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Page added on January 10, 2016
Arthur Berman: Why The Price Of Oil Must Rise
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
52 Comments on "Arthur Berman: Why The Price Of Oil Must Rise"
Davy on Sun, 10th Jan 2016 7:27 pm
“The same things that always drive prices in the end it’s always about fundamentals.” I would ask are there fundamentals anymore that one can comfortably rely on to make a statements like this. It appears like everything is coming apart and this macro unwind is creating new and different fundamentals.
twocats on Sun, 10th Jan 2016 9:29 pm
I would say that QEfinity and ZIRP/NIRP is what disrupted the fundamentals to begin with. Say what you will, capitalism is very good at price discovery (compared to other -isms) and we are seeing prices reasserting control.
makati1 on Sun, 10th Jan 2016 9:33 pm
Capitalism died when the first QE flashed onto the banks computer screens, to save the Empire. There has been a casino, not a stock market, since that first printing. The sooner the whole mess blows the better for all of us. Do it today and get it over with!
Bloomer on Sun, 10th Jan 2016 10:39 pm
The whales will swallow the small fish capturing their oil reserves and shutting down their production wells. When oil prices start to perk up the drilling rigs will return, but only after the whales have earned their handsome profits.
makati1 on Sun, 10th Jan 2016 11:33 pm
Bloomer, the whales are due for slaughter also. Assuming that this will go down like in the past is not taking into consideration the huge, unplayable debt and contracting economy of the world and especially the West. The whales will not be interested in paying the bills of the smaller fish and may have a difficult time raising the cash to do so even if they did. We shall see.
Davy on Mon, 11th Jan 2016 6:07 am
We just don’t know how things are going to turn out at this point. So much damage has been done economically since 08. The damage started long before 08 but that was the breaking point. Capitalism was “never was”. We always had an adapted capitalism. This adapted capitalism has increasingly become manipulated and driven to extremes. Normal price discovery and rule of law both civil and criminal has been breached. Moral hazard has been the name of the game ever since Clinton did away with Glass Steagall and the advent of digital financialization. Today it is psychopathic in nature.
We are in a new world of a mechanized system of corruption without even a head but many heads like a hydra. You cut off one and another appears. This is a systematic condition of a brittle relationship without answers. We are in a catch 22 of predicaments with an underlying energy trap and ecosystem failures human and natural. To talk about anything behaving with fundamentals in a normal way is just more of the same status quo groping.
No one want to admit we are friggen clueless all of us even the big boys. How hard has it been for the rich to get rich in recent years? Stupid could get rich when the market is in one big upward trend. Let’s not put our faith in stupid. We are now at physical limits of growth that is impacting our mental limits of growth. We are now trying to say we have an idea of what is ahead because, you know, “fundamentals”. There are no traditional fundamentals now in control. They are not gone just not in control. The fundamental in control is chaos and decay.
We can plainly see decay everywhere we look. With that said we can expect the fundamentals of dysfunction, irrational, and random. You would be better just going to the casino or the psychic for answers at this point. At least there are odds at the casino. Oil prices are in uncharted waters. We can say some fundamentals of supply and demand will be at work in what is left of our markets but we know little about the rest of the equation of drift and moral hazard. How long will it be until we throw up our hands and declare martial law? Then we will have some fundamentals.
Davy on Mon, 11th Jan 2016 7:57 am
“Oil Extends Slide From 11-Year Low as Hedge Funds Head for Exit”
http://www.bloomberg.com/news/articles/2016-01-10/oil-extends-slide-at-11-year-low-amid-signs-of-china-weakness
“China has torpedoed the hopes of the optimists,” David Hufton, chief executive officer of PVM Group, said in a report. “If the first week is anything to go by, we are in for a long, volatile and very exhausting year.”
Davy on Mon, 11th Jan 2016 8:06 am
“A Look to 2016”
http://www.economic-undertow.com/
“Energy deflation to take hold in 2016”
“The $64 trillion dollar question: ‘Is energy deflation under way’? If it is, get ready. It will be the biggest story of 2016 and years decades to come.”
