Book Review: Profit from the Peak
Posted by Robert Rapier on June 11, 2008 - 9:30am
Topic: Economics/Finance
Tags: book review, investing, peak oil [list all tags]
One of the threats from peak oil is the potential for financial ruin as oil prices run up. If you were invested in airline or automotive stocks through the recent run up in oil prices, you have probably seen those investments lose a lot of value. If, on the other hand, you were invested in oil futures, oil companies, or oil field service companies - you have probably done well even as the overall stock market slumped. The idea of profiting from the peak - an event that is likely to cause misery for those who are least prepared - may seem an odd combination. It almost feels like "Profit from Homelessness." But the reality is that unless you understand how energy prices affect the prospects of various sectors, you are placing yourself at a financial disadvantage.
Thus Profit from the Peak
First off, The Oil Drum was referenced a great many times in the book. The work from many of the regular contributors was featured. The first chapter was an introduction to peak oil, and it argued that peak oil is upon us. The information in the first chapter will bring a reader up to speed on the potential problems we are going to experience from peak oil, but it also provides background information such as how oil is formed and subsequently refined.
Moving on to Chapter 2, the book gives a good explanation of oil depletion, and provides a nice overview of the major oil producing countries. But it also brings up the first area of disagreement that I had with the book - and that is valuation of oil companies. As the book states when talking about investing in blue chip oil companies, "we wouldn't touch most of them with a five-mile drilling rod." I have a different opinion.
Theirs is not an unusual argument: Oil companies are seeing their reserves and production rates decrease, and therefore their stock values are bound to follow. But let's consider the case in which a company sees a 5% drop in their oil production rate, and yet the price of their remaining oil reserves increases by 50%. This is not too far off the mark from what we have seen happen. What has been happening - and what I think will continue to happen - is that oil prices will rise faster than production rates will drop. That means that the value of an oil company's reserves will increase year after year, even as the overall volume of the reserves declines. The argument that oil companies won't weather peak oil very well discounts (or ignores) this.
Consider the case of ConocoPhillips (COP). Full disclosure, ConocoPhillips was my previous employer, and I am still a stockholder. Here's why I still own COP, and will for the long haul. According to the 2007 annual report for COP (you can download it here), proved reserves at year-end 2007 were 10.6 billion barrels of oil equivalent (BOE), down 5.4% from 11.2 billion BOE at year end 2006 (this, primarily a result of the exit from Venezuela). At the end of 2006, the world average crude oil price was $55.95. At the end of 2007, the world average crude price was $89.76 - up 60% over year end 2006. Today, the world average crude price is $126.06 - up 125% over year end 2006.
Thus the value of COP's oil reserves has more than doubled in the past year and a half, even though the size of the reserve has fallen by a little over 5%. (Note that this comparison is approximate, as the majority, but not all, of the BOEs are from crude oil). Further, the total value of COP reserves at today's average crude price is $1.3 trillion - and I think prices are going higher in the long-term. The market cap for COP is about 1/10th of that at $142 billion. The market is seriously discounting the run-up in prices when evaluating oil companies like COP. Each $1 gain in crude prices increases the underlying value of COP's reserves by $10 billion. Yet you could buy COP a year ago - with oil trading at $60/bbl, for only 20% less than the current price. Investors must expect that oil prices will fall back to the $80 range.
However, there are two caveats to consider when evaluating oil companies. One is that governments are bound to intervene as oil company profits continue to rise. If oil goes to $200 and then keeps rising - Big Oil is going to make a ton of money. Governments are going to be under pressure from upset citizens to do something about this, and they will likely put various sorts of windfall profits taxes into effect. There will also be calls to nationalize, but the oil companies would likely just move to friendlier countries.
The second caveat is that the trend of falling production can't continue forever. At some point, the oil companies are going to have to make some strategic decisions and become much more diverse in their energy offerings. But since prices have been rising faster than production is falling, they are likely to have loads of cash for getting into other energy businesses. It is admittedly an atypical model - negative production growth combined with sharply higher revenue and profit growth. But unless you think production is going to fall faster than prices will rise, I think oil companies are a pretty safe bet. They possess a resource that people are going to be willing to pay a lot for.
