Arthur Berman: Why The Price Of Oil Must Rise
Submitted by Adam Taggart via PeakProsperity.com,
Geologist Arthur Berman explains why today's low oil prices are not here to stay, something investors and consumers alike should be very aware of. The crazy-low prices we're currently experiencing are due to an oversupply created by geopolitics and (historic) easy credit, not by sustainable economics.
And when the worm turns, we are more likely than not to experience a sudden supply shortfall, jolting prices viciously higher. This will be a situation not soon resolved, as the lag time for new production to come on-line will be much longer than the world wants:
The same things that always drive prices in the end it’s always about fundamentals. The markets are peculiar and they change every day. But the fundamentals of supply and demand at some point markets come back to those and have to adjust accordingly. Not on a daily basis, maybe not even on a monthly basis. But eventually they get it right. So this oil price collapse is really straight forward as far as I can tell, and it has to do with cheap stupid money because of artificially low interest rates that resulted in over-investment in oil -- as well as lots of other commodities that are not in my area of specialty, but that’s what I see. And over-investment led to over-production and eventually over-production swamped the market with too much supply and the price has to go down until we work our way through the excess supply.
Now the wrinkle in all of this is that because the supply excess/surplus was generated by debt and a lot of correlative instruments, the problem is that the companies and the countries that are doing all this over-production need to keep generating cash flow so they can service the debt, which means they have to continue producing pretty much at the highest levels they possibly can which doesn’t really allow very much room for reducing the surplus. So that’s piece number one and then there’s the demand side. So the thing that drove all of this over investment and over production were high prices. And after a while people get tired of high prices and we see a phenomenon called demand destruction or you know as Jamie Galbraith calls it the choke chain effect. You know your dog runs out on a leash, eventually you know it stops and he chokes and so we’re dealing with that. People have changed their behavior because of high prices and then we add to the fact that people just change their behavior. I mean young people aren’t driving as much as they used to, they spend their time in a – you know on a smart phone more than they do in a car. We’ve got climate change issues. There’s considerable momentum toward cutting back on fossil fuels. Add it all together, demand is down, supply is up, it’s a bad situation...
We started this conversation with your important observation that we’re only talking about a million or million and a half barrels a day of oversupply. So we could go from over-supply to deficit pretty quickly, because we’re not investing in finding that additional couple of million barrels a day that we need to be discovering. So we’re deferring major, major investments. We’re not just deferring exploration; we’re deferring development of proven reserves. Capital cuts across the world represent 20 billion barrels of development of known proven reserves. And so we will get to a point, and we will, we most certainly will, where suddenly everybody wakes up and says “Oh my God we don’t have enough oil! We’re now half million barrels a day low." And what will happen? The price will shoot up. That’s the way commodity markets work. And everybody will say “Whoopee! Let’s get back to drilling big time." Well there’s a big lag. There’s a huge time lag between when the price responds and people actually get around to drilling and they actually start bringing the oil onto the market and it becomes available as supply, because they’ve been asleep at the wheel for you know for how many months or years. And so you know you can’t just turn a valve and all of a sudden everything is okay again
Click the play button below to listen to Chris' interview with Arthur Berman (56m:07s)
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Teens First.
RIPS
this price of oil doesnt have to do shit! Im predicting $18
This is exactly the scenario most "peak oil" types have been predicting. The demand destruction hits and causes the already tenuous "wavy plateu" of peak oil production to drop significantly. This destroys exploration and new infrastructure investment and we never recover that peak ever again...
And they have been predicting this for what? Nearly a century?
Overproduction? No, try underdemand. The economy is collapsing, ffs!
Im sure the art of "Mothballing" oil reserves and bringing them back online will be the difference between winners and losers. Which tells me the author's premise is mistaken.
Since when does supply and demand fundamentals apply to ANY commodity in a debt fueled economess?
Ofcourse oil will go up someday. It can't go down much further can it?
Arthur Berman clearly doesn't understand the first thing about the effect a worldwide soverign debt crisis and massive deflation has on the price of all commodities.
The only thing that macroeconomic 'deflation' DOES NOT have an effect on is if you're an elite [jew] whose money is managed by jew money managers & paper printing franchises [owned & run by jews].
Otherwise ~ EVERYTHING IS AWESOME!
Im sure the art of "Mothballing" oil reserves and bringing them back online will be the difference between winners and losers. Which tells me the author's premise is mistaken.
