Sunday, May 03, 2020

Oil flows spell deep depression

Energy is not just one commodity among many in the economy; it is the commodity. Without energy, nothing gets done. And, oil is not just one form of energy in the energy commodity complex; it is the energy source upon which our modern way of life depends. In fact, it is the main energy source running through the arteries of the global economy.

Far from being a boon to the world, ultra-low oil prices signal that the global economy is flat on its back—even worse, flat on its back with two broken legs.

Petroleum geologist and consultant Art Berman recently detailed the problem in this piece. Berman is the man who accurately predicted—starting way back in 2008—the persistent losses that shale oil and gas would produce for the companies that extracted them. The shale industry continuously vilified Berman for his analysis over the next decade, even as the industry was in the process of blowing 80 percent of investors' capital as of last year. With the arrival of the coronavirus, the coup de grâce has just been delivered to a shale oil and gas industry that was already on its knees.

Perhaps the most important thing to understand about the current oil "glut" is that it is not merely the result of producing too much oil for an economy humming on all cylinders. It is primarily the product of a coronavirus-infested economy in which demand has dropped 20 percent in just a few weeks. As Berman points out, estimated U.S. oil consumption has returned to a level not seen since 1971.

Energy is the very basis for economic activity. There is now 20 percent less oil flowing through the veins of the global economy, and economic activity is tightly correlated with oil consumption. Ergo, economic activity must be down significantly around the planet. Coal consumption is declining as well, but it is harder to measure in real-time. This piece suggests significant declines in Chinese coal consumption. And the clearing air in China and in practically every city around the globe suggests a lot less burning of everything that we call fuel.

It may seem that as soon as lockdowns end (and they have already ended in China), the world economy will pick up and quickly return to its old pace. Our recent experience will somehow be remembered as two-month leave of absence in retrospect.

One of the indications of whether that is happening will be energy consumption worldwide. For comparison the U.S. Energy Information Administration reports that the decline in worldwide consumption of refined petroleum products between 2007 and the end of 2009 was 1.5 percent, the period now called the Great Financial Crisis (GFC). Total world energy consumption during the same period actually increased by 0.2 percent (though it declined by 1 percent between 2009 and 2010). We are currently looking at energy consumption declines of 20 times that for oil and probably many times that for total energy consumption. The latest consumption numbers for U.S. refined petroleum products do not provide any reason for optimism.

It is not at all clear how under these circumstances we could now recover to our previous level of economic activity more quickly than we did after the GFC as some people are predicting.

People and companies buy and use energy (and the products energy is needed to produce) when they are confident about their prospects. I am doubtful that the confidence needed to lift the world economy to new heights will return anytime soon. Our energy picture leads to this conclusion and also suggests that the world economy has further contraction ahead before even a slow recovery can begin.

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Naked Capitalism, Le Monde Diplomatique,, OilVoice, TalkMarkets,, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He is currently a fellow of the Arthur Morgan Institute for Community Solutions. He can be contacted at


Peter said...

Thank's for your insightful comments! I just spottet a small typo: it's "coup de grâce".

Kurt Cobb said...


Thanks for catching the typo. I had it corrected in one version. Just never made it to the final.

Anonymous said...

I completely agree with you that the recent oil drop is demand-driven, not supply-driven. When you see volume consumed dropping at the same time price is dropping, this is a sure sign of a demand-driven price drop. I don't really know any of my fellow cornucopians who need this correction. But if such irrational thinking exists, feel free to bonk them.

However, several other previous price drops have been supply-driven.

Probably the most notable is US natural gas, where prices, averaged across weather gyrations, dropped from $8+ in ~2008-2010 to $3- in ~2018-2020. You can tell this was supply-driven, not demand-driven because volume increased about 60% at the same time price was dropping. It was a collasal change and one where Art Berman was dramatically wrong with expected price and volume. And anyone betting on high prices because "Art Berman says shale can't compete" lost their shirts. There used to be a lot of coal fans on Seeking Alpha who would tout Art Berman or David Hughes saying that shale gas wouldn't do much. They lost entire company stock investments when almost every coal company went BK, as a result of shale gas competition and resultant price drops for coal.

Kurt Cobb said...

Thanks to anonymous for his thoughtful comment. I do want to correct something anonymous says that is misleading. Berman and Hughes were talking about the economics of shale gas. They said most would never be profitable. The fact that most of the companies producing shale gas have had negative free cash flows for most of past 10 years confirms that shale gas has not been profitable in most cases despite attempts to make it seem so. Cash flows don't lie.

Hughes never made any price forecasts although he was skeptical of EIA price forecasts. Berman might have made price forecasts. I don't know. But neither of them ever recommended buying coal investments so far as I know. I agree that shale gas volumes surprised us skeptics. But what didn't surprise us is the industry chewing up most of the capital invested in it since investors were essentially subsidizing unprofitable gas for consumers so that industry insiders could make a killing on stock options and bonuses. Not bad work if you can get it. But very lousy for investors.