Every week in our Off The Cuff Series, we interview expert minds on the premium side of PeakProsperity.com. These discussions are unscripted and informal, where my partner Chris Martenson and his guest react to recent macro developments and predict the likeliest repercussions.
Every once in while, when we have an exceptionally timely conversation, we’ll make it available to the public. And we’re doing that this week.
Chris caught petroleum geologist Art Berman right before he went on stage to deliver a presentation on the limitations of shale oil (his excellent slides can be found here). The world is finally starting to realize that the profit-making potential of this space was drastically over-hyped.
But more important, warns Art, is that the souring sentiment on shale oil is a reflection on the bigger challenge ahead of us: How we will power the world in a future of declining net energy?
When we reflect upon the material progress of humankind over the hundred and fifty years, it seems very clear to me that much, if not most, of it happened because humankind moved basically from wood to coal to oil/natural gas. To increasingly more dense sources of energy.
And the result is that we get a whole lot more work out of whatever energy we expend. Less and less of that is done by manual labor.
Everything works to live. Look at the African savanna: it’s all about energy. The animals spend all day long getting food one way or another. That’s the way life on earth works.
But not so much for us,because we’re fortunate – we humans have all this fossil energy at our disposal. You and I can sit and chat on Skype here without having to do very much.
But underneath it all is surplus energy – which, unfortunately, we’re running out of. That’s why we’re scraping the barrel with tight oil and shale gas, and oil sands, and heavy oil. And we’re fortunate to still have those options.
But our grandchildren, what are they going to do? I mean, this surplus energy isn’t going to last until they’re our age, I promise you that. I hope I’m wrong. But when I say ‘I promise’, I’m pretty sure I’m right.
To me Art is the one guest that measures the cause of our problems, all other guests measure the results.
The slide presentation is just irrefutable, great job Art and Chris.
What’s the difference between the BDAC scenario and the one the EIA predicts?
It’s the difference between night and day, war & peace, prosperity and ruin, population stabilization and decline, and between financial stability and collapse.
Have I made the point yet?
If so, then the next conversation to be having is why there aren’t more serious conversations about this in the public domain yet. It’s as if the Visigoths were at the gates and our Senators were instead most concerned with the assortment of fresh grapes on their plates.
When I view the above chart, I get that same feeling as when your tires have lost their grip on the highway and the car is now irretrievably pointed in the wrong direction.
Everything slows down and you think to yourself, “this is it, things just got real. Brace for impact. I hope it’s not too bad…”
I happen to think the BDAC is optimistic. Not for geological reasons, I’ll trust Art there 100%, but because the financial conditions are going to absolutely tank the shale space when the Fed finally loses control again and those with lendable funds decide not to toss it carelessly into hopeless projects.
So Chris,
I’ve been a big fan of Peak Prosperity ever since I found your website a couple years ago. I think you’re spot on about whats going to happen. You have great insights and good directions on how to prepare. I appreciate all the warnings, heads-ups, and instructions on becoming as self-sufficient as possible and I’m following your suggestions about preparing for the inevitable. Where I need greater insight is what do I do with my nest egg? I’m 59 and have enough to retire on, but what do I do with it? If I put it all in cash, if inflation hits it will erode. If I leave it in equities it may stave off inflation but if the crash hits, it can be wiped out. I can put it in bonds but if interest rates rise I lose. I can get an indexed annuity that grantees no loss as long as the insurance company remains solvent. Precious metals are a good insurance incase SHTF, but how much is too much. Do I hedge my bets get all of it to diversify?
Right now I have more equities to ride the wave, but can I get out in time when it crashes down?
So… in your opinion, what’s the safest bet to cover most probable scenarios.
Thanks,
Mike
If so, then the next conversation to be having is why there aren’t more serious conversations about this in the public domain yet. It’s as if the Visigoths were at the gates and our Senators were instead most concerned with the assortment of fresh grapes on their plates.
Thats a pretty good description of what actually happened in Rome. That’s what *always* happens. That’s what happened on Easter Island as they were cutting down the last two or three trees. But in both Rome and Easter Island we know (in the case of Rome) and can assume (in the case of Easter Island) that a few people saw what was happening. Some “got out of Dodge” while others prepared to survive the approaching crisis. And the numbers who took the red pill gradually grew and grew but it never became a large enough number to significantly alter the crash trajectory. The same thing is happening now to at least the developed world if not the whole human ecosphere. Apparently it is a law of nature we can’t change. Only small percentages can anticipate and attempt to adapt (which may be human evolution in action).