“Energy deflation is similar to Irving Fisher’s debt deflation: a premium or ‘scarcity rent’ is attached to the price of crude. This manifests itself as a reduction in customer borrowing power; the price of crude cannot fall fast enough to offset the ballooning scarcity rent! In energy deflation, fuel prices are always too high for customers while the same prices are too low the drillers. The outcome is a vicious cycle: increased scarcity rent and self-compounding fuel shortages => greater scarcity rent!”
shortonoil on Mon, 11th Jan 2016 9:44 am
It now takes over 4 barrels of oil to do the same thing that one barrel did 45 years ago. Supply and demand is not likely to work very well unless those issues are taken into consideration. Obviously, no one is taking them into consideration. The industry has lost $2.3 trillion in annual revenue over the last 20 months. Prices have fallen by 68%, and still are not low enough to encourage much additional consumption.
The price of oil is now range bound as we have shown here:
http://www.thehillsgroup.org/depletion2_022.htm
The lower bound is the lifting cost to extract the oil, and the upper is the maximum affordability. The maximum affordability is a consequence of the fact that it is taking more oil to do the same thing. It is taking more, and more oil to power the production of a $1’s worth of goods and services. In 1970 it required 1.85% of world GDP to just extract the oil; by 2009 it was requiring 2.66%. By 2013 that had risen to 4.65% for all liquid hydrocarbons. These numbers do not include the cost of production that the producers do not directly pay for; such as roads, military, harbors, education, health care, environmental damage, and etc. and etc. It is just the producers up front cost of extracting the raw crude.
The world is investing more, and more of its total budget to produce petroleum and its products. It therefore has less and less of that budget remaining with which to buy it. With less funds to buy it, the price goes down. It is possible that the price of oil may rebound somewhat as shown in graph above. That rebound will not be enough to compensate for the losses that are now taking place; the price is range bound. The under laying problem is simply depletion. One would expect a geologist to understand that concept. Apparently, not many of them do?
http://www.thehillsgroup.org/
marmico on Mon, 11th Jan 2016 10:01 am
It now takes over 4 barrels of oil to do the same thing that one barrel did 45 years ago
Bullshit.
It is taking more, and more oil to power the production of a $1’s worth of goods and services.
Double bullshit.
twocats on Mon, 11th Jan 2016 10:01 am
Or it could have nothing to do with supply, demand, peak, China, fundamentals. This article does a good job of at least bringing up one critical issue: certain factors are only factors when oil is in a certain price range:
“Oversupply may have pushed oil prices under $60, but the difference between $35 oil and $55 oil is primarily the USD, in our view.”
http://www.zerohedge.com/news/2016-01-11/oil-tumbles-11-year-lows-after-another-bank-joins-20-crude-bandwagon
Apneaman on Mon, 11th Jan 2016 11:09 am
marmi, Bullshit & Double bullshit? That’s all you got left eh? They goes out with a whimper they do.
marmico on Mon, 11th Jan 2016 11:28 am
It ain’t my bald assertions.
Why don’t you help out the quart shy of oil and scour your doomer porn sites and cite evidence that it takes 48,900 Btus to refine one gallon of oil?
shortonoil on Mon, 11th Jan 2016 4:01 pm
WTI hit $31 today. The world now has a paralyzed petroleum industry. It can not replace reserves, rig count is still going down, demand is not responding to declining prices, and soon wells will begin to be shut-in as lifting costs can not be met. The impact will be very severe!
Boat on Mon, 11th Jan 2016 4:22 pm
Berman says,
Add it all together, demand is down, supply is up, it’s a bad situation
Ahhhh yes, the old demand is down to to so many factors. Yet the world production and consumption of oil and it’s products continue to rise. The doomers have taken over MSM or is it the other way around.
Boat on Mon, 11th Jan 2016 4:30 pm
Short,
It now takes over 4 barrels of oil to do the same thing that one barrel did 45 years ago.
I want one of them online PHD framed things on my wall. Online for how much Short? Hope my car doesn’t lose that 38 mpg. I love PO. You can read it all here.
Boat on Mon, 11th Jan 2016 4:35 pm
twocats,
Or it could have nothing to do with supply, demand, peak, China, fundamentals. This article does a good job of at least bringing up one critical issue: certain factors are only factors when oil is in a certain price range:
What you smoking. That’s drug talk. lol
Boat on Mon, 11th Jan 2016 4:54 pm
Short
WTI hit $31 today. The world now has a paralyzed petroleum industry. It can not replace reserves, rig count is still going down, demand is not responding to declining prices.
The world, repeat, the world continues to add production and consumption. When it does not I will be the first to tell you so.
Apneaman on Mon, 11th Jan 2016 5:12 pm
Boat, with all your fuel savings you can invest more into to the S&P 500. Careful, SPDR bites can be lethal sometimes.
