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

Includes: OIL, UNG
by: Vinod Dar

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 19th 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

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