With the recent collapse in the price of oil, Gail Tverberg, returns to discuss the likely impact on the US shale oil industry, as well as the global market for oil.
Gail is a professional actuary who applies classic risk assessment procedures to global resources: studying issues such as oil & natural gas depletion, water shortages, climate change, etc. These days, she writes at her website OurFiniteWorld.com.
While as an actuary, Gail is one to avoid hyperbole and the let the numbers speak, her analysis of the outlook for future oil production is nothing short of dire:
What we need is cheap energy. We need cheap, liquid oil. When it’s high-priced it really messes up the economy. We need oil to run our cars and to operate our trucks and such things, but it needs to be cheap. And it suddenly is today.But, you have to be able to keep pulling it out at that same price. And the critical thing is, we can’t keep pulling it out at that price. What is going to happen, I’m afraid, is that once production goes down, we won’t be able to get it back up again.There’s several reasons. One of them is that very low interest rates have been helping keep production up. Once you get your interest rates back up because there’s been a lot of failures, particularly in the shale industry, the costs will be higher. So, they can’t pump it out for the same price that they had it before. But, there’s also the issue that these old wells need to be produced continuously and they need continuous investment. If you cut that off, it’s going to be very hard to restart them. So, there will need to be an extra investment just to get it back online. Trying to do that becomes extremely difficult when the price is low. If it’s really an affordability issue, you've got a double hurdle then. Not only do you have to get the price up, but you have to get the price very high so you can get lots of investment dollars so you can kind of make up for lost time, besides everything else. As we know, it takes a long time to get new production online.I think, too, that it gets to be even worse than that, because financial institutions have sold derivatives based on the assumption that things can kind of go along as normal. So, you start seeing very strange motions in terms of the rise of the dollar, the fall of the dollar, and a variety of other things besides just these oil price changes. Over time, what you're going to get is a bunch of business failures. That’s going to come through these derivatives and it’s going to come through the financial system in a different way than just the oil price itself would. We have multiple impacts of these things, some of which are not obvious when you just first look at the story.
Suppose you have a derivatives problem. If you have a derivatives problem and you have to go back against depositors, your depositors are things like companies that are making payroll payments. So, the big danger is that these payroll funds will be taken in this process of taking the money away to try to get enough money to fund the derivatives problem. Or, they might not be derivatives problems. They might be other kinds of problems that are putting banks under.
If you start taking the money from the oil companies that they were going to use to pay their employees or if you take the money from electricity companies that they were going to use to buy coal or that they were going to use to pay their employees, you have a very bad effect on the economy, which has nothing to do with the shape of the oil depletion curve.As I said, the big issue I see is an affordability issue. I don't see oil prices bouncing back up again, or certainly not bouncing up very long, for very far. So, for oil production, this is basically the beginning of the end…what we're seeing is the beginning of Peak Oil, basically. The oil production will actually permanently turn down at this point because we will not be able to get it back up, and because of all the financial situations coming along.
Click the play button below to listen to Chris' interview with Gail Tverberg (44m:20s)
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host Chris Martenson. The big news for late 2014 and now heading into 2015 is the collapse in the price of oil. As I look at my trading screen right here on the 12th of January, 2015 I see WTIC Crude, that’s US crude, falling another 4.8% on the day. It traded for a while at less than $46 a barrel—$46. And Brent Crude, the world benchmark, is trading at $47…$47. These prices are damaging to oil exploration companies' bottom lines today, tomorrow’s hope for production, and these prices are destabilizing to an increasing number of oil exporting nations.
To help us make sense of all of this today, we welcome Gail Tverberg to our program. Gail is a professional actuary who applies her risk assessment expertise to finite world issues—oil depletion, natural gas depletion, water shortages, climate change—and how this relates to the economy. For years, Gail authored some of the most informed analysis on the global net energy predicament in her posts at The Oil Drum, published under the pen name Gail the Actuary. But today, she runs the very popular blog, OurFiniteWorld.com. There you will find both intelligent articles and intelligent comments. Gail, thank you so much for joining us again.
Gail Tverberg: Thank you for inviting me.
Chris Martenson: First, the price of oil. How do you explain the dramatic and so far relentless decline in the price of oil—simple supply and demand or other factors at work here?
