End of Quarter Links

• We now know the incredible growth of shale oil (and shale gas), and the resultant downward pressure it put on oil and gas prices, fooled investors into thinking they could divert huge amounts of capital into unproductive renewable projects without any consequences. What are those consequences and how painful are they going to be? We are only now beginning to find out. In a normal cycle, falling inventory levels, rising prices, and improved profitability would have attracted capital back into the industry by now. Instead, ESG commitments made over the past several years are keeping capital from reentering the oil and gas industry, making the production problems much worse. Oil prices are at 15-year highs and natural gas in Europe and Asia are setting new records and yet E&P capital spending is still down 50% from the peak with shale spending down 60%. Despite record free cash flow, companies prefer to return capital through dividends and share buybacks rather than drill new wells. Several E&P executives were brought before Congress last fall and criticized for not doing more to curtail their fossil fuel production. These same companies were called to Washington again in April and asked why they were not producing more. Unfortunately, the impact of many years of anti-fossil fuel rhetoric cannot be undone overnight. Another major issue facing the energy industry is that, although the shale resource is extremely large, it is ultimately finite just like any other conventional field. Like a conventional resource, a shale basin ramps up early in its life then plateaus and ultimately declines. We were among the first to intensely study the concept of shale depletion as early as 2019 and we concluded their best days were likely past. This was an incredibly important conclusion given the US shale basins represented nearly 90% of all non-OPEC+ growth between 2010 and 2019. In our Q4 2019 letter, we laid out our research and predicted that shale growth would begin to falter, causing the global crude market to slip into deficit. So far this is exactly what has happened. [Goehring & Rozencwajg]
  
• ExxonMobil’s chief executive predicted a resurgence of investment in fossil fuel production as he blamed soaring oil and gas prices on pressure to move to cleaner energy at a time of relentless demand. Darren Woods, the head of the biggest western oil and gas supermajor, said efforts to reduce emissions by cutting production before addressing consumption had left the world struggling to meet energy needs, pointing to an “optimistic view” about how quickly the energy transition can happen. Governments had not only failed to deal “with the demand side of the equation” but also did not recognise “that you need a fairly robust set of alternative solutions if you’re going to reliably and affordably meet the needs of people”, Woods told the Financial Times. [FT]
• I knew these were time-wasting sites, but I didn’t realize that scrolling through short-form content like this could actually disrupt my attention span so deeply that I wouldn’t be able to sustain my concentration on books anymore. I didn’t realize that I was training my brain to glance and skim, reading only a few sentences or watching a short clip before shifting focus to the next snippet. [link]
• A federal appeals court on Friday granted Juul Labs Inc. a temporary stay of the Food and Drug Administration’s order for the vaping company to pull its e-cigarettes off the U.S. market. A panel of judges from the U.S. Court of Appeals for the D.C. Circuit on Friday afternoon granted Juul’s request to delay the FDA’s ban, according to court documents. The temporary stay gives the court time to hear arguments and wasn’t a ruling on the merits of the case, the judges wrote. In addition to fighting the FDA’s order, Juul has been working with its legal advisers on options that include a possible bankruptcy filing if the company is unable to get relief from the government’s ban, according to people familiar with the matter. The company’s counsel, Kirkland & Ellis is advising on the contingency plans, the people said. [WSJ]
• The way Ginni Thomas recalled it, she and her husband, Supreme Court Justice Clarence Thomas, were driving through upstate New York, by Lake George, when the red check engine light flickered on the dash of their 40-foot 1992 Prevost Marathon conversion coach. As they buzzed along Interstate 87, “The red light came on and the engine went down and it stopped. And Clarence pulled over to the side,” she said of the associate Supreme Court justice and proud RV driver. “I was like ‘uh-oh’ and was getting ready for a long time sitting on the side of the road,” she added. [Washington Examiner]
  
