In Light of Peak Oil, Financial Diversification Is a Bad Idea 82 comments
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The realities of peak oil and the disastrous US monetary policy of the last 8 years have completely changed the rules of investing. Pick up any financial publication - be it Money magazine, investment publications from Vanguard, or articles by the lead economists at firms like Schwab and Fidelity and you will still see a common theme: advice from money managers to have a well diversified portfolio. I am here to tell you that this is good advice for them, but terrible advice for you. Here's why.
Most investment advisors these days continue to promote a nice pie chart which is broken down into easily understandable slices. Typically, these slices include US stocks, international stocks, bonds, and cash. Some investment advisors have added commodities to the pie. Along with the slices, the advisors provide us with percentages, usually indexed to the investors age. Common advice might be something like: 40% US equities, 20% international equities, 20% bonds, 10% commodities and 10% cash. This is simply an example, but you get the idea.
Why do I believe this to be a bad idea? For US investors, the realities of peak oil mean the following: energy prices will continue on an upward climb and therefore inflation will follow. The massive devaluation of the US dollar since Bush took office (>50%) will simply exacerbate the problem since oil is traded the world over in US dollars (at least for now!). As readers are aware, I have often commented that the US dollar has been replaced as the world's "reserve currency" by a barrel of oil. Regardless, what do the realities of peak oil mean for the diversified investor?
Let's take a look at the pie. For the 40% of US equities (remember, these percentages are simply examples), if we assume this to be invested in the S&P500, only 15% of that will be in energy since that is the approximate energy weighting today (energy recently leap-frogged financials in this respect, which is a big red flag in itself for those paying attention). So, 15% of 40% and the investor will have roughly 6% of his money in energy. Hmmm...that's not very good. Considering the last 10 years the S&P500 has returned around 3.5%, now wonder people are complaining about their portfolios balances! Meanwhile, in that same period, many energy investments have been up 25-30% per year.
International equities is a bit of a different, and better, story. The falling US dollar has been a boon for foreign investments. Those investors which have been astute at foreign market picks have really done well. That said, in the future investors would be well advised to keep their foreign investments in countries that produce oil: Brazil and Russia come to my mind.
Most US bonds and fixed income in general is dead money. With low US interest rates (2.5%), high inflation (over 5%, don't believe the government data, which everyone knows is fudged), and a US currency that has been dropping 6-7% per year, most US fixed income investments are simply a way to fall behind in terms of capital preservation, let alone capital appreciation.
Commodities is a good bet. If the investment pie has a 10% slice in commodities, shake your advisor's hand. Oil, natural gas, gold, silver, wheat, cotton and soy beans are all good. These investments are real, or hard, assets and will surely help the US investors keep pace with inflation and a devalued currency.
"Cash" is a bad idea unless you place it in US dollar hedges like the Merk Hard Currency Fund [MERKX] or the Prudent Global Income Fund [PSAFX]. Cash simply won't keep up with inflation and the falling currency.
So, of the investment pie the professionals advise, only 21% are in assets that protect the investor from the realities of peak oil and a devalued currency: the 6% in energy and the 10% in commodities. Over the past 10 years, this formula would have been a losing proposition once inflation and the falling value of the dollar are taken into account.
What's an investor to do? First of all, forget diversification - it is a way to the poor house in the years ahead. Forget the S&P500 and US bonds. Concentrate your money in energy, precious metals, and commodities. Period.
Here are some great choices to outperform the market in the coming years (in no particular order):
- ConocoPhillips (COP)
- Exxon Mobil (XOM)
- Chevron (CVX)
- StatOil (STO)
- Schlumberger (SLB)
- Nabors Industries (NBR)
- Chesapeake Energy (CHK)
- Anadarko Petroleum (APC)
- GLD (Gold ETF)
- DBC (Commodities ETF)
- Vanguard Energy [VGENX]
- Vanguard Precious Metals [VGPMX]
- Fidelity Select Energy Services [FSESX]
- Fidelity Select Natural Gas [FSNGX]
- Merk Hard Currency Fund [MERKX]
- Prudent Global Income Fund [PSAFX]
Buy these stocks, funds, and ETFs and just hold them. Don't let day-to-day headlines or huge energy volatility scare you out of these positions and you will do fine over time. As an aside, the oil inventory report just came out today, and oil inventories were down over 8 million barrels, a big big surprise versus estimates. Anyone remember Gomer Pyle - "Surprise, surprise, surprise!" Still, there is no comprehensive US energy policy out of Washington, DC.
Dow Chemical yesterday specifically pointed to the lack of a comprehensive US energy policy as a big reason for having to raise its prices. This is a scenario the investor should get used to, and be prepared for in the years ahead.
Meantime, if you'd like to send your Congressman/woman or Senator a real comprehensive energy policy, please send them this link.
It will definitely be the most patriotic action you take this day. Thank you!
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This article has 82 comments:
20smoney.com/2008/05/0.../
That makes that about their 10 billionth oil discovery this year. Peak oil?
Consider Saudi Arabia is producing well below their maximum achieved rate of 10.5 Million BPD. Iraq is well under their maximum of nearly 4 mbpd.
OPEC in general is below 30 mbpd, down from a peak of nearly 35 mbpd.
Venezuela, Mexico, Norway, England, and Nigeria are all below their maximum production levels.
Iran indicates that they will produce less in the future. Perhaps, Mahmoud and co. know that they have reached a peak, and rather than just admit it and let it drop, they are going to politicize the future reduced output and keep the world thinking that they have more than they do.
