Professional Money Management and Peak Oil

Over the past two weeks I’ve taken the time to read over a new, 68 page Peak Oil report from Paul Sankey at Deutsche Bank, entitled, The Peak Oil Market. What’s notable about this report is its holistic, comprehensive treatment of the global oil system as a moving and dynamic interplay between supply, demand, and technological mitigation. With the exception of some work done over the years at Goldman Sachs, I don’t believe I’ve seen such an aggressive confrontation of this difficult subject from any of the other major investment houses. Indeed, most of the comprehensive work done in this area tends to still come from the scholarly community. What’s eye-opening is that Sankey appears to accept that the peak of Non-OPEC production is now in place, that a final peak of global production will arrive sometime in the 2015 period, and,  he is offering this viewpoint to the mainstream investment community. Generally, this is a community that remains ignorant of–if not dispositionally hostile to–oil and energy depletion issues.

To this point I was unsurprised to read Jeremy Grantham’s passing lament in his latest Quarterly Letter, that, his previous remarks on resource depletion went almost completely unnoticed, as though his words “had disappeared down a black hole” (see page 5). This is amusing to me personally, because, on the day that particular letter was released from Grantham’s GMO this Summer, I hurriedly sent it around to my fellow energy and economics gurus with the brief tag-line, “Grantham gets it.” Later in July I noted this event in my Gregor.us Monthly newsletter, The Burden of Transition, as I immediately regarded Grantham’s discussion of net energy and net resource decline as a signal that these ideas, much discussed in the energy community this decade, were now moving into the broader world of investment.

Of course, the investment world has always been interested in energy equities. But that is a much smaller domain than the whole-system problem of diminishing energy resources–not only in nominal, but in real terms. This larger system approach was addressed both at the ASPO Denver Conference which I attend 10-13 October, and, at the SUNY-ESF 2nd Annual Biophysical Economics Conference later the same week in Syracuse, NY. I would suggest as others have, to those like Mr. Grantham who have attempted to proffer these ideas, that the audience at this point in history is still very much steeped in an economic paradigm that unknowingly derives its assumptions from the era of energy abundance. The modern economist is not likely to understand or even care, therefore, about the power density of oil–and that this makes his theories possible.

Generally, however, it is only those in the investment community who evidence broad intellectual interests–those like Jeremy Grantham, Peter Thiel, Eric Janszen and a few others–that have opened up to the larger issues surrounding energy transition. Mostly, American money management remains quite stuck in a bunch of antiquated, regressive viewpoints about the world, most of which are American-centric and offer cheerleading in the place of science, and the hard work involved in understanding these subjects. Just today for example I was surprised (and not surprised) to see one well known money manager include the following hoary, head-banger phrase to partially explain the state of our oil supply in the United States: As my friend likes to say in his speeches, “All the oil in America is in four states: Texas, Louisiana, Mississippi and Alabama, and the dipsticks are in Washington.” When you read dumb stuff like that it reminds that maybe it’s time you asked your money manager: do you understand energy, or do you even care to do the work to understand energy? In the years ahead, the answer to that question will likely be crucial to a money manager’s performance, regardless of which asset class is their specialty.

-Gregor

Further Reading: Chris Nelder, The Narrow Ledge of Oil Prices. | The New York Times: New School of Thought Brings Energy to ‘the Dismal Science’

  • http://bobbrill.net Bob Brill

    net energy and net resource decline, thx i'll keep paying attention to your insights

  • TJGodel8

    Economist and money manager who don't understand the coming transition because they think tomorrow will always be the same as yesterday. For example the unregulated financial derivatives that lead to the current recession was predicted by a few, but mainstream economists and money money didn't have the curiosity to look deeper at their assumptions. Nouriel Roubini and few others taking hard looks at the numbers knew what was coming.

    I don't think mainstream will get it until a major incident occurs, like a major oil field stops production.

  • UnlikelyMoniker

    Two points in response to your comments. Firstly, it's good to see the ASPO and SUNY-ESF conferences side by side in the same sentence. It is woefully late in the day to begin the work of tracking down and sealing-off all the intellectual cul-de-sacs derived from an assumption of energy abundance but great to see the likes of George Mobus patiently laying the groundwork.

    Secondly, I'd like to share a brief story about the Deutsche Bank report you mentioned. I went looking for it on the web and came across a DB energy bulletin from September, wherein DB's analysts flatly stated that BP's Tiber discovery in the GoM was clear proof that Peak Oil 'theory' should be consigned to the dumpster of history.

    Well I emailed the DB guys to say that it's, you know, about the size of the tap not the size of the tank, and that even a big find like Tiber is really just a blip on the downward trend of discoveries vs. cumulative production.

