Peak Oil Theory Springs a Leak – Is “Peak Alpha” Theory Far Behind?

CAPM / Alpha Theory 23 Nov 2006

Peak Oil theorists have recently predicted that the world was once again running out of gas.  But it appears from new research that you can keep that SUV on your 2040 holiday gift list after all.  This report from Cambridge Energy Research Associates (via The Kirk Report) says that evolving technologies will facilitate cheaper extraction of unconventional reserves.

Says CERA’s November 14th press release:

This is the fifth time that the world is said to be running out of oil, says CERA Chairman Daniel Yergin. Each time — whether it was the ‘gasoline famine’ at the end of WWI or the ‘permanent shortage’ of the 1970s — technology and the opening of new frontier areas has banished the specter of decline. There’s no reason to think that technology is finished this time.

“Peak Alpha Theorists” would have us believe the world is running out of alpha.  However, like oil, new market inefficiencies (i.e. alpha opportunities) will continued to be discovered as long as markets evolve.  And, while alpha may look like it’s drying up sometimes, “there’s no reason to think that technology is finished this time.”

The report says production will rise until 2040 when it reaches an “undulating plateau”.  How?  New reserves and better extraction techniques.  CREA says:

“Hubbert failed to recognize that recoverable reserve estimates evolve with time and are subject to significant change and also underplays the substantial impact of technological advances”.

In a similar way, the evolution of financial markets will bring with it new market inefficiencies (creating active management “breadth”).  And as technology and skill evolves, these new reserves (like deep water oil fields) will be discovered and extracted more efficiently (creating active management “depth”).  In fact, the terms “breadth” and “depth” apply quite literally to both oil exploration and active management.

We believe that as long as markets continue to evolve, alpha will never run dry.  Sure, if extraction costs (i.e. management fees) get too high, new marginal exploration would cease – or at least become unprofitable.  Sure, as alternative “fuels” (e.g. market beta, hedge fund “clones”) are discovered, alpha production may fall.  But unlike oil, we believe world alpha reserves are essentially infinite over time.

– Alpha Male

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