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Bill received a BS in 1972 from West Point with concentrations in math, physics, chemistry, and engineering. He was an NCAA All American Wrestler and captain of the wrestling team. He is an eight-year infantry veteran, Airborne, Ranger, Arctic Light and Mechanized Infantry in the United States... More
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  • Gasoline Lines by Christmas? Investment Strategy 0 comments
    Nov 20, 2010 1:28 PM | about stocks: CSX, BNI
    Risks of gasoline lines by Christmas are very high in the US East. Within 18 months gas outages will be chronic nation-wide. This article is about investing under such conditions.

    Investment Strategy:
    • Invest in self-reliance where there are free markets.

    Investment Tactics:
    • Watch oil inventories (TWIP) for warnings of oil and gasoline supply shortfalls.
    • Invest in energy technologies and sources with Net Energy of 20:1 or better.  Solar (sun, wind, tides) and some fossil natural gas meet this requirement. Most new oil sources, all biofuels and hydrogen fail this test.
    • Invest in distribution energy networks that will displace the “single-machine” electrical grid. Mimic how the Internet and cell networks displaced analog networks -- networks that encourage tinkering with niche solutions, nurturing serendipity and exposing efforts to lucky breaks and scalability, avoid central planning.
    • Invest in efficiency gains of 10X or better. Buffett bought BNI for this reason; freight rail averages over 400 ton-miles per gallon. Electric cars fail this test. China has several hundred million electric motor scooters that meet this test. Personal Rapid Transit (PRT or PodCars) meets this test. Pickens’ Plan fails this test, but if applied to food distribution trucks, seems necessary.
    • Invest in countries with free markets in power and transport infrastructure.  China and Germany are economic lifeboats, leading world markets in self-reliant solar and wind entrepreneurs. Socialized, centrally planned infrastructure economies, such as the US, stifle innovation; case study, there was no market for the Internet or cell networks before deregulation in 1984.

    Background Key Points :
    • Significance of the change in chronic supply shortfalls.
    • Self-reliance.
    • Gas lines in Southeast in Sept 2008 and the logistical tail.
    • Gas lines by Christmas?
    • Military’s warning of chronic outages.
    • Error rate of EIA's and IEA's forecasts.

    Brutal Fact: Life requires energy; less energy or less affordable energy, less life.

    In oil-powered economies, higher gasoline prices reduced disposable income, reduced cash for mortgages, employment, housing, consumption, food, etc....  As more and more families were forced to choose between paying for their mortgage or commute, foreclosures exposed bad policies (the housing bubble) and collapsed the banking system. The food system seems likely to follow the banking system without aggressive investments in self-reliance.

    Gas lines in Southeast in Sept 2008 and the logistical tail:
    Gas lines hit the Southeast in Sept 2008. By being aware of oil’s logistical tail indicated this risk as noted in the July 2008 Seeking Alpha article “Gas Lines Coming This Fall”.  

    Below are graphs adapted for that article from the EIA’s TWIP Report.  The graph on the left show inventories decreasing. The graph on the right indicated that gas lines would be in the Gulf Coast.

    Required to understand the graphs is an awareness of how inventories are counted by EIA.  Oil inventories include products in pipelines and in transit:
    • 275 million barrels are reported by EIA as 20 days supply but is zero days of consumption away from outages (red area added to graph by the author).
    • 350 million barrels is reported by EIA as 26 days supply but is only six days consumption away from outages.
    • Risk: Consumer fear, keeping tanks full versus half-full, can reduce system inventories by more than one day’s supply. Fear of an outage can create an outage.
    • Risk: A 365 day food cycle powered by 0-5 days of energy inventory is extremely risky and fragile. A growing season could be lost if supply shortfalls hit during critical few weeks of planting or harvest.
    Inventories before outages in 2008

    Gas lines by Christmas?
    Current trends in gasoline inventories looks very risky. Principle risks are to the US East. View the TWIP Report to see regional data. Outages might be narrowly averted this time if refineries closed for maintenance reopen and European imports increase in late November and early December. Note uptick week of Nov 24.
    Drop in Gasoline Inventory

    Warning about EIA reports: The data is excellent but grossly mislabeled. “U.S. Gasoline Oil Days of Supply” is really the number of days of consumption residing in the logistical tail (pipelines, ships, trucks, etc...). My guess is size of the logistical tail is about 197 million barrels of gasoline or “20 days supply” (EIA definition of supply). Author added red to graphs to illustrate the logistical tail.

    Life and all civilization, including the United States developed within a solar energy budget.

    Thomas Edison, inventor of commercial electricity, provided the best investment advice in 1910 (emphasis added by the author):

    "Some day some fellow will invent a way of concentrating and storing up sunshine to use instead of this old, absurd Prometheus scheme of fire. I'll do the trick myself if some one else doesn't get at it. Why, that is all there is about my work in electricity--you know, I never claimed to have invented electricity--that is a campaign lie--nail it!"

