Chris Faulkner discusses the effects of the geopolitical turbulence on the energy markets.
Mike Norman, Hard Assets Investor (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. My guest today is Chris Faulkner, CEO of Breitling Energy. Chris, thanks very much for coming back on the show.
Chris Faulkner, CEO, Breitling Energy (Faulkner): Thank you, Mike.
Norman: So what is your outlook now? We see a lot of geopolitical turbulence hitting the market. We see WTI crude trading around $110. What do you make of it?
Faulkner: Well, I think it was an 18-month high at $110, and we’ve had a lot of volatility that’s created these tail winds for oil. We’ve got the current issue in Syria; what’s going to happen there? I think we’ve got probably $8 built into the price for Syria. We saw some pullback just recently, because I think that now folks think a strike is not imminent, but may still occur. So we’re going to see a little bit of pullback, but not down to $100.
But I think, more importantly, Libya has been a bigger concern. Libya was moving up, as far as its production numbers re-normalizing after the ouster of Gadhafi.
Norman: That snapped back nicely.
Faulkner: Now it’s pulling back again. We’re down to 300,000 barrels a day out of Libya; we were doing 1.6 million. So, literally, a very small amount.
Norman: Why did that happen?
Faulkner: Well, we’ve seen recently the security guards and the security personnel for the oil infrastructure in Libya have gone on strike. So we’re seeing traders saying, “Well, maybe these oil assets could be attacked, production has been pulled back.” And so Libya now is a major event. I think right now it’s a major event even more than Syria, as far as impacting our oil prices. And so we’re going to have to watch carefully what happens there.
But if Syria gets back on the map and a strike occurs, if Syria gets blown up or taken off the map, if you will, it doesn’t affect oil, because it’s not an exporter and producer of oil. But what it does affect is that things like Iraq could be a part of the picture, Russia, Iran. You’ve got Hezbollah which is a Lebanese fighter group that Iran kind of backs. And they’ve been involved in the fight in Syria. What if they would retaliate and attack Turkey or Iraq?
There’s a lot of oil coming out of there. If it spills into the Middle East, where a third of our oil production comes from, we could see prices of oil go from—what are they today—$108, or $110 and touch $150 or beyond. And that would be the record from 2008. We saw $147 in 2008. We could be there again if anything starts to actually materialize.
like it? Their budget numbers were based on $83 oil to pay out social programs or subsidies in the Middle East. But because they bailed out all these countries after the Arab Spring, they’re now saying, that with the money they’ve spent, they need $101 oil to pay for the budget they currently have going.
So their concerned that oil prices will begin to drop, that they can’t pay their bills over there. So they’re going to have to be aware that they’re going to have to pull their production down, because they know America will continue to push as much oil as we can. And that’s just the way things are, because of our big supplies, our new reservesNorman: I hear all this, and there are great bullish arguments, obviously. But on the flip side, we hear about this expanding production in the U.S.; very significant amounts of new production. In fact, we’re being called the next new Saudi Arabia. If somebody just a few years ago had said, “There’s going to be a discovery the size of another Saudi Arabia,” oil markets would have tanked; they’d’ve collapsed. But we don’t see that happening. Why?
Faulkner: I think you’re right. No. 1, we’re producing 7 1/2 million barrels of oil a day; it’s huge—up 20 percent from just a year ago. So we’re making massive strides. We’re becoming “Saudi America”; the biggest oil producer in the world, if we get to 10 million.
The market is well-supplied in oil. And demand is down because of efficiencies with cars, in the global economy issue that we have.
Norman: That’s a big thing too. And that’s long term, that’s secular.
Faulkner: It reduces by 5 or 6 million barrels a day off of our peak that combine with the economic conditions that we have. But I think that Saudi Arabia has pulled back their production. They’re producing now less than 10 million barrels a day down to 13 million. They wanted to go to 15 million but can’t because we’re pushing so much oil into the market, they’re trying to stabilize the price.
Saudi has said they like $100 oil. It’s not because they like it. If you dig a little bit deeper, why do they over here.
But I think what we’ve seen in the last whole year really is attributed to geopolitical concerns, tension and fear. I don’t think it’s down to basics and fundamentals. I think we’re talking about, not fear-mongering, but in a way, the markets’ reactions to uncertainty. There’s been a tremendous amount of that this entire year.
Norman: The Saudi Arabia story I think is very, very important. And I think it’s something that most people forget; that really they’re still sort of price setters at the margin because they have the excess capacity. And we always hear “drill, drill, drill”; that’s been the mantra. Or there’s been at least a faction or a group here in the United States politically who propose that. But they don’t understand that OPEC or the Saudis could offset whatever new production we bring on by cutting back their own.
