Peak Oil (Investment) / Inflation

An insightful video was posted on YouTube by Wendover Productions that reviewed events in the past 15-20 years of history in the oil industry and ties them together with one key conclusion. The market shock encountered early in the pandemic where some oil prices briefly went NEGATIVE acted as a final wake-up call to the oil industry and put us in a situation where we aren’t technically at “peak oil” but we ARE at a point where we are at (past?) “peak oil investment.”

Here’s the link to the video ---->

The slightly longer summary of the video boils down to this sequence of events.

Fracking technologies altered the cost structure of oil production significantly. Prior to fracking, typical means of production had very high fixed up-front costs but yielded lower average costs. With fracking, lower up-front costs of fracking on land allowed small players to enter production markets and cheap interest rates acted as a subsidy (for a while) but average costs of fracking are significantly higher than traditional means.

In relatively stable times, the boom in production volumes made possible with fracking firms (temporarily) destroyed the market leverage of OPEC. That new equilibrium could be sustained as long as market prices were above typical fracking incremental costs (which were/are HIGHER than traditional production).

When the COVID lockdowns began and demand for crude PLUMMETED, the inertia of daily production and inability to literally STOP production overnight briefly created NEGATIVE prices for crude in some markets. Producers literally had to pay refineries / tanker farms to absorb their production until demand returned or producers could shut down facilities.

Over the last twenty years, growth in the value of energy stocks is about par with inflation, meaning investors in fossil fuel firms haven’t made serious returns compared to other high flying sectors. Energy companies have looked at all of these factors and have flattened or cut back investment. For those firms that really cut back during the negative pricing blip of 2020, many have not returned that capacity to production. However, market demand HAS returned since that Spring 2020 nadir. That has led to a sustained gap between supply and demand. The only possible result when demand outstrips supply is a spike in prices. Yet because oil companies see electric vehicles growing in popularity and they have already delivered weak results to their shareholders, none want to “re-invest” by resuming suspended petro-capacity and are timid about getting into alternatives where their expertise and competitive advantages are not evident. In short, this spike over the last 18 months

  • has little to do with fears over Russian actions in Ukraine
  • has little to do with fears about other actions Russia may take
  • has little do do with any domestic regulatory restrictions or opportunities
  • has little to do with politics on any side

Most importantly, prices will likely go higher as investments in traditional production sources stay flat or decline.

Which brings up larger questions about causes for inflation and what – if any – actions can be taken to return it to prior abnormally low levels.

The key statistic I consider each time I hear news broadcasts airing stories about people selling kidneys to fill up their SUV or paying $20,000 for daycare or paying sticker for cars that take eight months to deliver is this…


Stop and think about that. Thankfully, there are very few children in that toll. Per the CDC’s website at one finds

  • 743,015 deaths were people 65 or older
  • 213,436 deaths were people 45-65
  • 42,247 deaths were people under 45

If you look at COVID CASES as summarized at this site ---->… the number of cases in the US of people age 18 to 65 is roughly 50.9 million people.

Think about these statistics from a labor market standpoint. Assuming the cases not ending in death only involved a 2 week absence from work, the case quantity means we lost 101 million weeks of labor over two years. For the fatal cases, we LOST 255,683 workers entirely.

Think about the impact of long-haul COVID on these numbers. Estimates range that between 14 and 30 percent of people contracting COVID experience long-haul symptoms that range from merely unpleasant to chronic brain fog / fatigue / pain. If only 10 percent of the long-haulers are experiencing those extreme symptoms, that could be another .10 x .30 x 50,900,000 or 1,527,000 people not fully present in the labor force.

Think about the secondary impacts of those deaths and cases. It would seem safe to assume for most of the working-age deaths, many involved hospitalization which resulted in a partner losing work time visiting the patient or doubling up on parenting duties. Think of the labor sectors where the experience of dealing with irate parents and the public led people to walk away from a medical, teaching, retail or restaurant position. Most people making those decisions – especially higher up the skill ladder – are NOT likely to return to those positions soon, if ever. That is producing upward wage pressure as firms become more desperate to retain the employees remaining, especially as demand (routine doctor visits, in-class learning, eating out, etc.) returns to normal levels with FEWER workers.

There’s no mystery to the inflation being seen now. And no instant cure for it exists in the economic or political realm. Economies around the world are going to have to sort out priorities and hope an equilibrium is re-established without nefarious actors with highly leveraged bets behind the scenes further disrupting the process while trying to protect their narrow interests.



Excellent video on oil industry investment and fracking.

