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Is There Enough Oil to Pay Our Debt?

Posted by Jeff Rubin on January 5th, 2011 under SmallerWorldTags: , , , , ,  • 49 Comments

2010 left us all with a mountain of debt. Whether you’re a taxpayer in the UK, Ireland or the US, it must already be pretty clear that you’re on the hook for a lot of IOUs borrowed from your future. You may not have borrowed the money yourself, but your government has already done it on your behalf, running up massive, record-setting deficits. What’s not clear is exactly how your government is going to pay that debt back.

With students already rioting in London over huge tuition increases, and general strikes the order of the day in places like Athens and Madrid, chances are slim that incumbent governments will survive long enough to cut their way to fiscal solvency. That’s not to say the fiscal brakes aren’t on (they are—at least everywhere but in the US). But the deficits are so gargantuan (as an example, Ireland’s is equal to one third of the country’s GDP) that the twin tasks of slashing spending and hiking taxes could last decades, provoking all kinds of social and political push-back during that time.

Given austerity’s slim chance at success, you might ask why government borrowing rates in the bond market, though rising, aren’t much higher. History would suggest that the yield on a ten-year US Treasury bond should be close to double what it is, given the size of Washington’s borrowing program.

The reason it’s not is that creditors and debtors both share a common belief that a powerful economic recovery lies just around the corner—one so powerful, in fact, that tax revenues will suddenly fill government coffers and let bondholders be paid the huge sums they are owed while at the same time sparing taxpayers an otherwise draconian fate.

The only problem is that the economic growth everyone is counting on is powered by oil. And as you’ve probably noticed, that’s getting more and more expensive to burn.

The minute global industrial production recovered from the recession, oil prices were suddenly on the verge of triple digits. That’s not an accident, since the two go hand in hand. Global oil demand is up 2.5 million barrels per day from last year. Any further increases in oil demand and oil prices will be trading comfortably in triple-digit range.

That suddenly makes all that government debt very energy intensive. It will take huge amounts of energy, particularly oil, to achieve the growth rates that all the near-bankrupt governments around the world need to even service their debt, let alone repay it.

So consider just how sustainable economic growth would be in a world of oil prices of $100 to $225 per barrel. Because those are the price parameters we’d be facing in the unlikely event that we actually see the kind of economic growth that bond markets and public treasuries around the world are so desperately depending on.

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  • http://thesneakattacker.blogspot.com/ Burkes66

    Good stuff. Something's gotta give.

  • Hy

    I don't think this is rocket science,If $100-225 oil could threaten the world economy I don't think its in the best interests of the oil producers to let oil rise to these prices with these potential repercussions

  • Osman Aziz

    The author makes a legitimate point that this sort of faith based expectation of the global economy recovering and allowing the tax base to become enriched to the extent that they can pay off the enormous debt burden is checked by oil price appreciation. I would take it one step further and suggest that there is an additional problem with the manner by which debt markets function presently.

    The fact that mark to market accounting rules have been put on hold has allowed banks and the government alike (in a sense, they are essentially the same) to artificially value the exit value of the debt they either issue or have purchased as an attempt to alleviate the credit crunch within the overnight lending markets. Once these rules are reinstated (which they inevitably must be), the global economy will likely witness a credit squeeze that is more sinister than the one that followed the collapse of the housing bubble.

    Something assuredly will give. The question is how the piper will be paid is all…

  • Jl3793

    Well actually the oil producers don't control the price of oil. Oil is traded around the world on many markets at all hours of the day. It is the actions of these buyers and sellers that determine the price of oil. Producers only interact because they also play the role of sellers (mostly) and buyers (sometimes).

  • Genoudmary

    I am too tired to look up figures; however, EIA (US) oil, based on 2007 global comsumption rates, was 41 years.
    Natural gas is not much better since I disagree with EIA global consumption rates.
    US is king of coal, if you're into dirt.

  • Abitibidoug

    Good stuff. Something's gotta give.

