A peak at this week's oil news

At times it has been a bit of a lonely position writing about the truth of the U.S. oil industry this past decade. For example, I’ve pitched several larger media outlets on stories about fraud in the U.S. shale industry over the years. No one was interested. The reality is that facts about the troubles facing U.S. oil producers are easily drowned out by headlines of record U.S. oil production and big profits. And stories of mega mergers which we are told are a sign of the industry’s strength. But it does appear that some of the mainstream media is beginning to understand what is happening. It’s not a sea change, but it's a start.  Let’s take a look. 

Peak US Oil?

“America’s Oil Power Might Be Near Its Peak”  This is not the headline one would expect in the Wall Street Journal shortly after several U.S. companies just announced plans to spend well over $100 billion to acquire a much bigger portion of the U.S. oil industry. But it is an acknowledgement of the reality of the industry being about to peak. 

While the article is behind the paywall, this quote sums up the issue. 

“The ease in growth has gone, unless somebody comes up with a very dramatic new technical innovation,” said Paul Horsnell, head of commodities research at Standard Chartered Bank.

We hear a lot about how technology is going to result in big new oil production gains in the U.S. (see Exxon), but as noted here, they are betting on some “very dramatic new technical innovation.”  That doesn’t currently exist so its a hell of a risky bet. 

So did the recent massive investment in this industry coincide with peak production? Seems likely. Not what you want to hear as an investor.

US Oil Industry Cleanup Costs

ProPublica published an in depth investigative piece this week about oil industry liabilities. 

Slow death of the U.S. oil industry is a sentiment you don’t see much about the industry but an accurate one. What are those rising costs?

“But an analysis by ProPublica and Capital & Main has found that the money set aside for this cleanup work in the 15 states accounting for nearly all the nation’s oil and gas production covers less than 2% of the projected cost.” 

It’s no surprise to see Pro Publica leading the way on reporting the facts but even I was surprised by the “Slow Death” headline. 

Saudi Money Woes?

Another interesting twist in the media was that Saudi Arabia has been borrowing big and is burning through cash on all of its mega projects and purchases of golf leagues, etc.  The Kingdom of Saudi Arabia is in a position where it needs oil prices over $80 to just pay its bills.  However, if it gets those higher oil prices, it makes electric vehicles that much more attractive. As noted in the article, ever thing seems fine and dandy…for now. 

“Everything seems fine and dandy for now,” said James Swanston, an economist covering the Middle East at London-based Capital Economics. “But if you go through a scenario of lower oil prices and you have to issue a bunch of debt…Even with Saud Arabia’s massive financial wealth, there always does come a point at which that wealth isn’t enough.”

Propaganda Efforts Continue

With these realities about the oil industry finances beginning to appear in the media it isn’t surprising that the industry is working on misleading the public about this topic. As I wrote about this week, that work continues as well. 

The oil industry does propaganda well. However, even they can’t hide the fact that the reserves of profitable oil are running out at the same time there are economically competitive alternatives and a massive cleanup bill is coming due.  It’s a catch-22.  From Saudi Arabia to North Dakota they need oil prices near $100 a barrel. Without that, in the U.S. shale patch they are relying on getting really lucky with, a “very dramatic new technical innovation.” This is unlikely. In the meantime, expect a lot more propaganda to try to keep investors believing that the promises of the CEOs of Exxon and Pioneer are a good bet. But remember what one Exxon employee said about that in the past, “No one I knew in the organization thought this was possible; the pressure to deliver on [Exxon CEO]Woods’ promise to the market permeated the organization.”

Invest wisely.