Peak oil proof stocks in Australia/New Zealand?

[cornucopian]

Since peak oil is near, can someone tell me if there are good peak oil proof investments in Australia?

Peak oil refers to maximum oil production after which oil production goes into an irreversible decline.

I am looking for companies that make bicycles, buses and trains.

I have been looking at bicycle companies in Taiwan (Giant and Merida), but I can't find a way to buy them cheap. The broker fees are too expensive, but I managed to find a HK broker who will let me do that.

I am looking at Shimano (Japanese bicycle supplier), Acell group (Dutch based) and Dorell( Canadian).

 

[qldfrog]

VMT is involved in electric scooters
disclaimer I own a few shares
In this contextI would also look at graphite/lithium and rare earth mines

 

[Sdajii]

I agree that going for lithium producers etc. is a safer bet than investing in companies making specific brands of specific products like bicycles (on the assumption that peak oil is about to suddenly bite us, which I don't necessarily agree with - I think oil will be the friend we love to hate for quite some time yet).

Think about the car industry in its infancy. Cars revolutionised the way people move and car production became (still is) one of the world's massive industries. But even in or just before the peak, if you invested in a couple of random car companies you would probably have lost all your money. Of all the car companies which popped up, most failed. If you had invested in the oil production though, whichever car was selling, the buyers would be buying your oil.

If peak oil changes how we travel it may not be an existing or currently popular brand which takes the new market, it may well be the oil companies making the new thing. They are the ones who know best and have some control over peak oil, so are best placed to orchestrate things.

Or maybe we'll all be getting around on Shimanoes in a few years and you'll be a millionaire It's more risky but feint heart never won fair lady.

 

[SuperGlue]

With increase shale oil production in US and large gas discoveries off the coast of
Mozambique & Tanzania in East Africa.

And secondly, if US is not sending troops to Iraq in the current turmoil over there in a hurry,
you can bet peak oil is still a long way to go.

Lithium, lost a bundle on (GXY) Galaxy Resourses, SP now 0.06, they sold off their
Lithium factory to the Chinese recently.

Geodynamics (GDY) & Ceramic Fuels (CFU) lost on these too.
All the above are penny dreadfuls now.

So I'll personally stay away from all the peak oil proofing companies. Not trying to discourage
anyone from investing in this sector.

The only one that paid off was coal seam gas.


http://business.financialpost.com/2...ania-in-east-africa-gas-race/?__lsa=5907-43d6



Please DYOR. The above are my personal opinion & experiences.

 

[sydboy007]

Not sure at present there's any peak oil proof investment. Everything requires oil, whether it's a core ingredient or the transport fuel.

The issue is we're now at the point where new supply is so expensive that the prices needed to encourage it are acting as a very big brake on growth. As more income is spent on fuel that leaves less for general consumption.

Possibly investing in emerging markets could act as a hedge as they are more likely to be able to get a better bang for buck return on oil consumption than a lot of developed ones ie they will be more likely to use the oil for production of goods rather than as consumption by motorists.

 

[Smurf1976]

World production of conventional crude oil hit what is basically a sideways (on a chart) plateau in mid-2004, so 10 years ago now.

Since then we've seen the price rise from $40 up to a peak of $147 which brought about a 2% rise in supply. Then the price collapsed back to $40 after the GFC but with production in early 2009 about 2% less than the level 5 years earlier. Since then we've seen a rise in price back to around $100 going up and down a bit here and there and production is back to within 1% of the level of 10 years ago.

So that's the "bumpy plateau" that some predicted would occur. Price goes up, production stays flat. You run faster in order to stand still - like being on a treadmill that keeps speeding up.

It must be pointed out that non-conventional oil sources have grown substantially in recent times, that in itself being as good as we're likely to get as confirmation that conventional (much cheaper) sources are maxed out. Tight oil in the US is one, gas liquids are another, tar sands in Canada is another example. They produce oil as such, but not in a manner or at a price that is directly comparable in resource terms with the conventional crude oil we used to rely on.

But where all these predictions tend to go wrong is that they take either the "engineering" side or they take a "political" or "economic" viewpoint. Very rarely does anyone try to combine the whole three, and that's where it goes astray.

