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Nearly every oil observer - Simmons, Maxwell, Jeff Rubin, many others, and least of all myself - see oil prices rising in 2 - 5 years, probably to new heights, if the global economy continues to recover. That’s based on pretty accurate visibility of new oil supply over the next 5 - 7 years, fairly certain rates of decline in old fields, plus assumptions of demand growth rates for OECD, developing, and oil exporting economies. I provided my own version of this vision in my newsletter last month, saying, “I continue to expect oil supply tightness to manifest itself in 2011, as indicated in my March analysis.

This vision of oil supply tightness is not a happy economic scenario. Very high oil prices would likely cause global stagflation and a poor investing climate. It would be particularly painful for relatively poor people and poor economies. It would help only oil exporting countries, many of which are not friendly to liberal humanitarian forms of government. So not really a very happy picture.

And yet this unhappy vision is built into the current business plan of all major global car companies - American, European, Japanese, and Chinese. They are all planning to bring on stream new hybrid gas-electric or diesel-electric or plug-in hybrid cars. Such cars will be about $7,000 - $15,000 more expensive than current standard models because of the added battery and related costs. Why do these companies think consumers will pony up so much more money for their new hybrids that perform only on a par with standard models in all ways but fuel mileage? Obviously because they think oil prices will be much higher. A future vision of stable or slow growing oil prices would not spawn the hoards of hybrids now entering into production.

I’ve often written that new technology is the only way the world can work itself out of a looming global oil shortage with minimal pain. Incremental technology improvements such as those being built into the new hybrids will be insufficient to avoid a painful period of adjustment to insufficient oil supplies. Only a major break-through could have such great impact. Only the development and rapid roll-out of a game changing battery technology will do the trick.

To be a game changer, it would need to store massive amounts of electricity at much lower costs than is currently available, be rapidly rechargeable and be safe in a crash. Such an energy storage unit would have impacts akin to the invention of the internet or to Edison’s harnessing of electricity or Ford’s development of the affordable car. We are not talking about simply a cheaper battery or a new way to make ethanol. We are talking about revolutionizing all aspects of energy use, not only transportation.

I hate to sound like a shill or a naive optimist. But I must say that it is looking to me like such a new technology could well be fairly near at hand. The technology is being developed by EEstor, a start-up company financed by a first-tier venture investment firm. I’ve written about EEstor and it’s minority owner, Zenn Motors several times in the past. I’ve noted that Zenn is an interesting speculation given the buy-in to EEstor by some very impressive people (Kleiner, Perkins and Lockheed Martin) and given that the upside potential for success would be so huge that is hard to even conceptualize. I’ve owned some modest positions in Zenn in nearly all my portfolios for about six months purely as a speculation. As with any speculation, you have to be willing to see your entire investment go down the drain if EEstor’s ESU turns out to be a dud for any reason.

Well, now I’m upping my stake in Zenn based on several recent developments. One is EEstor’s release of testing data indicating performance characteristics that exceed their objectives. A second reason is Zenn’s decision to exercise its option to invest an additional $700,000 to increases its ownership interest in EEstor from about 3.8% to over 10%. Zenn based their decision on independent analysis of EEstor’s test data. Zenn’s choice adds enormously to its potential value if EEstor pays off. Zenn also has rights to certain transportation uses of the EEstor USU.

The third factor in my decision to increase what is still a highly speculative “investment” is the release to the internet of an audio interview with EEstor CEO, Steve Weir. EEstor has been extremely quiet about it’s progress for the past few years. In fact it is known to some as a “stealth company” - in other words a company that is trying to avoid publicity. Now some enormously optimistic projections and background information has been leaked to the public via this audio interview. I’ve posted below a report of the interview by allcarselectric.com.

The report is long and detailed. Here are some key points that Weir makes:

- key to EEstor’s success is its aqueous process of barium-titanate production which eliminates impurities, plus sealing it with aluminum oxide.

- the ESU has a modular design that imparts great safety and reliability.

- a production line is being installed now and units are being assembled for Zenn. Zenn should be able to demonstrate product by year end.

- capital requirements for production are low and equipment is readily available, suggesting rapid scalability.

