written 7 April 2019
published 14 April 2019
The quantity of global capital has grown since the 60's, and deregulation has accelerated its flow around the world with destabilizing results. Unregulated global capital flow is like a loose cannon on the deck of a ship, rolling out of control as the ship moves, creating destruction as it crashes to a halt. Always chasing the greatest return on investment, money can rush into a regional economy, raising prices, displacing local investors, leaving devastation behind when it retreats. Like a flock of pigeons, a simple event can cause economic panic such as in Southeast Asia in the late 90's.
Investing is a confidence game, in both senses of the word: trust and swindle. To evaluate the worth of a project, an investor must trust they are getting good and complete information. The swindle comes if the information is false, incomplete, or if changing conditions are kept hidden. In a dynamic economic environment, if an investor waits too long, the value of their asset may disappear completely. Being one of the first to make an investment move can avoid economic loss when everyone tries to sell into a market with few buyers.
Fossil fuel stocks have appeared to be solid investments for decades, but the world is changing. Coal powered the rise of the British Empire, and still fuels 30% of the planet. But coal is less energy efficient or versatile than other fossil fuels, and has costly air and water pollution problems, so it is economically disadvantaged in the current marketplace, bankrupting investors.
Oil powered the rise of the American Empire, and still fuels 33% of the planet. Increasing demand drove a global search for new oil fields, but discoveries peaked in the 1960's. The Mexican Cantarell field, discovered in 1976, is the last new reserve producing over a million barrels a day. The average age of the 19 largest fields of conventional oil is almost 70 years. Depletion of these fields, with nothing to replace them, has driven production to more expensive unconventional sources: fracking, deep water, and tar sands. The major oil companies have cut back on further exploration as being too expensive, and the Norwegian Sovereign Wealth Fund, which was founded on North Sea oil, recently decided to completely divest from any further oil or gas exploration.
Domestic conventional oil production peaked in 1972, however, massive investment in fracking over the last decade made America the world production leader in in 2018. But fracking is a tertiary recovery method, literally scraping the bottom of the barrel. The oil is there, but the extraction costs in energy and money are huge. Profitability is affected by how long any given well produces, and at what rate. Conventional wells can produce for decades, declining a few percent per year, but fracked wells decline as rapidly as 30% to 50% per year. New wells have to be drill every year just to keep up with current production, and the best spots are already developed.
In the last decade, the industry lost over $250 billion, and the oil prices needed for fracking profitability would crash the economy. Investors keep pouring money into the industry, hoping the economics will mature and turn around, but the energy return on energy invested is about 5:1, lower than a firewood economy. Eventually investors will abandon delusional thinking, and the rush to a better return on investment could abruptly bankrupting the industry.
Renewable power generation, currently 2% globally, is expanding more rapidly than any other source. Twice as many Americans work in renewable energy (wind and solar) than coal, oil and natural gas combined. Solar panel prices dropped a factor of 15 in the last decade, and grid scale renewable production, combined with storage, is becoming cost competitive with even gas fired turbines.
Renewables have another advantage: free energy. The hardware investment is a fixed cost, which harvests free existing energy for the life of the equipment. Inflation proof power is something no fossil fuel can deliver. Fossil fuels are doomed by economic fundamentals to fail in the marketplace. If we also consider the economic advantage of having a habitable climate for our grandchildren, renewables are a slam dunk.
Divest now, and avoid the rush.
