Brilliant Minds, Sub-Optimal Outcomes in Investing: Ignore Oil and Gas at Everyone’s Peril

“Old” energy sucks as an asset class, yet not investing in it will undermine the driver of growth (cheap energy) that allows other sectors to soar. No individual investor is incentivized to support the common good.

In game theory, the Nash Equilibrium, named after the mathematician John F Nash Jr. (of “A Brilliant Mind” film fame), is a proposed solution of a non-cooperative game involving two or more players in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy. source 

To this we can add that the observation that such an equilibrium is often sub-optimal for all players, but as noted in the description, no player has any incentive to change. Players are “locked in” to a sub-optimal outcome. 

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Future Energy – technology will save us

Summary: With a focus on “Greener, Cleaner and Cheaper” energy, we are overlooking the possible negative consequences of cheap energy. More expensive energy can be seen as a big negative as it will slow economic growth, but cheaper energy could accelerate degradation of planetary resources. Damned if you do, damned if you don’t?

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

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What “Peak Demand”​ really looks like

Summary: Even in a “rapid transition” scenario the world will use over seven hundred billion barrels of oil in the next twenty years. This is more than 50% of the total oil produced since the inception of the industry in 1870. Since we have found and used most/all the cheap oil, inevitably the next 700 billion barrels will be more expensive. Peak Demand may be ahead, but “Peak Cheap Oil” is certainly behind us.

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

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The Cold Night of Forgetting*

Cold, dull, wind-less autumn days should make us think about the reality of energy security in a world celebrating high levels of renewable electricity supply

On a frigid autumn day let’s cast our minds back to the blissful dog-days of summer and the rampant headlines about how coal was now not needed and more than 50% of the UK’s power (meaning electricity) was provided by renewables. There has been a remarkable growth in renewable energy in the UK and whilst not blessed with much sun, wind is more abundant. Good news indeed.

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The real fossil fuel subsidy – its not what you think.

A “$5.2 trillion subsidy for fossil fuels” scream the headlines, followed rapidly by the conclusion that the subsidy-free “real” price to consumers should be much higher. The logic being that this artificially low price drives consumer demand of fossil fuels and thereby acts as a barrier to entry of renewables. The figures bandied about are eye-watering: US$5.2 trillion is 6.5% of global GDP… a very big number indeed. And this is a very emotive subject. So before getting onto the *real* fossil fuel subsidy, let’s take a moment to consider what is meant by “subsidy”.

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Time to “woke”​ up, oil still matters

Oil production companies are about as far from being part of the self-proclaimed “woke” set as you could imagine. A dinosaur industry with its head so far in the sand (to mix my metaphors) that it can’t even see that most of its assets will stay in the ground and be worthless. Woke people know that we will be 100% renewable by the middle of next month.

This week may not change public perception, but its a pretty big wake up call to all wokeists everywhere, if they bothered looking.

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The Voyage of the Malizia unintentionally debunking “zero-carbon”​ travel

There are many ways of looking at the voyage of the Malizia. In the first place it is a testament to Greta Thunberg’s integrity in following her principles. It may be a great adventure, it may be quite uncomfortable. Nature is pretty random. But overall, sailing trans-Atlantic is pretty cool, especially when on a peak-technology vessel with a highly experienced crew.

For many in the twittersphere, this is a beacon of hope, with the Voyage of the Malizia representing the future, with “zero-carbon” travel being proven. “If only everyone would do the same…” As/when they arrive in NY there will undoubtedly be a heroine’s welcome. If (and I sincerely hope not) they have to abandon and/or turn back, then I’m guessing that the “extreme” weather will be more proof of climate-change. Win-Win.

For the more cynical, the “zero-carbon” epithet so loved by headline writers is challenged on everything from Greta’s waterproof gear to the ultra-hi-tech four-million-dollar carbon-fibre race boat, to the various trans-atlantic flights of crew-members.

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What if there was no US shale?

In 1977 James Schlesinger (first US Secretary of Energy) noted that the energy markets have only two modes: Complacency and Panic. To that I would now update.

Disdain, Complacency and Panic.

Currently there is disdain for oil; we don’t want it, its unnecessary and pretty soon we won’t need it.

But of course the reality is that not only do we still need oil, but the demand is growing. This doesn’t play well, and headline writers love to announce that “oil demand is dropping” when what they actually mean is that “the rate of growth (of oil demand) is decreasing” – why let facts get in the way of a good headline? The day will come when demand drops, but it’s not just yet.

Demand is expected to increase by 1.3mmbbls/d this year, which is less than the 1.7mmbbls/d increase in each of the previous three years. To put this into perspective, global demand was c. 89mmbbls/d in 2012 when I started working in equity investing, and passed 100mmbbls/day in 2018. Ten million barrels/day of extra demand is a very big increase in just 6 years. But as Spencer Dale of BP puts it: “demand is the boring uncle, supply is the excitable niece”.

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How to stop Big Oil

It might seem odd that you never see advertising for crude oil, or petrol (gasoline). Oil companies may advertise their “brand”, but not their product.

No super-bowl half-time extravaganza, no online pop-ups or side-bars on Facebook, no “influencers” on Instagram, no pyramid selling-schemes.

Yet somehow, activists think that by targeting “Big Oil” and hitting the producers, they will stop consumption. The approach of consumer-activism has worked in many areas, notably Tobacco, Pharma and now in certain areas of processed foods and single-use plastics.

Generally, this approach works if the targeted product is not a necessity. How can you tell if a product is not necessary? Well chances are it has to be “marketed”, “advertised” and indeed “sold”. It may be the case that you just need to get your next great product in front of consumers, and they will lap it up. But mostly consumers are force-fed.

There is a vast subset of the working population who “innovate” products (ie make cosmetic changes and then try and sell more of them) and then use every psychological and psychosocial trick in the book – and in the cases of opioid based painkillers, cigarettes and alcohol, physiological tricks also – to get you to part with your money. It is not uncommon for people to have permanent storage solutions for the stuff they don’t need. There is now an industry of consultants ready to help people overwhelmed with stuff. When did that become normal?

Ironically, many people who work in the great machinery that is the consumer society are very middle-class, and very concerned about the eco-agenda. Undoubtedly recycling, doing carbon-off-setting wherever possible, and shopping organic and not using plastic straws at children’s birthday parties, maybe even cycling or driving a hybrid or EV to work. All the while pointing the finger at Big Oil as the cause of the problem and protesting that “something” must be done about climate change. Watermelons: green on the outside, red on the inside.

To the credit of the Extinction Rebellion, many (although clearly not all) try to live the lifestyle of less, not just evangelise about it.

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Complex problems don’t have simple solutions; from Brexit to Climate Change

Writing this on what is/was the future-ex Brexit Day should tell us one thing; complex problems don’t have simple solutions. Populist politics have always thrived on simple messages; pithy sound bites and one-liners that hit emotional buttons. Veracity is never much of an issue, and simple maths appeals to those to whom it is directed.

Twenty years ago Jean-Marie le Pen would say “there are three million immigrants and three million unemployed in France today…, you work it out!!” The below is a more recent version of the same. At the time I recall seeing an eminent French economist on a TV show, exasperatedly saying that obviously this was reductionist nonsense, but it would take him at least half an hour to prove it, and no one would be listening after the first minute – so what was the point?   Quite.

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