Peak Oil

[Marshac]

A few of us have been discussing peak oil at work after coming across this website- [administrator's note: dead link to lifeaftertheoilcrash dot net removed]

Any thoughts? The consensus at work is that we're pretty much screwed within the next 5 years, 10 at the most.... unfortunately I tend to agree, and as a result, have lost a few hours of sleep at night for the past several days.

So much for that social security check, eh?

 

[haha]

Good topic.

I just read a book by a retired Princeton geology professor and former Shell Oil geologist named Ken Deffeyes. Look at his charts. Follow his reasoning. It will make a believer out of you. I also read "Twilight in the Desert" by Matt Simmons, a Houston oil investment banker. His book is narrowly about Saudi Arabia- but as the Saudis go, so goes the world.

Deffeyes' new book- "Beyond Oil" is sober but not alarmist. He thinks there will be real short term trouble that didn't have to happen. But long term there is nuclear for electricity generation, and possibly hydrogen or the natural gas freed from generation to power transport. Also, diesel can be made from coal, and there is a big supply of coal right here in America.

I have believed this thesis for several years, and it is the reason why I stocked up on Suncor and other energy stocks. I don't plan to sell, but I do expect that there will be soft markets ahead from time to time, thus giving good opportunities to add.

Deffeyes says one thing to expect is wilder price volatility in all energy prices going forward.

Ha

 

[Michael]

As the price goes up, demand will eventually fall (it takes a while for people to wear out their SUVs, and buy smaller vehicles). There are plenty of alternative energy sources, but they are more expensive. As oil goes up, they will become more popular. We will have energy, but it will be more expensive.

 

[farmerEd]

I happen to be in the camp that we will run out of inexpensive oil, sooner rather than later...but it may not be a bad thing. I am sure we won't return to the dark ages of no lights, air-conditioning or inexpensive travel options....another energy source will be developed, it will probably be cleaner and cheaper...and things will continue into the future much as they are now.

Of course between now and then there will be disruptions, and opportunities as we transition from one source to another, but I have faith that the energy "problem" will be solved.

 

[Bookm]

Greetings HaHa:

I have believed this thesis for several years, and it is the reason why I stocked up on Suncor and other energy stocks. I don't plan to sell, but I do expect that there will be soft markets ahead from time to time, thus giving good opportunities to add.

So your energy holdings are LTB&H investments? I added some energy several months ago as part of my mad-money investments. Yet see the majority of the fund's stocks are at/near recent highs, and are richly priced. I don't plan on adding any more to this segment, so don't wish to use any downturn as a buying opportunity. I'm planning on jumping out before the end of the year. If you even care short-term, how do you see this sector acting. I know it's just speculation, just would enjoy the discussion. Thanks.

Bookm

 

[brewer12345]

I have been poking around looking at solar systems for a residence. It is interesting to see that a modest sized system would generate cash on cash returns of roughly 5 or 6%, based on what I now pay for electricity. Naturally, this is a heavily subsidized option (60% or so subsidy) and I am in an area with a less than great amount of sun (NJ), but prices have come down dramatically over the years and will likely continue to do so (these are based on semiconductors, after all).

 

[wildcat]

The naysayers I have read always point out that unlike the 70's we consume oil in a much more efficient manner So as they conclude we will not run out of oil.

 

[tozz]

Earth to brewer.  Earth to brewer.  Come in please.  (And I thought moving to Thailand was exotic.)

I have been poking around looking at solar systems for a residence. 

 

[TromboneAl]

I have been poking around looking at solar systems for a residence.

There's a nice one over in the gamma quadrant.

Tozz -- you beat me to it!

 

[brewer12345]

I have been poking around looking at solar systems for a residence.  It is interesting to see that a modest sized system would generate cash on cash returns of roughly 5 or 6%, based on what I now pay for electricity.  Naturally, this is a heavily subsidized option (60% or so subsidy) and I am in an area with a less than great amount of sun (NJ), but prices have come down dramatically over the years and will likely continue to do so (these are based on semiconductors, after all).