    The ensuing discussion ended up turning on a very narrow, semantic question about the definitiion of Peak Oil. The DB guy wouldn't budge from the position that, in order for Peak Oil to be possible, Hubbert, Campbell, Laherre et al had to be correct about the total URR being no more than 2.2 trillion barrels. If you take that view, any subsequent discovery or upward revision *technically* means that Peak Oil is wrong.

    Of course, this flies in the face of the bleedin' obvious, which is that peak liquids production is imminent if it hasn't already happened. The DB energy investment analyst's position is the same as, say, BP's. Define PO narrowly enough and every discovery becomes a refutation.

    I knew that companies like BP live or die by attracting investment on the basis of their reserves – the bed they made for themselves to lie on – but I hadn't expected supposedly independent investment advisers to adopt an extreme form of tunnel vision for the apparent purpose of ensuring they did not have to acknowledge the wider reality.

    Moreover, the analyst told me he'd met MK Hubbert, so he's clearly no naive newby.

    But the kicker for me was that the analyst forwarded by email to Michael Lynch – yes, that Michael Lynch – who took time out from his consulting/op-ed writing schedule to send me a somewhat bumptious email about the new golden age of exploration and production that's just over the horizon.

    Bear in mind that I'm little more than in interested observer. It seems that for everyone within the oil investment and finance community who is ready and willing to confront reality, there are a dozen or more who are absolutely wedded to the status quo and prepared to take time out to try to squelch even the most innocuous flicker of doubt.

    Perhaps Paul Sankey should check carefully under his car each morning.

  • http://www.competitivefutures.com/blog ericgarland

    The real resistance here is over systems thinking. You are asking people to replace their “Drill Baby Drill!” linear, growth-fetish view of the universe with a complex, nuanced, future-savvy view of the whole world. Cripes, no wonder people are resisting – that flies in the face of every other type of analysis out there right now. Our society runs on an atomistic, zero-sum, nothing-is-connected worldview, from the fakery of the stock market to the assumption that GDP must increase for eternity.

    It sounds philosophical more than economic, and it is. Thinking well about energy and the economy is EASY once you deal with the root problem – a fake linear worldview. Once you start thinking in terms of systems, the rest is just a matter of doing the homework.

  • Name

    What about the future of Equities? If the signs of bumping up against the fixed limits of a finite planet mean that there is no growth rate in the future (only sustainable economies) will equities become extinct leaving only bonds?

  • http://shiftingparadigms.tumblr.com Justin

    Where can I find the Deutsche Bank report?

  • gregor.us

    I understand. Fully. :-)

    G

  • gregor.us

    I see that Soros is funding a new Economics Institute. imo if he wasn't doing so, someone else would. I'd hate to be a Chicago School Econ prof right now, as the entering classes of students are going to ask you WTF?

    G

  • gregor.us

    As I'm sure you can understand, I cannot post a copy. I would suggest you contact Sankey's Dept in the NY Office of DB, and see if you can get a copy.

    G

  • chrisnelder

    Unlikely: As I think you're aware, all credible peak oil analysts define peak oil as the maximum rate of oil production. That's it. It's never been about the size of the reserves, although that does figure in peak rate calculations. To talk about reserve growth without talking about the rate is simply changing the subject.

  • michaelfkelly

    Eric – Thanks for reminding us that we live in systems and most people would prefer not to deal with all that messiness. Your same comments could be made for the usual views of any market, including that for technology, which I'm familiar with and have researched for years. But try to put a dynamic system model on a PowerPoint where effectiveness is judged by seven bullets and 3 to 6 words each. As you say, 'once you start thinking in systems' but how does that happen? Beats me….

  • jenniferleej

    We can't turn back time we need to adapt. Take a look at this article The Great Transition: http://www.scribd.com/doc/21656220/The-Great-Tr

  • ian807

    I would argue that “peak oil as the maximum rate of oil production” is the most critical issue to watch here. We face two oil “peaks.” The first is price. New finds are all well and good, but they tend to be in multiple small reservoirs, consist of heavier hydrocarbons and are frequently in deep water. They can be exploited profitably, if the price of a barrel is allowed to rise, and that's exactly what will happen.

    The second peak is a bit more subtle, but may sideswipe us first. Energy *return* on each barrel of oil (EROEI) has been declining very rapidly since the 60s when a barrel of oil's worth of energy got us 100 barrels in return. When it starts taking a barrel of oil's worth of energy to retrieve a barrel of oil, oil will cease to be a significant energy source. While *current* estimates of energy return vary (from 1 to 8 to 1 to 12), EROEI can only decrease as we selectively deplete the reservoirs with the highest economic return. Worse, EROEI seems to be decreasing much faster than actual supply.