- raw materials are cheap and abundant in the U.S.

- EEstor’s ESU should come in at a total cost per kWh of 20% - 10% of the cost of a lithium battery.

One thing I like about the EEstor story is that it is similar in some basic conceptual ways to previously successful game changing “new technologies” such as Ford’s cars or Edison’s harnessing of electricity. First, it is not really a new technology. Barium Titanate has been around for a long time. What EEstor adds is ways to prepare the substance, protect it, and utilize it. That’s similar to how Ford took existing technology but organized it in new ways. Secondly, like both Edison and Ford - and the internet - the potential uses for the new products are nearly infinite. If it works at the suggested price point of production, it will change not only transportation but warfare, electricity generation, and living conditions in third world countries, to mention only a few categories that come to mind quickly.

The investment question is whether or not this report of product available for testing by Q4 is reliable. There seems to be a lot of smoke coming out of EEstor recently; I think it’s likely there’s a fire. Something tells me EEstor is for real. That’s only a gut feeling, but given that the payback for success should easily be a ten bagger, I feel at this point that the risk/reward level is in quite attractive territory and thus Zenn stock merits a more substantial play.

Oil and Gas

I continue to think natural gas is not a commodity of interest because recent vast increase in reserves due in part to advanced drilling technologies means that price will not change meaningfully over a long time. Yes, prices will fluctuate a bit so active traders can profit. But essentially natural gas will be cheap for a very long time. So I am not interested in gassy E&P stocks. That said, some pipeline companies could be of interest to high yield investors, particularly if they are compensated based on volume. I do believe there will be added uses for NG in electrical production and perhaps transportation thus increasing volume requirements and thus pipeline traffic.

The price of oil seems to be rising and falling in sync with movements in stock averages. I think the price of oil stocks tends to lead the commodity so it was impressive that when oil took a dive from June 30 - July 14, oil stocks (OIH and IYE) at first followed suit but then recovered back to prior levels while oil stayed under $60. I think this was a clear bullish sign by oil stocks suggesting that oil traders were generally bullish, a view that has been vindicated as oil then rose right back up to nearly the $70 level of June 30.

On the other hand there is still plenty of spare capacity, perhaps 4 - 5 mb/d. And global demand is still sluggish. Evidence of low oil demand growth comes from, among others, BP statistical review of world energy as reported by The Oil and Gas Journal (7/6/09) under the headline, “BP Reports Fastest Oil Demand Fall since 1982.” The report points out that:

- for the first time, developing countries now consume more oil than OECD countries,

- the growth rate for developing countries, 17%, was the lowest in five years,

- OECD oil demand dropped 1.5 mb/d while non-OECD oil demand increased by only 1.1 mb/d.

- oil exporting countries in general need a price of $60 minimum to meet their internal spending requirements. Prices under $60 will result in further cutbacks to future oil production capacity.

I’m becoming convinced (along with many market observers) that the OECD economies will stop sliding and will have some sort of Q4 recovery. I don’t expect rapid recovery and I do expect an excruciatingly long wait for employment to increase. But I suspect that oil usage will stabilize in the OECD. If so, growth in developing and oil exporting countries plus continuing decline in old fields and reductions in E&P cap. ex. will begin to reduce global spare capacity soon. A 1% global oil demand growth rate for the next two years would eliminate 1.5 - 2 mb/d of spare capacity. Thus, it is not unlikely that by mid-2011 there could be sufficient pressure on oil supplies to bring the price well over $100 a barrel again. Oil equities are probably a moderately attractive buy on a long term basis, I think, based on the likelihood that the commodity will continue its longer term uptrend over the next few years.

Of course if the EEstor ESU comes to market as predicted by Weir, be prepared for some fallback in oil prices, especially longer dated oil prices. A cheap, reliable, powerful ESU will give electricity a big competitive boost compared with petroleum. That advantage will take years to filter into the economy, so it will probably not prevent oil from having one more big price surge. But it could begin to dampen oil shortages starting in three to five years and mitigate oil shortages completely in ten years.

Source: Game Changing Battery Technology: Is it Here Now?