"At the end of the Roman era, the general economic crisis destroyed the small and medium sized country estates and favoured the formation of a limited number of large villae, an expression of a strong concentration of agrarian property. Their proprietors left the city to move onto their land, where... they regained all the authority which they had lost in the deterioration of the political system.”
“It was inevitable that the relentless assault against fossil fuels would manifest in economic hardship for the lower and middle classes, and as the Northern Hemisphere heads into winter, it is once again rolling the dice on energy policy. This time the signs of crisis are emerging in a vital commodity that, unlike natural gas, has no substitutes. The market for middle distillates like diesel and heating oil is showing real signs of stress, especially on a seasonally adjusted basis, leaving an opening for our geopolitical opponents to drive a polarizing wedge into our domestic politics..
“As the reality begotten by climate policies causes some on the soft left to embark on a strategic retreat, hard left climate alarmists are in full-blown panic mode. Fresh off his attempt to reframe climate change as “global boiling,” United Nations Secretary General Antonio Guterres kicked off a climate summit last week with unhinged hysterics, boldly declaring, “Humanity has opened the gates to hell.” As we predicted in “It Was Never About Emissions,” the Guterres crowd is steadfastly opposed to carbon capture and sequestration technologies, proactively shifting the focus away from reducing emissions and toward eliminating the burning of fossil fuels altogether.
“With COP-28 approaching, quivering under the fresh sting of their weakening political power, expect the hard left’s hyperbolic rhetoric and ugly protests to accelerate. Meanwhile, the stark reality of trade-offs will force leaders and individuals alike to select between the Sunak camp (the “soft left backpedal”) and Macron camp (the “hard left double-down”). We suspect we know which way most will choose, and while we’ll certainly enjoy observing the spectacle from afar, we’ll also be keeping a close eye on the most important chart in the world:
“The price of diesel.”
In 1999 it was reported that the world population had reached 6 billion. The rate of growth was 1.3% per year. That might not sound dramatic. But at that rate, the world population would double over the next half century. (Recent changes in birthrates and even more recent demographic developments ‘associated’ with the global ‘overreaction’ to Covid suggest that population growth will not be the problem that it seemed at the turn of the millennium.)
Now 1.3% is a relatively modest annual growth rate. But if it were to continue, the world population would reach a density of one person per square metre on the dry land surface of the earth in just 780 years. The mass of people on the earth would equal the mass of the earth itself in just 2400 years. In the words of the late Dr Albert Bartlett, emeritus professor of physics at the University of Colorado at Boulder, US,
“The greatest shortcoming of the human race is our inability to understand the exponential function.”
An exponential function is simply one in which a variable increases at a fixed rate or percentage per time period. This is opposed to an arithmetic function, in which growth is by a fixed amount each period. The sequence 1,2,3,4,5,6 illustrates arithmetic growth. The sequence 1,2,4,8,16,32 demonstrates exponential growth.
This is the most important video you’ll ever see: http://www.youtube.com/watch?v=F-QA2rkpBSY.
But be warned: it is sobering stuff.
As Dr Bartlett points out, at some point in the comparatively near future, zero population growth will happen. (The WHO in association with Bill Gates may yet have played their part.) But it would be mathematically certain in any case, as a simple response to steady, exponential growth. Whatever human beings might want to do, the finite carrying capacity of the earth, and Mother Nature, will have the final say.
Let’s take another of Dr Bartlett’s observations. Imagine bacteria growing steadily in a bottle. They double in number every minute (the so-called “doubling time”, in other words, is one minute). At 11 am., there is one bacterium in the bottle; at 12 noon the bottle is full.
Answer to Question 1: the bottle was half full at 11.59 am.
Answer to Question 2: the question, of course, is rhetorical. But as Dr Bartlett says,
“Think about this. This kind of steady growth is the centrepiece of the national economy and of the entire global economy.”
At 11.55 am., the bottle is just 1/32 full. With just five minutes left until it fills completely with bacteria, the bottle is 31/32 empty !
