Posted June 03, 2021
By Byron King
Crazy Times Open Doors of Opportunity
I was out in front of a neighborhood coffee shop the other day. And not wearing a mask, which felt good.
There were empty parking spots along the sidewalk, kind of unusual for the locale. But soon, two cars pulled in, one after the other.
At first, I didn’t hear the vehicles. They were silent aside from the sound of tires on asphalt. Then I realized that both were battery-powered electric vehicles (EVs), two Teslas.
After parking, the drivers stepped out and walked toward each other. They began to talk, and from where I was, I could overhear the conversation. Basically, it was about what each one thought about their EV.
At one point, one guy said to the other, “I like this Tesla. It’s loaded with tech. I’m not using any gasoline. I save money and it’s a good feeling, like I’m helping the world.”
The other guy nodded, knowingly. Because he too loves his tech and is also saving the world, or so he thinks.
I kept my mouth shut. No need to insert myself into a discussion between total strangers, right?
But c’mon, man… Do you really believe all this EV “tech” is saving the world? Because even a Tesla just moves the energy issue from old fashioned gas tanks to a different sort of system.
Think of it this way:
It’s an amusing cartoon but makes the point. We live in crazy times. People do all sorts of things that might feel good, but at root just shift the problem somewhere else.
We’ll discuss it below. And along the way I’ll mention a few ideas on how to make some money out of this crazy situation.
Let’s dig in…
We’ll begin with a quick overview of oil and what’s going on in that immense sector of the economy. Then later, we’ll discuss some angles on all that magic tech that’s supposed to save the planet. And I’ll name some names along the way.
First, what do we know about oil? Well, people write books on the topic. But this chart sums up where things stand:
Half a century of oil production. Courtesy Prof. Charles Hall.
This is what half a century of global oil output looks like. It comes courtesy of Charles Hall, a retired professor of environmental sciences at SUNY Syracuse. Over his career, Hall wrote 14 books and over 300 articles related to energy, environment and economics. And he knows a few things.
Within the chart, you can see the so-called “peak oil” situation in many parts of the globe, mainly during the 2000s. And no, peak oil is not a discredited concept. As you can see, Prof. Hall labeled entire regions of the world where conventional oil output has maxed-out and is currently in decline.
And notice that U.S. shale oil “wedge” beginning about 2010. That’s the past decade of fracking at work when the U.S. kicked domestic oil output into high gear.
There’s no arguing with barrels at the wellhead. But in the grand landscape of industrial history, it’s fair to say that fracking was a short-term phenomenon unique to a certain moment in time within the U.S. economy, in particular those near-zero interest rates of the past dozen years.
U.S. fracking is now coming to an end, in part because the economics are awful. Plus, in large measure, because of rabid anti-carbon sentiment among the American and Western governing classes who don’t like oil, let alone fracked oil. This group includes politicians, big monied interests, academe, the environmental lobby and more.
We’ve discussed much of this in past articles, and we’ll discuss it again in the future.
For now, just focus on how the chart shows the Middle East is clearly the big global oil producer based on raw numbers. The geology is such that there are beaucoups barrels over there.
Oddly, though, the Middle East doesn’t control global oil pricing these days because of the fractured nature of its regional politics. In fact, Russia controls the world’s current “swing” oil output and hence has much to do with setting prices. I’ve mentioned this point before. We’ll visit it again another time.
The takeaway is that Prof. Hall’s oil chart describes the broad outlines of the world’s current state of petroleum energy. That is, the oil represented here is what powers the world’s cars, trucks, buses, planes, trains and ships. Without this oil, nothing moves.
Of course, there are growing markets where electric power and batteries currently work. Think of a carmaker like Tesla or others, many of which are Chinese companies that you’ve probably never heard of.
Which brings us to the next point.
The Western oil industry is under attack on many fronts. Anti-carbon and anti-oil policies out of the Biden administration speak for themselves. But it’s not just an American political thing.
Some old-line companies like BP and France’s Total have already announced major initiatives to back away from their oil patch roots and move into a more holistic business concept of energy. This includes shifting investment into wind and solar, plus entering into a new financial and monetary arena called “carbon credits.” (Long story here.)
Or consider Shell Oil, which recently lost a court case in the Netherlands. The outcome is that Shell is under order to “decarbonize” in the next decade.
And perhaps you saw news of how shareholders just added three new board members to ExxonMobil, with a mandate to decarbonize the company.
We could list many more examples of these kinds of anti-carbon developments. But the point is that there’s a distinct, global-scale trend against producing and burning up more and more of the earth’s oil endowment.
As retired, sometimes quirky professors are entitled to do, Hall lays out the broad issue, here:
We’re in a strange time, for sure. Courtesy Prof. Charles Hall.
It’s a simple graph but it forces you to think. That is, you must ponder how we arrived at this stage of energy usage after 100-plus years. Frankly, in my experience, most people don’t know and many politicians absolutely are clueless about it.
