Oil Prices Lower Forever? Hard Times In A Failing Global Economy

Two years into the global oil-price collapse, it seems unlikely that prices will return to sustained levels above $70 per barrel any time soon or perhaps, ever. That is because the global economy is exhausted.

The current oil-price rally is over as I predicted several months ago and prices are heading toward $40 per barrel.

Oil has been re-valued to affordable levels based on the real value of money. The market now accepts the erroneous producer claims of profitability below the cost of production and has adjusted expectations accordingly. Be careful of what you ask for.

Meanwhile, a global uprising is unfolding.

The U.K. vote to exit the European Union is part of it.  So is the Trump presidential candidacy in the U.S. and the re-run of the presidential election in Austria. Radical Islam and the Arab Spring were precursors. People want to throw out the elites who led the world into such a mess while assuring them that everything was fine.

The uprising seems to be about immigration and borders but it’s really about hard times in a failing global economy. Debt and the cost of energy are the pillars that underlie that failure and the resulting discontent. Immigrants and infidels are scapegoats invented by demagogues.

Energy Is The Economy

Energy is the economy. Energy resources are the reserve account behind currency. The economy can grow as long as there is surplus affordable energy in that account. The economy stops growing when the cost of energy production becomes unaffordable. It is irrelevant that oil companies can make a profit at unaffordable prices.

The oil-price collapse that began in July 2014 followed the longest period of unaffordable oil prices in history. Monthly oil prices (in 2016 dollars) were above $90 per barrel for 48 months from November 2010 through September 2014 (Figure 1).

Oil Prices in 2016 Dollars, 1950-2016
Figure 1. Oil Prices in 2016 Dollars, 1950-2016. Source: EIA, Federal Reserve Bank of St. Louis and Labyrinth Consulting Services, Inc.

That was more than 3.5 times longer than the period from September 2007 through September 2008 just before the Financial Collapse. It was almost twice as long as the period from September 1979 through November 1981 that preceded the longest oil-price collapse in history.

There is nothing magic about $90 per barrel but major economic dislocations have occurred following periods above that level. Few economists or world leaders seem to understand this or include the cost of energy in their models and policies.

There is a clear correlation between oil price and U.S. GDP (Gross Domestic Product) when both are normalized in real current dollar values (Figure 2). Periods of low or falling oil prices correspond to periods of increasing GDP and periods of high or rising prices coincide with periods of flat GDP.

CPI-Adjusted US GDP + Trendline & WTI October 2015_150
Figure 2. U.S. GDP and WTI Oil Price. Source: U.S. Bureau of Labor Statistics, The World Bank, EIA and Labyrinth Consulting Services, Inc.

Economic growth is complex and some will object to this correlation. Fine. But energy is also complex. Most people think about it as an independent topic or area of our lives. Like business, politics, economics, education, agriculture, and manufacturing, there is energy. This is understandable but wrong.

Energy underlies and connects everything. We need energy to make things, transport and sell things and to transport ourselves so that we can work and spend. We need it to run our computers, our homes and our businesses. It takes energy to heat, cool, cook and communicate. In fact, it is impossible to think of anything in our lives that does not rely on energy.

When energy costs are low, the costs of doing business are correspondingly low. When energy prices are high, it is difficult to make a profit because the underlying costs of manufacture and distribution are high. This is particularly true in a global economy that requires substantial transport of raw materials, goods and services.

The global economy expanded in the mid-1980s through 1990s when oil prices averaged $33 per barrel. Then, oil prices nearly doubled to an average of $68 per barrel from 1998 to 2008, and subsequently increased after 2008 to 2.5 times more than in the 1990s. When oil prices exceed $90 per barrel, the global economy is no longer profitable.

America’s Golden Age

The United States experienced a golden age of economic growth and prosperity during the 25 years following World War II. This period forms the basis for U.S. and indeed global expectations that growth is the norm and that recessions and slow growth are aberrations that result from mis-management of the economy. This is the America that today’s populists want to return to.

The Golden Age, however, was a singular phenomenon that is unlikely to recur. After 1945, the economies and militaries of Europe and Japan were in ruins. The U.S. was the only major power that survived the war intact.  Having no competition is a huge competitive advantage.

The U.S. was the first country to fully convert to petroleum, another competitive advantage. A barrel of oil contains about the same amount of energy as a human would expend in calories in 11 years of manual labor.  Crude oil contains more than twice as much energy as coal and two-and-a-half times more than wood. And it’s a liquid that can be moved easily around the world and put in vehicles for transport.

In 1950, the U.S. produced 52% of the crude oil in the world and was largely self-sufficient. Texas was the largest U.S. producing state and the Texas Railroad Commission (TXRRC) controlled the world price of oil through a system of allowable production that also ensured spare capacity.

Oil was cheap, the U.S. controlled its price and had a positive balance of payments.

Oil Shocks of the 1970s and 1980s

That began to change toward the end of the 1960s. A re-built Europe and Japan rose to challenge American commercial dominance and the costs of fighting the spread of communism–especially in Vietnam–weakened the American economy. In 1970, the U.S. economy went into recession and President Nixon took drastic steps including the end of backing the dollar with gold reserves. The rest of the countries that were part of the Bretton Woods Agreement did the same resulting in the largest global currency devaluation in history.

