Capitalizing on Peak Oil - Investing In Alternatives

By Chris Puplava, October 26, 2005

The term "Peak Oil" has been flying around the news lately, intensifying after the May 27^th release of Matt Simmons book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy."

Simmons has over 400 pages of technical evidence that spells out the following main points:

5 miracle giant oilfields created 90% of Saudi Arabia's oil
All these giants are now very mature
All used massive water injection to keep oil flows high
Vertical drilling is obsolete
Every key field faces risk of rapid decline
Coming up empty on exploration: Aramco tried but failed to find more oil

Matthew Simmons argues that 20 percent of the world consumes 60 percent of the oil and the other 80 percent are just getting addicted, the 80% being Chindia (China-India), as can be clearly seen in the following graph.

China's economy is expected to grow by 7.9 percent this year. That is down from the 9.4 percent growth rate in the fourth quarter of last year. An 8 percent growth rate is still substantial and it requires more energy to sustain it.

In geologist Kenneth S. Deffeyes' new book "Beyond Oil," he argues that we may hit peak oil as soon as this November or early next year. Many geologists believe that "peak oil" will arrive in this decade while Deffeyes believes it happens this year. What is known is that there have been no major oil discoveries in the last 30 years. The last big discoveries were in Alaska in the late 60's and the North Sea in the early 70's. Both of these discoveries are now in decline.

What is also known is that we have ignored all of the early warnings of peak oil over the last few years. Anyone notice the increased size in the Toyota Tacoma and Corolla, or the Nissan Pathfinder and Altima? Nearly across the board, new versions of previous models as well as engine sizes (Ford Mustang) have gotten larger, not smaller in the face of oil that has risen from $10 a barrel in 1999 to peaking over $70 a barrel in late August. I know consumers are just now starting to get the picture as many automakers are not taking SUV trade-ins due to a lack of buyers. September U.S. car and light truck sales fell 7.6% with GM's sales plunging 24% year over year (YOY) and Ford, known for its large SUV's and truck lineup, saw its YOY sales fall 19.5%.

Source: Evelina Tainer, Econoday Short Take - October 5, 2005

Does any of this remind anyone of the late 1970's and early 1980's? Here is an excerpt from the Fed's Beige Book national summary of January 2, 1980:

"New car sales dropped substantially, with large- and mid-sized autos taking the brunt of the decline. Compacts remain popular; some sales were lost because of shortages and delivery problems. Inventories of large-sized autos are high nationwide."

The high oil prices of 1979 caused consumers to rethink their auto purchases, switching from trucks and SUV's to compacts, today we see the switch to hybrids. Allow me to digress a minute here. Last night I watched the move "Kicking and Screaming," with Will Ferrell as a vitamin salesman who takes over his son's soccer team. There is a scene where he enters a parking lot and before he can pull into a parking space a Hummer driving soccer-mom cuts him off and takes 2 spaces. She gets out of her car and brags about how nice her Hummer is and mocks his green friendly Toyota Prius. Who do you think is doing the mocking now?

I don't want to go into any more of peak oil, as I am sure most readers have heard plenty on the subject, but what I do want to talk about is how higher oil & gas prices are making all other forms of energy more competitive, providing an opportunity to capitalize on the future boom in alternatives forced upon global economies by peak oil.

The Outlook for Alternatives is Bright

As immediate substitutes for oil and natural gas are unlikely and will take years to develop, Deffeyes argues that we should look at existing options and begin developing them. With an ever increasing push for R&D into alternatives that will move hand-in-hand with the price of oil, investing in alternative energies and those indirectly linked to them will stand to benefit in the future, and a list of investment areas is presented below.

Solar:

In light of high oil prices alternatives such as solar energy are beginning to shine even brighter. While doing some research on solar power I came across two articles that I found quite interesting. The Environment News Service had an article released on October 18^th entitled, "Navy Flips the Switch on Hawaii's Largest Federal Solar Array." The largest array of solar cells on federal property in Hawaii was dedicated this past Thursday, located on top of the U.S. Navy's Ford Island Building 54 in Pearl Harbor.

The solar panel array covers the 31,000 square feet of roof space and will generate 309 kilowatts (kW) of electricity from 1,545 solar panels, which generates enough energy to power the equivalent of 300 homes. The solar energy produced is expected to save the Navy $40,000 per year at current rates.

The system was designed and installed by PowerLight Corporation of Northern California whose biggest project was the 704 kW system they installed at Naval Base Coronado, located in San Diego, California.