    My sentiments exactly. I follow other blogs like Garth Turner's blog about how the real estate market in Canada is soon to correct like in the United States, or Harry S. Dent's blog (he was wrong about predictions of a falling stock market but right on other predictions) as well as other sources. In addition, as I see the extreme weather events (most recently in Australia), and get the feeling those climatologists are right.

    In putting all this information together, it's practically impossible to predict exactly what will happen, but one thing for sure is the world of 20 years from now will be far more different from the world of the present than the present is from 20 years past. The whole economic system has been based on continuous growth forever. Some people, whether far sighted economists (there aren't too many of them) or environmentalists like David Suzuki have warned us that it can't go on forever and it looks like their predictions are coming true.

    The problem is governments have all been throwing bailout money to keep the old order going, such as bailouts to the automotive industry and generous tax breaks to oil companies, and generally to stimulate more growth. That's why we're in this mess with debt that will take a long time to pay back if ever.

    The good news is the world is not going to end as some fear mongering predictions would have you to believe. What will happen is some serious realigning of how the world works, and there will be winners as well as losers. The bad news is it will cause a lot of people pain and suffering. The sooner we realize that we live in a finite world, accept it, and deal with it the less the pain and suffering will be if it’s not too late already.

  • Jr

    Nothing a few mind-numbing, mindless, Kool-aide fueled rounds of “Yes we can” won't solve. (Chanting “Yes, we have no bananas” will also do the same trick… emphasis on the word “trick.”

  • Bilos

    Dear Jeff,

    You are right as usual.

    “Why your world is about to get a whole lot smaller” is an excellent book that demonstrates your comprehensive understanding and great skill in simplifying complex matters without obscuring the truth. I've recommended it to several friends and colleagues.

    Ad hominem side-note:

    It's been said that 'arrogance' is what lessors accuse of their betters.
    I must confess that you're a much better man than I.

    Keep up the good work.

    - Jeb Ruffin

  • http://pulse.yahoo.com/_SMH33NWQAWMWFKWG5Q46YB26DY Neil Kitson

    Bravo..

  • trkdirect

    Agree with the article. And might add that rising costs from the coming global health crisis related to climate disruption have not even been factored in:
    http://www.the-scientist.com/article/.../

  • Walter Derzko

    I don't agree -oil prices are a geopolitical tool manipulated by the west -In the 1980s it was used to bankrupt the Soviet Union. It worked. The question is who is next? Russia or China?
    see http://smarteconomy.typepad.co…

  • teddebiase

    Jeff Rubin!! Great work out there. True leadership.
    Please get in touch with Donald Trump!
    He is talking a lot on the price of oil and the influence on the American economy and sounds uninformed.
    I encourage you to reach out.
    Love the book. Liked you on Squeeze Play. Look forward to more.

  • Leaveittobeaver

    On an individual basis, one must ask how does one invest to maintain their current standard of living by say continuing to drive their Ford 350. I think that if the Gateway pipeline goes through from Alberta to the coast and the other one to Texas refineries, Canada shoud have no problem paying down debt. Also, the Canadian currency will head to $1.50 or more against the $US and filling up the tank will not hurt so much.
    I'm a happy camper looking forward to a bright future.

  • Rojelio

    Is it even possible to stave off catastrophe anymore with conservation and efficiency? Has anyone done a study of the downside of peak oil on one side versus conservation, recycling, and technology on the other?

    Conservation since most Americans and other consumers could delete much of the crap they purchase without pain. Go into a big box store or a Wal-green and we could easily do without 95% of the plastic crap and candy on the shelves with no pain whatsoever. A large power-down is a given, but must it be catastrophic?

    Efficiency given that we're seeing exponential trajectories in some areas of technology (e.g, DNA sequencing, solar PV, computers etc..), so could we perhaps take a quantum leap in Energy Technology within the next 5 years or less? Futurist Ray Kurzweil promotes this type of idea.

  • Rojelio

    Walter, why are they drilling in super deep water or tapping the sludge in the tar sands? If it's all a political ploy, why would the west torture themselves in such a way and allow their economies to crash due to a lack of affordable oil in 2008?

