Dispatches from District 48
From hedge fund manager Reagan Silber, via South Bend Seven:
If you are long oil, you are short ingenuity.
My post on the 19th century Peak Whale crisis is here.
The huge worldwide environmental industrial complex (EIC) is dedicated to making sure that humans won't find an acceptable alternative in time. The EIC fights nuclear energy, it fights biofuels, it fights oil sands, shale oils, offshore drilling, clean coal, gas to liquids, and anything that might possibly work.
The only forms of energy the EIC supports are those exorbitant approaches that cannot possibly provide reliable baseload power -- wind and solar.
Peak Whale has nothing to do with this crisis except as a symbol of the environmental industrial complex and its ability to stop all feasible large scale energy projects.
That sums it up beautifully.
The energy content of a tank of good-old-fashioned unleaded gas is pretty incredible. I suspect that the problem is not one of ingenuity as much as economics - all the energy-storage replacements (for cars) are very expensive.
I for one will never put my kids in a car carrying Lithium batteries (having seen one burn up).
I think that you are missing the boat. We did hit a peak in whale oil production and had to find substitutes. Petroleum was that substitute and not only provided us with a substitute for whale oil used for lighting but with other very useful products and the cheap energy that has been the the basis of modern society for the past 150 years.
Being long oil does not mean that you are betting against technology and progress because progress is natural. The bet is not against progress but on the expectation that the transition will not be a smooth one. People who have followed the debate can see the EIA/IEA/CERA/USGA change their approach. Not long ago they all stood up and said that supply will be able to meet the growing demand of the world economy. The depletion rates being thrown around were low (2%-3.5%) and new projects were supposed to not only offset that production but add new barrels to the market every year as far as the eye can see. But the tune has changed recently. We now are noticing that the depletion rates are much higher and that fields that have used new technologies to get oil out of their reservoirs faster are suffering substantial decline rates as water cuts shut off flow from horizontal wells and the aggressive use of water drives has trapped oil that could have been removed if less aggressive methods had been used. We are now hearing stories of peak demand as stories are being spun about alternatives cutting into the market share of petroleum. But $100 billion a year in subsidies given to the alternative energy companies have failed to produce much energy. That means that oil prices are heading higher until someone comes up with a viable alternative that makes sense at that higher price point.
The goal of investing is to get as high a return as we can while taking the least amount of risk. From what I can see there is a lot less risk being long the cash-rich efficient producers in countries where political risks are priced properly than in betting against them. (For the record, I do not consider the risks in the US to be properly priced in and would avoid many of the American producers because there are better alternatives.)
Unfortunately it is not so much a theory as a careful analysis of mountains of data by a growing number of thoughtful geologists who have been in the business for years and are seeing the relentless trends of declining discoveries (since the 1960's).
As Vangel just pointed out all of the "political" forecasters (EIA/IEA/CERA/USGA) are now starting to look at the actual field by field data instead of just assuming that ingenuity will reverse the long term trend. And they are quietly but steadily getting much more conservative about future production. And they are doing this against the wishes of their political backers.
It is true that the BP's and Exxons are denying it but they have to or their stock price will go south quickly. But more courageous CEO's from some majors are starting to sound ominous about future suppy.
It is easy to say that good old ingenuity will find much more cheap oil but I prefer reality to wishful thinking. After two years of studying the data I am starting to bet long. But I am not happy about it. I prefer cheap energy and good economic growth. And like Vangle I am not betting on American producers. Their decline rates may be the highest.
It is not geologists who are promoting peak oil doom nonsense, but idiots like Matt Simmons and Kunstler. These guys are making money from books, seminars, newsletters. A sucker born every minute, what?
Last summer's demand destruction crash-bang was a good example of what happens when speculative peak oil tries to jump ahead of real world oil depletion by a number of decades. Not a pretty picture. It can happen again and again for many times over the next few dozens of years. The gullible sucker just never learn. They are being played like patsies.
Theory vs. Hypothesis
Just a nitpick but if you want to object to anything (global warming, peak oil,etc.) your language is important. In real science "just a theory" is not a very meaningful expression. You might want to call it a hypothesis. When something reaches theory class it is pretty powerful. Scientific ideas are not called a theory until they have been examined for years and found to have predictive power.
I still consider global warming and peak oil to be hypothesis. Calling them a theory is giving them too much credit at this point.
But I am starting to worry about peak oil. I haven't lost any sleep over global warming.
"Being long oil does not mean that you are betting against technology and progress because progress is natural. The bet is not against progress but on the expectation that the transition will not be a smooth one."
Not quite. The bet is on a rough transition AND you being able to time that transition better than other investors.
Actually, that doesn't even capture the complications. You don't need to time the transition better than other investors, you need to time the market's expectation for that transition better than other investors.
Even if one concedes the utter inevitability of peak oil that still does not suggest an optimal investing strategy.
"If you are long oil, you are short ingenuity."
A good one liner, but it doesn't address the issues.
I for one, would NOT be backing that hedge fund, if that is the quality of their decision making!
Good to see you still have an interest, How is your dad going?
I am long on oil (via an ETF) because:
1) The enviros will cause additional oil crises in the near/medium term
2) The political instability in the middle east
3) As an inflation hedge.