The other area that Chapter 2 missed on was the situation with refiners. While negative on Big Oil, the book was very bullish on refiners such as Tesoro (TSO) and Valero (VLO). Quoting from the book "Valero and Tesoro are going to make a pretty penny every hour they operate their refineries." Of course that depends on one very important issue: The ability to maintain decent crack spreads. Unfortunately for pure refiners, softening demand has prevented them from increasing gasoline prices at the same rate that oil prices have gone up. As a result, refining margins have been crushed. Big Oil has the advantage of being able to absorb soft refining margins. After all, they are also producers, so they are selling oil for $130 a barrel. Valero, on the other hand, is buying oil for $130/bbl. As a result, in the past 12 months Valero has seen their stock fall by 40%. Over the same time period COP has seen share prices rise by 21% (and in the past 5 years, COP shares have increased by 240% - not bad for a Blue Chip).
Chapter 4 makes the case that the true cost of oil - when the negative externalities are factored in - is $480/bbl. I have only minor quibbles there, and in general agree with the overall point that we don't pay the true cost of oil. I found Chapter 5 - The Pentagon Prepares for Peak Oil - to be a very interesting read. I had never really thought about it, but the book points out that the U.S. Department of Defense is consuming well over 100 million barrels of oil a year - the most of any government agency in the world. Imagine what $130 oil is doing to defense budgets. This chapter also makes the pertinent point that we have outsourced a lot of our manufacturing - and therefore our CO2 emissions - to China. Thus, it is hypocritical of us to blame the Chinese for their fast-growing carbon emissions.
Part II of the book is "Making Money from the Fossil Fuels that are Left." This section was generally a good, fact-filled read. The information on methane hydrates was quite interesting. The book stated that the U.S. possesses methane hydrate reserves equivalent to 56 trillion barrels of oil. Of course it will be a difficult prospect to extract them commercially. This section also put oil shale claims into perspective, pointing out something that has long been apparent: Break even is a moving target, and it tends to move up along with oil prices. I have noted this for years, but I never defined it with a catchy name like the Law of Receding Horizons. Oil shale always seems to be economical at the current price plus $10-$20/bbl.
I did find inaccuracies in this section. For the layperson, most of these are trivial. But if you think about energy most of your waking hours, some of the inaccuracies will feel like an itch that needs to be scratched. For instance, on Page 96, natural gas is described as a mix of methane and propane. Propane was probably a typo, as natural gas is primarily methane and ethane. Page 109 states that ExxonMobil shelved their $15 billion LNG plant in Qatar. That was actually a proposed GTL plant. And on Page 117, the book states that diesel produced from CTL emits twice the volume of greenhouse gases as normal diesel when you burn it - and another ton of CO2 per barrel when you make it. That's a misstatement. CTL diesel produces exactly the same CO2 emissions as normal diesel (after all, it is chemically the same as regular diesel) when you burn it. It is the production process of CTL that causes the overall carbon footprint to be so high.
There were two comments on tar sands that I disagreed with. One is on Page 127, and states that the total net energy gain is only 5 or 10%. That would make it worse than corn ethanol. Yet on Page 122, the EROI for tar sands was stated to be "as low as 5." An EROI of 5 indicates a net energy gain of 400% (invest 1 unit, get 5 back, the net is 4 and the net gain is 400%). The second disputed argument is that tar sands must be totally dependent upon natural gas, or the construction of dozens of new nuclear plants. Thus the conclusion is that tar sands can't scale up much. But if in fact the net energy return is 400%, the solution is easy. If you don't have natural gas, you cannibalize and burn part of your production to drive the process. That will be an economic decision, but will become more attractive as natural gas supplies deplete and drive prices up. (Note that this isn't an endorsement of tar sands production, as I agree with the book that there are many environmental concerns surrounding the process).
The last and final section of the book, Part III, was Energy after Oil. I particularly enjoyed the section on geothermal power, as I think this alternative option doesn't get enough coverage. The book did a good job of clearly explaining how geothermal works, and identified some potential investments in the sector. This section also does a good job on wave and tidal energy, takes on the hydrogen economy, makes strong arguments in favor of carbon taxes, and argues that the future will be electric.
