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Page added on September 6, 2016
Art Berman: Central Bankers Don’t Understand – The Economy Runs on Energy, Not Money
The following is a summary of our recent interview with Art Berman, which can be listened to in full on our site here or on iTunes here.
There’s a lot of confusion when it comes to energy markets and the idea of peak oil, according to Art Berman, a well-known geological consultant, director of Labyrinth Consulting Services and also director of the Association for the Study of Peak Oil and Gas in the US.
This time on Financial Sense, we spoke to Berman about his take on oil markets and how we need to be thinking about the most traded commodity in the world.
Peak Oil Is Not About Running Out of Oil
“Peak oil” is an unfortunate term we’re unlikely to escape, Berman said but is also entirely inaccurate.
“It has nothing to do with running out of oil,” he said. “That’s the first misconception. Peak oil is about running out of affordable oil.”
By the end of the 20th century, Berman explained we had gone through most of the easily accessible, cheap oil available around the world. As a result, production has been driven to explore for more difficult to extract deposits.
“Those are all perfectly legitimate sources of oil, but because of the environment, the depth, the risk of the cost, all of a sudden oil got a lot more expensive,” Berman said.
This is the heart of the issue, as oil prices are the determining factor when it comes to peak oil. In the 1990s, in terms of 2016 dollars, oil was around a third to a quarter the price it costs today to find and produce, Berman stated. As a result, the cost of everything that comes from oil is three or four times higher than it was just a couple of decades ago.
“From my perspective, the economy runs on energy, and money is nothing more than a call on energy,” Berman said.
Oil is the master resource right now, Berman explained. The current weak economic growth we see around the world is a direct result of this, Berman added.
In Terms of Growth, It’s All About Energy Prices and Excessive Debt
Between higher energy costs and unsustainable levels of debt in the world, Berman isn’t surprised we’re observing slow growth.
In Berman’s estimation, there is no “Goldilocks” price for oil. For example, if the price of oil has to be $80 for all companies and countries to remain profitable, given the weakness of the global economy, he thinks that would put the world into recession.
During the last recession we were able to squeeze growth out of the economy with interest rates close to zero, but as a result, debt levels skyrocketed.
“If I’m an investor, and I’m used to making 6 or 7 percent (on investments)…and all of a sudden, what can you get on Treasury bonds today, a percent and a half? …I’m not very happy with that anymore,” Berman said.
As a result, hundreds of billions of dollars have flowed to oil and gas companies because investors are hungry for yield, which created a bubble.
That’s what we saw when oil hit $100, Berman explained. There was an outsized flow of capital into the US and to some extent Canadian oil and gas development.
“It’s self-defeating to try to understand these big trends in the economy if you don’t think in terms of the fact that energy really is the economy and is not some secular topic,” Berman said. “It underlies and interrelates to virtually every important sector, certainly of the economy, if not the civilization.”
31 Comments on "Art Berman: Central Bankers Don’t Understand – The Economy Runs on Energy, Not Money"
HARM on Tue, 6th Sep 2016 6:59 pm
No, it’s Berman who doesn’t “get it”. There are two economies now: the so called “real” brick-and-mortar economy (Main Street), which –much like the working class– is slowly dying off and is being marginalized to irrelevance. And then there’s the new anything-goes .1% economy that runs on hopium, greed and BS. There is no shortage of BS, greed or hopium and there never will be –they are unlimited infinitely renewable resources. As Karl Rove succinctly put it, “We create our own reality”.
HARM on Tue, 6th Sep 2016 7:06 pm
“Credit”, much like it’s cousin “money”, has no physical constraints. Central banks don’t even need to print scrip or mint coins anymore –they can conjure up all the “money” they want for themselves in microseconds. And what’s more, there no longer seems to be any penalty against them doing so. The inflation beast is tamed and the bond vigilantes are nowhere to be seen.
For ordinary people the situation is, naturally, quite different. You and I face a reality where “money” is a scarce resource, even though there are bountiful opportunities to go into debt at usurious rates of interest.
Two economies, two realities.
Plantagenet on Tue, 6th Sep 2016 7:13 pm
Berman is exactly right that the economy runs on energy. As the easy oil is used up and EROI on new oil declines around the world, real GDP growth gets harder and harder to attain.
Cheers!
