Exploring Hydrocarbon Depletion
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QUOTE O’ THE DAY
"While the end-of-the-world scenario will be rife with unimaginable horrors, we believe that the pre-end period will be filled with unprecedented opportunities for profit.”
-- Robert Mankoff's Cartoon Banker
Page added on February 19, 2012
Those of us investing in the resource sector are likely to be very familiar with the concept of “peak everything” — the notion that the world is running out of critical natural resources that can be economically mined. Oil, phosphorous, copper, coal, lithium, neodymium, water, and many others have all been prophesied as being past peak production.
A key caveat to the notion of peak everything is the issue of economics. If new technology can be devised to make these resources cheaper to extract, the whole issue of peak everything could be set to rest.
But at least in the immediate sense, the notion of peak everything is alive and well. Peak oil is already here and is driving oil prices higher. Peak water may be here as well. There are lots of others, too, but even if just those two are true — oil and water — the implications are enormous: Higher oil costs could mean higher energy costs all around, and the end of water could easily be interpreted as the end of life. That’s a grim picture — not just for your portfolio, but for everything else too.
So what are the options here? How does peak everything affect the investment landscape?
For Now, Buy the Resources
In the immediate sense, the implications are straightforward: Simply invest in these natural resources as their scarcity faces demand that is only rising, and thus prices are destined to go higher. Uranium (URA), oil (USO), base metals (DBC) and agricultural products (DBA) are easy investment options for those who believe in peak everything. It’s a bit of a grim wager though, as the inevitable outcome here is a decline in standard of living and human population as rising prices is going to lead to some being priced out of the market. It also makes it increasingly likely that resources, and the economy as a whole, will be regulated in the name of resource maximization and social good. This sounds like a communist’s dream come true, but for investors, the threat of peak everything has potential to create an environment where markets come under greater and greater burdensome regulation.
The Rosier Outlook: New Energy Technology Saves Us
A rosier outlook, and one I genuinely believe is the one that will occur, is the realization that peak everything is not true — that in fact there is an abundance of resources at our disposal, and the world can support a significantly higher population that consumes even more energy on a per capita basis. While this outlook is still the underdog — “peak everything” has a much more credible basis when we look at the world around us and the rising prices of natural resources — there are some signs that a world of abundance is emerging. Specifically:
Natural gas. It’s no secret that hydraulic fracking is emerging as a disruptive technology unlocking previously inaccessible gas at economically feasible rates. The price of natural gas is thus plummeting, and the abundance has created a new problem: How to move it all around.
The situation with natural gas shows hope for much of the situation with many other items on the “peak everything” list: Can innovations in technology make economic extraction feasible? I believe so. I think fracking is a prime example that could help us overcome peak oil — and that other innovations in energy, transportation, and mining will help us reach previously untapped resources, like resources in deep sea.
Nuclear power. Nuclear power (NUCL) is on the rise, and small modular reactors are inching closer to widespread usage. Nuclear is the most dense form of energy, and so it is superior to all others. Moreover, the emergence of modular reactors is going to make nuclear power less expensive and more portable. Some adventurous mining firms are planning operations in the Arctic circle or in Antarctica, but as there aren’t roads and power plants there, that’s an especially daunting and perhaps economically an unviable strategy until the necessary infrastructure is created.
So, to put it simply: Advancements in mining and energy technology could make it possible to continue extracting key minerals that are already in the earth at economically feasible prices, thus overcoming the whole “peak everything” issue. This is something to keep an eye on, and what fracking is doing to natural gas is especially worth observing here.
But of course, there is a catch.
A New Governance System is Needed
In addition to the necessary technological innovations, there remains one other necessity: The proper governance environment. What type of environmental safety laws are needed? What about international trade treaties, which are currently being disregarded — what type of reform is needed? Even if the technology were present, who gets to tap into the ocean floor, who gets the rights to Antarctica and the Arctic circle, and who gets to go to outer space and all the aerial rights needed? These questions are real and they need to be resolved if technology is to solve the “peak everything” challenge.
For investors, here’s the bottom line as I see it:
For now, “peak everything” is real and is the dominant investment paradigm. As grim as it may be, I do believe the safest option is to continue buying natural resources that are scarce and on the peak list.
Game-changing technology is coming, though, and in some instances it may already be here — fracking in natural gas is proving that. However, that situation is also highlighting the need for a new global infrastructure and the governance system to make that happen. That governance system will come, I believe, after the sovereign debt crisis gets resolved. From this perspective, I think it will be time to exit the “peak everything” trade as signs of a new governmental infrastructure come closer to reality.