Art Berman: Like It Or Not, The Future Remains All About Oil

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Art Berman, 40-year veteran in the petroleum production industry and respected geological consultant, returns to the podcast this week to talk about oil.

After the price of oil fell from its previous $100+/bbl highs to under $30/bbl in 2015, many declared dead the concerns raised by peak oil theorists. Headlines selling the "shale miracle" have sought to convince us that the US will one day eclipse Saudi Arabia in oil production. In short: cheap, plentiful oil is here to stay.

How likely is this?

Not at all, warns Berman. World demand for oil shows no signs of abating while the outlook for future production looks increasingly scant. And the competition among nations for this "master resource" will be much more intense in future decades than we've been used to:

Since the 1980s, we simply have not been replacing reserves with new discoveries. So how does that work? Well, obviously, we've got a lot of oil on production and in reserves, so we're essentially drawing down our savings account if you want to think about it that way. You can do that for a long time if you've got a whole lot of money in your savings account, and we as a planet do. But you can't do it forever.

Eventually, you either have to stop spending as much so you don’t draw down your savings, or you need to put some money back in the account. And it doesn't seem like we're doing much of either, and haven't been doing much of either for a long time. So the concern is tremendous, at least, in my estimation(...)

We have to go back to FDR to understand that the centerpiece of U.S. foreign policy ever since World War II has been to maintain supply of oil. And, of course, back in FDR's time, the U.S was 100% oil self-sufficient. I think we produced something like 52% of the world's supply. So here's a guy who, without any immediate supply issues even on the horizon, said "We've got to look after our own oil security" and made a deal with Saudi Arabi to provide that. But now we've had the Obama and the Trump administration saying, "We don't need your stinking oil any more. We're the big guys on the block." China's saying, "Whoa. Here's an opportunity for us."

What does that mean to us other than political gamesmanship? Well, whatever else people might believe, the United States still imports 7+ million barrels a day of crude oil. Even if you work to net out our exports, we still import, pretty nearly on average, 6 million barrels a day. That's a huge volume. We get an awful lot of it from the Middle East. Well, if the Middle East is diverting their supply to countries like China, guess what? It's not available to us, or it's not available at the price that we want it. Not to mention that fact that Saudi Arabia's population is exploding. They're using more and more of their oil output for domestic consumption, so there's increasingly less to export.

These should be primary concerns to anyone who even remotely thinks about the future. Certainly to anyone who connects the supply and usage of petroleum to economic wellbeing.

Click the play button below to listen to Chris' interview with Art Berman (59m:44s).

This is a companion discussion topic for the original entry at https://peakprosperity.com/art-berman-like-it-or-not-the-future-remains-all-about-oil/

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Very sobering podcast! Chris, I’ve got a question about definitions. I remember a dozen or so years back (when fracking was in its infancy) that the Bakken reportedly contained approximately 80 billion barrels of oil. Art was saying that the “Bakken play” contained about 5 billion barrels. Is a “play” the whole basin? When he’s saying 5 billion barrels (based on others’ numbers,) is that how much he estimates remains that is recoverable? What happened to the rest?
Grover

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I think we missed out on the real question: when will the various basins peak out? Art has more-than-hinted that there are problems (increasing water cuts, decreasing natural gas percentages) and that the nodding donkeys won’t be able to actually function on shale wells because of not nearly enough darcys.
(https://en.wikipedia.org/wiki/Darcy_(unit))
So that suggests the “right side” of peak production in the shale basins might be fairly steep.
But when will that peak occur? That’s the big question. Once one of these big basins peaks out - with oil above $60 - I think that’s when the wheels come off the shale story.

