Thursday, May 29, 2008

Peak Oil and Alternative Energy Investments

Peak Oil is for real and it is already upon us. The phrase "Peak Oil" now frequently occurs in main stream medias nowadays, as the oil prices are skyrocketing. As I drive my Prius to work each day, I noticed the gasoline price is going up 5 or 10 cents a day recently. Who wouldn't notice the skyrocketing gasoline price? 99.99% of the people have noticed the raise of gasoline price. But I believe less than 0.01% of the people really truely understand peak oil, a very simple yet hard to accept concept.

I believe there are less people who can understand Peak Oil Theory, than people who can understand Einstein's Relativity Theory. Einstein published his theory in 1905. By 1912, it was already well accepted and his name became a household name. In 1956, King Hubert published his Peak Oil Theory, a pure and simple mathematical derivative of any presumed limited natural resource. Today, half a century has passed, and the point of Peak Oil has even just passed, but Hubert Peak is still treated as a crackpot theory by some of the best educated people on this planet. As for the Malthus Theory, an even simpler and purer mathematical derivative. It's been two centuries but it is still being treated as an absolute hoax. I wish to find another occasion to talk about Malthus, since the topic is just too emotionally stressful, especially when it's put together with Peak Oil.

Humans are incredibly stupid animals, when the rational thinking is jeopardized by emotional rejections, especially by emotions of greed, fear and utter unbelief when a vast amount of interests is involved. Warren Buffett had long discovered that Mr. Market could never think straight or rationally. Mr. Market either over-valuate something, or under-valuate it. He keeps oscillating between the two extremes. That's the basis why it is possible for an investor to overcome the emotions and make profit by defeating the irrational Mr. Market.

All of the world's biggest giant oil fields are in steep decline: No. 1 Guawar in Saudi Arabia; No. 2 Mexico's Cantarell; No. 3 in Kuwait; and No. 4 China's Da Qing. Shortly after the crackdown of the Gang of Four, which ended the Cultural Revolution, a period of ten years of utter political craziness that turned the mentality of one billion people upside down, I remember that China vowed to discover ten more giant oil fields each as big as Da Qing. No one ever thought about the question how we could find ten Da Qings, if there was none exist in nature for people to discover in the first place? Again when the population thinks as a group, the intelligence level is extremely and hopelessly low. We as individuals may think we are smart, but as a group, we are often incredibly foolish.

The depletion at Cantarell is shocking even to experts who know about it. Daily production drops to 1.07M barrels recently. A year ago it was 1.57M. Two years ago it was 2M barrels a day. People in denial of Peak Oil, those so called economists who recently predict oil to fall back to below $100 a barrel really need to take a closer look at Cantarell and the depletion at other giant oil fields. When supply can not be raised, there must be demand destruction to forcefully reduce demand down to the level of available supply. I don't see oil demand destruction at current price level yet. If people can spend $20K to buy a new car, they can surely afford $4 a gallon or even $10 a gallon to use that car, or even $20 a gallon. On a side note, there is an interesting article about the Bakken Formation.

But people surely are responding and trying to cope with the reality of ever increasing gasoline prices. According to GM, Ford, Toyota, Sales of fuel efficient cars are booming, while those of big trucks and SUVs are falling. I am seeing more and more Toyota Prius on the roads. If you are about to buy a new car lately, I urge you to buy a Prius now, before the big wave. At a 66.6 MPG fuel efficiency that I personally achieved, Prius is the best of the breed. The production is constrained by raw material supply. Global annual automobile sale is 70M, but Toyota only recently reached cumulative one million sales of Prius. Hybrid vehicles like Prius can never become a main stream commuting vehicles due to the global resource constraint.

That brings me to the topics of hybrid electric vehicles, fuel cells, battery technologies, and a few of my favorite base metals. Hybrid cars like Prius use a 50 kilograms battery package called NiMH to store and re-use energy. Toyota is also developing a plug-in hybrid, which may require a battery package almost ten times as big for practical range of driving without gasoline. I estimate 60% of the mass of NiMH is the metal nickel. That's 30 kilograms of nickel per Prius. One million such cars would cost 30,000 tons of nickel, whose global annual supply is roughly 1.5M tons. So Prius hybrid batteries along consume 2% of global nickel production. 20% if annual hybrid sales reach 10M. Much higher when plug-in hybrids go to mass production soon. I will be the first to buy a plug-in hybrid. We are talking about the equivalent of 50 cents per gallon gasoline if we can re-charge from the electric grid.