Gail Tverberg: Well, I think there’s a variety of factors at work. One of the things we’ve noticed is over the last, oh, more than ten years, the cost of extraction has been going up rapidly but people’s wages have not been going up, certainly not as rapidly as the cost of extraction has been going up. And at the same time, the governments have been doing all kinds of things to try to increase the amount of debt and to try to make debt more accessible. So, they’ve lowered the interest rates. They’ve done something which is called quantitative easing, which gets more money out there. And also, China has done some things in the growth of its infrastructure. That has added a great deal of debt as well and it’s added a great deal of demand for oil. But, what has happened is that this debt is starting to reach limits. The fact that it’s reaching limits and the fact that incomes aren't really growing to keep up with supply means that we can no longer afford the oil prices we were paying before.
Chris Martenson: So, if we can’t afford the price of oil… The numbers I’ve read is that there’s somewhere between a 1% and 2%, let’s call it a 1.5% over supply at this moment. I’ll admit, it’s hard to store oil above ground. So, even though that sounds small, it can create issues pretty quickly. But still, 1.5% oversupply of oil leading to a more than 50% price decline, is that normal behavior in your mind?
Gail Tverberg: Well certainly it isn’t for other kinds of commodities, but that’s what seems to happen for oil. We get all kinds of strange things, especially if there’s a lot of financial issues behind it. It’s really an affordability issue as opposed to a supply issues.
Chris Martenson: Yes. Let’s talk about that relationship really quickly then. One of the things I harp on a lot of course is the relationship between energy and the economy, but specifically oil and the economy. I know you do too. For our listeners, how important is oil to the global economy, generally, and to this concept of economic growth, specifically?
Gail Tverberg: Well, what we need is cheap energy. We need cheap, liquid oil. When it’s high priced it really messes up the economy. What we need is…we need oil to run our cars and to operate our trucks and such things, but it needs to be cheap.
Chris Martenson: Well, it’s cheap today.
Gail Tverberg: It is today. But, you have to be able to keep pulling it out at that same price. The critical thing is that you can’t keep pulling it out at that price. What is going to happen, I’m afraid, is that once it goes down, we won’t be able to get it back up again.
Chris Martenson: Really? Why is that?
Gail Tverberg: Well, there’s several reasons. One of them is that very low interest rates have been helping keep the production up. Once you get your interest rates back up because there’s been a lot of failures, particularly in the shale industry, the costs will be higher. So, they can’t pump it out for the same price that they had it before. But, there’s also the issue that these old wells need to be produced continuously and they need continuous investment. If you cut that off, it’s going to be very hard to restart them. So, there will need to be an extra investment just to get it back online. Trying to do that becomes extremely difficult when the price is low. If it’s really an affordability issue, you've got a double hurdle then. Not only do you have to get the price up, but you have to get the price very high so you can get lots of investment dollars so you can kind of make up for lost time, besides everything else. As we know, it takes a long time to get new production online.
Chris Martenson: It certainly does. The story that I hear emerging here, it’s one that I told a long time ago and I know other people in the peak oil arena have said as well. I’ve heard it from Hindberg [PH]. I heard it on The Oil Drum a lot. It’s this idea of both high oil prices being a problem and low oil prices being a problem. That sounds like a real predicament—not a problem. It sounds hard to solve. Is that really where we are at this point? You just said that above a certain price the economy can’t afford the oil. There’s all these feedback loops that sort of impact that whole scenario. But, at too low of a price then oil production can’t increase or even remain stable necessarily. So, A.) is that a fair characterization of where we are? If it is, what does that tell us about where we really are in this story?
Gail Tverberg: Yes. I think it is a fair characterization of the story. I think too that it gets to be even worse than what we think because financial institutions have sold derivatives based on the assumption that things can kind of go along as normal. So, you start seeing very strange motions in terms of the rise of the dollar, the fall of the dollar, and a variety of other things besides just these oil price changes. Over time, what you're going to get is a bunch of business failures. That’s going to come through these derivatives and it’s going to come through the financial system in a different way than just the oil price itself would. So we have multiple impacts of these things, some of which are not obvious when you just first look at the story.