In November 1970, U.S. oil production peaked and began to decline. In March 1972 the TXRRC abandoned allowable rates. The United States no longer had any spare capacity. OPEC had long objected that oil prices were held artificially low by the U.S. Now OPEC had the clout to do something about it.

In October 1973, OPEC declared an oil embargo against Israel’s allies including the U.S. during the Yom Kippur War. This was really was just an excuse to adjust oil prices to the devalued Western currencies following the end of the Bretton Woods Agreement.

The price of oil more than doubled by the end of January 1974 from $22 to $52 per barrel (2016 dollars). When the Arab-Israeli conflict ended a few months later, oil prices did not fall.

Real oil prices more than doubled again in 1980 to $117 when Iran and Iraq began a war that took more than 6 million barrels off the market by 1981. The effect of these price hikes on the world economy was devastating. World demand for oil decreased by almost 10 million barrels per day and did not recover to 1979 levels until 1994 (Figure 3). Real prices did not recover to $40 until 2004 except for a brief excursion during the First Persian Gulf War in 1990.

OPEC-World Liquids Compared to 1979 July 2016
Figure 3. OPEC and world liquids production compared to 1979 and world oil prices. Source: BP and Labyrinth Consulting Services, Inc.

The Miracle of Reagan Economics: Low Oil Price

Ronald Reagan is remembered as a great U.S. president because the economy improved and the Soviet Union fell during his administration. Both of these phenomena were because of low oil prices.

After U.S. oil production peaked, imports increased 5-fold from 1.3 to 6.6 mmbpd from 1970 to 1977 (Figure 4).

U.S. Crude Oil Production, Imports and Oil Price in 2016 Dollars
Figure 4. U.S. crude oil production, imports and oil price in 2016 dollars. Source: EIA, Federal Reserve Bank of St. Louis and Labyrinth Consulting Services, Inc.

When oil prices rose to nearly $110 per barrel during the Iran-Iraq War, the U.S. went into recession from mid-1981 through 1982. Oil consumption fell more than 3 million barrels per day. Production from Prudhoe Bay began in 1977 and somewhat dampened the overseas outflow of capital but it did not help consumers with price.

Federal Reserve Chairman Paul Volker raised interest rates to more than 16% by 1981 to bring the inflation caused by higher oil prices under control (Figure 5). This worsened the economic hardship for Americans in the short term but also became the foundation of the Reagan economic revival.

U.S. Public Debt 1950-2016
Figure 5. U.S. public and consumer debt and interest rates. Source: U.S. Treasury, U.S. Federal Reserve Banks and Labyrinth Consulting Services, Inc.

Much of the developing world had survived the oil shocks of the 1970s by borrowing from U.S. commercial banks. Higher U.S. interest rates put those countries into recession and that helped keep oil demand and prices low. By 1985, oil prices had fallen below $40 per barrel and would not rise above that level again until 2005.

Volker found an opportunity in the demand destruction from oil shocks. By raising U.S. interest rates, he managed to roll back oil prices almost to levels before the 1973 oil embargo and created a great economic boon for the U.S.

“He [Volker] used the strategic price that America continued to control—namely, world interest rate—as a weapon against the price of the strategic commodity that America no longer controlled, which was oil.”
James Kenneth Galbraith*

High interest rates attracted investment. Along with low oil prices, a strong dollar, tax cuts and increased military spending, Volker and Reagan restored growth to the U.S. economy. By 1991, the Soviet Union collapsed under the strain low oil prices, debt, and military spending.

Things Fall Apart; The Center Cannot Hold

Treasury bonds became the effective reserve asset of the world. The U.S. put economic growth on a credit card that it never planned to pay off. Public debt increased almost 6-fold from the beginning of Reagan’s administration ($1 trillion) in 1981 to the end of Clinton’s ($6 trillion) in 2000 (Figure 5). By the end of Bush’s presidency in 2008, debt had reached $10 trillion. It is now more than $18 trillion.

The 1990s were the longest period of economic growth in American history. There are, of course, limits to growth based on debt but the new economy seemed to be working as long as oil prices stayed low. Then, Prudhoe Bay peaked in 1985. Total U.S. production declined, and imports increased sharply as the economy improved (Figure 4). Similarly, the world economy slowly recovered after 1985 with lower oil prices.

Consumer credit expanded under President Clinton through mortgage debt. Manufacturing had been progressively outsourced to Latin American and Asia, and the evolving service economy was underwritten by consumer debt that increased 7-fold from less than $0.5 trillion in 1981 to $2.6 trillion in 2008 (Figure 5).

The “dot.com” market collapse in 2000 and the September 11, 2001 terror attacks pushed the U.S. economy into recession and the Federal Reserve reduced interest rates below 2%, the lowest levels in U.S. history to date. Mortgage financing boomed.

The 1993 repeal of The Glass-Steagall Act allowed banks to package mortgage debt into complex, high-risk securities (CDOs or collateralized debt obligations). In what can only be described as out-of-control speculative greed and institutional fraud, CDOs, synthetic CDOs that bet on the outcome of CDO bets, and the credit default swaps that bet against both propelled the economy to levels of leverage and instability not seen since the 1920s.

