I came across an interview of Art Berman, an oil expert by George Gammon worth listening. Some important insights are discussed about oil that you won’t hear via highly politicalized mainstream media touting solar, wind and electric cars as ultimate longer term solutions.
First I share some of my own thoughts.
Energy supply and oil are highly important topics, especially from a longer term investors standpoint. My perceptive on energy is that due of years on governmental support for unprofitable solar, wind and electric cars, there has been created a huge mal-investmement bubble in so-called renewable energy. The manufacturing of solar, wind and electric cars based on expansion of debts has resulted into pulling forward future supply of commodities, which could have been used later on for other more profitable, efficient applications.
The risk is that current economic difficulties may develop into a bigger governmental and corporate crisis as they are insolvent and bankrupt. In the longer term it will be impossible to sustain current governmental support for renewables. Central Banks are printing money in an ever faster and bigger rate to keep on adding liquidity to governments and big corporations. Central Bank interventions hide the amount of insolvent, unprofitable ‘businesses’, aka zombies. My best guess is when Central Banks finally lose control over their liquidity game of propping up insolvent governments and corporations, it will lead to a reappraisal of high density and effective energy sources as oil and uranium.
Nowadays the world has too much oil, OPEC has reduced its capacity since 2016. The reason there’s still too much oil today is because we are expanding the economy not via profits, but via expansion of debt. As a result of this ongoing debt expansion, we are borrowing against future energy surpluses and therefore pulling future oil supply forward. But truth is that the debt won’t go away as the future oil supply already has been depleted. Without the giant debt creation we would need years of work to be able to invest profits into developing new oil wells. The truth is that we’ve run out of surplus energy somewhere in the 70’s/80’s. What happened in that period was that Fed chairman Volcker started to fight the 1970’s inflation by raising interest rates up to 18% making the US Treasuries the preferred assets of world. Why would you invest in anything else if you get around 18% on a T Bond free of risk? The money poured into Treasuries from all over the world and the US used it to buy its future by forwarding consumption via debt expansion.
Over 40 years of excessive debt expansion made the US economy fundamentally unsound. The Corona crisis shows its current fragility. The virus is a problem but a much bigger problem is the fundamental unsound economy. A debt loaded economy is more vulnerable for any type of crisis, whether it’s a virus or something else.
The prediction is that future oil prices will be higher than today’s, that the future costs to produce oil will be less good, meaning production costs will rise because we have squandered a lot of the oil provisions by forwarding future oil production and bringing that to the market for terrible prices. The future cost of oil production will rise as oil becomes scarer and harder to get it out ground. The lower hanging fruit has already pumped up.
Economy is a proxy of oil, most people think the economy runs on money. That’s not true as we really rely on energy to live as we all need food, and we even need energy to produce food. Societies have developed from hunter oriented – towards agriculture oriented ones. Agriculture helped us to start creating surpluses and that shaped trade by exchange of goods. Agriculture was the first sector where surpluses were produced in order to trade.
The price of a barrel of oil is nowadays about $40. The costs to get it out of the ground is around $60 per barrel. The value of a barrel of oil is the work it contains and is around $120000. Oil is the the most productive form of energy we have.
Renewable energy as wind, solar electricity are less efficient and effective because the energy they generate has a lower density. The energy density of renewable energy sources are around 10% of a barrel of oil. The question is if technology can make solar, wind and electricity as efficient as oil so they can generate as much energy as a barrel of oil. The answer is no because technology doesn’t create energy. Technology only converts energy into work.
Some final thoughts
The world has developed because of transitions from lower to higher density energy sources, from fire and wind to coals and oil. It helped at the same time to create surpluses available for trade. An energy supply based on wind and solar is a huge step back again to lower density energy sources. How desirable is that? Because it means living in less prosperity as we have today thanks to a major energy supply on oil. Also Art said that technology in itself doesn’t not create energy. Can we conclude that solar, wind and electric technologies are overrated and should we focus more on exploration of more scarce becoming oil and commodities and efficient and clean technologies that can help to manage the higher costs to get it out of the ground?