Chris Martenson: They’re obvious to somebody because we know now that within the banking system, at least in the US, it looks like taxpayers have been put on the hook for a portion of the derivative structure that banks carry. We know that depositors have been moved down the chain of claimants to become almost last in line should any sort of a bankruptcy or other dissolution proceeding happen for a bank. But these derivatives that you're talking about are not just oil derivatives, right? You mean all of them—the credit default swaps, the interest rate swaps—all of those pieces. Those are all basically predicated on this idea that we’re going to have robust future growth like we’ve had in the past, say 4% real GDP globally, forever and ever. Is that right?
Gail Tverberg: Right.
[Talking over each other.]
Chris Martenson: Go on with that. I’m wondering, what do you think happens to that structure of…to me it’s like the price of the entire bond market and stock market has a growth component built into it. In the bond market, it's really explicit, as well as in the stock market. When that growth premium comes out, which is something Jeremy Grantham at GMO has been talking about, other people are starting to get their hands around this. I don't think the growth premium has been taken out of the markets yet. But if it does, what do you see happening?
Gail Tverberg: I think the issue is there’s not exactly a growth premium. It’s the fact that it either grows or it collapses…that you don’t have enough when you get to the end of the time period to pay back your debt with interest. In other words, a virtuous cycle turns to a vicious cycle. We hear about Ponzi schemes—this isn't a scheme as such, but what happens is you end up with a situation where you can’t repay a debt with interest. So, that affects everything all the way up from just your basic loans to your derivatives to everything else. I think that’s one of the big issues that’s coming up as we get to lower oil supply…not lower oil supply—an inability to keep the prices up with the cost of extraction.
Chris Martenson: I’ve studied this a bit and we’ve chewed these numbers at Peak Prosperity some. I’m wondering about your take on this. It’s tricky to get your hands around this idea of really what a marginal barrel costs. Of course all different projects have a different range. We know that some arctic stuff might have a full cycle cost $120 or more a barrel. We know there’s still a few cheap barrels to be had out there. But, the shale production seems to be the world’s new marginal producer, meaning that’s the one you can turn to and turn it on or off if the price is right. What’s your sense of what the full cycle or all-in costs are for shale? I understand it varies by region obviously, Bakken is different from Eagle Ford and all of that. But, I’ve seen Wall Street sell side analysts give us numbers as low as $25 a barrel. My numbers suggest that even at $90 a barrel I can’t find anybody who is turning a profit on a free cash flow basis ever, yet, so far. Have you looked at that? Where do you think the truth lies?
Gail Tverberg: I don't think we know for sure. I know that all the numbers we’ve looked at so far are based on a zero interest rate policy and lots of borrowing with cheap money. So, if it’s $90 today, it’s not going to be $90 when they come back in again. It’s going to be $135 or $150 a barrel. And, if it’s $25 a barrel today, it’s going to be $50 a barrel tomorrow when they have to pay real interest rates on this stuff. So, it’s going to change. Even if we did know what the marginal cost of the barrel was today, it doesn't tell us what it will be for the next few marginal barrels.
Chris Martenson: Yeah, it’s certainly a moving target because of course the cost structure of drilling and fracking a well is rapidly coming down as labor prices and bid prices for rigs and things comes down. I don't think there’s much more than 10-15% overall wiggle in those numbers because a lot of it is the cost of steel and sand and stuff that’s a little bit more firm. But, at any rate, there is a little wiggle room on that side as well. I’m just convinced that the all-in cost of production for the companies, when I was looking at it, was probably closer—on a break even standpoint—was probably closer to $110-$120 a barrel. But the thing that always concerned me was I don't think society is getting its proper severance taxes out of that to pay for road damage, bridge damage, the eventual capping costs of abandoned wells, and other things like that. It certainly seemed like if you wanted to fully burden the cost of a barrel of oil for all of the true costs, it would probably have been $150 a while back. That’s what I think, but it’s hard to get good numbers.
Gail Tverberg: Yeah, I would agree with you. I guess the point I was trying to make was even when you're doing it that way you have to be sure to also count in for the fact that estimate was made with ultra-low interest rates. So, if you're going to try to put in real interest rates besides, or you know interest rates that aren’t based on a zero interest rate policy, the cost…if they were $150 fully burden before, that’s comparable to something quite a bit higher if you have a higher interest rate that these folks have to pay when they’re trying to borrow a lot of money in order to try to extract this oil.
