The Week-end Stock Pot Watch, Thursday, November 28th-December 1st. Holiday Edition!

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91. Steve From Virginia: Nothing Lasts Forever

11/4/13 Steve From Virginia: Nothing Lasts Forever

Americans don’t want to know as their precious cars slowly slip away … along with the suburbs, the jet vacations to Las Vegas and Orlando, the college educations for the children, the ‘money-for-nothing’ investments, the privilege and the absence of accountability. Right now the car and the cost of fuel is pricing everything else out of reach … and the Americans are too dumb and TV-addled to recognize it.

Drillers are able to borrow from finance for modest periods of time. They have done a very good job promoting their latest speculative efforts and have been able to find hundreds of billions of dollars in new financing for plays that are marginal compared to previous plays. After the drillers borrow the customers arrive to retire the drillers’ loans with their own … either that or the drillers go out of business.

Because the new plays are more complex and difficult to exploit, the amounts needed by the drillers steadily increase. Fifty years ago a dollar would return fifty dollars or more worth of new crude, presently a dollar returns ten dollars or less. This diminution of returns is the consequence of our society’s extraction- and consumption success. No greater drilling effort … or monetary ‘cheating’ … can retrieve lost productivity. Waste has a lower entry cost than drilling; what we do best is waste more, faster.

Customers ultimately meet the cost of petroleum, they must borrow to do so. Meanwhile, what is borrowed for is simply thrown away. Oil in the ground is perpetual but its use is one-time and instantaneous. Because fuel has historically been improperly priced as a ‘loss-leader’ for the rest of industry there is no incentive to find other uses but to burn it for pleasure and label the process ‘work’. This lie has become very costly over the long term.

Continued borrowing in ever-increasing amounts of fuel slowly pauperizes the oil consuming customers who are ruined by their goods’ absence of return. Besides fuel, customers must borrow to pay for cars, freeways, parking lots, insurance companies and militaries. Think of energy components as accounting entities: the cost of fuel- plus the cost of credit needed to gain the fuel are on the ‘expense’ side of the ledger, the returns from using the fuel, the cars, freeways and whatnot are entered on the ‘income’ side, these two entities added together must equal zero. However, fuel use offers minimal returns; driving the car cannot pay for the car or anything else. Balancing the national energy ledger requires borrowing; eventually the account becomes nothing but a mass of bad loans.

This is how the world has accumulated so much debt, not social programs for humans but credit subsidies for the auto- and auto related industries and the absence of return for these things’ users. Right now, the arguments about continuing social programs are about choosing what to jettison in order to keep driving cars and wasting fuel. This is a foolish choice because the onrushing costs of subsidizing the car industry and fuel supply are unsustainable. Regardless of what choice is made the end result is insolvency and deleveraging … and fuel shortages.

A too-high price for fuel causes distress within the credit system: consider the too-high price to be the ‘upper bound’ where enough damage is done to the economy to destroy fuel demand. Since 2008 there has been an observable series of stepwise declining high fuel prices along with repeated crises; each succeeding price lower than those preceding, each crisis being more damaging. The world is becoming poorer every day … made so by the marching real costs of credit and petroleum.

The demand destruction process is incremental and cumulative: over time more customers become insolvent and can no longer borrow. As a consequence, governments have become the world’s borrowers of last resort. They are the ‘last man standing’ able to indirectly subsidize the petroleum industry. Governments and their central banks have become the rear guard of the waste-making status quo even as their own credit costs mount. The next step down the rabbit hole is for governments themselves to become insolvent … and for the fuel-waste regime to simply fall apart, as it must. This will occur even as the extraction industry by itself appears to be robust … due to its own self-aggrandizing propaganda and wishful thinking on the part of consumers.

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http://www.economic-undertow.com/2013/11/04/nothing-lasts-forever/