel is likely to increase. It remains to be seen what the carbon taxes of the future will look like, but it looks increasingly likely that there will be clear penalties for emitting carbon into the atmosphere.
Hydrogen is often seen as the fuel that will be used to replace hydrocarbons. Hydrogen has some very serious limitations, including:

  • Very low density: The density of hydrogen is so low that shipping it as a gas using tanker type equipment that is similar in design to the equipment that is now used to transport petroleum is out of the question. Shipping it as a refrigerated liquid improves this substantially but is energy intense, and creates another challenging set of storage issues.
  • Flammability: Hydrogen is extremely flammable, it takes very little energy to ignite, and can self ignite under certain circumstances.
  • Leakage and embrittlement: Hydrogen can leak through many container and plumbing materials, and can make them brittle and dangerous. The most common and cost-effective materials for tanks and plumbing cannot be used.

There is one fuel that can replace hydrocarbons in many of the applications where
the density of hydrogen is too low. This fuel is ammonia. Ammonia is similar in
handling characteristics to propane and it is already commonly used in
industry and agriculture.

The advantages of ammonia in comparison to hydrogen are:

  • Higher Storage Density
  • Reduced Flammability
  • No Carbon.

Ammonia is composed from nitrogen and hydrogen, and therefore can be made using several
known methods from air, water, and large quantities of energy. Since we currently don’t
know how to capture large quantities of renewable energy, most ammonia today is made from natural gas.

Ammonia has some challenges that often disqualify it from consideration as a fuel.

  • Toxicity: Ammonia is toxic enough that is will likely not be approved for common, untrained use.
  • Odor: Ammonia has a very strong odor, although this is desirable as it is nature’s defense against the toxicity.
  • Storage Considerations: Ammonia is a gas at standard atmospheric conditions. Its storage characteristics are similar to propane, with about half the energy density. This disqualifies ammonia for some uses, such as aviation.

While clearly ammonia is not the magic bullet that some seek, a survey of the realities of carbon capture and disposal, photosynthetic efficiency, battery efficiency, and storage density indicate that there are no other fuels that are as ready to be pressed into service as ammonia.

Ammonia is already one of the most commonly used and synthesized chemicals. The most common use is fertilizer, and without ammonia fertilizer there would be large scale starvation. Although ammonia may be too difficult and toxic to handle by untrained operators, it is ready today for professional use.

Now we just need the energy.

Global Warming, Peak Oil, and Economic Crisis

When Zach and I started this blog, we agreed that it should be in the technical domain, rather than the political one as much as possible. The hope was that with high quality information available to the political class and activists, the “solutions” would be forthcoming. As time goes on though, it seems that even as difficult as our energy challenges are, the political ones are tougher. This reality requires the Energy Strain blog to deal with issues that may be considered to be more in the political domain.

For the moment, the world seems focused on “Climate Change.” Climate change is the new term for what was originally termed “Global Warming.” It is difficult to figure out who changed “Global Warming” to “Climate Change.” I would argue that both of these names are actually very poor names for this problem. One thing that we know for sure is that the Earth’s climate has been changing for the entire time that it has existed. It seems to me that if you wanted to come up with a name to motivate people to action, you would not use a term that describes something that is “normal.”

Peak Oil is an equally poor name for the problems that people are using it to describe. Peak oil, when used in the M King Hubbert sense, is a perfectly correct term. Hopefully we all know of the work of M King Hubbert, and his curves describing how oil fields age. The problem with the way that “Peak Oil” is now used is that it now means hundreds of different things to different people. From the simplest and obviously correct meaning, that a mathematical curve can be applied to the theoretical extraction rate of an oil province, Peak Oil is now also being used as a substitute term for we’re running out of oil, Malthus was right, all problems are caused by running out of oil, and the end is coming.

Economic crisis is also a very poor name for a widely varied set of symptoms. Economists originally called it “Sub-Prime” Crisis, then “Recession,” and now their favorite seems to be “Economic Crisis.” The names are likely to change as the symptoms of the end of the Industrial Age present themselves.

After studying the end of the Industrial Age for about five years, it all seems quite simple to me. These problems are all related, and must be contemplated and solutions proposed for the actual problems, not just the symptoms, and not with solutions that “feel good,” but rather solutions that fit the physics of the problem.

