Tak3natheFlood (91.47)

Climate Change and Peak Oil as an Actionable Investment Theory

April 30, 2009 – Comments (2) | RELATED TICKERS: GE , NSC

Since Caps is an investment based game it would only make sense to make peak oil applicable as an investment theory. Now I’m not going to claim that I’m the first on this site to base a portfolio on these issues but I do consider it an important investment area to be cognizant of. The best way of describing the opportunity of peak oil is that demand is constantly growing as emerging markets want a taste of the good life. At the same time production is falling dramatically and that represents a phenomenal spread for investors. If oil production falls 2.5% percent a year and demand rises 3% a year extrapolated over the decades that it will take the major global economies to get off of oil the spreads only get wider. This falling oil availability along with rising demand for energy is a virtual investment sweet-spot.

From a specific investment perspective there are a few things to look at here. Commodities become more valuable not only in that they become harder to extract but in that they become more difficult to transport. Whether or not this ultimately hinders economic growth is unknown but what is does mean is stronger pricing power for mining outfits and steel producers. Steel is also a significant input for the most viable investment idea, wind! Even Warren Buffett has recognized wind as an important source of price stability for his utility MidAmerican Energy holdings.

Wind is a very strong investment as every year that passes with a lower amount of oil production the returns on wind become higher. Wind power generation is also an industry that has very little rivalry (4-5 large players GE, Vestas, Suzlon, Gamesa, etc.), high barriers to entry, weak supplier power, and growing customer demand just to name a few advantages. Another benefit is that many of these firms have long track records as growth companies and have missed by most analysts because they are foreign. The advent of the electric car as well only aids the demand for more grid electricity.

Another strong investment vehicle hinges on the eventual death of long-haul trucking due to fuel costs, trains. Every decade locomotive technology becomes more advanced and efficient making highway travel less advantageous every day not to mention our nations crumbling roads. To put it in perspective one train can take 300 truckloads off of our roads. That means replacing one efficient locomotive engine with 300 combustion engines. Railroads also will have the ability to exercise significant pricing power if volume growth and fuel scarcity increase.

Underperform opportunities are grounded in the airlines whose lifeblood is oil and another fuel run-up of over 100% could cripple many of the airlines sending them to the hangers indefinitely. As someone who loves to fly this is a disheartening outcome but one that is likely. Potentially ground based transportation on a commuter rail structure could ameliorate these traveling headwinds.

These ideas are the most viable and I would strong suggest reading Rudolphsteiner’s blog and checking out his picks. While many of them are ETFs and oil exploration companies the fundamental theory of his portfolio is solid. I also believe its important to note that by the time that everyone has heard off, seen, or discovered peak oil for themselves peak oil as an actionable investment theory will have passed. In the spirit of this season it’s safe to say that 'by the time the robins have arrived its already spring.'