Published April 02, 2014

Cheap Printing vs. Expensive Drilling

She’s easy, she knows it, and she’s doing it for you, Main Street.

Fed Chair Janet Yellen told a crowd at a community reinvestment conference in Chicago:

“The most important thing we do is to use monetary policy to promote a stronger economy. The Federal Reserve has taken extraordinary steps since the onset of the financial crisis to spur economic activity and create jobs, and I will explain why I believe those efforts are still needed.”

Madam Chairman was speaking to real people for a change, not those preeners and sociopaths on Capitol Hill. She implied those in Washington, DC including the Eccles Building were responsible for reducing unemployment from 10% to 6.7% and creating 7.5 million jobs. Surely, someone in the crowd wondered aloud about the record 20% of households now on food stamps, and 92 million Americans who have dropped out of the workforce.

Yellen continues doing God’s work that Ben Bernanke, and Alan Greenspan before him, started. If things aren’t perfect, it’s because the central bank hasn’t done enough for long enough. As she expands her balance sheet and sharpens her assumptions, her PhD training assures her the numbers will eventually fall into place and we’ll all live happily ever after. If Lord Keynes himself were here to charm her, surely he would counsel, “It’s not a matter of if, Janet, but when.”

Mrs. Yellen confused her audience throwing around terms like “slack,” “structural unemployment,” and “cyclical unemployment,” but then pivoted to warm and fuzzy. Mentioning three people she met, Dorine Poole, Jermaine Brownlee, and Vicki Lira, Yellen said,They are a reminder that there are real people behind the statistics, struggling to get by and eager for the opportunity to build better lives. Second, their experiences show some of the uniquely challenging and lasting effects of the Great Recession.”

Not so long ago, Professor Yellen’s employer sported a balance sheet under $900 billion in footings. Now it approaches $4.2 trillion, and still, the chairwoman admitted, “In some ways, the job market is tougher now than in any recession.”

So while central bank help has been inadequate so far, Yellen explained, presumably with a straight face, that the Fed helps people secure employment “by influencing interest rates.” She followed with this whopper, “Although we work through financial markets, our goal is to help Main Street, not Wall Street.”

Her predecessor used the same rhetoric in 2012. “This is a Main Street policy. Many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend.”

But speaking more plainly at Jackson Hole in 2011, Bernanke said, “It is probably not a coincidence that the sustained recovery in US equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.” He even pointed to how much the Russell 2000 index had increased versus the blue-chip indexes as a result of QE.

Oil, unlike the Fed’s fiat dollars, can’t be created out of nothing. And, job or no job, people are driving. With the article below, Chris Martenson gets you up to date on Peak Oil, a subject he addressed in these pages back in October.

So while Mrs. Yellen tells crowds, Don’t worry be happy, your job will be printed anytime now. Martenson sends reality crashing down on us with a stunning observation about the oil patch. Let’s just say, for those with a job to go to, getting there will not be getting easier.

(By the way, you’ll soon see what exactly can happen when governments and economies go haywire… and how “it could happen here.” Jonathan Roth, Casey’s chief video content officer and a former producer for well-known networks such as Discovery Channel, Biography Channel, and Vision TV, is putting the finishing touches on a brand-new video that will be released next week. Keep an eye out for this coming Casey attraction.)

Doug French, Contributing Editor

Peak Cheap Oil Rears Its Head: Oil Majors Throw In the Towel

Chris Martenson, Cofounder, Peak Prosperity

This is a critical update on the Peak Cheap Oil front.

Yes, I am talking about that tired old concept that was allegedly slain by American drilling ingenuity. It’s back in the news... if you know where to look.

I remain steadfastly interested in the oil outlook because everything, and I do mean everything, in our exponential monetary and associated economic system is hinged upon there being more cheap oil next year than there was last year.

If there is not, then every single assumption of future growth being made by the globe’s collective stock and bond markets is wrong. What I mean by that is the 350% debt-to-GDP ratio being held by the OECD countries in aggregate is a collective bet that the future will consist of very high rates of growth without any near or intermediate-term limits.

Further, a stock market with a price-to-earnings ratio (p/e ratio) that ranges from the 20s (S&P 500) to the mid-80s (small caps) is explicitly pricing in lots of future earnings growth as the justification for today’s prices. Because we sometimes need reminders to appreciate what ratios really imply, a p/e ratio of 80 means that an investor is willing to pay $1 today for a stock whose current earnings would require 80 years to accumulate that same dollar.