Chris Martenson: Alright. So let’s talk about peak oil. First of all, real or not?
Gail Tverberg: Well, I think that what happens is a financial collapse and as a result the oil production drops. So, it doesn't happen in the order that you think it does. Certainly, conventional oil has peaked and what has kept it up is all kinds of financial shenanigans. Once these financial shenanigans collapse, the whole thing falls down. But, it doesn't fall down in a way that the peak oil predictions were made.
Chris Martenson: We have to look at then a blended…there’s some geology at play obviously. Like, what’s happening in the North Sea is probably independent of financial shenanigans to a large extent, although it could wiggle a little I guess. But, largely speaking, there’s some geology. But we have to understand the intersection with prices and the cost of money.
Gail Tverberg: Well, I think it’s not even that. I don't know if you read my last article, but what I was talking about there is: Suppose you have a derivatives problem or whatever. If you have a derivatives problem and you have to go back against depositors, your depositors are things like companies that are making payroll payments. So, the big danger is that these payroll funds will be taken in this process of taking the money away to try to get enough money to fund the derivatives problems. Or, they might not be derivatives problems. They might be other kinds of problems that are putting banks under.
If you start taking the money from the oil companies that they were going to use to pay their employees or if you take the money from electricity companies that they were going to use to buy coal or that they were going to use to pay their employees, you have a very bad effect on the economy, which has nothing to do with the shape of the oil depletion curve.
Chris Martenson: Right. That’s a great point. What you're talking about here is around these bail-in provisions. So, depositors are supposed to share in the losses by haircuts to their deposits. Just to make sure everybody is following here: The depositors you are concerned about here would be companies who have, by default, their money in a bank. In fact, I don't know what I would do if I was CFO or treasurer of a large company knowing what I know about the banking system because you have to have your money in a bank. If those banks get in trouble and those funds get essentially haircut or frozen or taken, then you're talking about all of the follow-on effects that would happen after that.
Gail Tverberg: Exactly. That’s the kind of thing that we're up against. It’s as much the companies being affected as the individuals. But, they both can be affected and they can be affected pretty quickly if that’s the kind of program that’s put in place and people don’t realize what the follow-on effects are likely to be.
Chris Martenson: One thing I found is that the people who passed the financial rules seem to be just delightfully unaware of what the follow-on effects might be.
Gail Tverberg: Right.
Chris Martenson: I’ve been looking at peak oil as having both a geological component…we know that if everything was just firing on all cylinders, there hadn’t been an oil price collapse, if the cost of money hadn’t gone away, if everything was going along, the Energy Information Association (EIA) was projecting that US shale output was going to peak around 2020, give or take a year depending on how you count. So just accepting that as being true, we knew that the shale story was really not all that long lived, right?
Gail Tverberg: Right.
Chris Martenson: 2020 is almost tomorrow as far as I’m concerned. Yet, you know, to me that was probably the high water mark of international oil production at that point in time, taking US and everything in line. With this, the only wildcard in there I’m not clear on is Iraq. Iraq clearly could have a lot of extra capacity, I think, if they could become stable and get a lot of investment in there. But barring that, it seemed like we were probably facing this peak around…somewhere in that zone.
But, the world used to be aware of this: The conventional oil fields that are out there, all the fields that were drilled in the 20’s, 30’s, 40’s, 50’s, 60’s, 70’s, those fields are depleting at around 4% a year. I’m averaging. Some say as low as 3%, some say as high as 6.75%. I’ll just take 4%. So, that means 3-4 million barrels per year is coming offline from just regular depletion cycles, has to be brought back in through additional investment. So, now I want to turn to this part of future production and how you see today’s oil price affecting that.
Gail Tverberg: Well, as I said, the big issue I see is an affordability issue. I don't see oil prices bouncing back up again, or certainly not bouncing up very long, for very far. So, I see oil production—this is basically the beginning of the end of…what we're seeing is the beginning of peak oil basically. The oil production will actually permanently turn down at this point because we will not be able to get it back up, and because of all the financial situations coming along.
Chris Martenson: If that’s true though, then give me your follow-on prediction for what happens to the world economy.