Answer to Question 3: all of the bottles are completely full by 12.02. Those extra three bottles bought our bacteria just two extra minutes. That is the power and challenge of the exponential function. We should point out that the exponential function has an ominous relevance to growth – and the limits of growth – in government debt. That shrill, discordant sound you hear is the debt piper; and he really wants to be paid.
But let’s talk about energy. Particularly the political, social and market implications of “peak oil” in what are certain to be volatile years ahead.
Why the references to Dr Bartlett?
Because as US Secretary of Energy James Schlesinger told Time Magazine in April 1977 (perhaps the last time that Americans were truly worried about running out of oil), in the OPEC price hike-triggered energy crisis of the 1970s,
“we have a classic case of exponential growth against a finite source”.
You may be familiar with Hubbert’s Peak. The late Dr. M. King Hubbert was one of the most celebrated geophysicists who made his reputation on the back of a startling prediction, first made public in 1949, that the era of so-called fossil fuels would be surprisingly short-lived. In 1956 he predicted that US oil production would peak in around 1970 and decline thereafter.
US oil production did indeed peak in 1970. But as James Howard Kunstler points out in his book, ‘The Long Emergency’, it took a year for the peak to be detected, when lower production figures started to be reported.
Peak US oil production in 1970 amounted to 11.3 million barrels per day (bpd). That was the high watermark for the US oil industry. Production would fall by several per cent per year thereafter. By the mid-1980s, total US crude oil production had fallen below 9 million bpd. It is now running at approximately 6 million bpd. (Recent advances in the shale arena have somewhat rebalanced the equation – but then so have the Biden administration’s asinine energy ‘policies’.)
This is not just a US problem. Hubbert went on to forecast that global oil production would peak between 1990 and 2000. Colin Campbell, retired chief of research for Shell Oil, estimated that global peak oil would occur in 2007, and Kenneth Deffeyes of Princeton forecast the global peak at 2005. It may well be that the global oil peak is already behind us.
Not all of the oil below ground will ever be pumped out. Long before an oil field runs completely dry, the oil contained within it becomes so difficult or expensive to pump that it takes more than a barrel of oil’s worth of energy to pump out one barrel. Even at peak, there will be plenty of oil left in the ground. But in Kunstler’s words it will be
“the half that is deeper down, harder and costlier to extract, sitting under harsh and remote parts of the world, owned in some cases by people with a grudge against [the West], and this remaining oil will be contested by everyone. At peak and just beyond, there is massive potential for system failures of all kinds, social, economic and political. Peak is quite literally a tipping point. Beyond peak, things unravel and the centre does not hold. Beyond peak, all bets are off about civilisation’s future.”
Sound eerily relevant to our current cultural and economic predicaments today ? (Doubly a shame and a scandal beyond words, then, that the US – the world’s self-appointed policeman and putative sole superpower – appears frozen into trance-like paralysis under the baleful influence of the Biden crime administration, just as its ‘end of empire’ tribute act gets into full swing.)
If ‘peak oil’ is a real phenomenon, and it is still debated, it is a huge deal. We are not facing the end of fossil fuels, but we are undoubtedly facing the end of cheap fossil fuels.
Try and identify a single facet of modern life that doesn’t have its origins or continued existence courtesy of cheap oil and natural gas. Central heating; air conditioning; cars and the fuel that drives them; powered flight; electric lighting; the very fabric of agriculture, and not least fertilizers. And the clothes worn by ‘Just Stop Oil’ protesters.
In what James Howard Kunstler calls ‘The long emergency’, mankind may face a compelling pressure to revert to a more localised existence. Anything more “global” might be simply impossible once the next oil shock hits (if we’re not already experiencing it). We may have to get used to an altogether more “local” economy, one in which year-round strawberries are a thing of the past. Same goes for commuting for miles in a gas-guzzling SUV. Grotesque and illiberal though they are, things like ULEZ taxes and 15 minute cities seem indicative of the Big State’s determination to make political capital – and of course to seize private capital – out of a perceived concern over scarcity and the environment.
