Drill It Up, I Say

13 thoughts on “Drill It Up, I Say”

1. Humanity is late-cycle !! Well said Mr. H !! Stupidity is so deeply rooted in our human psyche.

2. I am of like mind. Not gratuitously making this political, but much like climate change, I am amazed at the number of people in this country who have no idea we are the world’s leading oil AND gas producer, as well as one of the top oil AND gas EXPORTERS. Without prompting, these same people will explain that Democrats’ green energy fantasies, pipeline resistance and/or irrational antagonism towards carbon are the proximate causes of perceived high energy prices, and if we just loosened things up a bit, we’d be back to $2.00 gasoline prices in no time. I guess add that to the punch card that the GOP is much better for the economy, budget deficit and stock market than the alternative. Mythos uber alles.

   1. Decades of historical data shows that equity markets do much better under Democratic Presidents than under Republicans. Like everything else, humans tend to process information in the way that they feel it should be, not the way things actually are. Even Plato knew that. Don’t be too happy about our energy independence. It is not destined to last. Our exporting what we know we will need later is about as stupid as humans can be.

      1. Agreed. Few also seem to understand/know that the end of the US export embargo for oil came as part of the GOP’s federal budget shenanigans in 2015 as they continued hamstringing Obama at every turn (and as they have continued doing under Biden). The Democrats eventually relented to the largely GOP demand to end the embargo after casual assurances that export volumes would not “likely” be signficant due to prevailing market conditions, and in return for renewable energy subsidies. Trickle down economics never worked well, so I guess gushing out economics was worth a try. Hopefully, I’ll be in the ground by the time we revert back to an energy dependent OPEC pawn.

   2. My thoughts exactly.

3. This assumes there is not an economic choice in the offing. What is the rational choice if solar power trends to zero and electric cars cost less than an ICE car? What is the rational choice if we can efficiently make ethanol from zero cost solar power without the trouble of growing grains? Why eat meat when you will likely live longer and better if you pursue the lower footprint of a plant based diet? These are just a few of many more examples.

   So is continued oil usage an addiction, resistance to change, lack of vision, or it is lack of knowledge?

   I see a large number of irreversible economic and technological changes that are if anything accelerating due to the transition being less costly than oil based machinery. What we are seeing will be in 40 years an ability to approach industrial chemistry with finesse. Compared to what is coming we have used brute force to get things done.

   I sold most of my oil investments not because of lack of profit but because I can ill afford to be holding the bag if there is an economic collapse of the oil based economy.

   1. Timing matters here.

      If you think the transition will be complete 40 years in the future, you can definitely hold oil stocks for another decade or two… I personally think (but also hope so I don’t have super high confidence in my own opinion) that the transition will be faster.

      I am for example pleased to see the US opening its first nuclear plant in a long time. And France is now in the process of authorising the building of a new fleet of reactors.

      So I’d call it within 5 to 15 years, depending on how hard governments push. And/or whether we start being serious about geoengineering.

      1. 40 years is based on personal experience with other catalyst process development in industrial setting. Also adding to this is the time it takes to develop a new battery system from the time it is first demonstrated in a lab. We might see some efficiencies but our past experience is that this is tedious work.

         I started my career in nuclear engineering but I only worked once in the nuclear industry for a DOE project, so generally outside nuclear power. One reason for this is that by the time I had graduated, nuclear power was proven to be too costly after being labeled in the 1950’s to be capable of being ‘too cheap to meter’. Therefore I am once burned twice shy and I have not come to trust that any developments in nuclear will truly lower costs. In any event until a new generation is available and sufficient numbers built we will not know the costs for sure. In the meantime solar power, as a technology and not a process, is likely to continue down the cost curve to near zero in a few years and as noted by Credit Suisse. Roll-to-roll production process development is underway and by some accounts close to startup, therefore lowering costs to near zero could happen in a few years. Then even moderately costly nuclear will be too expensive.