And that certainty that "...the art of mothballing oil reserves..." is where you are mistaken.
The problem is not that the Oil is any less available PHYSICALLY.
The problem lies in the FINANCING of the new companies to get at those reserves.
Most of these corporations that presently do this will be BANKRUPTED by this fiasco.
See this article...which was published after this article.
http://www.zerohedge.com/news/2016-01-12/after-noble-here-are-next-18-us...
And newer corporations that will replace the bankrupted ones will have a difficult time drawing in "new investment" and "venture capital" to restart the operations.
Once burned...twice shy...
See this article...
http://www.zerohedge.com/news/2016-01-12/heres-real-reason-high-yield-en...
Thus there will be a lag time. And in that interim period the price of Oil will skyrocket due to lack of production concurrent with the depletion of the available stockpiles out of the ground.
AS I HAVE PREVIOUSLY WRITTEN...MANY TIMES HERE ON ZH...REPEATEDLY...Exponential Growth leads to an Exponential Decline.
Well that holds true on the Short Side of any trade as well..
The Short Side is realizing exponential gains due to the exponential decline in the current price. And, likewise, there will be a point in time, in the near future (a couple of years, perhaps) when the gains on the Short Side diminish and then cease.
So the corollary rule is that Exponential Declines lead to Exponential Growth.
This phenomena is analogous to Predator-Prey relationships in Nature. As prey numbers decrease due to growth in predators there is a point where predators begin to starve out. Thus predators die off, due to starvation, and then the number of prey begin to grow due to lack of predators..
So there is a long term balance but short term moves can be dramatic. However it is cyclical and quantifiable.
In Nature, as well as in business and finance...
WHIPSAWS ARE A BITCH.
And you had best be aware of that.
You need to widen your time horizons and see the overall big picture.
Near term I am bearish on Oil.
On the other hand in the long term...
too long, dude
It's both actually.
It cannot be both?
Of course it can!
In a rare instance where Tyler Durden posted in the comment section, he humiliated otherwise ueber-poster JustObserving, who said in December 2014 the idea that oil may drastically drop was "rubbish". On that occasion, Tyler reposted (in the comment section) the chart that clearly shows oil prices not being driven by production of the actual commodity, but rather by its paper (futures) equivalent.
Well, nothing changed since then. Therefore, the price of oil will go up when (and only when) the US CB/politburo starts its liquidity "programs" anew. As said programs will take us to new orders of magnitude (where yottadollars is a word), oil prices in USD will increase proportionally.
here's what everyone forgets... from 1980 to 2004, oil prices consistently lived in a band of $18-$30 USD per barrel... it's only since the inception of ICE in 2000 and their subsequent stranglehold on the Brent supply chain from 2005 that brought on the triple digit oil prices recently experienced... well, that cabal has been broken, we no longer have pricing for a mere 10% if not less of the world's supply (Brent) driving prices for every drop produced... which means now prices can return back to normal
that's right folks, $30 USD per barrel is the _upper_ side of normal historically... why are we acting shocked when price manipulation has been cracked and oil prices are finally allowed to return to their _true market driven_ levels?
I again mock the Peak Oil crowd for focusing purely on supply, demand, and _known reserves_... this is a ridiculous way to predict the future of oil, it's never worked before and it will never work because a) price manipulation is also a primary "peak oil" driver, and b) predicting how much oil the world has to work with just by looking at proven reserves is like nailing jell-o to a tree, the target is always moving...
I again reiterate that I couldn't give enough +1 votes to that post from Tyler, it was _the_ insight into what was really going on and what results we should have expected when reality in the markets was going to be allowed to hold sway again... so, here we are, Q.E.D.
Yeah, unless there is demand for it, or something better like thorium or fusion comes along, making energy so cheap that it is easier to just synthesize the stuff than pull it out of the ground.
You peak oil guys are really dumb, you know that? Production of lots of things has peaked, and it hasn't been the end of the world.
"But this time it's different! Pay attention to me! Stroke my doomboner!"
" Doomboner "
LOL.
007 might have met his match..
Is that sung to "Goldfinger"?
