The Real Cause Of Low Oil Prices: Interview With Arthur Berman

Yves here. This is a terrific interview that you need to read pronto if you have any interest in the outlook for oil prices, understanding fracking economics, and the real reason for the push for Keystone XL pipeline. Berman is colorful, direct, and provides lots of granular detail.

By James Stafford, Editor of OilPrice. Originally published at OilPrice

With all the conspiracy theories surrounding OPEC’s November decision not cut production, is it really not just a case of simple economics? The U.S. shale boom has seen huge hype but the numbers speak for themselves and such overflowing optimism may have been unwarranted. When discussing harsh truths in energy, no sector is in greater need of a reality check than renewable energy.

In a third exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman explores:

• How the oil price situation came about and what was really behind OPEC’s decision
• What the future really holds in store for U.S. shale
• Why the U.S. oil exports debate is nonsensical for many reasons
• What lessons can be learnt from the U.S. shale boom
• Why technology doesn’t have as much of an influence on oil prices as you might think
• How the global energy mix is likely to change but not in the way many might have hoped

OP: The Current Oil Situation – What is your assessment?

Arthur Berman: The current situation with oil price is really very simple. Demand is down because of a high price for too long. Supply is up because of U.S. shale oil and the return of Libya’s production. Decreased demand and increased supply equals low price.

As far as Saudi Arabia and its motives, that is very simple also. The Saudis are good at money and arithmetic. Faced with the painful choice of losing money maintaining current production at $60/barrel or taking 2 million barrels per day off the market and losing much more money—it’s an easy choice: take the path that is less painful. If there are secondary reasons like hurting U.S. tight oil producers or hurting Iran and Russia, that’s great, but it’s really just about the money.

Saudi Arabia met with Russia before the November OPEC meeting and proposed that if Russia cut production, Saudi Arabia would also cut and get Kuwait and the Emirates at least to cut with it. Russia said, “No,” so Saudi Arabia said, “Fine, maybe you will change your mind in six months.” I think that Russia and maybe Iran, Venezuela, Nigeria and Angola will change their minds by the next OPEC meeting in June.

We’ve seen several announcements by U.S. companies that they will spend less money drilling tight oil in the Bakken and Eagle Ford Shale Plays and in the Permian Basin in 2015. That’s great but it will take a while before we see decreased production. In fact, it is more likely that production will increase before it decreases. That’s because it takes time to finish the drilling that’s started, do less drilling in 2015 and finally see a drop in production. Eventually though, U.S. tight oil production will decrease. About that time—perhaps near the end of 2015—world oil prices will recover somewhat due to OPEC and Russian cuts after June and increased demand because of lower oil price. Then, U.S. companies will drill more in 2016.

OP: How do you see the shale landscape changing in the U.S. given the current oil price slump?

Arthur Berman: We’ve read a lot of silly articles since oil prices started falling about how U.S. shale plays can break-even at whatever the latest, lowest price of oil happens to be. Doesn’t anyone realize that the investment banks that do the research behind these articles have a vested interest in making people believe that the companies they’ve put billions of dollars into won’t go broke because prices have fallen? This is total propaganda.

We’ve done real work to determine the EUR (estimated ultimate recovery) of all the wells in the core of the Bakken Shale play, for example. It’s about 450,000 barrels of oil equivalent per well counting gas. When we take the costs and realized oil and gas prices that the companies involved provide to the Securities and Exchange Commission in their 10-Qs, we get a break-even WTI price of $80-85/barrel. Bakken economics are at least as good or better than the Eagle Ford and Permian so this is a fairly representative price range for break-even oil prices.

But smart people don’t invest in things that break-even. I mean, why should I take a risk to make no money on an energy company when I can invest in a variable annuity or a REIT that has almost no risk that will pay me a reasonable margin?

Oil prices need to be around $90 to attract investment capital. So, are companies OK at current oil prices? Hell no! They are dying at these prices. That’s the truth based on real data. The crap that we read that companies are fine at $60/barrel is just that. They get to those prices by excluding important costs like everything except drilling and completion. Why does anyone believe this stuff?

If you somehow don’t believe or understand EURs and 10-Qs, just get on Google Finance and look at third quarter financial data for the companies that say they are doing fine at low oil prices.

Continental Resources is the biggest player in the Bakken. Their free cash flow—cash from operating activities minus capital expenditures—was -$1.1 billion in the third- quarter of 2014. That means that they spent more than $1 billion more than they made. Their debt was 120% of equity. That means that if they sold everything they own, they couldn’t pay off all their debt. That was at $93 oil prices.

And they say that they will be fine at $60 oil prices? Are you kidding? People need to wake up and click on Google Finance to see that I am right. Capital costs, by the way, don’t begin to reflect all of their costs like overhead, debt service, taxes, or operating costs so the true situation is really a lot worse.

So, how do I see the shale landscape changing in the U.S. given the current oil price slump? It was pretty awful before the price slump so it can only get worse. The real question is “when will people stop giving these companies money?” When the drilling slows down and production drops—which won’t happen until at least mid-2016—we will see the truth about the U.S. shale plays. They only work at high oil prices. Period.

OP: What, if any, effect will low oil prices have on the US oil exports debate?

Arthur Berman: The debate about U.S. oil exports is silly. We produce about 8.5 million barrels of crude oil per day. We import about 6.5 million barrels of crude oil per day although we have been importing less every year. That starts to change in 2015 and after 2018 our imports will start to rise again according to EIA. The same thing is true about domestic production. In 2014, we will see the greatest annual rate of increase in production. In 2015, the rate of increase starts to slow down and production will decline after 2019 again according to EIA.

Why would we want to export oil when we will probably never import less than 37 or 38 percent (5.8 million barrels per day) of our consumption? For money, of course!

Remember, all of the calls for export began when oil prices were high. WTI was around $100/barrel from February through mid-August of this year. Brent was $6 or $7 higher. WTI was lower than Brent because the shale players had over-produced oil, like they did earlier with gas, and lowered the domestic price.

U.S. refineries can’t handle the light oil and condensate from the shale plays so it has to be blended with heavier imported crudes and exported as refined products. Domestic producers could make more money faster if they could just export the light oil without going to all of the trouble to blend and refine it.

This, by the way, is the heart of the Keystone XL pipeline debate. We’re not planning to use the oil domestically but will blend that heavy oil with condensate from shale plays, refine it and export petroleum products. Keystone is about feedstock.

Would exporting unrefined light oil and condensate be good for the country? There may be some net economic benefit but it doesn’t seem smart for us to run through our domestic supply as fast as possible just so that some oil companies can make more money.

OP: In global terms, what do you think developing producer nations can learn from the US shale boom?

Arthur Berman: The biggest take-away about the U.S. shale boom for other countries is that prices have to be high and stay high for the plays to work. Another important message is that drilling can never stop once it begins because decline rates are high. Finally, no matter how big the play is, only about 10-15% of it—the core or sweet spot—has any chance of being commercial. If you don’t know how to identify the core early on, the play will probably fail.

Not all shale plays work. Only marine shales that are known oil source rocks seem to work based on empirical evidence from U.S. plays. Source rock quality and source maturity are the next big filter. Total organic carbon (TOC) has to be at least 2% by weight in a fairly thick sequence of shale. Vitrinite reflectance (Ro) needs to be 1.1 or higher.

If your shale doesn’t meet these threshold criteria, it probably won’t be commercial. Even if it does meet them, it may not work. There is a lot more uncertainty about shale plays than most people think.

OP: Given technological advances in both the onshore and offshore sectors which greatly increase production, how likely is it that oil will stay below $80 for years to come?

Arthur Berman: First of all, I’m not sure that the premise of the question is correct. Who said that technology is responsible for increasing production? Higher price has led to drilling more wells. That has increased production. It’s true that many of these wells were drilled using advances in technology like horizontal drilling and hydraulic fracturing but these weren’t free. Has the unit cost of a barrel of oil gas gone down in recent years? No, it has gone up. That’s why the price of oil is such a big deal right now.

Domestic oil prices were below about $30/barrel until 2004 and companies made enough money to stay in business. WTI averaged about $97/barrel from 2011 until August of 2014. That’s when we saw the tight oil boom. I would say that technology followed price and that price was the driver. Now that prices are low, all the technology in the world won’t stop falling production.

Many people think that the resurgence of U.S. oil production shows that Peak Oil was wrong. Peak oil doesn’t mean that we are running out of oil. It simply means that once conventional oil production begins to decline, future supply will have to come from more difficult sources that will be more expensive or of lower quality or both. This means production from deep water, shale and heavy oil. It seems to me that Peak Oil predictions are right on track.

Technology will not reduce the break-even price of oil. The cost of technology requires high oil prices. The companies involved in these plays never stop singing the praises of their increasing efficiency through technology—this has been a constant litany since about 2007—but we never see those improvements reflected in their financial statements. I don’t doubt that the companies learn and get better at things like drilling time but other costs must be increasing to explain the continued negative cash flow and high debt of most of these companies.

