R.I.P. 'Peak Oil'
R.I.P. 'Peak Oil'... 'We will never produce the last drop of economic oil'... An unexpected source of 'new' U.S. oil supply... Another of Porter's predictions is playing out right now... Used-car prices are falling faster and faster...
Editor's note: The mailbag is overflowing with feedback on Porter's must-read Friday Digest. If you missed it, drop everything and catch up here.
Is this the death of 'Peak Oil'?
Longtime Digest readers know Porter has been an outspoken critic of the "Peak Oil" story for more than 10 years. And this wasn't just an economic argument – that rising prices would ensure we never "run out" of oil. Rather, he also believed technology would allow us to find and produce vast new deposits of energy. As he explained in the August 31, 2012 Digest...
Today, known reserves are larger than they were in 1956 when [M. King Hubbert] first published his [Peak Oil] theory. Thus, Peak Oil is, at the very least, decades away. But the reality is, our ability to discover new reserves continues to increase. That means it's much more likely the risk of Peak Oil will continue to recede.
There's a cycle here I hope you'll notice... as long as the oil industry has been tracking known reserves, we've seen that reserves tend to keep pace with, or slightly exceed, production. That's counterintuitive. You'd think that as production increases rapidly, reserves would get consumed and the total amounts would fall. But that's simply not what's happened. That's why we have more reserves now than we did 56 years ago, despite the huge increases to production. How is that possible?
Look around. Observe that the same kind of abundance tends to manifest itself in almost every area of human endeavor. The simple fact is, the more energy we use, the more we discover. Likewise, the more computers we make, the better they get. The more food we grow, the more efficiently we can grow it. This so-called experience curve is the result of the application of the human mind. That's the one thing none of the experts ever seems to figure out.
This is the real reason Thomas Malthus was wrong. It is the real underlying reason Hubbert is wrong. Be glad... It explains much of the wealth we enjoy.
Of course, this is exactly what's happened...
New technologies like horizontal drilling and hydraulic fracturing ("fracking") have unlocked vast amounts of new oil from shale.
Today, U.S. oil production is quickly closing in on a new all-time high. And proven reserves have soared, just as Porter predicted. They've grown so much, it's now possible to argue that we may never run out of oil at any price. As Allen Gilmer, co-founder and executive chairman of the energy data analytics firm Drillinginfo, explained to Forbes magazine last week (emphasis added)...
We should view the Permian Basin as a permanent resource... The Permian is best viewed as a near infinite resource – we will never produce the last drop of economic oil from the Basin.
That is the practical reality with the amount of resource that is in the ground. The research we've done indicates that we have at least half a trillion barrels in the Permian at reasonable economics, and it could be as high as 2 trillion barrels.
That is, as a practical matter, an infinite amount of resource, and it is something that has huge geopolitical consequence for the United States, in a very good way. It has a huge consequence in terms of GDP, and right now it is creating an American energy global ascendancy.
In other words, the Permian Basin – which currently accounts for nearly 30% of total U.S. domestic production – contains enough oil to last for another 500 to 2,000 years at current production rates.
As Professor Mark Perry, editor of the popular economics blog Carpe Diem, noted in a recent post, this means there's virtually no chance we'll ever run out of oil, even if production continues to rise. And again, this is just the Permian Basin... And even these mind-boggling numbers are likely to grow as technology improves further.
'Old oil is new again'...
Speaking of U.S. oil production, another unexpected source of "new" supply is coming on line – old, conventional wells.
New technology is opening new stores of oil in wells that were previously thought too expensive to tap. As the Wall Street Journal reported yesterday morning...
As crude prices languish under $50 a barrel, and with increasing costs for land, labor and infrastructure, some shale fracking operations are starting to look expensive. That has some investors turning to conventional drilling to make a profit...
Some oil companies are choosing instead to apply newer technology and methods to vertical wells in century-old American oil fields, betting they can wring out faster and safer returns. The trick, they say, is finding the special locations where stranded oil can be profitably extracted from conventional wells, which are cheaper. They tend to cost less than $1 million, compared to between $6 million and $8 million for an average shale well.
As a result, smaller outfits drilling traditional wells in and around California and Oklahoma say they can make the investments work even at $10 to $30 a barrel.
So much for Peak Oil...
Used-car prices are plummeting at a 'breakneck' pace...
Another of Porter's predictions is also getting attention today...
