The Case for Human Ingenuity: The Absolute Return Letter - May 2011

Tuesday, May 03 2011 by
The Case for Human Ingenuity The Absolute Return Letter  May 2011

“When you buy commodities, you’re selling human ingenuity.”

Dylan Grice on why investing in commodities for the long run is a bad idea (SocGen Cross Asset Research, December 2010)

“This faith in the human brain is just human exceptionalism and is not justified either by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the-headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly.”

Jeremy Grantham on why the world is facing a paradigm shift on commodities (GMO Letter, April 2011)

On 1st March 2004 we published what I still consider the most controversial letter I have ever written. In the letter I predicted that oil prices would exceed $100 per barrel within the next decade (you can see it here). That morning (Brent) oil prices were hovering just over $33, and $100 oil prices seemed a ridiculous prospect to most people. Almost exactly four years later, on 29th February, 2008, the $100 barrier was broken for the first time.

The End of the Oil Era               

I don’t think I have ever written a letter which provoked more reaction, much of it of the kind that is not suitable for re-production. And, no, I am not reminding you of this fact just to cover myself in glory. In fact, it was not even my own idea; the logic behind the outrageous forecast came from our economic adviser, Woody Brock. The reason I bring it up now is that, after careful consideration, I have decided to reverse my long-standing bullish view on oil prices, as I believe we are approaching the end of the oil era - and this time Woody Brock has nothing to do with it, so don’t blame him if I turn out to be wrong.

There are essentially three reasons why I think oil prices will go through a rather dramatic correction over the next several years:

  1. Many investors who, in recent years,  have added commodities to their portfolios as a hedge will ultimately be disappointed by the lack of diversification this asset class offers;
  2. Governments and regulatory authorities, both in Europe and the United States, have effectively declared war on commodity speculators, and the area will become subject to a lot more scrutiny and regulation in the years to come;
  3. A number of new alternative energy forms…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


This material has been prepared by Absolute Return Partners LLP ("ARP"). ARP is authorised and regulated by the Financial Services Authority. It is provided for information purposes, is intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The information provided is not intended to provide a sufficient basis on which to make an investment decision. Information and opinions presented in this material have been obtained or derived from sources believed by ARP to be reliable, but ARP makes no representation as to their accuracy or completeness. ARP accepts no liability for any loss arising from the use of this material. The results referred to in this document are not a guide to the future performance of ARP. The value of investments can go down as well as up and the implementation of the approach described does not guarantee positive performance. Any reference to potential asset allocation and potential returns do not represent and should not be interpreted as projections.

Do you like this Post?
12 thumbs up
0 thumbs down
Share this post with friends

13 Comments on this Article show/hide all

littledavesab 4th May '11 1 of 13

Surprised there have not been more comments on this article. Kind of deals with the up and down arguments re oil (and therefore world inflation knock on prices) very well. Top marks.

| Link | Share
jhar257 6th May '11 2 of 13

In the short to medium term, what is going to happen when all the Chinese and Indian citizens start to drive? There's a lot of them and since it appears like we may have past peak oil I would think there is a long way for oil to go yet.

And if we all turn to hybrids, is there enough lithium for all those batteries? New tech will be required. There is a lot of research going on with supercapacitors but they are not there yet. I don't think the Chinese and Indians are going to wait - they want their cars now.

I think high oil prices may stay for a while

| Link | Share | 1 reply
marben100 7th May '11 3 of 13

A thought provoking article, slightly spoilt by factual errors regarding conventional, uranium based, nuclear power generation:

Hence a thorium based nuclear power facility is not dependent on electric power the way a uranium based facility is.

This is not an intrinsic flaw of U based fission, rather it was a design flaw in the 40+ year old designs in use at Fukushima. More modern designs use convective cooling to retain thermal control, which operates even without electric power, unlike the units in use at Fukushima. Interesting to discover this post, written in 2005:

...There's the additional problem of getting rid of the decay heat after the reactor has
shutdown. Most have emergency cooling pumps - but a pump could always fail. In
a passively safe reactor is designed so that natural convection cooling will suffice.

So the safety of a passively safe or inherently safe reactor doesn't depend on a pump
working, or a control rod dropping when requested. No - the reactor is kept safe by
the laws of physics which don't fail.


...just goes to show that the problems that occurred at Fukushima were well known and understood for many years, but ignored, as an "inconvenient truth".


A thorium based system operates at atmospheric pressure, so the explosions we experienced at Fukushima would not occur at a thorium based plant.

