Peak oil investment verities

Like many other verities in the investment world, peak oil investment verities have turned out to be anything but. Investment newsletter writer and author Jim Grant likes to say that knowledge in the sciences is cumulative, but knowledge in finance is cyclical.

And, so it has been with the general run of so-called peak oil investment strategies. Their heavy reliance on energy-linked investments made them a boon to all who followed them at first. But in the last six months such investments have suffered catastrophic reversals. The underlying cause, of course, was a devastating and unprecedented swoon in prices for oil, natural gas, and coal. Even uranium prices came down sharply, but this occurred somewhat earlier. Not surprisingly, the share prices of alternative energy companies, which rely on high prices for conventional fuels in order to remain competitive, followed the price of these fuels down sharply as well.

Even a stalwart of some peak oil portfolios, gold, managed to decline in the face of an obvious crackup in the world financial system. Everything seemed to be going down at once. The cause, in part, was that those who borrowed huge sums to gamble in the markets (mostly hedge funds and investment banks) had to sell at any price to pay back their loans before their investment portfolios completely vaporized. Selling begat more selling begat more selling. And with the selling, confidence in the financial system ebbed. The fundamental cause, however, was a swiftly declining economy, finally toppling under the burden of massive debt that individuals, companies and governments are increasingly unable to pay back.

This is not to say that some individuals who take peak oil seriously have not done well with their investments. But their strategies had to have been different from simply holding energy-related investments for the long run. The expectation for many peak oil investors had been that energy prices would rise more or less continuously due to increasing demand and constrained supply. That has not worked out as planned. Lately, economic contraction has led to declining demand which has had more influence on energy prices than any perceived constraint on production. But, of course, this doesn't mean that energy-laden investment portfolios might not prosper from this point on; no one can know for sure.

While the basic thesis of peak oil (and peak natural gas, coal and uranium for that matter) remains intact, its timing and exact effects continue to be elusive. Peak oil can still rightly qualify as a so-called "black swan event." The term, introduced to the public by former hedge fund manager and author Nassim Nicholas Taleb in his book "The Black Swan," denotes an unexpected and rare event of high impact which few people anticipate. It is precisely because few people anticipate it that is has high impact, and peak oil, though it is a better known concept today, remains poorly understood or unknown to the great majority of people on the planet.

The myriad factors that are leading us toward peak oil are not visible to any one observer. We can calculate, we can hypothesize, and we can prognosticate; but we cannot know for certain the date of its arrival or its ultimate effects on society and the markets. There will always be a gap between what we think we know and what we actually know.

The action in the investment markets ought to be a lesson for all those trying to envision what will happen in any complex system, especially one as complex as human society. Our powers of prediction are weak. We need to keep an open mind and observe carefully.

This doesn't mean we shouldn't try to plan or prepare or even invest. Humans are planning animals. But what they are really good at is improvisation. That's why careful attention to what is right before us rather than what we imagine for the future is of critical importance. The kick in the pants that all those who followed the peak oil investment paradigm received last year (including me to a minor degree) is a reminder that we ought not to allow our fantasies of the future to dominate our every action in the here and now.