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It was mentioned that oil demand keeps rising by 1.3 million barrels a day per year. Since there is so little net storage of oil in the system, am I correct in equating this with oil supply? This implies that Peak Oil is not upon us yet, in the big picture (of course it could be broken down into Peak Conventional Oil having already passed).
I think the timing of Peak Oil will coincide with the collapse / reset of the global financial system. As Chris and Art explain, the shale plays just aren’t profitable at any oil price. So how have they gone on so long? From the totally manipulated interest rate environment and easy money policies instituted by the world’s central banks. Same as why Netflix, Amazon, and Tesla aren’t profitable but continue to dominate the markets (and in the case of Amazon, unfairly destroying a large part of the retail market competition). It’s all a big ponzi scheme designed to extend and pretend. Once that system ends then so will this “phony” oil production, which will cause the peaking of oil production – the dividing line in the story of humanity.
Like a lot of other people I have always said that physical gold will be the undoing of this system, since global demand seems to outstrip supply by a wide margin, not reflected in price of course due to similar manipulations of the financial system. At some point the guys in charge will say, enough, we’re out of gold, let’s take the system down since we have no other choice.
It will be interesting to see what the relative prices of all of these different things end up being, and what current activities will continue in the new environment in which profit returns as the motivating force for private enterprise.
Art mentioned near the end that the US will be dependent on other people’s oil for a long time, he doesn’t see how it could be any other way. I don’t know if I agree. China could continue importing oil after the financial collapse because it exports manufactured stuff to balance trade, but the US doesn’t really have anything else going for it. I think the US could indeed be cutoff from other people’s oil, and would have to make it work by de-industrializing.
It will be a different world, difficult to imagine, but it’s so close, it’s right here, right now, lying under all the financial manipulations, only kept under the surface by the digital tendrils of the central banks into the major world markets. It’s amazing that it is so close, that we will be here to witness it. And we here are the only ones who seem to be able to see it as most everyone else is deluded by the propaganda of The Matrix.

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According to bp, the world has 1707 billion barrels of oil reserves giving us 50.6 years at present consumption.
According to bp, the number of years of oil we have left has steadily gone up from about 40 years left in 1986 to 50.6 years left in 2016.
https://www.bp.com/en/global/corporate/energy-economics/statistical-revi…
How does this square with the facts given by Chris that we are discovering 7 billion barrels of oil while consuming 30 per year ?

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climber99 wrote:
According to bp, the world has 1707 billion barrels of oil reserves giving us 50.6 years at present consumption. According to bp, the number of years of oil we have left has steadily gone up from about 40 years left in 1986 to 50.6 years left in 2016. https://www.bp.com/en/global/corporate/energy-economics/statistical-revi... How does this square with the facts given by Chris that we are discovering 7 billion barrels of oil while consuming 30 per year ?

I’m no expert, but they say you haven’t learned something until you have to explain it to someone else, so here goes…

Based on what I’ve learned, the difference between “oil in the ground” and “oil that is easily or economically extractable” is more than a semantic one. The former number is just a calculation of how much oil sits in all the places we’ve discovered it, and it’s a misleading number in that a lot of that oil isn’t the “good stuff.” In the case of the latter concept, the real question is how much of those reserves are recoverable with today’s technology, and at today’s market prices…and how much is in the ground but nigh impossible to harvest (like tight oil basins in China or extreme deep water oil)?

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Imagine for a moment I ran the Deep State Committee that is looking out for the long term interests of the US behind the scenes. I knew Peak Oil was a thing, and the math showed that it was pretty much destined to arrive around 2015 or so. How might I address this?

