Episode 14: All things Oil Investing with Art Berman

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the Alt Asset Allocation podcast. Today’s interview is with Art Berman. Who’s a world renowned oil expert. Art is a geological consultant with nearly 40 years of experience in petroleum exploration and production.

He’s often interviewed about energy topics on television, radio, and national print and web publications, many big ones that you’ve heard of. Art and I discuss why investors should pay attention to oil and ultimately where oil prices are headed in the future. Before you listen, please don’t forget to like, or subscribe to the podcast or even better.

Leave me a review. This really helps more people find the podcast and keeps this thing going. It really, really helps. There’s a lot of noise out there in the oil markets. And Art is very knowledgeable about this topic. You don’t want to miss Art Berman sharing all of his knowledge on these topics. Enjoy

Art welcome to the asset allocation podcast. I’m super excited to have you on today.

Art: [00:01:11] Pleasure to be here. Thanks Ben.

Ben: [00:01:13] So you’re all over the news and podcasts and this whole world with oil, but for my listeners who don’t know who you are, can you give a little brief background on who you are?

Art: [00:01:24] Sure. I’m a, I’m a petroleum geologist.

I am an active petroleum geologist. I’m not a pundit. I’m not an analyst. I’m not a journalist. I don’t run a, a podcast. I help my clients look for and produce oil and gas and part of what I do for them and others of my clients is to give them an idea of where markets are going, where prices are going.

what investors are thinking about oil and gas and, just all sorts of things like that. So I’ve done this now for little more than 40 years, which means I’m old, but it also means, I I’ve survived. So there, I’ve probably learned a few things that are useful anyway, so that that’s, that’s the simple summary of my, my career.

Ben: [00:02:19] Just a, just a few things, indeed. And I’m sure we’ll dive into a few of those things in more detail. I’ve heard you talk at length a number of different times, but just zooming out. Why should people care about oil and gas prices?

Art: [00:02:32] Oil is the economy. And most people don’t know that and I don’t expect them to know that, but, but it really is.

And, and, and why is that? So most people think that the economy runs on money. there was, there was a fellow who I heard recently on the radio. I think he runs a planet money or something like that on NPR. And he’s written a book yeah. About money. I mean, that’s the title of the book and I listened to him for 10 or 15 minutes and, he knows everything there is to know about money, except that it’s a claim on energy.

And, and most people don’t think about it that way, but if you think about the way that that money came into existence, I do work my physical work, my kilojoules or kilocalories are worth something to me. And if you want me to use them for you, then I’m going to do that in exchange for something. And initially, of course, you know, may, maybe you give me a bushel of wheat that you have leftover a surplus and I’ll, you know, dig all 40 or something like that while that gets cumbersome after awhile.

And so eventually currency was invented coinage first as, as a proxy for a bushel of wheat or whatever else was exchanged for my physical labor. So you give me. Food, which I need to generate energy. And I give you the results of that energy. That’s, that’s the whole basis of, of currency. And because everything is an nth derivative, today in our sophisticated world, we don’t think that.

And so I, I constantly have to deal with people who say, Oh, well, the price of oil is up because of the value of the dollar. Oh, there’s no doubt that there’s a correlation, but sorry, but you have it backwards. You know, the value of the dollar is up or down because the price of energy has somehow changed.

So the relationship is clear. It’s just that money is not primary. Money is, is a claim and, and debt is, is a lien. That is a, a claim on future surplus energy. And so as long as, as I have surplus energy that is available and cheap, I can grow my wealth and a country can grow its economy. And that’s the situation that the certainly the United States and much of the world has been in since, you know, just pick a day world war II.

that came to an end. I came to an end in the early 1970s, or it started to end. And, for those who, you know, who hearkened back back to the eighties as being the great America that we want to go back to what made it great again, was that. You know, the, the, the magic of Reaganomics was debts. not that he was the first one to figure it out, but, he and Paul Volcker has fed chairman.

they got, they got us into big time debt in the form of treasury. Bonds. And that was what got the us economy, booming again. And, you know, that was all great. we reached an end to that kind of in 2008, too much debt led to a financial collapse. price of oil was $140 a barrel. What a shock. we solved it with more debt and now we’re in another.

Financial economic crisis, which we’re solving with more depth. But the point is is that when you, when you run out of surplus energy, then you have to borrow energy from the future. And, and when you start to wonder if it’s really going to be. Commercial or even available then the whole system starts to, to, to founder and, and, and that’s, what’s going on right now in, in, in my view of things.

So why should you care about oil? Well, you probably shouldn’t except that the whole basis of the economy and the civilization is energy. And right now, Oil is the dominant form of energy. G certainly fossil energy, natural gas, coal and petroleum. Now it’s 84, 85% of the world’s. Energy consumption. So whether you like it or whether you don’t like it, you can’t deny the fact that that’s what it is.

Ben: [00:07:21] Based  on that premise alone. You should care about the price of oil and what oil is doing. Right.

Art: [00:07:27] I agree. Sure.

Ben: [00:07:28] The book that you mentioned was Money, the true story of a made up thing by Jacob Goldstein. And I actually binge read this the day it came out. Pretty interesting. All of this stuff coming off the gold standard in 71 and how that shapes all of this, that debt, where we are now is it’s certainly very, very interesting.

I’m curious, you’re saying that that, that the price of oil is the economy. So what is the price of oil now tell you about the economy

Art: [00:07:56] that we are in a period of deflation. And so what’s happened, just to refresh your. Your viewers and listeners memories. We had a period of the highest real oil prices sustained oil prices ever from 2011 to 2014 and oil prices in the United States were they averaged over $90, $2,020, for that whole period.

And that, that, that, that had never, ever, ever happened before. And in 2014, the price of oil collapsed for. well, not first time, but the first time in the 21st century and the price went from a hundred, let’s say to 50 and it slowly worked its way back and collapsed again in 2020. Most people think that well that’s because of, you know, the economic closure because of COVID and et cetera, but, but really what’s happened throughout that same period is that we, we start, we were.

Inflating our money supply and we were not finding any more surplus energy. And the result is deflation of, of commodity prices. It’s, it’s kind of straight forward. So you, you create more money, you don’t create any more product. Most people think, well, that’s going to create inflation. Well, the, the reality is, is that at least for oil and gas markets, it produces the inverse.

