Dutch economist /
oil analyst Maarten van Mourik examines in this exclusive interview the link
between gold and oil; important taboos in economics; the USA vs. Europe; the
dilemma with our energy-driven monetary system; and last but not least the
reason why “peak oil will be here, no matter how much of the stuff is in the
ground.”
By Lars Schall
Lars Schall:
Maarten, you have co-written a book recently with your friend Oskar
Slingerland, The Misunderstood Crisis with the sub-title It’s the energy stupid. Why the title?
Maarten van Mourik:
Because we have this financial crisis and everybody goes on and on about how
we have to get out of this subprime crisis and everything that happened to
the banks, but we believe that the crisis is only partly financial and mainly
due to an energy problem and more in particular to the problem of having
access to cheap and profitable oil.
LS: Yes, let’s
discuss that in more detail, but first: How important is oil?
MvM: Oil is very
important. People give different estimates that it might amount somewhere
between 30 or 60 percent of global GDP, but basically oil is everywhere
and roundabout 95 percent of our transportation needs are covered by
oil, and then obviously just look at your clothes that you’re wearing, it’s
oil.
LS: And plastic?
MvM: Plastics,
pharmaceuticals, anything. It’s everywhere.
LS: Is there a
correlation between the price of oil and economic growth?
MvM: Yes, over a long
period we have a quite strong correlation between the two, and we would say
that given the high prices of oil that we have been seeing for the last,
well, close to ten years, it’s hardly a surprise that we don’t have very much
economic growth going on and that everything today has been effectively
printed out of thin air.
LS: Would you say
that there is a price from which it becomes impossible to gain economic
growth?
MvM: Yes, I would think
so and people have asked this before and talked about it at what levels of
GDP the oil price would be too high. I think we’re looking at a moving
target, because over time our personal income is diluted from inflation
problems and effectively the ongoing issues with disposable income. So, as
time goes by our tolerance for the price keeps going down.
LS: Related to
the oil price spike of 2007/2008 which saw records prices in oil, I would
like to ask you why was this the real trigger of the financial crisis?
MvM: Well, basically in
my view is that the shock to the economy and the amount of money needed to
keep the economic machine running was just too much.
LS: And people
had to spend money on oil instead of their mortgages?
MvM: Exactly.
LS: Was
speculation part of this?
MvM: This is an ongoing
debate. I think to a certain extent there was speculation involved, but I
think in the end it’s the supply and demand fundamentals that have caused
this price to sky-rocket.
LS: In your book
you are telling that you were not surprised by the price spike in 2007/2008;
instead you were doing something to gain from it, can you tell us about this
please?
MvM: Yes, sure. I gave
the advice to a couple of traders who effectively took a position in it by
buying call options which were well “out of the money”, as they call it, and
they just came into the money as time progressed, so they made a good run of
it and we belonged to the few people effectively playing this game.
LS: But how did
you come to the conclusion that the price would spike?
MvM: Well, it started in
’98/’99 with the oil sale developments and oil company investment behavior;
we counted all the individual fields and how much development was going on
and we plotted the impact through the capacity that we developed for it and
then plotted the demand projections against it – and the simple conclusion
was that there wouldn’t be enough fuel development going on to fill both the
demand growth and the decline in the oil fields as we call it. The existing
fields become older and older and you produce less and less from existing
fields and you have to replace it with new fields and new fields investment
require activity from oil companies and they will only do so when it is
profitable and it wasn’t very profitable in the late 90s. It was highly profitable
in the mid-2000s, and again now it isn’t very profitable anymore.
LS: But it is
very profitable to develop fracking in the US?
MvM: Well, this is an
interesting point of view that you have there because we did calculations on
the economics of the companies involved in oil fracking and we came to the
conclusion that most of these companies are not making very much money over
the longer-term as far as we have been able to discern from the financial
reports being published. In fact, we would think that given the decline rates
in these oil wells the capital expenditure is becoming more or less a sort of
operational expenditure and then oil becomes very expensive to calculate on
that basis. So, to me this is probably the most expensive oil in the market.
LS: Yes, however
isn’t the current price of oil and the development of fracking due to high
prices a replay of what we saw in the aftermath of the oil shocks in 1973/74
and 1979 related to the oil developments in Alaska and in the North Sea?