Whether or not that company would return 100% of its earnings to an investor is doubtful and extremely unlikely, so really anybody paying 80 times earnings for a given stock is making just one explicit bet: that that company will grow earnings enormously in the years ahead. That is, an explicit bet on future growth is being made.

The same is true for anybody paying 20 times earnings... or even 10 times earnings.

Recent actions by oil majors add further evidence to the claim that all the cheap oil is gone, and that our global society needs to prepare for much higher oil prices in the future. Or reduced supplies. Either way, this is an admission that the world is past the peak of cheap, high net energy oil.

The only thing that could delay a major rise in global oil prices within the next few years would be a serious retreat in the global economy that drops oil demand from current levels. Otherwise, oil prices will have to rise to balance supply and demand.

Either the global economy advances and then gets walloped by much higher oil prices, or it retreats and oil demand drops as a result. Take your pick. Do you prefer to be walloped now or walloped later?

Future Demand

To understand the potential trouble, we have to begin with demand so we know what must be supplied.

The United States Energy Department (EIA) has forecast that world demand for oil will be met with supplies that look something like this:

The first thing we note is the obvious decline in the orange wedge at the bottom, which is all conventional fields… or Cheap Oil. As that goes away, the EIA projects that the shortfall will be met by future discoveries in the gray wedge.

Well, hang on right there, what should we make of that gray wedge there, which is comprised of “Crude Oil Yet-to-Find and Found-but-Yet-to-be-Developed”?

Well, it’s not shale oil, or tar sands, or ultra-deep water; because those are all contained in the top dark-gray wedge labeled “Unconventional Oil.”

That light-gray wedge is just good old, regular conventional oil that the oil companies first need to find and then produce.

And it is not an insignificant wedge… it’s 38 million barrels per day. That’s nearly four new Saudi Arabias or ten new US-sized shale miracles. Of course, the finds from today’s US shale miracle will peak in 2021 and will have been in decline for 15 years by 2035 and be a bare shadow of their former selves.

So, as they say in the oil business, you have to find it before you can drill it. So let’s take a look at the largest oil companies to see how they are doing in filling that light-gray wedge.


Here’s where the story gets downright fascinating.

Note these recent headlines:

And then there’s this summary article, which makes the claim that the oil majors are cutting CAPEX due to an embarrassment of riches, but we’ll debunk that assertion in a minute. First read the string of CAPEX cuts catalogued here:

Decline in IOCs’ capex amid growing oil, gas discoveries

Exxon Mobil Corporation recently disclosed that its capital spending will decline to $39.8 billion this year from a peak of $42.5 billion in 2013. Excluding potential acquisitions, capital expenditures are expected to average less than $37 billion per year from 2015 to 2017.

Royal Dutch Shell Plc had said it would slash capital budget and accelerate asset sales this year. Its capital spending, which totaled $46 billion in 2013, is expected to drop to around $37 billion in 2014, representing a nearly 20 percent decline.

United States-based Chevron had in December announced a $39.8 billion capital and exploratory investment programme for 2014, which is about $2 billion lower than total investments for 2013.

French oil major Total said it expects capital expenditure to fall to $26 billion in 2014 from $28 billion last year.

Italian oil giant Eni said it is cutting its four-year (2014-2017) capital expenditure plan by 5 percent to 54 billion euros ($74 billion.)

All told, every single one of the ten oil majors is planning on freezing or seriously cutting capital expenditures. This is the very lifeblood of their business… if you are not spending money to find and develop petroleum assets, you cannot grow production.

What does it tell us if Brent oil is trading at $110 a barrel and all ten oil majors are reducing their efforts to find oil?

Simply this: they have come to the conclusion that they cannot generate the necessary returns for their companies and shareholders at $110 per barrel. More bluntly, this means that the remaining plays that they have their eyes on are not sufficiently large and/or easy enough to justify pursuing them at $110.

Succinctly: Oil needs to be more expensive than $110 per barrel for the oil majors to become interested again in taking it out of the ground.

An Embarrassment of Production

Now, on to the idea that they have come across an embarrassment of riches that leads to falling investment…

Steven Koptis of Westwood Douglas has a truly excellent presentation on this issue, and in that he offers this chart:

This is a truly stunning chart. Instead of an embarrassment of riches, this chart tells the exact opposite tale. It reveals falling production since a high of 16.1 million barrels per day in 2006 to a current 14.0 million barrels.