Going back to the 1970's there was a huge amount written on the subject by many well respected people, including the major oil companies themselves, and nobody seriously disputed the basic notion that production at some point will peak and decline. They disagree about the timing and potential consequences, but the basic notion is pretty well accepted - largely because it has actually happened in enough countries to be considered in the "proven" category so far as theories go.

But here's the problem with the engineering, political and economic approaches.

Engineers see it as a geological and technical issue. This is how much oil there is, this is how much we can extract and at what rate and so on. They tend to take demand as "fixed" - if oil costs $10 or it if costs $500 then people will still use it the same, right? Therefore you have the inevitable conclusion about a "supply gap" opening up at some point and physical shortages of oil.

But what the engineers tend to miss is the economic and political factors. They generally didn't foresee that in 2014 we wouldn't in most places still have monopoly utilities (generally government owned) centrally planning energy supply, for example. Nor do they tend to take into account that getting oil out of Venezuela or Iraq isn't simply a matter of going there and drilling. I mean, nobody's going to stand in the way of drilling for oil, right? And if there's a political problem then that's just administrative - have a meeting and sort it out tomorrow afternoon. Etc.

Where the economists go wrong is failing to understand the geology and the very nature of energy. Eg they will tell you that rising price = more supply, a theory that works fine as long as you don't have politics, geology and thermodynamics standing in the way. Yes, it may become viable to drill certain fields if the price doubles. Just one problem, if the oil price doubles then that also greatly increases the cost of drilling in the first place. It's like noting that the bus is 500m down the road and that you should be able to run to it in a couple of minutes, completely forgetting that the bus itself is a moving target that can go faster than you can. Hence oil shale that was going to be viable at $40 per barrel still isn't anywhere close to being viable at $100 and it won't be happening at $200 either. As the oil price goes up, so too does the cost of extraction such that you need a very high price to make these alternatives actually work.

And where the politicians go wrong is overestimating their own power over others. It seems to escape them that the Saudi's etc have no real reason to actually want a low oil price, rationally they want the highest possible price that doesn't ruin their customers' economies to the point that they stop buying Saudi oil. But suffice to say that they're much better off selling 5 million barrels per day at $200 than they are selling 10 million barrels per day at $50 or even at $100. The aim of an oil exporting state is maximum revenue, not maximum production, and the two are not directly correlated in a world where governments, not companies, produce most of the oil (Exxon, Shell and BP all being relatively minor players in upstream production, even put together they are small compared to some of the state-owned oil companies).

And then there's the broader economic feedback that practically everyone seems to overlook. A logical conclusion is that an oil shortage sends the price up and prompts a shift to public transport etc. That sounds nice in theory, but does it really work in practice once you consider that the primary effect of a rising oil price is to crush the economy? Once the economy turns south, governments tend to not be too focused on building new railways or buying more trams.

If you look at pre-2004 forecasts then oil consumption today should be about 10 million barrels per day higher than it actually is. But we don't have petrol shortages and you can still fly practically anywhere in the world via a commercial airline, so what happened?

Demand destruction! It's just basic economics, the market rations the available supply and a balance occurs between production and consumption. If production can't go up without sending the price through the roof, then the price rises modestly and kills some consumption instead. And that's exactly what's happening thus far, consumption in entire countries is dropping (largely amidst struggling economies) to make way for consumption elsewhere (notably China).

So thus far at least, the effect has been on the general economy rather than on any particular sector. Sure, airlines have struggled but then so to have retailers and governments themselves. People didn't respond to higher oil prices only by cutting oil use, they cut spending in all sorts of areas. A flat lining of conventional crude oil production and a surge in price and an increased reliance on unconventional (higher cost) oil hasn't translated to a boom in public transport and the demise of cars yet. Or even a demise of airlines or tourism for that matter. It's just dampened the overall economy, noting that practically everything uses oil in some way, sufficiently to keep supply and demand in balance.

So I'd be cautious about investing on the basis of peak oil on an assumption that it will produce any particular outcome other than an increase in the marginal cost of oil extraction itself and things like LNG powered ships. Any other outcome seems hard to predict with any real accuracy, since it feeds into the economy overall and that's one very complex set of interactions.

So far as things like public transport are concerned, politics has at least as much, if not more, to do with it than the oil price. Eg expanding public transport in cities generally, and Australian cities are no exception, is generally a decision made by government which has competing political and financial objectives. Eg a future Australian government could decide to expand underground rail in Melbourne for $x or they could decide to cut the petrol excise by y cents per litre. The former might make sense in many ways, but the latter has more vote buying potential given that the majority of Australians don't regularly visit central Melbourne. Likewise things like cycleways etc also tend to be political projects.

