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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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Why Oil Prices Might Never Recover

Rig

Two years into the global oil-price collapse, it seems unlikely that prices will return to sustained levels above $70 per barrel any time soon or perhaps, ever. That is because the global economy is exhausted. The current oil-price rally is over as I predicted several months ago and prices are heading toward $40 per barrel.

Oil has been re-valued to affordable levels based on the real value of money. The market now accepts the erroneous producer claims of profitability below the cost of production and has adjusted expectations accordingly. Be careful of what you ask for.

Meanwhile, a global uprising is unfolding.

The U.K. vote to exit the European Union is part of it. So is the Trump presidential candidacy in the U.S. and the re-run of the presidential election in Austria. Radical Islam and the Arab Spring were precursors. People want to throw out the elites who led the world into such a mess while assuring them that everything was fine.

The uprising seems to be about immigration and borders but it’s really about hard times in a failing global economy. Debt and the cost of energy are the pillars that underlie that failure and the resulting discontent. Immigrants and infidels are scapegoats invented by demagogues.

Energy Is The Economy

Energy is the economy. Energy resources are the reserve account behind currency. The economy can grow as long as there is surplus affordable energy in that account. The economy stops growing when the cost of energy production becomes unaffordable. It is irrelevant that oil companies can make a profit at unaffordable prices.

The oil-price collapse that began in July 2014 followed the longest period of unaffordable oil prices in history. Monthly oil prices (in 2016 dollars) were above $90 per barrel for 48 months from November 2010 through September 2014 (Figure 1).

(Click to enlarge)

Figure 1. Oil Prices in 2016 Dollars, 1950-2016. Source: EIA, Federal Reserve Bank of St. Louis and Labyrinth Consulting Services, Inc.

That was more than 3.5 times longer than the period from September 2007 through September 2008 just before the financial collapse. It was almost twice as long as the period from September 1979 through November 1981 that preceded the longest oil-price collapse in history. Related: Venezuela’s Oil Production Plunges To 13-Year Low

There is nothing magic about $90 per barrel but major economic dislocations have occurred following periods above that level. Few economists or world leaders seem to understand this or include the cost of energy in their models and policies.

There is a clear correlation between oil price and U.S. GDP (Gross Domestic Product) when both are normalized in real current dollar values (Figure 2). Periods of low or falling oil prices correspond to periods of increasing GDP and periods of high or rising prices coincide with periods of flat GDP.

(Click to enlarge)

Figure 2. U.S. GDP and WTI Oil Price. Source: U.S. Bureau of Labor Statistics, The World Bank, EIA and Labyrinth Consulting Services, Inc.

Economic growth is complex and some will object to this correlation. Fine. But energy is also complex. Most people think about it as an independent topic or area of our lives. Like business, politics, economics, education, agriculture, and manufacturing, there is energy. This is understandable but wrong.

Energy underlies and connects everything. We need energy to make things, transport and sell things and to transport ourselves so that we can work and spend. We need it to run our computers, our homes and our businesses. It takes energy to heat, cool, cook and communicate. In fact, it is impossible to think of anything in our lives that does not rely on energy.

When energy costs are low, the costs of doing business are correspondingly low. When energy prices are high, it is difficult to make a profit because the underlying costs of manufacture and distribution are high. This is particularly true in a global economy that requires substantial transport of raw materials, goods and services.

The global economy expanded in the mid-1980s through 1990s when oil prices averaged $33 per barrel. Then, oil prices nearly doubled to an average of $68 per barrel from 1998 to 2008, and subsequently increased after 2008 to 2.5 times more than in the 1990s. When oil prices exceed $90 per barrel, the global economy is no longer profitable.

America’s Golden Age

The United States experienced a golden age of economic growth and prosperity during the 25 years following World War II. This period forms the basis for U.S. and indeed global expectations that growth is the norm and that recessions and slow growth are aberrations that result from mis-management of the economy. This is the America that today’s populists want to return to.

The Golden Age, however, was a singular phenomenon that is unlikely to recur. After 1945, the economies and militaries of Europe and Japan were in ruins. The U.S. was the only major power that survived the war intact. Having no competition is a huge competitive advantage.

The U.S. was the first country to fully convert to petroleum, another competitive advantage. A barrel of oil contains about the same amount of energy as a human would expend in calories in 11 years of manual labor. Crude oil contains more than twice as much energy as coal and two-and-a-half times more than wood. And it’s a liquid that can be moved easily around the world and put in vehicles for transport.

In 1950, the U.S. produced 52 percent of the crude oil in the world and was largely self-sufficient. Texas was the largest U.S. producing state and the Texas Railroad Commission (TXRRC) controlled the world price of oil through a system of allowable production that also ensured spare capacity.