Russia recently reported a 1% year on year drop in production. While it may be too early to call that a peak, as the drop is very small, it doesn't bode well.
It is also interesting to note that the US has also hit a peak (a few decades ago). But, we all know that if we just let the oil companies drill a little more that would not have occurred.
Each of these countries has peaked for different reasons; revolution (Nigeria, Iraq), incompetence (Russia, Mexico), environmental wackos (US), just plain wackos (Venezuela), economic choice (Saudi Arabia and Iran) or admittedly running out of oil (England and Norway). The bottom line is it sure is beginning to look a lot like Hubberts peak oil scenario.
"Oil Exporters Are Unable to Keep Up With Demand"
In particular, check out the production numbers of many countries are going DOWN as the oil price has skyrocketed. We'll see $200/barrel oil by 2010.
According to the American Geological Institute the high commodity price of oil is half explained by the weak dollar i.e. political and not geological factors: seekingalpha.com/artic...
woohoo, that beats the 2005 peak of 85.5mbpd. Glad to see that a 100% increase in oil prices has brought on additional 0.5% more oil into the market. I suggest you familiarize yourself with the production rates of some old friends of yours such as Cantrell and the North Sea.
There will always be oil on this planet. Its just that you won't always be able to pay for it
For investors, an important near term consideration may be the risk to USA based oil company ownership, given the rabid anti-big-oil sentiment of the citizenry and the naivety of the politicians with respect to facts.
Who has audited the Saudi fields? You take their word? An oil expert from Iran has sounded the peak oil bell--I can't tell you his name because I'm a slouch, but I've read his commentaries.
How about microcaps for the adventurous? How about uranium?
How about gold and silver?
Peak oil is a reality. However, I question putting huge amounts of money into the oil majors. These are dinosaurs who can't possibility replace their reserves. An oil company without reserves is dead. The stocks will be dead (lag the price of oil) for a long time to come. It seems the only group that wants to own for Exxon stock is Exxon!
But, as a Californian, my gut says that it's Enron revisited... & the world is being gamed... at least by 50%. My portfolio has not been very diversified in a long time. I've tended to energy, mining, food, infrastructure. Those are things that I can get my mind around.
However, I'm beginning to have those butterflies in my stomach that I tend to regret when my brain says put them on ignore. Those butterflies are warning that we'll see another energy crash like in the early 1990s.
It benefits all of these oil producing countries from Iran to Venezula to Nigeria to Saudi Arabia to slow the tap & skew their figures to the worst case scenario. But, it's a tight rope that they walk. They'll open the taps, oil will flow, & we'll revert to same ol' same ol'... but at a somewhat higher price.
The real question is how many times will we go thru this scenario with peak oil?
Ozarker: that cracked me up.
cynical: ur on the right track...it's not being cynical when the facts line up.
pursley: i won't debate you any more - we agreed after my last paper to simply check back in 5 years to see who was right. that said, the dollar is down about 50% since bush took office, yet oil is up over 6x - it ain't all about the dollar...it is supply/demand. not sure why supply/demand works for all other commodities but not oil. part of the denial process i suppose.
FoxV: excellent rebuttal! :)
bluesmoke: i'm flattered and would be glad to do the job for free! because i DO love my country and boy do we need somewhere there who acknowledges peak oil....otherwise, i fear we are toast.
User: good point. if we dont get an energy policy to deal rationally with peak oil, i can envision a scenario where the US gov takes over the big oil companies claiming "national security". i have oftened wondered if this is not the real reason why the US gov is ignoring peak oil and a rational energy policy to deal with it. once they control the oil, the have ultimate control over the population.
GMiki: that's right - non-peakers always talk about the new oil discoveries, but they never factor in the worldwide depletion rates of the current fields, currently depleting at the rate of about 4.5 million barrels/day. not to mention that the number of new elephant fields discovered since 1960's has slowed down dramatically, i.e. roughly less than 10 during that entire time.
enviro: i hear you wrt to the majors. that said, it seems a bit unwise in an era of peak oil not to hold a company that can produce 4 million barrels a day (XOM). i like ConocoPhillips as much for their nat gas exposure and Lukoil as i do for their oil production capability. plus, i Mulva is the best CEO in the business. and, i agree with you about XOM stock buybacks...they should be rewarding their shareholders with increased dividends! they have the lowest yield of the majors, by far, yet the best balance sheet, cash flow, and net income. i would much rather the rutkus at the shareholder's meeting be about the buybacks vs dividends than most of the poop that was discussed there.
scholastic: well, peak oil has happened many times in many places: continental US, prudoe bay, north sea, mexico's cantrell, etc. etc. the energy crisis of the 1970's was a political crisis (an embargo due to US Israeli policy). what we have now is a true supply/demand crisis due to increased consumption in china, india, russia, and the middle east at the same time production is beginning to top it. sure, we mights see a few million more barrels come online, and some of the top execs (Mulva at CEO) think we could perhaps top at 100 million BPD. that said, the EIA and DOE energy estimates are predicting demand will hit 135 million BPD. that is a huge huge disconnect. the US is the most exposed country in the world to peak oil: we use 20% of the world's oil (5% of the population) and import 65% of that. that is why i am so adamant about the US adopting a comprehensive energy policy to deal with it. time is quickly passing by and the last 8 years have been a complete waste.
So you're suggesting that the ultra deep, with no current technology available to exploit Tupi field will replace Cantrell that bubbled up from the ground?
Keep smoking
Diversification is a no brainer and it is reckless to have all your money concentrated in one or two stocks or even one or two industries. I am personally mostly invested overseas, to protect myself against the falling dollar, but I am invested all over the place, not just in oil and commodities.