Longtime readers know he's been warning for more than three years that the boom in subprime lending would lead to disaster for the auto industry. He has repeatedly pointed to growing supplies of used cars – and plunging used-car prices – as a key milestone in the coming crisis. As he and his analysts explained in the March 2014 issue of Stansberry's Investment Advisory (emphasis added)...
It's one of the most important lessons of finance: The easier the lending standards become, the larger the credit losses will eventually grow...
The average auto loan today is for 65 months (five years), and 20% of all auto loans are now for durations between 73 and 84 months. Likewise, the average amount of these loans (more than $26,000) is the largest ever recorded. And finally, the percentage of subprime borrowers is now at a record high – 27% of all car borrowers. That's almost double the amount of subprime borrowers that were in the car market back in 2009.
Americans currently owe more than $800 billion against their cars and trucks – 34% of this debt is owed by subprime credits. Another 10% is owed by "deep subprime" – folks with credit scores below 550...
If you lived through the subprime-mortgage debacle, you must know what will happen... Defaults will suddenly rise. Credit losses will follow. Used-car prices will fall as more and more cars are auctioned off. More and more car buyers will find credit suddenly unavailable. They will be unable to roll over their loans or get into a new lease, as credit becomes tighter. More and more vehicles will pile up on dealer lots.
Delinquencies and defaults have been quietly rising for months. And now, suddenly, used-car prices are accelerating to the downside. As Bloomberg reported this morning...
Your not-that-old car might not be a clunker quite yet, but it's probably a lot closer than you think.
The average used car lost 17% of its value in the past 12 months, dropping from $18,400 to $15,300, according to data from Black Book, an auto analytics company. That annual depreciation figure has been increasing steadily, too. The average used car today depreciates nearly twice as fast as it did in 2014, when the annual rate was just 9.5%...
The problem, of course, is supply. Seven consecutive years of increasing U.S. auto sales have put a glut of vehicles on the road. What's more, an increasing share of those sales came with a lease, so there's now a rising tide of machines flowing back onto the market when their three-year contracts run out.
Hmm, where have we heard that before?
In addition, the article notes the decline is having a dramatic effect on many companies...
The increasing pace of depreciation is also bad news at the corporate level. Companies with huge fleets of cars and trucks – think dealerships and rental chains – are seeing their balance sheets tick down by the day. Consider Avis Budget Group: In the quarter ended June 30, the rental-car empire managed to rent more cars than in the year-earlier period, and at fairly stable prices. Yet its profit dropped 92% as it struggled to sell vehicles it wasn't using. Expenses tied to vehicle depreciation and lease charges increased 12% in the quarter.
Hallett at KAR Auction said many fleet managers are in a similar pickle. At Hertz Global Holdings, for example, depreciation per vehicle was up 27% in the recent quarter; at the time, Hertz had 500,000 vehicles. "We call it losing money by volume," Hallett said.
Avis, in response, has resorted to selling more cars directly to consumers, cutting out the middleman at dealerships to realize slightly higher prices. And it's buying fewer 2018 models as it gears up for next year.
Unfortunately, while many folks are apparently surprised by the sudden decline, we suspect these losses are just beginning...
Today's flood of used cars is being driven by the 3.5 million 2014 vehicles coming "off lease" this year. But there are another 4 million 2015 vehicles coming to the market next year... and a record 4.5 million 2016 models coming in 2019.
In other words, there is more pain ahead. The downturn has barely begun.
New 52-week highs (as of 8/18/17): Alibaba (BABA), PowerShares Chinese Yuan Dim Sum Bond Fund (DSUM); short position in Brinker International (EAT); short position in Ford Motor (F); short position in GGP (GGP), short position in IBM (IBM), and short position in Interpublic Group of Companies (IPG); KraneShares E China Commercial Paper (KCNY); Procter and Gamble (PG).
In today's mailbag, subscribers take sides in the "Porter vs. Sjug" debate. Who are you following? Let us know at feedback@stansberryresearch.com. And no matter which side you choose, be sure to reserve your spot for Steve's can't-miss "Melt Up" event this week. You can sign up for free right here.
"Hi Porter, this Friday's Digest is one of your best and most clearly written Digests to date. Thank you!" – Paid-up subscriber Phil C.
"Hello, Porter – You and Sjug are both correct ... and not just like non-functioning Swiss timepieces. I placed wagers on over 100 of the so-called best Fortune 500 companies after the banking crises and it has been a nice ride based upon my picks. Recently, we crossed over 22,000 on the Dow and I developed a selling frenzy; the more I sold the more I wanted to sell. I had a 1987 grand mal flashback. Then, it hit me that Mr. Market may not be finished mocking the naysayers, so I jumped back into selected good historical performers, but with only a fraction of my former wagers.
