An Oil-Driven Paradigm Shift?

A couple of heavy comments came in over the weekend expressing concern about what might be coming around the bend, not so much in the stock market but bigger pictured items that could impact the stock market--well all capital markets really.

One reader questions whether the the current state of the energy market represents a paradigm shift in that "we are an oil-based economy and the supply of oil is finite."

That oil is finite (aka peak oil) is a complex issue. We know about ANWR, the Bakken Shale, the Marcellus Shale and one or two other spots where there is likely oil. The oil supposedly under water at Tupi and Carioca would make Brazil a big source of oil. I saw a report that the Athabasca oil sands will be able to double production over the next ten years.

That all sounds good, so what's the problem?

There is declining production in Mexico, the North Sea/Norway and probably a couple of other places that escape me at the moment.

At some point the US is going to drill in the places that are controversial which combined with new drilling in the places that are not controversial will buy time versus the gloomiest of forecasts.

It is also quite likely that the pace and subsequent adoption of replacement fuels will occur at an accelerating rate as technological advancement in all fields comes faster and faster (the last 100 years as an example).

None of that is to say uncomfortably high prices won't be something we have to deal with, because we might (depending on your thoughts you might think high prices will be permanent and maybe they will).

The fact is we know what sorts of technologies will contribute to the solution, they already exist. For now, most of them (maybe all of them?) are not economically viable, but they will become more so. Prices will come down, for example solar panels will never be the thing, it will be the cheaper solar film because it is much cheaper.

Knowing what the solution is makes things easier. People need to change their orientation, which will not be easy, but it will happen at some point.

What if my cock-eyed optimistic theory above turns out to be wrong? This leads to another comment about whether somehow oil or oil derivatives could be come the new currency.

My initial reaction to that comment was to question whether the threat of delivery nips this in the bud. What could anyone do with a barrel of oil? Who but George Costanza could lift a barrel of oil? Now factor in that one contract delivers 1000 barrels.

That society could devolve into some sort of Mad Max movie with gasoline being the most prized thing seems very difficult to imagine because as mentioned above the solution already exists. Further when we do start drilling in more places that will relieve some of the problem.

Even if it takes ten years from day one, ANWR is capable of 2.1 million BPD which is in the ballpark of 10% of daily US consumption which I think is significant. At some point it will make sense for some of us, depending on where we live, to cover our roofs with film. More and more of us will have one hybrid in the garage.

I think these things will just happen very undramatically even if gas is $6 a gallon.

My little scenario would not be hiccup free. I would expect distortions with inflation, interest rates and economic stats which would make things ugly but not depression ugly--I don't think.

If you maintain a globally diversified portfolio, you will own the things that do well. I would expect some of the same themes working over the last couple of years to keep on working. China and other countries will continue to ascend, and so anything selling into that need should do well.

Companies providing fossil fuels and alternative energy solutions will do well. That may seem like a contradiction to other comments I have made about solar stocks but it isn't. The technology will matter but we are at least a few years away from anything resembling widespread use and so I think there will be companies that come and go as capitalism does its thing in the next few years.

Or I'll be totally wrong.

Bottom line for me is the same thing I have been saying for a while, which is that historically normal returns will continue to exist but they may not be in all the same places as before. We must be willing to look for them in places that are not as familiar or comfortable for us.

Comments

[AlexS]

Maybe so. I talked to somebody here in truck country. They had been shopping for a car and noticed the huge numbers of used trucks on the lot. Some of the dealers have stopped taking them as trade-ins. One thing I don't necessarily agree with above is the idea that we will drill in the controversial areas. Consider that we still have no nuclear waste depository in Nevada and both candidates for President are against ANWR drilling and are for CO2 reductions via higher costs on everybody. This CO2 reduction thing could be a real problem in that oil shale, oil sands, etc. take more energy to produce and therefore more CO2 emissions. Never underestimate the politicians' ability to ignore the interests of the country in favor of their particular groups. Isn't that the lesson of all the misgoverned countries of the world? It will get worse before it gets better.

[iThinkBig]

Agreed AlexS. The solution requires tremendous political will. In Washington the politicians are ignoring the will of the people and I am a bit surprised considering this is an election.

Washington politicians are beyond corrupt and besides, they reap massive taxes from $4.00 gasoline (the devalued currency tax) and plan on new taxes in carbon credits, letting the tax cuts expire etc. What they should be doing is creating a massive competing market against petroleum which would solve the problems for Main St. and the markets. I'll report my carbon footprint and comply with the new carbon credit tax when Washington politicians get rid of there SUV traveling circuses.

[oilgurrl]

Oil production is peaking, demand has been growing at 4% per year. Prices must rise. If we tap in to ANWR, at current global consumption rates, it will supply us for 6 days. Not worth it.

In my view, it is just like the issues of logging, fishing, or for that matter, heroin addiction. Feeding the addiction is an act of destruction and only meets our short-term need, while laying waste to the future.

