Gregor MacDonald - Energy, transportation, and transitions

 Wp-Content Uploads 2010 05 Blanz-Roadshow-01

Incredible photo manipulation by Hubert Blanz.

Gregor MacDonald is an independent energy analyst & investment consultant. He publishes public analysis to his website, and hosts the internet investment show,, with Howard Lindzon. He offers private consultancy and regular email newsletters on global energy trends & investment guidelines.

I asked him some questions about his background, the state of global energy, the BP disaster, and California's dependency on oil...

How did you end up as an energy investment analyst? Would you describe the work you do now?

In 1995 I moved to London and found that living outside my own country enabled me to see the world with fresh eyes. In university I had studied cultural anthropology with an emphasis on markets and economies, and a number of the insights from those studies began to unfold the more time I spent in the UK, and Europe. I started to become interested in currencies as a cultural phenomenon, for example. I concluded there was very little logic in the purchasing power of the US Dollar, The British Pound, and continental currencies, and I started to form an early idea that perhaps in relation to oil, the US Dollar was overvalued. And that's how my interest in oil began.

For it was soon thereafter that, in order to pursue my idea of the US Dollar's overvaluation, I had to learn more about oil--which was this separate and very large, complex, global system in its own right. Ten years later, and probably 10,000 hours later (see Gladwell's Outliers for a discussion on the significance of 10,000 hours), I find myself doing a host of various research for individuals and a few institutions--primarily on the broader subject of energy. At I share my ideas for free, and also produce a subscription newsletter. At, which is a very cool startup based in the US, I run a model portfolio via and host an internet based show each Sunday night on That broadcast has viewership around the world, from Asia to North America. So, although my days in London are over and I am living back in the States, I still feel connected to people in other countries which is very important to me, and my work.

What does the current landscape of energy look like to you? Do you think renewables will replace fossil fuels any time soon?

Energy transitions, historically, are a long process which tend to be measured best in decades. What's very clear now is that global oil supply, which has been the primary energy source for the world, is no longer available to fund economic growth. We have enough current oil supply to maintain economic stasis for a few more years, but neither in absolute supply volumes nor in terms of affordable supply volumes, is oil able to increase its availability. To fund economic growth, therefore, the world will have to turn to an array of other energy resources. Unfortunately, none of them have the high levels of energy density as oil. This is not only a problem best described by energy physics, but its a problem for humanity because we have built the world over the past 80 years using the most powerful energy source of all. Transitioning now, away from this source, will be a difficult and lengthy process.

What's the most important global trend, in your mind, that people should be considering when thinking about energy?

That the world is increasingly turning to coal as an energy source, as oil is no longer able to fund economic growth. It's nice that so much wind and solar power is being constructed around the world. But, these are technologies to capture diffuse energy. The important trend, and risk, centers on coal.

How do you think the BP disaster in the Gulf of Mexico will affect energy policy in America?

Once again, just as in the conditions which led up to the bursting of the credit bubble, we have completely mis-priced risk. This is a huge subject but the bottom line is that because the new barrel of oil is expensive and hard to extract, not only will we have to pay more for that barrel outright--but we may have to start paying the environmental-risk costs of that barrel. I anticipate that insurance rates will blow sky high for offshore operations, thus lifting the cost structure for new oil even higher. The craziest thing of all? Vast numbers of well-educated people in the West still don't understand or accept peak oil. This is peak. You are watching peak in action, and its coming to us various ways. In the BP Leak, it's coming to us through price, and a tectonic change in perception of risk. As for energy policy, sometimes events like this actually serve to paralyze the policy making process more deeply. For example, there is a spreading view that this event will finally cause Americans to wake up. Don't bet on it.

Do you think there are circumstances or trends in America that could lead to similar energy insurgencies as those in Nigeria?

What we know from history is that large scale problems are simply too big to be addressed by a political process, and often what happens is that crisis--not discretion or choice--is the motivator to change. So, in this regard, we could see a State's Rights movement unfold that would derive some of its strength from those who want to assert state control over resources. I can't see Nigerian level insurgency in the US on the level of guns and boats and small scale military strikes. But, I could see Louisiana suing the government to assert control over oil extraction, or states in the interior attempting to rebuff Federal control over shale gas extraction. We could indeed very much see the issue of Federalism come into play over the issue of natural resources.

What are some of the most important things that California could do to manage it's energy dependence?

