I asked my in-house technical guru, Jon, why he hadn't registered it first. His excuse ... at the time he was only 11 years old!
The identity of the buyer is a mystery, but I suspect we'll learn soon enough. In any event, this payoff highlights the value of investing for the future, even when the future is very murky.
There's a term we use here in the office from time to time ... "the unforeseeable and the incalculable." It comes from Thomas Phelps, a successful long-term investor who preferred holding to selling, arguing that you didn't need to predict the future, you simply needed to put yourself in the right place to benefit from it when it came, and that usually meant investing in well-managed companies with great growth potential.
We differ from Tom in that we eventually sell, collect our profits and move on. But Tom's advice to remember the power of "the unforeseeable and the incalculable" has helped nonetheless.
For subscribers to Cabot Market Letter, for example, it's led to big profits in technology stocks like Apple and Microsoft, in networking stocks like Cisco and Ascend Communications, and in Internet stocks like Amazon.com and Yahoo!
Last year, it helped us get into First Solar, which has proved a huge winner.
In the future, who knows?
But remember those words ... "the unforeseeable and the incalculable" ... because I'll return to them below.
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Back on Wednesday, I struck a nerve with my article on Peak Oil, the theory that shrinking oil production combined with increasing global demand for energy will result in energy shortages, inflation, unemployment, reduced food production, failure of our transportation network and our electric grid, starvation and widespread death. Judging from the feedback ... the largest in the history of Cabot Wealth Advisory ... interest in the subject is high. After reading all your responses, I sorted them into groups, and here's how they stacked up.
7% of you acknowledge the problem of Peak Oil and see no solution.
73% of you acknowledge the problem of Peak Oil and believe a solution will be found, generally through development of alternative energy sources.
20% of you deny that Peak Oil is a problem and claim that further exploration and extraction will yield plenty of oil.
I've reproduced some of the best responses below, so you can get a better idea of precisely what your fellow investors are thinking.
Peak Oil Responses
"For my part, I don't believe we will ever run out of oil. As the price gets higher and availability lower, alternatives will become more economically feasible. Electricity will become the dominant energy and can be generated in any number of ways. Oil (and its other forms like oil shale) will be used for things where no alternatives exist. If oil becomes $500 a barrel, there are billions and billions of barrels locked up in places we never dreamt of looking. New economies will form around the oil alternatives. I just wish I had the courage to invest in all these alternatives."
"I just have this feeling they're exaggerating the risk of peak oil so the Arabs and oil companies benefit."
"The comment from the MIT teacher overlooks one very important hydrocarbon source: coal. There is lots of it and the Germans and South Africans have made gasoline out of it for more than 60 years. It is more expensive, but better quality and perfectly doable. So, we are all set for the next 200 years or so, if we put our minds to it."
"Peak oil will happen. The question is when. If it happens in the next 20 years we must act now. T. Boone Pickens, Matt Simmons and many others think it will happen in the next few years. If this is the case, it is an emergency right now. The world's stability and our very way of life depend on having a good plan. Every plan I have seen from U.S. and International Energy Agencies says that the world will produce the oil required. The problem is that it depends almost exclusively on Saudi Arabia. The whole world is depending for survival on a country that gives out no data, and doubled its stated reserves immediately after Aramco left.
I think a major problem is the oil companies. With their denial of peak oil, no self respecting media outlet is going to do much more than give it a little story every now and then. No politician will go out on a limb either, with the lobbyists saying it is nonsense.
If we are within 20 years of peak oil, perhaps the best thing to do with domestic oil is to leave it in the ground. It is another, larger strategic reserve. Drilling in Alaska and offshore is considered by many to be draconian. Perhaps if we took offsetting draconian measures it might displease every one to the same degree. For instance, double or more CAFE. Put a $.50 tax on gasoline. Put a $20 tax on a barrel of oil. Yes, this may cause pain, but nothing like the pain when peak oil hits."
"With regards to the peak oil phenomena, there is too much hullabaloo about the whole thing.
