Are Goehring & Rozencwajg Right about Oil?

Goehring & Rozencwajg Associates are an investment research firm specializing in natural resources. They believe we’re heading into an energy shortage — a shortage in both supply and production that will create significant long-term investment opportunities (if you’re into that sort of thing). I read them for my fix of dystopian non-fiction.

Let’s look at some history, according to G&R.

In 1973 and 79 there was a cut in oil supply from the Middle East which led to higher prices. We also experienced an oil shortage in 2008 when global supplies ran low. However, G&R believes both periods had extra production capacity that went untapped. Once the storage issue was sorted out, production had no problem keeping pace with demand. In other words, we never faced a threat to our long-term energy needs.

They believe that at some point in the near future, possibly 2022, supply will once again contract as demand rises. But this time, there will be NO EXTRA production capacity.

It takes months, if not years, to find, mine and refine oil. Currently, big oil is not investing in production. Indeed, for the past few years they have been spending half of what they spent before the pandemic.

For complex reasons, G&R does not believe shale can ramp-up easily and save the day.

Not surprisingly, oil production has been decreasing. The question is how much is demand decreasing from green energy coming on-line and how much from most people staying at home during the pandemic.

G&R believes the catalyst for rising energy prices is Covid. I’m even more bullish. Add to their argument, domestic violence and war.

I don’t see a war like the past two world wars, where you have soldiers, tanks and bombers. Instead, there will be skirmishes in proxy countries with missiles, drones and especially cyberattacks. These wars will increase energy costs. Risk will get priced in.

The main drivers from previous wars will be the same. Who gets cheap energy? China, the rest of Asia, Europe, etc. No matter how much we suffer from climate change, those with cheaper energy will live better, other things being equal. Those who have oil (fertilizer) for agriculture will eat for less too. People who pay too much, who feel extorted, will attack those controlling production.

In the past two world wars interest rates fell, to pay for them. They rose afterwards. Obviously, today’s interest rates are already low, but they are lower in some countries than others. That is, there is an interest rate, currency, war, in my opinion, but I’ll just gloss over it here.

In any case, after both world wars oil prices rose and never looked back.

I’m not sure oil will come back with a vengeance. So I will make the counter argument.

The first is we have an aging population, which may not have the animal spirits for war. And younger people are probably fine getting their adventure from a video game, rather than joining their friends in a military adventure. Patriotism is also less what it was.

Second, our productivity has been decreasing so energy demand may have already topped out.

Third, game-changing energy storage could become cheap and easily produced. Liquid metals, who knows. The major problem with renewables is when they’re usable.

Because no one knows the future, most big energy companies are playing it safe with cap ex spending. Sure, they may be leaving the world short of energy, but that is the consumer and government’s responsibility to protect. And why invest in oil production when doing so gets you accused of ruining the planet and killing everyone. I am not taking a position here, just pointing out simple psychology.

For those who believe people are woefully deluded about choosing green energy, which may leave you freezing at night, instead of hydrocarbon energy, which is always available, coal is that cynic cynic’s investment.

Here is the thesis again. Green politics have constrained investment in oil. Renewals haven’t been able to guarantee 24/7 capacity. When, or if, demand increases for 24/7 availability, it faces low inventories and reduced capacity to produce.

Goehring and Roozencwajg make many interesting arguments in their research. I have barely skimmed the surface.



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