Thursday, November 5, 2009

Trying to Profit from the End of Oil

The world is running out of oil and according to Profit from the Peak by Brian Hicks and Chris Nelder, shortly oil production rates will begin their inevitable slow decline. The authors call the resulting scramble for energy sources “the greatest investment event of the century,” but is there a way for investors to profit?

Official sources paint overly-rosy pictures of the amount of oil still available. The biggest reserves are controlled by Saudi Arabia, but the Saudis severely limit access to scientific information about these reserves. The authors painstakingly go through available scientific evidence and conclude that peak oil production world-wide is near despite official claims that at least 50 years of oil remain.

Part of the problem with oil production is that as an oil field matures it gets progressively harder to extract oil, and the extracted oil has more impurities that take energy to remove. At some point, even if a field still has oil, it becomes unprofitable to extract any more oil. So, estimates of the amount of oil remaining are misleading; what matters is how much oil can be extracted.

This book is filled with detailed information about not only oil, but almost every other current and foreseeable source of energy. Here are some of the major conclusions:

– Oil production has peaked or will do so in the next three years.
– Natural gas and coal will peak some time in the next 13 years.
– Nuclear energy will peak in the next 10 years because we are running out of high-grade uranium.
– Wind energy is already competitive with coal and nuclear at 4 to 6 cents per kilowatt-hour.
– A hydrogen-based economy is highly impractical.
– In the future we will have an electric energy infrastructure with distributed electricity production and storage.

Another fact that puts Warren Buffett’s recent acquisition of a rail company in perspective: moving goods by rail is about 8 times more energy-efficient than trucking.

I give this book an A+ for technical content and clarity of explanations. However, investors are interested in profits. Interspersed throughout the book are “Investment Opportunities” sections that basically list companies involved in various energy-related ventures.

Despite the quality of information in the book, I can’t see how to profit. No doubt some of the companies mentioned will be wildly successful and many will fail. I can’t tell them apart. Even if I could guess which new energy source will prevail, such as wind or solar, there are so many companies working in these areas that I can’t predict which ones will dominate.


  1. I hold stock in a company called Computer Modeling Group, TSX:CMG. They provide software that models oil reservoirs and advanced extraction techniques. As the price of oil rises, and companies turn to complex extraction, they use CMG's software to model it.

    I've done extremely well on the stock, and while I can't in good conscience recommend anyone buy it, I think it is an example of a company that might do well in an environment of rising oil prices. Seems many companies that produce oil will also thrive in an environment of decreasing supply and higher prices.

    As far as peak oil goes, didn't BP just discover a massive reservoir in the Gulf of Mexico? That aside, it seems plausible that we are reaching peak oil and a slow decline in production.

  2. Gene: I'm glad CMG has worked out for you. The biggest risk to the reasoning of decreasing supply and increasing demand leading to increased profits for most oil-related companies is the ramping up of alternative energy sources. I have no insight right now into how that race will end.

    World-wide oil consumption is 85 million barrels per day or 31 billion barrels per year. One guess of the size of the BP's find in the Gulf of Mexico is 3 billion barrels (a little over a month's supply). Iran is reported to have found a bigger reservoir, but it is reported to be only about 3.5 months supply. These finds may delay the date of peak oil production, but by months rather than decades.

  3. As far as predicting oil price itself, I think the hard part is the demand side. We know oil supply will decrease eventually, but if you're betting the farm on oil prices increasing as a result, you could get sucker-punched by a breakthrough in alternative energy.