FoxV: Your claim that no current technology is available to exploit Tupi is based upon willful ignorance and a lack of education.
Petrobras to Start Output at Tupi Ahead of Schedule: www.bloomberg.com/apps...
"I don't think we face any technical challenges that are insurmountable,'' said Gabrielli, 59. "We think that today the main problem is cost reduction, not availability of technology.'': www.bloomberg.com/apps...
How's that crack pipe treating you?
WORD ......
Same thing with coal to liquid technology or turkey guts or tar sands or oil share or whatever. Everything needs to ramp up a LOT of replace something like Cantarell in decline.
Most investment advisors these days continue to promote a nice pie chart which is broken down into easily understandable slices. Typically, these slices include US stocks, international stocks, bonds, and cash. Some investment advisors have added commodities to the pie. Along with the slices, the advisors provide us with percentages, usually indexed to the investors age. Common advice might be something like: 40% US equities, 20% international equities, 20% bonds, 10% commodities and 10% cash. This is simply an example, but you get the idea. RIGHT AGAIN.
Why do I believe this to be a bad idea? For US investors, the realities of peak oil mean the following: energy prices will continue on an upward climb and therefore inflation will follow. The massive devaluation of the US dollar since Bush took office (>50%) BEING POLITICAL AGAIN. WHY NOT SAY SINCE GREENSPAN RETIRED OR SINCE THE START OF THE 108TH CONGRESS? will simply exacerbate the problem since oil is traded the world over in US dollars (at least for now!). As readers are aware, I have often commented that the US dollar has been replaced as the world's "reserve currency" by a barrel of oil. NOT SURE I AGREE. I DON’T KNOW THE ANSWER, BUT THINK THAT GOLD AND PAPER ARE STILL EASIER TO STORE AND TRADE BECAUSE THE COST OF DELIVERY IS SO LOW BY COMPARISON. Regardless, what do the realities of peak oil mean for the diversified investor?
Let's take a look at the pie. For the 40% of US equities (remember, these percentages are simply examples), if we assume this to be invested in the S&P500, only 15% of that will be in energy since that is the approximate energy weighting today (energy recently leap-frogged financials in this respect, which is a big red flag in itself for those paying attention). I WISH YOU HAD EXPANDED UPON THIS IDEA. I WANT TO KNOW MORE OF WHY YOU FEEL THIS WAY. So, 15% of 40% and the investor will have roughly 6% of his money in energy. Hmmm...that's not very good. Considering the last 10 years NOW HE IS USING A DISPASIONATE AND NON POLITICAL DATE the S&P500 has returned around 3.5%, now wonder people are complaining about their portfolios balances! Meanwhile, in that same period, many energy investments OLD ‘LYING WITH STATISTICS’ TRICK – USE A SPECIFIC TO SHOW ONE SIDE OF THE ARGUMENT AND A GENERALIZATION FOR THE OTHER SIDE – APPLES TO ORANGES have been up 25-30% per year.
International equities is a bit of a different, and better, story. The falling US dollar has been a boon for foreign investments. Those investors which WHO have been astute at foreign market picks have really done well. That said, in the future investors would be well advised to keep their foreign investments in countries that produce oil: Brazil and Russia come to my mind. WHAT ABOUT STABILITY OF THE GOVERNMENT?
Most US bonds and fixed income in general is dead money. With low US interest rates (2.5%), high inflation (over 5%, don't believe the government data, which everyone knows is fudged), and a US currency that has been dropping 6-7% per year, most US fixed income investments are simply a way to fall behind in terms of capital preservation, let alone capital appreciation. COMPLETE AGREEMENT. I THINK REAL INFLATION IS WELL OVER 5%.
Commodities is a good bet. If the investment pie has a 10% slice in commodities, shake your advisor's hand. Oil, natural gas, gold, silver, wheat, cotton and soy beans are all good. These investments are real, or hard, assets and will surely help the US investors keep pace with inflation and a devalued currency. I WOULD ADD COPPER AND NICKEL.
"Cash" is a bad idea unless you place it in US dollar hedges like the Merk Hard Currency Fund [MERKX] or the Prudent Global Income Fund [PSAFX]. Cash simply won't keep up with inflation and the falling currency. AGREE AGAIN.
So, of the investment pie the professionals advise, only 21% SHOULD BE 16% are in assets that protect the investor from the realities of peak oil and a devalued currency: the 6% in energy and the 10% in commodities. Over the past 10 years, this formula would have been a losing proposition once inflation and the falling value of the dollar are taken into account.
What's an investor to do? First of all, forget diversification - it is a way to the poor house in the years ahead. Forget the S&P500 and US bonds. Concentrate your money in energy, precious metals, and commodities. Period. I THINK THERE IS ALSO A PLACE FOR REAL ESTATE IF ONLY A PROPERTY FROM WHICH YOU CAN GROW A MAJORITY OF YOUR FOOD NEEDS, PREFERABLY OFF THE GRID.