Personally, I've confined my oil-based investments to things which are reasonably predictable for this reason. Companies with substantial proven oil reserves in already developed fields - they benefit directly from a rise in price whilst the bulk of their extraction cost has already been incurred. Likewise those with LNG based on proven reserves etc too.

Things like lithium are more a bet on technology than on oil as such. Eg what if electric cars don't catch on and we just end up running vehicles on compressed natural gas? Or just go to small, lower powered diesel? There's no guarantee that we're going to (1) adopt electric cars on a large scale and (2) use LiFePO4 batteries to run them.

But if someone's got oil in the ground and has already spent the money to commence extraction then they're not likely to lose from an oil shortage as long as it occurs prior to them pumping out most of their oil.

 

[cornucopian]

I agree with the replies here. I am not making all my investments around peak oil.

Smurf explained the situation we are in, but I think people are not looking at the bigger picture.

1) Interest rates are at record lows and oil companies have been able to benefit by using cheap money. What will happen when rates rise? Oil consumption will fall, but production costs will increase.

2) Major oil producers cannot deal with low prices- Russia and Saudi arabia. (actually, it's the entire middle east)

3) Consumers cannot deal with $150 barrel.

Russian fields are mature and cost a lot. Saudi needs that money to fund welfare schemes to maintain stability.

from CNN:

But for the Saudis, who promised $130 billion in housing subsidies and other social spending this past spring to help ward off Arab Spring protests at home, this is a dangerous trend.

We believe Saudi Arabia now requires oil at $92 a barrel to break even fiscally, up from $60 a barrel in 2008, on higher post-Arab Spring spending," Deutsche Bank oil analyst Paul Sankey wore in a research note earlier this month. The Saudis "will cut production to defend $92."

from FT:

Net income margins in the sector are now at the lowest in a decade,” the firm said after reviewing the economics of the world’s 50-largest listed oil companies. “This is not sustainable. Either prices must rise or costs must fall,” it added.

Sanford C. Bernstein estimates that the marginal cost of oil production has increased about 250 per cent over the last decade, rising from just under $30 a barrel in 2002 to a record of $104.5 a barrel last year. At the same time, cash costs have risen from $9.70 a barrel in 2002 to $44.20 a barrel last year.

If oil prices drop for a prolonged period due to a recession (we most likely will have one), many oil companies and countries will find themselves in big trouble.

The big question is how slow will the decline be?

I thought about public transport and I realized that funding for massive transit programs are not going to happen anytime soon.


I like bicycles because it's cheap- no external fuel source (you still have to eat), no maintenance costs and no insurance. Most importantly, anyone can buy a bicycle and riding a bicycle helps to lose weight. Obesity is on the rise around the world. I read that during the last oil shock, bicycle sales reached record numbers.

 

[sptrawler]

I agree with the replies here. I am not making all my investments around peak oil.

Smurf explained the situation we are in, but I think people are not looking at the bigger picture.

1) Interest rates are at record lows and oil companies have been able to benefit by using cheap money. What will happen when rates rise? Oil consumption will fall, but production costs will increase.

2) Major oil producers cannot deal with low prices- Russia and Saudi arabia. (actually, it's the entire middle east)

3) Consumers cannot deal with $150 barrel.

Russian fields are mature and cost a lot. Saudi needs that money to fund welfare schemes to maintain stability.

from CNN:


from FT:



If oil prices drop for a prolonged period due to a recession (we most likely will have one), many oil companies and countries will find themselves in big trouble.

The big question is how slow will the decline be?

I thought about public transport and I realized that funding for massive transit programs are not going to happen anytime soon.


I like bicycles because it's cheap- no external fuel source (you still have to eat), no maintenance costs and no insurance. Most importantly, anyone can buy a bicycle and riding a bicycle helps to lose weight. Obesity is on the rise around the world. I read that during the last oil shock, bicycle sales reached record numbers.

Maybe we can bring Malvern Star back home from NZ

 

[Smurf1976]

Major oil producers cannot deal with low prices- Russia and Saudi arabia. (actually, it's the entire middle east)

Consumers cannot deal with $150 barrel.