“This was the new new world order: better living through financialization.”
–James Kenneth Galbraith**

From 2004 through 2008, world liquids production reached a plateau around 86 million barrels per day (Figure 5). Increased demand from China and other developing economies pushed oil prices higher as traders and investors worried that Peak Oil had perhaps arrived.

World Liquids Production and Oil Price in 2016 Dollars
Figure 6. World liquids production and oil price in 2016 dollars. Source: EIA June 2016 STEO and Labyrinth Consulting Services, Inc.

Oil prices soared to more than $140 per barrel and interest rates rose above 5%. The adjustable interest rates that underlaid much sub-prime debt also rose. Mortgage holders began to default and world financial markets collapsed in 2008.

The Second Coming

Debt and higher oil prices had spoiled the party. The problem was addressed with more debt and higher oil prices.

The Federal Reserve Bank brought interest rates to almost zero, created money and bought Treasury bonds while the government bailed out the banks and auto industry. OPEC cut production by 2.6 million barrels from December 2008 to March 2009 and oil prices recovered from $43 to $65 by May, and were more than $80 by year-end propelled by a weak dollar and easy credit.

Tight oil, deep water and oil sands projects that needed sustained high oil prices took off. Unconventional production in the U.S. and Canada increased 5 million barrels per day between January 2010 and October 2015 (Figure 7).

Incremental World Crude Oil + Condensate Production
Figure 7. Incremental world crude oil + lease condensate production. Source: EIA and Labyrinth Consulting Services, Inc. after Crude Oil Peak.

Tight oil used the same horizontal drilling and hydraulic fracturing technology that had been pioneered in earlier shale gas plays. The technology was expensive but once oil price topped $90 per barrel in late 2010 and stayed high for the next 4 years, the plays were deemed successful by producers and credit markets.

U.S. tight oil and deep-water production resulted in a second coming of sorts with monthly crude oil output reaching 9.69 million barrels per day in April 2015. That was 350,000 bopd less than the 1970 peak of  10.04 million bopd.

The difference of course was cost. In 1970, the market price of a barrel of oil in 2016 dollars was $20 per barrel versus $100 from 2011 to 2014, and $55 per barrel in 2015.

And this is precisely the problem with the almost universally held belief that technology will make all things possible, including making a finite resource like oil infinite. Technology has a cost that its evangelists forget to mention.

The reality is that technology allows us to extract tight oil from non-reservoir rock at almost 3 times the cost of high-quality reservoirs in the past. The truth is that we have no high-quality reservoirs left with sufficient reserves to move the needle on the high global appetite for oil. The consequence is that to keep consuming and producing as we always have will inevitably cost a lot more money. This is basic thermodynamics and not a pessimistic opinion about technology.

Nevertheless, in a zero-interest rate world, there was great enthusiasm for yields greater than conventional investments like U.S. Treasury bonds and savings accounts that continue to pay less than 2%.  Bank and mezzanine debt, high-yield corporate (“junk”) bonds and share offerings promised yields in the 6 to 10% range. As long as prices were high and the plays were marginally profitable, risks were downplayed and capital was almost unlimited. Two years into the oil-price collapse, capital is more limited because banks and investors have been burned.

Producers continue the mantra that costs keep going down and well performance keeps getting better. Those with some history and perspective, however, know and remember that they always say that but the balance sheets never reflect the claims.

In 1996, the late Aubrey McClendon made the following statement about the Louisiana Austin Chalk play:

“Today, because of improvements in horizontal drilling technology, you’ve got a play that could be the largest onshore play in the country, not only in size of potential reserves but also in a real extent.”

That play was a total failure for McClendon’s Chesapeake Energy Corporation and today Chesapeake is on the verge of bankruptcy for the second time.

People want to believe that things keep getting better and that they won’t have to change their behavior—even if these beliefs defy common sense and the laws of nature.

Slouching Toward Bethlehem

The oil-price collapse that began in July 2014 was technically about over-production. A surplus of unconventional oil from the United States and Canada, and a hiatus in geopolitical outages upset the world market balance and pushed prices lower.

Some have tried to emphasize the role that demand played. But there is simply no comparison to the 10 mmbpd demand destruction that occurred between 1979 and 1983 nor is this anything like the 2.6 mmbpd demand decline in 2008-2009.

This price collapse is simply different than the others. It more fundamental. The economy has been pushed beyond its limits.

Post-Financial Collapse monetary policies, the cumulative cost of nearly four decades of debt-financed growth, and the return of higher oil prices have exhausted the economy. Most debt is non-productive, interest rates cannot be increased, and 2016’s low oil prices are still one-third higher than in the 1990s (in 2016 dollars).

Producers and oil-field service companies are on life support. One-third of U.S. oil companies are in default.  Yet some analysts who have no experience working in the oil industry proclaim break-even prices below $40 per barrel and breathlessly predict that the business will come roaring back when prices exceed $50. Producers don’t help with outrageous claims of profitability at or below current oil prices that exclude costs and are not generally applicable to their portfolios.