And that’s because you’re, you’re taking a, you know, Goldstein says it’s, it’s something completely artificial. I totally disagree with him on that. But I, I also understand why he says that. and, and he’s a smart guy. No, no question about it, but the, but, but the point is is that if you you’re a fat by printing money, you devalue, you devalue the currency and therefore it’s worth less.

And so everything that’s critical to have. Goes down in price also. And so that, that’s where we are. And so we’re at, you know, oil prices are, you know, U S prices are down below $40, a barrel international prices are down. So we’ve, we’ve lost, you know, 12%, 10% of price just in last two weeks. and, and so, you know, is that a good thing or a bad thing?

Well, it’s a good thing for the consumer in a way. Because that means the things cost less. And that’s exactly why it’s happening because you know, everybody thought not everybody, but a lot of people thought, Oh good. the economy’s recovering, the oil markets are recovering. So, you know, he’s like Saudi Arabia raised their prices.

only to find that nobody wanted to buy it at a higher price. With uncombed defined, as I’ve been saying for months that this oil recovery is really not a recovery at all. And so when, when, when people either are unwilling to pay what you want, what, what the seller wants or unable to pay, which I think is more to the bullet in many cases, then there’s only one option.

And that is to lower the price. You know, you want to sell your house, you put a sticker price on it. Nobody’s. Nobody’s making any offers. What do you do? You reduce the price and that’s what’s happening right now with oil.

Ben: [00:11:34] Zooming out a bit. The thing that I always have in mind is lower oil, better for the economy, higher oil, worse for the economy. Is that fundamentally flawed in any way? Is that, is that more or less accurate?

Art: [00:11:46] It’s perfectly accurate. As far as, as the consumer is concerned. And, and of course, as you know, most consumers, their primary focus is the price of gasoline. And so for oil price goes down and the price of gasoline goes down in that.

And that, that is, that is a good thing. what is missing from that observation is how much of the us economy these days is driven by investment, not just in. In the oil business itself, drilling Wells, et cetera, but in all the, the industries that support it. So I live in Texas and, for many years, the Eagle for jail in South Texas, and then the Permian basin plays in West Texas have been a real.

Big thing in oil. Well, all the people who work in those businesses need places to stay. they need supplies. So their hotels, restaurants, trucks, trains, you know, a whole. Cascade of, of industries that rely on that economic activity for, for their expansion or maintenance of wellbeing. And so when the price of oil goes down and companies cut their budgets, they drill a lot less.

they let people go. And so all of those, those associated businesses, even if it’s just, you know, the truck stop or a diner, their business goes down as a result. So the immediate, the immediate reaction is, Oh, this is a good thing. Gasoline went down 10 cents. Per gallon. The bad thing is, is that the overall economy suffers much worse.

Once all of that, finally, the lags are taken into effect, but people don’t make that association. They think, Oh, well, you know, people were losing their jobs and I don’t really know why that’s happened. I think it must be the government’s fault or, you know, it’s the federal reserve or something. And, and, you know, maybe all those are true, but, but.

These days, I mean, you know, the United States, this is the biggest oil producer in the world and the biggest natural gas producer. And so when, when, when our production, infrastructure slows down them, the whole country slows down.

Ben: [00:14:16] A lot of analysts always talk about demand, gasoline consumption, obviously, but you seem to, I talk a lot about supply the supply of oil reserves and these things.

And then yeah. This talk about investment as well. Well, walk me through the biggest factors for each of these. I mean, how do you think through all of these different moving parts and how do you distill this to your clients and people that are asking you for your input on these things?

Art: [00:14:41] Right? Demand is an end member.

Supply is, an end member, and then there’s this thing called storage between. So we can think about that in terms of, you know, our own personal lives. And that is that, you know, I, I supply my work. I get money for it. assuming there’s demand for my work has to have both, you know, you can’t have one without the other.

If I make more than I need to spend, I put it in the bank. Put it in an account and not making as much money as I would like, or I have an extraordinary expense. I go to the bank and I take out some money. Okay. So there’s storage, which is your savings account or your investments that sit in between supply and demand.

So all three of those, it’s an integrated system. The the public. And, and I have to say that, that the, you know, the international agencies that really drive things, the international energy agency and France and OPAC, and the, you know, in the United States, the department of energy, the EIA, I mean, these guys are obsessed with demand.

And, and you can tell from my comments, well, you know, that’s like, you know, I’m obsessed with, you know, with the companies I work for, but what about that? What, what are they, what are they paying me? You know, it’s a great place to work, but if I don’t get paid, I’m not real happy about it. So you can’t look at these things in isolation that said markets.

Really only care about supply. Now I know that’s a, that’s a radical statement, but, but markets are us. Everyone is, is the market. you know, we use it in the first person or the third person, but, but it’s a, we and, and markets are smart because collectively we’re, we’re, we’re very smart and markets know that demand is a really tough thing to control.

But supply is a pretty easy thing to control and I can control supply with price. And so if, if the market says, you know, guys, I’m $45 oil is just not cutting it right now. We’re going to give you 40. Guess what happens? People stop drilling Wells. They stopped drilling Wells supply goes down, demand goes up, ideally, if it’s cheaper, I mean, in, in perfect world and everything’s fine now, markets don’t really care about consumers.

Markets care about having an adequate supply. In this case of oil, but I think all markets work that way. I, I can’t, I can’t think of, of any market that wants either too much or too little. So markets are just concerned with, do we have enough natural gas for winter? Do we have enough oil to supply gasoline summer driving season markets are kind of shortsighted in that respect.

And so markets have learned that if I turn up or down the dial on price, I get a pretty quick response from the people that go out and make that supply happen. And guess what? Demand, demand, adjusts. And so to me, The model is if you have to have a model, it’s a supply constraint model, and it’s really got to do with producer behavior.

Companies involved more than anything else and demand usually follows. So all the people that are, you know, obsessing about, about demands and well, if demand is down and supply is down, who cares? Well, I mean, somebody cares, but, but you know, from, from an average person’s perspective, as long as there isn’t too much or too little, then everything’s okay.

Right. And I may not be the right price for an oil company. That’s their problem. But as a market in the markets, they’re kind of in personally, Marcus don’t really care how Ben or art are doing right now in the presence economy. There they’re looking much more broadly. So, so I I’m, I’m much more if I have to pick my choices, take the integrated approach, but if you ask me.