The point is that there’s gas at the gas station for a long list of serious reasons, and not simply because God is kind and loves us.
It requires immense effort to get energy from the wellhead to your gas tank. And in other words, and as scripture relates, you should give God what is God’s, but you must render unto Caesar what is Caesar’s. And oil has been a mighty Caesar for well over a century.
Meanwhile, where are we just now? Well, some people argue over even mundane day-to-day facts. And yes, there’s oil in the world’s tankers and pipelines and gasoline down at your local filling station.
But if you follow the news even a little bit, you can probably sense that we’re currently in a transitional energy space, which Prof. Hall depicts with that squiggly line at the top of the graph.
And what happens next? What comes out of all these energy arguments we see playing out in Washington, boardrooms, banks, academe, media and more? Stand by on that question.
Try to imagine what happens in a politically anti-carbon world where, for example, new investment in the old-fashioned oil industry goes out of style?
Or where banks are under government and social pressure not to lend to oil companies?
Or where major auto companies like GM, Ford and many others literally brag about how they are transitioning away from internal combustion?
Where is all of this going?
Well, let’s keep it simple and get back to those two Teslas I mentioned at the beginning. Because EV cars like Teslas seta certain pace for a global reset in resource usage.
Oil is still oil, to be sure. It’s not going anywhere and you can ask the Chinese or Russians if you have any doubts.
But some kinds of metal are also becoming much more valuable; and in fact, they’re now the new oil. People have to mine it versus pump it.
For example, EVs use quite a bit more copper than internal combustion vehicles. And I discussed copper a couple of weeks ago.
In that last article I mentioned several investable names for copper, although Whiskey is not a portfolio newsletter and we don’t make formal recommendations. Still, if I mention a company in a good light, it means that I follow it. If you buy in, just be sure to use limit orders for small-cap plays and never chase momentum.
You may also know that EVs use significant amounts of rare earth elements (REEs) too, especially what are called “magnet metals,” namely neodymium and dysprosium. These REEs alone are essential to electric motors that turn the wheels.
I discussed REEs not long ago too.
The REE space is small, volatile and definitely not for the faint of heart. If you follow things though, you may have heard of a company called MP Materials (MP: NYSE). It’s a new version of a series of multiple bankrupt companies, built around the old Mountain Pass mine in California.
Basically, MP mines American ore and ships it to China for processing. Once that ore is on a ship to China, things are out of MP’s hands. That is, MP sells rock.
The company plans to bring some of that REE processing back to U.S. shores, sooner or later. And despite this very constrained business plan, MP boasts a market cap of over $5 billion. It’s wildly overvalued in my view, considering the technical and legal difficulties still ahead. And I wish them well, but I’ll let others hold those shares.
Meanwhile, one undervalued REE play is an early-stage Canadian junior exploration play called Defense Metals (DFMTF: OTC), with a market cap of a mere $18 million. It controls a superb REE ore deposit in British Columbia, a mining-friendly locale.
Defense Metals has proven resource numbers from past work. It’s in the midst of a summer drilling program to bulk up its tonnage. The metallurgy is excellent, meaning the company has demonstrated a process that turns ore into REE output. And the company is in discussions with much larger players who are interested in what’s called an “offtake” agreement.
Canadian juniors go up and down. But in my view, Defense Metals has upside — much more than the inherent downside risk of these kinds of ideas. And there’s likely good news in the pipeline over the next 12 months.
By comparison, and while we’re discussing EVs, I’ll mention a mineral called graphite. It’s a form of carbon, most familiar to people as the “lead” in pencils. That is, you don’t write with metallic lead. You write with graphite.
At any rate, and getting back to those Teslas from above, and the batteries underneath the frames, there’s more graphite in a so-called “lithium ion” battery than there is lithium. And it’s not just any graphite from any run-of-the-mine site either. Battery makers require certain kinds of high-end graphite.
Graphite is a long story, but the search actually took me to Madagascar some years back. I visited a project being put together by a small (at the time) Canadian outfit with a market cap of about $15 million. Indeed, my publisher asked me why I was visiting such a tiny company so far away.
Today that company is called NextSource Materials (NSRCD: OTC) with a market cap near $290 million. It’s run by Sir Mick Davis, who built mining giant Xstrata Plc into a multibillion-dollar giant. And it just announced a major deal to supply graphite to German industrial giant Thyssen-Krupp.
NextSource demonstrates how you might have to deal with frustration for many years in the exploration arena, but the payoff is there if things work out well.
So here we are, in a world built on oil, but where key forces want to turn things around not just fast, but in a staggering way. Obviously, we see alternatives like EVs, but they require all manner of metals and materials that are also becoming more and more scarce and valuable.
We can’t do much about global craziness, but it’s fair to say that the investment angles are quite real. You may as well work to make it benefit you.
And on that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Managing Editor, Rich Retirement Letter
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