The problem is simple.
Man found a substance in Earth’s “basement” that allowed him to temporarily overcome the normal limit of living on Earth, that limit being: living on the energy that comes from the Sun. Man used the energy from this substance to continuously increase the amount of energy available from this substance. He also created an economic system that automatically creates more interest debt as time passes, and thus requires economic growth in order that it remain plausible that the interest accumulation could be repaid. As he used this substance, he put the undesired components into the atmosphere, hoping that it would be OK.

Now Industrial Man finds himself in the following situation.
1. The net energy (gross energy minus the energy used in the extraction) from fossil fuel is in decline.
2. His financial system is collapsing because repayment of the interest is not plausible, and the economy cannot grow enough without more energy to make it plausible.
3. The Earths formerly sequestered carbon is now in the atmosphere, and he is not sure exactly what it means. But most agree it’s probably not good.

So Global Warming, Peak Oil, and financial collapse are the same problem.
Maybe we should name the entire situation “DADESFFC” for Dying and Dysfunctional Energy System Feeding Financial Collapse. Ok, so maybe it’s not a sexy acronym. Or maybe it’s too complicated for some to understand. But the point is that without understanding the big picture, and without looking for solutions to the actual problems, we are left in the dark shooting at the symptoms.

Lately “Climate Change” has been in the news with the negotiations in Copenhagen, Denmark. Some of the activists seem to be advocating that we solve the problems with massive redistribution of wealth. Their solutions are simple–take money from the polluters and give it to the less fortunate. Problem Solved. If only it were anywhere near this easy.

The reality is that the technologies that are available to “replace” the current fossil fuel technologies are not drop-in replacements. A society created from alternative energy technologies will be profoundly different. Here are some of the technical challenges along with the implications of a post fossil fuel economy:

1. Renewable energy sources are powered by low density energy.
Low density means that the systems will be very large, and consume huge quantities of resources and labor in order to construct. In an economic sense, this by necessity means that the systems will be expensive.

2. Renewable energy sources have low energy return on energy investment (EROEI). Low EROEI means that renewable energy systems will have low profitability for their investors, and will take many years to return their initial investment. It also means that there is not room for mistakes in the implementation of these systems. Small mistakes in implementation that cause increased energy consumption, will convert low EROEI energy “production” systems into energy “sinks,” i.e., they cause consumption rather than provide energy.

3. Renewable energy systems are not a drop-in for fossil fuel technologies. This means that much of the most expensive equipment in our fossil fuel powered industrial economy must be replaced. A replacement society that is powered from renewable energy sources will be less wealthy, and have less complexity than a fossil fuel powered one. This may mean that there is no excess wealth to transfer from the former “wealthy” countries to the “developing” countries.

Simply transferring wealth from the “wealthy” fossil fuel consumers to the “developing” countries is very likely to aggravate the problems. It could leave the “wealthy” countries without enough surplus capital to develop renewable technologies, and it could just cause increased energy consumption in the “developing” countries.

Converting to a post fossil fuel era will not be easy. Resources will be scarce and financial systems very unstable. This means that in order to successfully accomplish it, we will have to understand what we are really up against, not choose one symptom and propose a “solution” for it that aggravates the real problem.

If we cannot solve the technical problems of operating a modern society from renewable energy, the only “deal” that we may be able to make is to lower our standard of living to their standard of living, if they agree not to try to raise theirs.

It goes without saying that this will be a difficult political sell, and I fear that those who are pushing these large redistributions aren’t as concerned about the environment as they claim, meaning that this would not be an acceptable solution, even though it may be the only one that is technically feasible with our current technology.

Energy or Money–Which Is More Real?

Often while I am studying our energy future, I run into this question:

“As the price of energy increases, won’t the market respond by inventing new systems that generate new supplies of energy and prevent energy supply problems?”

This question begs the following question.

Does money control the energy supply? Or does the energy supply control the value of money? In order to answer these questions, we first need to understand the concepts of energy and money.

What is energy?
The word “energy” comes from the Greek word meaning activity, “energeia,” and is the quantity of work that can be done by a force. The study of energy turns up in nearly all scientific endeavors, from studies of the beginning of life to space travel.