You know, what’s what’s primary and what’s secondary applies is primary. I say storage is probably a more relevant indicator of, of where things are than even man. I’m I’m, I’m much more, you know, you read a, a report today. The. International agent energy agency said, Oh, well, we’re in a deficit right now.

Which means that the demand is greater than supply. And we think it’s going to be that way for the rest of the year. And everybody’s at hooray. Hooray. W we’re finally, you know, we’re, we’re getting that means oil prices are going up. Well, wait a minute. We’ve got record amounts of oil in storage. So my savings account is overflowing and people are cheering because.

Because what, because I might have to go and transfer money into my checking account. you know, I’d rather not do that, but it’s not a problem. And so the, you know, these are the kinds of things that I think are very difficult for, you know, for investors to, to really. Kind of get their hands around because they hear so many conflicting or, different sorts of opinions and approaches.

And it’s not that hard. It just takes a kind of a clear, a clear view of what’s really going on.

Ben: [00:20:16] That’s a very clear analogy with the savings savings account, the large amount of excess oil in storage. This is from the deficit that we’ve been running at with COVID related travel bans and things like this. Correct?

Art: [00:20:30] Of course.

Ben: [00:20:30] With the beauty of supply and demand is, you know, these markets exist and find some equilibrium. So what supply, I can understand that this only can help you forecast out. You know, price throughout your models to a certain extent, because everything adjusts accordingly, the price goes way down.

People shut down, they stopped drilling, demand, stays constant. The price goes back up. They ramp back up to, to equalize that out. But with demand, it seems like there can be longer term trends that you can kind of notice things like renewable energy is that presumably why investors focus more on the demand side of things?

It’s easier to wrap their head around.

Art: [00:21:10] That’s a good question. It’s it’s not easier for me. but you know, I don’t want to project myself. I mean, we are a, a civilization that is obsessed with growth and so growth is, I guess, you know, most correlative with demand. And so as long as demand for something, you know, whether it’s food or.

Or cars or oil, if demand is always going up, then that’s a good thing that means we’re growing. And so when demand is flat or declining, as it has been recently, that’s a bad thing. Yeah, that’s just the way we think. So I, I suspect that that’s, that’s the root of it all, although I don’t know, but, but why are we so obsessed with growth and in the answer is I think, first of all, we’re used to, I mean, ever since well, since you and I were born, we’ve been in.

A period of tremendous growth everywhere around the world. Even in, in very poor countries, there’s been quite a bit of growth and, and here in the United States, we, we entertain this conceit that it’s because we’re just so ingenious, you know, we’re so exceptional and innovative and just. Great. I mean, when you get right down to it and, and, and that’s true.

I mean, you know, we, we are pretty, we are, we are good, but I mean, truly it’s, it’s, it’s got, it’s got everything to do with, I mean, if you look at, at the, the ascendance of, of, of prosperity in the world, it, it happened because of oil. I mean, the productivity. Multiplier on oil is, is so immense. It’s just, I mean, it’s just really hard for people to understand that.

And, and, and, and if you compare that, I’ll, I’ll get back to that in a moment, but, you know, you compare that, that productivity multiplier in oil to say a productivity multiplier from wind or solar, or, you know, and let me just say it up front. yeah, I’ve made my living in the oil and gas business. I got into geology cause I’m, I’m an environmentalist, I’m a conservationist and I’m a 100% behind renewable energy.

So what I’m saying is it’s not partisan, it’s just it’s physics. Okay. It’s the physics of, of energy that I’m talking about. And, and, and th th so the truth is, is that. Is that the is the petroleum is what gave us the boost. And, and, and we’ve got an awful lot of people right now who think, well, all we have to do is get off of petroleum because it’s dirty and nasty and, you know, creates a lot of emissions.

And, you know, if you want to get into that, we can talk about it, but let’s just say for right now that they’re right. And so all we have to do is convert to cleaner energy and everything will be great. And, and, and what that misses lately is is, is the, the energy that’s contained or available the surplus energy.

Once again, you need surplus energy to grow your economy. And so it’s as if, you know, if I go out and fill my gas tank with. Standard gasoline. And I get, say 400 miles to the tank. Well, that’s really wonderful, but if I decide that I want to run my car off of electricity or natural gas, you know, I do the equivalent of filling my tank with battery charging or natural gas.

And whoops, I can only go 120 miles. Well, that’s not the same, let’s say a cost thing, which it doesn’t, but. That’s not a good deal. If I have a choice between filling my tank and going 400 miles and filling my tank and going 120 miles, give me 400 every day of the week. And there’s a reason for that. And the reason is the density of the fuel supply.

And so where, where I’m going with this is that energy is not an on, off switch. I mean, we think it is because we turned a switch on our car or, you know, our thermostat and it comes on, but energy, you know, you get, you pay more, you pay, it has quality, different quality, so oil and this’ll blow everyone’s mind who hasn’t heard it before.

But if you, if you convert the, the contents of 42 gallons of a barrel of oil into. Kilojoules or kilocalories work. It works out to be about four and a half years worth of human labor in one barrel of oil. Wow. Now I don’t care if that barrel costs $10 or a thousand dollars. you know, I don’t think you could hardly find anybody, you know, in the world who would work for four and a half years for a thousand dollars, even in the poorest country, in the world.

And so oil. Is just a heck of a good deal. And so that kind of multiply, it just doesn’t exist anywhere else in nature that is commercial and abundant to produce. And so you’re looking for a reason for why the world economy has grown. It’s real simple, four and a half years in a barrel of oil that on average has cost something like 35 or $40 a barrel.

You just can’t beat it. You just can’t beat it and you want to replace it with something and let’s be optimistic and say that, you know, you can’t put solar in a barrel or anything, or wind in a barrel, but just, just for a comparison, it’s probably, somebody’s gonna scream when I re say a number, but I’m just going to say, let’s say it’s 25%.

It’s probably less than that, but let’s, let’s just be nice and say it’s 25%. Okay. Well, I just took a 75% hit on my productivity, who in the world would want that? And the answer is nobody that I know if they knew that.

Ben: [00:27:45] Capitalism, right? I mean, there has to be some sort of offset to encourage that sort of .

Art: [00:27:51] got it.