The price of oil will recover. Opinions that it will remain low for a long time do not take into account that all producers need about $100/barrel. The big exporting nations need this price to balance their fiscal budgets. The deep-water, shale and heavy oil producers need $100 oil to make a small profit on their expensive projects. If oil price stays at $80 or lower, only conventional producers will be able to stay in business by ignoring the cost of social overhead to support their regimes. If this happens, global supply will fall and the price will increase above $80/barrel. Only a global economic collapse would permit low oil prices to persist for very long.

OP: How do you see the global energy mix changing in the coming decades? Have renewables made enough advances to properly compete with fossil fuels or is that still a long way off?

Arthur Berman: The global energy mix will move increasingly to natural gas and more slowly to renewable energy. Global conventional oil production peaked in 2005-2008. U.S. shale gas production will peak in the next 5 to 7 years but Russia, Iran, Qatar and Turkmenistan have sufficient conventional gas reserves to supply Europe and Asia for several decades. Huge discoveries have been made in the greater Indian Ocean region—Madagascar, offshore India, the Northwest Shelf of Australia and Papua New Guinea. These will provide the world with natural gas for several more decades. Other large finds have been made in the eastern Mediterranean.

There will be challenges as we move from an era of oil- to an era of gas-dominated energy supply. The most serious will be in the transport sector where we are thoroughly reliant on liquid fuels today —mostly gasoline and diesel. Part of the transformation will be electric transport using natural gas to generate the power. Increasingly, LNG will be a factor especially in regions that lack indigenous gas supply or where that supply will be depleted in the medium term and no alternative pipeline supply is available like in North America.

Of course, natural gas and renewable energy go hand-in-hand. Since renewable energy—primarily solar and wind—are intermittent, natural gas backup or base-load is necessary. I think that extreme views on either side of the renewable energy issue will have to moderate. On the one hand, renewable advocates are unrealistic about how quickly and easily the world can get off of fossil fuels. On the other hand, fossil fuel advocates ignore the fact that government is already on board with renewables and that, despite the economic issues that they raise, renewables are going to move forward albeit at considerable cost.

Time is rarely considered adequately. Renewable energy accounts for a little more than 2% of U.S. total energy consumption. No matter how much people want to replace fossil fuel with renewable energy, we cannot go from 2% to 20% or 30% in less than a decade no matter how aggressively we support or even mandate its use. In order to get to 50% or more of primary energy supply from renewable sources it will take decades.

I appreciate the urgency felt by those concerned with climate change. I think, however, that those who advocate a more-or-less immediate abandonment of fossil fuels fail to understand how a rapid transition might affect the quality of life and the global economy. Much of the climate change debate has centered on who is to blame for the problem. Little attention has been given to what comes next namely, how will we make that change without extreme economic and social dislocation?

I am not a climate scientist and, therefore, do not get involved in the technical debate. I suggest, however, that those who advocate decisive action in the near term think seriously about how natural gas and nuclear power can make the change they seek more palatable.

The great opportunity for renewable energy lies in electricity storage technology. At present, we are stuck with intermittent power and little effort has gone into figuring out ways to store the energy that wind and solar sources produce when conditions are right. If we put enough capital into storage capability, that can change everything.

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66 comments

  1. mmckinl

    Berman ~ “Many people think that the resurgence of U.S. oil production shows that Peak Oil was wrong. Peak oil doesn’t mean that we are running out of oil. It simply means that once conventional oil production begins to decline, future supply will have to come from more difficult sources that will be more expensive or of lower quality or both. This means production from deep water, shale and heavy oil. It seems to me that Peak Oil predictions are right on track.”

    Spot on … This post is the best description of our oil predicament I have read for many months. Fact is is that the world economy is contracting and taking oil prices with it … This is what “peak oil” looks like, boom and bust. The “powers that be” recognize this and are purposely gaming the system through the Fed and the ECB and all major markets from stocks to commodities to foreign exchange for profit and to extend the life of the oil based economy by reducing demand.

    1. Larry Y

      Always thought of it as more of a plateau. The supply is constrained by production cost vs. what producers and refiners can sell it for.

  2. c1ue

    Peak Cheap Oil theory by iTulip.com stated years ago that oil prices would behave in patterns of boom and bust as supply of cheap oil declined – the result being specifically an accelerating pattern as the economic impact of high oil prices brings forth a glut of oil supply, which in turn damages oil prices leading to a dearth.
    Bichler and Nitzan added to this via economic analysis showing that oil companies as an industry made the vast majority of their profits when conflicts in oil producing regions caused oil prices to jump – although they did not distinguish between supply uncertainty price increases and supply unavailability price impact.
    Nonetheless, great info from Mr. Berman, especially the notes on renewable energy going forward.

  3. Doug Terpstra

    Thanks for this article, Yves. It certainly supports the “just markets” theory of the oil price plunge and largely debunks my admittedly cynical Great-Game geopolitical theory of collusion to make Russia’s (Syria’s, Iran’s, Venzuela’s) economy scream. Still the sudden timing, the speed and depth of the plunge, the emergency derivatives protection bill, the separate, simultaneous attack on the ruble, and the conspicuous lack of pressure on the kingdom to moderate production leave unanswered questions. Perhaps there are concurrent and synergistic market and political forces at work? Time may tell.

    1. Chris

      The narratives changed so often I thought “this whole thing is rigged”. First it was demand is outpacing supply. Then it was there are unheard of inventories stockpiling. Now it’s supply is far outpacing demand. If that’s the case, why has the price dropped overnight? And for the foreseeable future?

      The Saudi’s head fake, to me, is purely politically motivated. Wasn’t John Kerry just there in October to help orchestrate this whole thing? If they wanted price stability, they could have very easily had it. This is about sticking a knife in multiple countries (regimes) then twisting.

      1. participant-observer-observed

        And there is still a stinking black hole in the relationships between Bush-Cheney families and House of Saud (and Saudi prince majority shareholder of Citicorp behind Cromnibus cram) walking away from 9-11 on free taxi c/o Bush family.

        It is premature to write off plutocrat monarch-wannabees in this nefarious dynamic. Saud plays DC like shoe-shine boys, and that is a relation you will never find the Chinese or Russians going in for. Koch bros in Saudi speed-dial too?

        Mr Market is only one hermeneutic and certainly not the only one!

  4. Eclair

    “I appreciate the urgency felt by those concerned with climate change. I think, however, that those who advocate a more-or-less immediate abandonment of fossil fuels fail to understand how a rapid transition might affect the quality of life and the global economy. Much of the climate change debate has centered on who is to blame for the problem. Little attention has been given to what comes next namely, how will we make that change without extreme economic and social dislocation?”

    Ummmm … I appreciate Berman’s call for caution before jumping headlong into schemes to keep fossil fuels in the ground, but if we keep drilling and burning at the current rate, we will experience extreme economic and social dislocation. Many sections of the world are already experiencing “extreme economic and social dislocation.” Ask a Syrian or Somalian refugee. Or an Inuit. Or a Dineh family trying to live on Black Mesa.

    I think what Berman means is that “we” might experience “extreme economic and social dislocation” if we abandon the fossil fuel economy.

    Other than his conclusion, the interview is illuminating. Especially: “…all producers need about $100/barrel. The big exporting nations need this price to balance their fiscal budgets. The deep-water, shale and heavy oil producers need $100 oil to make a small profit on their expensive projects. If oil price stays at $80 or lower, only conventional producers will be able to stay in business by ignoring the cost of social overhead to support their regimes. If this happens, global supply will fall and the price will increase above $80/barrel. Only a global economic collapse would permit low oil prices to persist for very long.”

    Whatever we do … or don’t do …. it’s going to be painful, either now or at some point in the future.

    1. lmkelley

      If we really want to keep most of the remaining fossil fuel in the ground, we must invent practical, scalable non-combustion ways of producing the energy to run our economies.

  5. Dino Reno

    Nice to see such a renowned expert voicing my hypothesis all along that this price swoon was all about the lack of demand. Lord knows I took some heat, but I have even been supported by the likes of Ilargi, who loves a good conspiracy theory when he sees one and he doesn’t see one here.
    Why demand dropped is because oil became too expensive. Berman sees the old cycle of production shut ins eventually leading to higher prices. The smart money would probably be right to bet on him and his expertise, but I think this time is an outlier. I think we have reached a tipping point on the demand side. Demand forecasts are all flat or down for the next few years. That, in itself, is uncharacteristic of the last hundred years of steadily rising demand.
    Lack of demand will continue to plague the oil patch due to structural changes in how we use and don’t use oil.
    Countries that depend on oil revenues will continue to pump and prices will stay lower longer that anyone now suspects.
    (The derivatives bailout provision in the new budget bill will be the first of many oil bailout bills that will be enacted to save BiG Oil and their investors in the years ahead. “Strategic resource” and ‘national security” will be the words used to sell these bills when, in fact, the money will be funneled to stupid and greedy investors who are TBTF.)

  6. jim mckay

    Time is rarely considered adequately.

    One of more insightful observations wrt everything, I’ve seen in sometime.

    Renewable energy accounts for a little more than 2% of U.S. total energy consumption. No matter how much people want to replace fossil fuel with renewable energy, we cannot go from 2% to 20% or 30% in less than a decade no matter how aggressively we support or even mandate its use.