Futures Signal More Losses After S&P 500’s Worst Week Since 2011
http://www.bloomberg.com/news/articles/2016-01-11/futures-signal-more-losses-after-s-p-500-s-worst-week-since-2011
JN2 on Mon, 11th Jan 2016 5:13 pm
Boat, please use quote marks, eg
>> The world, repeat, the world continues to add production and consumption. When it does not I will be the first to tell you so.<<
Thanks.
FWIW, the IEA agrees with you and shows both supply and demand increasing:
https://www.iea.org/oilmarketreport/omrpublic/
Apneaman on Mon, 11th Jan 2016 5:21 pm
Boat, apparently the lower price of oil is not translating into economic growth. Seems like the opposite in many regards. It’s almost as if oil does not drive the economy like it once did. Least not at these prices.
Retail Sales in Texas Plunge
http://wolfstreet.com/2015/12/14/retail-sales-in-texas-plunge/
Layoffs Expected to Continue in 2016 for Oil & Gas
http://houstonenergyinsider.com/?p=4550
Boat on Mon, 11th Jan 2016 6:22 pm
Apeman,
Why is it confusing to you that the highest cost producer will always lose market share to a lower one like Iraq, Russia, Saudi, Iran etc.
You seem to mix global and US production and consumption.
I for one do not look up Canadian data when talking about global production and consumption.
Apneaman on Mon, 11th Jan 2016 7:06 pm
That’s awesome Boat. I, for one do not look at things in isolation to shield my brain from sad realities. In a complex interconnected world, the price of rice in China matters to everything. Cherry picking confirms biases and your basket is full.
geopressure on Mon, 11th Jan 2016 7:34 pm
Short: “It now takes over 4 barrels of oil to do the same thing that one barrel did 45 years ago.”
Please elaborate, this should be amusing…
geopressure on Mon, 11th Jan 2016 7:40 pm
Art sounds like he’s really struggling to keep pushing his narrative in that interview… If you listen close to his voice, & the way that he answers a lot of the questions, you can tell that he isn’t being 100% straightforward (to say the least)…
GregT on Mon, 11th Jan 2016 11:01 pm
“When oil prices start to perk up the drilling rigs will return”
And who do you believe will pay for that oil Bloomer. Oil prices are still too high for economic recovery from the global financial crisis/great recession. Our economies are already circling the drain.
GregT on Mon, 11th Jan 2016 11:03 pm
“Please elaborate, this should be amusing…”
Hardly something to be amused about geo. Short has done his homework.
GregT on Mon, 11th Jan 2016 11:11 pm
Boat said:
“I want one of them online PHD framed things on my wall.”
You can always buy a pretend one if it makes you feel better Boat. You don’t have the smarts to earn a real one.
geopressure on Tue, 12th Jan 2016 1:57 am
“Hardly something to be amused about geo. Short has done his homework.”
He may have done his homework… It was just fundamentally incorrect…
Apneaman on Tue, 12th Jan 2016 2:50 am
Good eye or ear geo. You have all the hallmarks of a top notch FBI profiler. I feel safer knowing you’re on the case.
marmico on Tue, 12th Jan 2016 7:09 am
It was just fundamentally incorrect…
That’s an understatement. The model says that the oil well to car wheel EROI is 2. The model miserably fails the empirical test.
For the umpteenth + 2 times: Cite credible empirical evidence that it takes 48,900 Btus to refine one gallon of oil?
Davy on Tue, 12th Jan 2016 8:34 am
Marm, the point is more relevant than the details. The model can be discounted but not dismissed. You are fighting a losing battle against physics. Your cornucopian comments on the economy have gone quiet lately. Could it be you would look humorous being overly optimistic in today’s dangerous financial times? I think so. The same is true with Short’s model. Shorts model is very relevant and useful. It is still a model with uncertainty that can be discounted.
I see the economics of the global economy with the oil market included as having the most danger now. Poor decisions are and have been made. We are going to pay for these decisions. In the meantime Shorts model is playing out. It is a model of depletion and in that respect the model is a foundational representation of our existential economic survival. We are an oil based culture in an energy and growth trap. Short’s model is the best I have seen at addressing our predicament.
Nony on Tue, 12th Jan 2016 9:58 am
Berman says that total liquids (~90-94 MM bpd, global) includes products (he specifies jet fuel and gasoline) along with crude oil. This is wrong.
Total liquids=
*Crude and lease condensate
*Natural gas liquids (ethane, propane, butane, isobutene and plant condensate [pentanes plus]. Note that C2-C4 from refinery production are NOT included, nor is the naphtha cut.
