Sunday, November 22, 2015

Investment Crystal Ball: Energy

Investing is about creating the means of building a good life wherein you can pursue goals that you deem worthwhile achieving. Those goals may be reached or they may change; this happens all the time and thus aiming towards goals is a bit like going after a moving target. Achieving your goals can be satisfying; but make sure that the journey towards your ever changing goals is both enjoyable and worthwhile as well.  In this context the term retirement is devoid of meaning; it is more about reaching the goal of being a financial adult – a stage in your life where you are no-longer financially dependent on one particular job. 
That doesn’t mean that losing your job during financial adulthood is without pain; after all you consider it worthwhile doing.  However, in financial adulthood, you are in control of your life and your lifestyle regardless of such a set-back and you’ll be back to fight another day or to achieve your goal another way. Reaching financial adulthood is not tied to your ‘65th birthday’, or to ‘freedom 55’ – an insurance slogan you find in many ads. For example, my son aims to be a financial adult by age 35 – a bit rosy but not impossible. He is quite entrepreneurial and works hard on his salaried job. His dream is to work on a new living community format – quite an ambitious goal. Will he reach it? Who knows but at least he is moving in the right direction. If you don’t have goals or dreams and if you don’t work towards those goals you’re just drifting through life rudderless and you are unlikely to achieve anything or better you are unlikely to achieve the things you feel are worthwhile.
My life revolves around geology and energy – in particular oil and gas. But hey, maybe I’ll get a chance to go into geothermal energy. Right now I am working on old oil reservoirs somewhere in between the non-conventional and conventional realm. You may not realize it but many of those projects are comparable in scale with a small heavy oil sands project. Despite the whining and complaining by the masses including their current unrealistic hatred for fossil fuels and their distorted views of climate change; I personally feel that oil and gas, maybe even coal, are key ingredients for our society’s prosperity. Climate has changed since the beginning of our planet’s existence and it will change until its end. Sea-level will rise and fall throughout time (which in my scale of thinking is hundreds of millions of years). When you build a house on a spit or near the beach, don’t be surprised that nature will somehow destroy it - don’t blame ‘Global Warming’.
I have lived and worked in the energy industry through the Club of Rome Era; the era of the Peak Oil theory; the fear for a new ice-age in the late 70s; through the introduction of hydraulic frac’ing in vertical wells;  through the initial stages of horizontal drilling; 3D seismic; then the energy revolution of the first decades in 2000 when we started to apply hydraulic frac’ing to horizontal wells and today with multi-lateral (horizontal) wells and multistage hydraulic frac’ing which coincides with this new and deep, unjustified, public hatred for fossil fuels. Today everyone uses pipelines and oil sands as political footballs and it is easy to do so when the industry along with all other types of commodity producing industries are trying to adjust to the latest hysteria regarding oversupply and collapsed pricing.
Many forget that the current malaise is due mostly to an overvalued U.S. dollar.  If you invested in gold as a Canadian, you may have actually made money in gold bullion or at least broken even over the last 4 years, while expressed in U.S. dollars, gold bullion has lost nearly 40%  of its value.  We forget that thanks to the advances in oil and gas production technologies, the U.S. has gone from a state of huge trade deficits and dependence on rogue nations such as Saudi Arabia; Iran; Venezuela; Russia; etc. to a state of near North American energy self-sufficiency where the U.S. can afford to tell Syria to take care of its own problems rather than getting the West involved. You may think that we have Obama or Justin to thank for avoiding military involvement in Syria or Iraq but rather it is our reduced dependency on foreign oil and gas that allows us to care less about these failed states in the Middle East. This of course does not detract from the human tragedy that plays out in those areas and its spill-over effect into our and other countries.