You better give me some really good benefit other than just cleaner air. If you want to convince me to take a 75% hit on my productivity. And so. Where your question began was, well, you know, we hear an awful lot is the end of the oil age. You know, Exxon’s out of the, you know, the dowel and, BPS selling coffee and, you know, they’re going to be a renewable energy company and, you know, and, and, and I understand that, but back to where I started, I mean, 85% of our energy comes from fossil energy.

And, and, and if it were, if it were a law or, or, or, you know, a commandment on Mount Sinai, you know, thou shalt eliminate all oil, coal, and natural gas tomorrow, you can’t make that conversion fast enough, no matter how much you want to or need to, it takes decades. To replace 85% of everything that you run on with something else.

And then you get into the quality issues. So the point of all this is that, whatever you read, whatever you hear, whatever your stockbroker tells you, whatever your buddy tells you. If you think that we’re done with oil, then first of all, I think you’re dead wrong, but more importantly, If you believe that, then you also have to believe that going forward, the world is going to be a far poorer place by what do you want to say?

75%. And what, what portion of seven and a half or 8 billion people can we support on 25% of the energy that it takes to keep everybody alive? And so now we’re talking, you know, first thing we said as well, okay, we’re going to be poor. That sucks. But what happens to billions of people? I mean, they die is what happens.

I mean, the only reason we have seven and a half billion people on the planet is fertilizer, which comes from natural gas. The planet’s carrying capacity prior to the advent of the processes that make commercial fertilizer. And in the early 19 hundreds, just 2 billion. The only reason there’s 8 billion people on the planet is because we fertilize the soil and we get that productivity boost planet can’t support seven and a half billion people without fossil energy.

So now we have a moral issue on top of just a straight economic issue. You want to get rid of oil? Great. Sign me up, but understand what you’re signing them up. Standard of living. That’s right. Probably equivalent to 1950s or sixties. You know, I was alive in the 1950s and sixties. My life wasn’t terrible, but nobody wants to go backwards.

we lived in much smaller houses. We had one car, things like that that was in the United States, the most prosperous country in the world. And what are you going to do with billions of people that no longer can, can live? And, and so these are, you know, these are questions that, that investors really ought to ought to ponder because if everybody thinks that energy is a bad investment or oil is gotta be an opportunity there somewhere, right.

Ben: [00:31:26] There’s some deep, deep, moral questions there wrapped up with all of this, right? And I’m abundant, cheap surplus, energy and capital. Over these past, since world war II, call it, I mean has, has allowed for tremendous growth. So I think that’s, that’s very, very good point, but I mean, like you touched on Exxon out of the Dow.

BP now suddenly selling coffee as, you know, an actual business case. These are counter to the back to normal yeah. Energy markets, as we know it. And I think, are they just a distraction for investors and like, Hey, the world’s not transitioning off of oil any time soon, but these, these headlines sure.

Make you wonder and question that investment thesis, right.

Art: [00:32:12] I have no way of knowing some, I’m speculating here, but I think that not 95% of the kinds of statements that are coming out of companies like BP and shell and tell about, you know, becoming more renewable energy, GE companies, I think 95% of that is PR, and not necessarily PR for their customers, but, but PR for their investors.

People who are, who hold their shares. you know, that investors aren’t happy about dividends going to zero or dividends being cut by the companies that are cutting them. So they gotta, they gotta give them something back. And what are they going to give them back? They’re gonna give them back well, but you know, we’re becoming green con company.

We’re, we’re, we’re, you know, we’re gonna make money through renewable energy and we believe that the returns are there and, and, you know, and, and I, I’m not sure that they really are, to the extent that we’re being told, but anyone who believes the statements of any CEO needs to see a therapist. Anyway, I mean, these guys, I mean, their whole job is promoting.

Their company stock. I mean, that’s, that’s, that’s what they’re paid to do. That’s why they’re paid the amazing salaries they are. And so they, I’m not, I’m not questioning their integrity, but, you know, listen to what they say, understanding that there’s an agenda there. And the agenda is, is me. I make more money if I.

Push my company’s stock more as that’s just the way it works. So, you know, be careful. And the other thing I’d say is, you know, be careful about the investment banks that provide so much of this is commentary, whether it’s, you know, city or, you know, bank of America or joint UBank, or, you know, I mean, there, there, there are all of these investment banks have huge research departments that.

Make up an awful lot of the headline commentary about where prices of everything is going. I mean, these are, these companies are not these investment banks are, you know, they’re not philanthropic organizations. They’re not doing this as a public service. They’re, they’re providing so-called research because it promotes their interest.

And, and again, I’m not, I’m not in any way, you know, implying that they’re, you know, these, these analysts are dishonest. I’m just saying, you know, they know where their money, where their paychecks coming from. And so they’re, they’re putting out in information that benefits their company as they should, as they should.

But as a consumer of that information, we have to be careful. Because they’re, they’re pitching their book. I mean, that’s what it is. Goldman Sachs, you know, they come out and they say, we think the price oil’s going to $200 a barrel. Well, anybody with half a brain knows that’s ridiculous, but, but people take it serious.

I chose an experiment. They have said that in the past, but I mean, Goldman has an agenda Goldman’s and investment bank and they’re, they’re, they’re promoting a perspective. That benefits them. It’s just that simple investors be aware for one thing. you know, get your information from if such a thing exists, objective sources, you know, on oil.

I like to think I’m objective. I’m probably not as objective as I think I am. Cause I fall in love with my ideas, like the rest of us, but I am not beholden to an oil company or investment bank. They don’t pay my bills.

Ben: [00:35:55] Right. So you’re providing research for investors, oil companies. I mean a number of different parties, right?

Art: [00:36:03] Yesterday, I talked to a doctor radiologist in California and, he’s concerned about, investing in the stock market and treasury bonds and all that. And he’s looked into a couple of oil company deals, you know, where he can. As a, you know, as a, as an investor, a limited partnership. And he said, you know, can you tell me if, you know, should I put money in this or not?

Is this a good deal? Is it a bad, the cell, his perspective, he has perspectives and you know, he’s going to pay me not very much money, compared to the investment to tell him if I think that. What he’s looked, what he’s looking at here, does it, does it pass my sniff test? Does it look like it? You know, does it look like he has no chance at all that it’s a swindle or might there be something worthwhile here?