California needs to recognize that the automobile and highway system is now in a state of diminishing returns. It's an energy and economic sink, that is a net economic drag on the CA economy. I've done a lot of work in this area. Look at San Bernardino and Riverside counties, with their enormous and leveraged sensitivity to automobile and highway transport. Economically they are hurting very badly. They need gasoline at a dollar, not three to four dollars. Look at the food stamp usage and the unemployment in these counties. It's severe. So, California needs to realize that a dollar invested in maintaining the road-based transport system is a dollar that's going to money heaven, and never coming back.

What's the one possible energy outlier on the horizon that you find most interesting?

If the United States decided to spend a trillion dollars on rail based transport--light rail, commuter rail, high speed rail, and freight rail--and used Chinese financing or manufacturing in part to undertake this project, this could be the trigger for a Sino-American build-out also of utility grade solar and wind to provide the power to such a new system. Were that to happen, some economic synergies and economies of scale might finally come in to play, depressing temporarily the price of oil, and effecting a psychological shift in perception, globally. It's important to remember that the construction fuel for any global build-out of alternative energy is going to be oil. In that context, oil's high energy density would be used more efficiently. In other words, this is really the true fate of oil and the best tactical use for oil: as the construction fuel to fund not further economic growth but rather the massive 10-20 year global engineering project required to build out new power grids and new power generation. Obviously I hope that happens.



  1. I’m curious about some of the claims. For instance the comment that risk wasn’t appropriately priced. This makes sense in general economic terms but I wonder how well prior to the disaster BP felt they mitigated the risk. What did they consider their probability of failure. What was engineered in terms of safety both in design and construction?

    Then we need to ask how do we properly mitigate the risk and what will that cost? Would a relief well be sufficient to mitigate the risk and what would have been the over all price impact on the project? Then we need to ask how high a price of oil would they need to make the relief well economically viable given some reasonable expected rate of return.

    My other question is about the economic viability of rail vs automobile. I’ve heard before some say that high speed trains require a lot of maintenance. Everyone thinks they are such a great idea but if they were so good economically you would think you would see more of them.

    Finally with regards to peak oil that is a fairly big topic so I won’t even touch it.

    1. 2 things.
      First, mis-pricing risk is not just about what BP thought the likelihood of failure was, but rather what they felt the cost of failure would be. They would have only accounted for those costs they believed would accrue to them specifically. For an accidental spill (not due to criminal negligence) their liability is capped at $75 million. That is mis-priced risk, enforced by legislation. BP ought to be legally responsible also for the risks they are forcing others to incur without compensation- all the people living on the gulf coast, for example.

      Second, “Everyone thinks they are such a great idea but if they were so good economically you would think you would see more of them,” if a self-defeating argument. Every new technology is expensive (read: not so good economically) until it is sufficiently developed and deployed. So at first only a few early adopters build them, and many of these experiments will flop (that’s how research works). So then, finally, we reach a point where the technology is viable- yay! Only, all the people who subscribe to your view isnist that because it hasn’t worked on a big scale before, it never can because of some unspecified inherent problem.

    2. “This makes sense in general economic terms but I wonder how well prior to the disaster BP felt they mitigated the risk.”

      They didn’t. BP’s entire risk assessment for the site was a cheap, boilerplate copy used by every major oil producer. They didn’t concern themselves with risk period.

      They never even considered it, and due to the egregious negligence in the regulating bodies, they didn’t have to consider it. BP was making nearly $61,000,000 a day before the spill. A sonic-trigger backup blowout preventer would have cost them $500,000 extra.

      Slowly but surely the inevitability of risk-related pricing is going to make its way into the energy market. Whether it is through a sudden catastrophe like BP’s deepwater horizon spill, or through the slow accumulation of scientific studies and disease cluster analysis that determines coal fired power plants are to blame for increased asthma rates

      1. Thanks for the info on BP’s negligence. I haven’t been following the news that closely lately. If that is all that additional safety would have cost then clearly this is simply a case of negligence and bad engineering and has nothing to do with mispricing risk. Clearly such a safety measure would have had a negligible impact on the return of the well.

        This disaster to me is worse then a nuclear disaster and should have the same level of risk mitigation as nuclear power plants provide.

    3. Everyone thinks they are such a great idea but if they were so good economically you would think you would see more of them.