First, oil will not just peak and take everyone unawares. Oil produced (in this case conventional) will keep being produced at a steady rate for a period even at the so-called peak oil day!
Second, we are talking about a peak because of under-investment in oil & gas production. Now, increases in the price of oil generate the finances necessary for these investments.
Third, we must not forget that there are other reserves called unconventional reserves. These reserves include oil shale and oil sands and are extremely costly to produce for now because of cost are still there."
"I have been concerned about this issue for a couple of years, since I read Hubbert's Peak. From a great deal of thought I have come to the conclusion that, yes indeed matters are pretty far on. However, the law of supply and demand will quickly reallocate resources to where they are most profitably used.
When the peak hits (and I am pretty convinced we passed that point already) we will have used about half the available "readily accessible" oil. Pricing instability ensues (sound familiar?), as suppliers are less able to fill the void. As the price steps higher, we see alternatives in both supply and efficiency of use come to the fore.
A clear example of a bubble waiting to burst is our mindless dependence for all transportation on the automobile. We import 50% of our oil at a cost of $1 billion a day. We pay this money to friends we would not normally choose. This is a national disaster.
Nearly 80% of our oil is consumed by automobiles. To stop oil imports we need to reduce our automobile consumption by about 65%. This can be achieved by a combination of reduced use and increased efficiency, but implies a need to reverse urban sprawl and improve public transportation."
"Interesting newsletter today...depressing topic. And why don't we hear more about this? Maybe because our government in all its paternalistic glory, wants us to "be happy, don't worry"? Patting us on the head and telling us to run along to play/work/send them money has worked so far. Why change? It's a house of cards, isn't it?"
"I saw an interview with Boone Pickens, CEO of BP, and he mentioned the same thing, but also that he has been investing heavily in wind energy and natural gas. One other comment he made which struck me funny was the fact that of all the landfills we have in existence, only 15% are being tapped for the methane. This would be one of the first areas we could utilize for localized power supply. Now I understand it takes time to hit critical mass and most people do suffer from near-sightedness, but any good investor would realize if the oil ran out, electrical power would not go away since we still have nuclear and coal power churning away. If anything it would probably lead to more nuclear (or other energy like geo-thermal, solar, wind, methane, etc) to be built. It may wake up the politicians (though I think they know it's coming), and re-write many laws to fast track some of these new technologies.
I think it is our job as investors to vote with our dollars and "grease" the wheels of these technologies that seem most viable. If we invest in electric/hybrid cars, or generate enough electricity for a new mass transit system, one thing is for sure; it will be a very exciting time watching the paradigm shift take place. 40% of oil is used for transportation. Biofuels may pick up some of it (though I doubt that will be around much longer because of its inefficiencies) but I would bet that natural gas will be the way many trucks will go since there are already methods to change methane to natural gas.
These are the areas I am watching.
Thank you for you time, and thank you for an awesome newsletter. Your letters are the only ones I read anymore."
"Rest assured that "Peak Oil" is a farce being perpetuated by a particular class of people with something to gain. Most likely the gain is to promote a decreased use of oil, for what they believe are environmental reasons. In 1979, when I worked at Bell Labs, an individual also claimed we were about to run out of oil in just a few years (note this is when we were having lines at the gas pump) and, in fact, his masters thesis was on the subject. I knew it was not true from my own research at that time and it is still not true today. The truth is that there is a tremendous amount of yet to be discovered oil, and even the oil we have lasts for the rest of our lifetime plus. If one factors in the oil currently captured in the tar sands in Canada, the picture improves dramatically. Those sands hold more oil than the current known reserves of Saudi Arabia. As the prices increases, and technology improves, extracting the oil becomes easier and viable. "
"I own a small natural gas processing equipment company, and have been in the oil and gas industry since 1980. I think that the production of "inexpensive to produce oil" may be peaking, but there are huge reserves of hard to produce oil known and evaluated in various places. The Canadian tar sands are the most famous, but the Green River valley in the western U.S. is loaded with oil-bearing shale.
