Submitted by Adam Taggart via PeakProsperity.com,
Geologist Arthur Berman explains why today’s low oil prices are not here to stay, something investors and consumers alike should be very aware of. The crazy-low prices we’re currently experiencing are due to an oversupply created by geopolitics and (historic) easy credit, not by sustainable economics.
And when the worm turns, we are more likely than not to experience a sudden supply shortfall, jolting prices viciously higher. This will be a situation not soon resolved, as the lag time for new production to come on-line will be much longer than the world wants:
The same things that always drive prices in the end it’s always about fundamentals. The markets are peculiar and they change every day. But the fundamentals of supply and demand at some point markets come back to those and have to adjust accordingly. Not on a daily basis, maybe not even on a monthly basis. But eventually they get it right. So this oil price collapse is really straight forward as far as I can tell, and it has to do with cheap stupid money because of artificially low interest rates that resulted in over-investment in oil — as well as lots of other commodities that are not in my area of specialty, but that’s what I see. And over-investment led to over-production and eventually over-production swamped the market with too much supply and the price has to go down until we work our way through the excess supply.
Now the wrinkle in all of this is that because the supply excess/surplus was generated by debt and a lot of correlative instruments, the problem is that the companies and the countries that are doing all this over-production need to keep generating cash flow so they can service the debt, which means they have to continue producing pretty much at the highest levels they possibly can which doesn’t really allow very much room for reducing the surplus. So that’s piece number one and then there’s the demand side. So the thing that drove all of this over investment and over production were high prices. And after a while people get tired of high prices and we see a phenomenon called demand destruction or you know as Jamie Galbraith calls it the choke chain effect. You know your dog runs out on a leash, eventually you know it stops and he chokes and so we’re dealing with that. People have changed their behavior because of high prices and then we add to the fact that people just change their behavior. I mean young people aren’t driving as much as they used to, they spend their time in a – you know on a smart phone more than they do in a car. We’ve got climate change issues. There’s considerable momentum toward cutting back on fossil fuels. Add it all together, demand is down, supply is up, it’s a bad situation…
We started this conversation with your important observation that we’re only talking about a million or million and a half barrels a day of oversupply. So we could go from over-supply to deficit pretty quickly, because we’re not investing in finding that additional couple of million barrels a day that we need to be discovering. So we’re deferring major, major investments. We’re not just deferring exploration; we’re deferring development of proven reserves. Capital cuts across the world represent 20 billion barrels of development of known proven reserves. And so we will get to a point, and we will, we most certainly will, where suddenly everybody wakes up and says “Oh my God we don’t have enough oil! We’re now half million barrels a day low.” And what will happen? The price will shoot up. That’s the way commodity markets work. And everybody will say “Whoopee! Let’s get back to drilling big time.” Well there’s a big lag. There’s a huge time lag between when the price responds and people actually get around to drilling and they actually start bringing the oil onto the market and it becomes available as supply, because they’ve been asleep at the wheel for you know for how many months or years. And so you know you can’t just turn a valve and all of a sudden everything is okay again
Click the play button below to listen to Chris’ interview with Arthur Berman (56m:07s)
Heh, assuming the economy survives and we will be able to buy oil. ” demand is down, china is in a downturn,a third of americans are unemployed, where will the demand come from to drive back up oil prices ? Fool is living fools paradise.
War.
I understand what this huckster is driving at–but many of his points are wrong or narrow at the least.
I can think of a half dozen scenarios where oil demand NEVER goes back to 2007 levels ( reduced population = reduced demand to cover several scenarios).
The “choke chain” analogy to describe why consumers are “using less oil” was pretty off the wall and nonsensical.
Ultimately, he had me rolling my eyes with the word “MUST” in his title of the article–I know a person who suffers with BPD and always uses words like “must, only, just, the greatest, the best, the worst ever…”.
Hey Adam and Arthur–“must” means that there is no possible scenario where oil does not rise in cost ( as measured by humans under our current monetary system.)
If there is anything you would want to invest in right now, oil is it. Until the next great thing comes along anyway.