Among the red-pilled, we obsess over questions about surviving a horrific but undefined future crisis. That’s what “mikpits” is agonizing over in post #3. Mike, no one knows the “right” answers to those questions. Do your research, trust yourself and make your wisest guesses. Then get busy implementing your plan. That’s what the rest of us are doing, with no assurances that we’re doing the “right” things in the “right” sizes. The uncertainty can’t be eliminated because we’re preparing for future events which we can’t clearly see in detail or in timing. Some will flourish through the crisis and beyond. Some will be crushed by it. Others will survive but suffer greatly. The different outcomes will be due to another large set of unclear factors: preps that match well what eventually happens; otherwise good preps that turn out to be poorly matched to what unfolds; pure luck (good and bad); being in the wrong place at the wrong time with an otherwise good set of preps (and vice versa). We prepare the best we can while maintaining our integrity and enjoying life as much as possible today.
For concentrated wisdom in as few words as possible and understandable to all ages, I recommend Dr. Seuss right after the words of Jesus. Having raised our kids on both, Dr. Suess’ kernels of wisdom come back to me frequently when I’m facing adult predicaments. Tell me this one isn’t perfect for what we’re facing as we approach 2020.
https://m.youtube.com/watch?v=D6ZeZA6wF-k
Art focuses on “top down” concerns & solutions for declining oil. I don’t think this is necessary: the market does all this “thinking” for us. Since 70% of US oil is used for transportation, and most of this is simply wasted on our commutes or leisure. Why? Because we can.
The solution will be simple: $10-$20 /gal gas. People will start to live more densely and travel less on their own, and in the end have no loss in their true quality of life. I don’t see any downside; it’s all good. GDP won’t be much effected IMO. We will just be more efficient and productive.
I do agree with Art’s analysis how tight oil being just the latest reincarnation of the “same guys playing the same game”. We didn’t “chose” shale because we wanted to. We just ran out of easy oil. And we need $100/barrel oil to make it happen. This will come eventually (the Fed can’t hold prices down forever) and we will overshoot on the upside just like we have on the downside. Lot’s of $ to be made here IMO.
Art agrees geology is not equal all over the world, and source rocks have to be proper depth & pressure marine shale. So shale is not a long-term solution. A good part of the convo was the discussion how public owned oil is very hard to develop, and how the US was able to produce shale due to private ownership.
Good convo in general. What was lacking was how we don’t need to travel so much to keep GDP up, so we won’t. And oil stocks are pretty cheap right now: SLB & EOM are good buys right now, undervalued, with good ROR & solid dividend growth. And real estate close to city center with nearby leisure property is also a good buy.
Where I need greater insight is what do I do with my nest egg? I’m 59 and have enough to retire on, but what do I do with it? If I put it all in cash, if inflation hits it will erode. If I leave it in equities it may stave off inflation but if the crash hits, it can be wiped out. I can put it in bonds but if interest rates rise I lose. I can get an indexed annuity that grantees no loss as long as the insurance company remains solvent. Precious metals are a good insurance incase SHTF, but how much is too much. Do I hedge my bets get all of it to diversify?Ive been searching for a decent answer to this for a long time. As I became aware of climate and energy about 10 years ago, it had lead me to sit out most of the run up over the past decade. After getting killed in 2000 and 2008 I was in no mood and couldnt imagine that there could be a rebuild of the system on magic money.
The reality is, that if Chris' story is proximally correct, you are trying to hedge against the destruction of our entire way of life. And what are the chances being successful at that? And yet, here we are...
My response has been to do a certain amount with PMs and then to turn my property into a hollistic livestock farm that generates a fair amount of its own electricity. At least it provides me with stuff to eat and reduces my investment in BAU system that I dont believe in.
If stuff goes terribly wrong, it wont seem like much though.
JT
MKI-
So its all very benign-sounding to talk about “Conservation By Price”, but if $10 gas becomes a reality, there is a whole lot of infrastructure that almost instantly becomes uneconomic.
What is a house located 100 miles outside an urban center worth with gas at $10/gallon, if the owner (and most of the prospective buyers) can no longer pay to commute to make the mortgage payment?
A large amount of infrastructure will suddenly be found to be “in the wrong place”.
And that will happen right at a time when constructing replacement infrastructure will become a whole lot more expensive.
How will society overall make the necessary adjustments in order to effect this “conservation”? It sure sounds like it will result in banking crisis, and a large number of people getting substantially poorer.
It may not hit GDP directly, but the knock-on effects of the resulting deflationary banking crisis sure will. Not to mention all the wealth destruction that will happen.
“I’m not saying we wouldn’t get our hair mussed, Mr. President, but I do say not more than ten to twenty million dead - depending upon the breaks.”
Another quality podcast with Art ? Thanks!
As private investment and production dwindles, my belief is that the oil industry remaining (majors) will eventually be nationalised (with most $$$‘s going to the already privileged), and then financed in future by tax payers and money printing - to be utilised/controlled like a currency/benefit program thereafter (with the usual assortment of winners and losers resulting).
