Why Are There So Many More Energy Experts than Energy Billionaires?

There are many energy experts. They make a lot of predictions. If only half of those predictions were correct, these experts would be among the richest people in the world. All they need do is act on their advice. Why, then, are there so many energy experts and so few energy billionaires?

The simple and correct response is that most energy experts are wrong most of the time on most topics. Their forecasting record is far worse than that of weather forecasters. The very few experts who get the trends and inflexion points right at least half the time don’t talk about their predictions: they act on them by betting risk capital and building organizational capability and by so doing, become billionaires. As the axiom has it, “Those who can, do; those who can’t, teach.” The vast majority of energy experts teach because they cannot do.

The shabby record of energy experts is very similar to the shabby record of Wall Street experts, especially the Wall Street experts on TV. Yet both kinds of experts stay in business not just for years but sometimes for decades. Often wrong but rarely out of a job or an audience.

Consider the Record

In the 19^th century, as the industrial age was spreading through Europe, the energy experts of the day divined an energy crisis: Europe was going to run out of coal to fuel the new economy. The industrial revolution was over. Of course, nothing of the kind happened. The age of oil began and coal soon became uncompetitive. Today, Europe has plenty of coal.

In the mid 1970s, after the Yom Kippur War, the great majority of energy experts opined that oil was on its way to $100 per barrel (well over $250 per barrel in 2009 dollars, incidentally); Western economies were doomed to stagnation and increasing unemployment; that Saudi Arabia would dominate global capital flows and the petro-dollar recycling problem would overwhelm global financial markets. This was also the time when natural gas was deemed to be in chronic short supply in the US and the Government of that time wanted to ban the use of natural gas in industrial boilers and in power plants to preserve the precious blue flame for residential, commercial, institutional, petrochemical and fertilizer customers.

Indeed, the end of Western dominance became so fashionable as academic dogma that a whole limits to growth school was spawned in the mid 1970s that “proved” via the elaborate models that the world was going to run out of all natural resources in our lifetime, the planet was going to be overpopulated by starving black and brown babies (mostly Indians and Chinese) and markets couldn’t hope to cope with this impending calamity. None of this happened.

In the early 1990s, energy experts were certain that the U.S. faced a power generation crisis: the lights were going to flicker and dim and very high electricity prices were going to be the new norm; we all better get used to a third-world electric power supply “crisis” in the U.S. Now, electricity use is substantially higher than in the mid 19090s, real wholesale electricity prices have fallen sharply and asset owners cannot get the hoped for premium for generation plants built in the past 10 years. Once again, most energy experts were completely wrong.

In 2004, the headline from the energy experts was “natural gas crisis.” We are running out, high and higher natural gas prices are here forever, etc. Just 5 years later, real natural gas prices are markedly lower than at any time in the 1990s. Today, there is confident talk of an enduring glut and a bear market in natural gas.

If the energy experts have a miserable record they are in good company. Wall Street experts, especially research and market strategists, have an even worse record. As a group, they have failed to call major market turns for decades. They have not only consistently misled retail investors, but they have reversed direction without warning and abruptly after the market moves against them. The issue for all these experts is that trends play themselves out, psychology often trumps statistics and even basic relationships change over time because economies, societies and cultures keep changing, sometimes in the most astonishing ways.

So Why Do These Experts Stay in Business?

The real product most experts sell is not truth or unique insight, but validation of a position that advances the transactional, ideological or patronage interests of a constituency. When Wall Street wants to trade for the house account versus the retail investor or when it wants to flog new equity and credit offerings or cajole or frighten executives into mergers and acquisition, it trots out its experts on TV and on webinars and in the financial pages of big city newspapers or in business magazines to articulate and push a point of view carefully disguised as unbiased or objective research. The point of view influences short term decision making (not long term when economic and technological truths invariably triumph) in ways that advance the transactional interests of Wall Street or the ideological interests of politicians or policy makers. For advancing those interests, the experts are well rewarded. Being correct is quite beside the point. No doubt it is a bonus to be correct but not a condition of compensation. In this regard, the only track record that matters is how well the experts facilitated the agendas of their paymasters, not how well they did for retail investors or business executives.

The same is true for energy experts. Almost all energy experts are paid by people who have a vested interest in seeing forecasts of “problem” and “crisis” gain currency and credence. An energy problem or “crisis” immediately creates opportunities for political, public policy and capital market deal making. Money and power gravitate to those who promise to “do something” about the problem or crisis. Armies of analysts, planners, lobbyists, public policy and government agency bureaucrats, corporate managers, Capitol Hill staffers, consultants, and political operatives find tenure and lucrative living “solving” the problem. Of course, their sole objective is to perpetuate the problem since there is no percentage in solving the problem. As soon as the problem of the moment or decade solves itself with no discernable contribution from these false legions, another energy “problem” invariably rises to take its place: bigger, better, more dangerous, requiring an ever expanding share of power, money and prestige to address. Only ordinary, working people and retail investors and tax payers suffer but then, since they don’t pay the experts, it hardly matters.