I want to leave the planet at least as good as we found it for the next generations - our kids and grand kids and their grand kids grand kids. Time to dial it back. Less is the new more. I have been testing the waters, and been having more fun with less. Less debt, more time for walks and talks, less clutter, less consumer crap, ...

[redbaron]

While you touch on China, overall your 'little scenario' doesn't consider Global Oil/Gas increased consumption. While we here in the US are now using slightly less oil, the demand from the Mideast alone is going up more than we have eliminated, and that does not include the increase from China, India and other countries where energy consumption is subsidized by the Gov't. This is not just a US problem, and while I agree that there will be technological advances over time, exactly what direction these new developments will take, and how long it will take to implement them, is not at all clear at this point in time. Until those developments happen (or are invented and implemented), it seems to me that oil will continue to be a very prized global commodity, and as a result, highly priced.

Key Word: Global

[buyitcheap]

oilgurrl, logging and fishing are renewable if properly managed by loggers and fishermen who are among the first true conservationists. It is when government conservationists get involved that entire species get wiped out.

Just as our discovery of kerosene largely put an end to the whaling sector (for fuel), so too will the embrace of nuclear and spent fuel reprocessing, along with the adoption of electric vehicles, dramatically reduce the consumption of petroleum.

The fact is, we need nuclear, now, and materials engineered for minimum resistance, to bring us the electric car.

[FourBrane]

The comments found here are a representative cross section of the idea spectrum, running from right wing drill anywhere and to hell with the damn land people to back to moccasins and bone needles conservationists to the dreaming Polyannas who are certain that Amenrican Inventiveness can cure anything. Three blind men discussing the elephant, each describing their particular guess on what it looks like based on trunk, leg and tail.
Sadly, I doubt that there is a easy way out of this one because the elephant in the room is over-population. Demand for oil, food, water, and every other resource is now or will shortly be approaching asymptote.
Buy oil, natgas, uranium, other metals, water rights...and guns.

[Greencars]

The following quote from the article "Even if it takes ten years from day one, ANWR is capable of 2.1 million BPD which is in the ballpark of 10% of daily US consumption which I think is significant." is misinformation. The Trans-Alaska pipeline has a capacity of 2.1 mbpd. The most optimistic forcast for additional ANWR oil is 1.45 mbpd, with the most likely output being only 780,000 bpd. I am not against drilling in ANWR or on the continental shelf, I am simply saying it will not be nearly enough to solve our problems. We, as a nation, must make a concerted effort to move toward plug-in hybrid vehicles, natural gas vehicles, cellulosic ethanol, and public transportation. Failing to do so will end in social chaos and social degredation of unimaginable proportions.

[tuj]

The fact is, the NRC has 20 some applications in the pipeline for new reactors. These things don't get built overnight. There are only two companies in the world that can produce the castings for LWPR's.

[AlexS]

No single oil well or drilled area is enough to solve our problems. Never has been and never will be. And groups that use nonsensical reasoning (ANWR will only supply 30 seconds usage assuming 44 earth-like planets in the universe etc.) are only doing a disservice to the discussion. If ANWR is part of the solution, the market (including $100 oil) will determine whether it is worth it to drill there. It's nice that some people have enough to leisurely retire on their mountain top, most often on someone else's money. But some people actually have to travel to work and have to support their families.

[tessant]

It's crazy to see how much oil has taken over the mindframe of just about everyone everywhere. With uncertainty comes rising futures...

Scott
oilfeeds

[Zenfar]

Well said AlexS. It is simple you go all in. You drill in ANWR, you invest in solar, wind, and nukes. You continue with ethanol, probably with another crop. You hope for a breakthrough. You drill next to where China is drilling off the coast of Cuba, as long as the oil companies agree to clean up China's mess as well as there own. We should buy hybrids and plug in electrics and US car companies should built them. But most of all we should be serious about the problem and not driven by our emotions. Serious people of goodwill must address the problem and not say that more drilling or more taxes is the answer, you have to go all in.

[triznix]

Interesting that the author mentions having oil as the new money. Hey, got news for you: Oil has been the basis of value for the USD for a loooong time already. Do you really think oil going up in price has no relation to the USD going down???

[hvc--- (hudson valley charlie_]

About fifty years ago the Univac computer weighed a zillion tons, was as slow as molasses and needed a very cold space in order to function. Today we all carry in our shirt pockets the results that originated from that relic.

Remington Rand Univac's creator is long gone , but IBM , Hewlett Packard and the
Microsfts' and Intels many others survived
mostly by buying other companies to insure
their future growth.

The future of solar may be in film or in painted plastic

Some of the larger players in the solar game today will around tomorrow pickingup little
companies whose technology will help them
grow.

To many traders and pundits I suggest they
devote a little more time to the study of
recent history

[CloroxCowboy]

Wake up people...electric or hybrid vehicles are NOT any sort of solution at this point. Anything that is dependent on electricity today is just as much of a drain on supplies of non-renewable resources as using regular unleaded. For example, one person charging their electric car requires a microscopic increase in the power supplied by the electric grid. If everyone in the country switched to electric vehicles, the additional demand for electricity would be huge. As of 2006, only 28.8% of electricity was produced using nuclear or renewable energy sources...the remainder comes from burning coal, oil, or natural gas. So where does the increased supply of electricity come from in my example above?