On the COVID deaths, someone is profiting from the 250,000 or so “voluntary unvaccinated COVID deaths” since the vaccines were readily available as of May 2021. That wasn’t done by accident.

The obvious culprits are social media platforms like Facebook who can boost ad revenue by feeding misinformation to users to gin up “engagement”, same thing with Fox “news” and its evening opinion shows.

There’s even one Florida doctor who amassed a $100 million fortune off of vaccine disinformation.

The Most Influential Spreader of Coronavirus Misinformation Online…

Researchers and regulators say Joseph Mercola, an osteopathic physician, creates and profits from misleading claims about Covid-19 vaccines.




What a terrific post.

Your summary of the crux information is dead on. My “working interest” tiny % ownership on a large number of wells as well as ownership of mnineral righrs scattered over much of the “likely good for future fracking” Eagle Ford formation give me a close up look at what you describe.

A couple of months ago there was a flurry of “bottom fishing” low ball offers on some of my potential fracking interests after a few years of silence. My ancient still pumping working interests are showing very good profits, and the controlling partners are not only doing regular maintenance but also making some optional enhanmcements that will payoff over ten years or so, but will not significantly increase actual output for a few years.

GCC and the transformation of energy production and usage is a huge story, but mostly still ignored in day to day decisionmaking. However, Russia invading Ukraine has made it clear that the world’s post WWII mode of existence is rapidly dying, with China’s still mostly obscure “difficulties” promising more radical change real soon. The collapse of the central power of Eurasia – Russia – (and I now think that is close to inevitable real soon now) means the economic and political relations of the planet will be very very up in the air. E.g., nations will almost certainly withdraw from world wide just in time trade in goods and instead form smaller trading blocs that mutually assure their members of access to vital goods; the UN, beyond its mixed bag of agencies, is basically dead until Russia is replaced; the Dollar will rule supreme (with the Euro as a slowly rising adjudant); and political legitimacy will mostly be far more fragile almost everywhere bringing far less effective policymaking and much more chaos and misery.

We are entering a very different era. I believe the feeble attempts at holding back GCC were failing even before Putin lost his mind, but now they have been harpooned by the war and the obvious invulnerability of oilgas barons whether the Saudi princes, Norwegian Oil Fund, investors in Exxon, or (on a micro mini scale) yours truly. The real action will NOT be a rapid shift from oil, but a realingnment of long term planning by nations and the rich to an obsession for staying out of and limiting their individual danger from destructive heat, violent weather, and desperate populations. Where will the people of Bangladesh or the Sahel go?

david fb


WTH, it’s a pleasure to read your excellent analysis, as always.

<There’s no mystery to the inflation being seen now. And no instant cure for it exists in the economic or political realm. >

A large part of the consumer price inflation came from the fiscal stimulus (helicopter money called “Economic Impact Payments” or “EIP”) showered on the U.S. population in 2020 and 2021.

Federal Net Outlays as Percent of Gross Domestic Product were 31% of GDP in 2020 and 30% of GDP in 2021, adding up to a mind-boggling $13.37 Trillion. Compared with roughly $4 Trillion in 2017, 2018 and 2019. (GDP in 2021 was $24 Trillion).

The monetary stimulus ($9 Trillion to date) from the Federal Reserve from 2020 to 2021 did not cause significant consumer price inflation, mostly because it was loaned to banks which directed it more toward the asset markets than to consumers.

M1, which is liquid assets readily spent by consumers, increased only gradually until 2020, when it spiked. Much of the helicopter money was saved even though Personal Consumption Expenditures increased as the largesse was intended to do.

Spiking the consumer demand side for goods and services with such a huge amount of money at a time when supply was restricted inevitably led to consumer price inflation.

The Federal Reserve is trying to solve a fiscal excess using monetary means (raising the Fed funds rate and allowing longer-term Treasury and mortgage bonds to roll off its books). Raising Treasury rates does affect the consumer housing and auto markets, but not really day-to-day consumer spending. Thus, the only way to reduce consumer demand is the heavy hammer of recession, which causes job losses.

Eventually, the excess fiscal stimulus will pass through the economy like a pig through a boa constrictor. Then inflation will moderate as demand begins to equal supply.

But…going back to what you wrote…

The roots of inflation which you mentioned are more like secular trends than a “lump” that needs to be digested. The energy supply and the labor supply imbalances may not be as easily absorbed. They are certainly not under the influence of the Federal Reserve.

