By Terry Etam
In the US resides a guy who’s academic and professional credentials are as impressive and impeccable as one can assemble in a career. His Wikipedia professional/academic bio shows top-level roles at a who’s who of globally significant institutions.
Larry Summers has been: student at MIT, PhD from Harvard, US Secretary of the Treasury, director of the National Economic Council, president of Harvard University, Chief Economist of the World Bank, US federal Under Secretary for International Affairs in the Department of Treasury, a managing partner at a hedge fund, and is now on the board of OpenAI.
And yet…just a few weeks ago, Larry Summers made a comment about a bedrock of the economy seems so fundamentally bad that it is enough to shake one’s faith in every one of those institutions. He was talking about whether the US should create a Sovereign Wealth Fund, which is kind of like a national savings account that governments squirrel money into in order to fund future projects or spending requirements. They are very great things indeed, reflecting the wisdom of having savings for a rainy day, but given how politicians love to spend not just the money that they have but everything they can borrow, the idea seems kind of quaintly hopeless in the first place, even though some countries have accomplished it.
But the shocking part of this story is why Summers was against the idea; here’s his quote: “It’s one thing if you’re Norway or the Emirates — that has this huge natural resource that’s going to run out that you’re exporting — to accumulate a big wealth fund. But we’ve got a big trade deficit. We’ve got a big, budget deficit…”
He’s absolutely right about the US’ financial woes; our dear southern neighbour is currently the equivalent of a 28-year-old guy twice divorced with 8 kids between 4 women who is working at the lumber yard and juggles 14 credit cards simultaneously (definitely not implying Canada is much better…).
No, he’s right that those are the biggest fiscal issues to deal with, but what’s crazy is the other part of his statement. He says that Norway and the Emirates should create sovereign wealth funds because they ‘have this huge resource that’s going to run out that you’re exporting’ and thus can/should accumulate a big wealth fund.
Mr. Summers apparently does not understand either depleting natural resources, or the US’ economic powerhouse status due to these resources, or both. Either fact is shocking, given his stature; but his analysis of the situation gives a clue about why major western powers are in such shambles with respect to energy policy.
What Mr. Summers presumably meant is that the US does not have an economy that is dominated by export of a natural resource, such as how oil or natural gas exports are not a fundamental pillar of the economy as with Norway or the Emirates. And yes, the US does have other desperately needed uses for the money derived from exports.
But he seems to think the US is immune from its resources ‘running out’. He doesn’t seem to understand that while the US economy may not be dominated by oil/gas exports, the problem of resource depletion will not matter to the US because it does not dominate the economy. That is the charitable interpretation; the less kind one is that he may well believe that the US will never run out of affordable hydrocarbons.
It’s easy to see where he and other policy makers get the idea. If they think about petroleum reserves at all, they would find coverage in the general mainstream financial press, in publications such as Forbes, a standard of US economic communications that claims over 5 million readers through 43 global editions. The publication is aimed at the who’s who of the financial world: “Forbes is #1 within the business & finance competitive set for reaching influential decision-makers.” It is exactly what a guy like Summers would turn to to understand the US’ resource capability (I doubt he spends much time understanding rock quality).
Here is what Forbes had to say about the US’ hydrocarbon reserves. In an article entitled U.S. Shale Oil and Natural Gas, Underestimated Its Whole Life, the author chronicles how forecasts of US shale potential have been continually underestimating productive capability. Fair enough, that is definitely true. But the extrapolations/conclusions are pretty wild, and, dangerous: “…the reality is that shale production [for both oil and natural gas] has surpassed all expectations namely through the constant advance of technologies and improvement of operations…In fact, the Shale Revolution has shown us that the amount of oil and gas we can produce is essentially unlimited.”
It’s not a bad article on the whole, when it describes how we’ve underestimated shale growth, but these silly concluding assumptions are not good at all. They’re soundbites that reach far more ears because of the source than true expertise from industry journals (including, ahem, this excellent one). Those soundbites are what lodge in the minds of people like Larry Summers when he huddles with his global cohort to discuss energy policy.
