Peak Oil & Money
This is a journal entry in the truest sort; unplanned, and off the top of the head...
Over the past few days, while working to get the conference planned, I've been trying to tune in to what is going on in the news. It seems like everyone, particularly yesterday, was quite excited about an increase in oil prices, to about $135 per barrel.
Thanks to my new Alltel wireless hi-speed internet (I had been on dial up for my entire life), I was able to watch some news clips from CNBC. I was a bit surprised to find that the reporters were using the term "peak oil" and that they actually interviewed Robert Hirsch, author of the governments first report on peak oil, as well as Boone Pickens, a billionaire, who is placing a order for over 500 of the biggest GE wind turbines to make electricity in Texas. There were a lot of good clips, although it frustrated me a bit with how the Congress, and much of the media, still seems to be trying to seek the blame somewhere: Bush, the oil companies, OPEC, etc.
Another interesting development was that the oil futures market seems to have moved into "contango", which just means that if you buy oil that won't be delivered for a while, that it is actually more expensive the farther it goes out. This change is actually a bit worrying, because a contango tends to encourage purchasing closer to "now", which is drives up the near price, and which also drives up the longer out price.
I have this vision in my head of the price curve, when plotting all the futures contracts out, getting steeper and steeper as the weeks roll by. What I mean by that is that oil for next month might be near the spot price ($135/barrel) but the contracts for three years from now might sell for twice that, or more. I wonder and worry that this could really happen quite quickly as the oil purchasers finally figure out that oil is going to be MUCH, MUCH more expensive in the future, due to less supply, and that they had better lock in now on the price.
This brings me to a point that I'm a bit reticent to mention... Namely, the actual value of oil.
I'm reticent because I don't know of anyone who mentions oil being as valuable as I have calculated it to be. To be specific, and you can search for an earlier post on this where I did the math, the value of oil can be equated to the human labor needed to do the same work.
For example, if it takes 10 gallons of diesel to plow a small field, then the value of that 10-gallons is equal to the price the farm owner would have to pay to have people do this same work by hand. My results were that one GALLON of oil has the same amount of energy as two weeks of hard labor for one person... and that labor would cost a farmer about $1,500 if they had to hire it out.
The notion that $135 per BARREL (42 gallons) of oil is "high" is really... well... nuts.
The energy in a barrel of oil is worth somewhere around 42 x $1,500 or... $63,000.
That is for one barrel of oil, that is now selling for only $135.
Matthew Simmons, who has been talking about oil for decades, points out that even at $135 per barrel, oil is less than 25 cents per cup. Basically, oil, the most amazing, energy rich substance on the planet, is selling as if it were sea water, or some other almost free liquid.
Is $63,000 a barrel precise? No, of course not. My equating human work to oil energy is not exact, but just meant to get us in the ball park. In reality, today, at this moment, the true energy value of oil may be more like 50% higher or lower than that... so something like $30,000 to $100,000 per barrel.
I could do the math on this some more, and others could do their own analysis, but I think the primarily point is that our free market undervalues oil... and undervalues is an extreme understatement. $135 per barrel? That is probably 99% off the real value. We're paying only 1% of the energy value of in the oil. This would be like us going out to the store to buy a new car, and they move the decimal over twice to the left, and instead of paying $23,000 that we only pay $230. That is how undervalued and cheap oil is.
Getting from $135/barrel to anything close to the energy value would probably collapse all financial systems... so, in reality, I don't know if the price would ever get to the energy value... in a free market, oil will probably always be undervalued.
This makes me think that the free market is doing such a poor job at valuing oil, that there ought to be another way to value it. I don't want to delve into that line of thinking yet... I'll leave it up to others and another time.
Back to the news, James Howard Kunstler had an interesting clip on CNN about his new fiction book, World Made by Hand. The interviewer really seemed to get it, and Kunstler made some good points about things accelerating. I think of this acceleration as the prices for oil basically rising geometrically, playing havoc with the global economy, and the US economy in particular, and ending in a system crash.
Wow, I hope that's not where we are headed, but it really would not surprise me.
