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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Does the world’s economy depend on the hyperbolic decline curve?

The party is over for US shale (or Light Tight Oil “LTO”), so say some very smart and well researched analyses (here and here). 

The party has only just started – and LTO could provide energy independence and even energy dominance for the US for years to come (source:every mainstream press article..).

Cheap Oil underpins growth and development, expensive oil will likely tilt us into a global recession, where the debt-berg will sink many a Titanic. How can something so politically significant be so differently understood? 

It’s not as if the data on the LTO isn’t there; the US oil patch is operated by many public companies and regulated by state and federal bodies who publish huge amounts of data, not to mention the industry itself publishing vast data.

How can we not know?

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There is a light and it never goes out

The short version is that the near-future may be less rosy than the present, not due to climate change, but due to energy scarcity and increasing cost of energy. Focusing on climate change could accelerate the energy crisis. Yes I am a miserable git. This is a long read (3500 words), so if you want easily digestible bite-size nuggets with only good news, its not for you. Hopefully you’ll read on and it will be worth your time.

I am putting this out on the evening of Friday 16th November – not a great publishing date for a LinkedIn post. It also probably needs a lot more editing, but tomorrow there is an interesting event. In France, a grass-roots movement, with no political or union sponsorship is self-organising blockades of roads throughout the country. Not unusual you may say. However, this one has a twist. The protest is against a rise in fuel tax, which has been dressed up as a tax to help pay for the “energy transition”. Part of the anger is distrust that this is just an additional tax, but part of it is a recognition that in a big rural country, the cost of transport (to work) is a big factor for a lot of people, and there is a disconnect between the intellectual urban elite who fret about saving the world, and the population who fret about saving the end of the month. Trump’s rust-belt politics echoed, but without the Trump.

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Big Oil and the illusion of Capital Discipline

A couple of months ago, I wrote a post here on LinkedIn suggesting that what the industry and the world needed was a “goldilocks” oil price. A few days later Goldman Sachs published a thought piece entitled Goldilocks and Big Oils – The temperature is just right in “The Age of Restraint”.  As someone once said, whoever believes in coincidences doesn’t understand maths.

The GS piece was a detailed analysis of how and when Big Oil makes value for its shareholders – a pertinent distinction compared to the more usual analysis of how oil companies make money for themselves (then blow it all).  Their conclusions is that (a) “periods of restraint” were the best for shareholders of Big Oil and (b) we are entering to a period of restraint.

GS have analysed the historical record by looking at key shareholder metrics.  In this world view Restraint is caused by a perception of long-term abundance of oil resources.  Backwardation in the forward curve creates structural positive earnings revisions as consensus oil price gets rolled up over time, following the forward curve. The low price at the end of the curve preserves capital discipline. Expansion, in contrast, is a period of perceived tightness in the supply side which tends to favour service companies and explorers as big oil scrambles for resources.

Whilst this analysis has the usual rigor and depth one would expect from a big Investment Bank (and indeed makes a lot of sense), I think it is wrong one respect: that we are entering an age of restraint. I see a period of expansion and in all likelihood, a subsequent period of contraction, ahead, but only a tiny window for restraint.

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Goildilocks and the Bears – oh for an oil price that is “just right”

Last week my reading caught two articles. Low oil prices will cause political upheaval and unrest and high oil prices will cause…

yes, you guessed it, political upheaval and unrest.

1) Carbon ‘bubble’ could cost global economy trillions in which the journalist reports on a report – this is an annoying modern (?) trend where there is no analysis – just “he said, she said” reporting. But I’ll stay off my soap box on that one for now…

The underlying research by a Cambridge academic can be paraphrased as a reworking of the “stranded assets” theory – that the rapid transition away from fossil fuels will leave assets stranded or dirt cheap due to a “a rapid sell off, of oil and gas reserves by producing countries eager to get rid of the fuels before they become worthless.” Ergo a massive tranche of the world economy is removed (since oil is a trillion $ business) and the resulting massive budget defecits in oil producing countries will cause political upheavel and unrest.

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Do environmentalists dream of electric cows?

The EDF are crowdfunding the launch of a satellite to monitor methane emissions by oil companies; which makes a bit more sense when you realise that “EDF” in this case is the Environmental Defence Fund, not the French electricity company.

Yet another part of the slightly illogical crusade against oil producers which is very much in vogue? The current focus on producers is a bit like Narcos focusing on Pablo Escobar and ignoring all the dealers and users….(which is of course roughly what happened!).  An approach that does nothing to address retail-distribution or demand. Not that I should equate Big Oil to Colombian drug lords in anything other than a tongue-in-cheek analogy, in case someone takes me seriously.

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