  1. run a crash program to develop shale oil. Provide really cheap money for drillers - both debt and equity. Drill Baby Drill. Start this in 2008.
  2. oil glut hits in 2014. By then, shale space is spending $50 billion per year over and above income; its a total money loser. But from the standpoint of me, chairman of the deep state committee, without shale in 2015, the US would be spending $150/bbl, easy - 2 mbpd from shale in 2014 made it so we had a 2 mbpd oil glut, dropping oil from $150 (where it would have been w/o shale) to $50. 3 years of $50 oil (vs $150 oil) = about $1.2 trillion dollars. Shale easily pays for itself.
  3. run a crash program to develop AI. Self-driving cars are the goal. Start this in 2008 also. By 2012, GPUs start to appear that make AI possible. They become a thing in and of themselves. Get google to help.
  4. run a crash program to develop electric + battery cars. You need a face that will inspire everyone, so it doesn’t look like some boring government-run program. Elon Musk / Iron Man is selected as someone who will eagerly overpromise at every stage. His success (driven mainly from tesla stock price, plus government subsidies both direct & indirect) forces literally every other automaker to “go electric.” (Deep State: make sure to have enough money so that tesla stock & debt always have a bid)
  5. once shale starts to peak - perhaps 2019 - there is only one rabbit left to pull from the hat. Self-driving cars aren’t quite ready, neither are the batteries, and while solar is at grid parity, it hasn’t been rolled out quite far enough to make an impact. How to buy time? Demand destruction. That requires a bone-rattling crash that wipes out large amounts of demand for at least 5 years. This has the nice side effect of utterly crushing the oil exporters, whom we really never liked much anyway. 3 years of glut, followed by 5 years of demand destruction = revolution.
    And of course during the demand destruction phase, money flees to the US safe haven, making sure the US has enough capital to roll out the cars + batteries + solar panels it needs to build out its alternative infrastructure.
    Its kinda like the Hirsch Report, only with a slightly different twist, all done behind the scenes rather than being done overtly. After all, with an overt plan, the exporters will see it all coming, realize just how much leverage they had…and that wouldn’t do at all.
    And of course if, at any stage, there were awkward questions: about shale profitability, about self-driving cars and associated regulation, about fracking and water supplies, my “persuasion” sub-committee can make sure the money keeps flowing from the banking industry in spite of the losses, that a normally gridlocked Congress will vote overwhelmingly to grease the skids on self-driving car regs (sure guys, do whatever you like), and that the supposedly “green” Obama administration does exactly nothing about fracking’s environmental impact.
    That’s if I were the chairman. And there was such a committee.
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If you read the bp report, they explain what constitutes a “resource” and what constitutes a “reserve”. It is the same as your definition.
To answer my earlier comment. Net annual consumption is 23billion barrels (30 - 7). Divide this into 1707 billion barrels of reserves we get 74 more years of oil at current consumption and discovery.
Bye bye our industrial society by the end of this Century.

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climber99 wrote:
If you read the bp report, they explain what constitutes a "resource" and what constitutes a "reserve". It is the same as your definition. To answer my earlier comment. Net annual consumption is 23billion barrels (30 - 7). Divide this into 1707 billion barrels of reserves we get 74 more years of oil at current consumption and discovery. Bye bye our industrial society by the end of this Century.

Assuming those numbers to be accurate, that would represent when we run out of oil. The point at which diminishing supply and increasing demand would create massive price spikes and economic dislocations would come far, far earlier. It isn’t the point where we run out of oil completely that matters, it’s the point where the mainstream finally realizes we are on the downslope of global supply that does, and that is becoming harder to mask.

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Chris or anyone else, if I’m misrepresenting what I’ve been learning, let me know and correct it, as this is not my wheelhouse.

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Thanks, Art, for the refresher. But the real story is how is the world going to respond to reduced and limited access to those resources. Tell me what war hasn’t been fought over access to commodities? Was the American revolution about freedom and self-determination or access to Jamaica’s sugar monopoly. French and Indian war over access to abundant fish on the grand banks and resource rich North America; attack on Pearl Harbor for access to south Sea resources; anybody remember the Battle of Plassey that allowed India to relinquish it’s sovereignty to Britain or any of the other international conflicts to control access. How important is US-Russia diplomatic policies when the US can sell Russian gas to Europe? (see; https://oilprice.com/Energy/Natural-Gas/Paradise-Papers-Reveal-US-Selling-Russian-LNG-In-Europe.html ).
We can beat our gums, incessantly, over the details, but, eventually, vested interests will determine the size and scope of international actions. With Art’s insights, we should be focused on the larger issues of discovering energy sources to continue our lust for lifestyle, or, develop programs for the rational use of what we have left to cover us until we’re over “Peak Population”. Art’s observations are an attempt to help the industry focus on their areas of expertise. Whether we decide to “choke” on the results is really up to us. Besides, what’s Peak Prosperity all about, anyway?

