November 13 – November 19, 2015

“Peak demand” in oil consumption? Pollution in India, Burbank Interview, and a Breakthrough in Battery Storage technology is near.

Clearly over the last seven days there has been a lot of coverage on the world’s commodity markets as supplies are near all-time highs (oil consumer inventories rose to 487.3m barrels – close to the record of 490.9m barrels; FT Energy Source briefing by Kiran Stacey) and on the upcoming United Nations Climate Change Conference in Paris (Nov. 30 – Dec. 11).  However, several articles have stood out as somewhat profound to me along with a video of a guest lecture by John Burbank of Passport Capital at the Haas School of Business on October 5 (I finally got around to watching/finishing it).  First the articles, 1) in The Economist “Oil companies and climate change – Nodding donkeys” brings up the changing dynamics of the energy industry particularly in light of summit (UN Conference) goals, 2) was “Pollution in India: Gasping for air” by Amy Kazmin in The Financial Times that illustrates the challenges that India faces as it seeks to modernize/industrialize itself, and 3) was Ed Crooks “Batteries start to compete for power grid” in The Financial Times that discusses one of the technology advances that will assist countries in achieving the Paris Summit goal – keeping global warming below 2⁰C.

*Note: bold emphasis is mine, italic sections are from the articles.

Oil companies and climate change – Nodding donkeys. The Economist. 14 – 20 Nov. 2015.

“As the Paris summit has approached, ambitious pledges by more than 150 countries to cut greenhouse-gas emissions have taken oil bosses by surprise-even if the pledges are likely to fall short of the target of limiting global warming to two degrees Celsius above pre-industrial levels.”

“The International Energy Agency (IEA), a body that represents oil-consuming countries, says that to keep global warming to two degrees, fossil fuels would need to fall to 60% of the energy mix by 2040.”

“There should be no energy company in the world [which] believes that climate policies will not affect their business.” – Fatih Birol, executive director of IEA

As a result, many oil companies are investing heavily in natural gas as an alternative – “you can argue that Big Oil is becoming Big Gas,” – Occo Roelofsen of McKinsey

“BP executives, also favoring a gassier future, have been modelling potential “demand destruction” scenarios… BP has become one of the first majors to acknowledge the risk that the industry is spending money developing reserves that it may never tap.”

Let that sink in for a minute.  Imagine a scenario where oil is left in the ground because we don’t need it.  Further, that if we’ve reached peak demand, consider the implications for energy companies and oil rich countries if top line revenues stop growing (at least based on current lines of business)…

“Spencer Dale, its [BP] chief economist (and formerly of the Bank of England), recently estimated that the world has almost three times the reserves of oil, gas and coal that it could burn if it were to hit the two-degree goal.”

“Mark Carney, governor of the Bank of England, talks about the possibility of many oilfields turning into “stranded assets,” or “unburnable carbon,” if governments get serious about climate-change action.”

Therefore, it’s no surprise that “Faced with a world awash in crude, oil majors are abandoning high-cost reserves in the Arctic, Canada, North Sea and the Gulf of Mexico.”

Pollution in India: Gasping for air. Amy Kazmin. The Financial Times. 17 Nov. 2015.

According to the World Health Organization, India has 13 of the world’s 20 most polluted cities, as measured by average ambient PM2.5 levels (the particulates that lodge deep in the lungs and raise cancer risks).  Delhi is the most polluted – even worse than Beijing – “thanks to its toxic brew of diesel exhaust, construction dust, industrial emissions and the widespread burning of biofuels for cooking.”

 “India uses dirty diesel – which is often adulterated with subsidized kerosene – and its vehicle emission standards lag 10 to 15 years behind European counterparts.”

Additionally “…Delhi is engulfed each winter by a haze generated by the burning of an estimated 500m tons of post-harvest stubble in the fields in India’s granary states of Punjab and Haryana.”

