This is a guest post by my partner, Chris Bodnar. You can reach Chris at firstname.lastname@example.org BTW, I love working with smart people 🙂
The OPEC and energy pricing issues you bring up are interesting. I am going to quote Ron Baron the money manager who runs a mutual fund complex with the same name. One caveat, I have not checked the accuracy of the data. When oil was last touching $150/barrel Ron was in the financial press discussing oil supply/demand and prices. The key point he made was that we have only used 1% of our proven reserves since oil started being used as a fuel in the 1800s. Needless to say there is more undiscovered, but difficult to reach/extract, some protected by environmental regulations and some in even politically less friendly places than we source oil today. I concede we may be nearing peak production, but we have decades left where oil is still the key global fuel. Additionally, there are substitutes, however, I recognize they each have their positive and negative attributes: dirty, dangerous, expensive, etc. This is where it may make sense to return to Tim’s initial walk down memory lane- we may be succumbing to recency error by extrapolating the strength of the last 10 or 12 years. We shouldn’t forget that the lows reached in the late 90s were a confluence of factors that in aggregate gave the US low, perhaps artificially low energy prices. The context of variables are as follows: peace dividend following the fall of the Berlin Wall led to inventory liquidation in many raw materials (oil, gold, timber, nickel, etc) by the Russians and the rest of the former Soviet Bloc, a strong dollar on top of a good US economy and “balanced” US budgets, the rise of the big box retailers like WalMart was creating consumer deflation, and China was helping with low labor costs. All those trends caused price bottoms in most commodities in the late 90s around the time of the collapse of Long Term Capital Management. Post LTCM those trends reversed, inflation has picked up steam since with the occurence of 9/11, the Fed’s low interest rate policy after the internet and housing bubbles, and of course the rise of the BRIC countries. The icing on the cake has been the democratization of the financial markets allowing your average mutual fund manager, hedge fund manager, day trader and lowly retail investor to speculate in commodities. Thus in the last price peak three or four years ago saw more speculative holders than “natural” holders of energy contracts. With a government that may be ebasing the US dollar and a Fed running the printing presses oil is probably being used as fiat currency, an inflation hedge/store of value, and political risk hedge. It is interesting to note that the price of oil, a commodity which is more easily transported, is crushing the price of natural gas which has not kept pace despite being cleaner and more plentiful domestically.
Not long after Tim sat in gas lines after buying his first car we had an apocalyptic future predicted by movies like Mad Max. We would all be scrounging for oil in a desert wasteland, luckily a future that 30 years later has not come to pass. Also, Tim mentioned the fuel economy of cars has not improved, but we have had meaningful fuel economy improvements in trucks, light trucks and SUVs.
Finally, will investors make more money in alternative energy/power or conservation technology in the next 10 years? There are a lot of cross currents in the economy and the long groundwork I laid out hints at some of my skepticism that either alternatives or conservation are a lay-up. The answer is – it depends. First, being in the venture business we have a good look at what a lot of smart people are doing with these global issues, but I have no idea what every mad scientist is doing in his or her garage and what fantastic solutions are about to liberated for society to enjoy. As always the keys to succesful investing are timing, valuation, and of course management exectution. However, to take a crack at the 10 year horizon that was contemplated in the question I believe that in the next three years or less conservation is likely to provide better returns as it is a return-on-investment value proposition. Thus customer uptake should face lower hurdles. Alternative energy/power longer term is probably a larger addressable market opportunity which suggests bigger upside potential. But larger opportunity in commodity products requires long capex cycles, long customer adoption cycles, has longer payback periods and if the discoveries/inventions are large enough opportunities may require or force changes on us as dramatic as those brought on by the internal combustion engine over the last 150 years. That means changes in infrastructure, the way consumers live, perhaps the way utilities or governments operate- all of which require a lot of time and money. I believe our children will live in a world not dominated by fossil fuels. The jury is still out as to what form they will take.