Gail Tverberg: The world economy is what’s collapsing. It’s because the economy collapses that the oil production collapses. And, as does natural gas and coal at the same time. The renewables go down at the same time because they just support the electric system, which then the electric system goes down because the electric people can’t pay their employees. So you end up with a bad situation all over, but it’s because of the financial situation and most people will never figure out it had anything at all to do with oil.
Chris Martenson: They are both very well tied together. The oil business is really interesting. I mean, if you go…there’s a great little video I’m going to post on my site I found, which basically shows the complete drilling and fracking of a well from start to finish, from scraping the pad. It condenses it all into a minute and a half. It’s just a flurry of activity. Every one of these trucks have specialized people, specialized equipment, specialized tools. It’s a really heavily, heavily complicated business. For that to run, just looking at the number of different types of trucks that show up and all that, I’m going to guess there are several hundred companies making things that are used in that process. For those several hundred companies to be operating and delivering the things that they’re making, you need a functioning economy. Right?
Gail Tverberg: Right. Back at the time of the 2008 oil crash, one of the things we discovered was that a big problem was there are a lot of the small suppliers that have terrible credit ratings, even if the top company is a big company that has a good credit rating. What happens to the small suppliers is that they cannot get the financial backing that they need, so they drop out of the supply lines. It’s the fact that you can’t get the supply lines to work that’s the big problem.
Chris Martenson: Yeah. Any chance you think that…you know the Fed bailed out the housing market—bought $1.3 trillion of mortgages in order to affect that. Any chance you see a government response to say "this is too valuable of an industry. We can’t tolerate this sort of damage here"?
Gail Tverberg: I think the question is: Are we really talking about bailing out the financial system, and how big a bailout that really would be. I don't see that it’s going to be the oil industry so much as the financial system, maybe plus the oil industry that we’re talking about. At that point, I think it gets almost to be beyond what they can handle because we’re really talking about a fundamental mismatch at some point. We’ve made all kinds of promises that production and everything else can continue to expand in the future. You know, the thing you talked about in the beginning, that we’d have this continuous growth forever and ever. That promise really isn't true. So, at some point, that has to come to the floor.
Chris Martenson: Interesting that it would come to the floor as a consequence of low oil prices. That’s an interesting wrinkle in this story potentially, but I can see how it would happen.
Gail Tverberg: Lack of affordability.
Chris Martenson: Yeah. It’s interesting. I love the way you started by saying the cost of extraction is up a lot but wages are not. Wages for the average person are in the doldrums. It was always the broad middle class that really funded the type of consumption that led to the sorts of advances we’ve had in the past. We see lots of economists confused now by where’s our growth because by the headline numbers things look okay. The problem is they’re not analyzing it to the point of saying most of those gains are flowing to a very, very tiny fraction of players. They just pile the money up. So great. You know, we have excess reserves floating around by the trillions and all of that. But, that doesn't help anything if you really want this growth.
As you say now, we have to at some point as a species, or at least as a culture, square up to this idea, which is that endless growth was impossible anyway. And, we seem to have a system that you said—and I agree with this characterization—is either growing or collapsing. It doesn't seem to have a middle ground. Why is that?
Gail Tverberg: Well, it’s the way that the world is constructed. We are dealing in a competitive system. Each species and in fact, each individual must compete against other individuals and other species. It’s either grow and expand your population of your species or let some other species grow and expand the population of their species. Because of that, each species has more offspring than needed to reproduce themselves. It’s the ones that get the best control of energy that are able to outbid the other species. That’s what we’ve been able to do, first through our controlled use of fire over a million years ago. This is the way the economy is set up to go. Every little smaller civilization has grown until it reached a point of collapse. There’s never been a steady state system that I’m aware of.
Chris Martenson: This, to me, comes down to as well that when you have debt based money and you have an interest rate attached to it, as you mentioned before, in order to pay both the principal and the interest in the future there has to be some sort of growth associated with that. It just doesn't work otherwise. I know some people have put together spreadsheets and said with perfect flows it does, but in the real world it doesn't because you have imperfect flows. We really do seem to be trapped in this thing, this grow or die.
