"Kee" Points with Jim Kee, Ph.D.

Amy Myers Jaffe on:

  • The Future of Oil & Gas 
  • Geopolitical Forces
  • Emerging Markets?

Last week STMM hosted Amy Myers Jaffe in Houston for a series of talks titled, “The Future of US Oil & Gas: Technological and Geopolitical Influences.” Amy is the David M. Rubenstein Senior Fellow for Energy and the Environment at the Council on Foreign Relations, and prior to that she held senior positions at the University of California Davis and was also the Wallace S. Wilson Fellow in Energy Studies at Rice University’s James A. Baker III Institute for Public Policy. Amy is also chair of the Future of Oil and Gas at the World Economic Forum in Davos and has been honored by the US Association for Energy Economics for her career contributions to the field of energy economics. She was always one of the most popular speakers at our annual energy symposiums because of her independence of thought, access to major geopolitical figures, and her style as an obvious straight-shooter.

The Future of Oil and Gas

Amy cited the Houston Chronicle as asking the provocative question, “Will Houston become the next rust-belt city?” The basic premise of her talk was that alternative energy technology, particularly electric cars, will be changing the global energy landscape in a dramatic way, with important implications for investors. Electric car mandates and accelerating battery technologies will contribute to this on the demand side, while continued technological advances in energy production - for example using DNA testing for wells - will contribute on the supply side. As for the outlook for oil prices, current turmoil in the middle east, with independence referendums in several countries calling mineral ownership into question, could make 2018 a good year for energy prices. But the longer-term trends are certainly more bearish for the reasons cited above.

As far as investing goes, a 2018 price surge could well be a head-fake. Amy talked of, what in her career, was a 30-year narrative of how oil depletion (by about 2010) would lead to rising values of remaining underground reserves over time, which would increasingly be held by and empower countries like Saudi Arabia and Russia. She always questioned that view, asking, “Why would an industry dominated by exceedingly bright geophysicists and engineers not be characterized by technological advance? That never made any sense to me!” In truth the existing reserves may actually experience falling values over time (a depreciating asset), a possibility few have entertained, and perhaps a reason for the planned initial public offering of Saudi Aramco, one of the “largest enterprises on earth” (WSJ), i.e to monetize some of the value at existing oil prices.

Geopolitical Forces

Amy also mentioned a potential strategy of the Chinese of supplying technology to Iran, knowing it would cause the US to focus military resources on the Middle East rather than pivoting to Asia. With both the US and China being oil importers, and with the on-going shale development in the US, this could well backfire with the US becoming less oil dependent than China. She also talked of China’s enthusiasm for the Paris Climate Accord, with China supplying the world with the alternative energy products (batteries, solar panels, etc.), and mentioned that China currently has over 100 electric car companies. I thought for a minute that this could mean a shift of the world’s clean energy production and manufacturing to one of the most energy and pollution-intensive countries. And indeed this weekend’s Wall Street Journal featured an article by Holman Jenkins that China wants to shift pollution from vehicle tailpipe emissions to “the coal smokestack in the hopes of making cities more livable,” going from being dependent on imported oil to using more domestic coal. This is one reason some refer to electric cars with the derogatory moniker of "coal powered cars."

Emerging Markets

Another provocative topic Amy mentioned was the impact on emerging markets from 3-D printing, which increasingly makes it possible to move manufacturing to the countries consuming the products. This could change the global landscape away from emerging markets being the source of cheap manufacturing and assembly. It is conceivable then that the expected rise in incomes and consumption from those countries could fall well short of expectations.

From an investment perspective, this all reminds me of Wharton Professor Jeremy Siegel’s 2005 book, The Future for Investors. The book opens by asking which company would have rewarded investors the most over the past 50 years, IBM (aka “Big Blue”) or Exxon? IBM outperformed Exxon in all growth categories, like sales, dividends, cash flow, earnings, etc. And yet Exxon was the better stock, doubling the performance of IBM over that period. Siegel’s point was that valuation matters as much as the story. In other words, futuristic thinking can aid, but cannot replace, good fundamental research and analysis.