It’s nice that the price of gasoline is relatively low again. At $1.73 a gallon, the current average price here in Massachusetts according to AAA, I feel much better taking our other car, a gas-guzzlin’, low-production, high-speed ’89 BMW, out to exercise my lead foot.
But when thinking ahead for the best car we’ll want to buy in the future, I’m not planning for the most power money can buy. It’s hardly a bet that gasoline will once again be pushing $4 a gallon. Will it be next week or even a year from now? Maybe not. The U.S. remains the driving force in world oil demand, and as long as we are in a recession, that means there is less demand from us, and in turn less demand in China, which relies on us to buy its goods.
But eventually the economy will turn to growth again, probably sooner than people believe, if less dramatically than we saw under the real estate and dotcom bubbles. This recession is sowing some of the seeds of the next oil boom when we do recover. With demand slumping and credit tight, oil companies are pulling back on their research and development and slashing capacity. It’s the classic boom and bust model that defines the commodity–when demand returns, not enough production will be available.
But there is more to what is going on with fossil fuels than a simple reduction of capacity. As I told readers of the Cabot Green Investor in our December issue, the long-term supply picture for oil and gasoline prices is decidedly bleak. Overshadowed by the economic turmoil and the presidential election was a sobering report on the world energy outlook by the International Energy Agency. Bankrolled by the oil consuming nations of North America, Asia and Europe, the IEA is the most respected researcher of the world oil markets. What is the IEA telling its government customers? That we better find alternatives to oil and gasoline now, before it’s too late.
At the London news conference for the report, IEA Executive Director Nobuo Tanaka was blunt: “Current trends in energy supply and consumption are patently unsustainable–environmentally, economically and socially–they can and must be altered. Rising imports of oil and gas into [developed consuming nations] and developing Asia, together with the growing concentration of production in a small number of countries, would increase our susceptibility to supply disruptions and sharp price hikes. At the same time, greenhouse-gas emissions would be driven up inexorably, putting the world on track for an eventual global temperature increase of up to six degrees Celsius.”
Dramatic words. Of course, Al Gore and many others have argued similar points, so Tanaka’s outlook isn’t unique. But what analysis of the IEA report found–and what we detailed to subscribers–is that even if you overlook the worst-case scenario, the oil outlook is still disturbing. Adjusted for the October market crash, the IEA said it sees world oil demand growing at 1.6% annually into 2030.
That seems a modest amount, until you consider that 2030 demand would end up being 45% greater than today. That would be impossible to meet even if oil production from the recent price peak were to remain stable. But it won’t. The IEA sees production from the world’s oil companies in decline thanks to reduced R&D, the increased nationalization by producing countries of oil companies, (an event that always has resulted in less efficient production), and the difficulty in finding new oil fields to tap.
Saudi Arabia, for instance, does have a new oil field, but it’s turning out to be far less robust and thousands of times more expensive than the country’s primary Ghawar oil field. The impact of this is simple: Saudi Arabia is the world’s foremost oil producer and is believed to turn a profit when oil is well under $20 a barrel thanks to the strength of old giants like Ghawar. But as the old, low-cost fields disappear, and higher-cost fields take their place, they won’t even pump it out of the ground unless prices are much higher.
In July, we alerted Cabot Green Investor subscribers to a doctoral thesis by a German graduate student that examined world oil production. The study determined that 60% of the world’s oil comes from 1% of its oil fields, dubbed “giants.” The vast majority of these giants were discovered and tapped more than 50 years ago and appear to be coming to the end of their useful lives. The IEA sees the same thing, reaching the conclusion that even if demand remains at its current depressed levels, the world needs to find another four Saudi Arabias to meet future demand!
If there are no more Saudi Arabias to be found–and it is nearly certain there aren’t–what is the solution? Alternative energies, such as solar power, wind power, biofuels, tidal and experimental energies, all of which we detail to Cabot Green Investor subscribers. We are at an inflectional point in Green where the technology is now viable and closing in on grid parity, where the cost to generate power is equivalent to getting it from the existing electrical grid. The market potential is huge too: solar power’s most mature market, Germany, is slated to double its solar buying by 2012 to $19 billion, with the U.S. to match that shortly after.
The promise of Green energy is so strong that even in the bear market of 2008 we found several gems. Some examples: in February of last year, we recommended Chinese biofuel maker Gushan Environmental (GU), which surged 21% in the handful of trading sessions after we recommended it. In May, we identified American Superconductor (AMSC) as a stock about to realize tremendous strength from its wind turbine operations. The stock surged 45% in six weeks after our buy call, at which point we took some profits, selling the remainder over the summer for another double-digit gain.
By the end of September, we were largely in cash thanks to our market-timing discipline, allowing us to avoid the brunt of the October crash. Coming into the New Year, we were holding profitable positions in an American waste remediation company and a Green infrastructure firm that is already seeing early buying in anticipation of President-elect Barack Obama’s stimulus plan.
One stock we’re not holding? GM. Not, at least, until they prove the Volt is more than just a marketing concept.