Again I found some nits to pick about the biofuels coverage. On Page 142, it is stated that biodiesel can be used as a 100% blend. However, there are no warnings about the cloud and pour point issues surrounding straight biodiesel. Try running straight biodiesel in very cold weather, and you could end up with a frozen tank of fuel. I had a few minor quibbles around the ethanol section (Despite the hype, Brazil does not get 40% of their motor fuel from ethanol!), but overall I thought Section III was the strongest section of the book.
Conclusion
While I found some areas of disagreement, I found the book to be enjoyable to read, and I learned a few new things that I didn't know. Anytime I can do that, I am happy with a book. Those new to peak oil will especially get a lot of value out of the first section; those who know about peak oil will enjoy the latter parts of the book. Finally, each person will probably find that they disagree with one or more of the investment recommendations. That's bound to any time financial advice is being offered. But you will also find lots of little companies you never heard of - but are worth investigating.
Note: I don't consider myself to be an expert in investing. While I haven't done too badly, my style works for me, but it may not suit you. I try to anticipate long-range trends, so I am a buy and hold, long-term investor. So please don't write and ask for investment advice. I will not give it, and if you invest in a company that I mentioned in a favorable light, you are on your own.
I stayed up till the wee hours last night finishing off my copy.
I like the book and I like the review! The first chapters are like an ASPO/TOD/Matt Simmons recap! Long time lurkers will recognise quite a few of the graphs. Nice in print!
Geothermal also looks like a winner to me.
Overall: Its likely that high energy prices will push down PE ratios if we enter a drawn out Recession and Inflation will be even higher so its even more important to pick stock winners. This book gives useful advice on PO and companies likely to benefit -Recommended Reading.
Nick.
P.S. Regarding the Tar Sands -what about the new Hyperion Nuclear Battery? And generally one of the biggest areas that we can gain in is doing something with all that waste heat from electricity and industrial processes -IMO as big as gains from extracting energy in the first place...
Co-generation needs to be rolled out everywhere ASAP. Over 90% efficient. Its a no brainer - which our politicians should be able to identify with.
Energy Efficiency is the only option available to us.
no wind, solar, hydro or geothermal?
Wind, solar (thermal solar), hydro and geothermal are all highly efficient as far as I know, with high eroei.
But its a very good comment - I should have said energy efficiency in energy production and energy consumption is the only option available - in co-generation I was describing an energy production system that may run on coal (for base load) topped up with urban waste and biomass.
Yooooon, I absolutely agree on co-gen. It should be a requirement of any new permit to build a commercial structure, and planners should offer incentives for manufacturing plants etc. to co-locate with existing facilities that have waste heat. Likewise, I would favor strong incentives to deploy heat pumps; if the cost of the units can be brought down or offset by incentives, the "free" heat and cooling could put a real dent in heating oil and nat gas consumption.
Right now, I am not aware of any such incentives in any U.S. municipality. But with the stroke of a pen, planners could offer them, resulting in a very significant boom for both co-gen and heat pumps, and deployment could occur quite rapidly.
On the whole, I agree that efficiency is the no-brainer.
ChrisIs - UK stocks melted today. The day was one of several in recent months where one part of the market went one way - south - (Bank of Scotland down 11.6%, Royal Bank of Scotland down 9% - these are two of the UK's biggest banks) whilst BP up 1.5% and BG Group up 0.4%. The latter is one of my favorite stocks. One of the biggest sellers of LNG into the American market and significant equity in the Santos basin (declaration - I own BG.L stock).
We need to fight a bit harder to get energy efficiency adopted as standard currency. In absolutely everything we do, energy efficiency must be King. For a fair number of years at least, this will allow society to function, doing all it does at present, without too much pain - gives time to think about phase 2 of the Long Emergency.
But I gotta say that in a world run by **** heads - I'm not currently that optimistic.
Right with ya there...
Same thing here today: A tough day for the financials, and a bomber day for energy. But I wasn't complaining 'cuz I'm long energy, plus I saw the financial meltdown coming and went long SKF (ultrashort on the financials) a couple of weeks ago. It's nice to get it right once in a while...