I also recall a discussion I had with a DOE official many years ago in Washington, who indicated that our tax laws were promoting a "drain America first" policy that they intended to reverse. One of the best-kept secrets in the industry is the current production of oil in the Everglades in Florida. The industry knows that the East coast of Florida has a lot of oil; maybe when poor people can no longer afford to drive, they will demand the rich people's ocean view condos look out at drilling platforms.
The one thing that has puzzled me in the quest for new energy sources is the almost total lack of communication about the apparently successful onboard production of hydrogen in vehicles. The most famous work was done by the late Stanley Meyer, and more recently by Dennis Cline. I do not yet have personal experience, but I have spoken with a gentleman who said that his mining company was running electric generators on hydrogen from water, and I am in the process of attempting to replicate some of the work that has been reported.
Also, in a discussion with an Engineer from Capetown SA, I was told that Sasol has a liquid fuel production cost of under $0.50 per gallon using their coal-to-liquids technology. Several coal-to-liquid projects are underway here, but I am surprised that they get so little press.
Also, there has not been a shortage of crude oil for a long time. Actual inventories have been at or near historically high levels for all of last year. That is not to say that there is not a problem. The most blatant example of oil warfare is in the Sudan. A small Kentucky-based oil company named Arakis made the initial discovery, and drilled several additional proving wells, but the field was 800 miles from the coast and was in the black Christian area of the Country. The Chinese stepped in backing the Muslim North, and funded the construction of the pipeline allowing exports to, of all places, China.
I have been to Nigeria twice on business, and although Shell and BP have been the big players there to date, an estimated 80% of the reserves are left to be developed, and the Chinese last year signed a deal to develop the rest of the country's reserves.
From what I see, the Chinese are busy using their growing national wealth developing the tools and assets necessary to maintain and expand their influence and power, while we are using our shrinking wealth trying to maintain a massive military, AND expand our social outlays, resulting in a need to expand the money supply ASAP, which will undoubtedly lead to more inflation 'bubbles'. The only question is where.
One final thought. For years geologists believed that oil came from rotting plants and animals; however, there are now several examples indicating that oil may actually be produced somewhere deep in the earth by a process that we do not understand."
"There already is an alternative fuel source: WATER, YES, WATER. Water-based nitrogen gas. Stan Meyers in the United States was murdered, most likely because of this invention. Also there are compressed air cars already in service created by Guy Negur from France. Biofuel is a joke, it's nothing more than a way for farmers to get rich in corn futures and still not solve a damn thing except kill all the shrimp and fish in the Gulf of Mexico by overuse of nitrates for fertilizer (and you wonder why most all shrimp is coming from Thailand these days). The oil companies, central banks and politicians can stop free trade and inventions from ever seeing the light of day, but they cannot stop the genius of the human mind in overcoming and inventing solutions.
Royal Dutch Shell commissioned a report over 5 years ago that said we were already on the downside of the peak and would most likely start running into shortages by 2025. The real reason we're in Iraq is because IMF and banking cartels wanted control of Middle Eastern economy. Hey, we already have troops there, why not the oil also?"
"The problem with the peak oil theory is that its proponents neglect the ever-increasing estimates of worldwide oil reserves. Much of this oil may be more difficult to extract and refine, but it will be available at a price.
The developed world is suffering from a lack of refinery capacity, not oil production. The big oil companies have closed tens of facilities over the past 30 years, and that, not oil supply, is creating pain at the pump.
In North America, gas will probably have to rise to 6-7 dollars a gallon before consumers change their habits. Ironically, the drop in demand this will create will probably bring consumption more in line with sustainable refinery capacity.
Don't fret over peak oil; rather, be worried about the political stability of the nations that supply us with oil. No one imagined that the Shah of Iran would see his regime fall to an Islamic theocracy; a similar fate may await Saudi Arabia if Islamic fundamentalist expansionism is not contained.
At least the U.S.' largest energy supplier, Canada, is a paragon of political virtue and stability."
"The answer to the end of cheap oil is the storage of off-peak electricity. This will be accomplished by electric car battery charging in the off peak hours from nuclear, wind, and coal fired plants. When battery storage is accomplished for cars, the technology is close to home electric storage. Then solar and wind can make their contribution within their randomly effective time frame. The point here is that time displacement of available power will allow a combination of solutions to contribute to the problem of declining oil availability.
