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The End of the Oil Era

Written by Briton Ryle
Posted January 9, 2019

Who doesn't like a really big idea? I don't mean "you got chocolate in my peanut butter" big. I mean earth-shattering, changes-everything-you-thought-you-knew big. We're talking Darth Vader "I am your father" big. Those four words literally changed everything for Luke. His life couldn't ever be the same after that. There's simply no going back. 

I was probably 13 when I found out about Luke's dad. I was giddy walking out of theater. Star Wars was already awesome, but holy crap! Darth's bombshell changed the meaning of the word awesome. There was now infinite possibility in the world. 

Right now I feel kind of like I just walked out of that movie theater. But this time, it's not just a story that's got my mind reeling. This time it's real. And the implications for investors are simply huge. Screw this up, and it's a problem. Cling to the old investment ways, and you might as well sweep your money into a pile and set it on fire. 

But get it right, and you might still set piles of money on fire... except you'll have so much it doesn't matter.

Now, it's time for the big reveal, the moment I've spent three whole paragraphs and a couple sentence fragments getting to:

The Oil Age Is Over 

I've had a few oil investments in my Wealth Advisory newsletter since I took it over in February 2012. And last year, Jason and I recommended Apache (NYSE: APA) when it was clear that low oil prices were going to force an OPEC production cut. It looked like oil could put in a nice rally. And we were 100% correct. Oil made a huge run, nearly doubling from $40 to $75.

You know how much we made on Apache? Not a goddamn penny. I think we got up about 20% at one point. We've got a loss now, and we're about to take it. 

Now, when an underlying commodity rallies 75% (or whatever) but a producer's share price can only muster a 20% gain, and then the underlying commodity gives back nearly the whole rally, and it all happens in less than a year, it's a pretty good sign that something's wrong. And with oil, there is definitely something wrong. (Or something right, depending on how you look at it.) 

That something is that oil as an investment is done. Because there's basically no way global demand for oil can grow. 

The engine of oil demand is the internal combustion engine (ICE). ICEs uses over 70% of the oil that comes out of the ground. Their days are numbered, too. Electric vehicles (EV) have reached critical mass. EV sales growth will be higher than ICE from here on out.

As Hemingway said about bankruptcy, the change will happen slowly at first, then all at once. If you find yourself shaking your head and thinking, "There's 100 years of history behind the global oil market; EV batteries aren't good enough, it's a fad," or whatever, please refer to my earlier comments about on-fire money. 

Also, pay no attention to the fact that every major carmaker is already in the process of transitioning for an EV world. They probably have no idea what they're doing...

And never mind that stodgy old Warren Buffett's MidAmerican Energy will be the first in the U.S. that can meet its customers’ needs with 100% renewable energy. Selling off his stake in refiner Phillips 66 and buying renewables — he's probably going senile...

I'm sure it doesn't mean anything that Saudi Arabia wants to sell you its oil company, Aramco...

Forgive the sarcasm, but the signs are there if you're willing to look. The smart money is moving. Corporations are planning. And the owners are selling.

Moore's Law and Critical Mass

I am consistently in awe of Moore's law. In 1965, Moore predicted that the number of transistors on a circuit board will double about every two years. Doesn't sound so profound on the surface. But his simple statement perfectly predicts the deflationary aspect of technology that's led to you holding a moon-landing amount of processing power in your hand.

One could argue that Moore's Law predicts the most challenging economic issue facing humanity today: automation. We humans have priced ourselves out of many markets. Machines are taking our jobs. 

Technology makes things cheaper and more efficient. When U.S. oil companies needed to cut costs to survive after the Saudis crushed prices, technology was like, "I got you, bro," and cut drilling costs in half in less than two years. You wanna bet that EV batteries won't be better in two years? Or that charging times are going to fall? 

Now, about that critical mass thing. Maybe you've seen the headlines that car sales fell in China last year for the first time in two decades. That headline should read that ICE sales fell. Because EV sales rose in China last year. And EV sales are expected to account for virtually all sales growth going forward. 

Right now, the numbers aren't huge — 1 million EV cars sold in China last year (after 580K in 2017). It's the growth that matters. Chinese EV sales will rise 60% this year.

Investment money likes growth. EV is where the growth is. I expect to see sales numbers beat expectations pretty consistently for the next several years at least. 

I don't think it's a coincidence that renewable energy and EV sales are taking off as the world gets warmer. This is how investment money and technology work. Sometimes these twin forces seem to get to work on solutions before we even know there are problems.  

So now I am contemplating energy prices. How low can technology push them? I don't know. But I'm going with Moore's law on this one. We are in the early stages of technology-driven energy deflation. And ExxonMobil is a $300 billion company with revenue of $278 billion. The stock is hitting five-year lows right now. 

Use this information as you see fit.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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