Truth Has A Liberal Bias on Tue, 6th Sep 2016 7:21 pm
In Q1 2016 the US economy produced 64 billion in GDP and accrued 644 billion in private and public debt. That’s about $10 in increased debt for every dollar of ‘production’ (flipping mortgages, selling financial services, financing F150’s, a bit of weapons manufacturing). Once China declares its gold reserves in October and the world discovers China has more than the USA we’ll see US treasury bond interest rates rise and the debt pyramid will begin to implode.
Anonymous on Tue, 6th Sep 2016 7:36 pm
Brilliant observation there Captain Plantaobvious. 4 stars.
HARM on Tue, 6th Sep 2016 7:41 pm
“Once China declares its gold reserves in October and the world discovers China has more than the USA we’ll see US treasury bond interest rates rise and the debt pyramid will begin to implode.”
I’m not holding my breath. I’ve heard countless ghost stories about invisible bond vigilantes, goldbug/prepper armies, and how hyperinflation is about to strike. Any second now. Yet nothing happens, and the same gang of rich old guys get even richer while the status quo just rolls on.
For the .1%, money, like power, is unlimited. They obey no one’s rules but their own and answer to no one but themselves.
‘Ol Turd Blossom put it best:
“We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality —judiciously, as you will— we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors -and you, all of you, will be left to just study what we do.”
HARM on Tue, 6th Sep 2016 7:44 pm
When oil EROEI gets too low, the elites will simply switch to burning Little People. We have plenty of fat (the new “whale” oil harvesting industry?) and 89 million more of us get added every year. Truly renewable.
Curt Kurschus on Wed, 7th Sep 2016 5:25 am
The powers that be shall do all that they can to keep things going for as long as they can, but if the flow of affordable energy is not enough to support growth, then growth shall cease. Right now it looks like we are running out over the edge, with some economies being sacrificed to support that levitation trick. However, now that the shipping industry is in strife, the progress of the process of collapse may very well quicken. There is no point in having more easy credit available to buy stuff if nobody can afford to deliver stuff. Which in itself is both partly caused by and exacerbates the issue of more and more people being unable to afford to borrow and spend or spend their stagnant or declining incomes.
onlooker on Wed, 7th Sep 2016 5:35 am
If the Central Banks admit that it all comes tumbling down, asset prices, lending, investment , consumer confidence. Basically the whole house of cards
Dredd on Wed, 7th Sep 2016 6:17 am
“As a result, the cost of everything that comes from oil is three or four times higher than it was just a couple of decades ago.”
The same danger applies to the delivery of resources (The Extinction of Robust Sea Ports – 8).
peripato on Wed, 7th Sep 2016 9:48 am
@ HARM
B.S. may be infinitely renewable, but not oil.
peripato on Wed, 7th Sep 2016 9:51 am
@ Curt Kurschus
“…if the flow of affordable energy is not enough to support growth, then growth shall cease.”
Growth has already ceased, that’s what all the money printing, ZIRP and accounting baloney is masking.
peripato on Wed, 7th Sep 2016 9:53 am
@ onlooker
“If the Central Banks admit that it all comes tumbling down, asset prices, lending, investment , consumer confidence. Basically the whole house of cards”
They can choose to ignore reality, but they can’t avoid the consequences of doing so forever…
Boat on Wed, 7th Sep 2016 12:52 pm
Shell Finds Massive Nat Gas Field In Egypt
Apache To Develop New Texas Oilfield, Raises CAPEX
JGav on Wed, 7th Sep 2016 1:00 pm
Well, credit where credit is due: Yeah, Planter,here’s another example of something we agree on – hurrah!
And Truth – nice to read somebody who understands the importance of the bond markets! As for the Chinese accurately revealing their gold reserves in October, we’ll see …
JGav on Wed, 7th Sep 2016 1:06 pm
Curt and Peripato,
Always pleasant to hear new voices here (‘new’ to me at least), especially when they’re not trolls, and you obviously aren’t.
I found the above comments from both of you interesting and relevant. Oh yes, reality’s always gonna be there whether it’s ignored short-term or not.
HARM on Wed, 7th Sep 2016 1:20 pm
“They can choose to ignore reality, but they can’t avoid the consequences of doing so forever…”
Maybe not forever, but there’s a pretty wide spread of time between “right now” and “forever”.
“Markets can remain irrational for longer than you can remain solvent”
“In the long run, we’re all dead”
–John Maynard Keynes
JGav on Wed, 7th Sep 2016 1:25 pm
To extend a bit: ignoring reality for financial or political gain is clearly not a winning strategy in the mid or long-term. Doesn’t matter whether the subject is (net!)energy, climate weirding, biodiversity loss, oceanic fouling, economic globalization (supply chains, shipping …), resource depletion etc.