The Navy isn't the only military/intelligence department to take interest in solar energy. The other article that caught my attention was entitled, "The Latest Investor in Green Energy - The CIA," by John Dillin from the Christian Science Monitor. A venture capital firm set up by the CIA is a new investor in privately owned SkyBuilt Power Inc., which began developing its Mobile Power Station (MPS) electricity-generating unit, whose primary fuels are wind and solar energy.

The system is designed to run for years with little maintenance, using a battery backup system in case the wind is calm and or the sun is down. A prototype was built in Arlington and has been running for more than a year without repairs or maintenance. The MPS units can generate up to 150 kW of electricity. That's enough to power an emergency operations center, an Army field kitchen, or medical facility.

The electricity generating units are not limited to military use as they can be used for disaster relief in such circumstances as the recent hurricanes that slammed the Gulf, restoring power to critical areas like hospitals, evacuee centers, police and fire departments, and communication towers.

SkyBuilt's MPS unit is described by Vice President Scott Sklar, as "plop and drop, plug and play." All the parts are packed into standard-size shipping containers that can be moved by ship, truck, or even dropped by a laser-guided parachute to remote locations.

Source: SkyBuilt Power Inc.; Rich Clabaugh - staff

Once the MPS unit is positioned, the container is opened and arms and poles are attached to the outside to support the solar cells and wind turbines. The great thing about SkyBuilt's MPS unit is that most of its individual component parts are widely available, allowing it to be upgraded whenever new and improved batteries are developed.

Hybrids:

The case for converting to high-efficiency cars and hybrids will help in curbing demand for oil as can be clearly understood when looking at the following fuel efficiencies:

Honda Insight (MPG: City-60, HWY-66)
Toyota Prius (MPG: City-60, HWY-51)
Honda Civic Hybrid (MPG: City-49, HWY-51)

Investing in either Toyota or Honda is an obvious and direct play on the hybrid market. Just take a look at the charts for Honda and Toyota versus GM and Ford:

Wind:

Mark Jacobson, a civil engineering professor at Stanford University, is a strong proponent of wind energy. Jacobson argued in a 2001 Science magazine article that wind had become the cheapest way to produce electricity. He said that an investment of about half a trillion dollars would buy enough wind turbines to replace half of all the coal used to produce electricity. Furthermore, he said within 20 years that investment would be recovered by the lower costs of producing wind-generated energy. One of the attractive points of using wind turbines is that they can be constructed relatively quickly, within 24 months and without the requirement of highly skilled labor.

Contrast that picture to what it takes to build a refinery. Simmons described the growing problem with an aging oil industry in a speech he made titled, "An Energy Tsunami Ahead" (PDF). He points out that educating and training a new generation of oil workers will take a decade or more as the pre-1982 hires are all retiring over the next decade (youngest employee will be 53 years old). Michel J. Economides points out in his May 2005 World Energy Monthly Review, "Refineries: A Disaster Waiting to Happen," that it takes nearly 800 government permits to build a new refinery and that the number of chemical engineering graduates hired by the industry has fallen by 80% over the last 30 years.

Greenpeace released an article on October 17^th entitled, "China may emerge as world top wind power." The article states that China's parliament passed a renewable energy law that will be implemented next year, setting tariffs in favor of non-fossil energy such as water, wind and solar power. Beijing is aiming to build 20 gigawatts of wind power by the year 2020 and Graham White, managing director of Garrad Hassan Pacific Pty Ltd. from Australia, said China was likely to overtake Germany, Spain, the United States, and India as the top wind user. The local government of Guangdong has set its target to raise wind power to 3,000 megawatts by 2020 from 86 megawatts currently.

In the Unites States, wind energy has grown by 30% over the past six years, while only accounting for less than 1% of overall energy use. Investors interested in wind technology and those implementing it should look at FPL, GE, and SPI.

Nuclear Power:

In Simmons speech mentioned above he makes several points arguing for nuclear energy.

He said that America's 103 nuclear plants provide emission-free electricity for one in five homes and businesses. The uranium fuel the plants use is so efficient that just ONE nuclear fuel pellet provides as much energy as 149 gallons of oil, 1,780 pounds of coal, 17,000 cubic feet of natural gas, with 5 pellets meeting a household's electricity needs for an entire year. He further points out that nuclear energy is clean and that waste can be minimized, and that the security of small amounts of waste is the only "con."