  • Rojelio

    How hard is it to dig (using diesel fuel) for coal during peak oil? Some respectable guys (like Richard Heinberg, Chris Martenson) have also made the case for peak coal, at least that we've peaked in the high-grade coal like anthracite and now we're down to digging dirtier stuff right at the time that digging gets more expensive.

  • Zachary

    Ford F350 – less than 10 miles per gallon!

  • Leaveittobeaver

    You need a tuneup. You should get 12 at least on the highway.

  • A. P. Gow

    Substitutes. Petroleum substitutes are available, though more expensive than the crude stock. Behavioural change. Demand = Supply. As prices rise, demand falls. Substitutes are found. Natural gas replaces diesel oil in truck and bus transportation. Coal replaces petroleum in chemical production. As prices rise, it becomes more economic to mine and drill marginal petroleum provinces. Supply rises as the price rises. “Peak petroleum” has been cited numerable times in the past, yet it has never materialized.

    On the question of sovereign debt, one might ask what currency is a US treasury note denominated in? U.S. dollars. What prevents the production of more U.S. dollars? Nothing whatsoever. Where's the problem? Likewise for the “deficit”. As long as confidence remains in the U.S. dollar, borrowing will continue. If it becomes an issue, the U.S. simply retrenches; its assets and overseas holdings dwarf all alternatives. Consider what would happen to China if the U.S. ceased purchasing goods from the PRC. What alternative does China have, except war in such as scenario?

    Ireland provides a mini-example of the accommodations that nations make, internally and extra-nationally. The UK is a major creditor to Ireland; it has made concessions. Likewise Germany. Trade is the means by which Ireland will recover; that along with emigration and remittances from emigrants. Deficits tend to be transitory. Canada in the 1990s is an example of this.

    Petroleum is merely an input factor, and not the most important factor at that.

  • Billy Ruffian

    Jeb Ruffin = Jeff Rubin's alter Ego. Dissembling and perfidious backslapping?

  • Billy Ruffian

    Exxon pays more money into the US tresaury than the bottom 50% of ALL US taxpayers. Shouldn't many of us be thankful and wish them and the many other oil companies well ; and more and successful drilling?

  • Billy Ruffian

    The case for peak coal was eloquently made in 1840. It never happened. Matt Simmonds the latest and most eloquent speaker for peak oil was found dead last year in his hot pool under mysterious circumstances. Doesn't this tell you something?

  • Abitibidoug

    Quote: Conservation since most Americans and other consumers could delete much of the crap they purchase without pain.

    I couldn't agree more, and that goes for Canadians a well. About 20 years ago I was working for an electric utility and the lunch time discussion turned to how the utility will have to increase generating calacity to meet future demand increases (which has happened since then). An older guy in the crew (late 50's) spoke up and said: do you know what the problem is? We consume too much! Great words of wisdom, and as Rojelio said, quite true.

  • Billy Ruffian

    With Zachary getting less than 10 mph in his F-350 it is not worthwhile preaching a parable to him!

  • Billy Ruffian

    If Garth Turner is wrong for one more year he should be made head of the Liberal party. Next candidate could be J R!

  • http://smarteconomy.typepad.com Walter Derzko

    Read Zbigniew Brzezynski and the Grand ChessBoard….I bet that we will see $60 -$70 pbbl oil before we see $200 pbbl oil in 2011.

  • http://smarteconomy.typepad.com Walter Derzko

    Oil Price predictions for 2012
    US EIA Jan Outlook: Sees Oil Prices At $99 By End-2012 > http://imarketnews.com/?q=node…

  • http://smarteconomy.typepad.com Walter Derzko

    US EIA Jan Outlook: Sees Oil Prices At $99 By End-2012 > http://imarketnews.com/?q=node…

  • http://smarteconomy.typepad.com Walter Derzko

    Banks make as much money in a crash or more then they do in boom times (CDS and Derivatives markets)

  • Abitibidoug

    I hope you're right. With oil now at about $90 per barrel and expected to go higher (and it most likely will in the long term) that could present a buying opportunity for energy stocks or funds that invest in them.