As a result, the public and many policy makers believe that tight oil is a triumph of American ingenuity and that energy will be cheap and abundant going forward. The EIA forecasts that U.S. crude oil production will exceed the 1970 annual peak of 9.6 mmbpd by 2027 and that tight oil will account for almost 6 million barrels per day. Although I have great respect for EIA, these forecasts reflect a magical optimism based on what is technically possible rather than what is economically feasible.

Renewable energy will be increasingly part of the landscape but its enthusiasts are also magical thinkers.

In 2015, renewables accounted for only 3% of U.S. primary energy consumption. No matter the costs nor determination to convert from fossil to renewable energy, a transition of this magnitude is unlikely in less than decades.

Solar PV and wind provide much lower net energy than fossil fuels and have limited application for transport–the primary use of energy– without lengthy and costly equipment replacement. The daunting investment cost becomes critically problematic in a deteriorating economy.  Although proponents of renewable energy point to falling costs, more than half of all solar panels used in the U.S. are from China where cheap manufacturing is financed by unsustainable debt.

It is telling that energy and its cost can hardly be found among the endless discussions about the economy and its failure to grow. Technology optimists have disparaged the existence of an energy problem since at least the 1950s. Neither unconventional oil nor renewable energy offer satisfactory, reasonably priced, timely solutions to the dilemma.

As political leaders and economic experts debate peripheral issues, the public understands that there is something horribly wrong in the world. It is increasingly difficult for most people to get by in a failing global economy. That is why there are political upheavals going on in Britain, the United States and elsewhere.

The oil industry is damaged and higher prices won’t fix it because the economy cannot bear them. It is unlikely that sustained prices will reach $70 in the next few years and possibly, ever.

The British exit from the European Union adds another element of risk for investors. Lack of investment will inevitably lead to lower production, supply deficits and price spikes. These will further damage the economy.

The future for oil prices and the global economy is frightening. I don’t know what beast slouches toward Bethlehem but I am willing to bet that it does not include growth. The best path forward is to face the beast. Acknowledge the problem, stop looking for improbable solutions that allow us live like energy is still cheap, and find ways to live better with less.


*J.K. Galbraith, 2014, The End of Normal, p.54. Much of the economic interpretation in this post is based on Galbraith’s work.
**J.K. Galbraith, 2014, The End of Normal, p.57.


  • Thanks for this excellent overview. Only 2 additions:

    A contributing factor to the 2nd oil crisis in 1979 was peak oil in Iran under the Shah in the mid 1970s, before the revolution.


    And the peaking in the West Siberian oil fields in the mid 1980s also played a role. Plus the Tchernobyl nuclear accident.

    Russia’s oil peak and the German reunification

    The big question is: if oil prices remain low, do we have the global oil peak now?

    • Arthur Berman


      I always appreciate your comments and additions. You are right about Iran and Siberia.

      This was an ambitious post and I had to decide on details not to include.

      All the best,


  • Che

    So which is it,
    “unlikely that prices will return to sustained levels above $70 per barrel any time soon or perhaps, ever”
    or the “coming moonshot”?

    • Arthur Berman


      The key operative work is “sustained.”

      There will be a moonshot or hail Mary but it will not last because demand will be quickly destroyed and prices will again devalue. What we are experiencing now is the first of many future devaluations of oil prices.

      Thanks for your question,


  • striebs

    Art ,

    I’m an Englishman who voted for Brexit .

    I am very proud that my fellow countryman for having the courage to say “no” to their Lords and Masters who were universally pro-EU membership . I didn’t think we had it in us !

    Without doubt , dissatisfaction of ordinary people towards a global economy which does not work for them was an element in the Brexit vote , as was immigration , but they were not the main reasons .

    I don’t want to dwell on immigration but think that it is relevant to say that ordinary people (i.e. the market) could see the effects of automation and computerisation and concluded that in future , less people would be required so decided to reproduce less .

    They are also increasingly aware that the country can only grow a fraction of it’s own food and that energy is increasingly being imported – and that we cannot do anything here which cannot be done more cheaply elsewhere .

    The main reason is sovereignty – simply that most Briton’s want their country to be self governing . Surely not such an outrageous demand ?

    The EU is (or at least was) on a journey towards a United States of Europe/EUSSR and ordinary people (above the age of 40) just don’t want to be part of that .

    Our legal system is centuries more advanced than that in Europe and emerging countries like Israel chose this as a template .

    With the EU arrest warrant , we can be arrested and taken to an EU country which does not observe habeas corpus and where the defendant does not have a right to opt for a jury trial .

    The worst thing is that the extradition is no longer reviewed by a British court and cannot be stopped by one – this sovereignty has been given away .

    All I’m saying is not to read too much into the Brexit vote .

    Great article as always thanks .

    • Arthur Berman


      Many thanks for your insightful comments about the Brexit vote. I have read a fair amount about what is means but you bring up some points that I had not heard.

      I believe that a great deal of what makes the U.S. great is the legacy of English law. This clearly applies to many other former British colonies.

      I don’t want to read too much into the Brexit vote but as you acknowledge, some of the discontent it reflects is about the failed promise of growth and the increasing difficulty making ends meet. Many involved in the populism here in America may not be able to clearly articulate the root of their discontent. I am inferring that economic malaise is among the common elements in both of our countries.