The construction of nuclear plants and the continued growth of natural gas will provide ultimate and temporary solutions respectively during the transition to stored, time displaced, energy."
"Oil is not an infinite commodity, but it is a very long way from exhausted in terms of supply.
Almost daily one can read a doom and gloom report on something or other. For every negative report, there is a positive. 99% of what people worry about never occurs. I personally take one day at a time and do the best I can. Yesterday is past, and tomorrow may not come."
"Peak Oil is true. It is just a matter of time. It has nothing to do with the oil companies. They just refine and distribute it. Why does everyone bash the oil companies?
There is simply not an indefinite quantity of oil in the ground to support the world indefinitely. Nor is there any energy source on the horizon capable of substituting for oil without disruption. I have faith and hope that man will find an alternative"
"I don't know what to believe, as there is so much disinformation everywhere these days. It seems to me that oil will be available the rest of my lifetime (I'm 51), although it will continue to get more expensive, maybe a lot more expensive, eventually to the point where it is used only by the very rich and the most strategically vital institutions. But there are plenty of technologies out there that we can switch to. I think electric cars will be huge much sooner than later, although hydrogen is the ideal fuel. We need leaders to hustle us in that direction, giving grants and tax breaks to the next generation of technologies rather than spending our wealth being the warlord of the planet and giving hundreds of billions of dollars of tax breaks to the super wealthy. If we do, we could again lead the world in something and usher in an even brighter future. If we don't, something closer to the doomsday scenario in your email is more likely."
"I have great confidence that we will not allow the oil crisis to go unanswered. I think it's a crime that our Congress has been a roadblock to tapping into the ANWR fields, and other areas known to have vast reserves. The cost of extracting oil from shale fields in Canada and Northern United States will also become more economical as current reserves diminish. I believe the oil crisis has been caused by our own negligence. This has not kept me idle, however. I have bought several solar stocks that have already impacted my portfolio very favorably. Last, I also am confident that our scientists and engineers will find other energy sources that will eventually replace much of the oil uses; one being salt water that is currently getting a lot of attention as a source of producing energy. At this point, I don't visualize this crisis developing into a catastrophe for the human race. I hope I'm right."
"When we reach $5.00 per gallon mark! Then Americans will wake up! How long will it take? No one knows for sure. My guess is about sometime in 2016 or so we will have more use of biofuels and solar energy, and also greater use of natural gas. We still have ample supplies of natural gas. We also need to lift the embargo against Cuba. We should be using Cuban sugar to make ethanol. Cuba would also buy many of our manufactured products. In the meantime we will have to find more fossil fuels. Canada will be our main supplier of crude oil."
"The Green River area in Colorado has more oil deposited as shale than the current known oil reserves ever discovered. Plus Sasol in South Africa makes oil from coal. The US again has enough coal to last 300 years. There is no energy shortage for the US. We are smart to buy oil for years and run down the rest of the world supply so they will have to buy our oil at higher prices."
"I live out in a rural area and heat my house with propane. During the 2005-2006 heating season it cost an average of $14.00 per day from October 1 to May 1 to heat my house. In September of 2006 we converted to a geothermal system, using the heat from water that comes from my water well. During the 2006-2007 heating season my cost per day was $2.33. My average cost per day for heating and cooling was $1.11 during that first 365 days. The 55-degree water seems to work better for cooling than it does for heating. To take this all a step further, according to MIT, the temperature 4 miles down is at least 400 degrees. The heat will always be there because it is produced by pressure caused by the weight of the earth. We can put a pipe down and bring that heat up and produce steam (similar to a nuclear power plant). There is an article about this in Christian Science Monitor. MIT projects that the cost to produce electricity this way is about 5 cents per kilowatt-hour, which is half what we now pay here. It is my understanding there is no energy shortage in Iceland where the hot water just bubbles up to the surface naturally. I believe God has provided us with all we need BUT unless we put a stop to the promotion of ethanol (a poor fuel), we will have more food riots. People will starve to death if we feed our grain to our cars."
