Get It While You Can

Business Insider has interviewed Jim Chanos, who has made a name for himself in investing as a specialist for shorting companies.

Chanos thinks people should short oil companies. Here is his reason as stated in that interview:

I think if you were to look out five or 10 years, if I was a member of OPEC I would be pumping as much as I could today while it’s worth something because it might not be worth a whole lot by 2030.

The interview goes on to state the reason why he thinks that oil might be “not worth a whole lot in 2030”.

That’s because he expects cars to change to electric vehicles. And he notes that 80 percent of oil demand comes from transport.

Obviously, if members of OPEC take his advice and try to get it while they can, that will be the exact opposite of what they should do under the Phaseout Profit Theory I am discussing here.

All things equal, it will lead to even lower oil prices in the short term. Increasing supply by “pumping as much as you can” has that inconvenient consequence.

But Chanos may be right. I am quite certain that over the next couple of decades cars will switch to electric (as have trains before). It is only a question of how fast that will happen.

And it certainly looks like a problem for the oil industry if 80 percent of their demand is going away. This is a big problem. The oil industry does need a strategy to deal with it.

But the remedy to that problem is not to have a big closing sale. It is not to pump all they can, making global warming worse in the process and ruining the price for their product while demand is still strong.

The remedy is to make sure that prices are high enough to make up for the lost sales volume. That is easily done by introducing a mining schedule.

Always remember that the value of oil reserves goes up with the oil price even at much less sales volume.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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