      All the best,


  • Trader joe

    Good, thoughtful write-up…however, seems conflicted throughout.
    Energy essential everything including waking up in the morning….yet, prices to collapse so that we’re all driving around with 78-cent a gallon gas.
    Sorry….No Sale….and no soup for you.

    Although, I seem to recall that Venezuela had something like 20-cent/liter subsidized gas….so there’s that. Well, until the government revalued and price of gas went up 60-fold overnight.


    So, when you see oil and gasoline get dirt cheap (some would argue that Feb ’16 was “it”)….that’s the calm before the storm. Then up up and away.

    • Arthur Berman


      It will be up and away until demand destruction adjusts the price downward again. If I have learned anything in the last 2 years it is that we have crossed a boundary and nothing is like it was before. The market is essentially in balance now (EIA data shows the world was about 0.66 mmbpd over-supplied in June–that’s about as close to balance as we ever get) yet prices are falling. That’s not the way it’s supposed to work.

      I think that the economy is blown out with debt. People won’t spend because they can’t and if they have money, they pay down debt.

      I agree that there’s a storm coming but I don’t know how it will play.

      Thanks for your comments,



  • Joe Schreiber

    “A barrel of oil contains about the same amount of energy as a human would expend in calories in 11 years of manual labor.”

    Seems to me it’s worth about $1000/barrel.

    • Arthur Berman


      Oil is truly amazing stuff. I doubt that many anti-oil activists appreciate how much of the progress in our lives is thanks to oil. I doubt even more that they are prepared for the quality of life after oil.

      All the best,


  • John S


    “Ambitious” just might be the most understated adjective anyone could use to describe this article. How does one respond to such ambition?

    Thank you for for another thought provoking yet horrifying mental image of the future. I’m not sure that I can get to your future from my present but no one should question that there is a enormous tectonic change on its way. Energy….Self Determination….Imigration…..Infidels. Talk about a moving target.

    I have followed your public career for the last 8 years or so because your voice and Enno Peters and a few others are just about the only voices that validated my career in the E&P industry. There is good rock and bad rock but geology always wins. It will beat both technology and Central Banks ….. eventually. Depletion marches on and I only hope that the shale gas and LTO plays contract to your previously defined sweet spots sooner rather than later.

    Given the choice between holding oil and gas and fiat currency, I choose oil and gas and ……prayer.

    • Arthur Berman


      Thanks for your thoughtful comments. Energy will be an outstanding investment going forward for those who have their eyes open. That may not always mean being long on energy. One thing is sure–we will never stop needing energy. We may have to learn to live with less of it but it will always be in demand.

      Currency is nothing but a claim on energy. You agree to dig up my yard for a sprinkler system and I pay you money for your calories. Money is a marker. It has no intrinsic value.

      The problem that I see with gold is that it is a marker for money which is in turn a marker for work. It’s like a synthetic CDO–a bet on a bet, a second derivative. I choose energy. I spend most of my time figuring out where to drill for oil and gas and some of my time writing these posts.

      All the best,


  • Paul West

    Always look forward to your excellent analysis on energy. You truly provide a public service in regards to energy education.

  • Dimitar Mirchev

    Excellent article!

    However I do not share your pessimism about renewables. They are hardware. They follow the same learning curve as computer chips – especially photovoltaics and batteries

    And now they are the cheapest new options.

    Yes it will take time but as the old infrastructure and capacities begin to expire we’ll replace them with the cheapest options – wind, solar and batteries. We don’t have a choice – we have to replace. And because they are pretty much the same as computer hardware – the more you build the cheaper they get.

    Check Ramez Naam’s energy blog.

    The hypothesis is that the cheaper and cheaper renewables will put a cap on the fossil fuels usage and at the end (in 10-25 years) no one will invest in fossil fuels anymore because those trends will be obvious.

    And all that ia without Paris Agreement and other climate policies.

    I short – we will probably never have to worry about energy shortage or expensive energy

    • Arthur Berman


      I wish you and Ramez Naam all the best with your faith-based idealism about technology.

      I think that you have it right when you say that technology is hardware. It is a means to convert energy into work.

      Technology cannot create energy.

      Sunlight on earth is diffuse and has a very low energy density that varies according to latitude and weather. Wind has more energy density than sunlight when it is active but is more intermittent.

      Tight oil and shale gas advocates stress production volume as some kind of proof that their efforts are successful. Oil and gas has high energy density but the volume produced is meaningless by itself. It is only the net energy that remains after subtracting the energy input to extract the oil and gas. Although variable, tight oil net energy within core areas of fields is approximately 20:1 or somewhat greater.

      The global average for all oil is about 50:1.

      Renewable advocates have no case whatsoever for energy density so they focus on falling costs of manufacturing the hardware/technology to convert this source into work. No matter the cost, the source cannot be made into more than it is–diffuse and low density. The net energy of wind is approximately 15-20:1 in windy areas (like the core areas of tight oil fields) but 1 or less elsewhere. The net energy of solar PV is about 5:1 where sunlight is constant and relatively strong and less than 1 everywhere else.

      An analogy is the difference between making lemonade from lemons versus concentrate. It takes a long time, a lot of energy input and a big mess to clean up for a little lemonade from lemons.

