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HedgeFund.net: The Shadow KNOWS

by Marc Raybin ,Editor April 17, 2008

We hate to say it, but we told you so. The Shadow predicted (and chastised) only five months ago the world may have hit Peak Oil and that Peak Food would follow soon thereafter. Fast forward to last week and we see $115 a barrel oil and food riots springing up at various parts of the world.

In case you missed it last November, here is The Shadow’s prediction. Rather than saying The Shadow Sows, perhaps we should rename the column The Shadow Knows.

Don’t forget to tell us what you think in the new comments section below.

Are Hedge Funds Summiting Peak Oil?

November 16, 2007

Oil’s recent flirtation with the $100 per barrel mark is a strong message that our country is completely reliant on “black gold” and the world’s supply is in precarious balance. Hedge fund speculators tend to aim at areas under surges in demand or shortages in supply. They don’t tend to run out and buy Florida real estate right after the bubble has been pricked. But, why oil? Why is the energy sector of hedge funds now larger than all other hedge fund-focused industry sectors combined? Is the answer Peak Oil?

Well, on the off chance you are a Wall Street trader focused solely on the short-term gyrations of stock and bond prices, you might not know or care about peak oil theory. Peak Oil is the point at which annual production of oil plateaus and ultimately begins a slow and generally inevitable decline. The bell curve is a valuable model for the production of limited natural resources. Oil production ramps up as technology is brought to bear in almost every corner of the world, but at some point technology hits the wall. Now many optimists think this wall is so far out in the future that we can all go out and buy Hummers and suck down as much oil as we’d like. However, there is a chance that Peak Oil is now. You see the major oil companies have failed to increase production and may be producing not much more today then they did in the 1990s. Which leaves the state oil companies that control much of the world reserves, but what is the condition of their fields? Behaving like a big canary in the coal mine, Mexico’s miracle field Cantarell is now in a seemingly irreversible and dramatic decline.

If we are unprepared for Peak Oil the potential outcome may be devastating for our way of life and that of the world. Unfortunately, Peak Oil is expected to coincide with Peak Food because oil is required for food growth and delivery. Of course there are hundreds of millions who are not being fed already and these numbers may grow by enormous proportions. What about the fact that at $94 a barrel, many people can’t afford to heat their homes?

While Wall Street and mutual funds bury their heads in the sand like so many ostriches, there is one group of investment funds that is all over the energy equation, hedge funds. Hedge funds see profit in energy that justifies dedicated and focused funds, and these funds are ready to make their 20% incentive fees. The important point for the world is that moderate increases in oil prices have the unique ability to rapidly increase growth in alternative energy before world oil supply begins its decline. Without this surge in oil prices, a sudden disequilibrium in demand and supply would do much more serious damage to our way of life. So if they are right we are better off, and if they are wrong the world obtains oil alternatives at a faster pace, and thus we are better off. No one disputes that oil production will one day peak. I’m happy that Toyota and hedge funds decided not to wait for the memo to begin work on the problem.

The views expressed in this column do not necessarily reflect the views of Channel Capital Group. Inc.

http://www.hedgefund.net/publicnews/default.aspx?story=8669