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August 15, 2008

Review: Profit from the Peak
by David Shvartsman

Are we nearing the end of the Oil Age?

Is the end of a cheap fossil fuel era at hand? How will we make the transition from a world dependent on hydrocarbon energy to one powered by a mix of hydrocarbons and renewable energy, and can we profit from this coming shift?

Answers to these questions, and further insights into our oil-dependent global economy, are found in a new book by Brian Hicks and Chris Nelder, entitled, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century.

The Oil Age: An Epochal Shift

The book opens with an elegy to the end of an age: the Oil Age. As the authors tell it, that era recently came to an end when the world consumed its one-trillionth barrel of oil. By the end of 2005, we had used up half of the world's known oil reserves.

What's more, with global oil consumption growing steadily to over 85 million barrels a day, the world has, "only about 30 to 50 years' worth of oil left at present rates of consumption". The long up-cycle that brought oil abundance and steadily increasing oil production will give way to a declining curve in world oil production, bringing higher oil prices and shortages along with it.

As the authors remind us, this gradual decline in the availability of cheap oil and fossil fuel energy has implications that go beyond our need for liquid transport fuels.

Many of the manufactured products we use every day are made from petroleum products, or created with energy from fossil fuels. Our system of food production and storage has become totally dependent on fossil fuel energy. In turn, the rise of fossil fuel-dependent food production has supported the enormous growth in world population over the past one hundred years.

Approaching the Peak

With so much riding on the outcome of our energy future, and so little understanding of these issues in mainstream circles, it's no surprise that Hicks and Nelder have decided to devote the first part of Profit to a discussion of the approaching peak in global oil production and its consequences.

There is much to learn here, and the chapters and subtopics which introduce us to the problems of peak oil are very well thought out, factually detailed, and laid out in a clear, logical progression. The information is quite interesting and very up to date, and presented in a way that is likely to engage the energy novice, as well as the more seasoned peak oil observer.

Topics range from the geological formation of oil, to the problems with global oil reserve estimates and our dependence on production from aging, giant old fields. There follows a pointed discussion of why production of unconventional oil (tar sands, oil shales) and conventional crude oil from smaller fields is unlikely to mitigate production declines observed in larger, conventional oil fields.

Readers will also find a very useful breakdown and clarification of the various oil production figures bandied about in oil discussions and media reports, as well as a brief, but fascinating chapter on the true (external) costs associated with oil production and our oil dependence.

A Shift to Renewables and Electric Power

It's in the second and third parts of the book, in chapters like, "Twilight for Fossil Fuels", and, "The Renewable Revolution", that the authors shift their focus more towards the investment opportunities arising from the dwindling availability of hydrocarbon energy sources and the shift to renewable energy sources.

These later chapters mix overviews of what to expect from energy sources like tar sands, coal, geothermal, wind, and solar power with possible investment ideas, mostly through the highlighting of key stocks in each industry.

While investment themes are present throughout the book, many of the specific stock ideas are concentrated in the book's latter portion, and while these are largely limited to brief descriptions of companies operating in a given segment of the energy industry, they at least seem to provide some jumping off point for further investigation.

Hicks and Nelder summarize the push towards renewable fuel options on page 119, in a chapter subheading called, "Diminishing Returns and Receding Horizons":

"Whether we're talking about crude oil, natural gas, or coal, the trend is the same: every year we're paying more (and expending more effort) for less and less energy."

In short, we're not just facing a problem of peak oil; we're facing a bigger problem of "peak everything". We'll need all the help we can get from renewable energy sources, but will these technologies be able to ramp up in time to give us the energy we need?

Hicks and Nelder are very cautious on this point, seeing "no supply-side solutions" to our energy needs. Instead, they emphasise a need to reduce energy use in order to the smooth the transition to a post-peak world.

If there is a bright side to this vision, it's in the authors' hopes for an improved and expanded electricity infrastructure that would help us replace our current dependency on liquid fuels. This, along with their faith in humanity's ingenuity and ability to respond to problems with innovative solutions, gives the book a realistic, yet slightly optimistic outlook.

Overall Impression

One of the real strengths of Profit is its ability to introduce the reader to a big picture view of our global energy future and the likely onset of peak oil and peak fossil fuel energy. It discusses the idea of a "peak everything" future not in an alarmist way, but with all of the seriousness that this subject demands.

The authors seem to have a sincere faith in the effectiveness of large-scale efforts (such as their proposed "Manhattan Project for Energy") and government "investment" programs in solving some of our energy problems.

However, many of the so-called "investments" called for in the book (such as government-sponsored R&D programs for alternative energy) would more accurately be labelled "hope & spend" projects. Results from such government co-ordinated spending projects are likely to be slight in relation to the time and resources expended, especially given their historical track record and the probability that benchmarks of success will be open-ended and politically defined.

As mentioned, specific investment ideas were present throughout the book. Where Profit from the Peak really excels is in its excellent overviews of all current and up-and-coming energy sources. These overviews, more than anything, will help investors and traders to better understand the sectors they are hoping to get involved in. If you're looking to speculate in shares of, say, uranium companies, it may help you to first get a realistic view of the nuclear industry's prospects before jumping in.

The information throughout the book was interesting and layman-friendly (speaking from a personal viewpoint), and while I felt there were some minor things left out early on in the book (such as the authors' incomplete response to their own mention of the abiotic oil theory) or certain ideas I personally disagreed with, I found the book to be quite useful and informative overall.

I would certainly recommend Profit from the Peak to anyone who wants to better understand our current energy reality, as well as the economic and investment implications of our energy future.

David Shvartsman
Finance Trends Matter

Copyright © 2005-2009 David Shvartsman

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