Oil was cheap, the U.S. controlled its price and had a positive balance of payments.

Oil Shocks of the 1970s and 1980s

That began to change toward the end of the 1960s. A re-built Europe and Japan rose to challenge American commercial dominance and the costs of fighting the spread of communism–especially in Vietnam–weakened the American economy. In 1970, the U.S. economy went into recession and President Nixon took drastic steps including the end of backing the dollar with gold reserves. The rest of the countries that were part of the Bretton Woods Agreement did the same resulting in the largest global currency devaluation in history.

In November 1970, U.S. oil production peaked and began to decline. In March 1972 the TXRRC abandoned allowable rates. The United States no longer had any spare capacity. OPEC had long objected that oil prices were held artificially low by the U.S. Now OPEC had the clout to do something about it.

In October 1973, OPEC declared an oil embargo against Israel’s allies including the U.S. during the Yom Kippur War. This was really was just an excuse to adjust oil prices to the devalued Western currencies following the end of the Bretton Woods Agreement.

The price of oil more than doubled by the end of January 1974 from $22 to $52 per barrel (2016 dollars). When the Arab-Israeli conflict ended a few months later, oil prices did not fall.

Real oil prices more than doubled again in 1980 to $117 when Iran and Iraq began a war that took more than 6 million barrels off the market by 1981. The effect of these price hikes on the world economy was devastating. World demand for oil decreased by almost 10 million barrels per day and did not recover to 1979 levels until 1994 (Figure 3). Real prices did not recover to $40 until 2004 except for a brief excursion during the First Persian Gulf War in 1990.

Figure 3. OPEC and world liquids production compared to 1979 and world oil prices. Source: BP and Labyrinth Consulting Services, Inc.

The Miracle of Reagan Economics: Low Oil Price

Ronald Reagan is remembered as a great U.S. president because the economy improved and the Soviet Union fell during his administration. Both of these phenomena were because of low oil prices.

After U.S. oil production peaked, imports increased 5-fold from 1.3 to 6.6 mmbpd from 1970 to 1977 (Figure 4).

Figure 4. U.S. crude oil production, imports and oil price in 2016 dollars. Source: EIA, Federal Reserve Bank of St. Louis and Labyrinth Consulting Services, Inc.

When oil prices rose to nearly $110 per barrel during the Iran-Iraq War, the U.S. went into recession from mid-1981 through 1982. Oil consumption fell more than 3 million barrels per day. Production from Prudhoe Bay began in 1977 and somewhat dampened the overseas outflow of capital but it did not help consumers with price.

Federal Reserve Chairman Paul Volker raised interest rates to more than 16 percent by 1981 to bring the inflation caused by higher oil prices under control (Figure 5). This worsened the economic hardship for Americans in the short-term but also became the foundation of the Reagan economic revival.

(Click to enlarge)

Figure 5. U.S. public and consumer debt and interest rates. Source: U.S. Treasury, U.S. Federal Reserve Banks and Labyrinth Consulting Services, Inc.

Much of the developing world had survived the oil shocks of the 1970s by borrowing from U.S. commercial banks. Higher U.S. interest rates put those countries into recession and that helped keep oil demand and prices low. By 1985, oil prices had fallen below $40 per barrel and would not rise above that level again until 2005.

Volker found an opportunity in the demand destruction from oil shocks. By raising U.S. interest rates, he managed to roll back oil prices almost to levels before the 1973 oil embargo and created a great economic boon for the U.S.

“He [Volker] used the strategic price that America continued to control—namely, world interest rate—as a weapon against the price of the strategic commodity that America no longer controlled, which was oil.”

—James Kenneth Galbraith

High interest rates attracted investment. Along with low oil prices, a strong dollar, tax cuts and increased military spending, Volker and Reagan restored growth to the U.S. economy. By 1991, the Soviet Union collapsed under the strain of low oil prices, debt, and military spending.

Things Fall Apart; The Center Cannot Hold

Treasury bonds became the effective reserve asset of the world. The U.S. put economic growth on a credit card that it never planned to pay off. Public debt increased almost 6-fold from the beginning of Reagan’s administration ($1 trillion) in 1981 to the end of Clinton’s ($6 trillion) in 2000 (Figure 5). By the end of Bush’s presidency in 2008, debt had reached $10 trillion. It is now more than $18 trillion.

The 1990s were the longest period of economic growth in American history.

There are, of course, limits to growth based on debt but the new economy seemed to be working as long as oil prices stayed low. Then, Prudhoe Bay peaked in 1985. Total U.S. production declined, and imports increased sharply as the economy improved (Figure 4). Similarly, the world economy slowly recovered after 1985 with lower oil prices.

