November 16 2005
[Joel's Note: In today's edition of your Rude reading, Justice Litle draws an analogy between Pascal's wager concerning the presence of the omnipotent being, and the question over the validity of 'Peak Oil" claims. Should you throw caution to the wind as so many are wont to do? Or is a more cautious approach worth your while? Read on to see what Justice has to say on the topic and send your comments to your vagabond editor at aussiejoel@the-rude-awakening.com
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Wall Street, New York
GOD IS, OR HE IS NOT
By Justice Litle
"God is, or he is not. Which way should we incline? Reason cannot answer." - Blaise Pascal
The big oilmen recently gave testimony in Washington. Their multibillion-dollar profits have ruffled feathers, and the dubious notion of a "windfall profits tax" has risen on a current of hot air to top the agenda.
Anxious to distance themselves from the petrocrats in the White House, Republicans have been playing the outrage card more vigorously than Democrats (with one notable exception - the esteemed junior senator from New York). Like me, you may have been tempted to avert your eyes from this shameful spectacle.
Fortunately, the hearings are more bark than bite. Congress knows it, and the oilmen know it too. An ExxonMobil spokesman came close to calling a spade a spade: "In politics, time is measured in two, four or six years, based on the election cycle... In the energy industry, time is measured in decades, based on life cycles of our projects."
In other words, get on with your petty stump speeches so we can get on with our business. This quote from an anonymous European executive is even more blunt: "Oil companies already give enough. In terms of substance, Washington lawmakers will get nothing." Sen. Clinton, put that in your pipe and smoke it.
All theatrics aside, these hearings are interesting for another reason. Congress is guilty of a knee-jerk, populist, rabble-rousing response to high energy prices - which is clearly wrong - while the oilmen defend the virtues of private sector decision-making, which is clearly right. Yet the ends diverge from the means: Whatever its motive, Congress is right to show concern for America's energy future. And regardless of free market principles, the oilmen are wrong to be so sanguine about what is coming down the pike.
In casually dismissing the threat of Peak Oil, the devil- may-care attitude of the oil majors puts us all at risk. They are like the town criers of old, yodeling out with bored certainty: "Twelve o'clock, and all is well, and all wi' be well and all manner a' things is well..."
As if recent history were little more than a bad dream, the biggest-of-the-bigs acts as if cheap energy is just around the corner. BP, for example, still uses a hypothetical crude price of $20 a barrel to test the financial viability of new drilling projects. BP is convinced the price of oil will be cut in half five years from now - or at least its actions say as much.
Few are as dismissive of Peak Oil as Exxon's imperial CEO, Lee Raymond. He has told The Wall Street Journal that "When oil's at $60 a barrel, at least $20 of that is speculative." He goes on to say that a portion of crude's price "is not supported by the fundamentals." Nor does Mr. Raymond take bottleneck issues seriously: He refuses to invest Exxon's money in new refineries, arguing that "You have to think about where margins will be in 10-15 years time." Looking to the long term is generally wise. But does it make sense to ignore the steady trends of the past six months, 12 months and two years? Should a long-term trend be shrugged off as if it were a temporary spike? Does it make sense to pretend that the sea change of globalization and the skyrocketing demands of the developing world do not exist?
As head of a firm with a $360 billion market cap, Mr. Raymond is clearly no buffoon. He has reasons for speaking as he does, and he is not the only insider to pooh-pooh Peak Oil. It appears that for every energy expert who believes, there is another who does not. Matthew Simmons, who argues for Saudi Arabia's inevitable decline in his book, "Twilight in the Desert," was recently attacked by Jim Jarrell of the Ross Smith Energy Group, in a report mockingly titled "Another Day in the Desert." There is no love lost between the two camps.
Who to believe? When it comes to long-range forecasting and choosing among alternatives, one should weigh consequences as well as probabilities. This is where decision theory comes into play. Nearly 3½ centuries ago, the philosopher, Blaise Pascal, planted the seed of modern decision theory with a rather clever apologetics argument. Pascal posited that it is better to believe in God than not, due to the reward-to-risk profile behind one's choice. Embrace Him, Pascal argues, and you either go to heaven or find yourself none the worse for wear. Choose not to believe, however, and one runs the risk of eternal fire and brimstone.
Why bring up Pascal's Wager? If you'll pardon the odd analogy, believing in peak oil is a bit like believing in God. There is plenty of theoretical evidence to make a strong case, yet there is also plenty of ammunition for the doubters. Like God's existence, peak oil is truth to some, yet myth to others. And here is the rub: By the time a firm resolution comes around, it is too late to change tack.
In this regard, Raymond's Wager bears strong resemblance to Pascal's. Like his 17th century predecessor, the modern-day energy CEO weights consequences above probabilities. The key thing is that the reward-to-risk profile for a gargantuan oil major is not what you might expect. In the privacy of Mr. Raymond's executive chambers, the top brass probably reasoned it out like this:
*If Peak Oil turns out to be false, we'll avoid a lot of heartache by sticking with our $20-35 long-term forecast
*If Peak Oil turns out to be true, our current sky-high profits will stay sky-high for years, and we can finance further growth by snapping up independents
*Therefore, ramping up investment now has major downside risk if Peak Oil is wrong, whereas we can sit tight and still do well if Peak Oil is right. Regardless of probabilities, the consequences favor a conservative stance
*Just one snag: we can hardly share this reasoning with the public. To justify our lack of enthusiasm for investment here and now, we'll have to roll out the anti-crisis talking points.
Pascal might not be proud, but he would certainly recognize the logic. When Lee Raymond exudes gruff conviction in dismissing Peak Oil, it is a conviction that he is serving the best interests of his shareholders, not a conviction that his facts are right.
Conclusion: We cannot count on Big Oil to fully address the energy risks ahead. Doing so is simply not in their economic interests. Nor can we count on bumbling government for a workable solution. The only thing we can count on, then, is continued volatility. We will have to keep solving our energy problems the hard way - by the seat of our pants, with no time to spare.
[Joel's Note: Most investors become timid when volatility looks to prevail over calm sailing. Some relish the thought of larger profits to be made on larger, and faster, than normal market swings occur. Rather than sit out the tumultuous cycle ahead in the oil sector, why not turn it into your most profitable cycle yet? Justice's colleague and commodities expert, Kevin Kerr, has recently closed out oil trades with takings of 52%, 27% and 39%. This is something you can't afford to miss. Check it out here:
Hooray for Volatility! agora-inc.com
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