This implies that inflation will remain high for an extended period of time. The Fed will slow the economy with higher interest rates but inflation will remain high. This is classic stagflation, which I personally remember from the late 1970s.

The bond market appears to believe that inflation will be reversed by the Fed’s action within a very few years.

What is your opinion of this?


There’s no mystery to the inflation being seen now. And no instant cure for it exists in the economic or political realm.

Oh I would not call it a cure, the medicine will kill the patient.

The FED is normalizing interest rates plus. The USD is appreciating strongly. Commodities will drop nominally in value.

I am realizing Truman had tax rates at 90% in the top bracket not just to grow the US economy because during this part of the cycle demand is so extreme inflation is very ugly.

In other words if we do not raise taxes on the super wealthy y’all’s savings will be ruined. Or what you invest in will be swinging into economic recessions every time the FED has to hike rates and reduce the money supply to cut off inflation.

Truman was after FDR’s socialism. Truman was not a socialist. Give it up already.

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In other words if we do not raise taxes on the super wealthy y’all’s savings will be ruined.


I agree - most of the super wealthy are blood suckers, and they can still live in the lap of luxury with higher taxes.

I will try to provide a combined response to Wendy and Leap1 since there are overlapping factors related to some of their questions.

First, Wendy’s question referred to “secular inflation”, a term used to distinguish between influences stemming from millions of individual decisions of people IN an economy from the influences controlled by a relatively small number of policy makers and central bankers controlling “knobs” on the overall machine. The “secular” factors are thought of as providing reinforcing feedback as expectations of future inflation are incorporated into labor contracts, material contracts, interest rates on bank loans, etc. These secular factors thus contribute to inflation by trying to keep up with it. Because of this, when I hear the term “secular inflation”, I presume people are referencing inflation present for years because of those baked in human expectations which are very difficult to counteract.

The point of my post was that what might normally be analyzed as one-time “physical” shocks are likely to become an ongoing source of upward inputs into overall inflation. Rather than thinking of the inflation number at any point in time as ONE number due to ONE cause, we need to think about inflation in layers. Each layer’s thickness will vary over time but tackling the entire inflation number as though purely caused by faulty monetary policy (money’s too easy, raise rates) or caused purely by supply / demand shocks (spending stimulus) will worsen the situation.

The original post addressed two of the biggest factors getting people’s attention related to inflation – energy prices and wage rates. The news runs trite stories about “pain at the pump” and restaurants having to pay $15-19/hour to get anyone to show up to work, triggering price spikes for dining, etc. Those have very direct causes which have nothing to do with the hundreds of billions pumped into the economy by covid recovery programs. They stem from the supply of something being drastically reduced (shutdown of wells or fracking sites or people leaving specific job functions due to poor conditions, stress, etc.) or hundreds of thousands of workers DYING and being unavailable at any price in the labor market.

There are other factors at work which I expect will also contribute to ongoing higher inflation. As a worst case example, the worst kind of shock shifts BOTH supply and demand curves. Wars are a perfect example of this type of shift. The war in Ukraine is increasing the demand for steel in the short term (for use in weapons) and in the longer term (for eventual reconstruction of homes, businesses and infrastructure for at least 10 million people). But the same war is reducing supply for steel by destroying steel plant capacity in Ukraine and dislocating workers in the entire supply chain required to produce it. If you take the classic upward sloping demand curve and downward sloping supply curve and move them both to reflect an across the board increase in demand AND reduction in supply, the equilibrium price goes up.

Here in America, the skyrocketing pump prices have more people considering electric vehicles when they might not have previously when gas was $2.40/gallon. Can everyone suddenly interested in getting an electric car who was already in the market for a new car obtain one? Not at all. There is still a finite manufacturing capacity for the underlying battery packs and there are underlying supply issues for the rare earth metals needed by those battery plants. There may be enough capacity in those systems to go up 50% or 100% but probably not 5x or 10x. Until those supply issues for raw materials are corrected, what’s a car maker going to do if they only have enough batteries for (say) 400,000 cars? Do they put them in the $27,000 car for high mileage commuters and new grads that have profit margins of maybe $2000 per car? Or do they put them in the $80,000 luxury SUVs that have a profit margin of $15,000 per car and buyers who can afford following the price curve up? They put them in the highest margin cars with the least price sensitivity and there you go… Average car prices skyrocket.

