Lack of transparent disclosure has been an aggravation since my days as an international equity analyst. In my experience, there is only one solution to this aggravation: research. (Occasionally a sharp stick poked at the company directors worked.) The following was prompted by attendance at the ASrIA conference in Hong Kong in September 2011. The challenge to learn as much about the environmental sector in one week for three reasons: (1) How quickly may a director and officer become “reasonably” informed? (2) Do directors and officers need to know about it to survive? (3) If so, what should they be disclosing to shareholders and how? This is what I learnt….. The series runs sequentially over various subjects.
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Peak Oil
The debate is still raging on Peak Oil. Wikipedia reports (with sources) that the “optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis, without requiring major changes in the lifestyle of heavily oil-consuming nations. Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred, that oil production is on the cusp of the peak, or that it will occur shortly. The International Energy Agency (IEA) says production of conventional crude oil peaked in 2006.”
However Wikipedia goes on to say “Thriving economies such as China and India are quickly becoming large oil consumers. China has seen oil consumption grow by 8% yearly since 2002, doubling from 1996-2006.” In many reports this effect is called the motorisation of the economy.
To use Wikipedia as a source may be fudging it for sound analysis, but the point being made is that this information is ubiquitous, so that there cannot be any rationale for Directors and Officers to avoid this knowledge.
So in summary, peak oil was last decade or this decade. That is, in the “now”.
Arguments against Peak Oil
There are arguments that could be made against any concern; that is, for the status quo in Directors and Officers strategic plans. First, that oil may be replaced with renewable energy. However the conversion of farmland to producing alternative biofuels has an increasingly material effect on food production. And there are already 1 billion people going hungry (see later). Food Security is a key global thematic.
Or new sources could be found, such as the “vast tracks of the US are rich in oil, gas and liquids” (1) and new drilling occurring in the Arctic. In the former, fracking, the highly contentious method of extraction, is causing widespread ecological damage, uses chemicals and also substantial amounts of water. Its extraction and use puts more carbon into the environment than coal. There are objections with the former new source from the populace due to ecological disasters. And with the latter it is just a matter of time.
Another new source is oil sands. However, even at its most bullish the oil sands industry is only likely to reach in 2015, 3 million b/day, about 5% of current oil production[. Already there is a proposed EU directive to ban imports of this energy, and also shale gas[vi]. Combined biofuels, oil sands, shale, and deep sea drilling will not replace the present oil deficits[vii] let alone future ones.
If the risky externalities were priced into these new fuel production methods and locations, then the price would become prohibitive. (See later on pricing externalities). There is one example, to give just some understanding of cost, and that is the BP (and others) oil spill in the Gulf of Mexico. To date it is greater than US$41 billion and rising, or more than one third of its market cap, plus another nearly US$400 million in lost oil. And this does not include the cost to the environment that occurred, nor the opportunity cost to BP (and others) of its initial investment.
Further, there will be substantial new demand for these new reserves whatever their cost. The growth mentioned before in China and India will occur as their motor vehicle industries explode (if nothing else). In 1990 China produced few cars[viii]. In 2009 it surpassed the USA as the largest car market, with 13 million sold. By 2020 it is expected to be 330 million cars in China mainland. By 2050 the number of cars globally is expected to double from the level today of 820 million[ix].
From the same source, if China’s per capita oil consumption rose to the level of South Korea’s, its share of the world’s current oil consumption would rise to 70% from its present 10%. If you limit its consumption to equal the USA today, say, oil output would have to rise 13% per annum over the next decade – not the 1% growth rate average since 1975. That is, limit its consumption and the numbers still do not add up.
Strategies Peak Oil
The point is that Peak Oil is with us now, whether you are a director of a bank issuing credit cards [plastic is made from oil waste], or shipping your goods from one place to another, or using large computer facilities, or a large service industry whose staff must travel, the inputs that contribute to your business turnover are disappearing, or at the very least, will materially increase in cost in the near term. Within your current strategic forecast period.
What happens to your profits if the price of oil doubles? On which part of the business does it impact? Is it material? Staff travel for example, even to and from work, could they require an increase in salary? If you don’t measure it you can’t manage it.
How much? Don’t know? As a Director or Officer, you will have to do the numbers.
This is how the Swire Group reads the future:
In a world where negative fallout from man's activities is beginning to threaten the long-term viability of our species, the public rightly demands more accountability and more evidence of good governance in the way large corporations conduct their businesses. Any responsible, proactive company must therefore make these issues central to their business planning. Not to do so would be to abrogate both their commercial and their ethical responsibilities to their stakeholders - including their customers, shareholders and the wider community.[x]
(1) Financial Times 6 October 2011, New Wells to Draw On, Ed Crooks page 11
[v] http://seekingalpha.com/article/21999-crude-oil-is-on-the-rebound-maximize-your-returns-with-these-etfs
[vi] http://www.guardian.co.uk/environment/2011/oct/04/oil-sands-imports-eu-ban
[vii] Peak Oil and the Second Great Depression (2010-2030), Kenneth D Worth, 2010 http://peakoilportfolio.com/home
[viii] US Department of Energy estimates, see following reference for secondary source.
[ix] Consumptionomics; Chandran Nair, 2011, John Wiley & Sons, page 49. An excellent and well researched read by way of an introduction to the changes occurring in Asia.
[x] Swire Group is global diversified group listed on the Hong Kong stock exchange (amongst others). Sustainable Development Statement at http://www.swire.com/eng/sd/overview.htm
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