I wonder how the costs would compare in generating electricity centrally and using air heat pumps to multiply it's heating efficiency to suing buried hyperion reactors and installing pipework to pump hot water to houses in co-gen?
It's apparent that the installed co-gen pipework in places like Holland will give them an enormous advantage compared to, say, the UK.
A problem I see is that the global financial system itself is facing perpetual collapse in parallel with the decline of oil production. Does the book take this side of things into account?
Although I like the book a lot (great job, Chris), it doesn't discuss that at all. For those who know about the link between oil, the economy and fiat currency, it's the elephant in the room. I fair way of handling it might have been to say, "There is a limited amount of time to make your money." I don't have any idea what conversations were had behind the scenes on this topic but if Chris wants to chime in that would be helpful.
This is despite that in the Epilogue they do include a lot of urgency and the fact that we're really boxed in. However, the subtitle is "Why We're Energy Optimists" and for the life of me I can't figure out why they are given the poor evidence they muster. Earlier in the book they are really straight about all sorts of topics, including the link between fossil fuels and population. But the end of the book feels like something happened along the lines of a producer in Hollywood saying, "You have to make a happy ending or the film will bomb."
But this is a very good book and I don't hesitate recommending it. If you're looking to give someone a thorough review of the topic plus some investment advice, it's certainly worth the reading time and money.
-Andre'
www.PostPeakLiving.com
It may be true that the "global financial system itself is facing perpetual collapse in parallel with the decline of oil production," and indeed I did note several times in the book that the assumptions of continued economic growth are probably bad ones, due to the decline of oil
But--as with the sour crude refiners argument I made--it's probably oversimplifying things to say so. Tell the Middle East that it's facing perpetual financial collapse! I think they would say, "Maybe, but it will be long after yours."
No one can predict exactly how the cookie will crumble. There will be many losers, but there will also be winners. Likewise, no one can say exactly how much switching to renewable energy we can accomplish, or when, or how much demand destruction there might be along the way.
We can, however, say with great confidence that humanity will respond in unpredictable ways, and that it's not out of the question that we might fill the gap of fossil fuel depletion faster than anybody now expects. We already have a multitude of possible solutions to this problem. It's really more a question of political will and financial health than anything else, and who can predict that? To simply say that financial ruin lies ahead would be wrong, and counterproductive.
I truly believe, like the book's subtitle says, that this is the "greatest investment event of the century." Smart investors have an opportunity here to make an enormous amount of money in a very short time, regardless of the larger trends. That's why investing in the energy sector is the focus of the book, and why a discussion about fiat currency and economic theory would have been off topic.
That said, your Hollywood comment wasn't completely off the mark, Andre. I'll just say that it wasn't entirely up to me, and leave it at that.
Thanks for commenting, Chris. Re: the Hollywood ending, I understand how those conversations go. I don't need to pursue that further.
As for not being able to predict the future, please don't be insulted by this but I've found in my work that often that point is made as an excuse to stop thinking (remember that I coach business executives -- they are not immune from this particular foible). Of course you can't predict the future. But you can set ranges and bracket the possibilities. So let's not stop and instead keep going.
On the positive side, does anyone think the economy can grow while oil supply is shrinking? That's clearly impossible given how dependent on oil our economy is. (There are a few people who think this, we call them cornucopians and they are stuck in a paradigm and they can't see that they are stuck, so it's valid to ignore them for now.)
So that leaves the economy staying even as the best outcome possible. Is even that tenable?
No, because the best estimates are that each % of oil provides between 0.6% (from the last oil shocks; see Hirsch's paper on the topic) to 2.5% of the GDP. Given those two data points and at least looking to determine the correct order of magnitude, Hirsch reasons that a 1:10 ratio is too low and that a 10:1 ratio is too high, thus for his purposes a 1:1 ratio works well. I'll use the same order of magnitude.
Now we are left with the economy declining at something like the same rate that oil is declining as the best possible outcome.
What's the worst possible outcome?
