BernieP on June 25, 2008 - 8:48am
This is from a free investor newsletter. Mr Brown is starting to attract more attention with his ELM. Good job :0)
Whiskey & Gunpowder
Greg’s Note: A few weeks ago, David Galland from Casey Research introduced
you to the work of Jeffrey Brown and the Export Land Model. After
interviewing Dr. Brown, Galland returns with a very interesting comparison
to make when looking at today’s oil export markets. A country can only
export so much oil before it will become concerned about its own dwindling
supplies. At that point, export markets begin to take a much different
look. Send your thoughts on the subject to mailto:greg@whiskeyandgunpowder.com.
Whiskey & Gunpowder
June 24, 2008
By David Galland
Stowe, Vermont, U.S.A.
Midnight Oil
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.
Regards,
David Galland, Casey Research
theoildrum.com |
