Wednesday, June 17, 2015
Lacalle and Parrilla, The Energy World Is Flat
Ten forces are flattening the energy world, helping to make energy more of an enabler and less of a constraint: geopolitics; the energy reserves and resources glut; horizontal drilling and fracking; the energy broadband; overcapacity; globalization, industrialization, and urbanization; demand destruction; demand displacement; regulation and government intervention; and fiscal, monetary and macroeconomic flatteners.
This is, as the ten forces should make evident, a “big picture” book. It looks at how high oil prices have to be for Venezuela and Iran to balance their budgets (over $100/bbl) and at world demographic trends (population growth is slowing, on average the global population is getting older). It uses estimates from the UN for population growth, from the IMF for economic growth, and from the IEA for demand growth to conclude that “a global population growth of 0.7% pa may be able to generate economic growth in real GDP terms of 3.6% pa, while increasing energy consumption by 1.5% pa. These trends are consistent with the work from Laherrere, who claims that world oil consumption and production per capita peaked in 1979.” (p. 128)
How can the investor profit from the current energy revolution? The answers are complicated. For instance, the lead author believes that natural gas will emerge a winner, but, for two reasons, does not recommend buying the natural gas ETF: (1) natural gas will be a winner in volume but not necessarily in price and (2) the U.S. natural gas ETF has historically been a “financial weapon of wealth destruction.” (p. 247) The reason for the latter is that “the roll yield in natural gas has been so extreme, that over the long run the shape of the forward curve has been a more important factor in determining the value of the ETF than the actual price of natural gas.” At the time the author was writing this section, “the price of US natural gas was down 40% since launch, but the ETF was down 95%.” (p. 268)
The key to successful energy investing is to follow capital expenditure. “The winners will be those that ignore fashionable trends and favour good old return on capital as their key guideline—without ignoring [government] policy.” (p. 277)
“In the end,” the book concludes, “energy will continue to be about displacement of the least competitive. And the last barrel of oil will not be worth millions. It will be worth zero.” (p. 278)