These are all cans that have been kicked down the road for quite some time now – they’re starting to get kinda worn out.
When reality bites, it can be a real bastard! I don’t pretend to know exactly when, or exactly how fast or how far a systemic unravelling of such proportions will occur … but I do get a sense that it has already begun in subtle, hard-to-pinpoint ways. Hang on to your hats folks, I hope you’re better prepared than I am.
HARM on Wed, 7th Sep 2016 2:25 pm
9 years ago, as the aftermath of the global housing/credit bubble and oil bubble collapse played out, I would never have believed that in less than 10 years house prices would have equaled –much less surpassed– their 2007 peaks. I would also have never believed that oil production would have exceeded the late 2000’s peak, or that fracking would drive U.S. oil production to a second peak (something Hubbert could not have foreseen), or that we would be experiencing an oil glut with prices ~$35/BBL.
I know this goes against the grain here, but the fact of the matter is, central banks are far more powerful and capable of kicking that can than anyone here imagined. People here –including me– have routinely underestimated the ability of the .1% to maintain the status quo and keep the game going.
Yes, physical limits will eventually impose themselves and “oil” production must eventually crest and fall, but… getting the exact timing right is a real b-tch, and you underestimate TPTB at your own peril.
As JMK said, “In the long run, we’re all dead”. It’s hard to maintain a state of constant vigilance for a Collapse that never comes (and may never come in my lifetime). If the collapse hits 10 years after I’m dead and buried, then really, what’s the point? Why prep for a Doomsday/reckoning that keeps on getting deferred indefinitely?
Davy on Wed, 7th Sep 2016 2:45 pm
Harm, confidence is liquidity is sustenance. None can be ignored. Central banks are facing limits and diminishing returns but have continued to show an uncanny ability to sustain the status quo despite losing control. Tell me if this would be possible with loss of confidence? Would confidence hold if people were not sustained? If liquidity froze confidence and sustenance would vanish. This is a catch 22 dilemma because these conditions don’t support each other necessarily. If one if allowed too much room to grow the others suffer. It really is a balancing trick. Tell me how long a Ponzi Scheme stays balanced. It does until it don’t. IOW something gives and often the reasons are pointless.
Apneaman on Wed, 7th Sep 2016 2:58 pm
HARM, I hear ya and have some similar thoughts, but we should consider the the system itself is a behemoth. Many great civilization have had institutions that provide some form of checks and balances and that is a big part of what makes them great. The super elite have quite successfully done everything in their powers to corrupt and hollow it out, but it’s still sort of standing, on the ropes, but not yet down and out. When the institutions and checks and balances get to a certain point of dysfunction or are gone entirely then we will have totally collapsed. The elite are clever like rats or weasels, but they are not great men (we do not produce them at this time) and if you ask me what I’m most impressed with, I’ll tell you it’s the resilience of the system against the ceaseless onslaught of that small psychopathic elite. Hey, if the system is still standing it’s not because of them, but in spite of their non stop efforts to corrupt and destroy it. All they care about are their own interests and sometimes those will just happen to align with those of the commoners or national interests. I don’t think that collection of psychopaths give a shit about anything other than their own power and mo money as a means of keeping score amongst each other. I don’t believe they deserve any credit – they deserve both barrels is what they deserve.
HARM on Wed, 7th Sep 2016 3:38 pm
@Davy & Apneaman,
Thanks. I get a little tired of the quasi-dogmatic certainty about when/how the world is going to collapse, followed by steadfast denial and refusal to reexamine old assumptions when it doesn’t.
No, physical limits to growth have not been repealed. No abiotic oil is not going to refill depleted oilfields. Even so, there are a billion other factors that can easily shift or defer the date of reckoning. I’d just like to see some acknowledgement of that.
onlooker on Wed, 7th Sep 2016 3:45 pm
“Tell me how long a Ponzi Scheme stays balanced. It does until it don’t. IOW something gives and often the reasons are pointless.” A ponzi scheme will hold until one or more players see the end is approaching
Davy on Wed, 7th Sep 2016 4:44 pm
Yea, onlooker, they most often end in tears. Have you ever heard of a happy ending Ponzi? I know occasionally a thief gets away with the loot but usually not. I love that movie “Thunderbolt and Lightfoot”! I know that was not a Ponzi but the thief got away with the loot! Lol.