The worst possible outcome is that people around the world collectively wake up and realize that the money they think they have in the bank is really nothing but numbers in a computer database. What gives those numbers value are two things:
In other words, these numbers are just an agreement between people backed by the force of law. They are nothing more than that. Agreements can and do change all the time.
If people stop agreeing to the above, then the system breaks down — completely. The numbers in the databases become just numbers in a database.
Now that we've bracketed the best and worst cases (neither of which are very pleasant), let's look at what could cause people to stop agreeing that these numbers in the database are worth paying attention to.
One thing that would do that is massive defaults on the loans that are the source of our fiat currency (see Chris Martenson's Crash Course and the video Money as Debt to understand this point clearly). At that point it doesn't matter if the force of law is there to back up a contract because if the business or individual can't gather the money to service the debt the law can't do anything about it except organize the cleanup.
So what would cause a massive default of loans?
One thing that for sure would do that is a declining economy in which wave after wave of businesses and individuals declare bankruptcy. The filing for bankruptcy is primarily designed to discharge debts at some fraction of the original amount. Countries that allow quick discharges, like the U.S., have tended to be more resilient than those for which bankruptcy is more onerous because entrepreneurs are allowed within a relatively short time frame to dust themselves off and try again. But this would overwhelm the system.
All of a sudden a gradual decline doesn't seem very likely, does it? A massive wave of loan defaults is actually probable as oil is removed from the world economy.
Soon the financiers and asset holders will realize that their best bet is to turn their assets into cash which can then be used to buy things that they really want, like farm land, for instance. That will be the beginning of the Great Asset Selloff and you can already see the beginning of it as we enter the depression by looking at the number of listings in Craigslist.
When I started selling my car at the beginning of February there were about twenty Subaru of all models available in the Bay Area of San Francisco. My strategy was to be the lowest price always so that I got the calls before anyone else. I had two buyers that I foolishly thought were already getting a great deal so I didn't budge during negotiations and they walked away. That occurred at the$600 and $800 below-Blue Book prices. My final selling price at the beginning of May? $1400 below Blue Book and it was getting to be quite a job making sure I was the lowest price because the final week I counted over 70 Subarus of just my model.
The machine is grinding to a halt. Me saying so might just have people prepare a little who wouldn't otherwise, even at the cost of potentially speeding up the process.
So I think a long-term investment strategy has no logical basis to it — at all (see Chris' comment below). And I don't even think it's "on the edge" or "could go either way." Mathematically the economy we have set up requires growth. Remove oil and one removes growth. Remove growth and the system collapses. Period. If the reader doesn't believe that, ask someone who understands this to walk you through it.
That's why in the Post Peak Living Six Week UnCrash Course I recommend that people turn their money into things as quickly as they can (the course and The Guide To Post Peak Living have recommended things). I also coach people to give up their attachment to how they thought the future was going to look and start creating a new future for themselves worth living into. No one is going to give people their new role; they are going to have to create it for themselves and start preparing now. For instance, I am taking a welding course and am going to buy a welding machine and supplies. I figure that might be a good backup skill to have.
And I wish the very best of luck to all of us.
-André
President, PostPeakLiving.com
Cofounder, Post Carbon Marin (part of the Relocalize.net network)
I'm not so sure that the system will grind to a halt, but I do suspect it will both shrink and slow down. Growth isn't necessary for trade to occur. Nor is growth of the total economy necessary for investment. There are parts of the economy that will grow and those parts will get investment. The return on the investment will be small, much smaller than in the past, but it will be there.
I'm not saying that the markets will save us. I'm also not saying that I trust that my current portfolio, a large part of which is invested in ETFs of several major markets, will just grow as in the past. Nor am I saying that I disagree with your recommended courses of action. But I think it is too strong to say that "the machine is grinding to a halt". We're going to get (or are getting) a wallop and its affects are going to last a long time, but markets are incredibly adaptable, and as long as people want to trade goods and services, they will exist, if not grow inexorably.
Hi, Mark.
I don't think it will be the end of all markets. Forgive me if I left you with that impression. Where humans are markets are sure to spring up, of that I'm sure.