Here are some great choices to outperform the market in the coming years (in no particular order):
. ConocoPhillips (COP)
. Exxon Mobil (XOM)
. Chevron (CVX)
. StatOil (STO)
. Schlumberger (SLB)
. Nabors Industries (NBR)
. Chesapeake Energy (CHK)
. Anadarko Petroleum (APC)
. GLD (Gold ETF)
. DBC (Commodities ETF)
. Vanguard Energy [VGENX]
. Vanguard Precious Metals [VGPMX]
. Fidelity Select Energy Services [FSESX]
. Fidelity Select Natural Gas [FSNGX]
. Merk Hard Currency Fund [MERKX]
. Prudent Global Income Fund [PSAFX]
Buy these stocks, funds, and ETFs and just hold them. Don't let day-to-day headlines or huge energy volatility scare you out of these positions and you will do fine over time. As an aside, the oil inventory report just came out today, and oil inventories were down over 8 million barrels, a big big surprise versus estimates. Anyone remember Gomer Pyle - "Surprise, surprise, surprise!" Still, there is no comprehensive US energy policy out of Washington, DC. AGAIN, VENTURING INTO THE POLITICAL BUT I THINK OUR 'ENERGY POLICY' CHANGES WITH EVERY NEW CONGRESS.
Dow Chemical yesterday specifically pointed to the lack of a comprehensive US energy policy as a big reason for having to raise its prices. This is a scenario the investor should get used to, and be prepared for in the years ahead.
Meantime, if you'd like to send your Congressman/woman or Senator a real comprehensive energy policy, please send them this link.
It will definitely be the most patriotic action you take this day. Thank you!
GOOD PIECE. WHEN I GET THE TIME THIS WEEKEND, I WILL GO TO THE LINK AND READ THE ‘ENERGY POLICY.’ THIS COMMENT IS MEANT TO BE CONSTRUCTIVE, NOT DISTRUCTIVE. DROP THE POLITICS AND AVOID THE TEMPTATION TO SENSATIONALIZE WITH STATISTICAL GAMES AND I WOULD CALL THIS AN EXCELLENT PIECE. THANKS.
I love hindsight - don't diversify because we can't possibly be WRONG!
Honestly since peak oil is a certainty and it can only go up, it's so damn easy to make an investment decision.
I'd rather make boring above index returns than gamble on the 'it's different this time' crowd anyday.
We are also looking at alternative energy companies such as solar, wind, geothermal and even the newer wave power (eg Finavera) given that they should do well as oil continues to rise in price.
(disclaimer - we just bought some Finavera stock and are hoping they'll do well. Still figuring out what geothermal and solar stocks or etfs to buy....)
One area, I like RIGHT NOW is technology stocks (especially software). We should see CVLT, ORCL, SAP, GSB, AMSWA/LGTY, and numerous others... accelerate in their stock price. MSFT is too large (like XOM) to make major moves. Let's see what happens in TECH STOCKS during the next 6 months (in comparison to your portfolio).
I've been investing for almost 40 yrs. I've seen a number of bubbles, including sure-thing 'nifty-fifty', technology, and now peak oil. They come along and folks can't see beyond the hype, they think they will be money machines forever. They were not...and 'peak oil' won't be either.
I've learned many lessons from my mistakes.
I'll pass along just this one...over the course of the economic cycle, it isn't your big winners that are most important to your wealth; it's your big losers! If you allocate too much in one place, you are setting yourself up for huge losses.
Therefore, anyone who tells you not to diversify should be shunned.
That doesn't mean you should never overweigh 5 or 10% pts. in mega-trends -- like energy, alternative. energy, health care, or materials, for example...but anyone who leaves bonds and broad S&P 500 stocks out of his portfolio is going to pay dearly before this economic cycle ends.
The German government is in the news today regarding price fixing by commodity futures traders. The German Minister is going to bring up this topic at a G8 meeting.
I have started collecting articles from various sources ( including the 294 page report from the US Congress ) to give to my Congressman.
If you want price fixing to continue along with higher food, heating oil and gasoline prices then listen to these guys who are misleading you into thinking you are going to make big bucks in commodities trading.
It is a game for suckers. The prices will come down.
According to PBR's rather optimistic scenario (as noted in the link you attached), they expect to be pumping 20,000 bpd out of Tupi in 2009 (as the expert quoted in the article said, I also think that is pretty optimistic), 100K bpd by the end of 2010 (more than 2 years from now), and based on all of these finds (Tupi, Carioca, etc), PBR expects to be pumping 4.2 million bpd in 2015, versus 2.3 million now.
In other words, under PBR's own very optimistic schedule, they will produce an extra 1.9 mbpd seven years from now.
Question to you: If you add up depletion rates at Ghawar, Cantarell, and all the other fields in the world over the next 7 years (ie, by 2015), what does that total depletion add up to?
Many people believe global depletion to be running at 5-7%/year, but let's say 3% per year--and don't even compound it.
So, in 7 years, depletion is 20% of our current 85 mbpd--ie, 17 mbpd.
Certainly, PBR will not be the only source of extra oil--maybe the Middle East and Nigeria will settle down and pump fully (although I might note that human history is rather short on, if not entirely bereft of, epochs of global peace and harmony--man is the most contentious animal of all), and maybe the decision not to drill ANWR will be reversed (although I wouldn't hold my breath on that one), but not EVERYTHING will go the way of extra production.
In adddition, mark my words that by 2015, Tupi/Carioca/etc oil will cost at LEAST $100/barrell to produce, putting a floor of probably $130 (assuming a modest netback of $30/barrell) on the price of oil even without taking supply/demand into account.
My point: None of us know what real supply and real demand will be in 2015, but we all know that demand from developing countries will increase significantly, that all fields deplete naturally, that cost of production from the new fields will be far higher than the gushers of old, and that OPEC has made it clear that 2-digit oil prices are a thing of the past.
Thus, I believe that downside risk in the best oil/gas investments is rather limited while upside potential is pretty substantial.
