Oil vs. Human Ingenuity: Can Innovation Prevent an Energy Crisis?

During their recent episode, Taylor, Carlisle, and Joshua Young discussed Oil vs. Human Ingenuity: Can Innovation Prevent an Energy Crisis?. Here’s an excerpt from the episode:

Jake: Josh, what would be the counterargument to the thesis that being long-term long oil and gas is being short human ingenuity?

Joshua: I think it sounds really good, because in the last decade–

Jake: That’s why I said it [crosstalk] [laughs]

Joshua: Yeah. Because in the last decade, we saw human ingenuity crash the price and crash the gas price and keep it low. We’re seeing maybe the failure of human ingenuity as supply disappoints. At least, on the gas side, prices rise. Gas was the first mover on shale. It came way sooner than oil. Oil’s way harder. So, if you’re seeing price rise, you’re seeing supply disappoint, you’re seeing core exhaustion in these fields on the gas side, I don’t know why you’d think that you’re not going to see it even more so on the oil side.

So, anyway, I don’t know, there’s these weird sound bites and it’s great for selling subscriptions or whatever. But there’s a reality, which is that one hand, there’s human ingenuity. On the other side, there’s Malthusian scarcity, and we’ve balanced that very well as a species over our modern era. I’m not saying that we won’t be able to solve very high oil prices, but the history is that you need those price spikes in order to incent the investment and time and ingenuity to be able to get to another period of low prices.

The fact that that’s so popular and such a common conception itself is a good indicator that we’re about to experience a period of much higher prices and concern around the ability to innovate out of them.

Jake: It does feel like we’ve landed a few Hail Mary’s over time of– The Green Revolution, the productive output of agriculture from all of our various methods that we use, like huge productivity increases there to the point like, we could feed eight billion people. That was a real question mark for a long time. And then, shale. I put in the same thing of like we landed a Hail Mary. But this expectation that you’re always going to keep landing Hail Mary’s as a species, that might actually be a little bit of a dangerous idea that we’ve all generally accepted.

Joshua: Yeah. I think it’s not that we won’t. It’s that we won’t consistently. And that these Hail Mary’s are the result of enormous amounts of money and time. And so, when you deprive the money by going through a multi-year downturn, then you end up increasing the odds of experiencing a period of shortages. We’ve seen this on agriculture, we’ve seen this in other commodities. That’s what it means for a thing to be cyclical, is that you don’t end up–

We haven’t solved agriculture, we’ve improved productivity, but we also have various challenges associated with it. I don’t think we’ve solved oil and gas either. We’ve improved productivity for a period, found some good resources and then I think there’s some risks around that and those risks increase.

Our base thesis was, hey, there wasn’t enough exploration or delineation going on even back in 2015. And this problem would just compound over time. And so, we’ve seen it compound over time, and we see it as a way worse problem now than it was in 2015. There’s almost no one going and doing anything about it. And so, as you only discover 10% or 20% or so of the reserves that you produce in a year, eventually, you run out of those reserves and then what do you do. It’s not that there’s not that oil there or that ingenuity, you just are going to experience a period of too high prices and too much focus on the thing just like we experienced a long period of arguably too low prices and too little focus.

So, it’s not we can’t do it. It’s not that it’s going to be horrible forever. It’s just, hey, what is it like the good times lead to weak men, and weak men lead to bad times and the bad times lead to strong men sort of circularity. So, it’s similar for cyclical. So, it’s not impossible. We’re not going to have peak oil or anything like that, but we will require another reinvestment cycle. We haven’t had it. I believe in human ingenuity, but also, we need high prices and focus in order to be able to get that.

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