And if I tell him thumbs up, It doesn’t look bad on the face of it. You know, then he, he will hopefully ask me, well, you know, I’d like you to dig in deeper to that and, you know, really get down to the details, which of course will cost him a little bit more money. That’s a, that, you know, that’s one end of the spectrum of, of people that I work with.

I get calls from. You know, people in Southern California, you know, inherited some royalty interest in, you know, in some field outside of Bakersfield, they don’t know what to do with it. Somebody come to them as, Hey, you know, I’ll pay you X amount of money for your, you know, one half of 1%. Should I sell it to them?

Well, okay. So first of all, I don’t know, but tell me what, where it is. And let me, let me put a value on your one half of 1%. And if they offer you any less than that, tell them to go take a hike kind of thing. Those are the, you know, those are the small time people that I deal with. And then, you know, all the way on the other end to, you know, major funds, governments, Major oil companies, you name it.

So, you know, the whole, the whole spectrum of investment.

Ben: [00:38:07] Yeah. And this is the thing with investing. I mean, people want clarity. They want clarity from experts like yourself. So for the average investor that. Is investing based on the thesis that we’re not going to switch right over to renewable energy.

Yes. You know, I think we’re all aligned that that’s the future somewhere down the line, but, as you exemplified, like, it’s very difficult to turn it, switch it right over. Where are we at in this cycle from a hundred plus dollar barrel. Now we’re sub 40. What’s your outlook for the next. Whatever time period makes the most sense for you.

And how does a smaller investor get involved, fitting into that thesis? That energy is going to be around and maybe we’ll go back to normal in some way.

Art: [00:38:57] I think the, the simple answer to your question then is I don’t, I mean, I’m not going to tell my, you know, my, my, my radiologists that he’s. No he’s off on something.

He shouldn’t be, but, but really, and truly, I don’t recommend that individual investors, whatever their, their risk appetite or their, you know, the, the money, the, the discretionary money they have, whether it’s a few thousand dollars or a few hundred thousand dollars, I really don’t recommend that they make direct investments in the oil business.

It’s just hugely risky. And it’s not, the risks are too many to, to get involved in, but the simple, the simple risk is you drill a well, you think it’s going to cost 5 million bucks. Something happens completely beyond your control and it ends up costing 10 million. And, assuming that you find what you thought you were going to find.

Well, now your, you know, your, your, your capital investment just doubled, your net present value, you know, your payout is now moved, you know, years into the future and it, and it wasn’t anybody’s fault and it wasn’t predictable, direct investment. In oil is, is for people with massive access to capital.

Okay. And so, now if somebody wants to invest, I’m all, you know, I’ll be, I’ll be glad to, to steer them in a direction that makes sense for them or somebody like me. But I think it’s smarter for people to, to buy stock. And, and, you know, stock has its own multipliers, of course. And, there are different perceptions of different companies, but if you bought, if you bought it shares of no name, your, your, your title oil company, you know, diamond back, Concho, pioneer, any number of them in 2016, when oil prices were as low as they got in that cycle.

And all you did was hold that stock. Until sometime in the middle of 2018, you’d have made about a 200% gain. If you’re smart about it. And you, you know, you watch prices and you got in and you got out well, who knows how much he could have made. But, so, so when prices are low, that’s a bad thing for.

Well companies, but it’s a good thing for somebody that wants to get in at a low price, who thinks that the price is going to go up and how much does it have to go up? I mean, if your bad is all, it’s, it’s $40. And I think it’s going to go to a hundred. I mean, that’s kind of a risky bet, but the truth is, is that, if it goes from 40 to 41 and, and, and you’re, you’re sharp about your buying and selling, you can make a heck of a profit.

Just by picking a company that’s well positioned to benefit and oil companies. The price of their shares is directly proportional to the price of oil. And then depending on, on the, the, you know, the, the multiple involved, the perception of the public, you can, you can, you can add or subtract a number from that.

And again, that’s not without risk, but it’s liquid. I mean, it’s something, you know, you can, you can get into, you can get out. you can, you know, it doesn’t require a lot of upfront capital and then there’s all sorts of other things that, you know, maybe people want to get involved with, you know, some kind of.

You know, refining or, you know, natural gas, liquid extraction, they have midstream kind of stuff in between the production and, and the, and the exploration and the production. There’s a whole spectrum of things, but, but for most people, I think, you know, the stock market. Is is, is, is good. ETFs, are, are a way to, you know, to, to spread out your risk and of course your reward as well.

you get into an oil ETF and you’re, you’re probably not going to make the kind of profits that you would on an individual company, but you’re also probably not going to see the losses.

Ben: [00:43:16] Right. Just like you’re talking about like XLE energy, spider, right.

Art: [00:43:20] Vanguard, you know? Yeah.

Ben: [00:43:22] Yeah, but I mean, something like that, XLE is down like 40% this year.

and obviously it’s been a rough year, so this is highly correlated to the price of oil. So, I mean, are you comfortable doing oil price estimates because this is kind of a proxy for where these oil stocks are going. I mean, where, where do you see the price of oil going and. That’s this would translate to value for these stocks, right?

Art: [00:43:48] Sure. You can go back and, you know, read my tweets or you can go on my website, art, berman.com and you know, you can, you can read what I was writing about in March or April and in March or April, I said, Oil is, is almost certainly going to rebound to somewhere in the 40 to $45 range. That wasn’t a guess.

It wasn’t a Monte Carlo simulation. You know, it wasn’t some stochastic, you know, kind of a Fibonacci kind of an equation. It was based on, on, on some techniques that I’ve used for many years. I call it comparative inventory. It’s out there for anybody to take a look at and while off, I mean, oil got to exactly.

I think, I think I said $42 a barrel. It got to almost anything. It got to 43 and I said, early on it isn’t going any higher. And here are the reasons why, and. It didn’t go any higher and it went down. Okay. That, that doesn’t mean that I’m, I’m always right. It means that I understand the way the market works.

So, I’m not gonna make you a price forecast that you can take to the bank tomorrow. Cause I’d be an idiot if I did. and, and I’m, I’m gonna, I’m gonna approach price forecasting. Like I do everything else. It’s probabilistic. Okay, I’m going to tell you what I think what the most likely cases, but there’s, you know, there there’s a, there’s a peach Wani and a PhD in there’s, you know, all sorts of, so you, you know, you tell me what your, you know, what kind of risk you’re willing to take.