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It’s just a coincidence that the first word in the phrase “Raw Crude” is a backwards war
it’s just a coincidence that after 911, the country with one of last sources of easy crude was immediately accused of pulling it off without any evidence …and still without any evidence
It’s just a coincidence that we built the biggest embassy in the world there
It’s just a coincidence that Dick Cheney knows a thing or two about oil, along with his then boss
It’s just a coincidence, that before all this that he had all those oil meetings and fought like hell to keep that evidence public
Of course, as Uncle Tommy points out, none of this is shocking, because this is what empires do
But some do it better than others
And we seem to be getting less and less talented at the game
Out of all the death and destruction and energy and money spent in these never ending wars, I wonder what we’ve returned on our investment, morals aside?
But then again, this is often how empires end until everyone around them stops cooperating, trusting, agreeing or doing any number of things that they start to do among themselves .

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Well if we are going to talk history, let’s see what a “Historian” has to say.
https://www.amazon.com/British-Petroleum-Redline-Agreement-Mideast/dp/09…

Uncle Tommy - Art's observations are an attempt to help the industry focus on their areas of expertise. That's a scary thought. AKG
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Felt this was a good interview in general. Listened several times and read the transcript as well. Enjoyed the BOE discussion, one of my pet peeves, folk here often still use 6 due to contract issues when they really should be using 15 or more to make any sense. It’s about price, not energy, and NG is not oil! Grateful for the discussion about the longevity of the shale plays too. Never worked shale myself (quit a company that went that direction since I skeptical) so am very interested in how shale artificial lift is going to play out. Note refracing has worked well on conventional plays at higher prices say above $125 (even increasing EUR at times, as a bonus) so I assumed shale would have more life at higher prices as well. Very curious how it all plays out.
I was surprised at AB’s negativity on shale AL; assumed high API shale oil would would make AL more effective for the AL “end game”. Hungry to learn more.
CM: So taken together, that’s four terrible years of oil discoveries that have, together, no historical parallel. The very worst four years of global discoveries in the entire history of oil leased, as far as my data set is concerned, which begins in the 1920s
This is the key issue. Been waiting patiently for the price scramble (I foolishly guessed it would be 2020 over a decade ago, and thought 2005 was the start of it all, kicking myself at the time for not getting in). But 2005 seems a head fake, so lots of money left to be made in guessing right (or lost in guessing wrong). I was really hoping for one more crash in oil down to $20 for a time but I think the FED will prevent that. The whole shale oil and solar “is the future” meme would help with that. But it looks like the FED ain’t gonna allow deflation again…
One comment: if we assume that oil is an “irreplaceable” fuel to maintain our JIT economy at current GDP (which I don’t as 70% US oil is used for wasted transport aka suburbia, and a lot of transport could be transferred to NG or coal via electric), well, any transition is going to drive oil prices way up first, say $200 or more, and this will make the shale plays profitable. Which is likely why so many large companies are willing to lose money today; they know PO is upon us and are merely investing when prices are still cheap. I remember when oil was very low in the 90’s and smart companies just “hung on” to their fields at a loss yet are very, very profitable today. But at the time? Lsing money hand over fist.
Of course, the counter-argument is that our economy simply can’t afford $200 oil and maintain our GDP. Myself, I think we could go to $400 or more before we hit the wall because we will just use less more efficiently when the need arises in the form of price. America is one wasteful place. But that’s another conversation.
But great interview. Got me thinking. Only suggestion: be far more aggressive to better elucidate the issues and tap into AB’s deep knowledge. CM & AB just agree too much for CM to effectively tap into the more controversial points.