      Fossil sources of energy are geologically concentrated sunlight. They are like billions of lemons accumulated and concentrated as a solid (versus a liquid in a can of lemonade concentrate) over millions of years.

      There is a cliche about garbage in and garbage out. Sunlight and wind are not garbage but the quality of the energy taken from them by technology cannot become better than the source material.

      For our current lifestyles in the developed world to continue without using less energy will require a multiple of the difference between the net energy from oil and the net energy from renewable sources. The multiple needed for the average of wind and solar vs. the global average for oil is about 5x. So, it will take 5 times more energy input to extract the same energy out of renewables as oil. Let’s just say that the technology is free. It’s still 5 times less efficient.

      So, if you don’t like the impact of fossil energy on the planet–and I don’t either–then, for our lives to go using as much energy as we now do will mean 5 times more energy use than with oil. That may be more damaging to the environment than oil but let’s just say they are equal. What have we accomplished? Working harder to get the same result with no benefit to the planet.

      That’s if renewable energy has zero cost. If we factor in cost, even low cost, we get a really bad deal. More wasted energy to get what we need, no benefit to the planet and more cost.

      I am not opposed to renewable sources of energy (they are not in fact renewable at all, just repeatable–we can’t grow more sunlight or wind). In fact, I am a great supporter and stated in my post that I see this source of energy becoming increasingly important going forward.

      I don’t know Ramez Naam but I understand that he is software engineer. I doubt he has any direct background or experience with energy. I am not criticizing him but I am cautioning you to be careful of your sources because there is garbage in and garbage out there also.

      Thanks for your thoughts,


  • charles

    Looks like a case for uranium then?

  • Dimitar Mirchev

    Precisely because he is a software engineer he might be better suited to comprehend the ongoing energy transition. The IT people are used to the exponential growth and exponential improvements.

    And that is exactly the way PV and batteries are improving – roughly for every doubling the global installed capacities their price falls by 20-25%. This have been going for years and there is no end in sight.

    This and the inevitable merge of IT and Energy (especially electricity – smart grids, demand response, Internet of Things, smart storage, load follow manufacturing (they ramp up only when there is excess of power – when the power is cheap, google: Storing Power in Molten Aluminum Lakes), power-to-gas (again designed as energy sink – works only when supply is much greater than demand) etc etc) puts the IT people in unique position.

    Anyway this probably can only be proven in the reality.

    • Arthur Berman


      This is the same argument that supports electing a president with no experience in government.

      You prefer to listen to a software engineer than a 38-year veteran of the oil and gas business. That’s your choice but I wouldn’t make it.

      The list of things that you think will happen because of the merging of IT and energy are a beautiful dream. Believe in an energy amateur and elect a political amateur to run the country and get back to me in 10 years to tell me how that worked out for us all.

      All the best,


  • Art,

    Thank you for this thoughtful piece.
    As you rightly point out, there is a global uprising underway, which various signs can all be related, directly or indirectly, to the dearth of economic growth. This slow disappearance of economic growth mostly results from rising biophysical constraints, in particular concerning the quantity and quality of the energy supply. In the West it is feeding a ‘populist’ uprising against the ‘elites’. Yet the elites are probably not much more responsible for what is now wrong with the economy than they were responsible for what was perceived to be going right – or to be normal – in the past. What is going on is largely beyond their control.

    Even beyond the end of economic growth, what the populist surge across the West may reveal is that we might have entered a ‘crisis of complexity’, caused by rising biophysical constraints and characterized by diminishing returns of investments in societal complexity. Industrial societies might in fact have reached the point, identified and analysed by American anthropologist and historian Joseph Tainter, where our standard way of solving the problems we face – i.e. investing in organisational and technical complexity – is yielding diminishing returns. As a consequence, more and more of our complex economic, technical, political and social systems are showings signs of stress, or even early signs of failure. As our capacity to invest in further complexity continues to get eroded by energy-related and other biophysical constraints, we should expect more stress to develop across the board, potentially leading to some sort of systemic breakdown and forced simplification. The growing popular revolts against globalisation, the EU, or multiculturalism are signs that Western societies are already struggling to uphold their level of complexity and are subject to strong forces that are pulling towards a break down to a lower complexity level (i.e. localised economies, national governance, homogeneous societies, etc.).

    I’ve tried to explain this in more details here:

    • Arthur Berman


      You have clearly articulated precisely the vision behind my post. I am a petroleum geologist and, therefore, write about what I know. I touch on the many related aspects of economics, biophysics and political science because energy links them all but, other than history (which I also have a degree in), they are outside of my expertise.

      Many thanks for your insightful comments and link to your excellent post.

      All the best,


  • Lee Grove

    “Two years into the global oil-price collapse, it seems unlikely that prices will return to sustained levels above $70 per barrel any time soon or perhaps, ever. That is because the global economy is exhausted.”

    And that means, exactly, that we have passed Peak Prosperity via Decreasing Net Available Energy per Capita, and we are on the downslope of quality of life. And with so many factors other than just decreased energy per capita, there could, with a single black swan event, be a discontinuity of unprecedented magnitude. Those of almost any age could be young enough to witness utter collapse and the end of anything resembling civilization…

    • Arthur Berman


      You may be right but I see other, more attractive outcomes. Your allusion to Peak Prosperity indicates that you also follow Chris Martenson and his approach to whatever is coming. I have great respect for Chris and have learned a lot from him.