Although I think the author has overstated the case that diversification is unnecessary, I will also say that my rather sizable stock account is 100% invested in a Canroy (PWE) and a solar company (TSL). Of course, my stock account only constitutes a small percentage of my net worth, so I can take the chance to put all of my eggs in the "energy" basket, but that is NOT the approach I would suggest to others less risk-tolerant than I.
I would, however, recommend that people overweight good energy and alternative energy investments in their account.
Jack
It is a self-fulfilling prophecy. The oil and commodoties exchanges are reacting to inflow of money, not a shortage of oil or other goods. The self-consumed idealogues that have been running this country have not only failed to develop an energy policy, they have printed enough money to wallpaper the Great Wall of China! And meantime, we lemmings continue to tuck our 10% into our little 401k so that the stock market continues to be pumped up.
It is Econ 101 - too many dollars chasing too few goods ("investments") = lnflation!
And you and me making an extra 5% return on our money this year will likely not deliver us from the chaos that will engulf everyone if the trend continues. Broke people do stupid things, but starving people are often violent. Is that really the society you want to live in so you can protect (maybe) your little piece of the rock? Do you really want to explain to St. Peter why you thought it proper to run up the price of food to make a buck?
Not me. I have taken my 10% penalty and dealt myself out of the game. It is my intent to take most of my little nest egg and buy stocks in companies that (1) are focused on "earnings" versus "revenues" and (2) believe in "greening the future" because once this all ends, that's where the money will be.
For example, no matter what oil prices do near term, the value of oil service stocks will continue to skyrocket. There is only so much drilling equipment (esp. deepwater), and with oil company revenues at record highs, demand is off the charts.
The same goes for railroads. Only so many tracks and railcars, and they're getting a boost from the malaise in the trucking industry, as well. Agriculture industry related companies are also extended to capacity, which bodes well for their stocks. And ya gotta love Brazil, it seems they're doing everything right.
So by all means you MUST diversify, only watch how you do it. Just ask the guys who had all their money in lilies and dot-coms if they think that would have been a good idea.
BTW, given $875+ gold and $120+ oil, why aren't interest rates on long UST bonds way, way higher? One would think the bond market is forecasting a recession/depression. If that happens, where do commodity and overall stock prices go?
4
Agreed, interest rates on long bonds and 10-yr notes are not set by the Fed...and in the face of growing inflation, should be still higher than they are today. Are they telling us there is more economic pain ahead?...perhaps (and if so, oil consumption will decline by still more than we have seen recently).
1. Have product that is demand
2. Have high long term growth potential
3. Have high profit potential
4. Have the ability to pass along cost of business increases
5. Have great cash flow
6. Have a moat such as high cost of entry into the business segment
For the last several years, natural resources and energy have met these criteria because a growing world NEEDS these things.
Coal needs to be added to the list of investment considerations along with the miners, mining equipment, infrastructure and ag. It's all good!!!
Some say these companies are high risk because of the link to commodities. Right now though Financials, Consumer and Tech are all looking higher risk to me. I add Tech because it is consumer driven and the consumer is at risk.
We are also avoiding putting money into food commodities even if it is a good investment because we are concerned about raising food prices and affecting those that are barely making it. We ARE putting some money into oil companies that are diversifying or are diversified into other technologies (eg - Statoil ASA based in Norway has hydropower and is considering wind). I'm a little ambivalent about it. increased oil prices equals increased food and everything else prices, but increased oil prices will also cause a shift to alternative (hopefully cleaner) energy sources. Solar/geothermal/wind technologies are plenty mature enough to be increasingly used if the proper incentives are in place. If the government won't subsidize these, then the market will eventually force a change as oil becomes too expensive due to decreasing supply/demand. Check out Finavera (on the TSX). They are still small and could get into funding problems but they are a clean tech (wave power) and already have a contract with PG&E.
I am just curious about your picture. What peak are you on?
I doubt that military consumption of fuel in support of IRAQ will make much of a difference in global supply/demand.
On a different note. The problems in this region go back 1000's of years. In my opinion, when America leaves, (if we can ever make a gracefull exit) the entire region will once again de-stablize into fighting factions and civil war. History is on the side of my opinion in that regard. Any de-stabilization in this region will push the price of oil out of sight. Dissidents believe in reign or ruin. This is demonstarated on a smaller scale in Nigeria and it's problems with rebels. The US gets about 10% of it's imported oil from Nigeria.
I figured you were going to tell me since you peak oil cultists know everything even though you don't trust any statistics. How should I know? I thought Saudi statistics can't be trusted. Those are only 2 fields and according to Matt Simmons Ghawar should've run out already. See here: peakoildebunked.blogsp...
Anyway, who cares about Ghawar besides Matt Simmons and the Saudi Royal Family? I know I don't: peakoildebunked.blogsp...
There are other oil fields, get over it: peakoildebunked.blogsp...
With every boom, with every cycle, someone stands up and says ... but this time it's different. We have a NEW economic standard, a new paradigm. And sooner or later, a normalized cycle returns to the world.
Ultimately, this siren song gets repeated and repeated. Buy fertilizer! Buy oil refiners! Buy oil exploration! Buy alternative energy! Buy Internet stocks! Buy CDs! Buy Bonds! You'll never keep up with ravaging inflation/deflation/st... with that strategy!
Here is a simple example of how far off this strategy is ... gold, as an investment, has failed to keep up with the S&P over any reasonable time period (normally defined as 10 years). If the goal for a portion of your portfolio is a hedge against inflation, why not simply invest in TIPS or US Treasuries?