For some years now, we have been writing about the doleful effects of the global financial crisis, and endeavouring to navigate through it. In all that time, energy has been a side issue by comparison with the malign impact of broken banks and bankrupt sovereign finances.
But the long financial crisis will ultimately end, as confidence and economic vigour slowly returns, and those banking institutions that survive come to rebuild their shattered balance sheets. There will be pain to be dished out as holders of government bonds belatedly come to realise that those assets are not as riskless as they thought. That pain indeed began roughly two years ago as the fundamental insolvency of the West became manifest through surging bond yields after policy and market interest rates reached their lowest – and even at the time clearly unsustainable – levels for 5,000 years.
But an energy crisis borne out of a fundamental contraction in new oil supplies, and perhaps savage rises in the price of oil ? It is difficult to foresee any element of modern society that wouldn’t be dramatically affected.
Whether from a social or an investment perspective, the natural response to fears about peak oil is to highlight alternative energies, whether in the form of wind, tide, solar, nuclear or hydrogen. There are obviously certain environmental benefits to these alternative fuel technologies, but typical discussion of their implementation ignores one critical fact. Apart from being markedly less efficient, no single alternative energy source can remotely begin to replace oil over either the short or medium term – because the installed base of hydrocarbon infrastructure is simply too vast. Even if scientists were to suddenly create a magical new energy source that was effectively free to use, it would take decades and trillions of dollars to replace the existing hydrocarbon infrastructure – the network of tens of thousands of petrol stations that support the auto economy, for example. For more and excellent analysis of this topic, we recommend the excellent service provided by the Doomberg team on Substack.
And if peak oil is for real, and if we are close to, or beyond, that peak, one thing seems clear: two-digit oil prices may well soon be a thing of the past, too.
The immediate investment conclusion would seem to be to pile into the oil majors. But while the oil majors may well outperform the broader stock market – in recent history they’ve been absolute cash cows – we’re not convinced that they’ll be the best way to profit from peak oil. Why ? Because they will also be in the unenviable position of having to pay more and more to get every increasingly valuable barrel of oil out of the ground. In other words, while their oil inventory will be worth more in current dollars, their future extraction costs are going inevitably to soar as well, and the balance may not be in favour of stockholders. Precious metals and commodities miners have recently suffered from the shareholder perception (which we happen to think not entirely warranted) that higher extraction costs will outweigh higher future commodities prices.
Oil prices may yet be set for a secular rerating on the back of ‘peak oil’. Current heightened geopolitical tensions and fresh outright military conflict in the Middle East (and Asia ?) will clearly put a bid under prices. And higher prices will to an extent compensate the oil majors for the heightened costs and risks of exploration and production. But oil majors will be obliged to go to ever more remote locations to explore and drill and therefore face more complex geological and geopolitical risks.
Are people living in denial about the severity of the oil challenge facing the global economy ? As a side note, while researching Dr Bartlett’s book, ‘The Essential Exponential’, we happened to stumble upon a review for Colin Campbell’s 2004 book, ‘The truth about oil and the looming energy crisis’..
While on holiday in Italy some years back, we visited the remains of the Roman villa at Desenzano, Lake Garda, one of the most significant Roman villas in the north of the country. We were struck at how the museum’s guidebook described its establishment:
“At the end of the Roman era, the general economic crisis destroyed the small and medium sized country estates and favoured the formation of a limited number of large villae, an expression of a strong concentration of agrarian property. Their proprietors left the city to move onto their land, where… they regained all the authority which they had lost in the deterioration of the political system.”
Not much has changed with the passing of almost two thousand years. Now, as then, the wealthy are retreating to farmland – both geographically and within their investment portfolios – in a general focus on real assets amidst monetary and political uncertainty.
Whether or not we believe in the peak oil thesis, the harsh reality would seem to be that global population growth and trends in energy consumption are imposing an increasingly untenable burden on our installed but secularly underdeveloped and underinvested energy infrastructure. So we must all now pay the price for that colossal political policy failure – both literally, and figuratively.
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: firstname.lastname@example.org.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
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