It's All About the Energy
In 1971, President Nixon ended the United States’ commitment to convert dollars into gold at a fixed rate of $35 per ounce. In effect, the U.S. Government defaulted on its commitments and started the era of unlimited fiat.
Unlike fiat, gold was tied to the physical world and required energy to mine. This characteristic made gold an “un-forgeable” asset that had been used as a store of value for millennia. In the decades since moving off the gold standard we have seen unprecedented inflation.
Government debt since 1971 rose from ~$500 billion to nearly $31 trillion in 2022. The cost of electricity and food have risen ~10x, the median home price went from $25k to $428k, the wealth gap has exploded with the top 1% now controlling more wealth than ever.
Cumulative inflation is up over 600% since 1971 and the effects on society and our economic systems have been noticeable by anyone who is paying attention. This phenomenon is not a bug, but a feature of the fiat system. Fiat’s killer application was unlimited debt.
In 2008 we saw a crescendo in the perils of the fiat system when the Mortgage Backed Securities debacle nearly toppled the global financial system and governments around the world had to bail out the banks. Then on October 31, 2008, an anonymous figure sent an email that changed the world.
Using the pseudonym Satoshi Nakamoto, a white paper was sent to a cryptography mailing list describing a digital cryptocurrency, titled "Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin is an online payments system that doesn’t require a 3rd party intermediary.
There are two components of Bitcoin. Bitcoin the protocol (the network) and bitcoin the token (the currency). Like gold, Bitcoin ties its production to the physical world by expending energy to “mine” new units of the currency.
Thread below on why Bitcoin has value:
In the years after Bitcoin’s creation, the token had no value in fiat terms but in the subsequent decade we saw bitcoin rise in market cap to over $1 trillion in value. But with Bitcoin’s rise, so has been the rise in critics of the technology.
There are many criticisms of Bitcoin, but one of the most common is Bitcoin’s energy consumption. As the Bitcoin network security grows, so does its energy consumption. Like our traditional business (oil & gas), Bitcoin is continually under attacked about its carbon footprint.
Many of these criticisms are misguided. Bitcoin’s energy consumption is the “secret sauce” that allows for the network to remain decentralized. The network is the first time we have had large scale energy demand that is location agnostic, it’s a paradigm shift in energy.
Competing “cryptos” like Ethereum, have moved to a proof-of-stake model that ditches energy consumption in favor of a “staking mechanism” that attempts to solve the problem of decentralization. The POS model has many similarities to the fiat model.
Almost immediately after ETH switched to POS we saw the issues everyone warned would happen start to materialize. Currently nearly the entire ETH network is now OFAC compliant, showing that it is not censorship resistant & subject to traditional banking regulations.
Critics of POW contend that the network is still centralized because large mining companies can gobble up the hash rate. But in late 2022, with hash price at ATLs, we are seeing the opposite happening. One of the largest Bitcoin mining company announced last week it is insolvent.
Bitcoin is like gold. You can’t cheat it. No printing your way into more of it. And unlike proof-of-stake, there is real world execution risk. Bitcoin is un-forgeable, you can’t just stake your way into more of it, you have to put in the work.
As the price of energy rises and the difficulty to mine increases, only the most efficient Bitcoin miners will continue to be profitable. As designed. Imagine that, a monetary system that is governed by the invisible hand of the markets and competency of the builders.
In a world where inflation is running rampant, unelected bureaucrats are manipulating the world’s monetary systems, and polls are showing that faith in our establishments is at an all-time low. Satoshi’s invention is more relevant and prophetic than ever.
Happy 14th Birthday to the Bitcoin White Paper.
Talk Energy Podcast
Talk Energy #148 guest is Joe Brevetti the founder of Charter Oak Production. Joe is a long-time veteran of the oil and gas industry and spent the early part of his career working for Schlumberger and later went on to form his own exploration and production company, Charter Oak Production.