Let me be more specific: the current system of trade that depends on far flung suppliers that equally depend on relatively stable exchange rates between the currencies of different countries will grind to a halt.
This is no small thing. I'm not sure I could find even a handful of articles of clothing in my closet that are made in North America.
In the aftermath, small, hyperlocal markets will emerge.
(edit)
As for growth being necessary, I think you'll find all our systems are predicated on the notion that business profits will exist and grow in the future:
and so on.
-André
Cool. I think we are nearly of same mind. Completely agree that many of the services we enjoy today are going to change for the worse if not disappear altogether for a time.
Let's think about a system where growth is not expected. Heck, let's say that our current system comes to that realization. Bam! The markets drop massively with that expectation. Some markets even close as capital flees for cover. But where does the capital flee to? Commodities? Bonds? Cash? Inflation will probably make folk avoid cash and bonds. Companies will still exist, perhaps not the ones we know today, but those that survive will have learned their lesson. Ultimately, all that cash, probably much less valuable cash, will move back into the markets. But then what?
My bet is on growth. Not exponential growth, but a more sustainable curve. Perhaps logarithmic or logistic and starting well below what we're at today. Without the expectation of 6% profit per year, the markets will be much more sane. You won't throw your money into them unless you actually know something. People will still make money in the markets, even on average, just not the kind of money we've grown used to in the last 50 years.
But there's going to be some real suckage between now and then.
I think that without oil, money will have very little value compared to what it has now. The world has way too much money in it as it is, parked in bank accounts with owners who think they have real "wealth."
ChrisN said:
We already have a multitude of possible solutions to this problem. It's really more a question of political will and financial health than anything else
This sounds very cornucopian. Did you really mean that there is no doubt that alternative technologies and resources can substitute for fossil fuels, on the same scale for all uses, as well as allowing continued growth of the economy, into the future, with only politics and economics stopping that move?
Could you clarify whether that is what you meant?
No, I definitely don't mean that. I intentionally said nothing about whether they can achieve the same scale, for which uses, or whether they could allow continued growth. I only said that technologies and strategies exist that have yet to be really exploited.
Where I depart from Andre's view is that I assert that those questions are still formally unanswerable, whereas he seems to be quite convinced that global economic collapse is inevitable.
I think we have to be careful to state which time frames we're talking about, and which countries. In the next 20 years or so, I have no doubt that the developed world will experience economic fallout for all of the reasons he stated, and more. But I am not convinced that the effects will be nearly as bad for the red-hot sectors of the developing world, like Asia and the Middle East.
Likewise, if we go 50 years out into the future, who can say with any confidence what the balance of energy supply and demand will look like? On an day when I'm feeling optimistic, I might say that increased public transport, efficiency improvements, relocalization, and increased RE supply could make a huge difference by then--although how much, we can't say. On a pessimistic day, I might even buy Andre's scenario. But there is no way that I would claim either scenario with any certainty.
In the end, I don't think forecasting that far out is terribly useful anyway. The important thing is that as many people as possible understand the problems, and do their utmost to be one of those "silver BBs" that could, in aggregate, contribute mightily to the solutions.
As Andre alluded, he fears that any optimistic view of the future will breed complacency. I take an opposite position: It's crucial to have some optimism about what can be done in order to motivate people to seek their own solutions.
Hi, Chris.
Well, I thought it was self-evident that we'll experience collapse when people realize that the debt on the books will never be repaid. Just as letting air out of a tire leads to a flat tire so too will removing oil from our economy lead to a rudimentary, local market economy. (Forget alternative energy; it won't make a substantial difference in time or maybe ever.) But I guess it's not so self-evident after all :-).
I think this is formally answerable although I'm not going to attempt it now. One would need to demonstrate that the value of money approaches zero as the stored value on the books evaporates.
By the way, I think people bring emotion into play too early in the process. The first job to do is get clear on the range of possibilities. Do that as dispassionately as possible and use optimism and pessimism merely as tools to change the underlying variables. For instance, bring in optimism to really explore one end of the scale, and then pessimism to explore the other end of the scale. But then immediately remove them so that you can think clearly. Some people, typically engineers in my experience, are adept at this style of thinking.
