Energy Rising, page 2

This article discusses the possible arrival of peak oil and how it factors into our investment strategy.

The first question that must be asked is, what if the theory of peak oil is wrong? It is only a theory, after all.

I'm not going to go in depth to defend the peak oil theory. Those interested should conduct their own research rather than rely on my fifth-hand ramblings. I will say that I've examined both the for and against cases and the difference between the depth and intellectual rigor of the two sides is stark.

When you read the thoughts and opinions of people like Matt Simmons, Richard Heinberg or Boone Pickens, you are exposed to arguments anchored with hard data. You learn about valid concepts and facts such as EROEI (energy returned on energy invested), water cut, oil production statistics, the nature of reserves estimates, etc. You find out the names of the fields which produce this oil, their current status, the increased difficulty in maintaining or increasing production, the lack of new discoveries of similar scope, and the increasingly harsher exploration conditions. These experts also discuss the realities of existing energy alternatives in cold, hard facts:

* ethanol is, at best, energy neutral,

* wind/solar/tide energy isn't scalable,

* natural gas is peaking similar to oil,

* nuclear is taboo, first of all, as well as logistically problematic on a scalable basis,

* coal is dirty, etc.

On the other side, the arguments against peak oil are almost universally devoid of hard data. Instead, they verge on the realm of philosophical arguments, praising the greatness of human ingeniuty and touting the benefits of technologies that range from nascent prototypes to wholly unscalable.

The more I've approached this subject from an investing standpoint, the more confirmation I get for the energy scarcity argument. People like Kenneth Deffeyes or Richard Heinberg discuss peak oil from a societal standpoint. But examining the operating environment for companies like Transocean, Exxon-Mobil, Chevron, Schlumberger, etc. only solidifies what Deffeyes and Heinberg are saying. Oil is getting very hard to find and harder still to suck it out when found. The big oil companies are struggling to replace what they produce and they need to drill deeper and/or settle for lower-grade crude. In my opinion, these companies confirm my analysis that we are entering an era of structurally higher energy prices, led by constrained supply coupled with rising global demand and an obstinate American public.

As a result, you could probably throw a dart at any major energy company and see a handsome return in a few years time. If peak oil becomes reality, that return will turn into a major windfall. But I've been charged with investing all of my family's savings. I couldn't live with myself if I didn't take every precaution. I need a sure thing so I demand a margin of safety (though it may be smaller than for other "riskier" plays) even though I am supremely bullish on energy. I overweight my portfolio heavily toward the energy sector when I do find good prospects because by my count, these high-return, low-risk opportunities don't come along often.

So the answer to the question, what if peak oil is wrong? Based on existing data, there is a high probability peak oil isn't wrong. But even so, we still insist on a margin of safety in all of our investments, energy companies included. If peak oil doesn't come to pass, we still make money on our investments. After all, you can always count on some political clamoring for a windfall profits tax on oil companies every few years. It's a case of heads, we win a lot; tails, we make out like bandits!

The Enlightened American

Energy Rising, page 2