The fast expansion, rational or not, of China resulted in the early 2000s in a shortage of all kinds of commodities. So characteristically to the nature of all things in the commodity world, money poured into all kinds of mining and drilling projects; we over-invested both using equity and borrowed money. With China now transforming into a more service and consumer driven economy and with the construction follies such as China’s ghost cities coming to an end; we’re suddenly in a position of commodity oversupply – especially when combined with a sluggish world economy. The energy industry is adjusting through the destructing first of equity capital and next the destruction of credit (not to mention all the lost livelihoods). In the meantime commodity investing hasn’t been this much hated for decades; mines shut down; oil sands projects are no longer expanding and oil companies are on the verge of mass default. Pundits as a class, announce that prices will stay low for decades and that investing in gold mines, or in oil and gas is a value trap. Hysteria all around. Signs that we are approaching a bottom. Think back to the fall of 2008 all through March 2009 and recall the desperation of every pundit. Many of them had still not recognized in 2010 or 2011 during the so-called European Debt crisis that we had been in a bull market since the spring of 2009. The same is happening to oil and gas, as well as in the overall commodity complex. Yes, a turn-around is in the making.
Have you noticed that there is rarely a week that storage numbers estimated by pundits compared to the actual IEA numbers is correct? Did you notice that, more often than not, the discrepancy between estimate and actual numbers is epic in scale?  Do you follow the stories of massive tanker fleets holding millions if not billions of barrels of oil in storage?  When was the last time you heard that story? Was that in 1998? What happened during those days? And a couple of months later, all those experts announced that the other experts couldn’t find the phantom fleet of tankers!  In a matter of weeks all pundits claimed that they had never believed in such an oil tanker fleet.  Reality is that nobody really knows what is exactly going on.  We don’t even know how many barrels of producible oil are stored in the Saudi subsurface nor what their maximum daily production capability is, let be that of the entire globe.  Estimating oil and gas supply and demand is nearly as futile as predicting climate change!
What I do know is low energy prices are typically good for oil consumers. That during the low energy prices of the 1980s and well into the 1990’s the oil industry somehow survived and that the U.S. economy enjoyed an enormous revival that culminated in the High Tech Boom followed by its unavoidable crash. I know that the explosive supply of cheap goods from China contained inflation – probably more so than Paul Volcker’s high interest rate policies that led to the severe recession of 1982.  I know we are now living again in a period of low energy prices; with enough supplies that may last decades! This may make oil and gas producers, just like farmers, highly dependent on short-term weather patterns. In the future, inflation will probably remain low due to demographics and due to the robotization of the manufacturing industry which will keep costs low.  With the coming of age of the Millennium generation – a generation that is possibly more numerous than the baby boomers – combined with the cancellation of China’s one child policy we are at the dawn of a new era of  population rejuvenation, prosperity and economic growth that may resemble the Clinton Era.
Canada will probably look at a decade of slowly recovering commodity prices because the world population has to eat and fart J while playing video games along with the re-balancing of commodity supply and demand. Prosperity often leads to more peace and vice versa. Let’s hope that in the not-too-distant future, the Islamic world has outgrown its repressive clergy and its under-educated angry masses; that Islamic society returns to an open society where free thinkers can blossom and help create the prosperity so badly needed in those countries.
I have no idea whether fossil fuels will remain a main component of our energy supply; electricity is typically generated from fossil fuels and as such, electric cars will not free us from carbon emissions. Sorry, Elon Musk! But I suspect you already know that.  Solar energy and wind energy may supplement our energy needs. When I look around me in the world though, I see energy everywhere. It is not about whether there are sources of energy, conventional or alternative.  It is about generating energy at an economic price (typically the cheapest) and the only thing government meddling with market forces leads to is distorted markets with severe collapses.  Oil and gas is a very competitive industry with very little or no subsidies – regardless of the contorted claims of many fossil fuel opponents. Ultimately, it is economics that will determine where we are going.
For me, my vision is geothermal energy not extensive wind or solar farms. With hundreds of thousands of wells drilled into the subsurface of Alberta combined with its young and entrepreneurial population, I foresee this province to be ideally situated to become a hotbed (pun intended) for geothermal energy – in part thanks to the legacy of oil and gas wells as well as pipelines from the hydrocarbon energy complex. But only when geothermal proves to be more economically attractive than oil and gas; because I doubt we will ever run out of fossil energy.

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