Peak oil be damned, hedge fund manager Jim Chanos is betting against oil companies because they are not replenishing reserves.

Please consider Jim Chanos Shorts Oil Majors, Ford Shares, Hasn’t ‘Played’ BP

Jim Chanos, the hedge-fund manager who made money betting against Enron Corp., said he is short- selling shares of large oil companies because investment in drilling and exploration is eating up their cash flows.

The founder of Kynikos Associates Ltd. said in a Bloomberg Television interview from his office in New York that his bearish calls on “some” energy companies, which he declined to identify, pre-date the April 20 explosion of the Deepwater Horizon in the Gulf of Mexico. That incident led to the largest oil spill in U.S. history and sent BP Plc shares down 49 percent through yesterday.

“If you look at their cash-flow statements relative to their income statements, you will see companies that haven’t replaced reserves in years, and haven’t seen any increase in revenues in years,” he said. “They’re borrowing their dividend. They’re in effect liquidating.”

Chanos said he’s adding to short-sales of Ford Motor Co. as the second-biggest U.S. carmaker will struggle to compete against General Motors Co. United Auto Workers, the union that owns holdings in GM and Chrysler Group LLC, may favor those companies over Ford when negotiating upcoming labor contracts, he said.

“It’s going to be very interesting to see how it is that the union, which controls the employees — and I contend these entities are still run for their employees and retirees more than the shareholders — are going to look in an environment going forward, where the UAW is a major equity holder in some of the other entities,” the investor said. “It adds a new dynamic to the twist.”

Inquiring minds might be interest in a short Bloomberg video with Chanos.

GDP, Standard of Living, Geopolitical Tensions

My friend “BC” offers the following opinions…

Energy companies will be hit by both demand destruction of the product they sell but also the falling Energy Return on Investment (EROI) at peak production, reducing their ability to reinvest in capacity and exploration to sustain or increase reserves.

Because of Peak Oil, there is no mathematical possibility that China-Asia can achieve anything close to a Western per capita energy density, GDP, and standard of living without causing a dramatic decline or collapse of the Western economies.

The more Asians and others decide to compete with the Western economies for energy resources, the more likely Westerners will resort to desperate means to manage or try to prevent decline or collapse.

The post-Oil Age decline will not be a single collapse event. Rather, we are more likely to see a kind of stair step decline, like a ball bouncing downstairs, with increasing volatility of supply and price shocks from a positive feedback effect, reducing the very long-term trend of real GDP, per capita GDP, and population growth to 0% and negative.

Mike “Mish” Shedlock
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