Jul 15, 2009

Profit on the plight of others

People do stupid things for other people who don't to easily profit on the predictable peak predicament.
(there is an ant & grasshopper analogy here?)

While most who read this blog will continue to invest in our renewable and sustainable future it is hard to ignore the obvious investment opportunities in 'finite resource' markets.

As we make a cataclysmic choice NOT to reduce our nations energy and oil demands in the next decade... I have to look at the reality of investing in this 'plight for profit'.

It is called 'buy low, sell high' - Unlike my IRA or 401K, it works 100% of the time ;-(

From Seeking Alpha 'How to Invest in Peak Oil'
Suddenly there was very little peak oil talk. Today oil is around $60/barrel - and dropping. It is time to again visit peak oil thinking.

Several factors influence oil’s price. The fundamentals, of course, are supply and demand. Wars and rumors of wars, especially in the oil rich Middle East, can drive prices sharply higher in just minutes. Quantitative easing (printing of money), technological advances, Middle East stability, market manipulation, “herd mentality”, all influence oil prices.

So, any discussion on peak oil must also consider non-fundamentals.

Oil fields, once put into production, go into decline as the easiest to recover oil is drawn off first. In fields all over the world, the “easy stuff” is now largely gone. Even the massive Saudi Arabian fields are in decline. This is true of course for all resources. Consider copper: In early settlement days large copper ingots were found simply lying on the ground in parts of Michigan as gold nuggets were found in parts of California.

No one finds gold or copper lying around for the taking any more. We need to dig massive, miles wide, holes in the ground, thousands of feet deep. South Africa goes deeper and deeper to tap their prolific gold fields, yet production is in decline. Yes, I know this article is about oil, not gold or copper. The principle is the same though, we must exert greater and greater effort to extract natural resources.

New discoveries can drastically affect prices. In 1901, in southeastern Texas, after drilling down over a little over 1000 feet, the Spindletop oil well suddenly exploded up, oil gushing 150 feet into the air. Spindletop, originally expected to produce 50 barrels a day, initially produced an unheard for the time 100,000 barrels a day, more oil than anyone knew what to do with. By 1902 the price of oil had declined to an all time low of 3 cents a barrel. Previously most US oil had come from the less prolific Pennsylvania fields. Read about Spindletop here.

Now, with over one billion cars worldwide predicted by 2010, we know exactly what to do with with oil and gasoline.

We still occasionally find huge oil fields. However, they are miles deep, under the ocean, rock and salt or locked in tight shale formations. Read Kurt Wulff’s SA article about the large Petrobras finds off Brazil. In the US it has recently been estimated North Dakota’s Bakken shale may contain up to 500 billion barrels, yet only 3-4 billion is recoverable at today’s prices (see here).  Conclusion? Another “Spindletop” effect is extremely unlikely.

How to invest in today’s environment?
I think: play the extremes, at least the best you can - admittedly not easy. Don’t like to play? Wait for a dip, invest in some good companies and hold on. My best guess (hopefully an educated guess, but that is debatable) is that the recession/depression will drive prices down to below the $45 barrel range, then maybe stabilize (though stability in this market is rare) for a few years. Long term, 3-5 years out, prices will rebound much higher as world economies improve and supplies contract. Middle East unrest, of course, will at least in the short term, drive prices up considerably.

Natural gas will be much less volatile as the US if finding lots of it. Look for a slow substitution of natural for gasoline in vehicles...

Read more from
Seeking Alpha 'How to Invest in Peak Oil'