The US car market is about 15 million new vehicles per year. If ALL of those buyers wanted to buy a new electric car and the cars were available, do we have enough electricians to spend a day installing a charging port in the garage of each of those new car buyers? There are 625,000 electricians in the US today but they’re already pretty busy on home construction and existing work. If the volume of electric car sales skyrockets and electrician rates jump to attract more electricians into the field to do the work, that will look like inflation but has nothing to do with monetary policy.

Wendy pointed out a couple of interesting statistics. First, the jump in the M1 money supply reflected in monthly statistics after the covid relief programs were passed showed that many Americans didn’t go out and chase new toys with handout money, they simply banked it. One reason we didn’t see prices spike immediately in March/April of 2020 was that businesses were burning off existing inventories which, while thin by design, still provided some slack to handle demand for 4-6 weeks. Remember, everyone thought lockdowns would only last a few weeks, right? Instead of driving up prices for tangible goods, having that money in checking / savings accounts gave it to banks to chase short term asset plays trying to find something they could use to make easy money with OPM (Other People’s Money).

The second factor Wendy highlighted for review is the graph of interest rates on 5-year treasures from the St. Louis Federal Reserve. From looking at it, the only thing I can surmise from it is that those rates reflect an assumption that the biggest component causes in inflation right now are politically external (cough… Ukraine/Russia) and will not likely continue on longer than a year. My take is that they are not factoring in rebuilding costs and secondary political upheavals if territory has to change hands and millions require permanent relocation. I further think an assumption of lower inflation five years out is ignoring the possibility of other events I’ll call predictable black swans – economic events with generally large costs that cannot be forecasted exactly in magnitude or time but can be predicted thematically (see below).

While trying to avoid politics, I think there are other causes of inflation that have roots in long-standing policies that have not undergone sufficient review. For example, seeing housing prices (homes and rentals) rise 20% for consecutive years reflects major market failures being exacerbated by incoherent government policies at the local, state and federal levels:

  • NIMBY restrictions desired by CURRENT homeowners to limit NEW home construction nearby
  • construction labor market constraints due to both covid and immigration policy
  • huge quantities of homes being bought up by a new round of flippers / financial speculators

As a different sub-topic, another factor I feel will contribute to longer term inflation is climate change and near-term natural disasters stemming from it. Each new record hurricane or western wildfire that destroys 1,000 or 10,000 or 50,000 homes acts as another supply / demand shock, simultaneously creating a spike in demand while often reducing supplies of materials and labor. Philosophically, it might be a positive to have 50,000 homes that are 50 years old with ancient, inefficient HVAC and insulation replaced with homes filled with state-of-the-art, highly efficient components but imposing that demand as a square wave will always trigger inflation both for the materials and construction of those units and for temporary housing somewhere else in the meantime.

In general, I try to think of these processes like an engineer thinks of control systems with inputs, outputs and positive / negative feedback loops to respond to input changes without immediately halting or generating oscillations that feed upon themselves and eventually destroy the system. Or, I think of these processes like a CFO of a large, complex company, trying to figure out how much cash to retain inside the company to modernize “the plant” versus how much to shovel out to shareholders. Starve the plant of re-investment and the shareholders may be happy in the short term but your products will age and your productivity will decline and you’ll go out of business. Spend too much cash internally covering inefficient operations and the shareholders dump your stock and you cannot attract new investment to eventually modernize when you absolutely need to. You have to find a balance.

Unfortunately, as Leap1 pointed out, perhaps the biggest knob in the machine we can adjust – tax rates on the uber-wealthy – have been left at levels that are insufficient to fund modernization of all of the cogs and wheels inside the machine that produces value for us all. We are running on infrastructure that is 70 to 100 years old. It is failing or completely beyond its capacity (hello Texas electric grid operators!) and we seem to be lacking any recognition that very painful / disastrous / EXPENSIVE failures are days / weeks / months away, not years or decades.

Finally, there is a famous quote in macro / financial circles that “Inflation is always and everywhere a monetary phenomenon…” Most people leave it at that. The full quote from Milton Friedman is “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can only be produced by a more rapid increase in the quantity of money than in output.” In my view, the full quote is wrong. If inflation is measured by tracking the cost of a basket of goods over time and you have non-monetary forces like natural disasters, epidemics and technology advances altering the supply of or demand for goods in that basket, inflation can result without anyone firing up printing presses.