"Now, I have plenty of dry powder for the 'Melt Down' while still satisfying my addiction to some great 'Melt Up' stocks. I will, no doubt, be almost all out if we go vertical in one last up move except for some gold and silver royalty issues. Yours was a fantastic column today. Those megatrends will continue regardless of market action so one should never be totally out of the game. Cheers." – Paid-up subscriber Larry Barnes
"Hi, as a die-hard supporter of both Sjug and Porter, I have my feet firmly in both camps (if that is even possible). I am almost fully invested, and recently have invested about 10% of my portfolio outside of the USA – China, Japan, etc. I also have about 10% in gold and silver stocks. I have also got a few LEAPs with puts on DIA and SPY.
"I am also monitoring the situation closely – almost day-to-day – just to see what is going on with the markets. Will I have the discipline to bail when Sjug tells me to? Ah, I hope I do, and I hope I have learned enough from you guys to pull the plug when I get the signal. Cheers." – Paid-up subscriber Ravi S.
"Who's on first? Pulled out to be safe. Nearing retirement and could use an upward bump but risk/reward will keep me here for the most part. Seems that puts and shorts are the best game in town for now. I guess that that means my money is going with the melt down theory. If you knew my investment history you would be smart to go with Steve." – Paid-up subscriber Michael B.
"Porter, Re the Friday column: Cancel on Monday? Not a chance, too much learning to be had. Follow you or Sjug? Maybe both i.e. go with Sjug, hedge with you. Another GREAT Friday piece, always thought provoking. Have a wonderful weekend, best to you and the staff! Peace." – Paid-up 10-year Stansberry Alliance member Mike DiScala
"Porter, I'm currently following Steve's 'Melt Up' theory and investing accordingly. Although I wholeheartedly agree with your assessment of the current risk in the market, history has shown that a market plunge doesn't occur without everyone having already 'bought in' and I think the 'Wall of Worry' is currently intact. My trailing stops (via Trade Stops) are in place, so I'm not concerned about losing more than necessary whether the 'Melt Up' occurs or not...
"In my estimation, the advantage to your position is that the market could melt down soon and you were right or if the 'Melt Up' occurs for a period of time your subscribers may grumble a bit, but when the collapse occurs they'll be thankful they followed a more conservative course. I think, either way, you (Porter) win. Thanks for your great services and sharing of knowledge." – Paid-up subscriber Marc Slotten
"Who am I following, Steve or Porter? Both. I've done great with Steve's China recommendations, but I'm playing it very defensively with tight stops thanks to Porter." – Paid-up subscriber Jay R.
"'Teach a man to fish.' Many people do not want to think for themselves, but for those who want an education and who are not afraid to take responsibility for their actions, this is one of the places to be. [Stansberry Research] gives me well researched background info, so I can make informed decisions. Thanks." – Paid-up subscriber Jim Craned
"Which horse to back? I'm hedging. Based on your and Sjug's advice; raising cash as hard stops are met; have placed 6 – 1/18/19 puts, more to follow and long on 7 of Sjug's recommendations. Since following you folks this past year I'm up 26.3%. Thank you. I've never owned a foreign car, but thanks to Sjug I'm in China, Germany. I'll go where there's money to be made." – Paid-up subscriber Dan C.
"I'll try to follow both of you to some extent... I intend to raise some cash going into the fourth quarter. I'm going to try to make more conservative choices. There are some longer-term puts that I have already selected. But be sure, that if either of you say 'sell everything,' I will follow that direction the next morning." – Paid-up subscriber Richard G.
"Porter, it is my opinion that both you and Sjug are incredibly brilliant and far-seeing when it comes to economics and the world condition. That said, I am primarily following Sjug, but tempering his enthusiasm with your writings.
"Why? It's pretty difficult to argue with Sjug's success rate over time. I was not a believer in him at the beginning, but he just keeps being right. I will continue to follow him confidently through the melt up, but I will be tempering his enthusiasm with your caution and my own situational analysis.
"Who will be right? I think you both will be, the only difference being timing. Who will win? Hopefully me! Keep up the great work." – Paid-up subscriber Ed Labine
Regards,
Justin Brill Baltimore, Maryland August 21, 2017