*biofuels
*refinery gain
Products like gasoline and jet fuel are not part of total liquids. No, no, no. You would be way over 94 MM bpd if you added world production of gasoline and jet!
Outcast_Searcher on Tue, 12th Jan 2016 12:15 pm
Shortonoil said: “It now takes over 4 barrels of oil to do the same thing that one barrel did 45 years ago.”
Wrong, at least for developed countries. Energy intensity is falling. US example, per the EIA clearly shows this going back to 1980 with annual data here:
https://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=92&pid=46&aid=2
So in the US, overall, energy sources like oil are doing about twice what they were doing per unit as 45 years ago.
Globally, energy intensity is increasing because of BAU growth in third world countries. It’s not that energy is doing less — it’s that there is a much higher demand for it in third world countries as they modernize all they can.
And how about the primary use of oil as a transportation fuel? Does, as one example, the CAFE standard for the US auto fleet rising 5% annually mean oil is doing less? NO. Clearly it is doing about 5% more per year in its primary mission.
Statements like yours above show you don’t know what you’re talking about. Nice try to join the “we are doomed” crowd, though.
marmico on Tue, 12th Jan 2016 12:17 pm
The model can be discounted but not dismissed.
Bullshit. The model is an abject failure on the empirical net energy supply side.
For the umpteenth + 3 times: Cite credible empirical evidence that it takes 48,900 Btus to refine one gallon of oil?
Once that is answered I’ll deal with the net energy demand side.
That’s a piece of cake. A 2016 model year car uses 60% less net energy than a 1970 model year car.
Why you Cro-Magnons support the ETP model is your own “tribe” business.
Apneaman on Tue, 12th Jan 2016 12:52 pm
BP to slash at least 4,000 more jobs in face of oil downturn
http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/bp-plans-new-deep-staff-cuts-to-withstand-oil-price-storm/article28125903/
Davy on Tue, 12th Jan 2016 12:59 pm
Ok, marm, what is your explanation for oil depletion? Do you have an equation? Is it irrelevant? Short and I are not tribal enough that I would ignore a more accurate portrayal of the economic effects of depletion on oil and the economy. This is something obvious to many of us here. Btw I have asked you this before without a response.
Apneaman on Tue, 12th Jan 2016 1:07 pm
Economic mood darkens as rout spreads beyond oil patch
http://www.theglobeandmail.com/report-on-business/economy/businesses-outside-oil-patch-now-feeling-sting-of-commodity-price-rout-boc/article28105709/
marmico on Tue, 12th Jan 2016 1:08 pm
The oil Cro-Magnons have been calling for the end of the oil age for 100+ years. The oil Cro-Magnons are merely a subset of the Malthusian foodies for 200+ years.
Only Cro-Magnons know OOIP (Original Oil in Place), OOIP Net Recovery (NR) and Recovery Flow (RF), the tap as they say.
Technology has outpaced depletion since the beginning of the oil (foodie) era.
Apneaman on Tue, 12th Jan 2016 1:22 pm
marmi, when one reads original works, one can tell when someone else has not and simply keeps repeating think tank meme’s. You’ve never read Malthus and I doubt you have even read Adam Smith other than a few cherry picked, uncle Milton approved, quotes. Go play with your graphs.
Davy on Tue, 12th Jan 2016 1:32 pm
Marm, you didn’t tell me anything other than its a technology “Thang”. Sorry, who is then Cro-Magnon? At least offer me a fluff link. Why are you not preaching how good the enconomy is lately? We’re all those comments with fluff graphs a ruse?
Nony on Tue, 12th Jan 2016 2:00 pm
http://web.mit.edu/ceepr/www/publications/workingpapers/98008.pdf
“The cost and price of any mineral are constantly pushed in two opposing directions.
Depletion pushes the “supply curve toward the left, while growing knowledge pushes it rightward.”
Read it and think about it, Davy. There are a few parts where the author gets a little too cheerleader cornie-ish. Just look past that fluff for the meat. It is the point above, which is actually not purely cornie-ish, but has some peaker element to it.
Apneaman on Tue, 12th Jan 2016 2:06 pm
Growing bullshit.
marmico on Tue, 12th Jan 2016 2:16 pm
I’m telling you that The Quart Shy of Oil is a fuctard. The Cro-Magnon tribe can believe it or not.
For the umpteenth + 4 times: Cite credible empirical evidence that it takes 48,900 Btus to refine one gallon of oil?