  • Billy Ruffian

    This is a trashy paper built on baseless assumptions and faulty projections. It appeals to the mindless warmists like Cleitophon who thankfully has been quieted since being committed. Global climate disruption…really!

  • Billy Ruffian

    I agree with you and would put heavy money on it. Zachary has to be kept off the road, however, to better the odds.

  • Billy Ruffian

    When oil hits $60 buy Suncor and related companies for maximum leaverage.

  • Billy Ruffian

    “You are right as usual.” ….More like” You are left as usual.”

  • Rojelio

    No.

  • http://smarteconomy.typepad.com Walter Derzko

    Jeff Rubin doesn't factor in the roll of geopolitics enough that drive oil prices up and down
    Remember that oil price manipulations are a geopolitical tool or weapon that was successfully used by the USA (Zbigniew Brzezynski and the Reagan government) in an attempt to bankrupt the former Soviet Union. It worked.

    A review of the book: The Oil Card; Global Economic Warfare in the 21st Century by James Norman states:

    The book assembles a now well-documented chronology of how the US and its allies, including Saudi Arabia, pushed down oil prices dramatically in the 1980s, and kept them low for a decade. It was a concerted and stunningly successful effort to break the former Soviet Union by depriving it of desperately needed hard-currency income.

    It then raises the question whether those same price-control levers have lately been pushed in the opposite direction to rein in another target: the oil-short Peoples Republic of China. Contrary to popular perceptions, media commentary and official explanations, the book methodically lays out the geopolitical logic and the market mechanisms behind the stunning 12-fold run-up of oil prices from 1998 to mid-2008. It also offers an explanation for the sudden price drop from almost $150/barrel to under $100 as Russia again flexed its muscle by invading Georgia.

    This timely and unorthodox analysis offers a clear and compelling explanation for the huge and otherwise unjustified gyrations in oil and other commodity prices in recent years. It also contains unique viewpoints on the reasons behind the US invasion of Iraq in 2003 and the fall of Russian oil major Yukos. The book will appeal to a broad audience—from students and practitioners of geopolitics to hard-pressed consumers and energy producers wondering how long windfall prices can defy gravity.

  • Billy Ruffian

    You must attend the same elementary institution as Cleitophon. Unable to draw a reasonable conclusion from simple facts.

  • Abitibidoug

    If you read Garth Turner’s blog, you’ll see his ideas of how Canada’s real estate market is still in a bubble (same is true for Australia) and will correct sooner or later is based on sound reasoning with facts and figures to back it up. When there is a bubble of any kind, it is absolutely IMPOSSIBLE to predict how high it will go, when it will correct, and how low it will go during the correction. How many people predicted ahead of time the NASDAQ would go slightly above 5000 in early March 2000?

    As for Garth joining the Liberal party, he was a Conservative and quit politics because of many disagreements with Steve-O and Flapperty. From the start, Garth thought these 0/40 mortgages (equivalent to the American sub prime mortgages) were a bad idea and voiced his opposition. He was ignored, and that’s why we are in the situation of over valued real estate in many cities that could come back to reality any time now. Garth left politics, and now serves the Canadian public better than ever before by trying to help people out with their finances. As for politics, former Ontario premier Bob Rae was totally right when he said it’s a blood sport.

  • Billy Ruffian

    Could you show me where the Liberals and NDP ever voiced opposition to the 0-40 mortgages? You should be more polite to your political leaders and address them properly.

  • Billy Ruffian
  • Abitibidoug

    I don't know who voiced opposition to the 0/40 mortgages other than Garth Turner and some well informed economists. I'm sure Mark Carney also believes, in retrospect, it was a bad idea given his dire warnings recently of how Canadians are carrying so much debt.

