Submitted by Taps Coogan on the 9th of December 2019 to The Sounding Line.

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Despite the period of plentiful oil that has presided for the last several years, Ascent Oil Fund CIO Mark Gordon, recently spoke with MacroVoices‘ Erik Townsend to describe why he believes that the world is headed into a period of relative oil scarcity. According to Mr. Gordon, the combination of peaking shale production, declining conventional production, and some of the biggest declines on record in oil and gas capital expenditures is setting the market up for a repeat of past periods of ‘oil scarcity.’ To get the slide deck that Mr. Gordon references, you can sign up for free at MacroVoices (I have no affiliation with them, beyond enjoying their interviews).

Some excerpts from Mark Gordon and Erik Townsend:

Townsend:

“You’re showing that in the fourth quarter of 1998 and the third quarter of 2008, just 10 years later, you’ve got basically the same inventory conditions. On both of those dates, you had the same amount of inventory in the tanks in Cushing, Oklahoma and elsewhere around the nation. But, …it’s literally almost a 15 to 1 difference in price…”

Gordon

“…Indeed, when we had oil at $10 and we had oil at $147, we had the same days of forward demand (inventory). What that tells you is that inventory is not what’s driving price. It’s the larger regime around inventory, the framework through which you think about oil, which is driving the price. So what’s important is to recognize the framework that you’re in and when it is you might move from one regime to another. I’d also point out… that currently, today, globally we do have normal inventories. Although it doesn’t feel that way. And I think the oil price is below where it could be with the same level of inventories because of the negative sentiment or negative regime, and I think if you change regimes with the very same level of inventories, you could get a higher price. I’d also point out it’s not so much the level of inventories that matters but the direction of inventories. So, draining inventories are very bullish and inventories that are increasing are bearish…”

“I think what happened, and I guess we’re going to talk about how I think the market got Hubbert’s peak (oil) wrong, …is, as you pointed out, the oil price went up, and that brought on a whole bunch of new supply, primarily shale or tight oil. But also the Canadian oil sands and we have some sub-salt in Brazil. And then, on top of that, we have had this new demand paradigm that’s being driven by concerns around global warming. So, I think we went from a focus on scarcity to a shift towards abundance. And, really, the two factors driving the focus on abundance are, one, tight oil or shale, and two, it is concerns around peak demand from CO2. So it’s kind of amazing how you can go from scarce, or not enough oil, to a sense that we have too much oil. But that’s precisely… what happened from 2012 to today.”

“…So I think conventional production has not peaked yet. I think it’s been on a plateau since the early 2000s…. And I think that conventional production is going to hit this difficult spot in 2021-2022, and part of that is clearly driven from the capex cycle. We had very large capex spend from 2010 to 2014 with the $100 oil regime, and… when oil fell in 2014, the industry really had the largest capex cuts in history… we haven’t recovered from that… Conventional production is going to start to decline in 2021 or right around then. I feel like this is quite predictable because you have not only the geologic issue that King Hubbert brought up, but you have a capex issue, and the capex issue, you can count the projects. And where we are right now… is two of the very last projects sanctioned by the $100 oil world, that would be Johan Sverdrup in Norway, which was discovered in 2010. That just came on in October and that’s ramping… I think it’s the third largest oil field found in …at least in the Norwegian shelf. So, that’s an increment of about 450,000 (barrels per day). And then the other one is Brazil. They’re bringing on a lot of production right now. The interesting thing about Brazil is… they actually put out their production forecast for 2020, and they say it’s not going to grow…  So, that’s actually pretty shocking because one of the pillars of growth is not contributing growth…”

“I think that what the world has forgotten is that oil is finite. And I think we’re going to be reminded of that…”

“I think it’s intuitive to understand that energy transition needs to come through the pricing mechanism. That’s how capitalism works. You need a higher price to drive energy transitions. So, if we don’t get it, we’re going to have a problem, and that problem has an impact on two sides, both supply and demand. So, I actually think that the concern about CO2 is going to cause an even greater oil price spike. The reason being is that the majors are not investing because they are concerned about peak demand out in the future. And I think that that’s going to cause a larger hit to supply than it’s going to cause to demand. I mean, it was quite remarkable when a month ago we had a bid round in Brazil and all the majors decided not to participate”

“…There is one really surprising fact here, which is EV sales right now in the third quarter are down year-over-year, on a global basis… Another thing to think about is, if you look at SUVs… in 2010 they were 17% of light vehicle sales (in the US). And in 2018 they went all the way to 38%. So, that’s partly an impact of prices not being high enough, so the shift to SUVs has completely overwhelmed the shift to EVs that we’ve seen so far, and if you extrapolate this out into the future and you assume that SUVs continue to take share as they have, they go to 50% over the next decade, which would be a slower growth rate than we’ve seen over the last decade, that would actually overwhelm the movement to EVs…”

As we have noted a couple times here at The Sounding Line, when adjusted for population, global oil per capita production actually peaked in the early 1980s and is lower today than it was before the US shale oil boom started. If the world’s emerging markets are going to continue to ’emerge,’ and billions of people in Africa and India are to rise into the global middle class, where is the gasoline that they put into their cars going to come from?

There is much more to the interview, so enjoy the full discussion above.

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