Jack Yetiv

In Light of Peak Oil, Financial Diversification Is a Bad Idea

To Mr. Pursley regarding Brazilian finds and how quickly they will come to production:

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

$200 Oil, $2000 Gold?

I used to be heavy into HTE, but I think refining margins will continue to be squeezed by higher oil prices and lowering demand for gasoline, decreasing pricing power of the refiners.

I like ERF, PWE and AAV, although I hold all PWE right now because I think it has good upside potential if they execute better and I believe the 13% yield is pretty safe in this environment.

Jack Yetiv