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.

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