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What you propose makes excellent sense, and as your USD subcommittee chair, I’d plan to strengthen the USD significantly (despite the whining of the export sectors) as a necessary means of increasing the purchasing power of the USD so every unit of USD buys more oil than any of the other fiat currencies. A USD shortage wouldn’t be difficult to engineer globally, ditto higher rates that would push the purchasing power of the USD higher. There are many geopolitical benefits of a super-strong USD: our rivals’ currencies lose purchasing power, and a weakening currency is also a driver of unrest/revolution as loss of purchasing poweris functionally equivalent to high inflation. China’s peg to the USD would be crushed as China’s yuan would gain too much value, wreaking havoc on China’s one critical industry, cheap exports. So China blows up (nice to have gold but if you don’t have enough jobs/ income to distribute, the peasants eventually revolt), and the few remaining oil exporters find their income is no longer sufficient to stave off civil unrest.

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I regularly would report that our known but untapped reserves in ANWR and the east coast shelf are awaiting our eventual use. Sadly the latest 3D mapping says there’s not as much as we thought off the west coast, but there’s an ample set of reserves to allow our second phase of plans to proceed.
We’ve been burning through the high cost stuff (shale) while conditions allow. We are all amazed that the world has not caught on and that the US is allowed to run trillions of dollars in yearly deficits, both in trade and domestic budget.
High fives all around.
So as the ROW pumps like crazy because they need dollars their own reserves are run down as fast as they can be. This includes that cagy Russian Putin.
Again, high fives all around.
When the worm turns, phase II involves the world suffering through a structural shortage that will be even more advantageous to the US than WW II where our domestic manufacturing was preserved and everybody else’s was ruined.
Thankfully our plans for exporting all the useless (human) US jobs overseas has proceeded apace, and now the robotic replacements are re-shoring. The people that used to have those jobs seemed to accept that this was just some trick of fate, saving us from the obvious pain of having to fire them en masse after having them install the very robots that were replacing them.
In phase II China does not have enough oil for domestic purposes and collapses in revolt. Europe has to beg Russia for supplies, and we can engineer all sorts of difficulties there behind the scenes.
When the dust settles the US is again the uncontested world super power and remains that way for long enough that the next generations can work out how to keep things that way.
If only Trump doesn’t Eff this all up by initiating a too-early trade war with China that is… :frowning:

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In this “culture of now” we are living in, our concern for the future seems limited to the next fiscal quarter. Any threat with a longer horizon than a couple months is beyond our ability to act on, so it’s swept under the rug and we comfort ourselves with the belief that American exceptionalism, human ingenuity, technology and capitalism will come to the rescue.
One thing the future is likely to hold is a lot of shock, disappointment and chaos. How long before that future arrives?

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Ok, you guys are freaking me out. Those are some eerily good renditions of what such a committee would look like, and say.

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Snydeman wrote:
Ok, you guys are freaking me out. Those are some eerily good renditions of what such a committee would look like, and say.
Don't worry. Surely there cannot be other people in the world as smart as us, or capable of planning in this way. /sarc My rule of life is, if I've thought of it, 100,000 other people have already thought of it before me. Many of them, predictably, are in power/control.
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If the U.S. follows its historic practice, when the price of oil becomes to high for a rational use in a growing and sustainable economy (the military, notwithstanding), we will have to look to the government to nationalize the industry, thereby, institutionalizing the spiraling debt as they did for the real estate market. If Britain and Japan are any indication, is that a good thing?
(See: http://www.bbc.com/news/av/uk-wales-41885855/wylfa-newydd-nuclear-power-station-a-100-year-project
I wonder what kind of subcommittee Venezuela has been using?

Revenue from petroleum exports accounts for more than 50% of the country's GDP and roughly 95% of total exports. Venezuela is the sixth largest member of OPEC by oil production. (Wikipedia)