While there may well be merit in short term, overweighted holdings in gold/oil, there is no long term merit to it. If you are a speculator, I suppose Mr. Fitz's ideas might be reasonable. But the investment advisors support people with time frames of ten to thirty years - who are seeking performance without excess risk. There is no support for his ideas in such a time frame, and likely is why he doesn't offer them.
You're right that the supply is low due mainly to political factors. You're also right that the world has plenty of oil. I agree with both of those premises of yours and I'm still bullish on oil, at least for the next 5-7 years. Why? Because it will probably take at least that long for supply increases to catch up with demand. A lot of these projects take years to get the oil flowing, and everyone won't be trading their car for a hybrid overnight.
Follow the author and the fools who agree at your own detriment...
ps - does he blame the huge runup in dry bulk shipping rates on Bush too? Michael - you can't claim, out of both sides of your mouth at the same time, that 1) Bush is an idiot, and 2) that he's smart enough to be manipulating the entire global economy and all of its players. Puhleeeeeeeeeeeeeeeze.
Equities did not die, nor will they this time. They not only survived but thrived, thrived on the discipline Volcker imposed on the money supply. True, some companies will be winners and others losers in this madness, depending mainly on how long we allow the Fed to persist in its folly. But if US equities are to recover as they have before, that folly must end. Real interest rates must soar, and with prices rising rapidly, nominal rates must soar even faster. For this reason, I say that your parting words are self-contradictory: if equities are to be good investments again, surely anyone holding bonds must lose his shirt in the process. If these events do not take place, US equities really will die, to be followed in short order by Treasuries as the American economy collapses. You cannot have it both ways, but bonds are toast in either. I challenge you to describe a scenario in which Treasury prices do not decrease substantially over the next decade.
pursely: i thought we declared a truce for 5 years? meanwhile, after reading the WSJ article on page A8 last week, please explain to me while the oil exporter's production is dropping while oil has quadrupled - this is political?
oldgoldbug: yes, bush wanted to go into iraq no matter if the majority of the 9/11 hijackers were saudi (the saudis already supposedly "like" us). it was either iran or iraq - iraq was easier to manufacture reasons for, not to mention if the US goes into iran and the straits of hormuz are shut, oil doubles or more even from $126/barrel. i think bush and his buddies were even shocked by their inability to keep iraqi oil flowing and the geopolitical risk premium point on oil due to their actions. that said, i suppose their thinking is that it's easier to steal iraqi oil than to adopt a comprehensive energy policy.
scott: agree oil affects europe too, but they are much farther ahead in terms of france's nuclear and germany & spain's wind. however, when it comes to currrencies, i'd put my bet on brazil, russia, and even the middle eastern currencies if they get off the dollar peg, which they will have to unless they want to enjoy the inflation that goes with that. massive amounts of money is (and will continue to) flow to oil and gas producers from the importing countries. US's biggest trade deficit component is $650 billion/year for oil. can't say that is a scenario for a strong dollar. not to mention, the US can't fight inflation by raising interest rates because of the massive debt load of its non-saving citizens. therefore, US dollar weak, oil high, inflation high. thus, the portfolio i recommended.
sharpPA: agree. you must have worked the oil fields of western NY and PA with my grandpa, who managed to stay independent in spite of rockefeller's lock on railroad transportation of penny crude oil.
flylines: my field is (was?) electrical engineering with an eye toward systems architecture for wireless. what is "magical" about the past 8 years is this:
- US currency devalued over 50% (!)
- huge US fiscal deficits and an insane tax policy in time of "war"
- largest growth of the government in 8 year period in history
- takeover of publicly traded investment house by the Fed (Bear)
- lowering of interest rates when inflation is rising
all this by a "conservative" republican. these are facts. there is nothing "conservative" about these policies. they are the most RADICAL policies certainly in my lifetime.
you wanted examples of 25-30% gainers over the last 5 years, well, they are pretty much the recommended picks, so check them out.
you want to talk about stability of government?
you talk about stability like the US is and will be: what is so stable about a government that imports 65% of its oil and prints money like there is no tommorow. ever here of the weimer republic in germany? sure we have military superiority, but look how we use it: unilaterally while dissing our old allies? just like the little schoolboy, security is measured by the number of friends you have. we don't have any left. agree with your food comment, add a pond for fish and a mineral bag to attrack deer. thanks for your review - very thorough! and yes, plz send feedback on my energy policy. i have two late additions to it: 60 mph top speed limit; 4 day work week.
blah blah: good username selection for you.
papagiki: i have no problem with ETF's and hold some myself. that said, i absolutely love my positions in Vanguard Energy and Fidelity Select's Nat Gas & Energy Services. there performance over the last 5 year is probably close to 8-10x the S&P500. can't beat that with a stick man.
phil: demand for oil goes down? only in the case of a depressiona nd we're all hosed anyhow. so, not in my lifetime.
richjoy: i have invested for close to 30 years. i used to be a fan of diversification. peak oil has changed that for reasons i explained. i am still a big fan of diversification: within the energy and precious metals sectors! ;)
jjsason: "There are a lot of *people* who are not going to let the OPEC cartel rig oil prices along with the commodity futures exchanges." what, are the people gonna take over all the oil rigs in all oil producing nations? get real.
yetiv: well said! pursley and i have supposedly called a truce, but feel free to go after him yourself wrt depletion rates, which he appears to be in a state of denial.
ann: hi, i love it when the ladies participate. with respect to my strategy being "all for me", it's hard for me to watch the government rape the treasury and devalue my currency (and therefore my net worth) by 50% and stand by and watch without taking action. wrt money flowing into oil and pushing the price up, this is a good thing! high priced oil might be the one thing that gets the US off it's butt an adopt a comprehensive energy policy based on transitioning OFF of oil. i think we are on the same page here. have you read my energy policy?
