Fossil Fuel Depletion And The Stock Market

Less energy, less securitization and then what?

We live in a time when we’re so used to energy-everywhere that we cannot conceive of a day when that changes, or contextualize it in the homo-sapiens term of 400,000 years

Pre 1800s: Money backed by gold is a receipt. 99.05% of human history.

1800s To Present Day: Money backed by energy is an investment. 0.05% of human history.

Tomorrow: Money not backed by energy is worthless. At current projections our energy-as-investment world will have lasted 0.1% of human history.

Oil is about to enter terminal decline. Whether it happens today, or in 200 years, it’s a blink of an eye for homo sapiens (whose survival, like all species, it not guaranteed).

Without energy all factories are museums of metal sculptures.

Fossil fuels are hundreds of millions of years old. We can’t create them in a factory. Can’t match their energy density using solar/wind.

Uranium is a fixed supply too.

Huge growing supplies of energy in the 1900s created securities which give ownership to that future output.

From 1990 to 2000 the number of securities was growing at 7%. In the past few years it has dropped to under 3%. The decline of securitization is matching the decline in oil/gas reserves.

Interest rates, debt, money supply, etc., are all proxies for energy. They make us feel we’re in control of our economic life. They abstract away our dependence on something that is sticky, smelly, difficult to find and mine.

Energy supplies can explain stock market behavior just as well as interest rates.

Let’s look at how energy flows explains various stock market moves in the past 100 years.

Easy field oil began collapsing in the 1970s. The narrative is that the 1970s were caused by high interest rates or poor monetary policy or Middle East geopolitics.

The problems of the 1970s was partly due to our first brush with diminishing U.S. oil supplies.

The economy picked up at the same time we started extracting (adding) oil from Alaska and the Gulf of Mexico. The Middle East also ramped up production.

We then ran into a supply problem, again, in the 2000s. It wasn’t only housing that caused the Great Financial Crisis, (housing is a proxy) it was the increasing cost of energy extraction.

Quantitative Easing (QE) was also a way to free up debt for widespread fracking.

In 2010 fracking pushes the economy again. Today we have a push into frozen natural gas (LNG). That too won’t last and it’s a fuel of limited utility.

Gas cannot replace gasoline, diesel or jet-fuel of which our modern economies depend.

In the above graphic you can see another illustration of how the decline in field oil (from Alaska and Gulf of Mexico) and ramp up in fracking production explain both the GFC and the market recovery of the 2010s.

Here we see what happened to interest rates during the decline of easy oil in the 1970s. Interest rates are picking up again as, once again, we’re running into oil depletion.

For what it’s worth, I believe we’ll hit double-digit interest rates and inflation in the years ahead.

The above chart illustrates how monetary inflation (debt) is far outpacing current industrial energy supply. I use diesel because it has no replacement and it’s my proxy for industrial output.

Massive amounts of equity and debt securities will end up repriced to reflect energy supplies that won’t come.

The Fed will be helpless to mitigate the consequences.