Consumer credit expanded under President Clinton through mortgage debt. Manufacturing had been progressively outsourced to Latin American and Asia, and the evolving service economy was underwritten by consumer debt that increased 7-fold from less than $0.5 trillion in 1981 to $2.6 trillion in 2008 (Figure 5).

The “dot.com” market collapse in 2000 and the September 11, 2001 terror attacks pushed the U.S. economy into recession and the Federal Reserve reduced interest rates below 2 percent, the lowest levels in U.S. history to date. Mortgage financing boomed.

The 1993 repeal of The Glass-Steagall Act allowed banks to package mortgage debt into complex, high-risk securities (CDOs or collateralized debt obligations). In what can only be described as out-of-control speculative greed and institutional fraud, CDOs, synthetic CDOs that bet on the outcome of CDO bets, and the credit default swaps that bet against both propelled the economy to levels of leverage and instability not seen since the 1920s. Related: EV’s Won’t Kill Diesel – Electric Highways Will

“This was the new new world order: better living through financialization.”

–James Kenneth Galbraith

From 2004 through 2008, world liquids production reached a plateau around 86 million barrels per day (Figure 5). Increased demand from China and other developing economies pushed oil prices higher as traders and investors worried that Peak Oil had perhaps arrived.

(Click to enlarge)

Figure 6. World liquids production and oil price in 2016 dollars. Source: EIA June 2016 STEO and Labyrinth Consulting Services, Inc.

Oil prices soared to more than $140 per barrel and interest rates rose above 5 percent. The adjustable interest rates that underlaid much sub-prime debt also rose. Mortgage holders began to default and world financial markets collapsed in 2008.

The Second Coming

Debt and higher oil prices had spoiled the party. The problem was addressed with more debt and higher oil prices.

The Federal Reserve Bank brought interest rates to almost zero, created money and bought Treasury bonds while the government bailed out the banks and auto industry. OPEC cut production by 2.6 million barrels from December 2008 to March 2009 and oil prices recovered from $43 to $65 by May, and were more than $80 by year-end propelled by a weak dollar and easy credit.

Tight oil, deep water and oil sands projects that needed sustained high oil prices took off. Unconventional production in the U.S. and Canada increased 5 million barrels per day between January 2010 and October 2015 (Figure 7).

(Click to enlarge)

Figure 7. Incremental world crude oil + lease condensate production. Source: EIA and Labyrinth Consulting Services, Inc. after Crude Oil Peak.

Tight oil used the same horizontal drilling and hydraulic fracturing technology that had been pioneered in earlier shale gas plays. The technology was expensive but once oil price topped $90 per barrel in late 2010 and stayed high for the next 4 years, the plays were deemed successful by producers and credit markets.

U.S. tight oil and deep-water production resulted in a second coming of sorts with monthly crude oil output reaching 9.69 million barrels per day in April 2015. That was 350,000 bopd less than the 1970 peak of 10.04 million bopd.

The difference of course was cost. In 1970, the market price of a barrel of oil in 2016 dollars was $20 per barrel versus $100 from 2011 to 2014, and $55 per barrel in 2015.

And this is precisely the problem with the almost universally held belief that technology will make all things possible, including making a finite resource like oil infinite. Technology has a cost that its evangelists forget to mention.

The reality is that technology allows us to extract tight oil from non-reservoir rock at almost 3 times the cost of high-quality reservoirs in the past. The truth is that we have no high-quality reservoirs left with sufficient reserves to move the needle on the high global appetite for oil. The consequence is that to keep consuming and producing as we always have will inevitably cost a lot more money. This is basic thermodynamics and not a pessimistic opinion about technology.

Nevertheless, in a zero-interest rate world, there was great enthusiasm for yields greater than conventional investments like U.S. Treasury bonds and savings accounts that continue to pay less than 2 percent. Bank and mezzanine debt, high-yield corporate (“junk”) bonds and share offerings promised yields in the 6 to 10 percent range. As long as prices were high and the plays were marginally profitable, risks were downplayed and capital was almost unlimited. Two years into the oil-price collapse, capital is more limited because banks and investors have been burned.

Producers continue the mantra that costs keep going down and well performance keeps getting better. Those with some history and perspective, however, know and remember that they always say that but the balance sheets never reflect the claims.

In 1996, the late Aubrey McClendon made the following statement about the Louisiana Austin Chalk play:

“Today, because of improvements in horizontal drilling technology, you’ve got a play that could be the largest onshore play in the country, not only in size of potential reserves but also in areal extent.”

That play was a total failure for McClendon’s Chesapeake Energy Corporation and today Chesapeake is on the verge of bankruptcy for the second time.