seekingalpha.com/artic...
would appreciate your feedback plz. wrt 5%, it would be more on the order of 20-25%.
paulk: i like the railroads and ag too, that said, to me they are still peak oil plays.
richjoy: plz be more specific on my "blather".
philips49: is your first name conoco? :)
kat: i used to be against nuclear too. problem now is we have ignored oil and energy policy for so long, we simply have no choice but nuclear. i take coal generation off the table because, forgetting the CO2, it is simply destroying our water table, our lakes, streams, river, and fish with mercury poisining. and yes, i know the half-life of mercury. agree we need massive wind and solar, and agreed the government must get involved due to the sheer magnitude of the energy void which is coming. thx for your comments.
freefall: the picture is atop mt. conejos, 13,172 ft, san juan wilderness colorado. great day hike. not a 14'er, but will give you a good work out. besides, the cutthroat in tobacco lake, which you will pass on the way to the peak, are *huge*.
peark2k: from the article in the WSJ the other day on the US military's oil consumption, i figured out that the US military uses 1.5 days of total worldwide oil production per year.
pursely: very patriotic of you to buy the hummer. you're the best friend russia and the middle east has.
gr8ideas: good luck with the S&P500 and bonds in the coming years. i'll check back with you in 5 years and see if you are keeping up with inflation and the falling US dollar. wrt gold, please check out the 1970's action on gold, and compare to the action on gold the last few years - see any simliarities? now, after the 70's gold dropped along with oil when the saudis turned on the "spigot". i maintain there is no "spigot" any more, and the rise of oil will be as far into the future as you can see.
hackensack: again, plz read the previously referred to article in the WSJ and tell me why so many oil exporter's production is down while oil prices have gone up 4x? what kind of "politics" is that?
blah blah: again, no substance and your username was very well chosen.
Kezorm: oil, oil services, and gold creamed the S&P500 in the 1970's. high oil prices and rising inflation will do the same now. in fact, if the S&P didn't have the energy related companies in it, the outperformance would even be more exceptional.
lksseven: there is no guessing with respect to worldwide oil production and worldwide oil demand. politically unhinged? please read my bullets up above about what has happened financially during bush's administration and defend them. republican ideology seems to accept non-republican policy and blinded you to the truth of finances just as it did to the truth about iraq. you njever heard me say bush is manipulating the entire global economy - please point to those words in my article. you cannot. if you are going to debate me, at least debate ME, not yourself and your own words or interpretations of what you think i said.
zack: who is suggesting two energy stocks? did you not see the entire list of recommendations?
I have a friend working off-shore in the gulf and the challenges are enormous. Decades of underinvestment, rusted out rigs, lack of rigs, rising cost for steel, lack of skilled workers below retirement age (seems no one wanted to study geology or petro eng the past 20 years) and really making him nervous, hurricane season starts today. There's probably still plenty of oil out there but it won't be cheap (below $100). The National Oil Companies control the majority of the output and they are going to charge whatever they can to continue to fund their state welfare programs. This is their main source of revenue. I can't blame them. I feel like they are holding us hostage.
I recommend reading Prize and A Thousand Barrels A Second for a better historical understanding of what we're dealing with WRT our reliance upon oil to build and maintain industrial societies and the history behind it. I enjoyed reading the posts even those I disagree with. Keep them coming.
Truce? Didn't know we were at war haha. Just having a friendly debate. Indeed we won't know until 5 years from now. But I can tell you this: 5 years ago oil billionaires like Boone Pickens and Matt Simmons were crying wolf over 84 mbpd. In 2004 they were crying wolf over 82 mbpd. Now they are crying wolf over 86 mbpd.
Pickens called 82 mpd the peak: peakoildebunked.blogsp...
galew: i would not be so sure. we had a bigtime recession in the 1970's and oil & oil service stocks powered higher. it will be that times 10 this decade, IMHO.
philips: exactly.
pursley: the more i think of it, the more the debate about peak oil is irrelevant. the bottom line is this: oil is today over $120/barrel and doubled in a year. quadrupled (or more) in the past 10. the US dollar is weakening and inflation is rising. regardles of the peak oil debate, the question is, what should the US do about it and how should one invest. so, do you disagree with my investment advice? do you think the US should not adopt a comprehensive energy policy? saying there is plenty of oil out there as the price zooms ahead and is having a very substantial economic impact on the US is, imho, quite irrelevant even if you were to be correct.
The price of oil will continue to ascend it's price at a steady acceleration due to the lack of alternatives for current users/addicts.
Due to the high price of oil and it's direct influence on our economic reality, our spending will shift from wants to needs in a progressively gradual manner(needs being food and shelter (rent, mortgage, and/or comfort).... most of us have no need for new clothes). It will be more important to feel somewhat warm and cozy in the winter and somewhat cool in the summer, at least more important than the pleasure we derive from our eyes and hears and all industries that revolve around them. We will still have the American appetite. I know few people that will sacrifice their favorite carbon input loaded diet for much else, me included with my avocados, California salad greens, coconuts and other tropical fruits. We will no longer be able to have our cake and eat it too, in a sense. There will always be the super rich with the ability to buy whatever they please, but the other 95% of us will be choosing to heat or cool our homes moderately, eat our same or similar diet without a lot of changes. Nothing is as close to a person's heart both literally and figuratively as their stomach. We have had a economy that has serving our neurosis and our needs. Well, when push comes to shove, our neurotic selves give way to the needs of the body.
