Energy Dominance Isn’t Just a Trump Obsession
Energy Dominance Isn’t Just a Trump Obsession by Tom Luongo for Gold, Goats and Guns
Energy Dominance should be the catchphrase of the day. It’s on the minds of every political figure, and the focus of every economy.
This is especially true of those vulnerable to a change in the status quo, namely Saudi Arabia.
While some continue to believe the gyrations of the oil market over the past few months are evidence of our running up against the limit of the petroleum based global economy, I disagree.
The world is awash in decades of easily-extracted oil and gas. The supply of it has been kept off the market due to its centrality in the grand game of geopolitics. But, it has nothing to do with the amount of oil and gas out there.
Peak oil has become a religion among its adherents. Decrying the U.S. shale boom, rightly, for its profligacy has more to do with it being a consequence of disastrous central bank inflation rather than some grand plan of the ‘cabal’ because we passed peak EROEI some time ago.
When you drop interest rates to zero and flood the world with liquidity that can only find a home in equity markets, the natural result is malinvestment into unsustainable business practices.
The first wave of the shale boom in the U.S. occurred during this period and created the dynamic we have today. It’s groundwork was laid when oil prices spiked during Greenspan’s post-9/11 reflation and the Iraq War took a lot of marginal supply off the table.
That sparked a gold rush mentality and a huge boom occurred as oil prices kept rising after “Bernanke saved the world” with trillions in liquidity and multiple rounds of QE.
Properties were bought based on sky-high valuations which were the result of searching for yield in a yield-free world.
Does anyone think fracking would have happened post-2008 with the 10 year at 6%? If so, then you are, frankly, a religious fanatic.
Once the financial juice runs out the bust occurs. Financing costs are always the story with the pigs at the easy money trough. But, that’s the same in any industry. It doesn’t mean the oil isn’t there or extractable at prices which are relevant.
But, much of the second wave of fracking has removed a lot of that financial froth. Liquidation of the first wave means a lot a the unconventional wells in Eagle Ford and the Permian are being fracked profitably at $35 to $45 per barrel or, in some cases, lower.
Sure, there are still plenty that are not. But, no new well goes into production today without using plug and perf, which results in more oil over a longer period of time with a much lower initial rate.
Multhusians come in many forms, including adherents to Peak Oil. It’s nothing new. It’s simply people who falsely apply linear models to cyclical processes that the market understands implicitly and compensates for through investment in new technologies.