People want to believe that things keep getting better and that they won’t have to change their behavior—even if these beliefs defy common sense and the laws of nature.

Slouching Toward Bethlehem

The oil-price collapse that began in July 2014 was technically about over-production. A surplus of unconventional oil from the United States and Canada, and a hiatus in geopolitical outages upset the world market balance and pushed prices lower.

Some have tried to emphasize the role that demand played. But there is simply no comparison to the 10 mmbpd demand destruction that occurred between 1979 and 1983 nor is this anything like the 2.6 mmbpd demand decline in 2008-2009.

This price collapse is simply different than the others. It is more fundamental. The economy has been pushed beyond its limits.

Post-Financial Collapse monetary policies, the cumulative cost of nearly four decades of debt-financed growth, and the return of higher oil prices have exhausted the economy. Most debt is non-productive, interest rates cannot be increased, and 2016′s low oil prices are still one-third higher than in the 1990s.

Producers and oil-field service companies are on life support. One-third of U.S. oil companies are in default. Yet some analysts who have no experience working in the oil industry proclaim break-even prices below $40 per barrel and breathlessly predict that the business will come roaring back when prices exceed $50. Producers don’t help with outrageous claims of profitability at or below current oil prices that exclude costs and are not generally applicable to their portfolios.

As a result, the public and many policy makers believe that tight oil is a triumph of American ingenuity and that energy will be cheap and abundant going forward. The EIA forecasts that U.S. crude oil production will exceed the 1970 annual peak of 9.6 mmbpd by 2027 and that tight oil will account for almost 6 million barrels per day. Although I have great respect for EIA, these forecasts reflect a magical optimism based on what is technically possible rather than what is economically feasible.

Renewable energy will be increasingly part of the landscape but its enthusiasts are also magical thinkers.

In 2015, renewables accounted for only 3 percent of U.S. primary energy consumption. No matter the costs nor determination to convert from fossil to renewable energy, a transition of this magnitude is unlikely in less than decades.

Solar PV and wind provide much lower net energy than fossil fuels and have limited application for transport–the primary use of energy– without lengthy and costly equipment replacement. The daunting investment cost becomes critically problematic in a deteriorating economy. Although proponents of renewable energy point to falling costs, more than half of all solar panels used in the U.S. are from China where cheap manufacturing is financed by unsustainable debt.

It is telling that energy and its cost can hardly be found among the endless discussions about the economy and its failure to grow. Technology optimists have disparaged the existence of an energy problem since at least the 1950s. Neither unconventional oil nor renewable energy offer satisfactory, reasonably priced, timely solutions to the dilemma.

As political leaders and economic experts debate peripheral issues, the public understands that there is something horribly wrong in the world. It is increasingly difficult for most people to get by in a failing global economy. That is why there are political upheavals going on in Britain, the United States and elsewhere.

The oil industry is damaged and higher prices won’t fix it because the economy cannot bear them. It is unlikely that sustained prices will reach $70 in the next few years and possibly, ever.

The British exit from the European Union adds another element of risk for investors. Lack of investment will inevitably lead to lower production, supply deficits and price spikes. These will further damage the economy.

The future for oil prices and the global economy is frightening. I don’t know what beast slouches toward Bethlehem but I am willing to bet that it does not include growth. The best path forward is to face the beast. Acknowledge the problem, stop looking for improbable solutions that allow us live like energy is still cheap, and find ways to live better with less.

By Art Berman for Oilprice.com

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Leave a comment
  • Joe on July 18 2016 said:
    Arthur, that was one of the best written articles on the history of oil pricing I have seen in some time. I also appreciate your super macro viewpoint on the world economic state. However, I think you should go back to the red line on the graph representing oil prices in 2016 dollars. It boils down to simple math. Most OPEC countries will run out of money in a few more years. They will decide to curtail production to raise prices. World demand will take care of the rest, whether we think the world can afford it or not.
  • Geary Buchanan on July 18 2016 said:
    Very thorough and well thought analysis.
  • GregSS on July 18 2016 said:
    Great article Arthur, it's obvious you put a lot of time and thought into it. I think the oil industry might enjoy once last price spike, and then enter into a long slow decline. Thankfully I am not too far from retirement.
  • Hal on July 18 2016 said:
    Agree with the headline, to some extent, but demand destruction caused by plummeting battery costs and plummeting solar energy costs are the reasons why oil may never see $80/bbl again (though my hunch is there will be one last short-lived spike to $100/bbl). EVs are already a better economic proposition for consumers *today*, relative to internal combustion, if you figure total cost of ownership. This in large part is why demand for EVs is growing so fast without any advertising spend. Batteries are getting 14% cheaper every year, so EVs will continue to build on their existing lead in customer satisfaction and demand growth relative to ICE cars.