While energy can take many forms and is never lost, there are observed behaviors of energy expressed by the laws of thermodynamics. These laws are part of physical reality, preventing mankind from “creating” energy and also placing strict limits on its conversions.

Energy is an important part of anything that is alive. One definition of life is “a characteristic of an organism that uses biological processes to change free energy or energy containing substances to a degraded form.” Energy separates life from death, growth from decay, and breakdown from repair.

Most marvels of the modern world are massive energy consumers. A list of industries in the modern world reveals that nearly all are large consumers of energy. Modern transportation, housing, health care, and food production all require huge inputs of energy. The availability of large quantities of energy has changed human existence in such a profound way that it difficult to even contemplate. Much of what is commonly thought of as “amazing technology” and/or the “power of money” is actually “energy availability.”

The energy that humans currently use has allowed modern societies to break free of the limits that preceded and will follow this period. That limit is living with the energy that arrives at Earth each day from the Sun.

What is money?
Money is an accounting system used to facilitate trade and the keeping of accounts. United States money is a “fiat” currency system. Fiat means that federal law requires the currency be accepted for public and private debts. There are no guarantees the money will retain any value. In fact, the US government neither guarantees the value of money nor actually owns any money. All US dollars are owned by a private banking consortium called the Federal Reserve, and congress is prohibited by law from interfering with the wishes of the bankers. The private bankers adjust the money supply and therefore the value of the money as they see fit.

In summary
Money, at least the kind that most modern societies use, is a concept created by man and does not exist in the physical world. The rise and fall of currencies is of little consequence to the laws of energy and energy will limit the “wealth” of all organisms, beings, and societies long after all human currencies have collapsed and cease to exist. Money must be managed carefully by humans so that it remains useful in the face of changes in the energy system, for it is energy that powers everything from the human heart to the world’s largest building.

Crash Course

Crash Course: Economy, Energy, and the Environment

As discussed previously on this blog, with time more and more is understood about the effects of decreasing net energy on the industrial economy. Eventually one comes to the realization that nearly everything in Industrial Man’s world will change or will have to be changed.

Few things will have a bigger impact on the day to day life of everyone in the modern industrial world as the destabilization of the exponential financial system. All of us have been taught the “power” of compounding. In high school, I was told that if I put a little money in the bank each year, eventually my wealth would begin to grow in a near vertical curve. I learned this from a teacher who did not understand physics, and it would be 30 some years before I realized the absurdity of this curve. Where would the energy come from to cover my consumption if this were to occur and I were to spend that money? The answer is of course that the system would fatally collapse because the energy is not available.

In the process of studying the decreasing net energy collapse of the exponential economy, I found a web-based course called “Crash Course” from Chris Martenson at http://www.chrismartenson.com. This course is very good and is available on the web and via DVD. Chris Martenson has a very deep understanding of what is happening to the exponential financial system. Chris has a PhD in science and an MBA in finance and is the best teacher of this material that I have found. Chris even allows you to burn and sell his DVDs for profit.

Please check out the “Crash Course.” If you are stuck without high speed Internet, please contact us here at Energy Strain and we will send you a copy of the “Crash Course” DVD.

When will oil production peak?

When will peak oil happen?

One of the most common questions people ask when first learning about peak oil is when will “it” happen. People want to know “When will we run out of oil?” and later, “What is the date of Peak Oil?”

Unfortunately, these questions probably do not address what people really want to know. One of the most difficult things in educating people about peak oil is that you have to start off by telling them that their questions are incorrect. These questions stem from a lack of understanding about the world’s tiring oil production system and the extremely complex interaction between fossil fuel production and the economy.

Energy that can be summoned up at man’s command is his wealth in the physical world, and fossil fuel currently provides the vast majority of this wealth. At any given time, the net energy available for use by industrial man is given by the formula:

Eg – Ep = En

Where:

Eg is the gross energy extracted.

Ep is the Energy that has been consumed in the production of energy.

En is the net Energy that is available to power the industrial economy.

The net energy that is derived from fossil fuel production sets the possible wealth that our economy can potentially create. How much fossil fuel is produced over a given period of time is determined by a great many factors.