This all ties into money, of course, because money is really only a representation of the amount of energy that went into making some product. Rising oil prices, which means generally rising energy prices, can be looked at a different way...
A barrel of oil in 1970 is worth exactly the same as a barrel of oil today...
And yet now, instead of $3.65 per BARREL, we're paying $135.00 per barrel. Has the oil changed? No, not really. Has the value of money changed??? Well, if $3.65 could buy a barrel of oil back in 1970, and if it takes $135 to buy the same thing today, it seems like the only thing that is changing is money... money is losing value. I call this inflation.
What will money be worth when oil costs $1,000 per barrel? I guess that I'll basically have 90% less purchasing power... that doesn't make me too happy. The incentive with inflation like this is to buy stuff now, because it will be impossible to buy later.
I think I'll jump ahead a bit, so if it seems that I'm skipping over some of the explanation, that is probably true, as I mentioned at the start, this is a true stream-of-thought journal...
Money.
Oh, money, money, money...
STOP READING HERE
Okay, I did suggest you stop reading, and you are still reading, so... a bit of prep for the you...
I'm going to shift gears away from oil and energy a bit to talk just about money. I don't know anyone else talking or writing this way about money, so if this sounds odd or crazy or nuts or wacko then I wouldn't be surprised... but I've been thinking along this line for a while now, and I'm pretty sure that my thoughts on money are worth exploring... not only for myself, but for anyone that is really wondering how things work...
Money
Think about all the things that we don't want to be doing to Earth. We don't want to be polluting, we don't want trash, we don't want to be cutting down the trees, or polluting the atmosphere, or causing climate change, or causing war, or the extinction of species, etc.
There are lots of things that we don't want to happen... and yet they do... and no matter what we've done over the past... forever... things worsen. More extinct species, more pollution, more CO2 in the air, more deforestation, more fighting, more hunger, etc.
Who is causing all of this?
Well, it is us.
It is us because of the way in which money works.
In order not to make this sound like I'm blaming, which I'm really not, because I don't think it is really something that can be pinned on anyone in particular... I'll focus on myself.
The last time I spent money was at the gas station yesterday. Let's think about exactly what happened and do some analysis.
I took out my debit card, swiped it through the pump, and pumped $60 of fuel into the car (that was the most expensive fill up ever for me). Then what? Well, the money was transfered on paper from my account to the service station account.
Now, where is that money going to go?
There are two ways to look at this, either keep the $60 together as a chunk, or let it spread out somehow. Let's go with the chunk of money concept... because the end result is the same either way.
In a couple of days, one of the gas station employees gets paid, and part of their pay is that $60. Let's say it was direct deposit into their debit card account.
Off they go, to buy some food for family, and that $60 now goes to the grocery store. Okay, where from there. We'll, let's say this $60 is used to pay off part of a bill for buying milk.
Off the money goes to the milk seller. The $60 in the milk sellers, lets simplify and say this is the a person that ones a few thousand cattle in a standard CAFO, they use this money to buy some diesel for their tractor that they use to spread the urine from the cows. The tractor goes out and sprays the urine into the air and onto the ground.
The $60 goes back to the owner of a different gas station and this time, let's follow it towards the Niger Delta, because that could be where the oil came from. So, the money goes from gas station, to distributor, to refiner, to oil company, to pay a guy who overseas that a bunch of oil fields in the Niger Delta have armed security. He would be like a foreman of sorts, perhaps a native of Nigeria. To keep an eye on the facility, and to keep everyone else out, he hires some big thugs with guns...
The point of following this $60?
Our use of money, the impact of it, is really not seen by us, because that money flows forward in time, and allows and causes things that we might not want to happen.
In fact, a better way to think about it is to start at the action we don't want to happen, and work backwards. Start from the cutting down of the rain forest tree, the person that did the cutting, the person that did the paying, the place they got the money from, etc... it ends up back at us, eventually.
All right, that is enough for now... this isn't necessarily an easy or intuitive way to think about money, but it is really an essential one, to understand what is going on in the world.
