So… I emailed one of my favorite authors and… AGAIN got a response!!! HOLY COW!! I was so excited! James Fucking Kunstler!!! Well, he goes by James Howard Kunstler…
Another crazy magical event in my weirder and weirder life…
This guy was introduced to me when I was reading about peak oil some time back. Dan and I read his World Made by Hand long ago and really enjoyed it. And more recently, I was turned on to his blog – When Giants Fall – and again thrilled by his use of wit and sarcasm to explain our current situation. So I wrote him to tell him. And he wrote back!!!
I also listened to his interview on the recent Oil Patch issues… which taught me a bit about that. So I’m sharing it with you today.
April Crash – 4/20/20… so a memorable day.
Futures were reportedly created long ago when cold markets had the potential to destroy an annual reaping from crop sales so agreements were made to assure farmers they could “flatten the curve” on risk. Kinda like CSAs were designed to do more recently – though with perhaps better returns?
Oil futures have been useful for producers who HEDGE to control for a future price. So how’d we go negative? Get online, buy a contract for a barrel of oil at a certain price – with a contract expiration date – and, if you can’t sell it before expiration, you’re on the hook for those barrels of oil which requires selling at a loss if you get stuck.
What happened was 110M barrels of oil had to be dumped when May deadlines were expiring – had to PAY the ppl who had storage lease to take their “futures”. Paid about $37-38 for this to happen!
A little suspicious…. Hard to imagine how so many ppl – or a few owners of such a large # of contracts could get caught. No NEWS that we were running out of storage space… Gonna be investigated as it “smells funny” and seems a weird event with no clear explanation.
-$37/barrel means some took a bath on sales but NOT that oil has no value. 150X price to get rid of the contracts… $37 X 100M… that’s a lot of dollars. Meanwhile, markets were sending strong signals to producers to STOP Producting – no place to put it, no demand (which is why the former) so markets were CLEAR.
Shale oil party seems to be over… for a while anyway. But don’t sell them short… More than half the oil produced in the US is tight oil – shale oil. If this is going away, the US is in BIG TROUBLE.
What about conventional oil? Not as much as the 1060s but… what about those guys? Lot of it but in many small places – too deep, under a National Park, not feasible to extract at a profit. Economics of this shale oil is better than most conventional oil… including Saudi Arabia and Russia. Saudi oil being $3.80/barrel is hogwash. Cost to run pump is that much! But drilling, taxes, royalties, moving the oil to a pipeline, etc. Aramco offering “publicly” meant they disclosed cost info…. Nov 2019 IPO – break even price is about $40/barrel. 10X more than most ppl thought.
Decline in ratio of energy invested to energy return has been dropping – 1990s was 100:1 and now about 15:1 to 18:1… making it hard to run an industrial civilization at this ratio. EROI – net energy – is a brilliant idea but almost impossible to calculate. What is true cost of drilling a well – simple question but hard to determine – all the diesel, trucks, dozers, concrete – a bunch of costs. Bakken shale stufy years ago (with some questions) – about 30:1 to 50:1. It does require more energy today to get a barrel of oil than 70 years ago but beats the hell out of any other energy by a ton. Numbers are squishy… But solar and wind are about 10:1. Oil best bang for buck – coal is lower – may be beatable by renewables but the real competition is oil and natural gas.
Money-making is the deal… but examining the details shows cost of solar and wind is almost nothing – so dirt cheap nothing can compete – assume that is true, why is only 4% renewable? Well, not so cheap. Oil is most productive fuel that man has discuvered.
Costs of oil and costs of energy – how do they fit into rest of the economy? Decade of shale oil rising – none in 2005 to great summit in 2019… amounted to a financial racket. Many shale producers couldn’t make a buck but attracted investment – how while demonstrating it was not a good investment? True for oil business since day one. Not a special feature of shale.
