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Making the Case for Alternative Energy Investments: Jeremy Grantham's Initial Report: Running out of Resources

Making the case for Alternative Energy and Sustainability:

Jeremy Grantham is an icon to institutional investors and to a limited number of loyal retail clients.  He is especially popular among financial advisors and brokers.  His opinions and forecasts have had a major influence on the professional advisor.  Mr. Grantham is the founder of investment firm Grantham, Mayo and Van Otterloo Company (NYSEMKT:GMO), a Boston based investment firm that oversees $100 billion for its clients.  Currently, Mr. Grantham is an active member of GMO’s asset allocation division.

Prior to GMO’s founding in 1977, Mr. Grantham was co-founder of Batterymarch Financial Management in 1969.  There, he pioneered the use of commercial indexing, employing the strategy as early as 1971, one of many claims to being first.

Mr. Grantham began his investment career as an economist with Royal Dutch Shell.  He earned his undergraduate degree from the University of Sheffield (U.K.) and an M.B.A. from the Harvard Business School.

In addition to his duties as a member of the allocation committee at GMO, he published a widely read quarterly newsletter that is available on the GMO website, gmo.com.  If you take the time to read some of his prior posts, you will learn that he accurately called the tops in the market in 2000 and 2008, and he is an outspoken critic of public officials, including former Federal Reserve chair, Alan Greenspan.
 
Mr. Grantham's opinions count because he is often correct in his observations.  This has lead to a satisfied group of clients, who continue to invest with him and put their faith in his firm’s advice.  So when he speaks, I listen.

In his latest issue, dated July 27, 2009, the second half of his report is titled:

Initial Report:  Running Out of Resources
Getting used to lower growth and higher prices


After a short discussion about the excesses of the financial industry of the last few years, he commences a discussion on the world’s fast dwindling natural resources.  

There, “…lurks another longer-term and more important factor affecting the future growth, and that is the increasing limitations on resources:  we are simply running out of everything at a dangerous rate.  We apparently have trouble processing numeric issues of this kind, and this missing faculty will cause considerable grief.  We don’t understand the implications of exponential or compound growth rates:  the main implication being that they are impossible to sustain.
"No better example of resource limitation in the face of both denial and strong efforts can be found than U.S. oil production.  As is well known, we have been on the steep down slope of production since 1974 despite our best attempts to “Drill, baby, drill!”  The largest oil discovery in the Gulf in the last 20 years will keep our engines running for mere 41 days.  Nothing we do can reverse the decline, and drilling our reserves faster has been described as “oil independence through more rapid exhaustion of our reserves!”  Coal reserves of the highest quality – anthracite – are basically mined out everywhere and the second choice – bituminous coal – has probably also passed its peak.”

He gets more cheerful,

“All metals are facing the same depletion problem as hydrocarbons.  Where 30 tons of copper ore once produced a ton of copper, it now takes 500 tons of ore!  And with every extra ton of ore required, the energy intensity also rises.”

“This would be a dangerous situation with zero population growth; in fact it would guarantee that per capita growth would slow.  Yet population growth in the last century has been the fastest in the history of man.  The recent 100 year growth exceeded that of any 2000 year block in history.  And in terms of absolute numbers added, the world’s population has increased 2.5 times in my lifetime, from 2.5 billion to 6.5 billion.”

“At 1% growth in hydrocarbon consumption, which would be a dramatic reduction in the growth rates of the last 30 years, our reserves would last for merely one more generation.  As we move through our remarkable and irreplaceable hydrocarbon reserves, the price will, of course, rise remorselessly to ration supplies.  Hydrocarbons will increasingly be limited to the highest and best uses:  (probably) petrochemical feed stocks and aviation fuels.  The price rise, which for a while will quite likely to be parabolic – rising at a increasing rate rather than a steady rate – will have an immediate effect on the price of all agricultural products.  Also affected will be the price of all metals, which too have become extremely energy-intensive, as has hydrocarbon production itself.”

After taking a few moments to chastise mankind for not acting sooner, he goes on to warn,

“We must prepare ourselves for higher resource prices and periods of shortages unlike anything we have faced outside of wartime conditions.  In fact, I believe we are already several years into this painful transition but are still mostly invested in denying it.”
“As a parting note, let me point out that China is showing every sign of being a country ahead of the curve.  There has been a sniff of panic – which I believe is justified – in China’s last 5 years of behavior regarding resource limitation sand possible mitigation through truly dramatic  increases in alternatives, desperate attempts at resource acquisitions, and the fostering of special foreign relationships….It would be convenient if we could offset China’s natural advantages with some of our own; for example, flexibility, a vigorous venture capital industry, and, above all, an enlightened government policy.”

And then, strictly tongue in cheek,

“Do not allow yourselves to be kidded by our usual optimism – this is the Real McCoy!”

Mr. Grantham goes on to recommend reading Garrett Hardin’s book, Living within Limits:  Ecology, Economics, and Population Taboos (Oxford University Press, 1993) and the viewing of two lengthy (but worthwhile) presentations by Albert Bartlett, The Most Important Video You’ll Ever See, Arithmetic, Population and Energy ( 2009 youtube.com).  And, Chris Martenson’s The Crash Course (2009 chrismartenson.com).

I’ve posted Mr. Bartlett's and Mr. Martenson's videos on the blog for your convenience.