Here ends the journal... my hands and brain are both tired.
Over the past few days, while working to get the conference planned, I've been trying to tune in to what is going on in the news. It seems like everyone, particularly yesterday, was quite excited about an increase in oil prices, to about $135 per barrel.
Thanks to my new Alltel wireless hi-speed internet (I had been on dial up for my entire life), I was able to watch some news clips from CNBC. I was a bit surprised to find that the reporters were using the term "peak oil" and that they actually interviewed Robert Hirsch, author of the governments first report on peak oil, as well as Boone Pickens, a billionaire, who is placing a order for over 500 of the biggest GE wind turbines to make electricity in Texas. There were a lot of good clips, although it frustrated me a bit with how the Congress, and much of the media, still seems to be trying to seek the blame somewhere: Bush, the oil companies, OPEC, etc.
Another interesting development was that the oil futures market seems to have moved into "contango", which just means that if you buy oil that won't be delivered for a while, that it is actually more expensive the farther it goes out. This change is actually a bit worrying, because a contango tends to encourage purchasing closer to "now", which is drives up the near price, and which also drives up the longer out price.
I have this vision in my head of the price curve, when plotting all the futures contracts out, getting steeper and steeper as the weeks roll by. What I mean by that is that oil for next month might be near the spot price ($135/barrel) but the contracts for three years from now might sell for twice that, or more. I wonder and worry that this could really happen quite quickly as the oil purchasers finally figure out that oil is going to be MUCH, MUCH more expensive in the future, due to less supply, and that they had better lock in now on the price.
This brings me to a point that I'm a bit reticent to mention... Namely, the actual value of oil.
I'm reticent because I don't know of anyone who mentions oil being as valuable as I have calculated it to be. To be specific, and you can search for an earlier post on this where I did the math, the value of oil can be equated to the human labor needed to do the same work.
For example, if it takes 10 gallons of diesel to plow a small field, then the value of that 10-gallons is equal to the price the farm owner would have to pay to have people do this same work by hand. My results were that one GALLON of oil has the same amount of energy as two weeks of hard labor for one person... and that labor would cost a farmer about $1,500 if they had to hire it out.
The notion that $135 per BARREL (42 gallons) of oil is "high" is really... well... nuts.
The energy in a barrel of oil is worth somewhere around 42 x $1,500 or... $63,000.
That is for one barrel of oil, that is now selling for only $135.
Matthew Simmons, who has been talking about oil for decades, points out that even at $135 per barrel, oil is less than 25 cents per cup. Basically, oil, the most amazing, energy rich substance on the planet, is selling as if it were sea water, or some other almost free liquid.
Is $63,000 a barrel precise? No, of course not. My equating human work to oil energy is not exact, but just meant to get us in the ball park. In reality, today, at this moment, the true energy value of oil may be more like 50% higher or lower than that... so something like $30,000 to $100,000 per barrel.
I could do the math on this some more, and others could do their own analysis, but I think the primarily point is that our free market undervalues oil... and undervalues is an extreme understatement. $135 per barrel? That is probably 99% off the real value. We're paying only 1% of the energy value of in the oil. This would be like us going out to the store to buy a new car, and they move the decimal over twice to the left, and instead of paying $23,000 that we only pay $230. That is how undervalued and cheap oil is.
Getting from $135/barrel to anything close to the energy value would probably collapse all financial systems... so, in reality, I don't know if the price would ever get to the energy value... in a free market, oil will probably always be undervalued.
This makes me think that the free market is doing such a poor job at valuing oil, that there ought to be another way to value it. I don't want to delve into that line of thinking yet... I'll leave it up to others and another time.
Back to the news, James Howard Kunstler had an interesting clip on CNN about his new fiction book, World Made by Hand. The interviewer really seemed to get it, and Kunstler made some good points about things accelerating. I think of this acceleration as the prices for oil basically rising geometrically, playing havoc with the global economy, and the US economy in particular, and ending in a system crash.
Wow, I hope that's not where we are headed, but it really would not surprise me.
