HUMMONEY - Another Black Swan (Perspective)

-- By Greg Lewin 

The internet has always been a wonderful and dangerous two edged sword of information. Facts and opinions abound unfiltered and unchecked, more often than not of questionable value. But if you spend the time to verify and validate you can gain incredible insight. Over the past several months I have been following an intriguing series of observations which I would like to share which can potentially have important investment implications for investors worldwide.

In March 2010 I read an article in Le Monde, “Washington Considers a Decline of World Oil Production as of 2011.” In the article they interview Glen Sweetnam, who heads the publication of the Department of Energy’s annual International Energy Outlook. He describes what he identifies as a decline of liquid fuels production between 2011 and 2015 as the first stage of the “undulating plateau” pattern which will start when “maximum world oil production is reached.” Further in an April 2009 DOE round-table document entitled “Meeting the Growing Demand for Liquid Fuels,” the DOE had predicted that the decline of supply will be 2% per year starting in 2011, from 87 million barrels per day to just 80 Mbpd in 2015 as demand rises from the current 86Mbpd to 90Mbpd over the same period.

This is some pretty heady stuff so I thought it best to continue to see if we could find some more evidence. In April I found the following statement from the Energy Summary of the United States Department of Defense’s 2010 Joint Operating Environment Report: “By 2012 surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10Mbpd.”

In February 2010 The UK Industry Taskforce on Peak Oil and Energy Security had issued a lengthy report entitled “The Oil Crunch: A Wake-Up Call for the UK Economy.” This is a group of private British companies whose interests span a wide range of business sectors. And the presentation of this data at the Royal Society included Richard Branson of Virgin Group. Amongst their conclusions was that the net flow rate data shows that the increases in extraction will be slowing down in 2011-2013 and dropping thereafter. So the drumbeat of credible sources continues to support similar conclusions.

Another voice chimed in July 2010, as reported in The Guardian, “Lloyd’s Adds Its Voice to Dire ‘Peak Oil’ Warnings.” In a report issued by Lloyd’s of London called “Sustainable Energy Security: Strategic Risks and Opportunities for Business,” they state, “Even before we reach peak oil we could witness an oil supply crunch because of increased Asian demand. Major new investment takes 10-15 years . . . and to date we have not seen the amount of new projects that would supply the projected increase in demand.”

And finally from Spiegel Online in September 2010, a study claimed by the online newspaper to have been confirmed by sources in government circles and not meant for publication produced by the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military, points to peak oil occurring around the year 2010.

This subject is so very important because quite simply, energy makes the world go round. And given that alternatives are not remotely in position to absorb meaningful energy demand (and I recommend you look into this for yourself) this situation resolves itself in 1 of 2 ways: either meaningfully higher prices for not just energy but virtually everything you use in life that is transported, grown in the ground and manufactured, or demand falls meaningfully which means lower consumption, slower economies, poor job prospects and lower stock prices.  Now is the time for investors to think, verify and follow up because the first way to avoid the Black Swans is to identify and analyze them before they hit the pond.

---The views expressed here are of the author, HUMMoney contributor Greg Lewin; currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.