I agree, the Peak Oil Theory has been shot down. The Fracking genie is out of the bottle. Many Shale leases required production companies to drill a certain number of wells per year, if they wanted to keep their lease. They are drilling the wells, but not completing them. When prices recover (back into the upper $40s?), they will complete the wells, and oil will flow, regardless of cost, until the well is depleted. The other big feature is the fact that world crude inventories are almost totally full. Once they are full, you can store oil on ships (expensive), or shut off the pump on your most marginal wells. That pump can be switched back on if prices recover a bit. It is going to take a long time to consume all this inventory. The US alone has 482,000,000 barrels stored commecially. If you back off of 1,000,000 barrels per day of marginal US production, that inventory still lasts 482 days. Plus there is another 752,000,000 barrels of oil stored in the US Strategic reserves. The world has close to 3,000,000,000 barrels of oil stored. At some point, loans for that oil will come due, and interest rates should be higher. That oil needs to get sold. There is a LOT of oil in the world right now. The government is going to have to ramp up "green " energy subsidies to compete with cheap oil. I'll take my V8 F150 any day over those clown cars.
I agree, the Peak Oil Theory has been shot down. The Fracking genie is out of the bottle. Many Shale leases required production companies to drill a certain number of wells per year, if they wanted to keep their lease. They are drilling the wells, but not completing them. When prices recover (back into the upper $40s?), they will complete the wells, and oil will flow, regardless of cost, until the well is depleted. The other big feature is the fact that world crude inventories are almost totally full. Once they are full, you can store oil on ships (expensive), or shut off the pump on your most marginal wells. That pump can be switched back on if prices recover a bit. It is going to take a long time to consume all this inventory. The US alone has 482,000,000 barrels stored commecially. If you back off of 1,000,000 barrels per day of marginal US production, that inventory still lasts 482 days. Plus there is another 752,000,000 barrels of oil stored in the US Strategic reserves. The world has close to 3,000,000,000 barrels of oil stored. At some point, loans for that oil will come due, and interest rates should be higher. That oil needs to get sold. There is a LOT of oil in the world right now. The government is going to have to ramp up "green " energy subsidies to compete with cheap oil. I'll take my V8 F150 any day over those clown cars.
You need to do your homework. Upper 40s? Uh uh. that's the numbers the oil companies throw out to try and draw investment money into the game, but go and take a look at thebalance sheets of the companies tht were full-on into shale production when oil was sitting at $100 a barrel. Even at that price point, the cash flow statements don't look good at all. Shale cost more to extract than an industrial economy can reasonably afford... and most new production is similar in price. The cheap shit is mostly gone. This kind of very expensive energy only has a future if .gov starts subsidizing the living shit out of it.
Please explain.
Sure, it will go up just like gold and silver will, someday.
dup (sorry)
Hate to disagree with a distinguished geologist, but, only when the Saudi's decide that they are tired of losing money, by selling below cost, will the price go back up...
If Saudi Arabia collapses, which is quite likely, oil prices will shoot up:
Towards the collapse of Saudi Arabiaby Thierry Meyssan DAMASCUS (SYRIA)
While the Saud family enjoys the last few moments of its dictatorship, the decapitation of the leader of the opposition, Nimr al-Nimr, deprives half of the Saudi population of all hope. For Thierry Meyssan, the fall of the kingdom has become inevitable. It will probably be accompanied by a long period of extreme violence.
http://www.voltairenet.org/en
If there is one thing Turkey/ISIS has taught us, they will sell oil, no matter who is in power.
I wonder if someday, "Arco" gas stations will be replaced with "ISIS" gas stations.
New wells are still coming online as we speak. The oversupply will last a long time with global economies deflating as they are. Oil companies will just cap their existing wells for future usage. Bringing an already active well back online sounds kinda easier...but I'm no geologist
martison.. smart guy i suppose but his crash course stuff was way off ..way off.
For no other reason than financiers and manipulators.
Who cares. We can download money and upload war these days.
What a great comment.....
geologist/margin investor who is losing his shirt perhaps
Berman is a well known geologist who became well known when he publicly criticized the economic viability of shale gas. CHK and others effectively made him a black sheep. He's a realist and well regarded. He was embraced by the anti-fracking movement.
Anyone who quotes Jamie Galbraith admiringly is, by definition, a peckerwood...
That's the way commodity markets work.
Personal foul for using "markets" and "work" in the same sentence.