This all ties into money, of course, because money is really only a representation of the amount of energy that went into making some product. Rising oil prices, which means generally rising energy prices, can be looked at a different way...
A barrel of oil in 1970 is worth exactly the same as a barrel of oil today...
And yet now, instead of $3.65 per BARREL, we're paying $135.00 per barrel. Has the oil changed? No, not really. Has the value of money changed??? Well, if $3.65 could buy a barrel of oil back in 1970, and if it takes $135 to buy the same thing today, it seems like the only thing that is changing is money... money is losing value. I call this inflation.
What will money be worth when oil costs $1,000 per barrel? I guess that I'll basically have 90% less purchasing power... that doesn't make me too happy. The incentive with inflation like this is to buy stuff now, because it will be impossible to buy later.
I think I'll jump ahead a bit, so if it seems that I'm skipping over some of the explanation, that is probably true, as I mentioned at the start, this is a true stream-of-thought journal...
Money.
Oh, money, money, money...
STOP READING HERE
Okay, I did suggest you stop reading, and you are still reading, so... a bit of prep for the you...
I'm going to shift gears away from oil and energy a bit to talk just about money. I don't know anyone else talking or writing this way about money, so if this sounds odd or crazy or nuts or wacko then I wouldn't be surprised... but I've been thinking along this line for a while now, and I'm pretty sure that my thoughts on money are worth exploring... not only for myself, but for anyone that is really wondering how things work...
Money
Think about all the things that we don't want to be doing to Earth. We don't want to be polluting, we don't want trash, we don't want to be cutting down the trees, or polluting the atmosphere, or causing climate change, or causing war, or the extinction of species, etc.
There are lots of things that we don't want to happen... and yet they do... and no matter what we've done over the past... forever... things worsen. More extinct species, more pollution, more CO2 in the air, more deforestation, more fighting, more hunger, etc.
Who is causing all of this?
Well, it is us.
It is us because of the way in which money works.
In order not to make this sound like I'm blaming, which I'm really not, because I don't think it is really something that can be pinned on anyone in particular... I'll focus on myself.
The last time I spent money was at the gas station yesterday. Let's think about exactly what happened and do some analysis.
I took out my debit card, swiped it through the pump, and pumped $60 of fuel into the car (that was the most expensive fill up ever for me). Then what? Well, the money was transfered on paper from my account to the service station account.
Now, where is that money going to go?
There are two ways to look at this, either keep the $60 together as a chunk, or let it spread out somehow. Let's go with the chunk of money concept... because the end result is the same either way.
In a couple of days, one of the gas station employees gets paid, and part of their pay is that $60. Let's say it was direct deposit into their debit card account.
Off they go, to buy some food for family, and that $60 now goes to the grocery store. Okay, where from there. We'll, let's say this $60 is used to pay off part of a bill for buying milk.
Off the money goes to the milk seller. The $60 in the milk sellers, lets simplify and say this is the a person that ones a few thousand cattle in a standard CAFO, they use this money to buy some diesel for their tractor that they use to spread the urine from the cows. The tractor goes out and sprays the urine into the air and onto the ground.
The $60 goes back to the owner of a different gas station and this time, let's follow it towards the Niger Delta, because that could be where the oil came from. So, the money goes from gas station, to distributor, to refiner, to oil company, to pay a guy who overseas that a bunch of oil fields in the Niger Delta have armed security. He would be like a foreman of sorts, perhaps a native of Nigeria. To keep an eye on the facility, and to keep everyone else out, he hires some big thugs with guns...
The point of following this $60?
Our use of money, the impact of it, is really not seen by us, because that money flows forward in time, and allows and causes things that we might not want to happen.
In fact, a better way to think about it is to start at the action we don't want to happen, and work backwards. Start from the cutting down of the rain forest tree, the person that did the cutting, the person that did the paying, the place they got the money from, etc... it ends up back at us, eventually.
All right, that is enough for now... this isn't necessarily an easy or intuitive way to think about money, but it is really an essential one, to understand what is going on in the world.
Here ends the journal... my hands and brain are both tired.