Oil industry on avg has returned about 7% since the 70s. For something that has such high cost intensive risks, investors are wanting 20%… So did shale oil draw a bunch of investments because other investments weren’t getting as much as desired? After 2008 when interest rates went to 0… US Treasury bonds were a loser. Fed Reserve was buying bonds and wanted you to put $ in stocks. Yields on safe/passive investments like bonds and money markets were not worth having. Oil was “master resource of the world”, was backed by a hard investment in the ground… collateral! Given no more than a percent or two for most other investments – not so much a risk overall, buying oil – slightly higher risk but higher returns. Most of the investment in tight oil was not real checks written to oil companies to subsidize their operations. Most was in stock.
Early days 2007-09 was bank money, then joint ventures, then private equity – moving to BIGGER AND BIGGER investors. By 2012 or 2013 – certainly after oil crashed in 2014 – was almost all secondary share offerings. Stocks are money a company can use… if you look at shale companies and, if you bought in Jan 2016 – lowest point in oil until recently. If you held it to end of 2018 gave you 250% profit! For those who played it right…
23 minutes in begins a discussion about the investment in shale and how it was based on the system, not the true value of the companies. Art Berman, an independent oil geologist and industry analyst, admits that the stock market is a casino. Jim notes that there is a disappearance of capital – and a creation of new capital that doesn’t seem to be keeping up. He asks what will keep shale going. Berman notes that oil was poorest performing long before COVID-19 began. [Note: Art lives in Houston and writes a blog.
Recent rally showed 89% increase in their stocks. Oil company stock price fluctuates as a function of it’s product, OIL. Started at -$39 and went to $25 – $60 increase in two weeks is largest oil rally in the history of man. A distortion in a world full of distortions… People are making money on this goosed price. [I’d ask if that seems fair. Certainly seems like money being made for no effort so doesn’t seem far…]
US Oil could be screwed.
Info on current state and COVID seem to say we’re royally screwed.
Price, cost and value are not the same thing. Price is $25/barrel but COST is $60/barrel to get it out of the ground. Value is hundreds of hours of work – tremendous source of energy. 4.5 years of human labor in a barrel of oil = $120K/barrel. Value far exceeded it’s price or cost of extraction.
Discussion continues on the prospect of nationalizing some portion of US oil production. Art sees it as pretty sure this will happen. Companies have billions in debt load Futures market and stock market are saying “turn off production”. With no output, there is no payment of interest expense to creditors… and then bankruptcy. Whiting declares bankruptcy [Tar Sands refinery in Indiana].
Usually there is an Exxon or Chevron ready to buy the littler guys as they fold… for pennies on the dollar. But these guys are struggling to pay dividends! Shareholders will not tolerate buying a zombie oil company on the cheap. But… oil is so important to the economy that, if no one is there, the US Govt, like they did for GM, may bail them out.
Refineries are operating at 2/3 normal intake. They are not profitable if they are not at 100%. Might as well not operate at all – from a financial perspective – at 67%. Shipping relies on transport. Without that, the whole industrial sector is hosed. Will likely be not only producers but refiners and all in between to assure we have oil.
Renewables won’t cut it in a pinch. [That assumes we need to keep going at the pace we are… which I believe has been proven to slow… outside our span of control. Think we’re heading to a new world, just not sure what it will be yet.]
Jim asks if government will fund or actually take over the business – are they competent? Art notes they were not able to run the auto industry – GM was a big org – could underwrite debts and costs and leave mgmt structure. But with OIL, it’s 1000s if not tens of 1000s of companies. Of all the government policies – energy is too complex to be covered. If US becomes the default owner of energy production, “heaven help us”. Jim says we will become Venezuela. Mexico did same. Saudis have managed their national company pretty well. Art agrees.
Storage and overproduction situation. Shale are shutting in their oil – closing down wells – not a cheap or simple procedure. VERY COMPLEX Process. Using a beach ball analogy, Art explains it. Fluid and material (Barite?) loaded on top to keep the pressure and then a metal plug installed – requiring a rig and thousands of dollars – and then cement poured to kill the well. Hope the cement holds!!! Then you can take the rig off. So this is a process that will need to be done over and over.