The reactors at Fukushima were not pressurised reactors but BWRs (Boiling Water Reactors). The explosions had nothing to do with pressurisation. They were the result of uncontrolled decay heat, resulting in a thermal runaway process, in turn causing steam to be disassociated into hydrogen and oxygen - resulting in hydrogen explosions as the gas built up in the reactor buildings.

Does make you wonder what other factual errors the article contains. Having said all that, I am not opposed to thorium reactors, but they are still at the theoretical/development stage - whereas intrinsically safe uranium reactors are being built right now, in countries around the world.


| Link | Share
marben100 7th May '11 4 of 13

In reply to post #56288

I think high oil prices may stay for a while

...and even more to the point, high oil prices are positively required to stimulate investment in these (expensive) newer technologies. If oil prices fall back (for an extended period), what incentive will there be to invest in new technologies? Sure, there might be a correcton from current levels, for a while, but oil prices dropping below $70/bbl for any length of time would guarantee future physical shortages, as demand rose without a financial incentive to match it with supply or alternatives.


| Link | Share | 1 reply
jhar257 7th May '11 5 of 13

In reply to post #56293

Agreed. It was the oil crisis in the '70's that provided the impetus for all the solar research back then. If you look at charts of solar cell efficiencies versus year it was this decade and the following that saw most improvements.

| Link | Share
snickers 7th May '11 6 of 13

not sure i discovered this terrifically interesting map via stockopedia, but in any case here's the link:
japan looks like one of the very last places you'd want to build a reactor.

power beaming... no WAY will that happen. convert hydrocarbons to electricity, to light, back to electricity, then into mechanical power. not much would be left. imvho. What we need is a transnational electricity grid: we have continent-scale infrastructure for cars, trains, oil and gas transport, information, but not electricity. ..see the Desertec proposal to bring Fresnel-collected solar energy across the Med. megabucks but not gigabucks. is solar a smart investment? not sure what this the 1st name on the list on this page: implies.. but goldman do own at least 1 CSP plant via a firm called Congentrix.. don't bet against it, like.

| Link | Share
Mattybuoy 7th May '11 7 of 13

This is dreamworld. The only thing that will keep the oil price down is economic contraction.

| Link | Share
donnellya 7th May '11 8 of 13


One thing I think the author is missing is the sheer timelag involved in introducing new technologies. I bought a few torotrak shares many years ago (8?) thinking they were on the cusp of something big.

They clearly had a technology that could save fuel in most forms of transportation, howeer despite much interest from ford, toyota (and now tata) little happened beyond the concept stage, and the share price withered (although appears to be enjoying a mini-recovery).

I think the message is that change takes much longer than we can imagine. However I agree that govt legislation might accelerate the process, but is this really realistic with govt beholden to a multiplicity of interest groups, some of whom will be v. interested in retaining petroleum based industries.



| Link | Share
davjo 7th May '11 9 of 13

Earlier this year, at the Qatar Motor Show, Volkswagen unveiled a remarkable new car called the XL1 (see pictures here and more details about the car here), which is expected to go into limited production as early as 2013. The car runs on a 0.8 litre hybrid engine (combined TDI engine and lithium battery) capable of carrying two people at a top speed of 160 km/h (100 mph).

The XL1 can drive an astonishing 110 km/l (313 mpg) and emits only 24 g/km of CO2 in the process. As an added bonus, the car can do up to 35 km (22 miles) in battery mode, i.e. with zero carbon emissions. A lightweight body of only 795 kg partly explains the impressive performance. The car has been 13 years in the making and is by far the most fuel efficient car the world has seen to date.

Have to say I am absolutely gobsmacked at Volkswagen's claims. XL1 is the follow up to the L1 introduced in the Frankfurt Motor Show in Sep 2009. L1 is a 2 seater (in tandem), same shape but far smaller/lighter, same power pack yet managed 'only' 189 mpg.

In 18 months, Volkswagen appear to have considerably increased the size of the vehicle, yet somehow have reduced the drag, boosted power output of the diesel engine by over 60% and the electric motor by 90%, yet reduced CO2 emissions by 40% and have made it travel 124 miles further per gallon in the process. That is simply is any read-across in respect of global transport consumption, certainly at this point in time and probably 5 to 10 years ahead too!


| Link | Share | 1 reply
emptyend 9th May '11 10 of 13

In reply to post #56302

In 18 months, Volkswagen appear to have considerably increased the size of the vehicle, yet somehow have reduced the drag, boosted power output of the diesel engine by over 60% and the electric motor by 90%, yet reduced CO2 emissions by 40% and have made it travel 124 miles further per gallon in the process.