I’m concerned at this point, Gail, because what I’m looking at in terms of the future production of oil, I know that back in January and February of 2014, it was a year ago, Brent was still over $110 a barrel. And, all seven oil majors basically said "look, we can’t afford to explore at this price of oil and pay shareholder dividends." So, CAPEX verses dividends; something has got to give. So, they either froze or cut CAPEX back at $110. Here we are at less than half that number. I have to imagine that those CAPEX decisions are just getting absolutely shredded at this point in time, which means, in my world, if this low oil price persists for six months or longer, we’re going to have future production that’s not large enough to sustain the global economy at nearly the pace it needs to grow in order to justify current levels of indebtedness. That was a mouthful, but did that make sense?
Gail Tverberg: Right, right. The cutback that’s already flowing into the system is part of what’s going on. Oil production a year from now is going to be down regardless of what happens with all of these cutbacks we’re seeing in shale and such right now. The effect is we’ve got quite a bit of cutback already built into the system. That’s part of the reason why I’m saying that the system now is very well likely to be on a permanent way down because we’re going to be down so far there’s no possible way we can get back up again. We needed more than the $110 a barrel for the oil majors to keep the prices up back before for them to continue doing their exploration and production at the level they needed to. They needed a higher price than that. We’re not anywhere near there. We’re way, way, way, way down now. That’s why I say that I think we’re at a point where the oil production is going to end up permanently down.
Chris Martenson: With low oil prices, demand basically has to follow those prices down in some way because if demand picks up…normal supply and demand thing would say if we take the price point down, demand will go up and then supply will meet it there magically. You're saying that because the price has come down it’s likely to stay down because we won’t have the sort of economic activity we would need to drive demand up enough to create that price supply sort of rebalancing act. Is that right?
Gail Tverberg: Right. I guess the way I see it is that salaries…what we have is a network system. Salaries are determined…everything is hooked together. The reason why salaries are so low is because of diminishing returns that we’ve been reaching already. More and more of our resources are going into oil extraction and they're going into making renewables and they’re going into all kinds of other stuff that’s not really adding a whole lot to the economic growth of the rest of the economy. They’re certainly not adding proportional output to the input that they are. Anyhow, I don't see that we can get the growth back again.
Chris Martenson: That’s fascinating. As I look at this whole scenario of what’s really happening out there, it feels to me like the price of oil has to at least go back up to the marginal cost of production because the alternative to me is pretty much a collapse in the global economy. People tell me "oh, we’ve got thin film solar," which has nothing to do with oil. They say "oh, but we’re getting electric cars," at a fraction of a percent of the total vehicle fleet. That the world’s economy is decoupling from oil—I don't see any of that, Gail. One of my favorite things to do is go over to Vimeo and look at traffic jams around the world. We are 24/7, 365 a dissipating organism. We are just burning oil all the time.
Everything about…when I go online and I order something from Amazon, I click, and the big brown truck of happiness rolls up my driveway, the supply chain involved in anything that I bought is just so oillisously dependent on being transported that I can’t for the life of me imagine what people are thinking when they say "oh, we can still have a growing, functioning economy with less oil." What would you say to people who make that claim?
Gail Tverberg: I’d agree with you. They can’t. We can’t have a functioning economy with less oil. I think that the financial system is the first part to go. And, that’s not real easy to see.
Chris Martenson: Gail, one of the places I’ve been looking a lot is in the destruction of the, obviously, the equity prices for a lot of the shale drillers as well as other oil companies, service companies. We’ve seen their debt get hammered a lot. We’ve seen the cost of capital going up. Besides those obvious places, as you're looking for your clues that the financial aspect of the broader economy is starting to get hit because of this lack of ability to afford sufficient quantities of cheap oil, where would you be looking for signs and what are you looking for?
Gail Tverberg: I think what we’re going to be seeing is a lot of problems around the world of different kinds. I think the emerging market debt is going to be a problem. I think China may very well be one of the…you know, we consider that part of the emerging market, but I think they especially are going to have a lot of debt. We are going to be seeing a lot of different problems coming together. I think we’re also going to see things where it’s not just the oil is being cut back but areas…you know, there’s so much of the economy that depends on oil or is related to oil.
I think I put together a post where I showed a chart you may have seen elsewhere, where the shale states had pretty much all increase in employment in recent years, while the non-shale states are still way behind on jobs. So, you get a situation where there are a lot of different pieces of the economy that are doing badly at the same time. It’s a little hard to say exactly what it is that brings the whole thing down, but it’s a combination of things.