Apneaman on Tue, 12th Jan 2016 2:43 pm
marmi, continually hammering away at one single point is a sure sign of a failed argument. You’re the king of logical fallacies. In this case, you are trying to create a false dilemma. If you can find one wrong answer or an error or anomaly, then you can disprove the very concept of peak oil, while proving the “truth” of econ 101. You are also hoping to discredit/embarrass short. You always do this. It’s why and what you do when you follow/stalk Berman and Rapier around the intertubes. I know the playbook marmi. I know all your little sockpuppet disruptor tricks. You’re not convincing anyone – just confirming the bias of your fellow true believers. More of whom are converting to reality enmass. The capitalism you know and love – it’s days are numbered and you know it. Whaw
Nony on Tue, 12th Jan 2016 3:15 pm
My marmi persona doesn’t stalk them. This one does.
Oh…and your point about my other half banging one thing would mean more if short had conceded the point and then marm just kept grinding it. But when you have someone who refuses to concede a clear error, than how can you even have higher level of discussions about things that are analysis, not detail.
Boat on Tue, 12th Jan 2016 6:37 pm
Apeman,
Lot’s of single points there dude. Like the world cant flourish unless there is 3% growth. Says who, you and Davey? It takes more energy to get oil out of the ground. Where, in Iraq, Russia? True fracking takes more energy but that is 5 million barrels a day out of 98? You doomers forget these small details. Like here comes the big crash. Like when dude. I could go on and on.
Apneaman on Tue, 12th Jan 2016 7:29 pm
You don’t know where 3% comes from? That is consider the ideal growth rate by econ 101, world bank, IMF and the other masters of the universe. Very basic stuff boat. And you don’t know it. This is what happens when you take short cuts and skip the foundational learning and go straight to the source that tells you what you want to hear. Clearly boat, you are just another internet/think tank schooled self proclaimed expert. I doubt you have even read a book on any of the topics discussed around here. You remind me of christians who throw out verse at every turn, but don’t have a clue as to the context. The biggest indicator of your ignorance boat is your complete avoidance of debt. Maybe you read some of the propaganda meme’s from the think tanks in the last few years claiming it doesn’t really count anymore. Poof! just like that the goal posts are at midfield and cornies eat it up like a big shit sandwich and throw hissy fits when a few of us won’t take a bite. The worse the daily bleeding gets the grander your clams of a bright future. The other day you said things have never been better and will be good for 10 years. Meanwhile even the MSM mouthpieces are sounding like doomers as the numbers come in. How many TRILLION has been lost so far boat? How much you lost boat? Long before the internet I have been listening to investors rationalize why their investments are a sure thing no matter what. I’ve done it too, but nothing is eternal except for wished and desire. The stupid money they call it. Motivated reasoning and sunk costs. Emotional investors.
Global stock index has lost $2 TRILLION this year
http://www.cnbc.com/2016/01/07/global-stock-index-has-lost-2-trillion-this-year.html
Apneaman on Tue, 12th Jan 2016 7:44 pm
Boat, take the virtual non productive bullshit out of the economic numbers and you an’t got much left. Trade used to mean actual physical goods, not “financial instruments” that make up 40% of the economy.
“Nowhere To Hide” As Baltic ‘Fried’ Index Careens To Fresh Record Low
“20% lower than the previous record low in 1986”
http://www.zerohedge.com/news/2016-01-07/nowhere-hide-baltic-fried-index-careens-fresh-record-low
Of course shipping is down if commodities are down.
Worst start to year for commodities since at least 1992, shorts at 10-year high
“Sure, 2015 was bad for commodities. So far, 2016 is even worse.
The Bloomberg Commodity Index, a measure of returns for 22 raw materials, has tumbled more than 4 per cent in 2016. That’s the worst start to a year since the comparable data begins in 1992.”
http://www.afr.com/business/mining/gold/worst-start-to-year-for-commodities-since-at-least-1992-shorts-at-10year-high-20160112-gm4jib
GregT on Tue, 12th Jan 2016 8:11 pm
“Like the world cant flourish unless there is 3% growth.”
The world will flourish just fine without 3% growth Boat. What won’t flourish is our monetary systems, our economies, and modern industrial society as a whole. Without infinite exponential growth, (which is an impossibility) all of those systems will collapse in on themselves, just like they have started to do already, with only a slowdown in growth, so far.
Your constant mindless drivel proves one thing beyond the shadow of a reasonable doubt. You are not a very smart person Boat. Not even close.