That's the crux of it.

Take every possible source of oil globally and place them in a list from cheapest to most expensive. As with any resource, we use the cheapest ones first and develop progressively more expensive sources as needed to meet demand. That's the basic pattern of all resource development from oil to iron ore and even renewables. The "low hanging fruit" gets picked first.

Oil production is basically akin to having the foundations supporting a building slowly but surely sinking into the ground. You put the first one in, when it sinks a bit you put another row of bricks on top. Keep repeating that but the catch is that each additional row of bricks costs more than the previous one.

At some point you either choose not to add more bricks and accept the house sinking into the ground and/or you are forced to do so because you can't afford the bricks even if you did want to keep adding them. Once that day comes, the house (or oil production) starts to sink.

It's not quite a perfect analogy but it's close. The main complication being that some of the medium priced bricks are under the control of people who don't want to sell them and/or the factories that make them have a habit of being blown up or at least shut down amidst various wars. But all that does is remove some of the potential supply of bricks and push you toward the more expensive ones sooner than would otherwise have occurred. But the emphasis is on "sooner" since that's exactly what it does, the oil caught up in political or other conflict is still a finite resource.

The real uncertainty is how much can we actually afford to spend on oil? That's the big unknown, but it's safe to say that we can't spend 100% or even 50% of GDP on oil without the economy "breaking". Looking at it historically, somewhere around 5% is the realistic limit in countries like the USA.

Looking at the situation today, $100 per barrel gives us the current level of oil production. If prices remained flat in real terms then in due course that production starts to decline. So we need a rising price trend to sustain flat production - it's like being on a treadmill that slowly but surely speeds up. The big question being when can you no longer keep pace?

If price wasn't a factor then oil production would be a purely geological issue and easy to predict. That's the "engineer's" tendency I previously referred to - looking at it from a physical perspective and making a forecast based upon that. But in the real world, price is the key factor since whilst it might be technically possible to extract oil from whatever source at $400 per barrel, it's highly unlikely that we could afford to do so. As such, that oil is effectively useless.

Anecdotally, I suspect that the gap between what the economy can afford and the price needed to sustain production is getting rather narrow. Less than around $100 and production falls. But it seems doubtful that the economy could withstand $200, with even $150 being questionable. That's an assumption on my part, but it seems plausible given that most oil importing countries are already struggling somewhat economically.

Once the two lines on the chart cross, the one at the top being "how much can we afford" and the one at the bottom being "cost of producing the marginal barrel" then that's it, there's the peak.

Go back 15 years and with oil under $20 per barrel there was a pretty wide gap between those two lines on the chart. But with oil at $100 it's a lot narrower - the big unknown being exactly where the point lies that we can't afford to keep bringing on ever more expensive sources of oil.

We'll only know the timing of the actual peak production in hindsight, but I'd argue that it doesn't really matter anyway. What matters from a practical perspective is when either (if you're an oil company) you can't find more oil to extract in a profitable manner or (for everyone else) when the cost gets high enough to be a problem either individually or for society as a whole. When that day comes is hard to predict, but based on the available evidence I'd say that we're somewhere "in the zone" in terms of the overall 155 year history of oil extraction.

I thought about public transport and I realized that funding for massive transit programs are not going to happen anytime soon.

Agreed. It's largely a political decision and such things are hard to predict beyond the very short term in most countries. Go back 30 years - practically nobody would have accurately predicted much of what has taken place politically since then.

Most importantly, anyone can buy a bicycle

The trouble from an investment perspective is that just about anyone can also build one since it's a simple technology. Established operators might benefit from increased sales volume, but in the event of a physical shortage we'd see all sorts of small production lines being set up. Even in places with a relatively small population, eg the NT or Tas, it wouldn't be hard to go into the bicycle building business to supply the local market if there was an actual shortage. Unlike cars, aircraft and so on, you don't need much scale or a huge capital investment to build bicycles. Set up a workshop, buy a couple of bicycles, make copies.

On the other hand, if you own a lot of natural gas and have proprietary technology to turn it into diesel fuel as such (direct replacement for diesel from oil) well then that's very hard for anyone to replicate. At most, you might have a few competitors globally but you won't find someone doing it in their back shed.

 

[cornucopian]

That's the crux of it.