• We estimate that at the end of May, the Federal Reserve had an unrecognized mark-to-market loss of about $540 billion on its $8.8 trillion portfolio of Treasury bonds and mortgage securities. This loss, which will only get larger as interest rates increase, is more than 13 times the Federal Reserve System’s consolidated capital of $41 billion. Unlike regulated financial institutions, no matter how big the losses it may face, the Federal Reserve will not fail. It can continue to print money even if it is deeply insolvent. But, according to the Federal Reserve Act, Fed losses should impact its shareholders, who are the commercial bank members of the 12 district Federal Reserve banks. [The Hill]
• Douglas wrote the decision in Griswold v. Connecticut (1965) in stating that a constitutional right to privacy forbids state contraception bans because "specific guarantees in the Bill of Rights have penumbras, formed by emanations from those guarantees that help give them life and substance." That went too far for Hugo Black, who dissented in Griswold despite having been allies with Douglas. Justice Clarence Thomas would years later hang a sign in his chambers reading, "Please don't emanate in the penumbras." [William O Douglas]
• Supreme Court Justices tend to lecture at this expensive summer school for lawyers during the Salzburg Opera Festival in Austria. I don’t remember how they are compensated? Money? Opera tickets? There will be a rush of decisions released around now because the festival starts on July 18. [iSteve]
• The three-story Sears store at the Mall of America closed years ago, but a dispute lingers over whether the bankrupt retailer can transfer its original lease — just $10 a year — to Sears' former CEO. Now the U.S. Supreme Court will have a say. Bloomberg reports that the Supreme Court on Monday said it would consider an effort by Mall of America to appeal a bankruptcy court's 2019 approval of a transfer of the Sears lease to Transform Holdco, a company controlled by former Sears CEO Eddie Lampert, who bought Sears out of bankruptcy. The Bloomington megamall had appealed that decision, arguing that Transform Holdco plans to sublease the 200,000-square-foot space rather than occupy the store itself — all while paying just $10 yearly rent. [link]
• Trump’s next step was radical and brilliant: the creation of a new category of federal employment. It was called Schedule F. Employees of the federal government classified as Schedule F would have been subject to control by the elected president and other representatives. Who are they? They are those who met the following criteria: "Positions of a confidential, policy-determining, policy-making, or policy-advocating character not normally subject to change as a result of a Presidential transition shall be listed in Schedule F. In appointing an individual to a position in Schedule F, each agency shall follow the principle of veteran preference as far as administratively feasible." Schedule F employees would be fired. “You’re fired” was the slogan that made Trump TV famous. With this order, he would be in a position to do the same to the federal bureaucracy. [Brownstone Institute]
• I think urbanism is a Very Online movement, as nobody I've met IRL gives a shit about walkability, density, etc. Even the most progressive people I know would love to live on a five acre lot if they could afford it and have zero interest in riding a bicycle on the street. Walkability in a U.S. context kind of sucks. It just means that the most dysfunctional and antisocial elements of society have easy access to you and your property and you're constantly rubbing elbows with them whenever you go out. Nobody wants that. Auto dependency is a feature of the burbs, not a bug. The residents don't want it to be easy for randos to just stumble through their enclave. That said, I think people do like to walk, bike, ride golf carts, etc around their enclave. For anything utilitarian though, they don't find it a burden to use a car or truck, and if they do, they think it's worth it in exchange for the space. [High Desert Rider]
• These days most people desire an open concept kitchen incorporated into a family style great room. But this home simply didn’t lend itself to that kind of floor plan. The kitchen was boxed in by stairs on one side and the bath on another. Only a radical addition that enlarged the house off the back would work and that wasn’t in the budget. What we have instead is an updated version of a 1950s kitchen that functions well and looks good. The heavy duty stove was a splurge, but it’s part of the marketing strategy for the property. That one item probably does more to attract quality tenants than anything else. [Granola Shotgun]
• Las Vegas is a great place to poke around and examine these themes. This part of Nevada receives 4 inches (10 cm) of rain per year. To put that into perspective, the national average is 38 inches (96 cm.) The dominant soil is a sedimentary rock that’s a combination of heavy clay, gravel, sand and calcium carbonate called hardpan or caliche. It’s basically a naturally occurring form of concrete and quite possibly the worst material you could imagine if you were interested in growing anything. The high temperature in Las Vegas is 125 F (51 C) and the low is 8 degrees (– 13 C). Without modern machinery and a national network keeping this place supplied with essentials there’s no way the current population of 2,200,000 people could survive in this environment. Las Vegas is basically a space colony. [Granola Shotgun]
• Russia is a sad case that I am ambivalent about. Russia has aspects of anti-fragility because it already collapsed to a low order of complexity, and because it is net long and benefits from higher energy and commodity prices. It is just dumb luck that Russia has so much natural gas. If the communists could have sold it all in one slug to the west at any point, they would have. But they couldn't and these resources have now conferred an anti-fragility on Russia. Unfortunately from an investment perspective, Russia does not have a tradition of harmonious minority ownership of corporations. We will watch and see whether ownership in Russian public companies eventually translates into meaningful economic interest, but right now it doesn't. I propose a long-term short of the BRICs. Only a very ebullient social mood - and overpriced U.S. securities to match - has caused investors to be interested in abstract (imaginary) claims on BRIC businesses. The BRIC ETF BKF has a dividend yield of less than two percent. One of the funny things about buy and hold investors is that they choose to ignore some very unpleasant discontinuities in stock index time series. For example, once during the past century you would have lost all of your investment in Chinese companies in a confiscation. How do you account for that? Are you getting paid for that risk with a two percent yield? [CBS]
• Obviously there are lots of risk. Maybe the energy curve collapses. Maybe CHK is flat out lying to you and plans to light all of that cash flow on fire. Maybe the ground opens up and swallows all of CHK’s assets. Who knows? But there is a massive mismatch between the energy strip and the price energy companies’ stocks are trading at, and the companies are gushing so much cash that the market is going to be proven right or dramatically wrong on pricing these companies below the strip very quickly. [Yet Another Value Blog]
• The capital, operation and maintenance cost of two power systems, the need to operate at lower efficiencies, the extra stop/starts, grid balancing, spinning, the use of less efficient turbines and the need to buy gas on the spot market at times of high demand all add costs to the operation of the grid. Those costs will increase as you add more intermittent power sources to the grid, but they are never shown in the published costs of wind and solar power. Those extra costs are the reason why countries with high installed wind and solar capacity tend to have high electricity prices, and why your electricity bill will always go up when so-called “low cost” wind and solar are added to the grid. Higher installed wind and solar capacity correlate with higher prices. [jaberwock’s Newsletter]