The Bullish Case For Oil - Seeking Alpha

The Bullish Case For Oil | Seeking Alpha

The Bullish Case For Oil

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Summary

- Bitcoin mining is creating a larger, more immediate market for natural gas, increasing profitability for oil and gas companies.
- The climate change narrative and government regulations will lead to greater centralization and consolidation in the oil and gas industry.
- The scarcity of oil will drive up prices. However, technology and ingenuity will continue to produce oil at costs that compare favorably to other sources of energy.

Oil field site, in the evening, oil pumps are running, The oil pump and the beautiful sunset reflected in the water zhengzaishuru

Oil field site, in the evening, oil pumps are running, The oil pump and the beautiful sunset reflected in the water

zhengzaishuru

It has been a while since I have posted on Seeking Alpha. I took a few years off to focus and understand what was going on in the world and now I’m back. I had previously written about gold companies but now I will write more generally about other companies as well. Although I will write about companies in general, you will find that much of my focus will be on oil and gas producing companies as well as companies in the broader energy sector. With that being the case, here is my broad bull-thesis for the oil and gas industry.

As an introduction, since my last stint writing for Seeking Alpha, I have become a believer in what bitcoin is going to do for the world. In fact, I even spent an entire year writing a book about my bitcoin research that you can check out in my profile. It isn’t light reading but I believe it provides some unique insight into the world we are living in and the day-to-day events we see filling the headlines.

In its early days, bitcoin was viewed as a speculative asset that would likely go the way of the Holland tulip craze, but now it's been almost a decade and a half and bitcoin is still going strong. And given everything that is happening in the world, we can all agree that bitcoin has a real use case as a store of value, safe from corruption. Given that bitcoin will continue to exist and likely thrive, what this makes possible for oil and gas companies has not yet been realized. This and other trends discussed below will provide strong tailwinds for the oil and gas industry in the immediate future as well as for generations to come, in my opinion.

Bitcoin and Digital Proof-of-Work Currencies (Money Produced With Energy)

Bitcoin is, and will continue to increasingly be a gamechanger for the oil and gas industry. Right around 2021, some oil companies, including the granddaddy of them all, Exxon Mobil( XOM), began to explore the possibilities and the improved economics that bitcoin can bring to their oil and gas operations. How were they going to use bitcoin to improve individual well economics? Bitcoin mining. Bitcoin mining allows these companies to connect any excess energy received at the wellhead to an energy generator, whether that be natural gas or natural gas liquids, and generate energy that is able to power computers to mine bitcoin. This creates an immediate market for natural gas that was otherwise be uneconomical to connect to a pipeline and ship to market. As a result, the excess natural gas was “flared” or simply burned at the wellhead. Thanks to bitcoin, there is a readily available market for natural gas right at the wellhead which will inevitably increase profitability for companies who utilize this technology.

As more and more companies develop bitcoin mining operations, it will force other companies to do the same in order to remain competitive in the marketplace. This will be a multi-decade trend that already has, and will continue to create a bullish trend across various industries. That is my first bullish catalyst for the oil and gas industry. There are certainly governmental risks to this bullish catalyst, but any government policy that gets passed against bitcoin mining will have no merit other than the fact that bitcoin and digital proof-of-work currencies threaten the status quo.

Since America’s founding in 1776, it has continually risen to become one of the most industrialized nations in the world. In fact, the very year that America was founded, a Scotsman named James Watt invented a steam engine that was 75 percent more efficient than any previous steam engine. This was a gamechanger for the use of the steam engine in industrial applications and ultimately led to another phase in the Industrial Revolution that was already taking place. And for those who don’t know, the Latin word for energy is "Industria."

When James Watt invented the steam engine, it unleashed a new era where people could begin using stored energy in the form of fossil fuels to create products and enable them to make labor less laborious. The same thing is happening today, except with money. Today, we are entering an age where energy isn’t just used to create products and services, but is now being used to create the very thing that will someday be used as money, digital proof-of-work currencies. This, in my view, is incredibly bullish for the oil and gas industry at this stage of development.