    The author suggests Chinese overproduction is the cause of falling solar prices. That was true in 2011-2012 but is outdated information. Solar is falling in price regardless of the country of manufacture, because that's what tech always does -- it falls in price. Bids on a price per kWh basis (the only basis that matters) continue to fall rapidly, regardless of where equipment is manufactured. This is not magical thinking, it's empirical reality. Prices are falling due to rapidly improving tech, but also due to ongoing maturation of the industry more generally and due to scale.

    We are going to see a lot of very poor energy analysis in the next year or two, as people like this author fail to update their knowledge of this rapidly changing space. There is a feeling among many analysts that because the industry has not undergone any fundamental changes in a long time, that it never will. For anyone willing to pay attention, though, it's pretty obvious ICEs are in a terrible competitive position going forward, and fossil fuels generally are entering their long tail. The same thing that happened to coal will happen to fossil fuels more generally.
  • Adam on July 18 2016 said:
    How many times will this clown be wrong??/ he was bullish all last summer... He's never right! Gartman, Kilduff, and Art all the same-- and always worng
  • Ron Blumas on July 18 2016 said:
    Thank you for this extremely well written article on oil prices, its impact on the overall economy, and the historical perspective you provided.
  • David on July 18 2016 said:
    Damn Arthur, you need to up your dosage of Prozac. This is depressing.==Why the total turnabout in sentiment. Your last 2 articles were titled "Why we can expect cripplingly high oil prices in the near future" and "Don't listen to the analysts: The rig count still matters". Both these are fairly bullish on price. Now you publish this. ----- This is why I find it hard to follow these analysts. They're all over the page from week to week. Nothing has happened the last month that isn't happening now
  • David on July 18 2016 said:
    Damn Arthur, you need to up your dosage of Prozac. You were obviously depressed when you wrote this. Now I am.----Why the sudden about face. Your last 2 articles were titled "Why we can expect cripplingly higher oil prices in the near future" and Don't listen to the analysts: The rig count still matters". Both these articles were fairly bullish on oil prices. Now this? Nothing in the world has fundamentally changed from the time of your last articles to this one. I don't follow many analysts because most are all over the page from week to week and don't seem to have a fundamental understanding of this business. I always thought you were different. Here's to hoping you explain yourself. It's not fair to lead us down a road and then pull the rug out from under us.
  • John Brown on July 18 2016 said:
    Well that's an interesting if gloomy perspective. Oil prices won't go up because fracking and technology have opened up vast new supplies at the cost of production is getting cheaper, but it won't go up because the world economy can't support higher prices.
    I'd say it may be a combination of both. Certainly Obama has inflicted terrible damage on the U.S. economy and unbelievable levels of DEBT to buy his reelection and keep the economy from plunging into Depression and his policies kill jobs and growth.
    However, it also looks like the world has plenty of oil, that the cost of harder to produce oil is decreasing, and that swing producers like the U.S. can ramp up production faster and at lower prices than in the past. Meantime renewable's are getting better and less expensive even if they have a long way to go, and if the government would ever stop playing stupid politics and start looking at newer safer nuclear it could grow fast.
    I doubt if its all doom and gloom as this article points out. At least I hope not. After the nightmare Obama regime and all that DEBT and Funny Money, and all that corruption gumming up the entire system you have to wonder if we'll ever be able to recover.
    Its seems to me though that if we will only reject the stupidity and failure of Obama/Hillary and the democrats that we could restore growth, Jobs, and prosperity, and while oil might be more expensive than in the 80s, we know we aren't going to run out anytime soon, and we will have time for other energy sources to go down in price and replace oil with cleaner cheaper even if it takes 30 or 50 years.
  • Scott on July 18 2016 said:
    In reference to comments regarding Chesapeake - the author implies that Chesapeake failed because of the Austin Chaulk play - Chesapeake failed because natural gas prices fell from $13 to $2 and because the company spent aggressively on acreage inventory rather than drilling and increasing their reserves.

    This erroneous conclusion makes me wonder about his other conclusions in the article.
  • Richard G E Yap on July 18 2016 said:
    Great Article and excellent site to read the real and pro comments on the oil market! Excellent Job!
  • Kevin on July 19 2016 said:
    Great article, enjoyed reading. I do feel though the American economy can handle higher prices at the pump if that is what it takes. It won't shut things down. Also, if we ease up on
    a restrictions and open refineries again, this would help.
  • Ron Peters on July 19 2016 said:
    Amen, brother - you said it!
  • Seth on July 19 2016 said:
    From Peak Oil to more gloom-and-doom.