      People do not change without a crisis and the resulting trauma. Through much of history, this process led to the collapse of a civilization, an ensuing dark age and an eventual rebirth or renaissance from the melding of the best elements of the old, defeated culture with the new, more vital but more barbaric conquerors. I don’t think that model applies today but there is some probabilistic scenario like that I’m sure.

      More likely, there will be trauma, much will change and be discarded but a new, more vital renaissance will emerge without a dark age. We must learn to live better with less as I said at the end of my post. When there is little other choice, I think we will take that option.

      I recommend my friend Nate Hagens’ recent presentation.

      All the best,


  • GV

    I’m amazed how you succeeded in keeping the article short and accessible and at the same time coherent and to the point. Excellent!
    Though I must admit you have me worried by the references to Yeats’ apocalyptic poem.

    • Arthur Berman


      You are the only one (so far) to acknowledge the Yeats reference! Thanks for noticing.

      There are plenty of apocalyptic references in Yeats’ “The Second Coming” but their context is the paradigm that is ending. Yeats is focused on the paradigm that is emerging, that “slouches toward Bethlehem to be born.”

      The concentration of energy in petroleum has created an expansion of human prosperity, potential and population that was unknown in earlier millenia. Entropy has now caught up with that approach and behavior. Whatever emerges will be different but not, I hope, a dark age–that dark view is what the apocalyptic vision of western religious thought anticipates.

      Yeats was trying to take us to the mysterious and undiscovered potential beyond that limited and limiting perspective. As you know, Yeats was a mystic and drew heavily on the mythology and spiritual tradition of Ireland and the Celts.

      I am fascinated by the myth of Theseus who chose to seek out and confront the beast within the labyrinth. He emerged transformed. Isn’t this the narrative of most myths?

      We are confronted with a crisis in our time. The models of the past are no longer working. As I have said in several past posts, we have crossed a boundary. We can choose the apocalyptic model from the failed past or we can choose to meet the beast that will be born and be transformed ourselves in the process.

      All the best,


  • Francesco

    I’ve also read professor Galbraith book, one of the few economy books that really convinced me from the very first to the last line. Rune Likvern also did some great work on the relationship between oil, interest rates and debt. In general I’ve stopped thinking in price terms. Price is just a signal and it’s not an independente variable. If tomorrow morning the fiscal policy of the governments around the world change by dropping money in the hands of the final consumers, oil prices will explode higher; on the contrary they could contract even more. What’s really matter is how much energy per capita we have now and we will have in the future; I have an easy answer: less or much less but current economic theories can’t even think about it as well explained many times by Professor Charles Hall. The only thing uncertain is the trajectory, that is the speed of the adjustment. If it will be too fast, the economical/social/political system will collapse and we will stop debating about prices because we will be mosty dead. On the contrary, if the adjustment will be modulated, a different kind of society is possibile and could be much better than the current one (in the far far future I suspect). The problem is I don’t see this happening, so the sudden death looks like increasingly possibile. For a problem to be solved, it must be aknowledged for first. As Amory Lovins stated 30 years ago fixing the energy problem is conceptually easy: consume less energy.

    • Arthur Berman


      Thank you for your insightful thoughts and comments.

      You are entirely correct that oil price is a signal and that fiscal policy has a powerful influence. Nevertheless, I see good correlations between price and comparative inventories that are important. Noise from currency exchange rates, interest rates and sentiment can complicate that correlation over the near-term.

      I also agree that it is clear that there will be less energy available per-capita or otherwise in the future and that can have a spectrum of outcomes from dire to transformative.

      The fact that most people dispute that energy from oil is finite or believe that renewable energy will somehow allow our society to continue using energy as it has astounds me. Beliefs are more compelling than information.

      All the best,


  • John Munter

    Enjoyable article to read. Left out was the Saudi motivation to keep pumping oil. Obviously, they probably have their own climate advisors suggesting the Middle East could be at nearly unliveably high temps towards the end of the century. They are spending their assets before the world is forced into a non carbon economy while diversifying into health care, tourism, and high end oil products. Their oil is less carbon intensive anyway.

    Also sidelined was the wind potential coming off the Rockies that could power the entire country with big, national commitments to high voltage lines like we built the interstate highway system, rebuilt Europe, and went to the Moon. Germany and the UK are doing underground storage with wind that concentrates energy 700 times to run a turbine later with it. Thinking decades ahead we could do thorium nuclear energy that is completely safe that we pioneered but China and India are surging ahead on..with our help. It can be small-sized for a hospital and creates some waste but can actually consume nuclear waste.
    –John Munter, Warba MN

  • Sam V

    I am not so sure that oil is cheaper than wind. There are many factors in the conversion but looking at the end result in N.Z. the cost of running an electric car is equivalent to petrol in the U.S. at 84c per gallon.
    We have some of the most expensive electricity in the world after we followed the Enron model and sold off the grid.
    In British Columbia the price would be more like 42c per gallon running mainly on hydro power. The sustainability of batteries is another question.