I can speak from personal experience, pollution can be debilitating (I was hospitalized in Shanghai in January of 2013 – due to high PM2.5 levels).  China has a major problem, but they’re actively seeking to address it and they have the benefit of having already achieved mass industrialization.  India on the other hand has not and here they are trying to boost GDP growth and achieve mass industrialization while already having most of the worst polluted cities in the world.  It is no surprise that India is trying to slow progress for the Paris summit.  Yet, if India is to succeed, they will need to utilize the capabilities of its citizens…

“We are working very hard to improve nutrition, education and skills training to give India a competitive workforce, and this [pollution] could really work against it. The health of kids is important if you want to realize the demographic dividend.” – Onno Ruhl, India Country director of the World Bank

 Passport Capital: Burbank interview at UC Berkeley 10/05

I bring this video up because it brings up valuable insights and particularly in light of negative global GDP growth (in US dollar terms) and declining corporate profits.  Consider that “when growth is scarce, the world is zero-sum.”  You see this playing out with Russia annexing Crimea, ISIS being able to attract young and bored males from Europe and the U.S., Venezuela continuing to implement protectionist policies, U.S. corporations seeking tax inversions, etc.  More importantly, the technology is having a profound impact on change.

Information, one of the most valuable resources, now moves around free.

The internet boom of the late 1990s basically put in place the technological infrastructure that has enabled the “new” technology companies of today to excel.  Efficiencies are rampant and more is being accomplished with less.  “Deflation is progress.”  Growth will not come from resource consumption and likely will not come from an industrializing India.

The industrialization of China was a one-time event. The largest country (per capita) went from hibernation to mass industrialization within 30 years.  Never going to happen again – India won’t come close.

Rather, growth will come from change.

We’re in a world where ‘high-value-added’ things prevail.

The most important things don’t revert to the mean. They Diverge.

 Batteries start to compete for power grid. Ed Crooks. The Financial Times. 17 Nov. 2015.

Speaking of change…

“Within five years, Lazard (the investment bank) believes, the price of batteries is likely to have fallen to the point that they will be competitive against back-up fossil fuel power generation for a wide range of uses.”

 “New electricity storage installed on to the grid to support wind and solar power is likely to grow more than 60-fold from 196 megawatts of capacity this year to 12,700MW in 2025, according to Navigant, a research firm.”

 “Jim Robo, the chief executive of NextEra Energy, told a conference in September he expected that after 2020, “there may never be another peaker (typically a gas-fired power plant to meet high demand and cover uneven supply from renewable energy) built in the United States,” because electricity storage would be used instead.”

Interesting times…

Other Interesting Articles

 Bloomberg Businessweek

 

A Wealth of Common Sense: Buy Side vs. Sell Side 11/17

BloombergBusiness: Blackstone to Buy $3 Billion in Calpers Property Fund Stakes 11/12

Bloomberg News: China Has a $1.2 Trillion Ponzi Finance Problem 11/19

FT: Caterpillar warns lower Chinese demand will limit sales 11/15

FT: Yen’s days as weakest among peers are numbered 11/16

FT: Corporate surpluses are contributing to the savings glut 11/17

FT: Facebook secret weapon for artificial intelligence: humans 11/17

FT: Sharp tells workers to buy company goods 11/18

FT: Macau warns losing streak to continue 11/18

FT: China property – good things come 11/18
InvestmentNews: Nontraded REIT sponsors changing compensation for advisers 11/13

PBN: Hawaii Supreme Court temporarily strips authority of Thirty Meter Telescope land permit 11/17

Reuters: Hot private equity marketplace reduces Calpers’ bargaining power 11/16

WSJ: Park Avenue Apartment Tower Shifts Sales Approach 11/13

WSJ: Why Japan Keeps Falling Into Recession 11/16

WSJ: Japanese Deflation Threat Hangs Over China 11/18

WSJ: Germany – Money for Less than Nothing 11/18

 

Special Reports

Mesirow Financial: Themes on the Economy – “To Catch a Falling Knife – A Conversation with Sam Zell” 11/10

Passport Capital: Burbank interview at UC Berkeley 10/05

 

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