    Herein lies the larger challenge: US shale expansion has moved us further in delaying this transition, with little “adequate consideration of time” as author suggests. His entire discussion is testament to that fact. Noticing Germany’s renewable production +/- 27% of total production in 2014, better question would be why is US screwing around with shale at all.

    Germany’s just too dumb to comprehend US energy functioning I suppose.

    In order to get to 50% or more of primary energy supply from renewable sources it will take decades.

    Given US’ current dysfunctional political functioning, that estimate seems optimistic to me.

    I appreciate the urgency felt by those concerned with climate change. I think, however, that those who advocate a more-or-less immediate abandonment of fossil fuels fail to understand how a rapid transition might affect the quality of life and the global economy.

    I’d remind again of author’s observation time is rarely considered: massive efforts to maintain fossill fuel production maintaining more or less US historical primary reliance upon it at exclusion for planning intelligently for this transition… “quality of life” has suffered dramatically from this pursuit, just since Iraq invasion. “Global economy” is in regression for some years now.

    Much of the climate change debate has centered on who is to blame for the problem.

    I would say the “debate” is dominated by obfuscation this “problem” actually exists.

    Little attention has been given to what comes next namely, how will we make that change without extreme economic and social dislocation?

    I’d just leave off the “without extreme economic and social dislocation” part.

    I suggest, however, that those who advocate decisive action in the near term think seriously about how natural gas and nuclear power can make the change they seek more palatable.

    This has been, regrettably… BO’s “policy”: the problem is these “transition” fuels are largely discussed NOT as transition, but primary sources for decades of planning in US. I would prefer the author eliminate nuclear: it’s proponents argue only it’s greenhouse reduction benefits. They ignore the waste storage issue, which is the elephant in the room. We have no solutions for that.

      1. Jim McKay

        Are you suggesting Germany’s increase in renewables is not real?

        Fair enough to consider ALL their sources, including imports. Ought to do this planet wide IMO. NOT ok to draw conclusions about this transformation by using one piece of pie (imported energy) to slight overall picture.

        Germany’s increase in overall renewables (most comprehensive effort on the planet currently) is well documented for 2014 here (pg. 7). Compare with same data for 2013 (pg. 6).

        I’d remind Germany didn’t invade ME countries for control of oil fields. Coupled with (from your links) their adherence to STATE renewable goals while we’re cutting meager subsidies at behest of oil lobby…

        One thing I don’t see how anyone can (honestly) argue: energy production sources in US vs. Germany going decidedly in opposite directions. (Rummy’s “Old Europe” quip uncomfortably reminding me of our huge wasteful steps in the wrong direction).

        1. peteybee

          “Are you suggesting Germany’s increase in renewables is not real?”

          no not at all, what they’ve done is super impressive. Just the the 27% – 30% figure seems like it may be counting in a particular way (electricity production, rather than consumption or overall energy use) — and I was curious what was behind it. Thanks for the pdf links by the way.

          Seems like of their 2014 (first 11 months) production, 9% wind, 7% solar, 3.5% hydro, and 10% biomass (i.e., renewable sources of hydrocarbons, waste oils, wood products, or methane that is also burned).

          seems like DE imports a lot of electric from FR (mostly nuclear), exports a lot of electric to CH, AT, PL, with a healthy net surplus overall. Not sure how this figures into the sources of energy consumed.

          As to how can the US go in the opposite direction from EU? simple. tax policy and different priorities. we have radically cheaper conventional energy, hence much less incentive to economize on energy use and develop alternatives. same goes for public transportation by the way — and transportation is the other huge energy consumer. you can double the energy efficiency of your car by taking a passenger. imagine what a bus or train could do?

          1. Jim McKay

            As to how can the US go in the opposite direction from EU? simple.

            Cool!!! been waiting for someone w/a real solution for years.

            tax policy and different priorities.

            Ahhh… excellent. Then US shift to the future on energy is right around the corner? {snark}

            As long as most of public stays on the sidelines, and does fight through the thick fog of misinformation to intelligently investigate…

            1) current efficacy of renewables
            2) expanding environmental hazards (local everywhere in more toxic air/water, larger hazards collectively for climate/GW and host of other pretty much deadly realities little discussed. For example, at current rate of deforestation adequate oxygen for increasing populations of humans is very much in question. Scripps did research on this over 20 years ago.)
            3) CDC states often, in opening statements of their many “health assessments” of toxic environmental sites: One out of 3 Americans will get cancer. There’s certainly immediate causes of cancer other then environmental hazards most of us are exposed to (smoking, junk food, or just being an angry asshole), but these hazards are real with vast direct correlation to a host of cancers and other hugely debilitating maladies. One of my mantras here (Albuquerque) in our 501c’s efforts these last few years: People need to awaken to the fact our environment is not an abstraction subjugated to individuals inventory of $$: it’s where we live!!! We’ve got too much bass-ackwards.

            This is the kind of thing that, w/out dramatic changes in more people’s active participation, ensures these changes (in this discussion, shift to renewable energy in paradigm shifting mass) does not appear to be on the horizon. Those guys’ motivation is one thing only: money.

            Their smiling faces reflect controlling a lot of it, and winning battles to ensure they continue in that w/out truthful consideration of effects of their activities on everyone.

            Locally (e.g.: Albuquerque and NM as a whole), the inertia of very dated and environmentally guaranteed illness-causing-toxicity is overwhelming, yet little changes. Just a few examples:

            1) Navajo’s health was decimated by breaking of dirt/mud damns containing “tailings” from uranium mining during Manhattan project and cold war. Church rock was the biggest, but there were (literally) 1000’s of other similar events. The birth defects and disease from these events continues today, and the “tailings” from most of those other uranium mines exist today, never having been cleaned up.

            Thing about that is: DOD wants to do another big round of nuke development. Sandra Labs (here) and Kirtland AFB front and center in contracts likely to be awarded for this “work”. The quiet (little publicized) legal effort many here have been fighting: state issued licenses, called “aquifer exemption(s)”, for mining more uranium in underground water table below this same Navajo land. Those applying for these licenses proclaim the ensured “safety” of their methods, but they are the same companies who, in similar endeavors just in last 10 years, have destroyed water tables they’ve mined in.

            2) Sandia Labs’ workers cancer rates are < 15% above population average. Many open pit "dumps" on their facility containing all kinds of nuclear residue buried w/out containers going back over 70 years is making it's way to our water table (if not already there). Sandia political influence has successfully prevented EPA mandated cleanup. They (Sandia) had to excavate another similar dump on their site about 15 yrs ago when it's contents were detected in groundwater.

            (many similar examples just in ABQ. Los Alamos, arguably… even worse: nuke waste stored above ground, outside in containers where massive fires in "sick" forests encroached within a mile of the facility).

            People hear/read this stuff in other communities, and mostly think of it is something "over there", somewhere else. But go around the country, and there's far more communities similarly "toxified", yet the commonality of these individual circumstances does not get united in enough awareness to change things. The fracking in Pennsylvania (destruction of vast water supplies) w/same activity migrating west very fast in recent years: Rocky Mtn flats and most DOD/DOE major installations. 42 Air Force bases on superfund (not counting Navy/Army/Marine bases) for huge, health threatening pollution events in their communities. McClellan AFB near Sacramento toxified that city’s aquifer: what they take from it now all has to be filtered/cleaned, with state of technology to detect toxins therein insufficient to know it’s still not making people sick. Camp Lejeune (Marine) arguably most illuminating case study on this oft repeated DOD poisoning of local citizens while their stated purpose is to “keep us safe”. The timeline section on this site, among other things, depicts DOD knowingly and continuously lying about causes of severe disease.

            Bethpage (long Island), Otis AFB just a couple more examples of this exact same phenomena.

            What does this have to do with renewable energy?

            We’ve (US) emptied our federal coffers for nearly 15 years now, playing one pawn against the other in our feckless ME adventures, to ultimately get control of oil production. One of my assumptions is the ($5-9 trillion, depending on where one goes for costs of this effort) is all of our tax $$ subsidy for these “wars”. The disruption in societies, by these means… goes back now over a 100 years for the same exact motivation: oil energy.

            And here we are, doing the exact same things… the momentums uninterrupted even today, with the 99% watching it all go by on the sidelines having these discussions, while little changes.

            Energy in renewable generation is available for everyone, now. Our laws governing property (investment in “assets”, for more/expanded drilling… a “right”), simply do not fit the reality. Energy humanity needs to move forward… inexpensive, reliable over the long term, CLEAN… is held hostage by a few, too ignorant lazy and “fat from big bank accounts” to look into the future and see what needs to be done, to change.

            We need to find a way to collectively… all us “little guys”, to agree on common action in steadfast manner with a view to the future, and make the mass of these people greater then the unwilling and ignorant few. We need to do this with fortitude to see it through. And we need an outcome whereby costs of improving/building this infrastructure are shared +/- equally, but ALSO fees for return (e.g.: energy) go to a more common good, not a selfish few.