As Wendy pointed out, a key concern now is that the Fed seems intent on doing SOMETHING cuz by golly, their mission in life is to deliver “moderate” inflation (not too low to encourage bubbles, not too high to tank growth). Much of what we will be seeing won’t be caused by monetary decisions. Unfortunately, other players with knobs under their control don’t seem willing / able to tweak those knobs to adjust to the square wave changes in inputs. Since the Fed doesn’t have to run for office and feels more freedom to act, they are turning the only knob they control in the machine and it is likely NOT the knob we need tuned. Or, more charitably, it may help them chase some of the froth out of the economy but it will be insufficient to re-capitalize key segments of the economy to correct systemic imbalances and massive underspend for infrastructure.




Tell some of the knob turners if you get your way and cut taxes for the wealthy we will have tons more inflation and a deeper downturn as we go forward.

The idea there is no publicly discussed fiscal plan for curbing inflation irritates me. It is irresponsible not to tell the public what it takes regardless of your story…let the public take control of this.

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WTH, thank you for your illuminating post.

You rightly expanded your time horizon from the short-term (less than 5 years) to the long term. You mentioned the immense cost of infrastructure spending in the U.S. (That doesn’t include rebuilding Ukraine, which will surely expct the U.S. to chip in since Russia certainly won’t.)

The largest part of the federal budget is entitlement spending, especially Medicare and (to a lesser extent) Social Security. Current forecasts for deficit spending are mind-boggling.

**The 2021 Long-Term Budget Outlook**

**Deficits. At an estimated 10.3 percent of gross domestic product (GDP), the deficit in 2021 would be the second largest since 1945, exceeded only by the 14.9 percent shortfall recorded last year. In CBO’s projections, deficits decline as the effects of the 2020–2021 coronavirus pandemic wane. But they remain large by historical standards and begin to increase again during the latter half of the decade. Deficits increase further in subsequent decades, from 5.7 percent of GDP in 2031 to 13.3 percent by 2051 — exceeding their 50-year average of 3.3 percent of GDP in each year during that period.**

**Debt. By the end of 2021, federal debt held by the public is projected to equal 102 percent of GDP. Debt would reach 107 percent of GDP (surpassing its historical high) in 2031 and would almost double to 202 percent of GDP by 2051. Debt that is high and rising as a percentage of GDP boosts federal and private borrowing costs, slows the growth of economic output, and increases interest payments abroad. A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the U.S. dollar, making it more costly to finance public and private activity in international markets.** [end quote]

Three factors that were not included in the report would increase the government outlays, increasing the debt.

  1. In my opinion, the healthcare costs will be higher than predicted due to the growing obesity of the young-to-middle age U.S. population which will lead to shifting expensive chronic health problems of old age (diabetes, heart disease, dementia) to younger onset, resulting in longer periods of disability and dependency on government care.

  2. This report was written in 2021 after a long period of stable inflation. The assumptions made for interest on the federal debt are based on low interest rates which probably will not continue if inflation remains high for a long time. In the late 1970s, during the last inflationary period, interest on the debt was 1/4 of the entire federal budget. The report does not include that risk.

  3. As you described, much (if not most) of the nation’s infrastructure is old to ancient and desperately needs to be upgraded and/or replaced. Water systems, dams, bridges, roads, transit systems, electric grid. In 2020 and 2021, the American Society of Civil Engineers (ASCE) released five Failure to Act reports in a series covering 11 infrastructure sectors that are critical to the economic prosperity of the U.S. These reports totaled a funding gap of $2.6 Trillion until 2029.……

I’m sure that your opinion of Modern Monetary Theory (MMT) is similar to mine.…

Without thinking about resource constraints, the government has already made sweeping commitments which must be fulfilled. Without saying that they are practicing MMT, the government essentially does act as if the fiat USD will always hold its value despite enormous spending on non-productive activities like keeping millions of sick, old people alive.

The goods inflation in 2022 will eventually be resolved by building production capacity, thus bringing supply more in line with demand. (Except in energy, as you pointed out.) The services inflation due to staffing shortages will increase in the future unless immigration policy is changed to bring in more workers. (A highly-charged political issue.)

While Labor Productivity has grown steadily over decades, it is currently stalled. Any factor which increases material or labor costs (such as “nearshoring”) will increase inflation.

I see an inflationary future despite a recession in 2023. Do you agree?

What is your investing strategy to deal with the next 5 years?




Instead of looking to the worst regimes, look to Alberta for oil production: Premier

Jason Kenney, Alberta premier, joins BNN Bloomberg to discuss the pitch for Alberta to produce more oil for the United States. Kenney says we should be more ‘visionary’ about oil production, and build additional pipelines.


Or perhaps this fellow?



Oil swings with U.S. to allow talks with Venezuela oil company

Julia Fanzeres, Bloomberg News

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