It takes a breadth of knowledge to successfully invest in energy.
With the sector growing so diverse, one needs to be familiar not only with the traditional markets like oil and natural gas, but also with rapidly growing technologies like wind, solar, and the smart grid.
All of these markets present opportunities to grow capital. . . but they do so for different reasons.
Oil is a great investment because its finite nature has brought us to a point where economic scarcity will force its price to appreciate. . . even if our use of it only grows modestly.
Per the Energy Information Administration’s most recent International Energy Outlook, oil production will grow from 84.6 million barrels per day in 2006 to 106.8 million barrels per day in 2030 — an increase of 26%.
Between now and 2030, 26% is a drop in the barrel. I can make that in two weeks on a decent play. So it’s not growth that makes oil valuable, but its impending scarcity.
The bet is whether or not that 106.8 million bpd will be enough to satiate demand. When oil goes up, it’s because those placing bets think it won’t.
Natural Gas Growth
Using the same report as reference, natural gas consumption is expected to rise from 102.2 trillion cubic feet in 2006 to 152.5 trillion cubic feet in 2030.
Estimated natural gas production in 2030 is 153 trillion cubic feet — a 46% rise from 2006 levels.
So once again, going long natural gas is inherently a bet that supply won’t meet demand in the future. If investors thought there were natural gas or oil aplenty, future prices wouldn’t rise. This is basic supply and demand — ninth grade economics.
Don’t get me wrong, going long fossil fuel is a great way to make money. Our current dependence on fossil fuels, coupled with population rise and their entrenched infrastructure, will make them a sure bet for the next few decades.
What makes traditional fuels a great investment is the fact that there’s a precarious relationship between supply and demand.
Will demand rise at the expected rate? Will developing nations consume more than we think? Will unconventional sources come online quickly enough? Have reserve numbers been reported accurately?
The answers to these questions are what make the price of fossil fuels move. And it’s doubtful answers that fetch the highest prices.
Concerning these fuels, doubt abounds. So make your money, and make it well. But let me tell you about an energy sector in which widespread public doubt isn’t a requirement for profit.
Renewable Energy Growth
Keep in mind that by 2030, oil production will grow 26% and natural gas production will climb 46%, as I tell you about renewables’ future.
Taking into account just solar (PV, thermal, and concentrated), wind, and geothermal; renewable energy production capacity stands at 175,851 megawatts this year. By 2020, that number will grow to 934,366 megawatts.
That’s a ten-year increase of 431%, compared to 26% and 46% for oil and natural gas, respectively.
And this is not dependent on resource scarcity. This is not dependent on the fuzzy reserve numbers of new finds and OPEC. This is not dependent on finding new technologies to extract oil from sand or to drill in open water — all of which may or may not come to fruition.
This is based solely upon the wind, solar, and geothermal technologies available to us today.
And it’s based on a ten-year time-frame. . . less than half of the 2006-2030 time-frame from the fossil fuel example.
So with renewables, you’re looking at 431% growth in a decade versus 26% growth for oil in twice the time.
I don’t know about you, but where I come from, the sector that’s growing at a higher rate in a shorter amount of time is the sector that gets most of my investment dollars. Perhaps the fact that our own country has been largely out of the oil game for so long has led some of us to forget the basics.
The Middle East’s Oil Reach-Around
The Middle East certainly hasn’t forgotten the basics of energy investing.
The region from which we get a good chunk of our oil is fully embracing renewable technology. This is the equivalent of a drug dealer putting cash into rehab facilities on the sly.
Reports from the area cite the growing realization by oil-rich nations that their source of wealth is finite. As such, they are smartly adopting renewables to "conserve and prolong the longevity and value of their hydrocarbon resources, especially since the global demand for fossil fuels is bound to increase and prices are likely to remain on the higher side."
Saudi Oil Minister Ibrahim Al Naimi has gone as far to say that his country is making solar an important pillar of their domestic energy mix, calling solar "abundant, clean and available to all." He said Saudi Arabia will be giving "that sort of energy special attention."
Don’t you see what’s going on here?
Oil-rich countries are turning to renewables to provide their domestic power needs so they can sell every last drop to suckers like us that really need it. And they’re using oil profits to do it.
I’d say these Middle East oil countries are on the right track. They’re using oil profits from their front-end business to reach around and invest in clean technology on the backside.
And it’s because they understand the dynamics that make energy markets move. They understand that oil is precious — and will climb in value — only because of its finite nature.
But they also know that renewables are valuable for a different reason. If scarcity is the reason for fossil fuel appreciation, abundance is the attribute that makes renewables valuable.
And oil-exporting nations want to harness that abundance to ease the transition away from oil. They’re profiting from energy on two fronts: old and new.
You should be, too. After all, that’s what this letter’s all about: Profiting from the end of oil.
Call it like you see it,
P.S. Like I said, you should be profiting from energy on all fronts. Mr. Kohl can help you make it from traditional fuels, and I’ve been killing it on the cleantech side. The community of investors at Alternative Energy Speculator has closed a winner per week so far in 2009. Here’s how you can get in on the next three.