Once the range is established you are on more solid footing. THEN bring optimism to your response to whatever occurs, not because it's "the right thing to do" but because of what Chris said: people will stay in action and achieve more results if they are optimistic.
Bringing "optimism" in too early will give people a skewed view of the world and they will then make poor decisions.
-Andre'
Thanks for clarifying that. Your saying, "It's really more a question of political will and financial health than anything else" had me wondering if you thought that, technically, there are solutions that would enable economic growth to continue indefinitely.
My take is, I think, irrefutable. Economic growth requires more resources (ultimately), since it means more stuff is made and used (whether it's in services or physical products). As we can't assume that we'll ever be able to plunder the asteroids and other planets for resources, whilst maintaining a liveable environment, it is obvious that economic growth must end. The only real question is when. No doubt there are many factors though maybe collapse will come through the first scarcity of a vital resource.
If we don't move gracefully to a sustainable economic model and a sustainable society, then collapse is inevitable (how could it be otherwise?). If we do manage to get to a sustainable society then it will be very different from now and questions of "investment" and "profit" will have very different answers. From here to collapse or sustainability will be a decline, from the point of view of our current growth society. Even in that interim period, I think any financial investment is risky. If one doesn't absolutely have to urgently find alternative sources of income through gambling or investment, I'm not sure why anyone would indulge.
sofistek, I think the answer to why anyone would invest in energy at this point is self-evident: because if we don't invest in it, it won't materialize! The more we can produce unconventional fossil fuels, the more gradual the decline will be, and the greater our hopes for a managed reconfiguring of our economies instead of a sharp collapse. And the more we invest in renewable energy, the better our long-term chances are for achieving a sustainable society.
Anyone who has no need to increase their wealth or retire their debt is truly blessed, but that isn't the case for most people. I believe that investing in energy is a better choice than just about anything else, aside from the basics like land, water, and food.
Anyone who has no need to increase their wealth or retire their debt is truly blessed, but that isn't the case for most people.
I agree. However, one may be able to redefine "need".
Investing, as implied in your first paragraph (i.e. actually putting money into a venture, rather than trading stocks), is probably not the kind of thing that most people could get into. But both kinds of investing is a gamble, either in the short term or the long term. Those who "need" the extra money may not be able to risk what they have on the stock market. So "need" may be translated into "need, given one's current situation". That current situation may be changed by investments (of varying risk) or by re-arranging one's current situation. For example, taking a hit on one's property and moving down or away. Maybe moving in with family or combining resources with friends or family to better prepare.
For someone that can't afford to lose anything of what they have, is intrinsically risky investment ever the best way to go?
Tony
The first rule of investing is: never risk more than you can afford to lose!
Well said. People please note!
I think fiat currency discussion and economic theory should have been covered(I haven't read the book). what's most likely to happen is that we're going to have massive inflation and even hyperinflation as fiat currencies feel the strain of inflation. it may not be wise to hold some currencies. some fiat currencies might go away. some might convert back to gold or silver standard.
and why do you think that and do you have any historical examples?
How does this book compare with "The Oil Factor" by Stephen and Donna Leeb? Leeb and Leeb are peak oil aware. The key innovation in their book is their case against the buy-and-hold strategy. Their argument is roughly that normally you should invest in things like alternative energy, natural resources, etc. but that when the annual oil inflation rate goes really high (like over 80%) that presages a recession, and you switch to a defensive strategy with a lot of bonds until the inflation rate recedes. So you switch your investments depending on the economic climate.
I'm not so much interested in your comments on their strategy itself as whether "Profit from the Peak" references this argument or discusses this book in any way, and your thoughts on how "Profit from the Peak" compares to "The Oil Factor."
Keith
Keith,
I've read both books -PFTP does not address this strategy. By its market entry/exit timing ommision it essentially recommends a BUY AND HOLD strategy.
I would suggest PFTP is used to form a set of companies that a timing strategy may then be used with to optimise market returns.
Having said that Leebs market timing idea is probably itself too broad -its possible within each of these cycles bubbles may form and die. Corn Bio diesel -for example- could see a surge of investment only to die when EROI/Famine considerations kill it...
