Big Energy's Ponzi Scheme.

Author:Verleger, P.

Charles Ponzi was an infamous swindler who paid returns to early investors with funds received from more recent investors. The term "Ponzi scheme" was named for him.

One can argue that some of the world's largest energy companies are engaged in a Ponzi scheme of their own. The scheme's nature was explained by Total CEO Patrick Pouyanne in a speech delivered at the 2017 Oil and Money Conference. Pouyanne asserted that a sharp fall in investment has led to a decline in new projects. This decrease could result in a crude oil shortage after 2020 with an implied oil price spike.

Pouyanne added that his firm "would play its part in replenishing the industry's project pipeline," thereby boosting global supply. In his view, the industry would be better off with prices in the current range than with a return to $100 oil: '"$100 per barrel would be bad news,' he said, recalling how prices above that level before 2014 'opened the door to other technologies' such as U.S. shale and renewable energy," as the Financial Times reported.

Pouyanne's firm, as well as other large oil companies such Shell, ENI, Statoil, and Rosneft, are all increasing expenditures on costly exploration efforts. These programs often cannot be financed from cash flow, especially with oil hovering around $50 per barrel and natural gas in world trade moving for half the price of five years ago. Consequently, the companies must turn to debt markets to fund their exploration. One can argue that the debt offerings are a "hydrocarbon Ponzi scheme" because the...

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