            One other thing: a uniqueness of this area in what is generally regarded as amongst US’ poorest states: we have more Masters/PhD’s in physical sciences (by virtue of our DOD/DOE labs and AFB’s) per capita then any state in US, and a lot of them are pretty damn sharp. Just most of ’em working towards goals set by the few: non-ending nuke weapons development, many very very narrow military oriented tech projects at Sandia that get “spun off” in private enterprise… almost always delivered to well connected political contributors w/public oblivious to fact they’ve financed this stuff: eg. we get “double dipped”, continuously.

            Several of sharpest PhD’s (physics) from local labs have proven efficacy of nano technology based solar energy retrieval. I’ve spent many hours with them on the models. Essentially, these little “nano critters” are lighter then air: they “rise”. They also capture solar energy at elevation, until their mass exceeds atmospheric weight then fall & can be collected. Energy removed, stored, rinse and repeat. Technology exists to prototype these things, but no funding available.

            Efficiency looks like upwards of 80%, or (+/-) twice that of PV collection.

            Technology has promise for these “things”. AFAIC, technology is another word for modern tools for modern problems. Given massively greater challenges given far greater expanse and affect of our activities on this planet as a whole when compared to era in which fossil fuel generation was born, we need massive shift to employing tools available in this time, new ones… not those we inherited.

            15 years since blogosphere arrived (really born from outrage from 2k .com crash and 2k election recounts). It’s gotten splintered, and in particular (at least as I see it) the most committed and smart/intelligent largely relegated to (to quote Arios) “documenting the atrocities”. Very unsatisfying.

            Humans have to find a way to become bigger then money: we’re waiting for “markets” to do their magic, with one eye on “retirement” (enough $$ and maybe some “health care”), while our larger footprint on this place we live is making those happy wishes a more illusive outcome. I’m 59, keep myself more fit/healthy then most. To the extent these frustrations tax me, I see many similarly minded people here wearing out in what often seems like a fruitless fight, most of them considerably younger then I.

            We need to find a better way. The availability of Renewables and it’s promise is damn enticing for it’s promise/suggestions for the future. We need to find a way to get there. Obviously, it’s going to take something different (at least in US) then what we’ve been doing these last 15 years or so. From our laws to our politics, there’s too much that is broken.

    1. peteybee

      another distinction I just realized is in the links above is “primary energy” i.e., thermal energy content of fuel, before its conversion to a useful form such as mechanical or electrical energy. The conversion is subject to thermodynamic efficiency limits (pretty bad for coal and geothermal, so-so for natgas, solar, and nuclear, near perfect for hydro).

  7. scott

    Not sure where he is getting his Continental Resources performance numbers for Q3, but they appear to be way off. CLR had capital spending of $1.1 billion in the quarter, but also what appears to be record EBIT ($900 million) and EBITDA ($1.2 bilion) for the quarter. Like a lot of these companies, they’ve put $8 billion into capital expansion in just the last 3 years, 75% debt financed and 25% from equity. Their net income was 32% of revenue in Q3 and their EBITDA was 55% of revenue in the quarter. Looking forward, they have about $800 million of debt due during the next 2 years, + another $300-$400 million for interest, so it looks like they could drop their revenue by 30% and still make debt payments, as long as they cutoff new capital spending that is not debt-financed.
    I’m not suggesting he’s wrong about the $80 break-even point, but the data point he used as an example doesn’t appear to support that the way he indicates it does.

    1. Yves Smith Post author

      Here is Berman’s reply:

      Thanks for sending this along. I think the interview was a hit based on the responses. There are always guys who take issue with something but I covered a lot.

      My data on CLR comes straight from 10-K/10-Q data. That’s why I said to check it on Google Finance.

      I like to keep things relatively simple so a company that is spending $1 billion more than it is making and a D/E of 120% has a small problem especially when it’s negative cash flow and debt increases every quarter. Shale plays require unrelenting capex spend so it’s not going to get better unless the company is willing to let production fall. That will trigger investor flight and debt covenants, so that isn’t going to happen as long as there is other people’s money to spend. When that is gone, we’ll see how good this company is. I don’t mean to single CLR out, by the way–there are many just like them or worse. They are just so public about how great they are and they drill more wells than anyone in the Bakken so they should be a fair indicator.

      All the best,

      Art

      1. Tom

        A bit of a problem in your discussion of Continental Resources. You stated:

        “Continental Resources is the biggest player in the Bakken. Their free cash flow—cash from operating activities minus capital expenditures—was -$1.1 billion in the third- quarter of 2014. That means that they spent more than $1 billion more than they made. Their debt was 120% of equity. That means that if they sold everything they own, they couldn’t pay off all their debt. That was at $93 oil prices.”

        Debt at 120% of equity certainly does not mean that if they sold off everything they own they couldn’t pay off their debt. That would only be true if Debt-to-ASSETS were more than 100% (i.e., negative equity). Moreover, the 120% figure is at book values, but price to book is 2.7, meaning that in market value terms debt is only about 40% or 50% of equity.

        1. Yves Smith Post author

          They have been running at negative cash flow with no realistic prospect of getting to positive cash flow given depletion rates and the tightening of the junk bond market (new money will be more costly than old money). We had the same sort of valuations for money-losing companies in the dot com era. Remember how that movie turned out?

  8. peteybee

    Agree with much of article, but as mentioned before — counting breakeven WTI price on existing stock of wells (drilled in past 5 years lets say) is a purely backward-looking analysis.

    I think the effect on production implied by the tone of the article is overstated, and from that I think reduced prices could last longer. At the same time, I agree that the economics of currently existing oil businesses are surely screwed! Of course if the Saudis and the Russians (or whoever) were to make some kind of deal in 6 months, that trumps everything.

    mitigating factors:

    (1) as article says, drilling going forward will be only at more productive locations. If you drop the X% least productive wells, the production volume decrease will be considerably less than X%, since the ones you drop are the least productive ones.

    (2) ramp-up in tech and operational maturity, meets reduced demand. Despite what article says, over past 10 years, technology has actually made it cheaper to make an oil well, FOR A GIVEN TYPE OF UNCONVENTIONAL / LEVEL OF DIFFICULTY. The article takes a slightly different view, namely that the average well is now more likely to be unconventional, and of a more difficult type, therefore the average well across the board is more expensive. Not the same thing! This ramp-up in tech maturity meets decreasing demand in equipment / services, and you’ll get some reduction in costs for a given type of unconventional.

    (3) take-away capacity. typically, at least in the US, while fields are ramping up, take-away capacity is also ramping up, but lags and is saturated — forcing a substantial discount at the point of production vs the national or regional hub price. slowing production growth may relieve this discount, a sort of small saving grace for producers.

    (4) I want to say again, this is all a replay of what happened in natgas a couple of years ago. The economics got wrecked, production volumes took a momentary step back, then kept marching, for better or worse.

    1. EasyARB

      peteybee,

      Good stuff, very informative. Question for you though. Natural gas volumes stayed high for 3 reasons. The amazing productivity of the marcellus, the value add from NGL’s and large growth in associated gas production from crude directed drilling. As crude prices drop, the last 2 are less valuable, and to me hint of lower gas production growth in the future. Also, crude can only have 1 of those 3 supports pushing supply up (namely productive horizontal wells). Do you agree with that interpretation of the energy world?

      1. peteybee

        Good points, what you say makes sense.

        Another peculiarity in the natural gas story vs the current crude story, was that at the time NG price collapsed, there was an “inventory” of wells drilled and ready to go but awaiting infrastructure (pipeline), so nearly their entire cost was a sunk cost at that point. This “inventory” had to be passed by the system before you saw production respond price or rig count. Since liquids are easier to transport, I am guessing that effect as seen by producers will be a lot less for crude in the US. Flip side is US crude market is tied into international market, and there may be “80%-finished” projects out there internationally that will come online no matter what in the next year or two. That is something to look into.

        I do think that crude in the US will be the “first to respond” by reducing production vs price, since project timescales are shorter than other unconventionals. Reduction in growth rate for sure, very possibly less tight oil coming from the US. But how long would it take to equalize the global ramp-up in unconventional production? I have no idea to be honest.

  9. E.L. Beck

    All good points, but after the Fed lifted its finger off QE III, the cheap money flowing to speculators and commodity desks at banks dried up. Unsupported, the pyramid scheme for contracts dried up, and the bubble deflated.

    If Draghi successfully installs a similar QE plan in the ECB after the January 22nd meeting, commodity prices will roar back. However, if the rumors are true that Draghi wants to install a more effective QE plan – one that actually induces money flow to the middle class – a resurgence in commodity prices shouldn’t take place or, if it does, should be milder in comparison.

    Over the past few years, food and energy prices have suffered from synthetic inflation, induced largely by speculator activity, not from real demand.

    1. Paul Niemi

      You are correct. Two more reasons for the rapid fall in oil prices: first, refineries switched to winter blend gasoline, which is less expensive because of added volatiles from natural gas; second, half the storage capacity for gas is in people’s tanks, so when prices are rising they keep their tanks topped off, and when prices are falling they run to empty, waiting to fill up with the expectation that prices will be lower in a few more days. I just filled my car for $1.98.

