Killing the Sacred Cow
I'm going to tell you a story... one I hope will tell the whole story. It's a cow story, which is kind of weird, because I'm no cowboy. I'm the Investment Manager for Merrion Oil and Gas. My group puts Merrion's cash flow back in the ground trying to replace our production. In a time when record profits are being reported for the oil and gas industry, that might seem like a cushy position. In fact, it has never been more difficult.
Merrion Oil & Gas is like a mom and pop grocery store selling milk to the thirsty villagers. Because the masses in India and China have recently acquired a taste for milk, prices have shot up worldwide. Suddenly, the milk on our shelves is selling for twice as much as a year ago. Things are good, right?
The problem is, if we want to stay in business, we have to replace the milk the villagers are buying. But competition in the acquisition market is fierce, and the price of used cows has more than doubled. All the costs of a dairy farm have doubled as well, from leasing the land to cow feed to fence posts. And it is becoming extremely difficult to find places to put the cows. As much as people like their milk, darn it, they just don't want a cow in their back yard, or offshore, or even in the vast tundra of Alaska. Some milk drinkers don't want cows anywhere, anytime. I'm not sure where they think their milk comes from.
The regulators have jumped into the south forty with both feet. It now takes a year to get a cow permit. And there are many new rules in place as to how to have cow babies, what to feed them, and how to contain and monitor cow pies, and on and on. All of this drives the cost of producing milk through the roof. The bottom line is, our little grocery store is certainly making more money, but most of it is going back into the cost of keeping our shelves stocked.
Let's talk about the cow pies for a minute. Cows have been churning grass into meadow muffins for millions of years. It is still grass, just more compact, and at certain West Texas county fairs, more aerodynamic. But somewhere in New Mexico, a handful of the thousands and thousands of cow pies dropped in a stream. The answer? Now every cow must wear a diaper. They call it closed-poop milking. And we collect all these dirty diapers, put them into hundreds of air polluting trucks, and haul them off to be forever stored together at one site, where collectively they really might cause a stink. And that helps the environment how? It's udder nonsense.
Anti-cow advocates say that the milk industry is raking in the money, and can certainly afford to pay for whatever measures are asked, regardless of the cost. That may be true for the farmer raising big fat cows, but don't kid yourself, a lot of skinny little cows aren't going to make it. And that reduces the overall milk supply and increases the costs of the milk from the fat cows, which consumers will eventually pay for.
It is time to shift the story over to the mirror. Time to take a good hard look at ourselves... the milk drinkers. Man, we love milk. We like wearing the husky overalls, not some twinky pair of knickers. We Americans drink 3.9 gallons of milk per day each, while the Europeans drink only 1.2 gallons and the world averages less than a half gallon per day. The real environmental threat comes not from the cows, but from the gas we get when we consume all that milk, eh? We can and should start drinking more tea. The problem is, the kind of tea we need costs a lot, is hard to store, only grows when the sun is shining or the wind is blowing, takes up an incredible amount of land, and at this point, isn't an efficient source of nutrition. Nothing is easy.
Okay, my cow story is getting old. Time to moo-ve on. Let me summarize my points:
First, the high oil and gas prices are not set by the oil companies... they are driven by supply and demand. Second, there are more and more barriers to maintaining the supply. Many of the barriers have very little real environmental benefit, and only serve to drive up costs, which have been driven up already by their own supply and demand curve. The headlines are all about Exxon's record profits, not about the billions they are spending annually to keep their Superstore stocked for the masses. Finally, it is time to address the demand side of the equation. Reducing our demand will do far more towards bringing energy prices down (and helping the environment) than anything we can realistically do on the supply side. And as long as we demand it, industry will try to find a way to supply it. So don't kill the cow. It's just there because we want milk.
Investment Manager - Merrion Oil & Gas