Non-essential industries would tailspin first to help drive down demand and funnel global and local power and governing structures into oil haves and have-nots. Smells like global Venezuela to me but with nowhere to run.
Maybe to a certain extent, oil is already nationalized. It has been difficult for me to understand how oil at the gas pump can be under $3.00 while the break-even for fracking is in the neighborhood of $70-$75. The math has to work-out and there seems to be some missing dollars. Can somebody clear-up the murky details?
Is it true the price of oil is below the cost of production from shale? What is the break-even cost of production oil from fracking?
Regarding the national oil reserves, what is the price it is sold for and where does that revenue go?
Regarding the national oil reserves, are they being sold at one price and replenished with new oil at a different (higher) price, say the fracking break-even?
How does money from the Federal Reserve contribute to funding of the shale oil fracking companies and with what terms and interest rate/cost of borrowing?
Follow the money. Depending on the answers to these questions (and maybe others I’ve missed) the oil industry may already be nationalized to a certain extent.
Can anybody share how to make the math work-out?
It doesn’t work out is the simple answer. If you listen or read the works of Steve St. Angelo from the http://srsroccoreport.com or Gail Tverberg from http://www.ourfiniteworld.com they both agree with Art Berman that producing oil is a money loser for the energy producers.
Gail Tverberg has gone as far as to say that is the definition of Peak Oil and not how Hubbert’s theory outlined. We are at the point in, industrial civilization where oil is too damn expensive for the consumer and too damn costly for the producers. The numbers you cited are somewhat on the low side. I’ve read that conventional oil is in the $115 break even range and shale oil is close to $100, break even.
So if Gail Tverberg’s Peak Oil theory is correct, then it could explain why oil when it goes above $65 a barrel begins to slowdown the economy. So energy demand which drives the economy begins to decline so then you have an oversupply. Which then results in the producers lowering the price so Joe and Jane Six Pack can afford to fill up their tanks and buy stuff. And that stuff they buy either at retail or online is the result of energy supply.
So now the elephant in the room is saying, no the math doesn’t work and we are in BIGGLY trouble going forward because you have close to 8Billion on this planet as a result of fossil fuels.
No doubt we are the most coddled culture in history due to cheap and abundant resources.
We can go “Amish” and use very little oil which is probably better than 98% of the lifestyles in the USA. Or we can use fuel judiciously and use it to build sustainable frameworks.
Example: I just bought 5 bags of masonry cement and sand. I had 60 8x8x16 cinderblocks and water. I used a truck and a cement mixer. That was all it took …plus my labor…to build a 36’ long by 2’ wide growing bed in an underused area in my greenhouse.
No telling how much energy I used or fuel I burned but I have something enduring that will pay back for a very long time with no additional energy inputs. It’s hard to quantify this stuff, but I made a choice to use my truck for building something and yes I used oil but I’m proud of the result. 917CD834-CCC2-4B56-B2D3-39785EE20FFC
I think of my nest egg, which is pretty minimal (around $40K) as not something to store but as something to use, in the most effective way. Consider where you would like to be and where you are now and how to get to the first with the least amount of “friction”, that is, how much vig the System is going to ask from you to make the journey.
By all means put aside money for emergencies, but use the rest to improve the way you live now, to minimize how much you depend on the System for things like food and energy. As well as find ways to decouple yourself from dependency.
DFT, I was having this same convo before oil price action allowed shale to become a "thing" (disclosure: never worked shale & negative on it). Most importantly I put my investment money where my mouth is and been fully vindicated, while those who had everything all plotted out missed out.
A large amount of infrastructure will suddenly be “in the wrong place”.
Sure, like Detroit. Yes many prices will fall, as they should. But healthy city centers will thrive. People will move, canalize materials, and move on. And we will be better off for it. Speaking for myself, we moved/started walking/biking years ago and life is far better/healthier. America can change. This is why immigrants do so well here: they cut spending hard and live seriously. But only because they must. We won't change until we have to.
And that will happen right at a time when constructing replacement infrastructure will become a whole lot more expensive. How will society overall make the necessary adjustments in order to effect this “conservation”? It sure sounds like it will result in banking crisis, and a large number of people getting substantially poorer.
We really can't make accurate/detailed predictions on how this all plays out, and it's hubris to try. The idea we can "plan" how a free market responds to price action is a fallacy. But I don't care one way or the other; the US has the wealthiest people in the history of humanity; any haircut that forces us to conserve more, cut spending, eat less/healthier, and rely more on family will not be a bad thing, IMO. We have lots of fat to tap into (literally!). Look, I'm not saying life isn't hard: it is very hard. That's reality. To believe anything else is just lying to ourselves.