And I, and I’ll tell you, I’ll tell you the number, but you know, that’s not really the business assignment. It’s obviously part of the business, but, I’ve been, I’ve been. On on where oil prices are going. since I really, since I started doing that kind of work, back on the six, seven years ago on a, well specifically I was more into natural gas, but yeah, and I’m in, you know, natural gas is another good case.

Natural gas was. You know, averaging something like a dollar $60, 70 per thousand cubic feet or a million BTUs. And all of a sudden it started going up and everybody was freaking out and people were celebrating, Oh my God, you know, a gas price got to something like two 50 and the whole time I was writing.

You know, this is weather guys, you know it all. No, no, no. You know, it’s because of all the reduce production and there’s lower supply and blah, blah, and you know, D did I have moments of self doubt? Of course I did. But the reality is, is that, you know, it’s back down below $2 and, and it was weather. I mean, you got to understand natural gas markets.

It’s all about consumption. And we had, you know, you’re in California, California weather got really, really hot and spot prices of natural gas in California. Got over $200 an MCF on a short term basis. Okay. Well that puts the whole system out of whack. And it drove it way up and then things cooled off and we’re kind of back to normal.

So again, I’m, I’m not the guy to tell you, you know, you know, it’s, it’s, Seabiscuit in the, in the seventh. I don’t do that, but, but as prices are, you know, I’ll tell you, look, natural gas is way overpriced right now. And so whatever your business is, you know, if you just want to short natural gas, you can make a ton of money.

If you think I’m right. And I don’t have to be exactly right. You know, I’m going to say, I would have said, I did say I wrote it, you know, I don’t think gas has any business being over $2 an MCF. So, you know, factor that into whatever kind of a short you want, whether it’s on an oil, gas company stock, or an ETF or a commodity or some proxy for a commodity, you would have made a fortune.

And everybody said, Oh, Berman’s wrong. He’s an idiot. You know, he doesn’t understand blah, blah, blah, blah. And sometimes they’re probably right. You know, I don’t want to have a, I don’t have a monopoly on, on, on truth or correct in this, but, yeah, those are there, there are a lot of things that go on in these markets that let’s just say there’s a lot of amateurs in these markets.

And, and, and they see momentum go in one direction and they get real excited and, you know, God bless them. I mean, that’s great. And you know, enthusiasm is good, but, you know, I said forever, after labor day and natural gas look out because that’s when markets say, do we have enough gas for winter?

And these, these corrections, I just mentioned, what do you know? They happened right around labor day. Not everybody knows that it’s not a secret, but you know, you’ve been doing this for four days. You’ll learn a few things.

Ben: [00:49:00] Well, the future is unknowable, right? So anytime you’re forecasting out, you’re looking at probabilities and, and these things and making the best guests.

But yeah. Ultimately it’s unknowable. So it’s very, very difficult. You touched on a number of things there, separating the signal from the noise. I mean, there, there, there’s a lot of noise out there on things that are going on what key things should investors be monitoring, you know, around supply storage and demand like these, these sorts of factors?

What, where, where should they be? focusing their attention to better understand the oil market. Besides your Twitter, which is excellent by the way.

Art: [00:49:38] Thank you. well there, so we are in a, you know, sort of a clash of the Titans at the moment between OPEC and there. Friends and family, no Russia, Mexico, all the various countries that are currently have been cutting production.

So it’s, it’s been a, it’s been a producer. It’s been, it’s been a sellers market for the better part of 50 years, one way or another and China. Has in its own kind of a behind the scenes way. China’s a country. I mean, China’s the biggest oil importer in the world, and there’s not a heck of a lot that China can do about that because most of China’s oil production, it, it has a respectable amount of production, but it peaked a long time ago and it doesn’t become close to meeting there.

For their demand. And so China has been very, clever in essentially figuring out how to turn oil into a buyer’s market. So, one thing that an answer to your question that people can watch is how much oil is China, right. And that’s. Publicly available. I mean, you can get on, you know, Reuters or Bloomberg or even the New York times wall street journal.

And these are in just get online and go to, you know, WSJ wall street, journal energy, and it’ll come up and they’ll tell you stuff, you know, give you headlines and you can click on those if you subscribe. And if you don’t try, you know, there’s somebody that’ll reprint it. But the point is, is that most of the oil recovery.

Since April has been because China’s been buying cheaper other than buying millions and millions and millions of barrels. That’s a form of demand. Isn’t it? Okay. So as long as China’s buying cheap oil things look pretty darn good. Well, Gets to a certain price and China says, you know what? We don’t need any more.

We certainly don’t need any more at this price. China stops by what happened. I’ll have the demand recovery just stalled. We don’t really understand what’s happening. Yeah, we do. China stopped buying. So China’s got this really important lever that it’s turning and it did the same thing in 2008. the reason that oil got to 140 some odd dollars a barrel was because China was, you know, China was rising and China was buying every barrel in sight until they stopped.

And so that dynamic of supply side by side is in a huge flux right now. And if you’re a have not, and there’s more of those in the world than there are haves in terms of big economies and all the Asian economies. I mean, they got nothing. There’s no oil whatsoever for Korea, for Japan and for, you know, an awful lot of these large economies.

And so they’re, they’re on board with, with China’s leadership on this deal. And of course, China has been out buying production, lending money to developing countries that happen to have oil production. So, you know, that’s, that’s a real deal. So, you know, follow, follow what China’s doing. And that’ll tell you a great deal about where things will be for oil supply demand and prices in a couple of that’s just one of many little things that anybody can do a fake character.

Ben: [00:53:24] Interesting. Yeah, it’s a, it’s absolutely terrifying how lovely to the Chinese economy and their growth. The rest of the world is, I lived and worked in Thailand for four years and spent a lot of the time in that region and countries like Laos, Cambodia, Myanmar, and the amount of Chinese investment and everything just.

Coming over from China is, is fascinating and terrifying and alarming. What major catalysts, what are you looking for that would reverse your kind of bold thesis oil as a driver for global economy? Is there, I mean, China suddenly saying they’ve. Opened up all of Tibet as a solar energy farm, and they’re going to be energy independent.

