In spite of the recent low prices for oil and natural gas, an energy supply crunch is looming, warns geological consultant Arthur Berman.
Berman's perspective should not be lightly dismissed: he has 37 years of experience in petroleum exploration and production, with 20 of those years at Amoco (now known as BP). He has published more than 100 articles and reports on geology, technology and the petroleum industry during the past five years--more than 20 of those focused on the shale industry including the Barnett, Fayetteville, Haynesville, Bakken and Eagleford plays:
Chris Martenson: I'm reading lots of reports in the Wall Street Journal and other places that say that shale companies could make money at $30 a barrel.. not, wait.. they'll come roaring back at $40 a barrel. Well, here we are at $50 a barrel. Has the shale business come roaring back?
Arthur Berman: If we're talking about a break-even oil price of $30 and you're not talking about royalties or taxes or paying your employees or your debt service.. well yeah, you look pretty darn good. But you add in the normal cost of doing business and now we're talking about a different story. Bottom line, Chris, is that there isn’t an oil play in the United States or Canada that can break even at less than $50. And there isn’t an oil play in the world, in fact, when you include country overhead -- which is to say what a country like Saudi Arabia or Kuwait needs to balance its fiscal budget, which is overhead. There is nobody in the world that can break even at less than $50. By the way, Kuwait is the cheapest producer.
What we have seen is a situation where not very long ago in the 1990s, oil prices in real 2016 dollars were $20, and companies and countries were making money enough to stay in business at least on $20 oil. What I am telling you now is that, about 20 years later, nobody can stay in business at less than 2.5 times that basic cost. And so the cost of energy -- certainly the cost of crude oil -- has gone up two and a half times in two decades, and that has absolutely very significant implications for everything that we talk about and think about. And when we read in the press or on television that oil is just getting more and more abundant, well okay, I am not going to argue with the abundance issue, because that is another argument. But if it costs two and a half more times to have this abundance, then what is it really worth? That is an important piece of information to understand.
Chris Martenson: What you are saying is that even if oil prices went up, the types of oil finds that are left are going to require a much higher price for oil in order to justify them, perhaps by as much as two and a half times?
Arthur Berman: That is absolutely correct. For the shale plays, $50 is the cheapest -- and really we need to be talking about $60-$65 kind of on average for the best of the plays in the core areas. Deepwater is higher. Oil sands can be sort of in that range for existing projects, probably $80 for new projects.
What's happening right now that (at least according to the International Energy Agency) has never happened before is that we had two consecutive years where investment in oil production, infrastructure, exploration is significantly lower than the year before. And we may be going on a third year. With that in mind, we're talking about half a trillion dollars less if you take what we are going to spend in 2015 and 16 on these projects versus what we did in 2014. Half a trillion dollars. That's going to come back and hammer us. It is absolutely going to hammer us.
Conventional oil is declining: it's in terminal decline. Nobody is investing in conventional oil projects that move the needle in terms of global supply. Not reserves that really matter. All of the investment that is going on today is in expensive oil.
What we are going to have -- and I don’t want to create any sort of sensationalistic fears or anything, but I've got to tell the truth -- the truth is that we are going to see an absolute moon-shot in terms of oil prices sometime sooner than later, I think -- let’s just say in the next five years. And I shudder to imagine the devastating impact that will have on the global economy. It's going to be paralyzing.
Click play below to listen to Chris' interview with Art Berman (41m:29s).