         Nuclear is bandied about partly as some type of protest against ‘green’ policies by making some type of political statement that is intended to anger the ‘greens’. However, it is very very difficult to beat a solar panel for costs when it lasts 25 years and requires no fuel. We are even finding some beneficial spin off benefits like increased agricultural production. We are also seeing in the laboratory means to generate power at night from solar panels. 3 methods different I have read about generate power at night. These are significant developments but only a partial listing of the technological changes afoot. The aforementioned production of chemicals, in some cases at 92% coulombic efficiency, is going to be economically impactful to the United States in the 40 years it will take to retool our petrochemical complexes on the gulf coast.

         So yes there are decades of petrochemical production in our future but this will be at reduced economies of scale and therein lies the risk. Industrial production along the gulf coast is dependent on economies of scale and anything that disrupts that can cause rapid and far reaching impacts. The petrochemical complex along the gulf coast, by some estimates is an economic engine larger than the rest of the world combined, will continue to hum for hundreds of years and the bumps along the way will become a footnote in history. All the above is subjected to the vagaries of future telling and is ‘one side’ of the explanation but it is a side that is not commonly understood even amongst insiders. (Walt, thank you for noting that we must argue both sides)

         Most of these technological changes are a direct result of our ability to understand physical chemistry which is also commonly known as quantum mechanics. I personally am a fan of the Copenhagen approach to this technology as ‘shut up your opinions and calculate’. I use this approach in investing as well.

         1. I don’t favor nuclear to anger the greens, I am angry the greens did not support nuclear and made every possible attempt to sink nuclear as a source of energy.

            But taking your analysis that solar is cheap and getting cheaper still, how do you get 40 years? Installed base has consistently beaten EIA predictions and not by a little…

4. Great piece, I share your proclivity to nod and say very little when listening to 99% of humans.

   I’m also bullish energy — there was a great piece in the times about how all of these new data centers are in need of energy.

   I can’t wait to purchase an EV, but my next vehicle is going to be a hybrid. People buying gas consuming cars today are going to be needing gasoline for many years to come.

   1. (I was curious what you ordered)

5. Agree w/ investment thesis. One fact unmentioned: Biden and Co are buying oil from XOM and others under $79/bbl. Recently, 3m bbl at ~$76/bbl. The Biden oil put. Doubt anyone bet on that scenario in 2020. It’s also a great geopolitical hedge that spins off cash while waiting for the crazy momo algos to discover it.

   Agree climate change is real (it’s ridiculous to need to say it), but as I and some of my friends have impressed upon some environmentally-friendly colleagues and friends, it’s impossible to flip a switch and go from fossil fuels to alt energy. I’m located near a major university and am friends w/ some profs who are experts in nuclear, atmospheric chem and satellite detection of emissions, deforestation and supply chain emissions, etc. All of them endorse the idea that were in a state of energy transition. They are practically minded and will gladly work w/ those in the fossil fuel industry who also recognize the transition state. And no, I’m not blindly naive about greenwashing, some oil execs untruthful past, etc. But at least some younger employees of XOM, CVX, etc., want to facilitate the transition and find a place for XOM and others in the future. Not sure that’s possible, but their hearts are in the right place.

   It may be that an unfortunate turn of events causes energy stocks to do well, but I’m in.

6. I was very overweight oil and gas in 2021-22 and have held a lower weight since 2023, largely because the valuations were so attractive, partially because the physical demand/supply seemed better than the stock action, and finally as a hedge against geopolitical turmoil.

   The majors have been not terrible stocks in the past year – well, not good on a relative basis but tolerable on an absolute basis. Gas has been surprisingly – to me – bad given the growth in US LNG exports, I didn’t grasp how gassy the growth in shale oil production has been, but those names are showing a bit of life. The worst names have been Canadian oil stocks, some of whom have what seem like absurdly low EV / FCF ratios, and honestly I think I’m still there because of stubbornness.

   All in all, still better than investing in US renewable energy, I mean just look at TAN.

   I remind myself sometimes that oil and gas companies should trade at low valuations, because the industry has a finite life. But that life is longer than ours, and “peak oil” is a moving target, so that’s probably an academic point.

   More salient right now, I think, is that a global rate cutting cycle is likely to start by midyear – SNB first – and the Farmers Alamanac says rate cuts tend to support commodity prices.