It thus my belief that our economy could focus on consumer needs for a while and that the next bubble will include all of the industries that are required for the production, supply, and distribution of these items, thus oil, ag, natural gas, nuclear, wind, solar, rail delivery as opposed to truck, etc. Some could argue that we have seen a bubble already forming in these industries but then again, it is not like people are pulling ALL of their money out of Apple at this point to invest in our more immediate and basic industries. The market seems to be fairly diversified still, a diversification that resembles the idea that cheap oil will perpetuate into the unknown future.
So I guess my little ramble is this, we have had an economy predicated on cheap oil for a long time and it will correct itself. It is as we have been taking out a loan that is now due. The way it will be paid off is through a more subsistence like lifestyle. It is also my belief that commodities will be the most stable currency. The people that get in early are going to see those investments grow exponentially, even if one starts today.
This is the way Warren Buffet thinks. Ken Heebner, the other, virtually unknown Wall Street maverick (currently on the cover of Fortunre) also is on this track. Both these investors are basic needs investors and virtually no tech to boot.
One other thing I would like to address is the "it is different this time" theme that sometime props up. Well, it actually could be different this time. We now have 6 billion people fighting for dwindling resources.
Plus, even if oil wasn't peaking, there will still be caps on emissions coming soon enough with serious financial implications on our economy
At the last Berkshire meeting Charlie said "diversification is for know nothing investors, not professionals" and went on to add that at times he's had more than 100% of his net worth in a single idea: www.cnbc.com/id/244413.../
I think you'll get your alpha owning CVX and COP.
And I also agree with most of your energy proposals (the drilling part not the raising taxes part). The problem is drilling is currently illegal on over 10,000 miles of US coastline. Drill Here, Drill Now, Pay Less: www.youtube.com/watch?...
The fact that hydrocarbons have an abiogenic origin in the mantle is what most people are missing and why I keep ranting: oilismastery.blogspot..../
One of the big reasons for the current oil increase is large amounts of institutional money being allocated in that area, partially due to the dollar, but also because more investors now go where few used to go.
But if you look at history of oil, there have been boom and bust cycles for years. It is a commodity after all.
Go all in if you like, but be careful out there.
KenC: yes, i see countries that export oil as being "strong" and countries that import oil being "weak". the US being amongst the weakest as we are not only the biggest user, but the biggest importer. we are exposed bigtime. yet, the politicians and media are for all intents and purposes appear oblivious to what is about to happen.
barnburner: i have no problem with the strict oil and natural gas ETF's - i am just more comfortable with owning energy companies just like i would rather own gold producers. i keep thinking that if you can find companies in both these markets that can increase production, you get the price appreciation and the growth in net income. i think, in the coming years, there will be big jumps, followed by consolidation (like now in oil) and times when the straight ETFs won't do much. that said, long term, i agree with your point. i just haven't gone overboard myself in that direction - but you have me thinking about it some. thx.
xander: i agree we should be drilling. i think congress and environmentalist (which i consider myself to be actually) we be re-thinking US exploration policies when gasoline hits $10 which it will in the next few years. bad news: it takes some years to bring alot of these resources online - meanwhile, steel, pipe, compressors, turbines, etc. etc. are all going up in prices....
wobatus: with all due respect, i think the big danger not only to your personal finances but to civilization is to believe oil WON'T keep going up forever. sure, we'll have some consolidations, but long term, you've got big powerful countries all bidding after the same pool of oil resources. huge supply increases simply have not come online, nor, do i think they will - at least not in the volume to offset demand and depletion rates. big problem. world in denial. hey, i should write a song: "World in Denial". perhaps with a reggae beat - it wouldn't be taken seriously anyway. i can't even get the WSJ to publish my energy policy article :(
Maybe they have information that you don't know. After all, these guys can buy any information they want. How about you? If you are at an information disadvantage, can you make better decisions than those smart and successful people?
Pangaea: it IS different: oil prices have doubled in the last year, and are up 6x over the last 10 years. meanwhile, the supply "cushion" that existed the last time we had an energy crisis (1970's) not longer exists. Therefore, it is different. Not to mention that fact that oil traded at a record $134 recently, the US treasury is for all intents and purposes bankrupt while simultaneously fighting two undeclared wars and giving tax breaks to the uber-wealthy. Man, if that's not different than the 1970's, I don't know what else to tell ya.
You hit the nail on the head. Diversification is for the folks that are unwilling to do the research, (watching Cramer, and reading blogs looking for tips does not count). Energy, Ag, Commodities for the next few periods, maybe longer. Keep working to figure out what,s next. There is no easy money........Black Horse Running.
future bloggers maintain civility and honesty in their future blogs.
Here's a little reality check to those that believe the future will merely be a brighter version of today
"Brazilian Oil Finds May Cost $240 Billion to Develop"
www.bloomberg.com/apps...
And to think they want these fields pumping by 2009. In the middle of a credit crisis? They'll be lucky if they have financing by 2009. And guess what, once they have financing, the estimate will be raised to $500B. And thats if nothing goes wrong in the meantime
en.wikipedia.org/wiki/...
If we see a drop of oil from the fields by 2012 I'll eat my hat
The good news is that we have easy efficiency gains out there for the taking and they will create jobs in the process. Bill Clinton said that the efficiency gains from IT were responsible for the booming economy under his term. Maybe the next administration will be wise enough to encourage the retrofitting of America's infrastructure and prosper as well.
even if you assume there will be new ways to tap existing reserves and new deposits to exploit the bottom line is growth in demand is exponential while supply is at best linear. you do the math