How to invest in peak oil, climate change, and economic downturn
Most of us have investments of some kind, even if we are unaware of it. It could be mutual funds or bonds held by our pension plan, or a more hands-on kind of investment. With the coming of peak oil, climate change and an almost inevitable economic downturn we need to seriously question the kind of investments we are making. Here are some guidelines and resources for investing in an era of history that will include a peak and decline in oil production, global man- made temperature increases, and a US recession that could spread to the rest of the world.
First of all, learn more about peak oil, climate change, and the financial system.
In dealing with peak oil, you need to understand the alternatives to oil and some of the likely scenarios of decline. Here is a peak oil primer if you know nothing about it. Like peak oil, greenhouse gas reduction schemes should favour renewable energy, but one of the prime divergences between peak oil and climate change is over how important coal will be in the future, and how important carbon sequestration will be when coal is used. In dealing with the stock market, you need to understand how companies are valued - which may be Price over Earnings (P/E) or preferably some more complex system. You need to look at the financial reports of companies you are considering buying, which are readily available online, and try to understand what makes the company profitable, or not.
Investment opportunity: Alternative energy
To evaluate alternatives you need to understand the concept of energy returned on energy invested (EROEI), net energy, or energy payback times (three different measures of essentially the same thing). In considering long term energy investments, and especially investments in renewable energy, this energy equation is the single most important factor to consider.
Lets start with oil. In the 1940's you could drill a well and oil often just bubbled out of the ground. Oil fields could be found with minimal effort and were often huge. Investing the energy from one barrel of oil into exploration, drilling and extraction would yield 100 barrels of oil in return. By the 1970's this had declined to about 23 barrels returned for one invested. Conventional oil today is estimated somewhere around 10-15 barrels, and oil sands only return 2-3 barrels of oil for every one invested. Why does this matter?
For one thing, we need to use more and more of our production to sustain further production. In other words the reserves left in the ground will be less and less available to fuel the rest of the economy. Most interestingly, the energy payback on oil, and to a lesser extent coal, is rapidly reaching that of some of the better renewable technologies. Understanding which renewables have a competetive net energy is the starting point for investing in alternative energy stocks. For example, ethanol takes almost the same amount of energy to produce as it contains. So it effectively is not a solution to peak oil or climate change. Therefore, as many people have discovered it is a terrible investment, and one that is completely dependent on large government subsidies. On the other hand, a wind turbine produces as much energy as it takes to build it in only 3-8 months, solar photovoltaic cells have an energy payback time of 1.7-4.6 years but this is steadily improving. This is still far better than ethanol. If you don't want to do your own research and make self-directed investments in renewable energy, you can invest in the New Alternatives Fund - which has an excellent portfolio of renewable energy companies. The Market Vectors Global Alternative Energy ETF (GEX) also holds a variety of alternative energy companies with global diversification.
Here are some sites that deal with renewable energy:
So far that's all very general, but what renewable energy stocks should you consider buying? You can follow the professionals by using the New Alternatives Fund list of investments as a starting point. You MUST do your own research and also consider peaks and dips and broader market conditions before buying individual stocks. Here also are a few stocks that are in my long-term portfolio, which you may want to look at:
Broadwind Energy (formerly Towertech) BWEN - US based company that manufactures wind towers and gear systems as well as providing maintenance services for the wind industry. This is a moderate to high risk investment, since the company was profitable for the first time last year. Good growth potential
Ormat Technologies ORA - a leader in binary process geothermal technology, renewable energy that can scale up quickly with competetive cost. If coal and natural gas continue to climb, this will be a winner. Fairly safe investment, good mid-long term growth potential.
Conergy CGY - a European powerhouse of renewable energy, specialising in solar installations globally. Also small wind and other renewables. Conergy stock has been hit hard by unexpected losses, but I believe the stock is now undervalued. Has a cooperative agreement with Nanosolar, which I think has been overlooked in its long-term potential. This is a contrarian stock pick, buy at your own risk.
Ocean Power Technologies OPT - A wave power company with a proven track record of generating power using its powerbuoys. Not currently profitable and never has been, therefore this is a high risk investment. However the company has a lot of cash in the bank and projects in various stages of development.