  • DB

    Apparently, you didn't spend much time at all reading the DB report on oil…it does not analyze peak production, but peak demand – which says will peak around 2015 when oil prices are at about 7% of GDP.

  • gregor.us

    Well, I could have certainly made a long post, using the 3 pages of notes I made on the DB report. That said I disagree that it is exclusively a peak demand report. It is both a peak demand, peak expensive supply, and new technology mitigation report. Because I do take issue with a number of these takes in the DB report, my intention was to highlight its existence–rather than its full array of assertions. To this end I think my take in this post is both quite fair and accurate. To characterize it as a peak demand report would not be correct, in my view. However, one has to remember that I see the broad sweep of the report more fully than others would. It helps to have watched the progression of this work over the decade.

    G

  • gregor.us

    If only the public could see the data, or was exposed to repsonsible journalism that would explain the data, than at least the public would understand that there's a fast growing gap between the increasing cost of oil production in Non-OPEC (roughly 60% of global supply) and OPEC. BTW, this was addressed well by Sankey.

    Also, you have to understand that these are large moving systems. So some will only understand peak supply in nominal terms, others will only understand peak supply in nominal and real terms, while others will only understand peak demand as a function of price or GDP. Still others only want to pay attention to mitigation–new technologies.

    In other words, even if you laid it all out, many people would only take a piece away from the discussion. No doubt, many people will do just that with the Sankey report, just as they would with any newsarticle, or TV segment.

    G

  • http://www.competitivefutures.com/blog ericgarland

    Michael – I think you're describing my life's work, which remains totally unfinished: How do you invite people along on the journey of seeing the world as interconnected systems? Like life, such a worldview is messy, uncertain, deeply fascinating, transformative. If you start seeing the world a field of interconnected systems instead of an atomistic place of Big Things and Small Things, you can no longer justify people being in control over other people. You can't pigeonhole people as easily, you have to start seeing them as changing systems in their own right.

    The thing is, I believe that when you see things in this way, you do get a bonus – you are right more often, insofar as you are describing the world more accurately. I believe that my forecasts are more correct because they look, by nature, at the system that surrounds anything you want to study. You know more (but not everything!) by looking at a system.

    This is what makes Mr. MacDonald's work so compelling – he's actually looking at the complexity of the energy system. Perhaps this is why he is so unnerving to the press.

  • DB

    Apparently, you didn't spend much time at all reading the DB report on oil…it does not analyze peak production, but peak demand – which says will peak around 2015 when oil prices are at about 7% of GDP.

  • gregor.us

    Well, I could have certainly made a long post, using the 3 pages of notes I made on the DB report. That said I disagree that it is exclusively a peak demand report. It is both a peak demand, peak expensive supply, and new technology mitigation report. Because I do take issue with a number of these takes in the DB report, my intention was to highlight its existence–rather than its full array of assertions. To this end I think my take in this post is both quite fair and accurate. To characterize it as a peak demand report would not be correct, in my view. However, one has to remember that I see the broad sweep of the report more fully than others would. It helps to have watched the progression of this work over the decade.

    G

  • gregor.us

    If only the public could see the data, or was exposed to repsonsible journalism that would explain the data, than at least the public would understand that there's a fast growing gap between the increasing cost of oil production in Non-OPEC (roughly 60% of global supply) and OPEC. BTW, this was addressed well by Sankey.

    Also, you have to understand that these are large moving systems. So some will only understand peak supply in nominal terms, others will only understand peak supply in nominal and real terms, while others will only understand peak demand as a function of price or GDP. Still others only want to pay attention to mitigation–new technologies.

    In other words, even if you laid it all out, many people would only take a piece away from the discussion. No doubt, many people will do just that with the Sankey report, just as they would with any newsarticle, or TV segment.

    G

  • http://blog.competitivefutures.com/ ericgarland

    Michael – I think you're describing my life's work, which remains totally unfinished: How do you invite people along on the journey of seeing the world as interconnected systems? Like life, such a worldview is messy, uncertain, deeply fascinating, transformative. If you start seeing the world a field of interconnected systems instead of an atomistic place of Big Things and Small Things, you can no longer justify people being in control over other people. You can't pigeonhole people as easily, you have to start seeing them as changing systems in their own right.

    The thing is, I believe that when you see things in this way, you do get a bonus – you are right more often, insofar as you are describing the world more accurately. I believe that my forecasts are more correct because they look, by nature, at the system that surrounds anything you want to study. You know more (but not everything!) by looking at a system.

    This is what makes Mr. MacDonald's work so compelling – he's actually looking at the complexity of the energy system. Perhaps this is why he is so unnerving to the press.