Pondering Energy On A Cool Day In Key West

Walk into Captain Tony’s Saloon on Greene Street in Key West. On the left side you'll see the original “hanging tree” that now grows through and towers over the roof. It is aptly named for its role in the punishments dealt to miscreants in early Key West history.
 
In the ’30s the spot was called Sloppy Joe’s, and Ernest Hemingway sat and wrote at the end of the bar. At that time, the establishment was run by Hemingway’s fishing buddy Joe Russell, and the tree grew outside next to the bar. Hemingway's favorite corner for both rum consumption and writing is about 30 feet from the tree trunk. When Captain Tony, who purchased the place in 1958, expanded the bar, the city forced him to preserve the tree and build the roof around it. A walk down the alley across the street confirms that the tree still sprouts green above the roof.
 
Today, however, Sloppy Joe’s and its Life magazine cover poster of Hemingway are to be found on Duval Street, about half of a block away from Captain Tony's. You see, it seems that back in 1938, after a dispute with the landlord, Russell, aided by his customers, moved Sloppy Joe's bar in the middle of the night – though I have heard several different versions of the story.
 
The real history, however, is still to be found in Captain Tony’s. Here is a picture of Tony Tarracino, a colorful Key West character in his own right, and Ernest Hemingway. You can find it in an obscure corner next to one of the pool tables to the far right of the entrance. Joe Russell, Captain Tony, Hemingway, and Hemingway's longtime fishing boat captain Gregorio Fuentes (who may have been the model for Santiago in The Old Man and the Sea) all helped to make the place famous – with a little help from Jimmy Buffett, but that’s another story.
 
I think about Key West and Hemingway, and the mind swirls. My favorite Hemingway novel is The Old Man and the Sea (1952). Its imagery and story line, with its portrayal of the ebb and flow of human spirit as we move from hope to despair and return, touches the heart of this fisherman.
 
It interesting is to sit here in Captain Tony’s today and remember that novel. Its power was brought to the screen in 1958 with Spencer Tracy in the Oscar-nominated lead role. Perhaps a modern equivalent can be found in Robert Redford, start of J. C. Chandor’s film All Is Lost (2013).
 
There are many similarities between the original Hemingway story, the compelling Spencer Tracy film, and the modern Redford version. Was one the inspiration for the other? Did Chandor or Redford drink any rum in Key West? I have to wonder.
 
It is cold enough in Key West today that people are wearing jackets and hats. Some even wear scarves and gloves. We are 90 miles from Cuba in the southernmost continental US city, and we are wearing hats and fleeces.
 
That is the nature of the polar vortex and its associated breezes that have borne down over the US. As I make this pilgrimage to Key West history, I am also drawn into thinking about this peculiar (and hopefully temporary) cold weather and its relationship to energy production and consumption in the US.
 
So let’s shift from the great writer and his legendary story to this energy construction in America. In the last few weeks, we have been thinking about it and discussing it in various forms. The situation is starting to crystalize, and clarity comes. Whether we are right about it remains to be seen.
 
If we are right, these energy discussions are about major strategic change. We believe the US has reached and passed a key inflection point. It is so crucial that we might invoke Malcolm Gladwell’s The Tipping Point (2000) to describe the drama.
 
We think about it in the following way. For a number of decades we had an oil price flatlined at about $3 per barrel. Then, in 1973 and 1974, the geopolitical shock of a Middle East war empowered the OPEC (Organization of the Petroleum Exporting Countries) cartel. Its activism was spearheaded by the Saudis.
 
OPEC took the price of oil from $3 to $12. I remember sitting in New York at a conference, listening to the Saudi Oil Minister, Sheikh Zaki Yamani, talk about the new era of oil. Of course, his positions were laced with his own political views of the Middle East, featuring Israel as an unwelcome party, and he put America on notice that its politics were headed in a wrong direction.
 
Since this Middle East oil shock 40 years ago, the US and its financial markets, businesses, and government have evidenced behavior that can be characterized as reactive to ongoing energy scarcity and rising prices. This situation persisted even as consumption became more efficient. The oil price peaked at almost $150 per barrel in mid-2008.
 
Now, something critical has changed in the US. We are evolving an entirely new energy system. We are heading for eventual self-sufficiency. The trend may span much of this century. We are only beginning to develop our enormous energy resources and are way beyond dependency and headed for independence.
 
No more power will accrue at an accelerating rate to oil barons elsewhere in the world. Over time, they will weaken. The despotic ones are increasingly at risk.
 
This is hugely bullish for the US. One-fourth, perhaps even one-third, of the incremental growth rate of our country will come from the evolution of the energy patch. The entire industry is destined to grow, and other industries with it.
 
We have gone from scarcity and rising prices to abundance and falling prices, or at least stable prices. In fact, we may have both falling nominal prices and dramatically falling real prices (in inflation-adjusted terms).We think this is a distinct possibility.
 
Contemplate a world in which all the energy inputs and accompanying capital adjustments of business and domestic energy consumers are affected by falling or stable oil and gas prices. The ensuing behavioral changes and material benefits to the US economy will be many. We are already seeing the effects in hiring. Graduating energy engineers get 15 job offers, while Wall Street aspirants search for months and newly minted lawyers turn to bartending.
 
We are bullish on the energy sector in the US. We are investing in it in various ways. We are choosing ETFs that capture the beneficiaries of the new US energy regime, which will be celebrated for the next several decades in financial markets. It will provide an improved quality of life in the US, with less inflationary pressure from the energy price path.
 
With the economic growth that derives from stable or falling energy prices, a comprehensive energy regime change benefits America in transportation, rising consumption, positive capital allocation decisions, and geographical shifts. States that encourage this industry (North Dakota and Texas among them) will flourish, while those that suppress it will languish.
 
In Key West it is 61°F. In spite of the occasional sweater or scarf, energy is not really on anyone’s mind as we eavesdrop on conversations in the Duval Street crowds. Our reflective pilgrimage to Hemingway’s haunt inspires us. An American energy renaissance is in our future just as surely as Captain Tony and “you know who” are in our past.

BY David R. Kotok