Norman: And if you look at the last 40 years, you’ve had non-OPEC production grow something like 400 percent and OPEC production come down around 5 or 10 percent. So they’ve offset a lot of the new production for non-OPEC, and that’s why prices keep going up.
Faulkner: That’s correct. Two things are occurring. Right now on this planet, we use 88 million barrels of oil a day. Every model we’ve looked at, and forecasts even from the EIA and the IEA internationally look at about 110 million barrels a day of usage by 2035. The numbers are going up. Supplies in the Middle East, though, are starting to come down. They have a lot of conventional assets that are in heavy decline.
We have unconventional assets that we’re finding by the boatload. So I think the oil puzzle is definitely starting to shift. If you watch the OPEC meeting that we just had a couple of months back, the Saudi energy minister, when they started talking about fracking and shale, he got angry and started talking in Arabic and refused to continue the conversation, because you touch a nerve with these folks.
They’re saying look, fracking in the U.S. is going to become a major player, a powerhouse in oil and gas. We have 100 years of natural gas. And if we keep going down this road, we’ll be supplying our own needs at 10 1/2, 13 million barrels here by 2020 or 2025. Then you can serve Saudi Arabia, and more importantly, Qatar. When they were going to produce all the natural gas we needed and they built those terminals to send gas over here through liquefaction, we said, “Hey, we don’t need it anymore. Within five years, we found so much gas in 2005-2010; we don’t need your gas.” They sent that gas over to Asia, and specifically China.
But now we’re going to China with our technology—horizontal drilling and fracking—and teaching China how to do it. So then they’re saying, “Hold on, China is our new customer.” Then it becomes America again saying, “China, if you start using these tools and techniques, you can produce your own gas from natural gas there in your domestic shalegas field.” And so Qatar says, “Hold on a minute, we don’t want that to happen.”
This summer, you might have heard of a movie that came out called “Promise Land,” with Matt Damon and Hollywood. It was about kind of an anti-fracking theme.
Norman: Outside of Hollywood.
Faulkner: It’s all made up. Abu Dhabi, Image Nation, financed 60 percent of that film. So the Middle East paid to produce a majority of that film. It had a very anti-fracking narrative to it. So I think what it shows is the Middle East is concerned.
And just recently a Saudi prince came out and said, “Look, we’re deathly afraid of North Dakota.” They said this out of Saudi Arabia. They’re concerned that the Bakken shale is surging continually with new oil production. And they’re worried: “America is becoming an oil island. They’re not going to be our customer anymore. But more importantly, what if they become self-sufficient and independent and can start exporting crude oil? They could start being a competitor to the Middle Eastern oil.” I think that’s where some of the concern lies.
Norman: That’s incredible. And earlier you touched on the new technologies, the shifts into electric vehicles. This is not going to be rolled back; this is here to stay. So what does that portend for the long term? What’s the outlook then for oil when we’ve been hearing for so long about the peak oil situation? We may be in a period where oil can enter into a long-term decline. Is that possible?
Faulkner: I think with the current supplies that we have today, and our production numbers where we’re at, 7 1/2 million—more important, the resources that we have … We’ve got the Bakken, and the Eagle for the Monterey was just discussed out in California. It could be five times bigger than the Bakken. The new field in Siberia that they found that’s shale driven, it’s liquid, it’s oil—they’re talking about 10, 15, 20 times bigger than the Bakken.
So planet wise, we’ve got a ton of new oil reserves. I think the idea of peak oil is out in the window, even though it’s been recycled so many times. And I think commodity wise, we’re dealing with $100-plus or average commodity. Oil may pull back and go into the $90s, and it may go into the $110s, but overall I think we’re dealing with a $95-100 commodity going forward; oil will continue to rise over the next 10, 20, 30, 40 years. Because just look at India, Latin America, China; these GDPs,these need demand pulls from those countries.
Just those alone, and the population growth we’re seeing on the planet … It took us 35 years to get from where we were, like 3.5-4 billion to 7 billion. It’s going to go take us 15 or 20 to get to 9 billion. So we’re moving at a very, very rapid pace. And that’s why I look at those EIA numbers saying we’re using 88 million today going to 110 million every single day; that’s 22 million barrels a day of new oil we have to find just to keep up.
Norman: Great stuff. Chris, always a pleasure having you. That’s it for now folks. This is Mike Norman, saying, see you next time.