      When a government or cartel supports the price of a commodity above its natural market price, and we are talking about Fed primary dealers with access to money at zero interest gambling in the oil futures markets, suppliers ramp up production to respond to the higher price. It takes a lag of about five years for production to ramp up. Then it becomes more and more expensive to support the higher price, and the article points out that when prices are too high too long demand also decreases. At some point there is a collapse in price of the commodity to below what it would have been without the attempt to rig the market.

      We need to assess the cost to the public of oil prices that were too high too long. We also need to investigate if the higher prices caused by a rigged market enabled the members of the cartel to profit from making loans to the industry at the same time as supporting the price of oil to justify the loans. We need to know who has been left holding the bag for the bad loans, and who has profited from the price collapse.

    2. Yves Smith Post author

      You are incorrect re the impact of QE on commodity prices. Japan’s repeated announcements and implementations of QE did bupkis for its economy or commodity prices. In fact, QE would weaken the euro and strengthen, which will LOWER oil prices which are denominated in $ terms. That was a big part of market action today.

      You need fiscal spending to produce more demand for commodities, which no one seems willing to do.

      1. E.L. Beck

        Paul – All excellent additional points to consider. Ultimately, if D.C. backstops Wall Street again, the taxpayers are left holding the bag.

        Yves – But fiscal spending isn’t real demand either, since it doesn’t emanate from business or households. It may be better than nothing, but it is still artificial life support, and I don’t want to operate in a country where the economy indefinitely remains on life support.

        You may be right about the euro and the fact that commodities are priced in USD$, but that would also explain why Japan’s efforts never granted real traction… that and the fact that at any given moment, Japan’s efforts were always anemic, always marginal attempts.

        You must also realize that under present currency trades, the euro is getting cheaper to convert to USD$, thus multinational banks and hedges will find the conversion costs favorable against the profits that can be made driving up food and energy commodities once again.

        A look at supply-to-use ratios in commodities versus contract prices over the past few years clearly show commodity prices have been artificially inflated, compared to the historical prices for given ratios.

  10. Pwelder

    I’ve been telling people that if you pay attention to Art Berman and Gail Tverberg, you’ll have a pretty good handle on what you need to know about current trends in the energy space.

    So then Berman serves up this howler: Speaking of Continental Resources, he says: “Their debt was 120% of equity. That means that if they sold everything they own, they couldn’t pay off all their debt. ”

    Jeez Louise. Sophomores flunk Accounting 1 for that kind of stuff. OK, Berman’s a technical guy, and accounting is not his strong suit. But still…

    1. Jim Haygood

      Nice spot, E.L.

      Speaking of debt-to-equity ratios, spare a thought for our struggling colleagues at the Federal Reserve, whose liabilities are 80 times their equity (more or less, since they ain’t markin’ to market).

      It don’t mean that it would take 80 years to dig out of the hole they’re in. But it’s still bad.

      1. Ben Johannson

        Arguing the Fed can’t meet its liabilities is equivalent to stating the sun will run out of light.

  11. Jef

    First of all when he talks of being economic he,as with almost all analysis, focuses primarily on economics of the Fossil Fuel sector and the financial concerns supporting it. Little or no focus is spent on the other 90% of life on planet earth called the real economy. $100 dollar oil is great for the oil sector but kills off all other sectors.

    $100 oil would be fine if there were some other sectors of the real economy that were really booming increasing the overall income of the general population so they could afford it. The opposite is happening.

    So called “renewable energy” (which there is no such thing in the physical world, certainly not one that can power a wealthy advanced civilization), would be doable if there were some other sectors of the real economy that were really booming increasing the overall income of the general population so they could afford it. The opposite is happening.

    The transition everyone talks about is one of ever increasing poverty, inequality, hunger, and death. But hey… you never know maybe something that no one anywhere has any hint of might come along and change it all…right?

  12. NYer

    2nd try on this comment, so apologies if any double post.

    I dont understand Berman’s first point about the Saudis just trying to maximize revenue (frequently asserted on this blog as well). Assuming $60 oil, and that the Saudis currently pump about 10mn bpd, the Saudis would be better off cutting production by as much as 4mn bpd if it would maintain a $100 price. Thats their revenue break-even – under either scenario they would earn $600mn/day. i highly doubt they would need that drastic a cut, so they might even earn more now by cutting say, 2mn bpd. but even if they did need to cut 4mn bpd, its still better on a NPV basis to do so, because by cutting production they get to “store” 4mn bpd to sell later.

    So just maximizing revenue can’t be the Saudis motivation, unless the cut needs to be 5-6mn bpd. Which would be really hard to believe.

    1. Yves Smith Post author

      First, the Saudis break even is not $100 a barrel.

      Their break even based on cost of production is $4-$5 a barrel.

      Their fiscal break even (as in what they need to fund their budget) is estimated at $90 a barrel.

      The Saudis have a big sovereign wealth fund and Moodys has said they can tap into that for years and feel no pain.

      Second, given US fracking and the big drop in Chinese demand and continuing deflation and recession in Europe, it’s not clear if a 4 mm BPD cut would be enough. Their beef is that the other OPEC members cheat (as in don’t cut production much/at all) and they as the lowest cost producer should not be the swing producer. Plus they almost assuredly have other aims, like hurting Syria and Iran, other high cost producers (they also don’t like the Russian, but the Russians are lower on their list). They have also been very upset with the US for quite some time for not being as aggressive as they’d like v. Iran and Syria, so I strongly suspect they don’t mind, and actually might want to hurt the US too.

      1. NYer

        Apologies if I wasn’t clear, by “break even” I was only talking about the revenue break-even between two differing strategies to maximize revenue: (a) cutting production to maintain a high price or (b) just accepting a lower price, whatever it may be, on full production. I.e, they can cut production by X–which we don’t know, but I doubt its more than a few million bpd, especially if they signal more cuts to come etc–and obtain the same revenue as they get from $50-$60 oil * 10mn bpd. Not to mention that the unsold oil can be sold later, further lowering the “NPV” break even.

        Its just…odd. They talk like they would be fine selling ALL their oil at $20/bbl. That is the equivalent -in revenue terms – of cutting their production 80%! So either there is so much surplus oil on the market (and “suddenly” at that) that they would have to cut 5-8mn BPD – or there is some other set of factors is in play as you suggest. Berman seems to think its ONLY being driven by revenue maximization, when to me it doesn’t look like it has anything to do with such.

  13. Jackrabbit

    Berman’s opinion aside, the data presented actually SUPPORTS the conspiracy theory.

    BERMAN’s OPINION:
    “Faced with the painful choice of losing money maintaining current production at $60/barrel or taking 2 million barrels per day off the market and losing much more money—it’s an easy choice: take the path that is less painful.”

    Doesn’t this assume that Saudi Arabia would take the full ‘hit’? Maybe that appeared to be the choice that Saudia Arabia faced initially but reports that I read were that other OPEC members were pleading with Saudia Arabia to join with them to stabilize prices. So the ‘pain’ would’ve been shared.

    =

    FACTS HE PROVIDES:

    * “We’ve seen several announcements by U.S. companies that they will spend less money drilling tight oil in the Bakken and Eagle Ford Shale Plays and in the Permian Basin in 2015. That’s great but it will take a while before we see decreased production. In fact, it is more likely that production will increase before it decreases. That’s because it takes time to finish the drilling that’s started . . .”

    * Berman calculates a Shale Oil “break-even WTI price of $80-85/barrel. . . . Oil prices need to be around $90 to attract investment capital.”

    * ” . . . all producers need about $100/barrel. The big exporting nations need this price to balance their fiscal budgets. . . . Only a global economic collapse would permit low oil prices to persist for very long.”

    According to Berman, a price of less than $90 chokes off “tight oil” production and prices lower than this don’t noticeably affect production for many months. So why would Saudia Arabia choose to drive the price significantly below $90 when they could’ve joined with other OPEC members to stabilize the price in 80’s?

    Furthermore, Berman pegs what we might call the ‘natural price’ of oil at $100. The market price should fluctuate around this price. The further and longer that oil deviates from this price, the more the market is manipulated. The question is: to what purpose?

    =

    Unless an insider comes out to say that he/she has direct knowledge of conspiracy/collusion on oil prices that target certain countries, we will not know for sure. I have previously explained that my skepticism comes from:

    1) the importance to the West (and Saudia Arabia is definitely in the Western sphere) of overcoming Russia (and thereby SCO and BRICS plans);

    2) the strange timing and hell-bent determination of the price drop: it seems that signaling a willingness to drop the price years ago would’ve choked off investment in “tight oil”;

    3) the strangeness in how the oil price drop has been communicated and handled: differing stories, propaganda-like ‘need’ for people to reject any suggestion of pricing conspiracy; lack of complaining from oil companies and their Congressmen and other representatives, etc.

    I initially believed that a slow economy was the reason for the drop in oil prices but when Saudi Arabia rejected OPEC pleas to stabilizing prices, I thought more deeply about the issue and that led me to ask: WHY NOW??? Why did Saudi Arabia suddenly “get religion” about Shale Oil just as the new Cold War got underway?