Take every possible source of oil globally and place them in a list from cheapest to most expensive. As with any resource, we use the cheapest ones first and develop progressively more expensive sources as needed to meet demand. That's the basic pattern of all resource development from oil to iron ore and even renewables. The "low hanging fruit" gets picked first.

Oil production is basically akin to having the foundations supporting a building slowly but surely sinking into the ground. You put the first one in, when it sinks a bit you put another row of bricks on top. Keep repeating that but the catch is that each additional row of bricks costs more than the previous one.

At some point you either choose not to add more bricks and accept the house sinking into the ground and/or you are forced to do so because you can't afford the bricks even if you did want to keep adding them. Once that day comes, the house (or oil production) starts to sink.

It's not quite a perfect analogy but it's close. The main complication being that some of the medium priced bricks are under the control of people who don't want to sell them and/or the factories that make them have a habit of being blown up or at least shut down amidst various wars. But all that does is remove some of the potential supply of bricks and push you toward the more expensive ones sooner than would otherwise have occurred. But the emphasis is on "sooner" since that's exactly what it does, the oil caught up in political or other conflict is still a finite resource.

The real uncertainty is how much can we actually afford to spend on oil? That's the big unknown, but it's safe to say that we can't spend 100% or even 50% of GDP on oil without the economy "breaking". Looking at it historically, somewhere around 5% is the realistic limit in countries like the USA.

Looking at the situation today, $100 per barrel gives us the current level of oil production. If prices remained flat in real terms then in due course that production starts to decline. So we need a rising price trend to sustain flat production - it's like being on a treadmill that slowly but surely speeds up. The big question being when can you no longer keep pace?

If price wasn't a factor then oil production would be a purely geological issue and easy to predict. That's the "engineer's" tendency I previously referred to - looking at it from a physical perspective and making a forecast based upon that. But in the real world, price is the key factor since whilst it might be technically possible to extract oil from whatever source at $400 per barrel, it's highly unlikely that we could afford to do so. As such, that oil is effectively useless.

Anecdotally, I suspect that the gap between what the economy can afford and the price needed to sustain production is getting rather narrow. Less than around $100 and production falls. But it seems doubtful that the economy could withstand $200, with even $150 being questionable. That's an assumption on my part, but it seems plausible given that most oil importing countries are already struggling somewhat economically.

Once the two lines on the chart cross, the one at the top being "how much can we afford" and the one at the bottom being "cost of producing the marginal barrel" then that's it, there's the peak.

Go back 15 years and with oil under $20 per barrel there was a pretty wide gap between those two lines on the chart. But with oil at $100 it's a lot narrower - the big unknown being exactly where the point lies that we can't afford to keep bringing on ever more expensive sources of oil.

We'll only know the timing of the actual peak production in hindsight, but I'd argue that it doesn't really matter anyway. What matters from a practical perspective is when either (if you're an oil company) you can't find more oil to extract in a profitable manner or (for everyone else) when the cost gets high enough to be a problem either individually or for society as a whole. When that day comes is hard to predict, but based on the available evidence I'd say that we're somewhere "in the zone" in terms of the overall 155 year history of oil extraction.



Agreed. It's largely a political decision and such things are hard to predict beyond the very short term in most countries. Go back 30 years - practically nobody would have accurately predicted much of what has taken place politically since then.



The trouble from an investment perspective is that just about anyone can also build one since it's a simple technology. Established operators might benefit from increased sales volume, but in the event of a physical shortage we'd see all sorts of small production lines being set up. Even in places with a relatively small population, eg the NT or Tas, it wouldn't be hard to go into the bicycle building business to supply the local market if there was an actual shortage. Unlike cars, aircraft and so on, you don't need much scale or a huge capital investment to build bicycles. Set up a workshop, buy a couple of bicycles, make copies.

On the other hand, if you own a lot of natural gas and have proprietary technology to turn it into diesel fuel as such (direct replacement for diesel from oil) well then that's very hard for anyone to replicate. At most, you might have a few competitors globally but you won't find someone doing it in their back shed.

I have heard of S.A converting coal to oil during the apartheid. I think it's Sasol and they are traded as ADRs in New York.

You are right about the low barrier to entry. Most western bicycle manufacturers have given up because the Chinese have been able to copy/replicate their products.


I do find this chart of Giant Manufacturing, merida and shimano interesting.