Petrobank Energy and Resources PBG - This is NOT a renewable energy company, however it is testing oil sands technology (THAI) that substantially reduces water and energy inputs, and greenhouse gas emissions. This may help buffer the transition to renewable energy systems, assuming imminent peak oil. The company is, and will be, pofitable under almost any scenario. Low to moderate risk investment.
For your consideration...
Investment opportunity / liability: economic downturn
The US and the world as a whole are likely headed for a recession, and rising energy costs will simply exacerbate the already significant problems in the economy. Therefore it makes sense to protect yourself against a falling stock market, inflation, and other nasty effects of a recession such as rising unemployment. One way to do this is to place a bet that stocks will fall, commonly called "shorting" stocks, or selling short. This can be a risky and slightly difficult business, but there is an easy way to do it by investing in a fund that shorts some part of the stock market. If you're going to invest in energy stocks, it is probably a good idea to back it up with one of these funds in case the entire market falls. Buying gold is another way to protect yourself against economic downturn, especially if inflation is high. Buying gold, by the way, is generally not all that ethical once you start to look into mining practices. Silver (SLV) is another option, it may be somewhat more ethical but still has problems.
Proshares ultrashort ETFs are a tool for the average investor to sell short, because you aren't exposed to the unlimited risk of shorting an individual stock. The most you could possibly lose is your initial investment, and you still have potential for large gains.
I like SDS, which shorts the S&P 500 and doubles the daily loss on this index. This is a good hedge against the possibility of a broad recession / depression. The ultrashort Financial and Real Estate (SKF / SRS) are also obvious places to go, but I have a feeling that the S&P is generally overvalued, whereas those sectors have already taken a big hit (I do think they will keep dropping, but how much?). Any of these funds are good value right now. Personally, I am heavily invested in energy, which will climb in the long term, but it needs a hedge against a major short-mid term recession.
The US economy is poised to take a fall. One risk I see in these short funds is that inflation will cause an apparent climb in stock prices while their actual value is falling. And of course, if you get the timing wrong and the market climbs, you will certainly lose money in the short term.
Inflationary recession
We are probably entering a period of inflationary recession. Over the coming years inflation will be driven by increasing prices of energy and food, and these are the places to invest (if you're going to invest anywhere in this crazy market). Especially energy, but avoid oil majors as they are not replacing their reserves, and sooner or later this will affect their valuations. Coal is jumping in price, which should favour renewables that scale up easily such as wind and geothermal electricity. Personally I don't invest in food because of moral considerations of profiting while people go hungry.
About shoeshine boys
Joe Kennedy has been quoted as saying that you know it is time to sell when the shoe-shine boy tries to give you stock tips. In fact, Joe Kennedy and many others exited the stock market in 1928-1929 and then bought back in after the market crashed, thereby making a lot of money. There is a lesson for all amateur investors here - we are the shoeshine boys, and had best be aware of it. When everyone can invest in stocks through an internet trading account, it has never been easier to create a bubble that will inevitably burst. This should always be in the back of your mind while you're investing.
BTW here is a chart of the historical P/E of the S&P 500 - still lots of
room there to fall below median (note gray shading shows P/E)...
http://bigpicture.typepad.com/comments/2005/12/pe_vs_sp_500_50.html
Here is a 100 year chart of the Dow Jones Industrial Index
http://bigpicture.typepad.com/comments/2005/12/100_year_bull_b.html
About me
"the life you know-- all the stuff you take for granted-- it's not going to last"
- Terminator 3, the Rise of the Machines
oddly, this reflects my investment philosophy. As global conventional energy supplies peak, fish stocks collapse, grain inventories plummet, and demand for all these things skyrockets overseas, our urban-suburban lifestyle will have to change. This is an investment opportunity. I'll use the profits to build an off-grid straw bale house and grow some food, like a hippie without the free love. Oil and Natural Gas will peak by 2015 or sooner.
I am in the top 1% of over 50,000 investors on Motley Fool Caps, and my own personal portfolio has nearly doubled in less than a year. However, I am not an expert investor. I learned the basics of investing and did my own research on large scale trends and specific companies / technologies. You can do the same, but learn as much as you can and invest cautiously (see about shoeshine boys - above).