    "In 1996, the late Aubrey McClendon made the following statement about the Louisiana Austin Chalk play:

    “Today, because of improvements in horizontal drilling technology, you’ve got a play that could be the largest onshore play in the country, not only in size of potential reserves but also in areal extent.”

    That play was a total failure for McClendon’s Chesapeake Energy Corporation and today Chesapeake is on the verge of bankruptcy for the second time.

    People want to believe that things keep getting better and that they won’t have to change their behavior—even if these beliefs defy common sense and the laws of nature."

    It's funny that after the death of the Peak Oil Industry, of which Art was a high priest, Art focuses on one fracking/shale failure instead of the Permian, Bakken, and many other revolutionary successes that make the United States the top country in the world in terms of oil reserves. Exxon recently announced major finds in Guyana and the North Sea and last year a major oil discovery was discovered onshore near London.

    We've barely scratched the surface with new techniques and equipment to find and extract more oil, and with advances in solar and wind, the world is in great shape in terms of energy.
  • michael stefko on July 19 2016 said:
    A lot to think about. A lot to tie together. With half the country still believing in supply side economics, we need some supercomputers to put all this info through the wringer. Great article. Some great comments, too. Thanks.
  • Ray on July 19 2016 said:
    Excellent article, Arthur thank you. You should note commodity and equity prices can be manipulated for short and long periods of time as an example gold a relative useless metal that people and countries may use as hedges. However, when has anyone offered to pay for any product or service with an ounce of gold in modern times?
  • Garyth evans on July 19 2016 said:
    Not bad however oil will be back in the 60 range next year. It will be at fifty or slightly higher by end of year
  • James on July 20 2016 said:
    Thanks Arthur for sharing your insight. It is rare to come by this level of analysis. I enjoyed reading the article very much indeed.
  • GREGORY FOREMAN on July 22 2016 said:
    The oil industry “powers” and the majority of “expert analyst” fail to appreciate nor comprehend the bases for the past two years of turmoil in the industry is traceable to one momentous event: amending the 1975 Energy Policy and Conversation Act(EPCA) in 2015 to permit export of U.S. crude oil. Among US oil interest, the general consensus is to attribute the decline in oil prices and the resulting effect on the US oil industry to those “dam Arabs”. If only OPEC would simply quit pumping as much oil? (Like OPEC should factor into their market dynamics the effect such decisions will have on the US oil industry.)
    Such critics fail to consider the fact the US “reneged” on what could be best described as a legislative no-compete clause, ie, the 1975 Energy Policy and Conservation Act, that prohibited US crude oil exports. Therefore, it is not ironic the drop in crude oil prices commenced within months of the lobbying effort aimed at amending the 1975 EPCA?
    Such, the drop in oil prices, should have been considered a “shot over the bow” from OPEC. Unfortunately, the oil industry failed to appreciate the precarious position of US oil “visa-vie” the global oil market. Essentially, it was OPEC’s way of saying “thank you” to the US for reneging on a 40 year legislative “no compete” agreement. It was OPEC’s way of communicating in dollars and cents, the only way they know how, if you “enter our sandbox”, ie, enter the global oil market, there is going to be hell to pay. Unfortunately, US oil interest have failed to appreciate the message that US oil concerns do not live in a bubble.
    US oil interest adopted the “ugly American” attitude and approach, lobbying for and successfully repealing the 1975 EPCA prohibition against crude oil exports with little if any concern or comprehension the repeal would have on the domestic oil industry.
    The fact is OPEC, in the form of the Saudi’s, have a better quantitative and qualitative comprehension of the US oil industry than US oil companies.
    Never being one to oversimplify or “conspiracize” a given issue, I have to make an exception on this particular subject. Everything bad that has befallen the US oil industry in the past two years can unequivocally be traced to amendment of the 1975 EPCA and the resulting resumption of US oil exports.
    If anyone “thinks” otherwise...then they may need a re-evaluation of their thought processes.
  • John Observer on July 22 2016 said:
    Excellent, absolutely well documented and logical conclusions.
  • heisenberg on July 22 2016 said:
    "Energy is the economy."

    No it isn't.The economy is the sum total of all work, both physical and mental, both labor and capital. And yes, work does require energy. But there is nothing, NOTHING, sacred about oil.

    I do agree that the price of oil might never recover but not for the "reason" given here. (Oh horrors, cheap oil means that the economy might never recover!!! Please, please, please let us have $120 oil again! So what if tyrants and religious fanatics would once again be rolling cash.)

    The old economy was pulled by ever-increasing consumption and pushed by fossil fuel. That paradigm is dying, and good riddance! In the new data-driven paradigm, the economy is pulled by efficiency and pushed by renewably generated electrons. And that's what scares the coal-tar out of the vested interests.
  • Ronald Wagner on July 22 2016 said:
    Great article except for its pessimism and political comments.