It may even be that the Federal Reserve raises the interest rates. Raising interest rates will really bring the US economy down if it's more than just a tiny, tiny percentage or fraction of a percent. That is something that is the lever that they use to get…that they’ve been trying to use to offset high oil prices. So, that could be one of the big pieces too that pushes the economy down.
Chris Martenson: I’ve heard it said, I think it was Jim Puplava—I thought it was very right at the time, a few years back—he said that the price of oil is the new fed funds rate. Meaning, as the price of oil goes up it’s providing a resistive effect on the overall economic growth. Now that the oil price has declined, it would have the reverse—it would have a stimulative effect. What do you say? I read a lot of comments where people say "oh, this is unequivocally good. Lower oil prices mean consumers pay less for fuel. That’s just a positive. "
Gail Tverberg: Well, it’s good from a first order kind of look at things. But, the fact that you can’t keep pulling the oil out at that rate is a big problem. The fact that there’s a lot of follow-on effects that you don’t see immediately. Part of those follow-on effects are in other countries around the world too. We need Saudi Arabia and we need all of the other countries, even Venezuela and all of our exporters, to continue their exporting. If the governments fail, then it’s not that they just cut back a little bit on their oil production, they are likely to be cutting back a whole lot on their oil production.
Chris Martenson: Interesting. The piece that’s come up a lot for me as I’ve read, honestly, very qualified economists say that this lower oil price is going to be a big boost to GDP because it puts all this disposable income back in people’s pockets. I’m like "whoa big boys and girls." GDP is a macro statistic. So, to the extent that oil companies operating in the US and the whole chain, from refining through distribution and retail, the extent to which they’re receiving less money and consumers are receiving that benefit on their side, that’s a zero on the GDP ledger. Nothing happened there. The only thing that matters is if you're importing oil it’s a positive because your imports deduct from your exports to give you an overall GDP boost or decline, depending on how those numbers balance out.
I see a little bit of a gain for the US because we still do import a lot of oil—5-6 million barrels a day. So, we’re paying less for that. That will boost GDP. Otherwise, it’s kind of a wash, isn't it?
Gail Tverberg: Well, I sat down and I wrote one post that I think it was called “Ten Reasons Why A Severe Drop in Oil Prices is a Problem.” As I sat down and looked at it and enumerated it, I realized that there were things that people are not taking into account in that analysis. It’s a lot worse than what you think. There’s enough bad effects…if you take some kind of a whole and divide it into two pieces—we’ll say and egg. You know, the two pieces are not equal to the one together. It really changes the whole situation materially. It’s the fact that it's materially changed that is a problem. You can’t put your egg back together again after you break it, even if you could say that’s the same egg you had before, even if you've cracked it in two.
Chris Martenson: Absolutely. As we look at the spill on effects that would happen here... North Dakota is going to have to wrestle with some stuff. They're going to have to figure out what a bust feels like in this story. If you lose $100,000 truck driving job in that area, there’s all the second order things that you would lose as well—the demand for the burger flipper at $20 an hour and the maid at $25 cleaning rooms in the hotel that’s selling rooms for $200 a night. All of that stuff gets impacted as well. So, the loss of a little bit of oil revenue can really ripple through an economy, can’t it?
Gail Tverberg: Exactly. One of the things I discovered as I was looking at this is things like, you assume that all of this savings is going to go back to the consumer. Well, are airlines going to give the lower oil prices back to the consumer? No. They’re not going to lower their prices. They’re going to take one of the empty planes they’ve got sitting around from 2008 and put it back in the air because there’s not much cost in doing that. And, they’re going to try to run more planes rather than trying to actually reduce the fares to give the savings in oil price back to the consumers.
Chris Martenson: As we look forward then, what do you see happening? You said you don’t see oil prices rising anytime soon. Do you literally mean like…what would your prediction for oil prices for 2015 actually be here?
Gail Tverberg: They probably will bump along, but we’re probably talking down to the $20 barrel range.
Chris Martenson: Twenty dollars, okay. Simply because somebody can make money selling it at that range, or that’s just where you see demand falling for this?
Gail Tverberg: Well, I think because we end up with so many financial problems.