Actually, I take it back. I missed some things in my original poking around. Cash on cash returns actually look like they would be on the order of 18%! Here's the math:

~$15k PV system cost
Less $10k rebates

Total cost ~$5k.

System would generate 2,920 kwh, based on 2 kw @ 4 hours avg. per day. I pay about $.11 a kwh. The state forces utilities to have a certain percentage of capacity from renewable/green sources. One of the way they do this is to buy credits from owners of PV systems at about $.20 a kwh. So net-net, the PV system would produce electricity and credits worth ~$.31 per kwh. 2,920 times .31 is $905. $905 divided by $5k net system cost is ~18% yield, tax free.

I am still trying to confirm that this approximates reality, so if anyone has thoughts, feel free to air them.

Haha, guys. Now you have me forced into nerd jargon: PV, etc.

 

[tozz]

Walk me through this.  How did you end up with $.31/kwh rather than either the $.11 you pay or the $.20/kwh that the utility would pay you?  Perhaps I'm not understanding the credit thing.

So net-net, the PV system would produce electricity and credits worth ~$.31 per kwh. 

 

[JPatrick]

I have been poking around looking at solar systems for a residence.  It is interesting to see that a modest sized system would generate cash on cash returns of roughly 5 or 6%, based on what I now pay for electricity.  Naturally, this is a heavily subsidized option (60% or so subsidy) and I am in an area with a less than great amount of sun (NJ), but prices have come down dramatically over the years and will likely continue to do so (these are based on semiconductors, after all).

Be certain to check the solar products here :
http://www.sunpowercorp.com/html/Products/Solar/solarcells.html
BTW this company is going to IPO in a few months.  Right now a subsid of CY.  I don't know how hot (no pun intended) the IPO will be , but I'll get a chunk of it through my holdings in CY, a stock that regularly breaks my heart. 

 

[brewer12345]

Walk me through this.  How did you end up with $.31/kwh rather than either the $.11 you pay or the $.20/kwh that the utility would pay you?  Perhaps I'm not understanding the credit thing.

$.11 is what I pay now per kwh. If a PV system were to generate a kwh, it is $.11 less I pay the utility. So the electricity generated is worth $.11. I don't actually receive a check from the utility because I use more kwh than the system would generate, but there is still $.11 per kwh more in my bank account courtesy of the PV system.

$.20 is what the utility pays me for the emissions credit (actual cash received).

.20 plus .11 equals .31.

 

[Marshac]

If the number of oil consumers remained static, I believe you're right- demand would decrease as price increases. Unfortunately, the number of oil consumers is increasing (China being the largest), which leads me to believe that the net demand will increase, regardless of price. I think that world governments realize this, and have been positioning themselves to be in the best possible situation when demand finally outstrips supply in any serious manner. Recent examples can be found in some of China's dealings- offer to purchase unical, tar-sand deal with Canada, Bush's 2001 order to fill the strategic petroleum reserves (should be full by next month), etc. I know that the NeoCons understand the importance of Oil (http://www.newamericancentury.org/), and that they are willing to fight for those resources... I wonder if an eventual showdown with China is inevitable?

Wow... more doom and gloom than usual from me. Sorry guys.

 

[TromboneAl]

It's a pretty convincing article. OTOH, I read some similarly convincing articles about Y2K.

Are you going to make any changes in your investments because of this?

P.S. Note that this problem is caused by, or at least greatly aggravated by, overpopulation.

 

[Mountain_Mike]

I believe there is a finite amount of petroleum on the earth. I also believe there is a finite peak as to the amount that can be extracted and refined. Further, increased population would tend to increase demand on all resources, including oil. Therefore, it is logical that someday we will reach a point where increased demand is in excess of available supply....ergo, peak oil. In my mind it is not a question of "if" but "when."

 

[wildcat]

I had a thread the other day about a permanent change in investments.  Looked at some old correlation #'s for S&P and energy and it was fairly low.  We all seek the low correl investments for our portfolio.  With oil being high I imagine the low correlation is even more obvious.  So with that said should we add some sort of energy play?  I suppose PRCIX could be suffice for many.      

