Citi's oil bear makes a move
One of Wall Street's best energy analysts is packing up to go and sell solar panels in Costa Rica. Over steak in London, Seth Kleinman explains why
"A pay cut from Citi? Yeah—infinite, percentage-wise. As of the end of this month I will go from making a lot of money to zero."
Seth Kleinman is speaking, half way through some Argentine beef, in a restaurant near London Bridge. He's explaining why he's leaving his job as global head of energy strategy at one of the world's biggest banks to move to Central America—and why it's such an easy decision.
Kleinman is clear-eyed, eloquent and punchy on the subject of oil. It's why his commentary on the market for Citi has been so popular. He's just as forthright on oil's problem and why he wants out. Oil bulls should stop reading now.
An epoch-making shift is underway in global energy, believes Kleinman, and it's visible on rooftops, where solar panels are proliferating at a pace few analysts expected. The nascent distributed generation movement—small-scale independent power that frees people and businesses from the grid—is proving that "even people with aggressive market development forecasts can be wrong," says Kleinman.
"It's not about one centralised actor, whether it's a Rockefeller or a government," deciding the shape of the energy system, he says. "Every single person in this restaurant can say 'To hell with it, I'm going to get in this game'. That's why this one is different."
Kleinman wants to be part of it. With two friends, he is forming Avolta, an engineering, procurement and construction firm to develop and sell solar, starting in Costa Rica but expanding eventually across the Caribbean. One of the partners already lives there and Kleinman and his family will be moving this summer. The partners are raising private money in London, but will turn to institutional financing later.
Swapping Wall Street for Costa Rica might be a gamble. But Kleinman's not shy of adventure. He spent four years studying martial arts in South Korea and Japan, had a spell as a fisherman in Alaska and did another four years of hard time snowboarding in Colorado, all before figuring out he needed to earn some coin.
He leaves Citi on good terms, full of praise for Ed Morse, the bank's global head of commodities research and one of the doyens of oil-market analysis. "He is the kindest, gentlest, sweetest man. Ed's been great the whole time."
Ultimately, it's the analyst in Kleinman that took a macro view and decided to act on it. "The structural trend is so obvious. Do you want to be in an industry fighting structural decline or one facing exponential growth?"
It's a question the oil sector needs to answer. For too long, industry leaders have dismissed renewables, thinking they were too marginal to pose a threat. Kleinman waves this away between steak bites. "People focus on 'can you go to 100% renewables?' Who cares?"
Systematic change isn't needed "to wreak havoc in the existing industry", he argues. "Look at coal. Global demand comes down 2% from its all-time high and the entire US coal sector goes bankrupt." His point isn't that one fuel will entirely replace another—it's that as one starts to bite at the margins, the growth story for the incumbent will come under pressure.
It's relevant to oil, and not just because electric vehicles (EVs) and renewable energy are now pulling at its coat-tails. "What does Aramco do, what does Kuwait do? They're sitting on 70 years of reserves." If the market looks like it's going to start shrinking, Kleinman suggests, the response might just be "'We've got to get it out now'". If so, "you're into the $10-20 oil scenario".
'Do you want to be in an industry fighting structural decline or one facing exponential growth?'
Assuming this outlook plays, won't cheap oil prices just stimulate more demand?
Not really, believes Kleinman. One of his arguments in recent years is that as much demand growth emanates from oil-exporting economies themselves, like those in the Middle East, falling crude prices will just weakens these economies, sapping consumption. "The places where you might have the potential, like Africa, they'll get annihilated in a $10-oil situation."
Meanwhile, technology changing demand elsewhere. Kleinman thinks improvements in energy-storage capacity—several new battery factories will come online this year—could yield price drops of 20-30% in the next 18 months. If so, yet more renewable-energy capacity will be available. "A lot of stuff that looks marginal becomes viable."
That's more bad news for oil: imagine plugging your car in at home so your solar-charged-battery can feed the motor all night. Kleinman has little time for the EV naysayers. "Elon Musk has totally changed the world," he says, talking of the Tesla founder. "People say you can't drive from London to Edinburgh in an EV. But, a), you probably will be able to soon, and b), who drives from London to Edinburgh these days? Give it five or 10 years and you're not going to be able to drive into London or Paris or half the cities in Europe unless you're driving an EV."
With that, Kleinman is on his way, off to work out his last few days at Citi and start planning his move. Any nerves? "It's definitely a big risk—I'm not sure my wife understands quite how big." In any case, "Costa Rica's a good place to be poor: grab a coconut, go surfing."