Hello Reader,
Let’s talk about the global economic outlook for 2022 and beyond.
I’ll start off this letter with a general overview of the energy markets and then circle back to personal investment strategy. I’ve also included a bonus discussion about renewables.
As a precursor, I implore you to leave behind any bias on wether you like/hate oil and whatever views you have on climate change. That is not the point of this letter.
Oil, Energy and Cars
A big issue in the world right now is “clean energy”.
Many people want to be seen as righteous humans who care about the planet.
I italicize “seen” for a number of reasons that we will get to later.
Our global energy consumption is as follows:
It is no surprise that oil is the biggest source of energy consumption. It is cheap, efficient and easily accessible to current technology.
It allows us to perform “work” without using too much energy. You can heat your homes, power buildings, drive cars etc. The average American consumes about 20 barrels of oil a year.
As “clean energy” has become a hot topic of much debate, one industry has seemingly committed itself to distancing away from efficient oil. This is the automotive industry.
Many automakers like Mercedes-Benz, Ford, General-Motors and Jaguar have pledged a “zero-emission” vehicle lineup by 2035.
This idea requires substantial amounts of investment in battery factories, assembly plants, R&D, charging stations etc.
This is effectively the supply chain of automakers.
Luke Gromen, an investor who frequents the TIP podcast, brought up an interesting point in regards to the supply chain of automakers.
He said, “Why are companies pledging to change 100% of their supply chain in a just few years time?”.
No rational business would do something like that just to please the climate change crowd, so another reason must exist.
Gromen then mentioned the possible shortage of “cheap-oil”.
Cheap Oil refers to the readily available oil that has all-ready been extracted from the ground. It is extracted from early layers in the Earth’s crust and requires the least amount of energy/technological output from miners.
This is merely a hypothesis as we are not 100% sure when “cheap-oil” is expected to run out but a reasonable estimate may be after 2050. This just means that oil will become more expensive over time as miners will have to invest more resources (time, money, energy, technology etc.) to extract deeper oil reserves in the Earth’s crust.
If efficient technologies are created then the price of oil can become cheaper. You have to remember oil-extraction is a business. A business will only lower the price of its products if:
A) no one is buying
B) their cost of acquiring the product decreases
Option B is the case where R&D allows for a cheaper way to extract oil.
Aside: The same principles apply to gold. Gold is relatively scarce, not mathematically scarce (like Bitcoin). “Relatively” scarce implies that more gold can be extracted but only when it is profitable to do so. The price of gold mined must be higher than the cost of mining said gold. Due to its scarcity, gold-mining requires a large initial investment. Deposits can quickly run out or may only produce a small quantity of the precious metal. This is why golds scarcity is “relative”.
The “cheap oil” narrative does not mean that oil itself will run out. This is a common misconception. Anyone reading this letter in 2021 will most likely be dead before oil runs out (pain).
Just like gold mining, the oil miners will only extract more oil if the price increases. This is why the current batch of oil is considered “cheap oil”. Consumers rarely understand the fundamentals behind oil production. They look at the price of gas and use that as an estimate (reasonable approach).
Aside 2: The current prices of gas are inflated due to the monetary effects of you-know-what as well as supply chain issues.
This brings us back to the original question.
Why do you think automakers would want to change their entire supply chain?
Elon Musk’s journey with Tesla is a gentle reminder that zero-emission auto-making is an expensive business. The trial and error required to perfect a lithium-battery car is much more substantial than traditional combustion engines.
Ford, GM, Mercedes-Benz and a majority of the “big” automakers do not have a supply chain process like Tesla. Their cars are made in other parts of the world and shipped to other countries. Tesla controls a majority of its supply chain process. They have multiple Gigafactories, charging stations world-wide, revenue from ev-credits and almost all of their technology is created in-house.
This is one reason why I don’t think the Tesla shorts will win anytime soon (sorry Micheal Burry). The company has a huge advantage over its future competitors from a pure supply chain point-of-view.
My View
It seems likely that oil will become more expensive in the near future.
Oil ETF’s like PXE and FCG are up 90% each in the past 12 months. EXOM is up almost 50% as well. If the current economic situation is any indicator, it seems that oil will continue to do well.
A word of caution: one must be aware of all the external price factors of oil. Middle East relations, USA politics, Russia and China, climate change warriors, “woke” corporations etc.
Bonus: A Discussion about Renewable Energy
Here are two charts that show the difference in world-wide energy consumption from 1977 to 2019, a span of over 40 years.
The regions that have darkened in color are the main consumers of energy. Asia, parts of Europe, South America, North America and Australia have seen the biggest change. It is not surprising that a majority of these regions are at the fore-front of renewable energy application.
The most common forms of renewable energy are nuclear, wind, solar, hydro, electric and their hybrids.
Oil, gas, nuclear and hydropower are forms of stored/concentrated energy. These are dense forms of energy that are very efficient. Things like wind-turbines and solar power need external components like wind and sunlight hence the concentration of their energy production is very small. The dependence on external factors is the reason why solar and wind have a high monetary and environmental cost.
Example: If you want to build a solar field, you will have to take over acres of land (environment cost) and spend obscene amounts of money (monetary cost) for something that “may” pay off after 8-10 years.
As a physicist, nuclear and geothermal energy seem the most promising out of the bunch. El Salvador is starting efforts to harness volcano energy to create an efficient power source (which will mine Bitcoin). Hydro power is one source that is universally appreciated but one can only build a limited amount of hydro dams. Nuclear energy is one of the most efficient forms of energy but for some reason, stigma around its usage exists. Nuclear power plants are being closed in many parts of the world and this returns us to the opening statement in this letter.
Many people want to be seen as righteous humans who care about the planet.
This is a very dangerous notion as it throws actual science and technology into the shadows. By ignoring the potential of nuclear energy, people will inherently force others to use less efficient energy sources like wind and solar.
The reasonable conclusion would be to invest in technologies that promote dense forms of energy. Wether this is nuclear, geothermal or hydropower.
It would also be prudent to think of oil as our most readily accessible energy source. While we have it, we should use it to better technology and development; a result which will inherently lead to revolutions in renewable energy. Also, one must not forget that lithium batteries and renewable infrastructure require the use the fossil fuels. The environmental costs of lithium mining are often over-looked because people want be seen as doing the right thing.
Remember, efficiency combined with technological advancement is key.
Thank You
Disclaimer: The views expressed by the author are not intended to serve as any form of financial advice. This letter is for entertainment purposes only. Please do your own due diligence and research.
I’d love to hear your thoughts on this topic. Feel free to connect with me on Twitter!
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