And this was despite the increase in collective CAPEX from $50 billion in 2000 to a whopping $262 billion in 2012.

The decline rate of production across all the majors is running at about 5% per year, and this is with CAPEX increasing by 14.8% per year. That’s a double whammy of exponential badness right there.

Instead of an embarrassment of riches as the above article suggested, I see an embarrassment of production, and an expensive one at that.

Faced with this, the oil majors have effectively tossed in the towel and decided not to chase dwindling oil supplies at these prices.

Now let’s turn back to this chart from the EIA and turn our attention to the light-gray wedge comprising “crude oil yet to find…”:

That’s exactly the stuff that the oil majors are saying they are not going to be trying to get as much of going forward. Without increasing CAPEX, it’s safe to say there won’t be any growth at all in that gray wedge.

If there’s no growth in the gray wedge, then overall oil production will fall across the globe.

What will make more oil come out of the ground? More CAPEX expenditures.

What will make CAPEX go up? Higher oil prices.


End of story.

The Squeeze Box

At a minimum, we might expect that oil has to move to $120 to $130 per barrel in order to incentivize CAPEX to go higher.

This next chart from the Koptis presentation, the original source for which is Goldman Sachs, explains everything. It shows the price of oil that would be required for various companies to be cash flow neutral after paying dividends and for CAPEX.

Note that all of the oil majors are above that nasty, red, dotted line, and that explains why they are sacrificing CAPEX here.

But if the world economy is already straining under the burden of $110 oil, and it is, what might we predict would happen to it at $130? And what about after the oil majors exhaust all the $130 oil plays and then need $150 to move forward? What’s our prediction set for the world economy at $150?

The prediction is “nothing good, and a whole lot of bad.”

The weakness will spread, as it always does, from the outside in. The already-weak economic players will wither and fall off the tree. Already-challenged countries like Greece and Spain will only find their economic headwinds that much stiffer. The number of people on food stamps will climb as will the rolls of the unemployed. Weak, over-indebted companies, like those that are found occupying the junk bond section of the debt ladder, will fail and losses will mount.

And this will cause oil demand to fall. So on the bottom of our squeeze box we have rising oil production costs, while the upper portion of our box is the price for oil that our massively over-indebted economy can afford before it keels over.

The boundaries of that box are closing in. And that’s what the oil majors cutting CAPEX with Brent crude oil trading at $110 tells us in no uncertain terms.

So the price of oil will have to go up, and it will. And on the downslope of the Peak Cheap Oil curve, we will find that only those that can afford oil will be able to use it.


The really huge, gigantic predicament, of course, lies with the very system of money and credit we have that demands continued exponential growth for its very existence.

This chart is growing nearly perfectly exponentially with an R2 of 0.99 and leaving the math aside, that’s just a smoking gun of an indictment of our current monetary system, and by extension our economic system.

Nothing can grow exponentially forever. And without continued exponential growth in energy, it is game over sooner than might be true otherwise.

But if our money system cannot grow exponentially, is that really such a bad thing? Why do I predict and warn that such an eventual date with the reality of limits will be so disruptive?

I do this because every single time credit growth has even slowed down, our financial and economic systems have flashed major warning signs. In the one time that it actually went backwards in living memory, the entire system threatened collapse.

Add to this view the untested $700 trillion in derivatives, which some people think might actually tip a quadrillion—whatever that number means—and which are additive to whatever debt numbers we might toss around, and I’m pretty sure that really nothing very positive will result from the process of reconciling those figures with reality.

And what is the reality?

Simply this: the oil majors have said there’s nothing useful we want to pursue here with oil at only $110 a barrel.

That’s a quite interesting if not stunning development.

It means that we will get less future growth in oil supplies because even with a 500% increase in CAPEX from 2000 to 2012 we saw falling, not rising, oil production.

It is an easy prediction to make that less CAPEX will result in even less future production. That’s an easy prediction to make.

Following easily from that is the prediction that oil will have to rise in price because less supply with the same demand can only be resolved through higher prices.

The tacit admission by the oil majors that they cannot profitably pursue new oil opportunities at $110 a barrel is a stunning development—not to me or you, of course, but it should be a stunning development to anybody and everybody else paying the slightest bit of attention here.

The oil majors have tossed in the towel at $110.

Which means, of course, that when it comes to preparations, I’d much rather be a year early than a day late.

For more of Chris Martenson’s analysis, visit