One of the most interesting and poorly studied factors in fossil fuel production is how the economy is affected by the decreasing availability of high quality oil reserves. While the U.S. Department of Energy and IEA show that gross oil production has been approximately flat over the last few years, this data does not take into account the increased amount of energy consumed in the extraction of decreasing quality reserves. Nor does it take into account the large amount of diesel fuel energy that has been converted into less desirable Ethanol or that the increase in the world’s population has decreased the quantity of oil energy available per person.

As the quality of a fossil fuel resource declines, the net energy available from its production decreases and the strain on the economy increases. Eventually, the economy will reach a point that it cannot afford to increase production, and thus will be resized for lower energy consumption. For a time, the price of oil may decline. This decline in price will actually further reduce the supply of oil because the new, more expensive production and recovery projects will be canceled or scaled back. And while the decreased oil prices from the economic downsizing may encourage the economy to grow again, this growth will quickly be stopped by the limited supply of high net energy resources.

Consider how the long-term, global trends of increasing energy consumption in oil extraction have affected the U.S.

In 1965 when the oil industry was just starting to experience declining results from increased efforts in oil production, the U.S. was the world’s largest creditor nation, and the wealth of the U.S was growing each year. In 1970, U.S oil production peaked and began to decline in spite of the greater amounts of energy expended in attempts to increase production.

Move to the fall of 2008, with the U.S as the world’s largest debtor nation and its wealth declining each year. Not even global oil prices in the $100 range and above for several months could raise oil production substantially above the level that it was in 2005 when oil prices were in the $45 range. Now in the winter of 2008, the economy has given in and oil consumption and oil prices have crashed. This cycle can be expected to continue unless proper management is implemented.

Without correct management of the economy, it is possible that the economy can be stimulated enough to get a short economic up cycle with oil prices and production higher than ever before. However, this becomes increasingly unlikely with each cycle.

I am convinced that no one understands all of the things that would be necessary to predict when global oil production will be at the highest level. There are just too many factors, including some that are completely unpredictable like the weather and politics.

I think that the question “When will oil production peak” is more accurately addressed by the following two questions:

1. When will increasing energy intensity of fossil fuel production begin to limit the wealth that can be created with the U.S. economy?

That already occurred in approximately 1965.

2. When will the increasing energy intensity of fossil fuel production really show up as a serious problem to the global economy?

That too has already happened, in the fall of 2008.

As for when the all-time peak of oil production will occur, each month that passes with the economy in decline increases the likelihood that the peak is now past. The reason is that high net energy reserves are being depleted, and low net energy reserves are not being developed. This makes it unlikely that any economic up cycle can last long enough and allow oil prices to be high enough to ever increase production above levels that were seen in the summer of 2005 – fall of 2008. But we will have to wait for the history books to be written for the best answer.

Understanding the Low Prices of Oil and Gasoline

Oil prices have fallen from over $147 per barrel (42 gallons) in July of 2008 to $64 during this Friday’s trading. I was in Houston at the end of the week and drove by some gas stations that were selling unleaded regular for under $2.26 per gallon. This price looked shocking to me as I have become accustomed to the price of motor gasoline costing at least $3.50 per gallon and even $4 plus per gallon like it was this summer. So the question becomes, what is causing these low gasoline prices?

There are dozens of factors that cause the price of motor gasoline to fluctuate, as we are aware. Let’s look at the most important factors in conjunction with the current news to see if we can figure out what is causing the low price of oil.

Long Term Factors:

  • Oil Supply
  • If new reserves of oil are found, and can be brought online at a rate faster than existing oil fields are being depleted, the supply of oil will increase and the price will fall. If new oil supplies are not found or new extraction technologies fail to offset the aging of the fields, oil production will fall and prices will increase.

    There hasn’t been much in the news about oil supplies in the last few years. There have been no new large supplies of oil brought online in recent months. There have been no new discoveries that will substantially increase supply in the next six years. There have been no substantial new innovations in production/extraction technologies. Government reports show oil supplies looking very flat since the summer of 2005.

  • Intensity of Oil Usage and Technology
  • If technology is invented that makes oil less useful or desirable at its current market prices, oil demand will drop as the other inventions take its place. If technology is invented that makes oil more useful to the economy, oil prices will rise.

    There have been no substantial changes to the oil technologies that are powering our economy. No new engine designs or significant agricultural breakthroughs have been reported. Even positive news on oil efficient technologies has been scarce. Boeing has been promising 787s that are supposed to save 20% fuel, but not one has been delivered.