In the short-term we can't crank up the hydro, wind, solar, or nuclear production too much...we will be forced to buy and burn more fossil fuels. So as much as we would love to believe that going electric is the same as going green, it's just not the case yet. We MUST put at least as much effort (probably more) into cleaning up the production of electricity as we do weaning our cars off gas.

[Halp]

I am actually amazed that we, The USA, did not more aggressively develop many different types of alternative energy programs the last time our reliance on ME oil caused havoc with the economy.
(Remember 1973 ?) The situation is much worse now than back in 1973 to 1983.
Additionally, when federal or state government do provide some sort of tax incentives to assist a fledgling start up idea or industry, either one of the two major political parties or those industries on the other side of the street run to their laywers and try to shut "change" down.
I'm sick of the partisan politics that run...or should I saw ruin ...this country !

[keithofrpi]

The ideology that clouds this discussion is breathtaking to me. Why call conservationists "back to moccasins and bone needles"--FourBra... Why provide false information about ANWR--"Even if it takes ten years from day one, ANWR is capable of 2.1 million BPD"? Why blame the government for wiping out fish species--"It is when government conservationists get involved that entire species get wiped out."--buyitcheap... Hard to have a reasoned discussion when such nonsense gets retailed. The basic problem for the US is that our entire economy is built on the assumption of cheap oil. Here's the problem, in a nutshell, and if it isn't happening today, it will tomorrow: The guy commuting 30 miles one way in his SUV can't afford to run it. He can't sell the SUV for as much as he owes on it. He can't sell his commuter house for what he owes on the mortgage. Under the new bankruptcy law he can't declare bankruptcy and escape all this debt. How many are in this predicament, and what can be done about it?

[galewhitaker]

This is a dopy article. No matter what people do its too late to avoid worldwide chaos caused by lack of cheap energy. Think about the hundreds of millions of people who will not be able to heat their homes next winter. When the price of refined fuels finally catches up to the price of oil it will cause the price of food to skyrocket causing hundreds of millions to go hungry. Eventually oil producing nations will start hoarding their supplys. This will cause the price of oil to rocket out of sight and may lead to war. Human beings lack the capacity to imagine major shifts in their nice comfortable environment.

[PK de C'ville]

Can we place our trust in the current (oil) leadership of the USA? Cheney forged an oil policy in cahoots w/ his oil brethren. He wanted ANWR, but never offered support of green energy as a GRAND compromise. If he had, we might have has a stronger green commitment alongside his ANWR and coastal oil fields.

Ever wonder why he never pitched this? Could be he sold the US out in favor of big oil.

Sorry. I'm getting way too cynical about him and George.

[User 86999]

Interesting article and the long series of comments; shows how much the issue is touching on the soft spot. Some people think the pricey oil is because of the weak dollar, well ... that's just partly true. Oil has gone up by 38% in the last 6 months, if measured in gold (the time-tested currency). And don't worry about the next winter and lack of heating oil. Bern-anke-Bern is printing tons of money, we should be able to burn lots of that paper to keep us warm!

[User 208061]

Interesting! Why isn't Geothermal even considered when discussing alternatives? It has several advantages that seem very important. 1) It provides base load power and has a very high reliability factor. (Normally quoted at between 90 and 99%.) 2) It also has a very small footprint. Have you read the recent Scientific American article about the 1000's of square miles of photo voltaics required to produce a significant fraction of our energy needs? Granted there needs to be more R&D to be able to move to Enhanced Geothermal, but the needed technology seems to be very straight forward and probably is easily adaptable from oil and gas drilling techniques.

[Roger Nusbaum]

User 208061--you are of course correct along with hydro.

[Waiting for action]

Looks like the issue will be divided again... The Republicans on the get more product and use supply and demand to solve it and the Democrats on the other - tax the "Big Oil" companies and do nothing about supply - hit the consumer in the pants for being too wasteful and the best - wait another 100 years to act on this issue...

Get real... Windfall Profits Tax did not work last time and it will not work now. The only thing that will work is working hard to produce what we have and find an alternative to the black stuff!!

Our elected officials need to be held accountable for this mess... We should demand that they use every means possible to let the world know, especially the other producers, that we the largest consumer will not be held hostage by them. Open up the flood gates and start drilling and refining some US oil from any place we have reserves....
Another thing... Why can China and Castro drill 50 miles off Florida and we can't?

Who is better at making sure we do not create an environmental problem? The US producers that we can control or China/Castro who we have not been able too???????

[tuj]

Conventional geothermal and hydro are all utilized where they are available, and some new projects are going on like Hydro-Quebec's big one, but there's only so much you can do. EG has been a hard sell, because it tends to cause geological problems... like mini-earthquakes.