    =
    =
    =
    H O P

    1. Jackrabbit

      4) Saudi’s and USA work together. They have since well before the establishment of the petrodollar. Some make too much of this and consider Saudi Arabia as a USA ‘client state’ because USA is superpower. Such a stance is easy to dismiss. A better understanding is a kind of co-dependence. When they disagree, it is probably more a matter of priorities and emphasis. For example, USA supported the Egyptian Muslim Brotherhood (MB). Thought they could be controlled. The Saudi’s never liked MB – fearing their populism. When the democratically elected MB was overthrown, USA did nothing and said little.

      Note: Mike Whitney did a good job laying out the history of USA-KSA cooperation in his counterpunch article.

      Before the oil price drop I had written about the silliness of the purported USA – Saudi diplomatic breech. Supposedly, the Saudi’s are upset with Obama’s peace ovature. Neocons are said to be hating on Obama for the same reason. Poppycock. The neocons got virtually everything they ever wanted from Obama. There is no reason to believe that Obama would buck them on Iran. And every reason to believe that the ‘real plan’ includes Iranian regime change down the road (a deal on nukes only allows more time for that).

      So what’s really going on? Well, for starters, everyone should be mindful that for political reasons and to undermine critics, Israel, Saudi Arabia, and USA refuse to acknowledge any working together that is not entirely superficial. So, for example, ISIL goes from a defeated gang to Islamic State virtually overnight and despite threatening everyone in the region and beyond, it just can not be stopped. Mmmm…. the logical conclusion is that some state(s) is helping them somehow because they see a benefit. It hard NOT to see what that benefit might be to the most powerful actors in the region: anti-Shia guerrilla war against Iran, Syria, and Hezbollah.

      Another important point: after the debacle of the Iraqi War, the neocons got even more crafty. Everything is now done covertly and behind the scenes and the public is fed propaganda. Even our Presidential elections are BS (Change you Can Believe In!) And thus, we have the War on Whistle-blowers and the War on Conspiracy Theories. TPTB want to rule over consumer dumbf*ck wage slaves who take M$M news as gospel. Chaos! is a cover story. Look away! (But make sure you elect the establishment candidate that is neocon-approved to navigate “a dangerous world.”)

      This is all backdrop to the utter collapse of oil prices. Here, we see the old neolib trick that Lambert has identified so well. Anyone that sees through the “Markets!” BS and understands that TPTB manipulate or allow crony’s to manipulate markets should just “go die”. In this case, the matter is more weighty because we are witnessing a geopolitical rift that could lead to war.

      So maybe we could agree that some part of the price drop is due to market dynamics (to about $80 or so) but the price fall beyond THAT is largely due to an attack on recalcitrant states that are bucking the West (Russia, Iran, Venezuela, mostly)? MAYBE these two are being conflated? Maybe purposely. “The price dropped because of the market” could be an accurate statement – BUT, what is left out is this: it continued to drop/dropped further because of enmity.
      /rant

      1. Yves Smith Post author

        I beg to differ. The Saudis are among other things the moving force behind ISIS, which started out as Prince Bandar’s private army, and has not looked like “normal” terrorist groups in tons of ways, such as how well funded they are and their extensive and savvy use of social media. The Saudis are also ripshit that the US is cooperating with Iran (as indirectly as possible) against ISIS.

        Your view of the US/Saudi relationship is dated. The Saudis are furious with the US and have never taken orders from us.

        1. Jackrabbit

          @Yves

          I am not saying that the Saudi’s are “taking orders”. I do think that there is some jockeying among US-KSA-Qatar-Israel-etc. on but I think that they generally view Iran and Putin’s Russia with similar concern – yet they don’t want to appear to be working together or coordinating. That makes it difficult to piece together what is really happening. To do so, requires logic and a knowledge of history.

          There are many moving parts and much scepticism is called for. For example, you mention the US “cooperating with Iran” – but are they really? or are they drawing them in to the sectarian war? I don’t know the answer, but it is something that has crossed by mind. The Saudi’s apparent anger with US could be genuine but could also be seen as a device. It allows US space to talk with Iran and to possibly get a deal on the nukes, but I sense that the Israelis and Saudi’s will not really feel ‘safe’ until the Iranian regime is overthrown. And I also sense that the peace initiative is mostly buying time for both sides to make alternative plans (they just distrust each other soooo much).

          At some point one just has to see how it all plays out. We are not given enough solid info to spur any real protest. For better or worse, we are ‘locked in’ to a future decided by neocons and foreign interests. And that is extremely frustrating. Why the price has dropped is sorta secondary to that but I see understanding and awareness of how markets and opinions are shaped as key to positive change.

  14. Paul Tioxon

    Mr. Berman is another worthless mouthpiece of bourgeoisie capitalist bullshit with customary bravado of certainty invoking arithmetic, you know, the numbers don’t lie!, and the fabled sensible middle ground position of moderation in all things, especially the unrealistic notions of environmentalist demands for a quicker transition to alternative energy, so idealistically unrealistic !! As an alleged energy expert, or maybe just a numbers geek who reads the corporate filings for substantial pricing info, let’s point out the big lies straight from the fossil fuel PR machine. I won’t even bother with his one dimensional bean counters analysis of what makes the world go round, barely touching on the geo-politcs of Russian/Saudi cooperation he swerves back to profits, profits, profits, it’s all just a supply and demand world.

    BIG BAD BOLD LIES FROM BIG BAD OIL

    #1. “Of course, natural gas and renewable energy go hand-in-hand. Since renewable energy—primarily solar and wind—are intermittent, natural gas backup or base-load is necessary. I think that extreme views on either side of the renewable energy issue will have to moderate. On the one hand, renewable advocates are unrealistic about how quickly and easily the world can get off of fossil fuels. On the other hand, fossil fuel advocates ignore the fact that government is already on board with renewables and that, despite the economic issues that they raise, renewables are going to move forward albeit at considerable cost.”

    The Natgas and solar energy bromance is the Carl Icahn Green Capitalist play. Coal is on the way out as we speak, and the expensive, hard to finance without ZIRP fracked or open pit tar sand oil plays have limited duration as more and more observes of the industry are pointing out. It is not a decades supply. So that leaves Natgas to the rescue, why, because the big lie says that it will be impossible to get all of the electricity we need right now or EVER in America and elsewhere from solar. Intermittent sunshine disrupts the baseload. NO! Not if you build commercial solar plants that store the heat in molten salts that run the steam turbines when the sun goes down. Not if you understand energy, like a reputed energy maven should, that solar panels work in the day and at night, when the earth acting as solar mass or storage, releases heat from the ground and touches the cool air of the night, you get wind currents! And this is how Germany has managed to get over 25% of its energy in a decade from solar! Wow, this leads into lie #2…

    #2. “Time is rarely considered adequately. Renewable energy accounts for a little more than 2% of U.S. total energy consumption. No matter how much people want to replace fossil fuel with renewable energy, we cannot go from 2% to 20% or 30% in less than a decade no matter how aggressively we support or even mandate its use. In order to get to 50% or more of primary energy supply from renewable sources it will take decades.” Gee, another lie to make us spend capital and political capital on Natgas and not solar. Well, let’s look at Germany, not exactly on the equator if you can catch my drift.

    “As Europe struggles to ease its dependency on Russian gas, Germany is getting ever greener: During the first half of 2014, the nation generated 31 percent of its electricity from renewable energy sources, according to a recent report by the Fraunhofer Institute (PDF). Excluding hydro, renewables accounted for 27 percent of electricity production, up from 24 percent last year.

    “Solar and wind alone made up a whopping 17 percent of power generation, up from around 12 percent to 13 percent in the past few years,” according to Renewables International, which provides a helpful rundown of the Fraunhofer report. The country’s solar power plants increased total production by 28 percent compared with the first half of 2013, while wind power grew about 19 percent.

    Germany still derives most of its energy from coal, though consumption of brown coal dropped 4 percent. Power from natural gas fell 25 percent, while nuclear power decreased by only about 2 percent.”

    http://www.businessweek.com/articles/2014-08-14/germany-reaches-new-levels-of-greendom-gets-31-percent-of-its-electricity-from-renewables

    #3. “I appreciate the urgency felt by those concerned with climate change. I think, however, that those who advocate a more-or-less immediate abandonment of fossil fuels fail to understand how a rapid transition might affect the quality of life and the global economy. Much of the climate change debate has centered on who is to blame for the problem. Little attention has been given to what comes next namely, how will we make that change without extreme economic and social dislocation?”
    Wow, such empathy and compassion, think of the children!!!!!!!!! If would be great if this guy might have opened his mouth with something other than words like “immediate abandonment” and “extreme economic and social dislocation”. I don’t want to immediately abandon any immediate source of energy without a commensurate immediate replacement, because you know, weather and stuff like cooking food and seeing when its dark and getting to hospital with power, the little creature comforts. But the dislocation of the entire city of New Orleans which still has not recovered from the lost of hundreds of thousands of people who are not returning, or the destruction of the fishing in the Gulf due to the BP/Haliburton deep sea oil platform disaster, or the Iraq, Afghanistan, Syria, Pakistan oil induced blood bath as part of the failed New American Century project, well, I can’t see much moderation or realistic acceptance of the cruelty that goes with having to have oil run the industrial economies of the world. But environmentalist don’t get it? Enviromentalist have extremist view? Mr Berman is such a lying sack of shit, I don’t think anyone should take anything he says seriously, not even if he were to say the sun also rises.

    http://www.theverge.com/2014/2/13/5408686/ivanpah-solar-plant-begins-commercial-operation

    1. James Levy

      I think you are overplaying your angry hand here–arithmetic does function as a nice indicator of what is really happening in the world and the kind of transition you discuss will be disruptive and, just as importantly, will need an authoritarian revolution to implement. You will have to be able to dictate to people what they can buy, consume, and be forced to replace. Those things are not easily done in a democratic system under the rule of law and with our current understanding of Constitutional guarantees of liberty and property. When people resist them you will have to be prepared to squelch first their freedom of speech, and then probably have to kill some of them to convince the rest to go along when you tell them their well-paying fracking job is now over, their pickup truck burns too much gas and their coal stove will have to go. You are almost certainly right that these changes are necessary, but in our culture there is no room for them as you seem to present them. I do not know what the answer is, but to denigrate and lambaste someone for pointing out that such a transition will be radical, disruptive, and difficult to push through is rather silly and counterproductive.