Intermediate Factors:

  • Annual Cycles of Demand
  • Each year, the demand for oil changes as the year progresses. Demand for finished products is highest in the summer during driving season and demand for crude is usually highest while the heating oil inventories are being built up and there is still pre-winter driving demand.

    Currently we are at the low point of demand. Driving season is over and heating season has not really started.

  • Amount of Economic Activity
  • Oil demand is a direct result of economic activity. As long as there is no new technology to supplant oil for many necessary parts of our economy, oil will be required in direct proportion to the economic activity. Think of a small business. If delivering $100 worth of pizza requires $10 of gasoline, delivering $90 of pizza will only require $9 of gasoline. If business picks up to $110 worth of pizza, about $11 of gas will be required to deliver it.

    Consider some recent news:

    “Feds to slash interest rates as recession looms”
    “Chrysler to cut 25% of salaried workers”
    “NorthWest Airlines loses 317 Million dollars, announced schedule cuts”
    “Trading in Austrian Airlines halted”
    “Airlines see load factors drop despite capacity cuts”
    “Southwest loses $120,000,000 first loss in 17 years, will cut unpopular flights”
    “Gainey Trucking can’t pay owner”
    “Canadian truckers face losses from diesel fuel shortage”
    “UPS faces precipitous declines on overnight shipping”

Short Range Factors:

  • Speculation
  • Speculation tends to increase the volatility or the size of the price cycles; it also therefore increases the height of the highs and the depth of the lows. The reason for this is simple. If a speculator sees that each day for a year the price of gasoline is $3.00, there is no way for him or her to make any money from buying or selling it. He would just end up buying it, sitting on it, and selling it again at the same price, making no money and wasting his time. The speculator makes his money when the price deviations increase. If the price is dropping, he sells what he has and increases the market supply, causing the price to go down further. If the price is going up, he buys more to sell at a later time. Deferred selling shrinks the available market supply and raises prices.

    Consider this quote from www.marketwatch.com in an article about how OPEC is on its own as investors flee from oil speculation:

    “This time, however, OPEC is on its own. With speculators fleeing, the cartel is going to have to build a floor under oil prices through disciplined production cuts. This isn’t a group known for discipline, however. And given the wheezing global economy, OPEC has only an outside chance of pushing prices back up to $100 a barrel even if they manage to significantly slash output.”

    From this and similar articles, it is clear that investors are selling oil positions due to both the oversupply and subsequent price drop, as well as the fact that they need money to cover losses in other areas of the falling market. This causes the price of oil to drop even further, but can only continue until investors sell off all of their positions. After this, the price of oil will begin to rise even if speculators do not buy again.

  • Weather
  • The weather can affect both the supply and the demand of oil. Unusual weather events can be things like extreme cold snaps in the Northeast Unites States, resulting in the demand for heating oil to increase substantially. Conversely, very mild winters cause decreased heating oil demand. On the supply side, weather can decrease supply by preventing the transportation of oil from the point of production to the consumer or refiner.

    Searching the news about the weather, it looks as though the weather has been very friendly to the price of oil. There have been no weather-related reasons for declines in supply or evidence that demand has strayed from the seasonal norms in the last few months.

  • Accidents and/or Malicious Destruction
  • Accidents or malicious destruction of petroleum equipment that is necessary for petroleum production can cause oil supplies to drop and prices to increase.

    There has been no substantial accidental or malicious damage to the petroleum infrastructure in the last few months.

Conclusion:
The current low price of oil is caused primarily by what economists call “demand destruction.” That is, as economic activity winds down, the demand for oil drops and the market verges on a glut in supply. The price will stay low and most likely go lower as long as the following continues:

The weather stays good.
There are no accidents or attacks on the petroleum infrastructure.
The speculators continue to sell.
The economy continues to decline.

The last one is the most important because the health of our currently configured industrial economy is directly related to how much oil is being consumed–much like your car requires fuel in proportion to how much work it does. Let’s hope that we can get the economy going well enough again to bring on some unprecedented high prices. If not, we will be dealing with more economic disaster and unemployment.

Daniel J Swanson
dswanson@danswanson.com