      There’s a difference between present value and future value. Rail in the U.S. isn’t all that competitive today, but with the price of energy going up, it will be. However, as MacDonald points out, it takes energy to build infrastructure, so if we wait until it is needed, it’ll just become more expensive, ironically delaying the day when it breaks even. The best thing to do would be to build it before it’s needed or even competitive. But that requires foresight, another resource that’s in short supply.

      1. It is great to argue fore-site but government has always been bad at picking winners. That is why the free market has always done better then centrally planed economies. Unfortunately the free market doesn’t apply to transportation because it is subsidized and controlled by government.

        What government do is support fads and I think that this hiders the creative destruction of the free market in business, science, energy and transportation.

        There is a free market mechanism for foresight and it is related to the interest rate and the time value of money. The government makes this artificially low in order to stimulate growth and it results in an over investment in capital and accentuates market swings.

        Well, transportation is not controlled by the free market the government still needs to consider the time value of money as it often needs to borrow money to do large infrastructure projects. Governments typically have a lower borrowing cost then private entities and therefor should have a greater preference for future value then private entities do.

        Now with regards to fore-site if we try to pick the technology based on say the future price of oil not only are we speculating on the price of oil but we are also speculating on what technologies will win in the future. Perhaps the reason we congregate in cities is more due to specialization in labour and has nothing to do with efficiencies in the cost of living or transportation.

        In japan they have buildings which are almost cities in themselves. It is anything but cheap to live in japan. Yet people still congregate in large cities. Perhaps in the future we will see more of this and our transportation will look more like star treck style turbo lifts then the rail system we see today. This may not be cheap but the economic goals may be more about the efficiency of transportation with regards to how quickly and efficiently we move people then the cost of the transportation.

        Another alternative future scenario is perhaps the automobile will not go away and we will simply replace the energy source by something more efficient like say fusion power.

        Foresight is wonderful but the more specific our predictions about the future the more likely we are to fail. The more we try to centrally plan the more we hinder human creativity. It is not at all apparent to me that rail is the future of transportation.

  2. ^^It’s not a very controversial concept — risk is very seldom “appropriately priced” and that’s exactly why the derivatives market is so profitable and busy. The market cannot price what humans have no rational concept of to begin with…

  3. is that an actual photograph, or has it been doctored up? Much of it makes sense, I can see how the exits and entrances work, but some of it looks too dense to be believable.

  4. I am fully onboard with the author’s push for revamping America’s rail structure, especially a high speed cross country one powered by alterna energy sources. It would be awesome to have a system set up with underground cryocooled superconducting cables as well. A trillion dollar price tag seems reasonable and with the price of oil rising inexorably, it could pay itself off in our lifetimes, but good luck getting it through congress. True, there is upkeep involved with rail, same with the roads and highways all over this country. Oil will run out sooner or later, but we are short sighted as a species, which could spell our doom.

  5. Thanks dculberson! I’m still going to use it as a background for a few days, it makes me glad to live in a two lane road kind of town.

  6. “if [high speed trains] were so good economically you would think you would see more of them”

    There are more of them. Spain and South Africa (where I live) spring immediately to mind.

  7. All of these ideas for using the remaining supply of inexpensive oil to build a public transit infrastructure in the United States are fantastic. However, in order to implement this plan the electorate has to be well informed and rational. I’m sorry to be the one to break that you.

    Politically this is impossible without an unambiguous crisis. In November the center-right Democrats are likely to lose power to the far-right Republicans, and with the public already upset about the use of borrowed money for stimulus and bailout programs, these proposals simply won’t happen. They wouldn’t happen with the current Congress, and it’s not going to get more rosy anytime soon.

  8. i dream of a self-sustaining electric car that will have zero emissions and zero fuel expenses. such a vehicle will have an electric motor that will turn the crankshaft and transfer power and torque to the front wheels and a dynamo for a generator at the rear. the generator will then use the power achieved to charge the electric motor and perform electronic tasks such as drive-by-wire and off-engine air conditioning

  9. nuclear power plants, as everyone knows, is not clean energy. because of this, i propose that the volatility of concentrated hydrogen peroxide should be harnessed to full one experiment , it was revealed that when hydrogen peroxide is kept in a small confinement in the presence of a catalyst such as rust , it expands in volume due to the production of steam, causing the confinement to explode from pressure increasing by thousand-fold.couldn’t this energy be used to drive turbines which will power generators?instead, the world relies on radioactive uranium-235 for fuel for powerplants

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