    "Sunshine is spread out thin and so is electricity. Perhaps they are the same, but we will take that up later. Now the trick was, you see, to concentrate the juice and liberate it as you needed it. The old-fashioned way inaugurated by Jove, of letting it off in a clap of thunder, is dangerous, disconcerting and wasteful. It doesn't fetch up anywhere. My task was to subdivide the current and use it in a great number of little lights, and to do this I had to store it. And we haven't really found out how to store it yet and let it off real easy-like and cheap. Why, we have just begun to commence to get ready to find out about electricity. This scheme of combustion to get power makes me sick to think of--it is so wasteful. It is just the old, foolish Prometheus idea, and the father of Prometheus was a baboon."

    "When we learn how to store electricity, we will cease being apes ourselves; until then we are tailless orangutans. You see, we should utilize natural forces and thus get all of our power. Sunshine is a form of energy, and the winds and the tides are manifestations of energy."

    "Do we use them? Oh, no! We burn up wood and coal, as renters burn up the front fence for fuel. We live like squatters, not as if we owned the property.

    "There must surely come a time when heat and power will be stored in unlimited quantities in every community, all gathered by natural forces. Electricity ought to be as cheap as oxygen, for it can not be destroyed."

    Enough solar energy hits the Earth every hour of every day to power all human economies for a year. The issue with Renewables is that they behave like Internet servers -- many intermittent, distributed sources. As cell phones are not compatible with analog phone lines, Renewables are not compatible with the "single-machine" centralized electrical grid. Networks have to innovate and will provide incredible investment opportunities. My guess is that rail and PRT networks will replace highways and natural gas (fossil and synthetic) pipelines will replace the electrical grid.

    Edison noted, "Why, we have just begun to commence to get ready to find out about electricity," when World War I, Depression, World War II and REA effectively socialized power and transport and subjected them to government central planning. Innovation stopped. Central planners’ prime directive is consistency; innovation is a consistency failure. The unintended consequences: a century of rotary phones, the loss of countless windmills, thousands of miles of railroads and other efficiency-driven alternatives. We still have the same gasoline mileage as the Model-T. Oil/highways became the monolithic answer to transportation, imports increased to 65%, setting up a Potato Famine potential.

    Millions of job, vast innovation, better service at lower costs resulted after communication infrastructure was returned to a free market governed by performance standards in 1984.

    Investments where governments end central planning and exploit capabilities of free markets will have an advantage. China and Germany are world leaders in solar. Their economies are prospering as the rest of the developed world struggles with $80 a barrel oil.

    Investments in companies that apply the Internet’s concepts of distributed systems to power and transport will do spectacularly well. The book Outliers notes that 20% of the richest people in all human history were born in the US in the 1830's. They leveraged railroads to innovate the shift in energy systems from biofuels to fossil fuels. The next paradigm shift will change energy systems from fossil to solar. Edison was right; central planners stopped innovating.

    Chronic nature of future outages:
    The Joint Forces Command's warning to all US military commands and policy leaders:

    "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day."

    "A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is difficult to predict. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest."

    "Energy production and distribution infrastructure must see significant new investment if energy demand is to be satisfied at a cost compatible with economic growth and prosperity."

    "The discovery rate for new petroleum and gas fields over the past two decades (with the possible exception of Brazil) provides little reason for optimism that future efforts will find major new fields."

    Forward by General James N Mattis

    The US seems especially at risk in that it must borrow money from China to buy imported oil. At this time, US farms cannot function without massive amounts of cheap oil.

    Error rate of EIA and IEA:
    EIA and IEA were created to warn of energy issues. Their actions, intentional and repeated, will likely result in the collapse of governments (Ireland and Greece for starters). The personal harm can be seen in foreclosures for families that risked their life’s savings to buy homes without being warned that gasoline price increases would reduce their disposable income by $2,000 per family per year.

    Dallas Federal Reserve and ASPO-USA (Association for the Study of Peak Oil) provided the following graphic assessment of IEA and EIA repeated forecasting failures for price (left) and supply (right). Even knowing that their forecasts are wildly optimistic (harmful), failures are repeated year after year.

    Dallas Fed & ASPO reports on EIA and IEA repeated forecast errors

    IEA's 2010 World Energy Outlook continues what seems like an intent to mislead. In the following graph, supply meets demand (top of gold area). Major and growing sources of oil are "fields yet to be developed" and "fields yet to be found."  This graph seems to indicate that the oil industry has not been looking for oil nor trying to improve extraction techniques. The "fields yet to be found" will apparently be discovered simultaneously with wells already drilled, as oil apparently will be shipping without the 6-10 years normally required to develop oil fields. Based on the vertical line, the graph was likely created in 2009 and was not adjusted for the BP Spill, drilling moratorium or additional capital risks to exploration.

    Economies powered by "fields yet to be found"

    IEA and EIA historical data is excellent. Using their judgment of future potential has resulted in grave harm. Investing in the oil powered economy seems extremely risky. Solar is intermittent but oil is depleting and "yet to be found" in volumes far exceeding current discoveries.

    I am and encourage others to invest in self-reliance based on the understanding that Edison and General Mattis are right: there is a trick to making solar as useful as electricity and the oil powered economy will be 10 million barrels a day short by 2015.
    I believe that trick, like the Internet and cell phones, is distributed networks in free markets that allow innovation, tinkering and exposes efforts to luck.

    Disclosure: Author is founder and investor in JPods, Inc. a PRT company and investor in synthetic natural gas.
    Stocks: CSX, BNI
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