    The writer totally overlooks the role of cheap clean natural gas and the fact that it can be used in place of oil at a competitive price. It would only involve leadership and good thinking.
  • sd on July 23 2016 said:
    Wait a second: Weren't you telling Chris Martenson in an interview recently that oil prices were going to take off big?
  • John on July 23 2016 said:
    What we have here is a man with a masters degree in petroleum geology
    discussing highly complex global economics. A formidable task for even the economic geniuses of our time.
    Unfortunately, making speeches and posting articles based on gathered
    charts constructed by others does not make one correct in their assumptions.
    While we commend Mr. Berman's attempt at deciphering a thousand roadsigns, I reserve the right to say his true expertise may lie elsewhere.
    At last check, Walmart still does not sell crystal balls.
  • Tim on July 27 2016 said:
    I agree with Hal. The figures on supply and demand disparity that caused the oil crash that I've seen reported was made up of about 30% demand destruction from battery electric vehicles. Even if US BEVs only total 500,000 units, that is still a lot of oil demand lost, essentially permanently for the next 10 years. China's BEV adoption is set to dwarf that of the US this year.

    The next three years are going to see an explosion of BEV sales, with the 200-mile Chevy Bolt, Tesla Model 3, and 2nd Generation Nissan LEAF hitting the market. These BEVs will have the same price point as today's 100 mile EVs, but travel 200+ miles on a charge.

    The charging network has seen dramatic growth in the last two years, with many major cities such as Pittsburgh, PA gaining 20 quick chargers scattered in and around the city. These are the units that will give most EVs an 80% charge in 30 minutes or less. One quick charger I use semi-regularly doubles my EV's driving range with about an hour of en-route charging.

    Also, many BEV owners opt to install solar panels. My solar panels are manufactured by SolarWorld, which manufactures their solar panels in the US and Germany, and due to the location of the US plant, are manufactured using a majority of hydropower. Without incentives, and including all costs of installation and equipment, my solar array is cheaper per kWh than (coal/nat. gas based) grid power over the 25 year warranty of the solar panels. It was installed in 2013. While Chinese solar panels did initially cause a dramatic price drop, the resulting demand increase because of that is keeping prices low through economies of scale. The current trend is to hold the price point and increase power output, lowering the cost/kWh by making panels more power dense, and allowing smaller systems to produce similar power to older, larger systems. My panels are rated at 265 watts output, and the same size/cost panels today output 290-300 watts.

    While renewable energy and BEVs are small by comparison, don't underestimate their impact. I save $80/month by driving on solar-sourced electricity over gasoline. My BEV is capable of much larger savings, as I use less than half a charge most days on a 62-mile EV.
  • Bill Wall on July 28 2016 said:
    Lots of hard work and good information on the history there.

    Looking ahead is always difficult, but the shrugging off of the PV potential is not justified by the tech developments in process. It's not the declining cost of PV panels that will revolutionize the solar business from where it is at in 2016, it is the next generation of battery tech that will do it. By 2022, the EV will be at cost parity with the ICE car. At that point, there will be a seachange toward the purchase of the EV car as it will be a matter of economics then, not just for climate change believers. And by then you will be able to place a few even cheaper PV panels on your house, save the power into an affordable battery, charge your EV at night, and now your fuel costs are at $0 out of pocket cost after a low cost investment.

    That is just the beginning. Mines and other industrial projects in remote areas all over the world will be powered by solar rather than diesel generators and this is happening now for both new developments and for conversions. Even in developed areas with a grid, solar will soon reach grid parity and conversion will be a matter of economics, not social policy.

    Oil's sunset is in the horizon. It will be around for the rest of the century, but will increasingly become irrelevant to economic, social, and even foreign policy.
  • Brett Ingham on July 30 2016 said:
    This is an excellent, if not perfect article. I believe the hidden message, between the lines so to speak, is that at some point oil supplies world wide will not suffice, and technology for replacement energy will not be sufficient either. At some point energy costs skyrocket, worldwide GDP declines, and we enter another, much longer, and perhaps much deeper depression.

    I have been a skeptic of alternative fuels to oil. After all, electric cars are not very attainable to the 2 billion Chinese and Indians that don't have but aspire to have automobiles. Also, most electricity is produced by coal, meaning most electric cars are running on coal, albeit with two or three times the efficiency of gasoline. How do we recycle the dead batteries - tens of millions of them every year? Is that not toxic waste? And what is the cost to our infrastructure to convert massively to electrically powered vehicles. Go tell the Japanese, or anyone else for that matter, that nuclear is the solution.

