Hope for alternative forms of energy if you like, but invest in crude
Because I’m a dork, I’ve made a habit of reading the quarterly reports of hedge-fund managers whose thinking I admire. After all, these guys have billions on the line and can afford to conduct original research far more creative and wide-ranging than even that of a giant financial-services company, which must stick to narrowly defined sectors and company sizes within those sectors.
One report that’s caught my eye is that of Common Wealth Opportunity Capital, the embryonic hedge fund run by two partners in Los Angeles and Miami. It took some very special konigees to start a hedge fund in November 2008. Not only do they confirm my worldview—that the triplingof debt during the first six months of the Obama presidency has basically sentenced America to a generation of struggle and wealth depletion—but they also make a clear case for what they’re doing with that information. The fund is up 24 percent in 2009. All the more impressive because it relies so heavily on risk-offsetting trades and hedges.
A recent shareholder report had a chart that felt like a noose around my throat—debt outstanding relative to GDP. This kind of debt will inevitably devalue the dollar used to repay it, and that would typically point to gold and other hard assets. But Reagan Silber and Adam Fisher, the fund’s partners, made a compelling argument for something else: oil. Having heard the case for “peak oil”—the idea that the earth has used more than half the oil it’s ever going to find—basically all my life, I was skeptical. Gas was about a buck-fifty when I got my license 24 years ago, and it’s not much more than that today. No matter how much we burn, there always seems to be more cheap oil available.
But when I called to demand an explanation, they converted me. “Every ounce of gold ever mined is still here,” Silber observed. “Every single barrel of oil ever drilled is gone.” Silber knocked down my objections with one of the better quotes ever squeezed out of a money manager: “If you are longoil, you are short ingenuity.” In other words, you don’t believe man will find an acceptable substitute in time.
The Commonwealth report artfully explains why it will be so difficult to replace oil as an efficient, easily transportable deliverer of energy. The key argument is not that we’re running out of oil; it’s that we’re running out of cheap oil. It points out that the Saudis still get half their ten million barrels a day from the Ghawar field, which was discovered more than 60 years ago. No readily accessible Saudi field that produces even one million barrels a day has been discovered in more than 30 years.
What’s happening is that the production lost from cheap, easily drilled fields isbeingreplaced by oil that’s a lot more expensive to exploit. The Russians used slave labor to take millions of barrels out of easily accessible fields during the communist era; now they’re paying workers to dig in Siberia. Even the best oil find of the past decade— the Santos Basin of Brazil, notably the Tupi field, with five to eight billion barrels—takes a journey through about 18,000 feet of water, rock, and salt. Extraction costs are estimated at $75 a barrel. I’m a believer.
Of course, even if you accept the premise, the real art is expressing it financially. One of the main ways Commonwealth docs it-selling credit-default swaps on Abu Dhabi—isn’t appropriate for individual investors. But there are many ways to bet on oil’s continued sad dominance and the utter failure of all alternatives to deliver calories as densely or any more cheaply.
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