China recently announced plans to build 30 nuclear reactors, potentially awarding an $8B order to a foreign supplier, beginning in 2007. Plans are already underway to bolster China's nuclear infrastructure as China's newest nuclear power plant, the Tianwan station north of Shanghai, has begun generating electricity, the government said Monday, six years after construction began in 1999.

Tianwan has the largest installed capacity of any of China's nuclear power reactors, with its first phase due to have two pressure water reactors that each has a capacity of 1.06 million kilowatts. The Tianwan plant can accommodate eight generators with a combined eventual capacity of 8 million to 10 million kilowatts. When completed, it is expected to generate 60-70 billion kilowatt hours of electricity a year, worth more than 25 billion Yuan ($3 billion).

The impact of the 2005 Energy Bill looks encouraging for nuclear energy here at home. Tax credits and loan guarantees are provided for thousands of megawatts and could substantially lower the cost of those plants to consumers. Provisions for nuclear energy research and development demonstrate a renewed commitment from the U.S. Federal Government to next-generation facilities.

An expanding nuclear industry world wide is putting a squeeze on the supply of uranium as reactor requirements more than double western world production.

Source: World Nuclear Association

Uranium Production by Region, 1990-2004

Source: The Ux Consulting Company, Updated: 9/20/05

The supply and demand constraints on uranium have driven uranium spot prices considerably over the past two years, with spot prices up 43% from January to September, and up 196% since January 2003 to September.

Source: The Ux Consulting Company

Uranium producers stand to benefit not only from their increasing profit margins from the nearly 200% rise in uranium prices over the past two and half years, but also from a future demand spike resulting from a dramatic increase in the number of nuclear power plants set to come online from now to 2020, with China's most recent addition coming online two days ago.

Coal:

Nuclear power wasn't the only alternative that benefited from the recent 2005 U.S. Energy Bill. The bill provides substantial amounts in direct grants, loan guarantees and accelerated depreciation. As a result of the incentives in the Act, the first few clean-coal and gasification projects will be in a strong position to come to fruition, and those pursuing such projects should accelerate their development efforts. One provision appropriated $100 million to Waste Management and Processors Inc (WMPI) to help the company finance a $612 million dollar plant that will produce more than 5,000 barrels of zero-sulfur fuel a day selling at $1.25 a gallon.

I've written previously on the opportunity of coal to liquid technology and coal in general, and those interested in reading further can click on the link below to view the archived wrap up. (09/28/05 Wrap Up, subtitled "The Return of the King: KING COAL"

Today's Market

Equity Indices	Close	Day Chg	Day % Change	YTD % Change
DJIA	10344.98	-32.89	-0.32	-4.06
DJ TRAN	3735.29	-1.45	-0.04	-1.65
DJ UTIL	392.11	-5.3	-1.33	17.07
NASDAQ	2100.05	-9.4	-0.45	-3.47
NYSE	7334.77	-27.07	-0.37	1.17
AMEX	1631.09	-8.24	-0.5	13.72
S&P 100	550.39	-2.32	-0.42	-4.33
S&P 500	1191.38	-5.16	-0.43	-1.69
RUS 2000	638.41	-4.32	-0.67	-2.02
10-YR BOND	4.59	0.08	1.77	8.77

Sector Summary

Description	Last Price	Price Change	Today's % Price Change	Week To Date % Price Change	1 Month % Price Change
Basic Materials	1,181,127	6,761	0.6%	2.6%	-3.8%
Capital Goods	643,988	-3,656	-0.6%	0.8%	-5.3%
Conglomerates	763,658	-3,475	-0.5%	0.3%	-1.5%
Consumer Cyclical	760,928	1,037	0.1%	1.5%	-2.5%
Consumer/Non-Cyclical	1,288,747	-7,538	-0.6%	0.3%	-1.6%
Energy	2,501,900	-16,397	-0.7%	3.6%	-9.2%
Financial	4,612,141	7,271	0.2%	1.3%	0.1%
Healthcare	2,219,380	-12,724	-0.6%	0.0%	-2.3%
Services	4,403,506	-21,024	-0.5%	0.6%	-2.2%
Technology	2,935,474	-12,489	-0.4%	0.3%	-1.0%
Transportation	357,451	-1,854	-0.5%	2.0%	2.9%
Utilities	856,458	-10,401	-1.2%	0.8%	-6.1%

Have a pleasant weekend,

Chris Puplava

Contact Information

Christopher M. Puplava
PFS Group
PO Box 503147
San Diego, CA 92150-3147
(888) 486-3939 Toll Free
(858) 487-3939 Tel
(858) 487-3969 Fax
Email