Sunday, March 19, 2006

Can Peak Oil Make You Rich? Does it Matter?

There is no shortage of financial newsletters, blogs, and websites that will tell you quite confidently that we are closing in on world peak oil production and that you can make a lot of money with the right investments. (For a sampling, try this promo for a newsletter called Outstanding Investments, blogs such as The Real Deal and New Era Investor, and websites such as Resource Investor and 321energy.) What this tells me is that these investment-oriented commentators don't quite grasp the issue. The question isn't whether you can make money on peak oil. Somebody will. The question is whether doing so will matter.

No doubt a few market participants will make great fortunes in the ongoing energy bull market. That this particular bull market may or may not be the result of an imminent peak in world oil production doesn't really matter to an investor. Other factors may be sufficient to spawn new speculative fortunes in energy including previous low investment resulting in infrastructure and personnel limitations; war and the threat of war in the Middle East; skyrocketing demand, especially in Asia; and regional natural gas shortages.

Investment advice on peak oil, however, is lost on most of the people in the world because they simply do not have the savings to invest or lack the skills to do so even if they do have the money. For the remaining few, the answer to whether such investing actually matters depends on the time frame. In the short term the answer is probably yes. In the long term, the answer is more than likely to be, "Not as much as many people think."

In the short term climbing energy prices will undermine the standard of living for all the world's energy consumers. A small group who work for energy producing companies and countries will prosper, and shareholders in energy companies are likely to prosper as well. So, from this perspective it may make sense to hedge one's bets by investing some money in the energy markets.

But, peak oil is probably not going to be a one-way street to financial heaven. One of the effects of high energy prices is to depress economic activity. If high prices bring on a recession or even worse, an economic depression, energy prices will fall along with all other prices--maybe not as far, but far enough to put a big dent in any investing profits. The other thing to remember is that investing is a social phenomenon. If everybody who invests "knows" that energy is the place to be, the market is probably topping. The point is that by definition not everyone will reap big profits in the emerging energy bull market. It takes latecomers to make such investing pan out for those who got in early.

Oddly, sites promoting peak oil money-making ideas seem to be assuming that we will somehow return to a business-as-usual world in which lucky investors can spend their new fortunes. But, in the long term, peak oil means we will never go back to business as usual.

Perhaps the world will move on to a miraculous new energy source making any investments in the fossil fuel industry ultimately a big loser. Perhaps the world will be faced with ever decreasing supplies of energy which will result in a chaotic and highly destructive descent into a low-energy society that gives new meaning to the word "post-industrial." Perhaps money and credit as we know it will cease to exist, and life will become intensely local. In such a world the financial riches of a networked, global economy won't have any meaning. Beyond this is the question of timing. Either the optimistic or the pessimistic scenario might unfold quickly or take decades to reach a conclusion.

Given the uncertainties, perhaps the most important investments that any of us can make are in helping to prepare our families, friends and communities for the energy challenges ahead. This might mean spending some of our own treasure for the public good. In this way, at least in the short-term, peak oil investing can provide a benefit, not just to the individuals who do it, but also to the communities in which they live.

If those who profit from rising energy prices come truly to understand our energy predicament, they can help communicate it to others and assist in preparing our communities. But the peak oil investor who succeeds at making money, while failing to grasp the gravity of our situation, may find that his or her new fortune means nothing to a community that has been forced by circumstances to move quickly beyond a world governed by Wall Street wizards and international finance. In such a world, even if you manage to hold on to your investment winnings, from that point onward what you can do will be far more important than what you are worth.


John said...

Mr. Cobb,

I agree with you about strengthing ties with family, friends, and neighbors. However I take exception with some of your comments. For example,

"What this tells me is that these investment-oriented commentators don't quite grasp the issue. The question isn't whether you can make money on peak oil. Somebody will. The question is whether doing so will matter."