      1. Paul Tioxon

        Mr. Levy,
        You are the kind of person, the moderate, even handed high minded kind of middle class person socialized along the lines of high minded statesmanship, and quite frankly, who is more worried about how I say it rather than what I say. You are and Mr. Berman are completely irrelevant to the solution that is rising around you, befuddled as you both are with mortal fear of a Thermidorian Reaction, articulated in Mr. Berman’s infantile fantasy of an “immediate abandonment” demand of some sort of green eco-revolution. I am sure if you look on google for witless, young but good hearted 20 somethings, you will find an immediate demand for a change in policy. But no one wants to simply shut down all of the power plants and then go about building a solar micro grid inch by inch until we reach the necessary level of supply. But that is your implication of solar energy when I simple report on the facts of accomplishments in Germany or the Mojave desert. Are you that frightened of just how empowered Andrea Merkel might get when all of Germany’s electricity comes from renewables?

        But let me address your condescending, garden variety attempt at a response to my post. It is not the first time have posted detailed information about solar energy. Google is available to anyone reading this and can educate even the most isolated specialist on oil pricing who has no idea that solar commercial power plants operate all over the world and contribute to the base load of electrical grids. Just this week in India, one of the states of that nation passed a mandatory requirement to install solar electric power to the state’s standards on all properties on a plot of 500 sq. yds. or more.
        I am sure you are anxious to see the results of this freedom killing totalitarian tactic which will only result in gestapo storm trooping. That is what you are hinting at, isn’t it Mr. Levy? How juvenile!

        Have you ever read the empty polemic called “ROAD TO SERFDOM”? I have. Just repeat incessantly hallowed concepts like FREEDOM, LIBERTY, OR your choices “democratic system” and “rule of law”. And fear monger how freedom of speech will be squelched, presumably inspired by my anger. Apparently, I have not received the Earth Liberation Front memo telling me about the “authoritarian revolution” you mention that will have to force some people, even, and I shudder to think, “KILL some of them”. Really Mr. Levy, I am now a homicidal maniac who proposes a totalitarian take over and public executions to get the herd in line with “MY” forced take over for the sake of solar energy. Are these the fevered dreams you have at night Mr. Levy, that pick up trucks and coal furnaces in homes will be confiscated, after I shut up people like you, of course, the independent deep thinking defender of liberty and who unmask plots to go through transitions of one form of energy, fossil fuels, to another, solar energy. Well Mr. Levy, the Republic is safe. The Constitution will shield the misguided from my assault on their inalienable rights which of course, I either as a knave, plot to steal with the barrel of a gun or I am a deluded pathetic fool, who just does not understand the complexities socio-politico-economic transitions, which much be very carefully handled, because it might not end up well.

        As always, your pointless and useless knowledge shows you up for who you really are, a reactionary who wants things to change only if it favors you personally, or does not cost you a dime. All of your implications of a police state takeover to move from where we are today to where we will be tomorrow are an attempt to smear, demagogue and use only disembodied terms: democracy, freedom of speech, Constitutional, property, rule of law. You do not know that solar energy is being built right now. But when I report on it happening, you construct this dystopian rage fueled future of enforced environmentalism, as if people will only accept change at gun point or extortion like intimidation. Mr Levy, here are the Nissan Leaf, a plug EV, electric vehicle sales for 2014: 30,200. Mr. Levy, we are not going to shoot our way to the solar age, we are going to build it bit by bit. It is not going to happen by raiding redneck enclaves and confiscating pickups and coal furnaces, it is happening by installing solar panels on rooftops, schools and yes, even sports stadiums, like the one in Philadelphia where the Eagles play, powered by sun and wind. And Mr. Levy, I am not going to have to squelch people like you, freedom defenders of liberty and the like, I am going to ignore you completely now that I know what a complete idiot you are. Expect more good news in 2015 about solar rising and coal going the way of the dodo bird. All without firing a shot.

        1. Yves Smith Post author

          The fact that you take Hayek seriously discredits your rant, as if the ranting didn’t do that already.

          And your ad hominem attack on Levy was completely out of line.

          1. Paul Tioxon

            Yves,
            The mere mention of Hayek’s book makes you see me as taking him seriously. Hah, do you even understand my rants? Mr Levy deserves an attack, against his text. His text reveals a condescending idiot and I don’t deserve you misreading me, as I am comparing him to Hayek’s polemical work which Mr Levy mimics with a lesson in paternalistic history of murderous social change that will result in some forced governmental policy to go green.

            He could not be more of a boring 7th grade civics teacher gone wild with his imagination of state sponsored political oppression, all over me attacking an out touch analysis of renewables! While the oil discussion by Mr. Berman may spot on, it doesn’t strike as much different than a half dozen other reports by experts trying to sort out the free fall of oil prices. However, that does not mean he gets to lie though his teeth about the very source of energy that holds the promise for the world of not having to go through these disruptions. Certainly the suffering of the people of petro states, who will be squeezed by falling prices and national budgets cut due to that, is a reality worse than the dreamed up nonsense by Mr. Levy who claims a solar police state is in future if we go green!

            And Yves, you of all people should understand anger and going after someone intelligent enough to know better. If Mr. Berman is an energy analyst, doesn’t he have to know the entire market, which would include the competition which will drive down oil demand, slowly but surely. Instead, insinuates his expertise in the oil sector somehow leads to commenting on renewables. And his comments were all wrong, out of touch and clearly an ax grinding moment of someone who has a problem with someone like me who supports policies that promote solar and most anything else that gets us to stop burning fuels for energy. The stakes for humanity are too high to let anyone get a pass and yeah, I am goddamn angry and ranting and attacking who ever I see as a political enemy. And this guy and his defender should look at what is really going on in the world beyond their charts and graphs in their little specialized world. If I can come here and read about and learn about finance and its systemic political tentacles, maybe they ought to do the world a favor and google solar energy once a month and find out what the alternatives are. If you want to attack TINA, then you need to look for the alternatives and not be so upset when you get attacked for ignorance.

            1. Ormond Otvos

              Paul, I too feel rage at the brainless incompetence of so many would-be experts, AND I think your analysis spot on.
              I care not a whit about rudeness, only accuracy.

    2. sd

      Irony – New Orleans has recovered in parts to become a bit of a play land for the hipsters with the gentrification now having spread from the Latin Quarter to St. Bernard Parish via St. Claude. However, the state tax coffers are not taking in much of a bump in tax revenue as they instead continue to offer tax incentives to the oil industry cleverly hidden by brokers. Louisiana tax incentives are brokered so that what looks like a tax incentive for film production is in fact going to the oil industry.

      Meanwhile, Louisiana gets federal funds paid for by the federal revenue from other states taxpayers to make up for its give away to big oil.

      Tax incentives should be used to encourage projects that the private sector might not otherwise invest in rather than pad the profit margins of multinational corporations.

    3. Rosario

      Much agreed. What “just markets” are we talking about with respect to pricing energy? Energy pricing has been and always will be tightly linked to politics until energy can be had through a completely sovereign energy production portfolio. I’m blown away by people who continue to make this argument when considering the obvious political manipulation practiced by the United States to secure cheap oil since we tethered our (and ultimately the world’s) economy to it in the early 20th century. What do the numbers matter when they are modelling exchange behaviors in a politically rigged system? Absolutely nothing. This thinking is dangerous because it denies the role of nation-states and the power they exercise to manipulate markets and commodity prices, in turn, jogging wrong headed economic theories that leave out countless influencing variables. Does decreased demand matter, sure, but so does supply glut, which can be and has been, historically, remedied very easily by major producers (the 70s should have made this clear to us).

