Podcast: The Perfect Energy Storm

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Markets are currently assuming that oil prices are capped right now and that with increased shale production in the US, we’re unlikely to see higher prices anytime soon.

This time on the Financial Sense Newshour's Big Picture, Jim Puplava looks at why peak oil production and other supply issues may lead to a rude awakening.

The Story of Low Oil Prices

All we’ve heard from the financial news are stories about a glut of oil inventory, Puplava noted, based on the boom in American shale oil production. For the first time since 1970, US oil production is going to be over 10 million barrels this year, exceeding that of Saudi Arabia.

We’ve heard that if oil prices go up, shale producers will simply drill more wells. Some have even speculated that we could produce 11 million barrels a day, which would put us in line to be the number one producer in the world right now, behind Russia.

“As inventories have been shrinking, there's a new narrative that has come into prominence and that is American shale oil production will continue to expand, satisfying that thirst for oil from the emerging world,” Puplava said. “A lot of the big oil consumption growth is really coming from the emerging world.”

Will Peak Demand Cap Prices?

Markets may be too optimistic about shale’s ability to stave off problems, Puplava noted, and the reality of electric vehicles hasn’t lived up to the hype.

While electric cars are gaining traction, the IEA just put out a report in late-2017 stating that new registrations of electric cars hit a record in 2016 with over 750,000 cars sold worldwide. However, we need to remember that the rate of growth has slowed down. We saw an 85 percent increase in electric car growth in 2014, which dropped to 77 percent in 2015, and in 2016, it dropped below 50 percent.

The idea that peak demand is just around the corner discounts the fact that electric cars represent only two-tenths of one percent of the vehicles deployed in the global car fleet, Puplava stated. We have a long way to go before electric cars penetrate markets enough to create a slack in demand.

“Maybe 20 years from now, that might be a story,” Puplava said. “But I certainly don't see it as a big story leading to peak demand in the next 5 to 10 years.”

Phantom Energy Crisis a Possibility

There are a number of factors that could create conditions for a perfect storm in the next two or three years, Puplava stated.

We’re seeing rising global demand for oil, which is increasing by over one million barrels a day, as reported by both the EIA and the IEA. Also, accelerating oil depletion means that existing oil fields are going into decline as they either go dry or it becomes uneconomical to pump any oil from them.

There are geopolitical disruptions to consider as well, and nobody seems to want to acknowledge that crude inventories are falling. After the glut we saw in 2015 and 2016 when OPEC decided to ramp up oil production in an attempt to drive shale producers out of business, we’ve seen inventories decline as excess supply has been used up.

“One of the reasons we didn't see any oil shocks over the last couple years was due to large inventories,” Puplava said. “Now, that inventory is coming offline...we're more likely to see some spikes, whether due to geopolitical tensions, weather, or other factors.”

The Oil Industry Is Flying Blind Into a Crisis

Discoveries of new resources fell to a record low of only 4 billion barrels last year, while the world consumed 36 billion barrels in 2017, Puplava noted, which means we're not replacing what we're consuming. The IEA is projecting that global demand will increase by nearly 7 million barrels a day from 2017 to almost 105 million barrels a day by 2023.

Investment spending is likely to only go up by 6 percent in 2018 across the board, which means oil producers aren’t investing enough to replace diminishing production capacity.

“If you're not making new discoveries to replace what it is you're consuming, sooner or later, you're either going to have to make those necessary investments, or we’re going to … end up sleep-walking our way into our next oil crisis,” Puplava said.

“It's not just that you have to find and produce more oil,” Puplava said. “You also have to find enough oil to replace what it is you're losing in depletion. Mark my words: in the next couple of years, depletion is once again going to rear its ugly head. … Sooner or later, the supply-demand curve is going to cross, and it's going to force prices higher.”

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