The true energy experts are those few entrepreneurs who pursue an idea derided by others and turn concept into an operating reality and those corporate leaders who successfully bring large scale innovation and risk capital to the energy industry, worldwide. In so doing, they improve the lives of billions of people. For this, they deserve to be billionaires. The true expert makes it happen. Everyone else is the organ grinder’s monkey.

Disclosure: The author owns stocks in oil, natural gas and electricity companies. Please see the profile for additional disclaimers

Comments

[Alan von Al...:]

"validation of a position that advances the transactional, ideological or patronage interests of a constituency... energy experts are paid by people who have a vested interest in seeing forecasts of 'problem' and 'crisis' gain currency and credence"

We do geology. You do what? - executive coaching. Very nice.

May 06 06:16 AM

[john s. gordon:]

energy experts drive using their rear view mirrors?
> jack

May 06 08:25 AM

[Ferdinand E...:]

Well Vinod, I call myself the leading academic energy economist in the world, I am a brilliant teacher, and if you examine my books and articles you will discover that I have almost always been right.

The problem is those other people. You know, people like Milton Friendman, who said that the price of oil would fall to a few dollars per barrel and OPEC would collapse. I have spent so much time ridiculing those ladies and gentleman that I did not have time to place the right kind of bets, or to work on my charisma. Of course I placed a few of the wrong kind of bets, but that is neither here nor there.

What about the future. Nuclear energy is my thing now. I sent a brilliant short article on that topic to this forum, but it was refused - REFUSED, imagine that, and me the....Of course I seem to remember it being published in a couple of other places, and so I won't have a nervous breakdown, but in any event when you are a genuine expert - like yours truly - there isn't really much room for you out dont cater to the fantasies of the high and mighty. In any event, they haven't barred me from the faculty of economics...yet.

May 06 08:56 AM

[User 314831:]

Academic speculation only requires the skill to develop an opinion & to write about.

Actual speculation or successful speculation requires the skillset of risk taking. Very few understand the difference, let alone what it entails to be consistently successful at that endeavor.

One is like petting your cat on your sofa @ home. The other is akin the entering the tiger's cage at the zoo to do the same.

Here...kitty...kitty.....

May 06 09:22 AM

[stockferret:]

Although I agree that it seems that most 'experts' are wrong more than right, I don't think we should blame the 'experts'. If I read an opinion here or see one on TV or elsewhere all I can really expect is that they state their case, back it up with truthful information, and tell me what, if any, stake they have in the subject of their opinion.

Where we fall down is in accountability. How is it that these 'experts' can be so wrong so often yet still appear on CNBC or have gigs on Yahoo? We need an organization that holds these experts to account. Maybe something similar to Politifact for polititions - a non-biased organization that tracks the experts and the accuracy of their 'facts' and the results of their opinions. Clearly the MSM is just a tool for Wall Street and doesn't hold these folks accountable so we need an independent group who will.

Heck, it sounds like a potential business although I don't know if there is money in it.

May 06 11:47 AM

[Larry House:]

If the weather man can be wrong as often as he is--even with the high tech tools at hand that he has--it is even harder to correctly evaluate all the variables in the world of energy. Besides, how much fun would it be if we KNEW every move in the energy world? Everyone would know it, so how could anyone make money?

May 06 11:48 AM

[Fueled By R...:]

Predictions often do not come true because they are effective in warning people. Example: a hurricane is predicted to hit the coast in the next 72 hours and kill thousands of people. So, what does the rational person do? He prepares for this by leaving the coast and moving inland. If the hurricane does indeed hit with the force predicted, there are a lot fewer people left on the coast available to be killed. Trivial example, but makes the point. However, it is the disaster no one sees coming that is the most devastating. Using the hurricane example, if many of the coastal people fled to higher ground, not anticipating that heavy rains would trigger a massive mud slide that no one predicted....

May 06 01:05 PM

[tuj:]

"The same is true for energy experts. Almost all energy experts are paid by people who have a vested interest in seeing forecasts of “problem” and “crisis” gain currency and credence. An energy problem or “crisis” immediately creates opportunities for political, public policy and capital market deal making."

You fail to consider that many of these experts are in the business not necessarily of producing, but rather of trading the energy commodities. As a trader, it is not one's duty to be long or short, but rather to be right. And the much maligned experts largely have this perspective, but it is of course important to differentiate an expert employed by a producer from one employed by a speculative shop.

Or you can just continue believing that the people who know the most about energy are all in a giant conspiracy against us all.

May 06 01:38 PM

[searcher:]

It used to be said that an 'expert' was anybody more than 10 miles from home. Today, sadly, with nearly instantaneous communications and nearly complete retrieval with ubiquitous access we see that reputations grow and intrench themselves even without the aid of ignorance. Why is that? The need for validation of irrational attitudes.

May 06 02:55 PM