The pressure causes a probability that you will damage the formation. After 6-12 months, re-opening will be again, this same complex process – drill cement, pull metal plug, drain fluid… and then hope it pumps on its own. More often than not, it’s not that easy. Requires acid, zylene, cleanup and possibly re-fracking and STILL you may not get past performance.
Jim notes the Europe situation for oil (only Norway and a bit from Britain)? Not hearing from EU bigwigs about concerns for their lack of supply. Reset to an economic level unthinkable a few years ago? Art argues this will be a US and worldwide problem, not just European. He argues there is a 1:1 correlation between GDP and oil consumption. If the world is consuming 20% less oil, then GDP will reasonably to fall 20%. “A damn disaster. A catastrophe!” [But is it? Aren’t we destroying the planet too quickly? Wouldn’t that be a good thing to slow down?]
No one will like the way we get through it. We will NOT GO BACK to the way we were before – certainly not in the near term. Things are gonna suck economically. Jim is not surprised.
Europe is captive but there are lots – Saudi, Iran, Iraq, N. Africa, Libya, Tunesia…. We have more oil than we need as consumers. [Wait, what about peak oil?] Dispelling the myths from the Secretary of Energy that the US is a net exporter…
US imported avg of 9M Barrels/day of crude oil. More than Europe uses! US imports oil from around the world, refines it and sells as products. But we are NOT A PRODUCER of oil. We are an exporter of REFINING. US the NOT energy independent.
Art asks… if our oil is so great, why are we selling every barrel? Because our oil is NOT GREAT and we need better oil. We produce gasoline – light stuff – doesn’t contain molecular compounds needed to make DEISEL. Nothing you can do to give it something it doesn’t have so we have to blend it with heavier oil and there are limits to what we can do. 3.5M Barrels/day still exporting. VALUE IS WORTHLESS to us. May be worth something to a producer but, if it were so valuable, why would we export it?
Art Berman’s view on US 5-10 year economics, living, ordinary life: Geologist here… Simple answer is IDK but a range of scenarios exists.
Worst case – about 25% of Americans missed their mortgage last month and a bit higher % didn’t make rent payment. If this persists, creditors don’t get paid and the financial system collapses. If US finances collapse, then entire world system collapses and we’re in a parallel universe – unthinkable. In 5 years time, maybe things will be better… assuming no wars, mass chaos, rioting. [Well…] Then all bets are off.
Best case – that is completely avoided. Treasury, Fed defibrillate the economy by creating liquidity and capital to help us live through. In a service economy, can’t make widgets faster to make up for lost productivity. Consumer, industries – all damaged. Everyone saving to not let this happen again. In a few years, the US is hugely weaker. Credit out of system – 30% haircut on what we’re used to. Not the worst in the world but not many who will sign up for a 1970 standard of living. Best case? Maybe most likely case…
Hard to see a happy ending if nothing happens other than what is already happening.
5000 B/day – have to be there next month. Then 50% reduction in production. What is good news for the economy? If oil drops 63%, GDP drops 63%…
Optimists say Art is a pessimist but he argues he’s a scientist. Optimists choose to ignore objective information. Can’t pull a rabbit out of the hat. Hope you’re right – my feeling part wants to agree. But the present implies that the future looks awful. Hoping Treasury/Fed can make things happen but don’t see it based on the info today.
Jim agrees there is much anxiety and distress and we’re gonna have to stick with it. American impatience with uncertainty needs to end… we need to grow up.
Thank goodness for plum blossoms and roses. The critters don’t seem to be affected by all this. Hmmmm. Something to ponder.
Update 12/7/20: In hindsight, as I watch Enbridge rush to drill under the Mississippi River to install a NEW Tar Sands Pipeline in Aitkin County, Minnesota, it seems the critters are affected by this… we just haven’t been paying close enough attention. But yes, the critters go on, as best they can, as humans continue to destroy the planet’s ability to host human life. Fewer of them, certainly. I’m glad for those that remain in the forest where I live. ❤