Jim Chanos Explains Why He Is Short Oil

• Jim Chanos appeared on CNBC on late Thursday.
• The founder of Kynikos Associates explained why he is short SolarCity Corp SCTY but still bullish on solar energy as a whole, and then went into his outlook for oil.
• This article will focus on the latter issue.

Kynikos Associates founder Jim Chanos was recently on CNBC talking about his short position in SolarCity, his view on the wider solar industry, and the future of oil. At one point in the interview, the expert assured that many major automakers are actually switching their fleets to electric – and this is not just Tesla Motors Inc TSLA, but also other giants like Ford Motor Company F and BMW.

Related Link: Jim Chanos Explains Why He's Short SolarCity But Still Bullish On Solar Energy

“Imagine a world in which most of the vehicles are electric, and yet they are powered off the grid by natural gas and solar,” he said.

But, if new power sources will replace oil, and given that most oil is used for transportation, where are oil prices going?

Not being a “commodities speculator,” Chanos revealed, he does not know where oil prices were going to go over the next few weeks or months. However, looking at a longer-term horizon -- 5 or 10 years, “if I was a member of OPEC, I’d be pumping as much as I could today while it’s worth something, because it might not be worth a whole lot by 2030,” he assured.

Chanos’ Oil Shorts

“You can be pretty much sure we [at Kynikos Associates] are short all of the major leveraged oil companies,” Chanos ensured, when asked if he was short Chevron Corporation CVX.

But, is there a way for these companies to “bail themselves out of this situation,” say by swapping stock or combining with one another? Closing Bell’s co-anchor Kelly Evans asked.

To this, Chanos answered that investors should keep in mind that the commodity itself is substantially down (Brent, for instance, more than 60 percent), while stocks of some of “the large majors” are only slightly or moderately down – about 20 percent year-to-date. And, while “their cash flows are really getting under duress,” they are still committed to paying cash dividends, so the stock prices have held up. However, it should be noted that these companies are in fact borrowing money to pay their dividends.

The expert then went into the E&P space, where the situation is somewhat different. “We don’t believe that the model works,” the hedge fund manager assured. The well are depleting too fast, he explicated, so companies have to reinvest constantly to keep their production going.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.