Investing In The Coming Era
of Energy Scarcity
Jack Bowers
Fidelity Monitor
Is Gasoline Cheap or Expensive?
Cost per Pint:
Regular Unleaded Gasoline
Budweiser (on sale)
$0.44
$0.74
Beer is easier to make, and a pint of it has only
a fraction of the energy content of gasoline.
So why does gasoline sell for less?
Reality: We’re still in the age of cheap energy.
Fidelity Monitor
Why Oil Importing Nations are Filling Their
Strategic Petroleum Reserves to the Brim
• The IOCs (ExxonMobil, BP, Shell, Chevron, Total)
have been losing access to reserves for decades.
This trend has accelerated with higher oil prices.
• The NOCs (Saudi Aramco, PDV, PetroChina, Pemex)
are mostly state-owned monopolies. If global supplies
are disrupted, some may suspend exports to make sure
their own citizens are not subject to hardship. It could
be every country for itself.
1949
2005
Fidelity Monitor
Greed is Not Good
When it Comes to Nationalism
• When countries nationalize their oil resources,
economic incentives go out the window:
Exploration & Development budgets are cut
Best employees leave for private jobs
Subsidized motor fuels encourage consumption
• Iran (4th largest producer) already imports half of its
gasoline; has begun to ration to control consumption.
• Mexico (5th largest producer) has constitutional limit
that forces government to explore and produce with
antiquated technology. Cantarell field is fading fast.
• Venezuela (8th largest producer) has seized assets
and is diverting oil revenue to social programs.
Fidelity Monitor
Geological Constraints
• U.S. oil output peaked in the early 70s, about 7 decades
after big oil strikes began. Production has gone in half.
• On a global basis, annual oil production has exceeded
new discoveries since the mid-1980s, and relies heavily
on several dozen very large and old oil fields.
• Nearly all of the world’s super-sized fields have been
discovered and significantly depleted. It takes dozens
of smaller fields to replace a giant.
Ghawar
Bolivar Coastal
Burgan
Cantarel
Kirkuk
Daqing
The world’s top six oil fields
account for nearly 15% of
global production, but their
average age is 64 years
Fidelity Monitor
Emerging Country Demand Is Growing
• Car sales in China will soon hit 5 million/year.
• Taking a cue from Ford’s Model T, India’s Tata Motors
plans to introduce a $2500 car in 2008.
• If per capita oil consumption in China and India climb to
Mexico’s level, it’s similar to a doubling in U.S. demand.
U.S.
Mexico
China
India
25.1 barrels per year
6.6
1.8
0.8
Fidelity Monitor
Liquid Fuel Alternatives Slow To Materialize
• Biofuels: Limited to about 10% of demand
Ethanol production consuming a third of U.S. corn supply
Most vehicles can’t tolerate ethanol blends above 10%
Food prices going through the roof
• Oil Sands: Will take a decade to get to 15% of demand
Canadian operation resembles mining, not pumping
Requires lots of people, natural gas, and water
• Natural Gas Liquids: Best hope but capital intensive
It could take three decades to build up infrastructure
• Hydrogen-powered vehicles will never be viable
Hydrogen is too costly to produce, store and transport
• We’re just getting started on electric transportation
High battery costs will limit volumes during next five years
Fidelity Monitor
How Expensive Can Oil Get?
• 50% chance that oil will sustain $100/barrel in 2008
Global oil production topping out despite high prices
Even with slow economy, diesel running short of demand
OPEC struggling with domestic consumption, aging fields
• It could get really ugly after 2012
Deep water projects stall out
Dozens of large, aging fields slip into decline
Auto sales set records, but world forced to live on less
• Price of oil ultimately driven by demand, not supply
Some Europeans currently pay equivalent of $220/barrel
• Wind, Solar, and Nuclear will help little in the short run
Electrical Grid faces its own shortage of capacity
Replacing gas cars with electric vehicles takes 30+ years
Fidelity Monitor
What to Expect in the Next 10-15 Years
• Higher inflation from energy-intensive goods/services
Food
Electricity
Water
Fertilizer
Transportation
Shipping
Basic Materials (concrete, rubber, plastic, paper, metals)
• Real returns from cash turn negative
Money market funds already losing 2 or 3
percentage points of purchasing power
• Lower multiples on stocks
Still best for keeping ahead of inflation
• Most energy and soft energy groups will outperform
But alternative energy will likely disappoint
Fidelity Monitor
Best Way To Structure Your Portfolio
• Dedicate 80% of your portfolio to conservative funds
• Keep remaining 20% in an energy sector
Select Natural Resources (75% energy, 25% materials)
Select Energy
Select Energy Service
Select Natural Gas
• Consider opportunities in soft-energy groups
Select Consumer Staples (food and beverages)
Select Industrial Equip (efficiency play)
Select Materials (chemicals and metals)
Select Transportation (freight and railroads)
Select Utilities Growth (electric utilities)
Fidelity Monitor
Why Asset Allocation Funds Make Sense
• Slow and steady approach not the most exciting way to invest,
but actually the most foolproof way to grow your portfolio.
• Better than buying CDs, because it keeps you ahead of
inflation after taxes are paid.
• Far less risky than betting on growth stocks, emerging markets,
or other vehicles that can inflict so much damage that you may
never recover.
• Derives benefit from asset class rebalancing.
• Ideal for retirees; conservative portfolio geared for 10% annual
returns will likely sustain a 4% liquidation rate indefinitely.
Fidelity Monitor
The Power of Conservative Strategies
And Long-Term Compounding
• Fidelity Puritan has realized a 60-year annual
return of 11.7% by investing in a 60/40 mix of
value stocks and bonds.
- $1000 invested now worth $750,000
- 85x gain in purchasing power even
after discounting for 4% inflation
• Even at 10% per year, a portfolio quadruples in value
every 15 years!
Fidelity Monitor
Conservative Funds Enjoy the
Sweet Spot on the Efficient Frontier
10-year risk versus reward, all Fidelity funds
1 8.0 %
1 6.0 %
1 4.0 %
1 2.0 %
1 0.0 %
8 .0%
6 .0%
4 .0%
2 .0%
0 .0%
0 .00
0 .50
1 .00
1 .50
Risk (Relative to S&P 500)
Fidelity Monitor
2 .00
2 .50
How To Take The Conservative Path
• Follow Fidelity Monitor’s Growth and Income Model
10% annual return over 14-year period
Only about two-thirds as volatile as the S&P 500
• Stock/Bond Funds
Fidelity Balanced
Fidelity Puritan
Fidelity Global Balanced
• Stock/Bond/Cash Funds
Fidelity Asset Mgr 20%, 30%, 40%, 50%, 60%, 70%, 85%
• Lifecycle Funds
Fidelity Freedom 2010, ‘15, ‘20, ‘25, ‘30, ‘35, ‘40, ‘45, ‘50
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