    As for the politicians, do you remember the early 1990's when Canada's debt was dangerously high and which government dealt with the problem? It was the Liberals with Jean Chretien as prime minister and Paul Martin (who later became prime minister) as finance minister that tackled the debt and got Canada’s finances back in order and not the Conservatives. That’s why I didn’t vote for the Conservatives.

  • Billy Ruffian

    As soon as the Conservatives get a majority you will see debt cutting in earnest. Next spring perhaps. Will you be voting for debt cutting?

  • Abitibidoug

    I'll vote for debt cutting, as the British government is starting to do now. Sure, it will cause some hardship, but it will be far worse if dealing with the debt problem is postponed longer. As for whether or not the Conservatives get a majority, time will tell.

  • Billy Ruffian

    The Greens will kill the Liberals and NDP and the Conservatives will prevail. They should cut corporate taxes on oil sands production and other companies to near 0 and increase the GST. There will be a boom of unprecidented and the CDN$ will soar. Then Canadians can buy out the rest of the world and oil would pay for everone's pension.

  • Bob Curry

    Reading a recent flyer from my local Conservative MP – I read that our current Government's Transboundary Waters Protection Act would prohibit the export of bulk freshwater, and “send a message; Canada's freshwater is not for sale ” Isn't this misleading in that every barrel of oil exported to the US has an umbilical connection to contaminated waste “produced water” many many times the volume of oil extracted – Bob Curry Gibsons BC

  • Billy Ruffian

    Every log from your parts also consumes many times the volume of water and by extension so does dimensional lumber and furniture. Should we stop permanently exporting these items based on this umbilical cord connection. I believe your local economy has already had a taste of this.
    Oilsands extraction recycles 80%+ of water. Any contamination is a figment of the green lobby propaganda.

    We should also consider exporting water rather than being so selfish. This could alleviate problems in many parts of the world. The selfish left will have none of this, however.

  • Billy Ruffian
  • http://smarteconomy.typepad.com Walter Derzko

    Update of Joule biotech that has produced GM bacteria that make gasoline from CO2 and sunlight

    The Globe and mail today ran a story on Joule Unlimited (previously Joule Biotech) which has patented a genetically modified bacteria E.coli, that can convert CO2 (carbon dioxide) using sunlight into hydrocarbons including gasoline and diesel ay about $30 per bbl. (see http://www.theglobeandmail.com…/)

    I first alerted smart economy blog readers about this here http://smarteconomy.typepad.co… in Nov 2009.

  • Imrich

    Oil to pay down debt? Can't be done! Creditors only want money, and as long as every penny in, virtually the entire world, is borrowed into existence by private banks (how can you borrow without incurring debt?), trying to pay off a debt with a debt is impossible, or is that practice actually taught in school as a stable fiscal monetary policy?
    Government, by Canadian law, at least, is solely responsible for currency and coinage, but has turned that authority over to private banks; if a country has a central bank, it is in the same boat – all money is BORROWED into existence. How can anyone pay off a debt with a debt?
    We should be demanding our Government take back its authority, instead of playing the smoke and mirror game of looking at this industry or that, this natural resource or that. A country's money should be based on the production of its people, not some other substance that, control of which, can be obtained by any person, institute, or group. Governments are supposed to be instituted for the benefit of the people who instituted them; private banks benefit at the expense of the people who did not institute them.
    Let's get on topic here, realize what the real problem is, as Parliament was trying to do as far back as 1938, and do something about the real problem.
    Again, the real problem is that private banks create money out of debt. Government has the authority to print its own money, for the benefit of the people, and SPEND that money into circulation; when Government does that today, it does it with debt-based money, not equity-based money.
    Using oil to pay off debt? How? Pay off a debt with a debt? How? I would love to have someone explain how to pay off a debt with a debt!
    Ron Richardson
    c/o 235 Cassandra Blvd
    Sarnia Ontario
    N7S 0A3
    imrich@cogeco.ca
    see also http://www.freedomfromdebt.org

copyright © 2009 Jeff Rubin. All rights reserved.