MvM: No, I wouldn’t name
it like that because the fracking is more like a production type process. So
you have to do it continuously. If you stop the capital expenditure or
basically developing the new wells then your production profile falls back
very quickly – and this was not the case in either Alaska or the North Sea.
So all this money had been spent and has been spent in these two areas, but
the production that came from it has lasted a very long time. So it’s not
directly comparable.
LS: Yes, but what
I mean is that it took a lot of money to develop those fields in Alaska and
the North Sea, and now it takes a lot of money to do the fracking.
MvM: Yes, that’s entirely
true, but the difference is that it requires a constant stream of money in
fracking to sustain the production levels, whereas in Alaska and the North
Sea the amount of money invested was high, but then it gave also long profile
of substantial amounts of oil coming back in without requiring additional
large amounts of capital expenditures.
LS: What do you
see coming in the next years? Is there some kind of vicious circle involved
in the financial crisis that only few pay attention to?
MvM: Yes, I would think
so. If you look at the amount of crude oil being produced, it has been static
more or less since 2005. We have been throwing all sorts of money and all
sorts of liquids to the market and we just can’t get the price down. So
fracking is not a real solution, because it’s not a cheap form of energy that
goes into the economic engine. So, one way or another we have to find
something that is cheaper or we have to reduce our demand – and demand is
only being reduced when the price goes high enough.
LS: What can our
societies do to solve those problems related to energy?
MvM: We have to be much
more energy efficient. Effectively prioritize different things; we can drive
smaller cars for instance.
LS: Do we also
have to over-think our way or our obsession with economic growth?
MvM: Yes, I think it
would be an entirely good thing to start thinking about, for instance, goals
and quality rather than quantity. I think there is a lot of misguidance and
erroneous thinking about how economic growth can only be achieved by
increasing the scale of production..
LS: Do you also
think that we have to over-think our financial system vis-à-vis high energy
prices?
MvM: Yes.
LS: And why so?
MvM: I think that we
should try to become a little bit more conservative in the way that we
finance our system, our companies. I think we should having a more long-term
view of financing like we had before – basically corporate type banking.
LS: Now that you
say long-term perspective, do the Chinese have a long-term perspective
related to energy?
MvM: It looks like it;
they’ve been investing considerably in buying up resources in all sorts of
countries all over the world when they’ve got the chance. So, I do think that
they do.
LS: Final
question, you would say that the financial crisis is everything but not over?
MvM: Absolutely. I mean,
they’re tapering over it with printing money. So far it has gotten us very
expensive oil. I can’t see how we get out of this without adjusting the
balance sheets of these companies. Basically, let banks go bankrupt and let
the system reset. Moreover, I would think to let the oil price do its thing
itself.
LS: Yes.
MvM: Then people will
adjust very clearly, very simply. If you go to the pump and you have to fill
up your car with EUR3 per liter diesel, you will think twice about what you
are going to put in.
LS: So,
ultimately you are optimistic?
MvM: Yes, I think that we
have good opportunities. Anything can be done; just the economic incentive
needs to be there. When the oil price itself is high enough, the incentive is
there.
LS: Thank you
very much for the short conversation, Maarten
MvM: You are most
welcome, Lars.
Maarten van Mourik (born 1967 in the Netherlands) studied micro-economics / industrial
economics and shipping economics at Erasmus University in Rotterdam,
Netherlands between 1988 and 1991. Afterwards he worked with the Netherlands
Economic Institute on transportation policy research, mainly maritime
transport. For Petrodata Ltd of Scotland he was doing offshore drilling rig
and marine support vessel market forecasting. From 2000 onwards he has had
his own business, doing bottom-up field by field non-OPEC supply forecasting,
oil market analysis as well as forecasting offshore equipment markets. The
work was supplied to OPEC as well as investment funds. As an economist he has
worked on port infrastructure feasibility studies around the world. He
favours independent analysis, Austrian economics and an eclectic approach to
analysing and predicting market behaviour. He currently lives in France.
Van Mourik recently
co-authored the book “The Misunderstood Crisis: It’s the energy
stupid!”.
Dec 2011 Matterhorn
interview with Van Mourik: “Money Drives Everything”.