Dear Art: The Saudi's are going for market share, and thereby killing "2 birds with one stone"; 1) the US shale biz, and 2) the hated Iranians. Their cost to produce a barrel of crude is about $9 - $12 per barrel. Once they destroy both, they shut the spigot off and now [someday] you have your scenario. Don't hold your breath Art, the entire crude oil futures curve going out 10 years is below $50/bbl. Sheeple, don't be an Andy Hall.
www.traderzoo.mobi
This Martenson guy said in 2010 that silver would be fully depleted in 10 years. We're half way and I don't see any sign of depletion.
This idea of an enormous lag between collapse of the over-supply and bringing 'new' supply online is pure bullshit.
The oil companies and petro-states will crank up production yet further as soon as prices return viability to known and/or drilled off-line 'marginal' cost supplies.
S.A. is just bringing huge off-shore fields online.
Iran is waiting to be 'allowed' to sell.
Iraq is still under producing.
Libya, home of some of the lightest and sweetest in the world was to a large extent taken off market by a combo of U.S. intervention and post-intervention local chaos and global disdain.
The frackers will go ape-shit again with a return to triple or quadruple or quintuple the present prices.
There are actually wells that have been capped and left idle simply because the oil is waaaaay too much pressure for contemporary tech to even try to put a straw into it without blowing the rig.
So much fucking oil under such immense pressure that it cannot even be accesssed.
See: MACONDO.
None of ^that^ takes into account that BOTH the price of wind, solar, etc, are dropping and efficiencies of energy use are increasing, that fusion is being tested in Europe and the first commercial Liquid Salt Throium is being funded in Asia...
Finally: IMHO, the biggest and most serious problem with the petroleum markets is the same problem with almost every other market for any other asset and/or commodity in the World: the global monetary system has been run by greedy self-interested scumbags for so long that it has distorted all markets and prices beyond any possible rational evaluation.
P.S.
I almost hate to ask; but, what the fuck does a geologist know about PRICES & DEMAND that I don't?
He has his opinion and so do You and I.
The difference is he is one of the most respected geo's in the world and you are.....
He knows geology. Given.
WTF does he know about the missallocation of investment due to political ideology, money printing and devaluations, levereaged bankster speculative bubbles, busts and squeezes, etc..???
WTF does he know about debt dynamics or actual demand or under a crooked/crippled/debt saturated system trapped at NIRP/ZIRP ???
Maybe I'd respect his opinions more if they were restricted to a discussions of geology and did not contradict an enormous amount of data to the contrary to his out-of-specialty opinions...
I hear many opinions/assertions backed by little evidence or fact...
Andy Hall & Citi thought they knew all about trading oil products and derivaties -and they were a lot closer to this discussion.
QUESTIONS for Mr. Geologist:
Where is the data concerning biological activty inside oil at pressure in the ground?
IS petroleum full of living organisms?
...IF SO -what is the biology based upon? What components of the crude mixture are being transformed by that biology into from what into what?
Oh, dear: he is NOT a biologist is he? We should not expect that he have functional knowledge outside his expertise...
Maybe you can enlighten me as to why the biological activity is relevant
The natural synthesis of petroleum may not be merely 'geological'.
There may be biological processes at work similar to processes of photosynthesis or fermentation, etc...
Hubert was also a geologist -- that just happened to work for Shell Oil whilst proclaiming "peak oil doom" which turned out -- as we all know -- to be epic bullshit...
Why did anyone ever listen to a guy working for Shell oil tell us we are running out? Think about that.
Post of the day!
Furthermore, lets not forget how many wells up in the Bakken etc are Shut ins -- probably >2,000 ready to pump when needed. Literally days a way from functioning producing wells ready for market participation. Just say go. That sure as hell doesn't work well with our geologists dire predictions now does it...
White Line Nightmare, prophetic words - https://www.youtube.com/watch?v=9n29c-q3_8Q
OMG, HOW many times have I heard that BEFORE?....Eh, What's Up Doc? - every frick'in thing except OIL....
Well, normally it might be true that short supplies in the future would lead to higher prices. I just wanted to point out that these are NOT normal times, and in the interim, while we are waiting for this future supply-squeeze, the global economy is suffering real structural damage...
I find it a little hard to swallow the idea that a few years from now, we will all be ready or able to spend more. The lowered demand may well be permanent, at least for our lifetimes.
A destroyed global economy will not have any use for oil at higher prices. Or a lot of other things either. Of course, at some point people will begin to rebuild again, and the economy will again grow. But the generation directly traumatized will NOT be the ones to do the rebuilding, so we won't live to see it, or profit from it.