  • John Doyle

    This is an excellent article with graphs I have never seen before.
    However I see a flaw in some of the reasoning. Not sure if it impacts the overview of the situation but it should be noted;
    After the headline”Things fall apart..etc” Treasury bonds are described as public debt. This contradicts the line that Treasuries became the world’s reserve assets. So they cannot be both. In fact treasuries are non government assets but when accounted by governments they figure as debts. Your own savings account is a bank debt too.
    The Federal government is monetary sovereign which means it has no need of its treasuries. Other moneys stored in the Fed are bank reserves and they are there in part for monetary reasons, but they are not treasury bonds. That 18-20 Trillion dollars can be accessed readily by the private sector. In fact that is what the Fed wants, so it sets interest rates low to get them moving back into the economy, but as you explain, not very successfully. So it’s just private[non US government money] stored with the fed, the safest place for it, being guaranteed.

  • Oil price is not only be affected by downstream demand, but also be affected by major players and agencies such as OPEC, Saudi Aramco and Goldman Sachs. Bichain Oilfield Chemical: http://www.bichain.com

  • Oil price is not only be affected by downstream demand, but also be affected by major players and agencies such as OPEC, Saudi Aramco and Goldman Sachs. Bichain Oilfield Chemical.

    • Arthur Berman


      I don’t believe that I ever stated that demand was the principal driver of oil price. I made a case that demand destruction in 1979, 1983 and 2008-2009 was a key factor. I also said that the current situation is nothing like those.

      Thanks for your comments,


  • jef pike

    Another outstanding summary of the current position and a warning for the future . As a follower of Art since the 1980’s I am amazed how consistently he has been correct but does he have a view as to how to make good investments now ?

    • Arthur Berman


      I am not a financial advisor and don’t know enough to have a high-level view of making good investments now. Ask me about specific companies and I have a view. That is an important part of my consulting practice.

      For what it’s worth, I have very few personal investments in energy companies. Developing and drilling my own oil and gas prospects is another story altogether!

      All the best,


  • GV

    Thanks for the reply. You presented an original interpretation of the poem. Nice find!
    One thought. We need to meet the beast before it’s born. Today the (fossil energy) beast has veiled itself under a cloak of supply glut, cheap prices and (financial) propaganda.
    I see something akin happening in agriculture.
    I’m optimistic in the sense that we can do it but I do wonder whether we will do it … in time. Or optimistic on our capabilities but pessimistic on our attitude.

  • Daniel Pearson

    “I recommend my friend Nate Hagens’ recent presentation.”


    Thanks for posting the link above to Nate Hagen’s work. Nates work is very refreshing to read and his out look for the future of fossil carbons is very pragmatic. His approach to future fossil carbons considering ‘Biophysical Accounting’ & ‘Econometrics’ gives me/us a new approach to looking at how climate science may play out in Earths future. I wish and hope more people read Hagen’s work. Regards, Dan.

  • Karl

    Mr. Berman,

    Would you hazard a guess as to the worldwide decline rate of onshore conventional oil? It seems to me that once that ball gets rolling, irrespective of the state of finance and shale play developments, we will see the full effects of peak oil on society. I doubt any combination of efficiency or alternative energy will be able to outrun it.



    • Arthur Berman


      Conventional oil decline rate depends on many factors and, therefore, varies but for a high-level estimate, 4-6% per year. Right now, unconventional oil is only about 15% of world production although it accounts for more than 50% in the United States.

      You are, therefore, absolutely correct. The 85% is in terminal decline so it is inevitable that we will be in greater trouble as time goes on. You are also correct that it is unlikely that we can find ways to continue using as much energy as we do now at an affordable cost by any means. The future seems obvious: we must learn to live with less energy.

      I am optimistic that this new way of life will ultimately be better but the adjustment will involve considerable trauma. The liars on both sides of the energy debate–fossil and renewable–guarantee that trauma by encouraging people to continue living wastefully until the lies are obvious and it is too late for a soft landing.

      Thanks for your question and comments,


  • Dr.Anthony Harwell

    I am amazed at the accuracy of your arguments. I am also questioning the return of higher prices. I do not have the experience you have but I have read everything I
    can on the oil and gas industry for the last year. I grew up in the shadow of big oil
    in Houston where my father worked for Gulf Oil and have great faith in the improvement of the oil and gas stocks. The problem is I cannot make a case for higher prices. I love the companies operating in the Midland area but I question their profitability in the economic condition we are in today. I fear we will see more failures
    in the days to come.

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  • richard

    I’d suggest that above $90 per barrel it becomes feasible to swap food for oil.

    Also, if we can find some way of keeping heavy trucks running without recourse to petroleum products, we can probably find an acceptable way to get everything else done.

    • Arthur Berman


      Morgan is a bright, insightful thinker. His variant on net energy–the Energy Cost of Energy–is important but fundamentally no more useful than EROI because no one has successfully figured out how to sum all of the inputs.

      I totally agree with his ideas about high energy costs and economic stagnation being co-related. I have been saying that energy is the economy for some time. He comes from the economic side of that equation and seems to have reached a similar conclusion by a different path. Few economists understand that money is just a call on energy and I’m not sure that he is there yet either but he’s closer than most.

      All the best,


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