This would obviously have a catastrophic impact on price of oil, but what, what kind of major catalysts would just make you totally rethink everything? You know, about oil?

Art: [00:54:19] I always try to, to ask myself where could I be wrong? Because I’ve, we’ve all been wrong. Right? And usually when, when, when I’m most wrong, it’s because I.

I’m certain that I can’t be wrong. having said that though, Ben, I, I mean energy is the basis of life, you know, forget about human beings. I mean, look at, you know, at any, any animal or any living thing, for most animals. Depending on what they do and what they eat. I mean, somewhere between 50 and 90% of their time is involved with getting food.

Okay. Animals understand that energy is life because if they don’t eat, they die. And that’s that, that, that just isn’t going to change. That is the basis of life and, and my thesis. That energy is the economy is it can only be wrong because it’s a derivative that, I mean, everything that we do is a derivative of a derivative of derivative in human society.

So what I explained is that, is that the primary exercise is what all animals do. I need food to eat. I hunt, I farm whatever. I get surplus energy. I get somebody, I get, you know, I get more, more food than I need. I pay somebody else in foods so that they do my work for me. Eventually we invent money. So food is a first derivative of life.

Money is a second derivative. then I can make money without. Doing anything, but you know, a stock or something, and that’s the third derivative I can buy synthetics. I can get credit default swaps and synthetic credit, default swaps, which are probably a, a 50th derivative of, of what do I need to eat today?

And so we lose sight of, of what all that’s based on so that I, I know I can be wrong. I don’t see how, how life. Can be based on anything other than energy. And so to your question, let’s say that China decides to, go all out and replacing its reliance on fossil energy the way, I mean, they, they are, I mean, China is intent on leading the electric vehicle.

Movement, solar panels, wind turbines, all the rare earth metals that go into that stuff in there. And they’re winning in that regard because they saw it. Nobody else did, or nobody else needed as much as they do, but, but here’s the problem. If you want to turn to bet into a solar farm, the first thing that you need to ask.

Is where do the components for the solar panels come from? What are they? Well, there’s obviously metal cause or wind turbine, you know, where’s the steel come from? Well, it comes from iron for the most part. How do you get iron out of the ground? You mind? What do you use to mine? Iron diesel. What do you do with the iron?

When it comes out of a mine and Chile, let’s say, well, you send it somewhere. To be smelled it, put it on a boat. What’s the boat run on, but runs on diesel and the boat takes it across the Pacific ocean. Maybe it goes to China, goes into a smelter. What’s a smelter run on coal. I mean, the day that we figure out how to replace metallurgy with, with wind power, I want to be there.

Cause it ain’t going to happen. You cannot produce that level of heat with it, you know, in, in, in anything that’s even remotely affordable with electricity, you can do it, but the cost is just ridiculous. So you smell the steel with coal and then you send the metal. We’re just talking about the casing. For the solar panel, you send it to a factory that’s to be going to form it.

And that’s going to run on electricity, which is called natural gas. You make the parts, you put the lithium, you put all the other crap in it. That all comes from mines that run on diesel on boats that run on diesel, et cetera. And finally, you’ve got your solar panel. And what do you do with it? Where are you going to send it to the United States?

Of course. How does it get here? Put it on a boat. It runs on diesel. It shows up at the port of Los Angeles. What happens? It gets picked up in a truck, which truck run on diesel. Okay. So, you know, you, you, you do all this calculation and, and, and those who say w we’re we’re gonna, you know, we need to get off of oil and run on what, what we’re going to run on solar panels.

Okay. Well, I just went through that. No, you’re not you well, okay. So we’re going to have to keep some oil. Okay, you’re going to have to keep some oil. How much is some, you know, do the calculation. I don’t want to get into that right now. The answer is you can reduce your reliance on oil, but you cannot replace those fundamental functions.

Now the option is you want to live in a poor world. Oh, okay. Well, now, now we can start talking. You know, we can, we can, we can say, well, what are you willing to do without a guarantee? You’re not gonna, you’re not gonna use high tech, solar panels to run a poor world without the metals and everything that goes well, we can replace those.

And, and here’s a point that I want to leave everyone with that we in America are hopeless. Faith-based. Technology believers. We believe in technology that hasn’t even been invented yet. We believe in technology more than we believe in God. Well, somebody’s going to figure this out well. Okay. But nobody has, so what are we going to do in between the now and the someday?

Somebody’s going to figure out how to smelt iron with electricity. That’s commercial. Well, I’m not going to be a lie. Nobody knows how to do that now. And if nobody knows how to do it now, and let’s say they figure it out tomorrow, it’s going to be decades before it’s upscaled and then commercialized and then adopted.

And so we’re, we’re always talking decades. And yet we Americans just think that, well, you know, it’s going to happen tomorrow and it never does. I mean when I was a kid, I honestly was sad that I wouldn’t be able to drive a car because I thought that, you know, no, the Jetsons were going to happen. Right.

We’d all be driving around. I was really sad about that. No cause it’s in 10 years, we’re not going to be used in cars anymore. And I watch my neighbor, you know, Washington is 57 Chevy am I missed it? You know? Well, that didn’t happen. and it didn’t happen for a reason. And that is that you don’t just retire perfectly good equipment.

I, when we’ve got something like 300 million internal combustion should engine cars in the United States and, and, and maybe we want to get rid of. Internal combustion. What are you continue to throw them away? No, you’re not going to throw them away. You’re going to use them until they wear out. That’s the way it works.

I mean, do you remember when we converted from analog to digital television? A couple of years ago, I mean only 20% of Americans used analog television to begin with. And all you had to do. To be part of the mandated regulated conversion was go someplace in your car and get a box for free. And it took three years just like, you know, the census was supposed to have been due and whenever, March, and I still see people out knocking on doors cause people don’t do what they’re told.

Okay. Well, all these people didn’t get the damn boxes. And so three years later, we finally turned off the animal that was free. And so for people who think that humans change their habits quickly, I invite you to observe, observe life in all of its full adoption happens. Usually over my dead body is the way it works.

And so all of these, you know, I got a friend who calls it. Hopium. You know, all of this, hopium about what somebody is going to figure out how to do eventually, you know, put it on a shelf if it doesn’t exist today in, you know, if it isn’t at least a pilot program, then as an investor, forget about it. I mean, to me, maybe I’m very shortsighted, but for me I say, you know, I’m going to be 70 years old in a month or two.

