The following article is based on our recent Big Picture podcast: Banana Greens and Peak Everything.
The shock waves of scarcity have swept across the world, from empty shelves in supermarkets to dwindling natural resources, creating a stark reality that we've begun to call the era of "Peak Everything." The decade's wake-up call came in the form of COVID-19, reminding us how the flutter of a butterfly's wings could, in fact, cause a typhoon.
The Dangers of Scarcity
The coronavirus pandemic, with its consequential lockdowns, became the catalyst, exposing our collective vulnerability. Suddenly, the scarcity of everyday items - from toilet paper to eggs, milk, and chicken - became a stark reality. Even computer chips and drugs were not spared from this conundrum. And it wasn't just the pandemic; the Ukraine war underscored the fragility of our global energy system. This conflict impacted the supply of key commodities like oil, natural gas, and wheat, pushing us to confront the consequences of scarcity.
Though the Covid pandemic and subsequent lockdowns, as well as the Russia-Ukraine war, highlighted the speed with which certain items could quickly disappear or no longer become readily available, the reality is that the US and many other countries have pursued strategies that led us to a point of supply chain fragility and overdependency, and many of these policies are still in play.
The most notable areas where we believe this will present a problem long-term is the fact that investments into raw materials and infrastructure have not kept pace with demand. This is partly due to the prolonged bear market in commodities after the last major bull run but, more recently, the ESG and BANANA (Build Absolutely Nothing Anywhere Near Anybody) Green movements' advocacy for environmental sustainability continues to place heavy restrictions on mining and drilling, which means domestic inventory levels for major commodities are sitting at record lows.
Fossil Fuels and the Peak Oil Predicament
Our energy landscape is a case in point, as energy companies continue to cut back on production and long-term investments in the face of regulatory and political pressure. However, geology itself is also playing a role. The peak of energy discoveries was back in the 1960s, with production peaking in the 1970s. As per BP's Statistical Review, out of 55 oil-producing countries, 46 have now surpassed their peak and are in decline. This leaves just nine nations responsible for compensating the shortfall.
Various signs underscore this point. The confirmation from the Russian Minister in April 2021 that the nation's production could not return to 2019 levels and the revelation during President Biden's visit to Saudi Arabia that no more capacity could be squeezed beyond 13 million barrels per day hint at an undeniable reality - peak "cheap" oil is here, and it's real.
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In a world where everything in our economy is powered by fossil fuels, this is a concerning revelation. Our global GDP and debt-based economic system are predicated on continuous growth, which is impossible without energy, particularly cheap energy. Currently, fossil fuels are still responsible for 82% of our energy use, underpinning our complex, modern economy.
The Green Transition: A Work in Progress
At first glance, transitioning to a green economy seems like the answer. However, it's becoming increasingly clear that the green transition, in its current form, is untenable. A key issue is the sheer quantity of metals required to manufacture one generation of renewable technology. The inconsistency of renewable energy sources such as wind and solar is another concern. They're intermittent, incapable of providing continuous power, and impractical for approximately two-thirds of the planet where wind and solar output is inadequate.
Consider the sheer scale required to replace our current energy consumption of 89.9 million barrels per day or 32.8 billion barrels of oil annually. We would need 15,600 nuclear plants, 15,611,000 wind towers, 380 million acres of land for solar panels, or an impossible 10 billion acres of farmland for biofuels. Additionally, we face obstacles in mining and refining the rare earth metals necessary for these technologies—a sector currently dominated by China.
Conclusion: An Impending Resource War?
The imminent peak of oil production necessitates urgent rethinking. Our dependence on fossil fuels is immense; everything in our homes and stores got there by a truck. As we grapple with these realities, we must acknowledge the potential for shortages, power outs, and higher inflation. The danger lies in not planning ahead to prevent resource wars, a common driver of conflict throughout history.
Indeed, we're faced with difficult decisions, and it seems climate change mitigation efforts have often leaned towards dogmatic adherence rather than a scientifically grounded approach. The US, blessed with an abundance of resources, has suffered not from resource scarcity but from policy decisions that have often been misguided.
Though much of the focus has rightly been placed on semiconductor chips over the past two to three years, one area that may increasingly be a source of conflict underpinning a large number of advanced technologies and military applications—as well as solar, wind, and electric vehicles—is rare earth metals. This was covered in Guillaume Pitron's must-read 2020 book, The Rare Metals War, which we also spoke with him on Financial Sense Newshour here: Guillaume Pitron on The Rare Metals War: The Dark Side of Clean Energy and Digital Technologies.
Investment Opportunities in a Time of Scarcity
Amidst the challenges, there are also investment opportunities. Oil still presents a viable investment option for long-term, value investors, as evidenced by Warren Buffett's exposure to this area. Base metals, the building blocks of many industries, have also become increasingly scarce, which may make them attractive investment opportunities over a multi-year timeframe.
Additionally, mining/agriculture equipment companies, pharmaceuticals, and staples are, we believe, also areas for investors to consider for the long-term, particularly in stable, blue chip companies that offer a decent dividend. The scarcity era necessitates a paradigm shift in our approach to resource management and investment strategies. Unfortunately, without a big change in the political or regulatory climate on mining and production of the raw materials we all need, the low inventory levels we see across the resource space are likely to translate to higher prices in the years ahead.
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