Art's presentation has a lot of good data that contradicts the "sky-is-falling" approach to energy. Look at Slide 3, where oil is only 37% of our energy use (even when it is dirt cheap and we waste it like crazy). Cut out our driving waste alone that could go to 20% easy with $10/gal. We could telecommute more. Walk & bike. Public transport. Vacation at home. We could take our industries back from China and stop buying so much junk and shipping it. We have lots more coal and NG and nuke power. Not to mention starting a trend of gardening in our lawns. And this doesn't even include the tech changes that will follow to help us conserve more. It's all good!
It may not hit GDP directly, but the knock-on effects of the resulting deflationary banking crisis sure will. Not to mention all the wealth destruction that will happen.
Agreed, but I think this will be a good thing. The free market develops real wealth only if the signals are correct (no subsidies and bailouts). It's too bad the government bailed everyone out in 2008 because it caused malinvestment and prevented the deserved losses from those invested in garbage.
Basically, your concerns are my hopes. We need more pain for the free market to work. The premise of communism was/is to separate one's consumption from the pain of production...I'm for the other camp where people get to experience the gains/pains of their own choices (within a basic humanitarian safety net of course).
MKI-
From the 250,000 ft view I agree completely. Viewed from orbit, there is lots of fat to cut.
You say that detailed predictions are not possible about the future. I agree. I wasn’t making detailed predictions, just general ones.
Here’s an easy prediction to make: if a bit of infrastructure (let’s call it “a home”) is constructed and then purchased by a worker that must commute to his/her job, and the purchase is funded via a mortgage, and that worker’s commute suddenly quadruples in price, some (relatively large) number of those mortgage payments won’t get made anymore. The longer the commute, the more mortgages will fail.
(Related: if you live 100 miles from work, you aren’t likely to find “using a bicycle” as a solution to your commute problem)
It would be hubris to predict which mortgages will fail, but in aggregate, I can surely predict that a much larger number of them will do so if gas goes to $10 or $20/gallon. And from that, I can predict that the knock-on effects from these mortgage failures will affect the banking system, most likely leading to a banking crisis. I can’t predict in detail which banks will fail, but I can certainly predict a crisis.
Again, I’m in total agreement with you about the systems analysis, viewed from orbit. “creative destruction” is a great thing.
Unless, of course, it is my little bit of infrastructure - suddenly found to be “in the wrong place” - whose market price suddenly gets chopped by 90%.
Its all fun and games until someone loses an eye!
I do not think telecommuting is “the way”; although I work remotely, most jobs that require teamwork don’t lend themselves to remote work. Larger projects requires teams, and it is my observation (as a manager, and an individual contributor) that humans do much better with in-person contact. I’d bet there are studies on this; I haven’t gone down that rabbit hole, but I’m betting there’s a productivity-related reason all the big companies require people to actually come in to work.
Certainly there is lots of fat to cut. And I’m a big believer in light transport; 12 years ago I used to commute to work in San Francisco on a battery-powered goped: https://goped.com/scooters/electric/esr-750-hoverboard
long before such things were popular. I was literally the only person I knew that had such a thing. But I made it a point to always live close to work. I hated commuting, and I was paid well enough so I was able to live in the city. Many people couldn’t. They had to commute. It is these people I’m talking about.
Viewed from orbit, “the right thing will happen.”
Perhaps this is my point: leaving orbit, coming down to the individual case, what actions should we individuals take so we do not become a casualty of the “creative destruction” that the system will require?
And related: what will be the socio-political impact of all that “creative destruction”?
I don’t think things are going to work out. The last half century of the dollar being the reserve currency has created huge misallocations which are going to smack us all at once when it ends. The transition required would not be possible without social upheaval.
The free market will not save us. Free market capitalism doesn’t work. It died over a century ago and the monster we have been suffering through since then is the inevitable consequence needed to keep the markets from crashing. Free market capitalism results in an increasing disparity between the wealthy at the top and everyone else. This requires economic growth to 1) prevent the masses from entering poverty and 2) provide a positive return on invested capital. The idea that the entire planet can be sustainably run by a system based on everyone trying to maximize their own personal profit in the 5 year time horizon, as if externalities don’t exist, is naive.
Communism also doesn’t work because no one has any incentive to do anything except be corrupt, and the lack of a market prevents any kind of price discovery and efficient capital allocation.
The closest we have come to a sustainable system has been the mild capitalism implemented in Scandinavia. But it too has failed since it didn’t use a wealth tax to target the elites. So humanity has never seen an example of a sustainable economic system beyond the tribes of a hundred huts we used to live in, in which excessive wealth by one of the members of that tribe would have been easily noticed by everyone else and promptly ended. This fantasy which so many adhere to today, in which we place billionaires like Bill Gates up on a pedestal and argue that he provides an example of a goal to which other entrepreneurs should aspire in our capitalist system to “create” wealth, is simply not sustainable.
The system will crash, catastrophically, and we have no viable alternative to replace it with that will make it better afterwards.