This episode we discuss Joe’s career in oil and gas and the lessons he learned that gave him the skillset to start his own company. We talk about taking the leap and becoming an entrepreneur, dealing with uncertainty, and understanding how to adapt in the volatile commodity business.
Lastly, we discuss current the current events unfolding around the world’s energy markets. Hope you enjoy the show!
Ancova Market Update
Crude Oil
Today, WTI is trading at $88.23/ bbl. The most recent EIA Report from earlier this morning reflected a decrease in crude production, crude storage and SPR storage.
The U.S. Commerce Department announced the third quarter GDP increase of 2.6%, which came a surprise to most analysts. This increase reverses the prior negative GDP growth from the first half of the year. The U.S. SPR releases/ crude exports, totaling ~1mm bbls/ day, was the main contributor of the GDP increase.
U.S. production companies continue to receive mixed messages from the White House while demanding increased production. The White House has accused oil companies of price gouging, war profiteering, and record profits while threatening the industry with windfall taxes.
The EIA Petroleum Status Report for the week ending October 28th, 2022 was released on Wednesday, there was a 3.1mm bbl draw from the previous week. At 436.8mm bbls in crude storage, it is 3% below the five year average. Crude production had a minor decrease from the previous week. Cushing storage increased another 1.3mm bbls on the week. Refinery run rates increased back up to 90.6%. Crude exports decreased 1.2mm bbls.
Rig Count Update:
The U.S. O&G rig count increased by another eight rigs on the week, up to 890 per Enverus, making it the highest total since Nov 2019. Among the major basins, the Permian accounted for eight, Haynesville dropped three, Eagle Ford stayed flat and all others added a lone rig. Of the 890, oil rigs account for 683 and gas rigs make up 207. The tone of industry analysts and “experts” continue to be bullish on the overall rig count in 2023. An internal survey of 70 customers conducted by Patterson-UTI suggested an increase of at least 90 rig additions between now and the end of 2023.
Natural Gas
After opening the week in the high $5 range this week, Natural Gas prices have bumped above the $6 range throughout the week. With this week’s weather forecast in most of the US showing warmer than normal temps, expect prices to continue bouncing around as the weather patterns are mixed. Prices appear to have a mild start to winter built in, however, with the next few weeks showing a shift toward colder temps, time will tell if winter heating demand kicks in and begins to dent the inventory build. With record domestic production and storage facilities filling up since the end of summer, all eyes will be focused on any signs of an unusually cold winter that could send prices soaring.
Midcon prices have continued to fall off this week. Yesterday’s total net flows into the region dropped to its lowest levels since March. Total Midcon demand is expected to continue downward to 13.6 Bcf/d, over 2 Bcf below the previous week according to S&P Global Commodity Insights. Chicago city-gates lowered to a $1.04 discount to Henry Hub, ANR-OK is coming in $0.97 off Henry Hub at $3.54 while NGPL-Midcon is $1.91 back at $2.60.
The EIA released storage numbers this morning, coming in at 3,501 Bcf, representing a net +107 Bcf increase from the previous week. This increase was slightly above marketplace expectations of +100. Stocks were 101 Bcf higher this time last year, however, this week’s levels are still within the 5 yr. historical range of 3,636 Bcf.
Natural Gas Liquids (NGLs)
Mont Belvieu and Conway products all higher compared to prior week, with the exception of ethane, down 1% and 7%, respectively. Propane and heaviers were between 1 and 4% higher. A bump in crude price pushed price per barrel lower (see below), although changes were mild.
ANCOVA DISCLAIMER: The opinions expressed in this report are based on information which Ancova believes is reliable; however, Ancova does not represent or warrant its accuracy. These opinions represent the views of Ancova as of the date of this report. These opinions may be subject to change without notice and Ancova will not be responsible for any consequences associated with reliance on any statement or opinion contained in this report. This report should not be considered as an offer or solicitation to buy or sell any securities.