 

[haha]

The naysayers I have read always point out that unlike the 70's we consume oil in a much more efficient manner    So as they conclude we will not run out of oil. 

This is a bizarre form of illogic. If we consume energy efficiently, yet are tapping out our low cost production anyway, that means we have no easy moves to make on the conservation side. This quandary is more serious.

Ha

 

[haha]

Greetings HaHa:
So your energy holdings are LTB&H investments? I added some energy several months ago as part of my mad-money investments. Yet see the majority of the fund's stocks are at/near recent highs, and are richly priced. I don't plan on adding any more to this segment, so don't wish to use any downturn as a buying opportunity. I'm planning on jumping out before the end of the year. If you even care short-term, how do you see this sector acting. I know it's just speculation, just would enjoy the discussion. Thanks.

Bookm

Hi Bookm-

I can't say about short term movements. Clearly, a recession would knock down demand, and thus price for a while. Oil stocks would take a hit. It would look like there are no problems after all. I have been LTB&H in this area for years, and it has usually been an error to sell.

Still, with prices as high as currently, anything can happen.

If you do put a lot of money in energy, think carefully about what your individual companies will do, if the Peak Oil thesis is correct. For example, in the 70s I owned a driller that increased over 10 times when the oil price jumped. Today, there has not been a proportionate increase in exploration drilling. My take on this is that many companies see exploration as a dead end anyway, (due to peak oil) and find better uses for their cash.

Ha

 

[laurence]

O.K., O.K., I agree, we have a finite amount of oil, and we will run out someday, no question. But it seems doomsayers are often right, just almost always early. Wasn't the original peak date somewhere in the '80's? I mean, the theorists could be essentially correct and yet we could not really feel a pinch for 40 years, and that's just too far out for me to worry about (as far as my portfolio goes). Plus, as oil goes up in price, certian demands on oil will fall away as viable substitutes become cheaper relative to oil. My prediction: soft landing.

 

[Bookm]

Thanks for the response Ha. After some eyeballing, energy does seem to add to one's diversification. I've not seen actual numbers, but it seems energy either has a low correlation or is un-correlated to the overall market. I've seen them do the opposite of each other on some days, and on others one may have a big day and the other average (like today)

Bookm

 

[haha]

Wasn't the original peak date somewhere in the '80's?

No; the originally predicted US peak (by King Hubbert) was for about 1973. The actual US peak was more like 1970.

  I mean, the theorists could be essentially correct and yet we could not really feel a pinch for 40 years, and that's just too far out for me to worry about (as far as my portfolio goes).

Even the Cornucopians aren’t this optimistic.

Plus, as oil goes up in price, certian demands on oil will fall away as viable substitutes become cheaper relative to oil.  My prediction: soft landing. 

And you could be right. As the man said- you pays your money and takes your choice.

Ha

 

[laurence]

Hmmm...and you know I didn't think about the low correlation and diversification aspect. It's just hard to think about dipping my toe in after this huge run up.

 

[wildcat]

I hate to buy anything near highs too Laurence but I do find the potential diversification play interesting. Some of us hold gold for protection and low/negative correlation but it can be a pain in the ass to hold. Oil may very well be a better commodity to own for protection from what I see despite gold having a lower correlation to equities. I haven't dipped yet but I am considering.

HaHa -

You are correct. The logic behind the naysayers reasoning is flawed. Even if the US becomes more efficient in energy use it does not guarantee a damn thing. And developing nations are far from being efficient users of energy (not talking about the nations that still use animals for everything so scratch that argument).

 

[Michael]

Unfortunately, the number of oil consumers is increasing

Good point. This has been true for a long time because of population growth, but the industrialization of China has accelerated the trend. Commodities are probably a good long term play, although there are sufficient alternative energy sources to absorb even Chinese demand, at a price.

I wonder if an eventual showdown with China is inevitable?

They have been heavily arming themselves, but mostly for an assault on Taiwan. They don't yet have the ability to project massive force very far from their borders, so a blockade of the Persian Gulf in unlikely in the near future.