Biggest Casualty of Crude Oil Price Collapse?

Alternative energy 12 Jan 2015

brynjoheadshotBy John Brynjolfsson

What’s the biggest casualty of the crude oil price collapse?

Tesla.

Tesla’s success is a manifestation of the Second Machine Age. During the Second Machine Age fortune “favors those who can innovate and create new products, services, and business models” (Erik Brynjolfsson, Andrew McAfee & Michael Spence, “New World Order” July/August 2014 Foreign Affairs). All those who want to understand the present, and the future, would do well to read this article, and embrace its implications for productivity, career, wealth and life.

However, innovation in Silicon Valley is sorely lagging innovation in North Dakota.

Not far from Tesla’s headquarters in Palo Alto, 50 years ago Gordon Moore of the chip maker Intel suggested the number of transistors in a dense integrated circuit doubles approximately every two years. In the meantime, “doubling efficiency every two years” has become a mantra of Silicon Valley’s innovators like Elon Musk.

North Dakota crude producers or at least Pennsylvania gas producers are outpacing that, and have for almost a decade.

According to noted energy analyst Leonardo Maugeri, new well production in the Marcellus Shale increased six-fold in four years, from 2010 to 2014, while costs decreased 40%. This suggest a tripling, not doubling, of efficiency every two years. Perhaps, Marcellus Gas is not North Dakota Oil, North Dakota Oil is not Gasoline at the Pump, a gas-guzzling pickup is not a Tesla, Detroit is not Palo Alto, doubling efficiency is not sore lagging tripling efficiency and this comparison can’t be taken too literally.

However the recent collapse in spot crude prices, and the durability of this collapse suggested by the almost commensurate drop in 5-years forward crude prices, is real, and it spells a curve in the road ahead for Tesla.

 

Mr. Brynjolfsson John.Brynjolfsson@ArmoredWolf.com oversees all investment activity at Armored Wolf. A popular and provocative communicator, Mr. Brynjolfsson is a frequent guest on CNBC, Bloomberg TV and PBS’s Wealth Track; has been quoted in The New York Times and the Wall Street Journal and featured in Fortune; is a member of industry advisory committees; and has testified before the House Financial Services Committee as an expert on catastrophic risk transfer. Mr. Brynjolfsson is co-author of Inflation-Protection Bonds and co-editor of The Handbook of Inflation-Indexed Bonds. He has more than 20 years of investment experience and holds a bachelor’s degree in physics and mathematics from Columbia College and a master’s degree in finance and economics from the MIT Sloan School of Management.

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