Art Berman: Central Bankers Don't Understand - The Economy Runs on Energy, Not Money

Tue, Sep 6, 2016 - 9:36am

The following is a summary of our recent interview with Art Berman, which can be listened to in full on our site here or on iTunes here.

There’s a lot of confusion when it comes to energy markets and the idea of peak oil, according to Art Berman, a well-known geological consultant, director of Labyrinth Consulting Services and also director of the Association for the Study of Peak Oil and Gas in the US.

This time on Financial Sense, we spoke to Berman about his take on oil markets and how we need to be thinking about the most traded commodity in the world.

Peak Oil Is Not About Running Out of Oil

“Peak oil” is an unfortunate term we’re unlikely to escape, Berman said but is also entirely inaccurate.

“It has nothing to do with running out of oil,” he said. “That’s the first misconception. Peak oil is about running out of affordable oil.”

By the end of the 20th century, Berman explained we had gone through most of the easily accessible, cheap oil available around the world. As a result, production has been driven to explore for more difficult to extract deposits.

“Those are all perfectly legitimate sources of oil, but because of the environment, the depth, the risk of the cost, all of a sudden oil got a lot more expensive,” Berman said.

This is the heart of the issue, as oil prices are the determining factor when it comes to peak oil. In the 1990s, in terms of 2016 dollars, oil was around a third to a quarter the price it costs today to find and produce, Berman stated. As a result, the cost of everything that comes from oil is three or four times higher than it was just a couple of decades ago.

“From my perspective, the economy runs on energy, and money is nothing more than a call on energy,” Berman said.

Oil is the master resource right now, Berman explained. The current weak economic growth we see around the world is a direct result of this, Berman added.

In Terms of Growth, It’s All About Energy Prices and Excessive Debt

Between higher energy costs and unsustainable levels of debt in the world, Berman isn’t surprised we’re observing slow growth.

In Berman’s estimation, there is no “Goldilocks” price for oil. For example, if the price of oil has to be for all companies and countries to remain profitable, given the weakness of the global economy, he thinks that would put the world into recession.

During the last recession we were able to squeeze growth out of the economy with interest rates close to zero, but as a result, debt levels skyrocketed.

“If I’m an investor, and I’m used to making 6 or 7 percent (on investments)…and all of a sudden, what can you get on Treasury bonds today, a percent and a half? …I’m not very happy with that anymore,” Berman said.

As a result, hundreds of billions of dollars have flowed to oil and gas companies because investors are hungry for yield, which created a bubble.

That’s what we saw when oil hit 0, Berman explained. There was an outsized flow of capital into the US and to some extent Canadian oil and gas development.

“It’s self-defeating to try to understand these big trends in the economy if you don’t think in terms of the fact that energy really is the economy and is not some secular topic,” Berman said. “It underlies and interrelates to virtually every important sector, certainly of the economy, if not the civilization.”

Listen to this full interview with Art Berman on the Newshour page by logging in and clicking here. Not a subscriber? Click here

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