Tech is Bullish on Oil

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Dear fellow investors,

The news of the shocking OPEC+ announcement of a supply cut is saturating the minds of investors and market prognosticators. We would like to remind our investors of the longer-term implications of what we are seeing around the economy and markets pertaining to the energy business. We normally understand this from purely looking at the energy business, but also want to look at it from a technology lens.

We have Mark Mills to thank for getting us past a cognitive disconnect over the last few years. His two books that we’d recommend are The Bottomless Well, that he co-authored with Peter Huber in 2005, and his newest title, The Cloud Revolution, which was published in 2021. His first publication was prophetic because it was accurate, and his second should be read by every tech CEO to understand where we are going in energy markets.

One falsehood believed by many smart people is that technology will reduce the use of energy (gas, oil, solar, etc.). Early in The Cloud Revolution, Mills introduces his readers to the Jevons paradox. The Jevons paradox was coined by William Stanley Jevons to allay Britain’s fear of running out of coal from overuse. The Jevons paradox assumed the engines used to fire the coal would become more efficient. Policy makers assumed this would drive more scarcity, but instead it drove a far greater demand for coal.

Mills explains:

Put differently: the purpose of improved efficiency in the real world, as opposed to the policy world, is to capture the benefits from a machine, or a process. So long as people and businesses want more of the benefits the machine or process provides, the declining cost of use increases demand and thus use. And then the growth in those demands, for nearly all things for all of history, in turn outstrips the efficiency gains, leading to a net gain in consumption.

If affordable steam engines had remained as inefficient as those first invented, they would never have proliferated, nor would the attendant economic gains and associated rise in coal demand have happened. The same could be said about more modern combustion engines. Today's aircraft, for example, are three times more energy efficient than the first commercial passenger jets. That efficiency didn't "save" fuel but instead propelled a four-fold rise in aviation energy use since then.

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