Oil Exports

For a useful way to think about energy exports and prices, Dallas based geologist Jeffrey Brown points to the current situation with global rice supplies. Brown among others worked on the Export Land Model (ELM), a model that reflects the decline in oil exports as a result of Peak Oil.

As long as there are abundant local supplies of rice, countries are happy, eager in fact, to export excess production in order to generate foreign exchange. But as soon as local consumption exceeds locally available production, then all hell breaks loose and the next thing you know countries are banning exports, a move that has already been undertaken by Vietnam and a number of other countries.

In that scenario, price eventually no longer becomes a factor in the availability of the commodity. Vietnam, for example, is not going to let its people starve just because higher global prices would allow it to earn an extra $10 a bag of rice.

And so in the face of the prospect of any serious shortage of an important resource — energy being maybe the most important — export markets freeze up and the price begins to be set at the margin, literally based on a global competition for the dwindling supplies that manage to leak out around the edges.

“People are crazy not to be focusing on the oil export situation,” Dr. Brown told me.

Of course, the question of energy alternatives is a big topic and one which needs a far more extensive discussion than space allows for here.

Will viable alternatives be developed to help mitigate a domino collapse of oil exports? Absolutely. Of those alternatives, nuclear, solar and heavy oil seem to hold the greatest promise.

But the sheer scope of the problem — with the world now consuming the energy equivalent of one billion barrels of oil every five days — assures that we are probably decades away from a real solution.

In the words of Jeffrey Brown…

“If you look at the situation in terms of presidential terms, looking at fossil fuels plus nuclear the world burned through the equivalent of 10 percent of all oil ever consumed in Bush’s first four-year term. And, in our model, we’re going to burn 10 percent of all remaining conventional crude in the second four years of Bush’s term.

“That is the equivalent of around 25 billion barrels a year. So that’s 100 billion barrels every four years, and we’ve burned 1,000 billion barrels. It gets interesting when you consider that current estimates are that we’ve only got 1,000 billion barrels of conventional crude remaining. I think with natural gas liquids, we’ve got a little bit more. But of the conventional crude oil, we’ve got 1,000 billion remaining. Which then begs the question, how fast can we bring on the tar sands and everything else?”

Grasping for straws, I asked Jeff about an article I had read recently about the Bakken oil shale reserves around North Dakota.

“They’re talking about somewhere between 200 billion and 500 billion barrels in situ, but the USGS recently came out with a mean estimate of between 2.5 and 4.4 billion barrels recoverable, as an outer limit,” he replied, before continuing.

“In 1966, they said, if Lower 48 ultimately recoverable is 150 billion barrels, then the U.S. would peak in 1966. If the recoverable oil from the Lower 48 ultimately came in at 200 billion barrels, then the U.S. peak would come in 1971. The higher-end estimate probably turned out to more accurate, and the U.S. peaked in 1970. But the point is this; a one-third increase of estimated ultimate recoverable — a total increase of 50 billion barrels — postponed the peak by all of five years.”

The trend for sustained higher energy prices appears solidly in motion.  If Brown and the ELM are correct, energy prices will double then double again.

Even if he is wrong and prices don’t rise geometrically, the global dogfight to replace declining supplies — decidedly exacerbated by the loss of Mexican and maybe Russian exports in the near future — is going to get ugly and expensive.

So, what’s the investment angle? Paradoxically, the larger energy companies are probably a bad bet, because they are forced to replace their depleting reserves, which is getting harder and more expensive to do with each passing day.

It is our contention that, because the solutions to the world’s energy problems are going to involve a variety of energy sources and technologies, you have to build a portfolio that is equally varied.

That assures you are well positioned to profit from the broader trend, while avoiding the risks of being overly exposed to a single sector. (As an example, solar has had a great run, but most solar plays are now overvalued).

The good news is that there are no shortage of high quality energy-related investments available…in coal, heavy oil, LNG, photovoltaics, natural gas consolidators, “run of river” hydroelectric, uranium and small to mid-cap oil companies with the potential for significant near-term gains in reserves or production.

In the final analysis, it comes down to two choices; you can either suffer the consequences of persistent higher energy prices, or use the work Jeffrey Brown has done with the Export Land Model as an early warning and get positioned to profit.

The decision is yours, but don’t wait long to make it.

David Galland, Casey Research
June 24, 2008