I am curious if you have ever read "Outstanding Investments". They have an excellent grasp of the peak oil issue and have wriiten several articles on the issue, abiotic oil theory ( they disagree with the theory), and EROEI. They are also rated the number one newsletter the last three years by Barron's magazine. The selections in my blog were up over 100% last year. As I am a libertarian and an unashamed capitalist that actually works in the energy industry I will continue to do what I do best, comment on the energy markets and take advantage of the situations in those markets as they present themselves. I do not presume to know how things will play out so I will take the available information and act in my best self interest. That is all I can do (with respect to my duties to family and friends) as I have found in the past that "a prophet is unloved in his own country."


John Polomny

Robert said...

As long as there is money, there will be investing and speculation regardless whether peak oil related or not. Money and speculation are tied together - they can not be separated. To question the usefulness of peak oil related financial speculation is really a call for abandoning money. While this may eventually happen, it will most certainly not happen within the next 10 years. In the modern world we live in nothing can be accomplished without money. In major cities one can not even visit a restroom without paying for it first.

To question the usefulness of financial speculation on peak oil is as dumb as the advice given to people to stop working for money and instead to engage in community services.

Anonymous said...

Let's be honest, most of humanity doesn't want to know about Peak Oil or anything else that might impact adversely on their lives of mindless consumption and endless TV viewing. So if you are ahead of the herd in terms of awareness, what is wrong with making some pragmatic investments to improve your family's chances after the collapse. During the depression, the people with money were able to buy assets at fire sale prices from those who didn't.

The best that we can hope for in terms of community cooperation is to find a few like-minded souls and work with them to prepare.

Anyone who sits around waiting for the majority to join them in a poarayer circle and sing Koombaya is in for a big disappointment.

The above is posted by someone with a strong left leaning tendency.

Anonymous said...

poarayer circle = prayer circle

Anonymous said...

My concern with investing in share markets is that they drive the outrageously destructive behemoth of neoliberal globalisation, which is making us comprehensively more vulnerable to oil depletion by lengthening production chains, replacing artisanal knowledge, mechanising processes, concentrating resource ownership and wasting biotic and physical reosurces.

These are all eminently rational economically and lead to handsome returns for investors, but are making sustainability an ever more distant fantasy. We should be withdrawing our money, not putting in more in the amoral hope we emerge with some-elses cash.

This is not an argument that markets or investing or money are bad ideas at all, but AS THEY WORK now, they're killing people, and those people could soon be us.

JustZisGuy said...

We can only guess at what the future brings, but I really think you're being too pessimistic.

It is possible to move to a society which primarily uses renewable energy, and while I think the cultural inertia to use oil will take some time to overcome, it will eventually be overcome. There is a point in pricing at which wind turbines will sprout up like wildflowers, for example.

The scenario I think is most likely is that large increases in energy prices (say, to $200-$500 per boe) will start the abandon-the-SUV-suburban-lifestyle trend. At first it will likely be a least-discomfort move - don't actually reduce driving much, just drive something 4 times more efficient such as today's Toyota Prius. Some serious moves to improve public transit may occur as well. Combine these sorts of baby steps with what I think is likely to be an extended plateau in oil production and you will find that the inevitable can be fended off long enough to build a very large renewable energy system.

In the end perhaps a lot of suburban infrastructure will be either abandoned or transformed - for example, you can take a shopping centre and redevelop it into pedestrian friendly streets and shops. Small photovoltaic systems will likely be installed on most roofs in sunny climates, along with some serious more-efficient direct solar schemes such as solar chimneys. Wind turbines will be everywhere where they make sense. And so on.

I'm not just dreaming, I have done some calculations - while the added capacity required to power most things from electricity is HUGE, it is not so huge as to be completely impossible. With a combination of acts it's possible we could power something approximating today's society with "only" an extra TW or two of production. Oil would still remain hugely expensive, so expensive that society will turn on those burning it for stupid things such as personal transportation, just as society has in general turned against those who smoke. Whether much of an airline industry will remain is questionable, but I suspect it will, especially for transoceanic travel. So, oil will be used for things it is best suited for, where there is no alternative, such as aircraft and some petrochemical products.