” Capital cuts across the world represent 20 billion barrels of development of known proven reserves. And so we will get to a point, and we will, we most certainly will, where suddenly everybody wakes up and says “Oh my God we don’t have enough oil! We’re now half million barrels a day low.” And what will happen? The price will shoot up. That’s the way commodity markets work. And everybody will say “Whoopee! Let’s get back to drilling big time.” Well there’s a big lag. There’s a huge time lag between when the price responds and people actually get around to drilling and they actually start bringing the oil onto the market and it becomes available as supply, because they’ve been asleep at the wheel for you know for how many months or years. ”
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When we speak of the “free market,” it’s not just feel-good nonsense noise, but rather “free” in the sense of *adaptive,* as in unhindered by top-down normative “I’m from the government, you didn’t build that, and I know best how you should run your business” political ordination.
What you’re seeing in the oil and other commodity markets is a *lack* of freedom in precisely this sense, efforts to politically control these markets not just directly by way of quotas and subsidies and set-asides and all the rest of that corporate socialist shit but indirectly by way of currency debauchment (“quantitative easing”) and other banksterism.
The premise to be borne in mind is that politicians (and their tax-feeding bureaucrat underlings) have no fucking idea of how to run a division-of-labor economy. All they understand is that they can carrot-and-stick productive people into following orders; they don’t know shit about what orders to give. Limited information, unlimited arrogance. Hayek’s “knowledge problem.”
Thus the marketplace in petrochemical fuels, liquid, solid, and gaseous, all of which needs to have government “guidance” removed.
Preferably by firing squad or some equally gaudy exemplary demonstration that the productive sector of society has fucking well totally HAD IT with these shitwads.
When the tides of war sweep in, oil will spike higher than ever.
The only question is whether it will be a leading indicator or as a result-of said war.
The cure for low prices is low prices.
The cure for high prices is high prices.
50% of Austrian Econ. in two sentences.
BTW, also 100% true.
Arthur Berman is a wise man on this subject. He’s been at it for over 3 decades. It may take some time, but he will prove me right about fracking and energy independence. And Admin wrong.
Oil and gas production are CRITICAL national assets. Right up there at the top of the list. Way ahead of bullshit national defense projects such as the F-35 or the next generation of Ohio-class nuclear subs. Way, way ahead. The more energy we can produce here in this country, the less vulnerable we are to responding to foreign events such as a major war in the Middle East.
My dream end game on near total energy independence is this: if we have to import ANY oil, it would be from one, and only one, foreign country. I’ll leave it to readers of this comment to guess which country that would be. First correct answer wins a free week’s stay at the Banff National Park Resort in Alberta, Canada. Heh.
The only way we can achieve temporary energy independence is for the non productive population to die off. Then all bleeding eventually stops as we run out of stored solar energy..
Canada.
no fracking
Admin, what are your conclusions based on that chart. Mine are that the stronger balance sheet companies will buy up the small or weak ones for pennies on the dollar. Thoughts?
Mike
To me, that chart proves there was massive malinvestment because any company could get cheap debt. I think one third of all oil exploration companies will go bankrupt in the next two years and exploration for new oil will plunge. Berman will be right. All of a sudden there won’t be enough supply to meet the demand and prices will rise back to $100.
MRO for instance. Debt ratio .8. A/L = 2.6. Equity/Market cap 3.1. Cash pretty much equals current liabilities, but on pace to lose 2 billion this year.
Oil is always boom or bust.
There are a lot of factors that go into each boom and each bust and they aren’t always the same factors, but oil is always a boom or bust industry with very few stable growth periods involved.
Suzanna says:
“no fracking”
Let me break it to you
Fucking auto posts. Once again.
Suzanna says: “no fracking”
Let me break this to you as gently as I know how, Suzanna. You’re a world class dumbass.
There is nothing, save for a sufficient national defense system, more important to a modern nation than a reliable and safe supply of energy. If you can’t properly defend your energy supply, or whatever else you have, someone will try to take it from you sooner or later. Violently.
Energy is every bit as important in a modern nation as water and food. Co-equal. And if we have to get natural gas and oil through fracking, so be it. One more thing: think more nuclear power plants. Lots of them. Greatly reduces our dependence on oil and natural gas with the bonus of shoving it up the Warmers’ asses on the bogus carbon dioxide issue.
There you go, Suzanna. Fixed it for you in two paragraphs. You’re welcome.
SSS writes: “Energy is every bit as important in a modern nation as water and food. Co-equal. And if we have to get natural gas and oil through fracking, so be it. One more thing: think more nuclear power plants. Lots of them. Greatly reduces our dependence on oil and natural gas with the bonus of shoving it up the Warmers’ asses on the bogus carbon dioxide issue.”
I’d say that _one_ paragraph puts the essentials pikestaff-plain.