Gregor MacDonald - Energy, transportation, and transitions

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Gregor MacDonald is an independent energy analyst & investment consultant. He publishes public analysis to his website, Gregor.us and hosts the internet investment show, StockTwits.tv, 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 www.gregor.us I share my ideas for free, and also produce a subscription newsletter. At StockTwits.com, which is a very cool startup based in the US, I run a model portfolio via www.gregorweekly.com and host an internet based show each Sunday night on www.stocktwits.tv. 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.