Climate Change Narrative

My second bull case is the climate change narrative. Whether you are a believer in climate change or not, and I suspect most are not, the narrative is being pushed by the deepest pockets in the world. The largest holding companies in the world(and we all know who they are) are funneling and pressuring companies to take part in their ESG initiatives ( PAXWX). In my opinion, this is clearly a political ploy as companies like Tesla ( TSLA), who one would think should receive a favorable ESG score, has recently received a low ESG score relative to other companies according to the S&P ratings agency. In fact, this particular article notes that Tesla has an ESG score of 37 while various tobacco companies such as Phillip Morris obtained scores that more than doubled Tesla’s. Even some oil companies have higher ESG scores than Tesla, which is counter to what the ESG narrative purports to try to accomplish. And Musk’s other company, Twitter, had an even lower ESG score of just 12. So why does Tesla have such a low score? I think it is obvious and is likely because Elon Musk has refused to play by their rules. In response, Elon Musk tweeted, “Why ESG is the devil…”

Regardless of the merits(or lack thereof) of ESG, I expect the climate change narrative will certainly be with us for this generation, and likely for generations to come. This is simply my opinion, not because I want it to be true, but because I expect it to be true. Until a boundless, clean energy source is found, climate change will be a tool in the pocket of those who wish to manipulate and control people using fear. So what does this mean for energy companies? We have seen this playbook before and any time the government becomes involved, greater centralization and consolidation is usually the end result. Ever heard of "Too Big To Fail," banking? What this means for at least the next few generations is greater and greater centralization inside various facets of the energy industry. In particular, I would expect centralization to take place inside the oil and gas industry as well as energy generation companies such as the utilities.

So why is this bullish for oil and gas companies? This is bullish because the very reason that oil and gas companies will consolidate is because the cost to produce the hydrocarbons will increase. With ever increasing government regulations, consolidation becomes inevitable and the oil and gas producers with legacy properties already producing will experience outsized benefits relative to smaller companies without legacy positions. I would expect the companies that staked out large positions in the horizontal oil shale plays to do well for many, many years. Furthermore, companies are proceeding more cautiously in this environment with their capital investments which could be bullish for oil prices when considering oil supply versus oil demand. If you have a gas powered car, and most of us do, then owning oil stocks could be a wise hedge against rising costs of travel.

This hostile political environment will make it more difficult for smaller companies to enter into the oil and gas industry, although there will still be some. Here's another way to think about the government's policy surrounding oil and gas companies. In the coming generations, energy companies will become the new central banks that use energy to create money, only they will be much more dispersed geographically than the Federal Reserve and its twelve branches. And where money is created, the government will become deeply involved.

Greater Scarcity And Some Lessons From History

Today, the United States uses just over 20 million barrels of oil per day. It is estimated that as of 2021, the United States holds 44.4 billion barrels of oil in the ground as proven reserves. At this pace, without importing any oil from outside countries, the United States will run out of oil in only a few years. However, I assure you this is not a cause for alarm. The United States is not going to run out of oil in the same way that Britain or Germany has never run out of coal. (More on that in a moment) This means that as of 2021, the United States had 5 years of oil reserves but just in 2021 alone, the proven oil reserves increased by 16 percent. As I review company after company in the coming months, we will see that companies always somehow find a way to replace and grow their oil reserves.

Although it will continue to very slowly be phased out of use within society (not in our lifetimes), the scarcity of oil will continue to drive up the price per barrel. But this is nothing to fear, as technology and ingenuity will continue to produce oil at costs people can afford, somewhat. As some economists like to say, "The cure for high commodity prices is high prices."

I enjoy history and even have a website where I document history from a unique perspective. And the one thing that I find interesting is that there are always two narratives at play at the same time. There is always a narrative that purports scarcity and fear (Malthusianism), and one that purports work, ingenuity, and abundance. Let me give you just one example of this, from history.

The year was 1865 and Great Britain had been the greatest empire in the world for several centuries and the discovery of abundant coal mines, or collieries as they were called, had continued to be a factor that propelled Great Britain’s status in the world. But in this year, the British economist William Stanley Jevons wrote a book titled The Coal Question where he presented the question in a Malthusian vein, if Britain had enough coal deposits to continue to meet demand. Jevons stated it this way in his book.... "Are we wise," he stated, "in allowing the commerce of this country to rise beyond the point at which we can long maintain it?"