Chris Martenson: Yeah. So then…
Gail Tverberg: The sole issue is how bad does the financial system come out? How many derivatives problems do we have? How many problems do we have of other sorts? How much haircut is being done of people’s bank accounts? That kind of thing.
Chris Martenson: Well so then, this sort of squares up with my personal opinion/prediction. I think there’s a deflationary impulse. For a long time, I thought that inflation was going to win. I kind of believed the whole helicopter money would do it. But, they failed to get the money in the hands of people. They got it into the hands of a concentrated set of speculators. That didn't do the trick. So, it looks to me like now we’re seeing more deflationary impulses than anything—China being a big wildcard in this. They went through their building boom. They are absolutely not importing nearly the same amounts of coal, oil, steel, copper—the big four I track for the macro story. Europe is in trouble. The United States, despite the 5% GDP reading, which is really just a whole lot of Obamacare brought forward into a single quarter for a nice bump effect—I’m seeing deflation as the impulse. That’s a scary proposition to our world leaders. I think they’ll fight it with everything they’ve got because deflation destroys institutions, it wrecks whole economies, it ruins financial systems, and it most importantly shortens political careers.
Do you agree that, in your $20 oil, I’m projecting that you're saying there’s a deflationary impulse on our way?
Gail Tverberg: Exactly. It makes debt harder to repay. So, you end up with more and more countries having difficulty with all of the debt they have outstanding and the businesses in those countries having difficulty with their debt.
Chris Martenson: What if the Federal Reserve went wild? That happens and they just go wild and they say "great. We’re going to just give everybody money." I don't care how they do it. They might give everybody a retroactive tax rebate for the last three years or they might just send checks or have the government do it but then fund the deficit—who cares. Would your opinion of all this change if the Fed just threw even more money at this?
Gail Tverberg: Well, I don't know. It may delay things…it may keep things, the financial crash that I’m concerned about, you know make it go out a few months or even a year or two. I don't know. We’ve managed to do some amazing things so far. There are a lot of things that are possible that maybe you could kind of keep the balls up in the air for a little bit longer. When you look at it, you say it can’t go on indefinitely. Maybe they can figure out something. I don't know. It certainly doesn't give us a corresponding amount of real buying power because there’s not that much stuff to be bought.
Chris Martenson: Right. This is really an interesting…this is why I love to keep focusing on the energy. Energy is everything in this story, as far as I’m concerned. We can’t have an analysis around just the economy and hope to get anywhere without really understanding the master resource, because energy is everything. The peak oil community has been talking about net energy and the role of that and energy return on energy invested. Obviously we’re slowly swapping high net energy oil for less high net energy oil. We’re in this part where I just can’t see global growth returning like people are counting on or like financial models are counting on. Because of that, I just have a sense right here, Gail, of tremendous pressures building because the fiscal and monetary authorities are blissfully unaware of that part of the energy story you and I are talking about. So, they just keep pushing and pushing, creating more debt, more derivatives, more lending, more money, more claims. I think you said it best. It’s the amount of real stuff that matters at the end of the day, not the claims. The claims are just piling up over there. That is a pressure, if you will, that’s going to connect at some point and either the economy really takes off and rip roar grows to the future, or the claims have to get reduced. You're saying that’s where we’re headed. In fact, we’re almost there.
Gail Tverberg: Right. I think though that the claims in the future, they really do play a role though in trying to keep the price of oil up. If you don’t have your debt growing, you can’t keep the price of oil up. So, cutting back on debt creates a real problem in terms of oil price. That sometimes is one thing that people don’t understand when they say "oh, we need to just roll back things." We’ll, you can only roll back things if you can keep your prices up high enough.
Chris Martenson: Interesting. Fascinating thoughts there. We’re out of time for this. I really want to thank you for your time today. Again, just remind people. Tell them about your excellent website and how to get there.
Gail Tverberg: Okay. My name is Gail Tverberg. The name of my website is OurFiniteWorld.com, Gail Tverberg, but either one of those will get you…if you put my name in, you can get to it as well.
Chris Martenson: And there’s just some fantastic articles there, full of data, very well done. So Gail, thank you so much for today and for the work you do in analyzing and spreading the word.
Gail Tverberg: Thanks for inviting me.