I don't find it too difficult to conceive that big changes CAN be achieved in the performance of electric vehicles and hybrids - and indeed made some investigations of attractive looking vehicles.

However, the point that most commentators appear to completely overlook is that these new technolgies come with a very high capital cost!  The new VW won't be a mass market car, it won't be widely available and it won't make much of a difference. It will undoubtedly be priced at a fierce premium to comparable petrol engines, primarily for two reasons:

1) Because VW have to do that, in order to recoup the costs of development quickly and to fund future research and

2) Because charging a high price will be the profit-maximising pricing for VW

To explain the second point, it is my opinion (based on all electric car releases so far) that manufacturers will charge premium prices in an attempt to capture most or all of the economic rent available - in other words they will be attempting to PV the entire difference in the expected average operating costs of the new vehicles compared to a petrol/diesel equivalent.

There will be no material saving to early buyers of these cars - they will pay more for the cars and pay less to operate them, but the two sides will more or less balance out....and the result will be small numbers being sold to those who prefer "green" cars, and large per-unit profits for the manufacturers.

It is possible to conceive that these supernormal profits will eventually be competed away when the market in the developed world grows to the point where genuinely mass market cars are widely available from several sources (and the technology is developed further to overcome general "range anxiety" and provide much more efficient and quick charging) - but we are at least a decade away from that......

....and even if that eventually happens in the developed markets, it won't happen in the developing world. Tata's Nano car (which is actually quite attractive, though under-powered and feature-poor) still sells for under £2000 equivalent in its home market in India, even after recent price increases.  It may take the better part of a century before mass market electric vehicles can seriously compete in the BRICs.


| Link | Share | 1 reply
freddythefish 9th May '11 11 of 13

The first challenge is to make electric/alternative vehicles lifecycle-cost competitive with existing vehicles (which is also implied in posts above). We are still some way from that.

Beyond that point, the tax take from liquid/gas fuels will start to diminish and will need to be replaced. At least some of that will be levied on electric vehicles, further pushing up the cost.

The transition away from liquid/gas fuels will (imho) be a long drawn out process. The transition from vacuum tubes to solid state took some time to complete and that was to a massively superior (in most ways) technology. There is no equivalent superiority for electric vehicles.


| Link | Share
Mattybuoy 9th May '11 12 of 13

On a worldwide basis electricity is made mostly from coal and natural gas, and this will continue to be the case for a very long time. Given this, it would almost certainly be cheaper and easier to run vehicles directly on these fossil fuels rather than on electricity, which is after all only an energy transmission mechanism.

a) Convert or build vehicles to run on CNG or LNG .
b) Convert coal to diesel using Fischer-Tropsch or whatever.

Pure electric vehicles are (IMO) mostly just greenwash on the part of the perpetually desperate motor industry.

Note though that the VW super-vehicle referred to above is in fact a diesel-electric hybrid, which is much more sensible.

| Link | Share
davjo 9th May '11 13 of 13

In reply to post #56310

On the theme of batteries for electric cars, I had a quick look at ee's link to the Tesla Roadster[looks a handsome beastie and pretty rapid too :-)]. Looks like the battery warranty was for 3 years (?). However an extended warranty costing $12,000 is available for battery replacement 7 years from purchase, which also covers earlier replacement at $2000 extra for each year earlier, so at worst, which could prove normal for many, a potential battery replacement bill of $20,000 after 3 years. For each year after 7 years $1000 is repaid( as if!!). I read elsewhere that if you don't insure, a battery replacement would cost $30,000.

Whichever way you look at it, it's a non-starter on economic terms, especially having regard to the 300% tax lost from diesel/petrol, something I've been banging on about for years.

| Link | Share

Please subscribe to submit a comment

About Niels Jensen

Niels Jensen

Niels Clemen Jensen has nearly 30 years of investment banking and investment management experience. He began his career in Copenhagen in 1984 before moving to Sherson Lehman in London in 1986. In 1989 he joined Goldman Sachs and became co-head of its U.S. equity business in Europe in 1992, a post he held until 1996, when he joined Oppenheimer to manage its European business. In 1999 he re-joined Lehman Brothers, now in charge of European Wealth Management. In 2006 he was appointed Director of Trafalgar House Trustees Limited, advising one of the UK's leading corporate pension funds on its investment strategy. Niels founded Absolute Return Partners in 2002 and is its Managing Partner. He is a graduate of University of Copenhagen with a Masters Degree in economics. more »

Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis