ExxonMobil and Venezuela navigate the media with guile and shredded bravado, respectively (of course)

Just how wrong can an expert be?

That sounds like a fairly stupid hypothetical question; obviously they can be exactly wrong, particularly when it comes to things like forecasts. These are proved right or wrong by time,and of course most of them will be wrong. The purpose here is to look at some statements that are beyond simple forecasts, to look at a few recent prognoses offered by some of the world’s most senior oil executives that, on the face of it, seem inescapably half-witted.

In the past month or so, several energy industry luminaries made headlines while talking about the state of global oil supply. What they had to say either defied simple logic or, in the second case, any logic. But neither person is dumb; there must have been some reason for what they had to say. We may have to guess at their motives, but we can be sure that they knew that whatever came out of the top of their expensive suits would be considered seriously, because of who they were and, well, because they were really expensive suits.

To the examination table. First up is an industry titan who heads the world’s largest oil company. At a recent conference, ExxonMobil CEO Rex Tillerson’s perfectly coiffed silver head gave a startling little speech. He opined that there was no supply shortage on the horizon largely because of US shale supply, and that people shouldn’t underestimate the ingenuity of the oil patch. This is true; US shale supplies are indeed a significant resource, and it is a resourceful business. But the assumption that these new shale plays can backfill global declines is shared by virtually no one except localized cheerleaders.

Hey, I don’t know what he’s up to, so you won’t find answers here. But it does help to remember that a lot of people in the media “talk their book”; that is, they advance ideas or positions that indirectly benefit their position. Never trust a trader being quoted in the news, if he doesn’t disclose his positions, because odds are he’s (and people engaged in these shenanigans are pretty much always “he’s”) utilizing the media in a way that will benefit his positions. It is hard to imagine he’d do the opposite, when it’s all opinions for which he could never be held liable.

Back to Tillerson, it helps to remember the context of where he is speaking from, what “his book” is. First off, to eliminate the obvious, US shale production is simply not up to the task of offsetting the massive amounts of capital that have evaporated. US shale oil production peaked at 5 million b/d, at a cost of perhaps half a trillion dollars. Sweet spots are being drilled up as we speak, and it would take a considerable optimist to see US shale getting to 10 or 15 million b/d in the next 10 years. Yet that would be required, and then some, to offset what is happening in the world. China’s output is way down, as is Venezuela, much of Africa, the North Sea, the US, and large parts of OPEC which are being starved of capital. A few significant parties have increased production (Saudi Arabia, Russia and Iran) but nowhere on earth is there considered to be a sizeable cushion of spare capacity (other than Saudi Arabia with its claimed 2 million b/d surplus). For the rest, an estimated $1 trillion in capital has disappeared.

Mr. Tillerson thinks $60 oil will bring that back? Any major new oil production development over the past decade only happened because of oil prices far above that. Furthermore, if oil prices rise to $60 per barrel, drillers better watch out for price hikes – it’s started already in Canada as rig rates are rising in an industry that is insolvent at $50 oil. So, US shale is going to have a tough time growing at all, never mind filling the global shortfall.

Having said that, why would Tillerson be so certain (and he certainly sounded certain) in stating that? It comes back to context, where we have to guess, but consider who he’s speaking for. ExxonMobil is such a global powerhouse that it deals with issues from a level it is hard to comprehend. The company is being investigated by the SEC for how it values its oil reserves despite the fall in crude prices. It also is being hounded for various climate change war crimes, such as speculation that it knew about the phenomenon in 1981 but covered it up, or whatever that witch-hunt alleges.

At any rate, Tillerson is most likely not offering these comments in a totally objective commentary about balancing global markets. Parsing his words, he backs up his position with the world’s weakest propaganda rather than any substantial argument. It is therefore most likely that his comments are aimed at another purpose. That’s neither here nor there; the point is that it pays to consider the source before ascribing any value to these statements just because they came out of such perfectly distilled essence of executive. The purpose of the speech, and its contents, may have been quite different than the distillation picked up by the media.

Now for something completely different. Shortly before the ExxonMobil story made headlines, Venezuela’s oil minister Eulogio del Pino made similar sized headlines by announcing that global oil markets were oversupplied by 10 percent. If that didn’t faze you, this should provide the missing spit-take – that’s 9.5 million b/d. Removing that amount from the global scene would send prices to the moon and back. Of the countless estimates of global oversupply over the past 3 years I’ve yet to see one that exceeded 3 million b/d, and that sounded crazy. Mr. del Pino went all Trump on the existing record.

Whereas Tillerson’s speech came across as calculating and aimed at a higher purpose, del Pino’s may be simply a near volcanic verbal eruption not linked to any particular thought in his head. Consider the beasts clawing at the poor guy’s door as we speak – the country is imploding, production is falling, oil workers are trading work clothes for food, the state oil company wants to issue $5 billion in debt just to pay service companies, etc. For this poor guy, there is a jumble of big numbers in his head and none of them are good, so we shouldn’t be too surprised if there was a faulty neurotransmission. It’s hard to recite even your birthdate if you’re on fire.

Media coverage can be quite frustrating, veering from minute by minute market commentary to macro level stories like those above that aren’t to be believed. It’s no wonder the energy business has a tough time explaining itself.