His conclusion was no. However, seven years earlier, in 1858, the first oil well was discovered in Oil Springs, Ontario and in 1865, while Jevons was worried about coal, the oil industry was born with John D Rockefeller starting what would become Standard Oil. In the very year that the oil industry started, Britain economists were wondering if it had enough coal to keep up with increasing demand. And guess what, Great Britain, to this day has not run out of coal.

This example may cause you to think that I am saying there will be something that displaces oil in the immediate future. And of course there eventually will be, just not immediately. And to be clear, it will never totally be displaced. Now, do I think there will be a form of energy that supplements oil, the same way that oil slowly supplemented energy demand alongside coal. Yes, I do, but I don’t believe it will have any immediate effect on oil demand. I won’t present what I believe that new source of energy will likely be in this article, but as I continue to write, I will make it known where I believe the distant future of the energy industry sits.

In conclusion, oil demand is not going anywhere soon. And unfortunately, most of the United States oil is now coming from tight shale oil deposits, which are more expensive to find and extract. And so this is another reason why established oil and gas companies will benefit from this environment. This presents another barrier to entry for smaller companies which will ultimately have a positive impact on oil's price, benefiting established oil companies.

Counter Arguments

Any time you are making the case for something to behave bullishly, it is also good to understand the counter arguments.

First, this is a broad presentation and doesn’t state anything of the nature of individual companies. When I speak bullishly for or against something this broadly, one should understand that investors must still be strategic in which companies they choose to invest in. However, if I just wanted to invest into the energy industry to have some exposure, I would simply invest in Exxon Mobil and Chevron ( CVX). To buy and hold these companies over the next thirty years will likely generate attractive returns because they will undoubtedly be beneficiaries of the factors mentioned above. However, as I write about companies, I believe we can be more strategic and thoughtful than to buy the industry behemoths and never sell them.

Climate Change and Electric Vehicles Counter Argument

Now, back to the counterarguments. I believe counter arguments are difficult to come by. The primary counterargument is the argument that I am wrong about the climate change narrative and this will have a much larger effect on oil demand than I’m expecting. However, as I pointed out already, oil demand right now in the United States is just over 20 million barrels per day. That demand for oil is not going to go anywhere soon. Oil demand will remain high and increasing in the United States for at least the next seven years or so, or until electric cars begin to go mainstream. This will be something that should continually be reassessed as time and technology progresses.

Also, although the climate narrative is being pushed aggressively in the states, it's not as aggressive in other parts of the world and there are people around the world that in order to lift themselves out of poverty, need energy and won’t necessarily care where that energy comes from. Naturally, fossil fuels will be the most readily available to these peoples.

Alternative Energy Counter Argument

Another counter argument is the alternative energy argument. Everyone knows that these sources of energy, although fine to supplement the grid with, are not reliable as sources of energy every single day. They are weather-dependent and will never be able to replace fossil fuels totally. Furthermore, although no one likes to talk about it, they come with their own environmental hazards. So I would expect renewable energy sources such as wind and solar ( TAN) to have minimal impact in the short to medium term.

If only there was an energy source with dependable run times and little environmental impact that we can use right now. I believe there is and will share that in the future, but it doesn’t affect my bullish thesis for oil at this time.

Fear and History

Scared money doesn't make money. One counterargument is that politicians will be successful in their attempts to kill the oil and natural gas industry. Once again, we must understand that history is not moving backwards, but rather is moving forwards. To believe politicians want to "kill" the oil and gas industry is to take politicians at their word. And any student of history should know not to take a politician at their word. The rhetoric from politicians is likely only a façade for greater government regulation. And again, this has the potential to be bullish for oil prices.

Conclusion

I believe that oil and gas companies will be a bullish investment for at least the next seven years up until 2029-2030. At that point, it will be time to reassess the energy landscape, as the powers that be try to reshape society in several ways, including shifting towards electric vehicles.

But for now, the bullish case for energy sits with the fact that society cannot operate without it. If energy sources were to dry up overnight, society would fall apart alongside it. There are many opportunities right now in the oil and gas industry which I will be highlighting and covering in the coming months with the same level of detail that I once covered gold companies.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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