Consider as an alternative analysis something far more thoughtful and thus less dead-certain, such as the work of Novi Labs, who put out incredibly detailed reports that analyze production trends, with a key difference from Forbes: Novi bases their projections on actual well data, well spacing, well productivity, well length, gas/oil ratios, rock quality, and many other parameters. For example, Novi recently published a paper entitled “Analyzing Midland Basin Well Performance and Future Outlook with Machine Learning” in which they conclude that, based on the above parameters and more, that the Midland Basin has about 25,000 future locations remaining, and breaks them out into prices required to develop them, and has the wisdom to conclude: “Due to the Permian Basin’s role as the marginal growth barrel, overestimating the remaining resources will have consequences spanning from price spikes to energy security and geopolitics.”
Based on such incredibly detailed analyses, Novi is comfortable making, for example, Permian oil/gas production out to the year 2030.
Forbes is comfortable making oil/gas production forecasts to infinity, based on nothing more than a string of failed projections.
And people head off into the highest levels of government having read Forbes but not Novi. And we get Germany. And Canada. And etc.
This isn’t a question about whether we will “run out of oil”. The surest way to rile an audience it seems – just behind challenging EV superiority – is to question the ultimate productive capability of hydrocarbon resources. “Peak oil” is now a term of derision, in some ways rightly so because many smart people have, over time, warned that resources are about to run out.
It does seem erroneous to think that way, because as prices for something rise, more exploration will occur, and by definition we don’t know what those discoveries will encounter. Could be a little, could be a lot.
The point here is best explained by way of a real life example. A long time ago, late last century, natural gas was dirt cheap across western Canada. (Bizarrely, it’s even cheaper now, but not consistently so.) In Saskatchewan where (and when) I grew up, an alfalfa processing industry had developed that was a godsend to many small communities. Farmers would grow alfalfa and dedicate the output to a local (often community owned) alfalfa-processing facility that would convert green alfalfa into nutrient-rich pellets for which Japan (primarily) had a seemingly insatiable appetite.
The whole business existed because of the availability of cheap natural gas, which allowed for the rapid and economical dehydration of the green alfalfa; huge drying drums ran around the clock, all summer long, turning huge piles of fresh chopped-alfalfa salad into dried out pellets within 12 hours.
But then natural gas prices soared to unprecedented levels, over $10/GJ, and found a new average that was probably about twice the average in the 1980s and 1990s. This spike in natural gas prices wiped out the entire industry. Every little town lost a pillar of the community, investors lost investments, municipalities lost tax revenue, and hundreds or maybe even thousands of punks like me lost summer job opportunities.
THAT is what people like Larry Summers should be thinking about when they talk of, or heaven forbid ask questions about, the longevity of our hydrocarbon resources. Yes, there will be oil and natural gas reserves forever – but at what price? And what will the consequences of higher prices be?
In the spring of 2022, some large US trade associations issued warnings about the consequences of higher natural gas prices. “Last winter’s heating bills were unsustainable,” said the CEO of the Western Equipment Dealers Association. The winter to which he was referring, 2021-22, had average Henry Hub prices of $4.56/mmbtu – far higher than today, but a number that will probably be required over the long term to enable continued US reservoir development and feed LNG export demand.
That price level of which the CEO was frightened of, it is well worth noting, is a fraction of the global price of LNG. In other words, US industry will freak out if it has to pay even half of what the rest of the world does.
At a time when the US is desperate to ‘onshore’ a lot of manufacturing capacity, policy makers should be very careful about ‘what they know for sure’ about the future of US and Canadian energy productive capability.
Energy ignorance, at these levels of government, are getting deadly. I mean, we can all see Germany, right? It’s turning slapstick, what they’re doing to energy policy, and so many western leaders seem intent on following them. Force the closure of baseload power, force the adoption of intermittent power, watch AI buy up all the power from nuclear sources, claim to support new nuclear power which everyone knows won’t get here for a few decades, then trot off to an annual fall climate conference to tell the world what to do next.
As Mark Twain said, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”
Terry Etam is a columnist with the BOE Report, a leading energy industry newsletter based in Calgary. He is the author of The End of Fossil Fuel Insanity. You can watch his Policy on the Frontier session from May 5, 2022 here.