Toyota, Nissan and Volkswagen all announced recently they are buiding new factories to produce NiMH battery packs for hybrid vehicles. All these of course will translate into greater demand of the nickel metal. That's bullish for my favorite mining stock, PAL, North American Palladium, which produces nickel as a main metal byproducts. The battery fever of auto makers even caught the attention of Jack Lifton at Resource Investors. Read what he had to say.

The coal stock JRCC has been super bullish! I meantioned JRCC before and recommended it. I had watched it since early 2007 and when it dropped to $4 I loaded it up big. But I sold it right before it reached $8 a share, because I thought a correction may come. The correction did came two days after I sold, and brought it all the way down to $4.76, almost erased the gain completely. But I wasn't in a position to buy at that time, I never bought back. I thought those folks who did not sell at $8 and saw it drop back to $4-ish must felt the hurt. Today JRCC reached $40+, a 3 year target that I gave JRCC. I am the one who hurts. Lesssons learned!

I don't understand it! JRCC released a Q1, 2008 loss much worse than expected and worse than last year, due to higher cost, and the share price rallied from $22 to $40 after the bad news. All those folks who was watching then and would not touch $4 JRCC with a ten feet pole, now fight hands over fists to pay $40 a share. Long term coal should be bullish. But I am skeptical how much of recent coal rally is due to real shortage, and how much is speculative buy by the funds.

Mean while, PAL reported a Q1, 2008 profit of 16 cents per share, far better than expectation, on top of that they reported world class high grade drill result, even the VP was saying this was a good result no one else has seen. And now after some initial excitement, PAL falls right back to where it closed before the May 12th earnings release, $5.22 a share.

Another stock I missed is ENER. I discovered ENER when I was researching about tellurium. I liked it and made a bullish call on it but I thought it was a long term play. Recently ENER reported a Q1, 08 profit of 17 cents per share, versus 14 cents loss last Q. ENER rallied almost 75% to more than $61 since the good news! ENER is a good company to own on two critical technologies, the tellurium based ovonic materials, and its NiMH battery technology, which is now hot for hybrid vehicles I just meantioned. I have no doubt ENER share price should go to triple digits and beyond. But I would wait for a significant pull back to buy. Progress of technology developments takes time.

Comparatively PAL also reported a similar 16 cents per share profit in Q1, 08, same as ENER. I don't understand why PAL still only deserve $5.22 a share, while ENER deserve $61.30 a share, almost 12 times more expensive for the same amount of profit per share. Buying $5.22 a share PAL is like day time bank rubbery! In a previous article I point out two extremely bullish developments for platinum and palladium: the termination of Russian palladium stockpile sale; and the ongoing electricity crisis in South Africa.

Latest SA government statistics (see page 9) show that South African PGM metal production in March, 08 dropped 28% from March, 07 due to the ongoing electricity crisis. The march production is even worse than January, when a 5 day mine stoppage due to electricity crisis caught the attention of the world. South Africa produces 85% of the world's platinum and 35% of palladium, so if they lose 28% that's a huge shortfall. The metal prices must go up dramatically soon, as South Africa is entering winter, when the electricity demand is high. Higher metal prices will immediately impact PAL's quarterly result, as they are totally unhedged.

So why people have not rushed in to buy PAL at $5.22? Must be the same people who avoided to touch a $4 JRCC with a ten feet pole.

Most market participants surely are stupid. But I feel even more heart breaking for folks who bought into the hype of FSLR. Please read my past articles. I wrote about FSLR's vulnerability in tellurium. My tellurium article has been cited and quoted all over the internet. And none of the folks holding FSLR shares even feel uncomfortable about the tellurium vulnerability, or even bother to give FSLR a call and demand an answer? I currently hold no FSLR short position only because I think the PGM metals sector, the PAL and SWC stocks, will give me more profit potential than shorting FSLR. Two recent developments in FSLR's tellurium supply struggle are shockingly disturbing, in my opinion. One is a recent FSLR job posting which revealed a secretive Tellurium Initiative Department. Another one is this news item I discovered, which is pretty interesting because FSLR is obviously interested in a potential poor grade gold mine in Australia just because there might be 59 grams tellurium per ton of ores. I will stop here at the facts and reserve my own opinions till next time. Let people speculate on their own. What I don't understand is if you like solar players, why don't you buy more legitimate silicon based companies like LDK, TSL, JASO, CSIQ, ESLR? At least these companies have a bright future. I am all for solar energy, but using tellurium to generate a few watts of electricity is a waste of precious natural resources.

P.S. The author is heavily invested in SWC and PAL stocks, and has hoarded physical tellurium metal to speculate on the price.