Nick.
There is much overlap with Profit, but I found that Profit gives better context mostly because it is more up to date.
The Leeb book helped me get in and his subscription investment service has been valuable, although the monthly newsletters are free as far as I can tell. He also misses some stocks by a mile. It was obvious 6 months ago that First Solar was soaring, but Leeb didn't recommend it until it ran out of steam at $250/share just this month. Patterns like that make me think of "pump and dump". He also missed things like Vestas at $98, now over $650 after only 2 years. Pretty obvious investment, not that I was able to make it because of asinine trading restrictions. I can convince myself that there are huge investment returns to be made in completely inconsequential parts of our energy solution. All part of being on at the ground floor of incredible exponential growth. Don't expect that the companies you gain from will change the world, most cannot scale. Meanwhile, ones that can e.g. GE are burdened by all sorts of crap like financial services and "entertainment".
I don't churn as much as Leeb recommends, and he provides no insight into seasonal timing of energy investments (viz natural gas). He is big on "Chindia", claiming e.g. that Coca Cola is a great buy because millions of Chinese are going to drink that swill. I'm not so sure. Recall the "Come Alive with Pepsi" fiasco, which was translated in China into "Pepsi brings you back from the dead." Perhaps that is accurate.
However, Leeb is no longer following his own advice. Oil has broken through his Indicator (TM), and by his rationale one should be bailing out of stocks and into deflationary hedges. Instead, he is rationalizing that his recommended investments are hedged already, which makes sense only if you hold the 50-60 stocks in his various categories. I have gained on a half dozen recommendations that doubled or more over 2 yrs, and lost a bit on ones he said to dump. So, there is value there, but you need to put in many thousands of $ to make it worth the time. I invest to preserve value against true energy+food inflation and the $ collapse.
One of the more doomerish arguments of the PO community is that when oil peaks, further economic growth becomes impossible. When the financial community wakes up to this there won't be any more need of a stock market since it is a way of giving money now hoping to increase it due to growth. I would be interested in hearing comments on this argument.
Me too!
In addition the Stock Markets in the 1970s got absolutley hammered (apart from certain key sectors: Gold, some commodities, oil, others?)
It's likely the stock market is going to be a 'war zone' post peak. PE Ratios could plummet as the 'future growth paradigm' that many stock valuations rely on is gradually erroded away...
Having said that its also going to be a market where companies that offer solutions will see their stocks soar. How much would a starving man pay for a machine that made food?
My highly speculative timeline shows the collapse of the financial system as a possibility 'Mid 2020s' -I think a lot of things have to happen b4 Capitalisms Engine (the market) dies!
http://www.flickr.com/photos/8745365@N04/2504887199/sizes/o
The markets have been around for ~250 years so for a 95% confidence interval we can say they will exist between 12.5 and 5000 more years... -12.5 years would put their demise @ 2021...
Nick.
Well, "the economy" isn't some monolithic thing. If you watch the daily action of the stock market lately, you usually see one of two things: Either the energy sector gains, and all other sectors lose, or vice versa. As energy stocks gain, that contributes to economic growth. This is why it's a silly argument (though one that's made often enough) to say that peak oil means the death of the markets. A huge portion of the S&P 500 index (which is generally considered the best barometer of "the market" in general) derives from fossil fuel stocks!
Look at it this way: Some (and I am one of them) say that we have effectively been on the peak/plateau for three years now. While this has undoubtedly been a factor in slowing the growth of the U.S. economy, the dollar has been another very important factor. If you look beyond the U.S., you see the euro holding up quite well in the face of peak oil, and you see China still maintaining an 11% economic growth rate, with India and the major Middle Eastern producers not far behind. And global trade continues to be extremely important to all participants.
This is why it's a silly argument to say that peak oil means the death of the markets.
It's silly without qualification.
I think a lot depends on people's awareness and reaction to that awareness. If we see recession deepen and unemployment rise inexorably, even whilst energy costs rise, maybe people will start to get the notion of a finite planet. If people start to realise that all of their aspirations for the future (and for their children's futures) will come to nothing, who knows what reaction that will spark off?