I got no time for what if, and maybe I need something that will grow for me in the next couple of decades. And if it doesn’t have that potential, well, you know, some young guy can, or girl can, you know, put your money in that. That’s great. I think you’re going to lose your money, but that’s fine. but for me, You know, I, I I’m, I’m interested in, I’m a big, big picture guy, so I’m not next quarter kind of guy, but you know, if it doesn’t exist and it isn’t commercial and people aren’t yeah.

Using it, forget about it. So Tibet turning into solar panels, just forget about it. It’s not going to happen. It’s not going to, it happened in a timeframe that’s meaningful and it’s going to take so much metal and so much hydrocarbon oil and gas that. If everything else were easy. It wouldn’t happen.

Ben: [01:05:03] I think it’s a very good point.

I mean, it, it, opens up the door to some rather philosophical debate on the alignment of longterm incentives and things like this that I definitely don’t want to go down that rabbit hole, but I think that’s, that’s a very good point to kind of. Leave it on. I did have one more question. So speaking of your Twitter feed, I mean, you have a, quite a nice breadth of good information on oil markets.

How do you consume data? How do you, do you use any tool tools to, to help kind of parse through this? is there any insight that you can offer? our, our more novice Twitter users like myself?

Art: [01:05:43] Yeah. Well, Twitter is so. If you’re interested in oil, learn your hashtags. Okay. So follow you don’t have to actually follow me, but just, just take a look at one of my tweets and, and, and double click on it.

So you can see it large and look at the hashtags I use. And I’m going to use things like, oil and gas and WTI and crude and OPAC all with a hashtag and just start following those, those groups. And you will suddenly be overwhelmed with all kinds of information from people like me. You never have to follow me, but since I list those, I tag those, everything that I put out goes to them.

And if you’re, if you’re lined up with them, then you’ll get it all from not just me, but everybody else who, you know, who does that sort of thing. And, and. People that know Twitter or other platforms know how to do that. So that’s that, that’s the simple way to go. But, but one, one theme that we didn’t talk about that I want to briefly mention, because I think it’s crucial and that is that, and this is maybe on the theme of hopium a little bit, but, but for those who think that, that once we get a vaccine for COVID.

That everything’s going back to whatever normal was. I invite you to put that on the same shelf as the, what ifs and maybes about Tibet turning into a solar, a solar farm, things never go back to the way they were to begin with. normal was not normal. It’s what we remember as normal, but this is the economy.

And I mean, the world anime has been so, so fundamentally damaged. By what’s happened in the last few months. And none of that was because of COVID. It was because of, of the bad habits and the structural flaws. We’ve been accumulating for this entire debt cycle, 50 or 60 years. COVID accelerated it tremendously.

COVID didn’t cause it, okay. Now all of those things are out in the open and let’s say COVID goes away. Let’s say we find not just the vaccine, but we kill it and it’s gone. I mean, BP, as we’re buying coffee from them, told us yesterday that their best estimate is that world GDP will be 5% lower than it is today, or 5% lower than it would have been in 2050.

Because of what’s already happened, assuming an immediate recovery, 5% negative GDP, 30 years from now. Now I invite you to be hugely skeptical about everything BP and every other 14, 100 or 500 corporation. But for anyone who thinks that, that, you know, we just shake this off and go back. My God. I mean, you know, let’s say they’re wrong.

What let’s say it’s only a half a percent. I mean, back in, in whatever was normal, a half a percent drop in GDP in one year was catastrophic. So I don’t want to be, I’m not, I don’t want to be passing

your audience is investors. Investors need to have their eyes open. And an investor who thinks the things are going to snap back to the way they were is going to be an investor that loses his ass if his investments are based on that. So I, you know, people ask me all the time or they comment and he’s like, well, you know, aren’t, we, I agree with everything you just said, but the difference between you and me is that I’m an optimist and you’re a passenger.

And I reply back, you know, actually I’m neither, I’m a scientist. The universe doesn’t really care about optimism or pessimism physics doesn’t care, geology doesn’t care. These are not factors. This is what the information is telling me about the present configuration of the universe today you can do with that, what you like for the future, but so it’s not pessimistic to take into account this information.

It may be wrong. It probably is wrong. But, please consider these are legitimate. Where could you be wrong in your investment? If your investment scheme is based on, things will be back to normal by the end of 2021, I think you’re going to be very disappointed. So I’ll leave it there.

Ben: [01:10:36] Oh, I mean, this is a very valid, valid point.

And this whole, the whole thought that growth can, can clip on at 3% to 5% into perpetuity. People don’t understand it exponential growth, right? Like I think the Egyptian population had, they grown at 5% from their heyday. There’d be like a hundred billion Egyptians running around the world right now.

Right. It’s just population growth plateaus. You can’t have. Cheap debt forever, but this is, there’s a whole another can of worms that’s for sure.

Art: [01:11:09] And, and a lot of people don’t in discounting either. That’s, that’s the other thing that I see, but no, I’ve, it’s been a great conversation. Been really, really fun to talk to you.

Ben: [01:11:19] Yeah. Yeah. I really appreciate it. I mean, you, as I said before, he started you’re, you’re an expert in this field and you can talk, at length about all the different levers that are being pulled and, you know, Unprecedented uncharted waters that we’re in right now, navigating those in a way that kind of makes sense.

Where, where would you like my listeners to go to find out more about you? About what you’re working on? Where do you want to send them?

Art: [01:11:44] They should go to artberman.com. that’s that’s, almost everything there is free there’s subscription stuff. If you want to do it big, deeper into any of this kind of stuff.

And of course, @ABerman12 is Twitter that tells you, you know, every little, you know, brain tremor that I have, often a lot of it goes out there. And if you’re, if you, if you want to know. Who I pay attention to and what information I think is worthwhile. That’s, that’s a pretty good way to find out in a hurry.

Ben: [01:12:16] Perfect. Well, we’ll leave it at that. And I’ll, I’ll link all of those in the show notes really appreciate you taking the time today. Art. It’s great to have you on.

Art: [01:12:24] Pleasure to talk to you, Ben, all the best.

Ben: [01:12:27] There you have it. Thank you for listening. I really appreciate your support. Show notes, transcript links, and more can be found on our website at altassetallocation.com.

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