The Peak Oil Myth

The Peak Oil Myth: Don’t Go Broke On This Popular Investing Fallacy

by Alexander Green, Chairman, Investment U -Investment Director, The Oxford Club
Friday, January 22, 2007: Issue #630

At an investment conference last year, I ran into an attendee who told me he had just put his entire fortune into oil stocks. Sadly, this was just as oil was crossing the $75 mark.

“Haven’t you heard about Peak Oil?” he asked, looking incredulous. “According to The Association for the Study of Peak Oil (ASPO), world oil production has already peaked. Our planet is certain to run out of fossil fuels in our lifetimes.

Whenever someone mentions the word “certain” in an economic forecast, I tend to shudder involuntarily. This time was no exception.

Peak Oil Theory goes something like this: Oil is a finite resource. Production has peaked. With the world’s population surging and developing countries industrializing rapidly - especially giants like India and China - it’s just a matter of time before demand outstrips supply, leading to sky-high oil prices.

That, of course, should cause oil stocks to soar. Ergo, we need to jump on energy stocks the way the Hunt brothers loaded up on silver.I hate to be the skunk at the garden party, but there are quite a few holes in so-called Peak Oil Theory.

Anyone who has bought into this idea may want to think again. It turns out that the Peak Oil Theory may actually be the peak oil myth, here’s why

Finite Resources and Peak Oil Theory

In 1930, the United States had 13 billion barrels of proven oil reserves. With those 13 billion barrels, the country fought World War II, energized the post-war economic boom, and fueled Americans’ newfound love affair with the automobile. Sixty years later, how much of that 13 billion-barrel reserve do you suppose was left?

Omitting Alaska, the lower 48 states alone had proven reserves of 17 billion barrels, 31% more than in 1930.The same thing happened in the Persian Gulf. In 1975, official reports concluded that the region had 74 billion barrels of oil. This was during the energy crisis. Americans were told that that the world had only enough fuel to last a couple more decades.

Yet by 1993, the official estimate was that Persian Gulf reserves exceeded 663 billion barrels, nine times as much as 20 years before.“This time it’s different,” the Peak Oilers insist. Yet last year we saw the discovery of enormous new oil reserves in the Gulf of Mexico. And let’s not forget the large-scale processing of high-quality crude from Alberta’s oil sands.

A Scientist’s Perspective On Peak Oil

Further raining on Peak Oil’s parade is Ray Kurzweil.

Scientist and author Kurzweil insists that nanotechnology will make oil obsolete within two decades.It sounds outlandish, I know. But hear him out. “Even though our energy needs are projected to triple within 20 years,” he wrote recently, “we’ll capture that .0003 of the sunlight needed to meet all of our energy needs with no use of fossil fuels, by using extremely inexpensive, highly efficient, lightweight, nano-engineered solar panels. From there, the energy will be stored in safe, highly distributed fuel cells.”

“Solar power,” he insists “is now providing one part in a thousand of our energy needs but that percentage is doubling every two years, which means multiplying by a thousand in 20 years.

Almost all of the discussions I’ve seen about energy fail to consider the ability of future nanotechnology-based solutions to solve this problem. This development will be motivated not just by concern for the environment, but by the $2 trillion we spend annually on energy.

This is already a major area of venture funding.”I’ll concede - and my wife will happily confirm - that I’m no nanotechnologist.

And clearly much of what Kurzweil says is speculative. Yet plenty of scientists, including pioneering nanotechnologist Dr. Eric Drexler, argue that Kurzweil is correct.

But even if he’s wrong, higher oil prices are an incentive to explore more broadly, extract more efficiently, and continue improving technology and energy alternatives. Higher oil prices also encourage greater conservation.

Note To Oil Investors: Don’t Bet the Bank

So despite the population boom and increasing industrialization, banking on oil hitting the moon anytime soon is not a particularly sound bet.And that’s a good thing.

Unless, of course, you happen to be a Middle East dictator, a Venezuelan socialist or some poor sod banking on the peak oil myth.

Good Investing,

Alex

Today’s Investment U Crib Sheet

Oil slipped below $50 a barrel Thursday for the first time since May of 2005. The Energy Information Administration reported that inventories in the U.S. are now above average for this time of year.
In its most recent monthly report, the International Energy Agency lowered its forecast for 2007 oil demand growth. The report said higher inventory levels in the U.S., mild weather and adjustments to U.S. GDP assumptions will lower demand by about 160,000 barrels per day.

Shock Stocks

Despite more than a 1% slip in the Nasdaq yesterday, a dozen stocks advanced by more than 10%.

Shares of Hoku Scientific, Inc. (Nasdaq: HOKU) led the pack, soaring 130% after the company said that one of its solar panel-related divisions signed a long-term contract with Sanyo Electric Company. The deal could be worth $370 million.