shortonoil on Wed, 7th Sep 2016 5:13 pm
” A ponzi scheme will hold until one or more players see the end is approaching
When a complex system will transition into a chaotic state can not be predetermined. Neither can the outcome of that transition be predetermined. That is the situation that we are now facing. It is pretty evident, however, that the present system is being held together with the modern day equivalent of duck tape, and bailing twine. It is self evident that it is matter of when, not if. When it does arrive, the trigger that sets it off, will probably surprise us all.
onlooker on Wed, 7th Sep 2016 5:26 pm
True Short my explanation is simplistic. However, I was alluding to the reactionary forces at play and how it will act like a stampede as the System rapidly loses the confidence of its players. The actual mechanism and timing of the trigger event(s) is very difficult to pinpoint.
Dave Thompson on Wed, 7th Sep 2016 8:28 pm
Great comments from all. When can we talk about Art Berman’s podcast?
shortonoil on Thu, 8th Sep 2016 7:41 am
““Peak oil” is an unfortunate term we’re unlikely to escape, Berman said but is also entirely inaccurate. “
The term Peak Oil appeared because people looked at Hubbert’s curve, and “assumed” that the back side of the curve would look like the front side. Hubbert never had any guarantee as to why that would be true, and neither did his followers. In actuality, oil production is an energy producing process, and that is what determines what the back side of that curve will look like. Most are aware that the petroleum industry is an energy industry, but again they “assumed” that the energy curve would look like the volumetric curve. It doesn’t
Berman once again skates around the issue of separating Gross Energy and Net Energy (Deliverable Energy in our report). Gross Energy is irrelevant if there is an insufficient amount of Net Energy available to power the economy that is required to produce the demand for the oil. That is the very situation we find ourselves facing.
Until that issue is addressed the industry will be unable to explain why inventories are continuing to build, and why the price has fallen below the average cost of production. It will be unable to explain why the industry is incapable of replacing its reserves in a world soaked in oil.
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/icbkDFACM4iA/v2/-1x-1.png
After almost three years of rising inventories, falling price, and declining reserves one wonders how long analysts will continue to use methodologies that obviously don’t work any longer. It appears to be simply a matter of not letting a few facts get in the way of a preferred storyline. Insisting that every problem is a nail because all one has is a hammer will eventually result in the building falling down!
http://www.thehillsgroup.org/
Cloggie on Thu, 8th Sep 2016 7:58 am
“‘Ol Turd Blossom put it best”
I would swear it was Ron Suskind, not Karl Rove. who said that.
curlyq3 on Thu, 8th Sep 2016 10:39 am
Howdy and good morning Peak Oilers … I think of Dr Albert Bartlett and his celebrated lecture “Arithmetic, Population and Energy: Sustainability 101” which he was purported to have given over 1,742 times … he was very concerned with the exponential function and and how most of humanity does not understand how it relates to our finite resources here on our place in the cosmos … at some point a critical resource will be exhausted and collapse will occur … due to the lack of awareness of the exponential function, most of humanity will never see it coming
curlyq3
beammeup on Thu, 8th Sep 2016 5:34 pm
Harm wrote [I] “I know this goes against the grain here, but the fact of the matter is, central banks are far more powerful and capable of kicking that can than anyone here imagined. People here –including me– have routinely underestimated the ability of the .1% to maintain the status quo and keep the game going.
Yes, physical limits will eventually impose themselves and “oil” production must eventually crest and fall, but… getting the exact timing right is a real b-tch, and you underestimate TPTB at your own peril.” [/I]
Agree 100%. Since the days of The Oil Drum, it’s been my position that the system has enough inertia to stumble along for much longer than the vast majority of doomers give it credit. I also don’t buy into the “Zombie Apocalypse” version of global collapse, although it has certainly happened in specific locales. Those are discontinuities on a long, non-monotonic descent trend. That trend is likely to play out for much longer, as the world gets more crowded, dirtier and less civil as time goes on.
Within that backdrop it’s absolutely possible to work within the system to carve out some relative prosperity for you and yours. 15 years ago, many doomers were convinced the system would come crashing down imminently, so they bailed out to grow tomatoes in buckets and stockpile canned goods. In the intervening time, their contemporaries kept at it, got ahead, and are now much better positioned financially and logistically to survive the long descent that is well underway, and will likely continue.