    Oil is truly our only short term (20 years) option, and we will run out of it long before oceans rise over Miami.
  • Tim on August 01 2016 said:
    Brett, as much of a step forward that EVs are over conventional autos, that doesn't mean that everybody should have one. If anything, we should be moving beyond the personal automobile. India is way too crowded for there to be a large automobile market. They wouldn't have physical space to drive them around. It'd be LA gridlock 24/7. If they can only aspire to have an automobile, then a gasoline or diesel vehicle isn't very attainable then, either.

    In the meantime, though, it is wise to swap out the current ICE vehicles for electric as that alone is a big step forward.

    As you correctly pointed out, EVs running on coal are still more efficient than gasoline, and that is only going to get better as the grid gets cleaner. As the 2nd Generation lithium-ion EVs hit the road over the next 2 years, they are going to displace a fair portion of oil consumption by personal automobiles, and as companies such as Nikola Motors and Tesla Motors both work to bring hybrid and electric semis and buses to market, diesel consumption is going to drop considerably. Nikola Motors is working on a natural gas hybrid semi truck, and Tesla will likely bring the pure electric semi.

    Lithium-ion batteries aren't nearly as toxic as previous batteries. Most of the metal making up li-ion batteries is copper and aluminum. Lithium itself is a rather small percentage of the battery. EV batteries are likely to have a 20-30 year lifespan, the first 10 years or so actually being in the vehicle. Afterwards, the packs will likely be used as stationary storage because energy density isn't as important for stationary applications. This is all still an unknown as we are not at that stage of the game yet. The oldest li-ion EV on the road is the Tesla Roadster, with the first copies being 8 years old. The first generation RAV4-EVs, made from 2000-2002, run on NiMH, and the majority of the survivors (ones that weren't reclaimed and crushed by Toyota) are still running on their original packs some 14 years and 150,000+ miles later.

    As for infrastructure cost, EV charging is the lowest of the available alternatives. The backbone infrastructure is already in place (the national grid), the only thing to install are plugs at places like hotels and restaurants and quick chargers along the highways and at fast food restaurants. Hydrogen, natural gas, and other fuels require either an entirely new infrastructure or major expansion of existing infrastructure. At home, a simple 120 volt outlet is all that's needed to get started. Home charging stations average $500 to enable 240 volt charging. Tesla vehicles currently ship with a 120/240 volt cord that can plug into a variety of outlets. All other EVs come with a 120 volt cord.

    Solar reached grid parity in many regions of the US within the last 3 years when factored over the 25 year warranty of the solar panels. The higher the cost of electricity, the faster the payback of solar panels.
  • DGG on August 05 2016 said:
    Wow, seems like you know your business - are you really a geologist. Can't be that smart? Kidding as I am too. So where does it go from here? We need a prediction...... slow recovery as the economies of the world shed debt and see the benefit of low prices. However, debt is so high who knows, likely a nice world war will reset the agenda?

    Don't know why gov't subsidizes electric vehicles when it is already broke and in debt?
  • Felix Llevada on August 11 2016 said:
    Very good article, Arthur. Very good, indeed.

    You do need to brush up on your PV renewables and its economic factors.

    PV, subsidized to whatever point, by China, Germany, the U.S. or whoever, is basically on a par with coal and Natural Gas, yet has production and installation costs going down for at least another decade, that's opposite to the fossil fuel industry.

    PV is "mainly" based on silicon (and silicon electronics), for which there is a lot of established design and manufacture experience and an "endless" supply of raw material. Silicon PV is "self generating" in that it can produce energy that will further grow the supply of the raw "electronic grade" silicon material, at low cost, in the long run.

    Therefore, as you state, energy is key ... and it will be based on silicon. It will be very, very cheap indeed.

    To Mars and beyond ... maybe.
  • Ross Melton, Jr. on August 12 2016 said:
    I have to think about this a lot; it seems like it could be profound! I got the link from Ed Wallace's Inside Automotive.
  • G wilson on September 07 2016 said:
    Tesla will sell 300,000 model 3's by the end of 2018. At an average of 12k miles per car per annum, and 35mpg, that's over 100M gallons of fuel not sold. By 2022 conservatively that's over 1B gallons of fuel not sold. The model 3 Luducris version has faster pickup than a Porsche 911 and costs much less.

    Solar is already bring bid down to $0.04/kWh for a utility grade project in Nevada.

    Batteries are falling in cost 14% per year.

    All of these technologies only decrease in cost and improve in efficiency. They are all approaching the S-shape of the curve. This is not magical thinking. Look at the graphs.

    Oil may be able to compete now, but it's days are numbered. Experts in this field will behave the same as others in during fields have done in the past and will be unable to perceive the massive shift about to transpire. Fortunately we are not dependent on their insight or lack thereof

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