      Not adjusting production to match demand and ETF peculiarities will tank the oil price much faster than a gradual decrease in demand. I have a hard time believing all of the global trade has decreased by 50% and a whole swath of America has moved into “no drive” urban neighborhoods in the last 6 months dramatically lowering the price of oil. In addition, China has been stocking up on strategic reserves like there is no tomorrow (post oil price crash: http://www.bloomberg.com/news/2014-12-12/record-oil-tankers-seen-sailing-to-china-amid-stockpiling-signs.html AND pre-oil price crash: http://business.financialpost.com/2014/05/21/why-china-is-stockpiling-huge-amounts-of-oil-at-a-record-pace/), and this in an environment where there is, apparently, a dramatically decreasing demand that warrants a 50% price decrease!? China is one of the largest oil consumers in the world. Oil price has dropped by 50% in 6 months and this was in the midst of globally recognized political events involving major oil producing nations! Why can’t we acknowledge the obvious instead of turning it into a numbers game?

      The 1973 oil embargo shows how quickly political decisions can completely alter energy markets in turn affecting numerous other economic behaviors in subsequent years (move to more efficient vehicles, slowdown of international trade, etc.). See the following chart to get an idea of the time scales we are talking about (http://www.economywatch.com/world-industries/oil/historical-prices.html). A greater than 50% increase in price in less than a year after the embargo was declared. This works in the opposite direction as well. I think we need to remind ourselves that all those numbers we follow are part of a bigger picture of global geopolitics. Even if one can show some compelling numbers rationalizing a “just market” tanking the oil price these numbers are subject to, and ultimately designed by/within a system that is political and directed (however haphazardly and irrationally).

    4. Rosario

      My rant about oil price aside, your comment as a whole is excellent, and your analysis of energy misconceptions is spot on. Keep fighting the disinformation!

  15. fosforos

    The “problem” of storing solar/aeolian electricity simply does not exist. The technologies have long existed to use “surplus” energy to produce hydrogen via electrolysis of water, to store the hydrogen in compressed form, to use it for electricity regeneration via a fuel cell, and to do this at virtually any scale. It is as certain as can be that, once these technologies are put into full scale operation, technological progress plus economies of mass-production will reduce the cost of “regenerated” electricity to the “too cheap to meter” level!

    1. Yves Smith Post author

      I suspect you are new to this site. I use that only on cross posts, not original articles (as in written by me). I find that despite putting an author tag line at the beginning of cross posts, I receive a much higher level of comments that assume I wrote the body of the post if I put that in than if I don’t.

  16. trinity river

    Thanks updating my latest opinions from reading other sources. Sometimes I think NC is all I need, but I always like to get several sources before forming an opinion.

    Arthur Berman doesn’t mention QE, but since in 2010 the congressional hearings attributed up to 60% of the price of oil to speculation, that may be the reason we are finally adjusting the price of oil to the poor world economy as E. L. Beck mentions. It had seemed to me all along that oil prices should be coming down due to decreased demand. It took so long I almost forgot.

    If Germany is doing so well switching to renewables, how are they doing it. Are they just subsidizing it no matter the cost? Some have questioned if they are doing as well as they say. I do not know.

  17. Avocet

    Nice article.

    One minor accounting quibble: The article says “Their debt was 120% of equity. That means that if they sold everything they own, they couldn’t pay off all their debt.” You might replace the word equity with assets or make some other suitable change.

    1. Yves Smith Post author

      I can’t change that. This is what the interview said and this is a cross post. I agree that what you said is pretty much certainly what he meant.

  18. Luke The Debtor

    AB is wrong. He was wrong about peak oil and now he is trying to skew the price drop as a story of demand. Supply is going up because demand is going up. There isn’t some secret oil repository. Some people can’t stand the fact that America is a leading innovator in oil field technology. This includes the republicans who want an XL pipeline because energy security.

    1. Yves Smith Post author

      Straw man. I suggest you read what Berman said and address that if you care to. His statement on Peak Oil is cogent and accurate, that the new fossil fuel sources are more costly. And they are less reliable. The latest studies by the Post Carbon Institute and the University of Texas, which were much more exacting in how they looked at the geology, both came up with shale gas output figures far below official forecasts. See here for a post on UT: http://www.nakedcapitalism.com/2014/12/new-study-says-us-fracking-boom-will-fall-quickly-after-2020.html. The Post Carbon Institute work is more recent, arguably more rigorous, and more negative.

      And that’s ONLY considering producer economics. Fracking has tons more externalities than conventional oil: it’s at least as abad from a climate change standpoint by virtue of the methane releases, it uses water, our most limited resource, it contaminates aquifers, and it will require a costly conversion to LNG transport.

      As Joe Costello said by e-mail last month:

      One thing to keep in mind about all this, shale is not the only high priced oil out there, in fact pretty much everything that’s been brought on-line globally for last 10 years is up there, at what price, no one knows for sure, but at this price lot more than shale is in trouble. Remember for the last year, the majors were saying they couldn’t get new oil for under a $100 at this point, were they exaggerating, maybe, but not by much…

      The shale guys after trying to put a up a bunch of BS have now begun to follow suit. Continental, who were talking the loudest, have in recent weeks cut capx almost by half. And remember as soon as the shale guys quit drilling, production is going to start falling pretty quickly and large, these aint your daddy’s oil wells.

      I dont believe anything about how they improved tech, there’s no solid cost numbers behind that, cause there were no solid costs numbers to begin with. The biggest thing they’ve done in last couple years is start to stack the holes nearer to each other, and that never worked in traditional wells, the next well just becomes a parasite on the first, it increases production initially, but than drops off quicker and usually results in less oil over time from the various pressure dynamics.

      There’s no real great cost cutting gains, its just plain in simple more capital intensive than the old wells, and yeah no doubt you can get better and more efficient, but that’s trimming costs not some great savings with better technologies. New oil, wherever it is just more expensive period and there’s less and less of it, and no one wants to admit that. I see all the Americans’ moods have grown better since oil’s come down in price, nothing like a quick fix.

      Boone Pickens was on yesterday https://www.youtube.com/watch?v=uwGz4foNsx8 with the knuckleheads of CNBC good to watch. What we once defined as old crude peaked in 05 and Picken’s right, if it wasn’t for this shale, the world would be looking at quite a deficit in supply even with stagnant demand. Most importantly, not only the costs on shale hid by the debt, but it never was a long play, most of the geologists/engineers I’ve read for a long time have all said it will peak in next year or two and it looks like thats probably right – http://peakoilbarrel.com/bakken-1st-24-hour-prod-validity-verified/

      FYI “the majors” are among the biggest players in shale gas too.

      1. Luke The Debtor

        Berman likes to talk about the ‘conventional’ oil peak. ‘Conventional’ oil 100 years ago when the Standard Oil trust was being broken (before the populairty of automobiles might I add) was far different than the ‘conventional’ oil that was being produced 50 years later. The drilling depths in the early 1900s were far shallower and ‘offshore’ platforms were wooden and resembled piers compared to their mid-century counterparts.

        I agree with Berman to an extent. Companies will look to their completion backlogs, reduce rig count, shut in wells and increase workover, and look to lower their capex as well as offshore/outsource whatever backoffice jobs they can. That’s the way of the world.

        And he is right that there are sweetspots: anticlines (i.e. Bakken), reefs (i.e. Eagle Ford), salt domes (i.e. GOM), etc. And there are hazards: low permeability, low TOC, maleable/soft rock, leakage, etc. But those are fundamentals that every single explorer and producer has ever had to deal with. Even the Saudis drill dry holes. To give some perspective, the Bakken and Eagle Ford were first drilled in the 1950s.

        Oil is a very political commodity and the US could increase world production by another 2 million barrels without ever having to drill a single well itself – by passing the XL Pipeline and lifting sanctions against Iran. Peak oil predictors have been wrong.

  19. Jay M

    Tight and sweet (no sulfur) and and a sweet spot. Wouldn’t want to call it shall oil?

    Driving around in circles.

  20. Gerard Pierce

    Bumper sticker from Denver in the 1980’s: “Dear Lord, please give me one more oil boom – this time I promise not to piss it all away.”

  21. steelhead23

    I too like this article. However, I think the time/price dislocation deserves a bit more attention. That is, by the time a play comes into production there would be a ton of sunk costs. Hence, when an oil company investment officer is asked to recommend whether or not to fund a given play, he has to amortize all those sunk development costs plus production costs and gaze into his crystal ball (fancy model no doubt) to estimate the price stream over the life of production in order to reach a rational decision. Add to that the natural risk of exploration/development that production might be far less than anticipated. Then, of course, there’s the cost of financing to consider. My concern is that this time/price uncertainty issue is likely to cause a substantial reduction in exploration/development within a year or so. Then, total production would begin to drop. And after a considerable period of low prices increased demand (a couple of years), we could face shortages and years of increasing prices as production ramped up. This leads to a concern I have about modern corporate governance – the Milton Friedman edict to maximize shareholder value has led highly profitable oil companies to have relatively little investible funds because they’ve spend prior profits buying back stock and paying dividends. Were I Warren Buffet, I might be eyeing foolish energy companies like Continental Resources which have substantial developable resource with inadequate cash flow to fund them, buy them out and fund those plays today with the expectation that by the time the play comes into high production the aforementioned shortages would lead to substantial profit. Come to think of it, this would be a smart play for Buffet as he already owns those Bakken oil trains.

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