"I read the 42 page report on peak oil that you sent out. It was interesting and detailed. I did have some questions when I thought about the conclusions. Little trust or speculation on the ability of our modern scientists to create new options...for instance: A recent news bit from Los Alamos described research on an old lab experiment where you pass CO2 over carbonic acid or other acids and capture the CO2. Products are Hydrogen and an acid salt that can be commercial. The news bit predicted that the process would be expensive--several billion dollars, but it would break even about when gas reached $6 - $8 per gallon. CO2 could be eliminated or controlled at lower levels allowing global warming to be greatly diminished. There are more areas of research also that suggest solutions rather than catastrophes in our possible future. I have neither the time or the age to pursue oil research or other ventures but my background in physics (I studied with seven of the original 25 Manhattan guys) or my years as a physician before retiring, or my time spent in parts of the world in different medical treatment systems, make me comfortable in making comments about certain aspects of my exposure to some scientific areas that we exist in."
"I was cheered by your confidence in the scientists and engineers rather than politicians where many people do place their confidence. Energy sources such as coal, where the technology to convert to diesel (for trucks) already exists, methane, and less well known sources such as borax that reputedly can provide hydrogen on demand for fuel-cell powered cars & buses. The high energy density fossil fuels coupled with nuclear and the green solutions (wind, solar, and energy-from-waste) will provide the time for scientists & engineers to "finally" solve the fusion problems. We've been able to make hydrogen bombs for over 50 years but a controlled reaction for producing energy is always 25 years in the future. It will probably take at least 25 to 50 years to get a plant setup on the moon to mine and recover the isotope of helium (He3) that will be used with deuterium in our future fusion plants. In addition to getting a bunch of energy the byproducts are helium, which can be used to fill balloons at birthday parties, and hydrogen for our fuel-cell powered cars."
Which of these perspectives is "correct" time will tell. What's clear is that our knowledge on the topic is ever evolving. What one person holds as an obvious truth may be viewed by another as a pack of lies or wishful thinking. But as time goes by, we all process new information and slowly adjust our perceptions. Some of us are far more open to new ideas, while others change our opinions more slowly ... and this is not criticism but simply observed fact. Somehow we muddle through.
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Believing in Peak Oil
Personally, I'm convinced the problem of Peak Oil is real. But being an optimist, and a person who's spent decades watching the market solve problems and fill needs, I believe the market, helped by engineers and scientists, will solve this problem, too. No doubt part of the solution will involve conservation, but conservation alone can only delay the inevitable. Eventually, we will need vastly improved technology ... or technology that doesn't even exist yet.
Which brings us back to the words of Tom Phelps, "the unforeseeable and the incalculable."
The scientists who authored the 42-page report I referenced on Wednesday were thorough. They analyzed oil reserves, tar sands, shale, methane, biofuel, coal, hydrogen, wind, solar, hydro and more, and concluded that none of them could stave off global economic disaster.
And as far as their research goes, I believe them. Ample coal reserves are not going to keep our airline fleets in the air. Ample oil sands exist, but the cost of extraction is prohibitive. Name the technology, and they have an answer; using today's technology, it can't be done.
But they can't evaluate technology we don't have ... the unforeseeable and the incalculable. Neither can I. But I've seen the great strides made by technology both before I was born and since, and I have no doubt that the future will bring more revolutionary developments. I tend to believe the answers will lie not in coal or methane or biofuels (which are old technologies to me) but in solar, nuclear, hydrogen, and nanotechnology, which are more advanced.
And I think we should pressure our elected representatives to help us achieve these technologies, by increasing support for the teaching of science in schools, and by removing the visa restrictions that prevent many foreign scientists from working in the U.S. ... and by knocking off the support for ethanol, which was procured only after the intense efforts of farm lobbyists.
Finally, I think every one of us--or at least those of us who recognize there is a problem--should invest in alternative energy technologies. Partly, of course, you should do this for selfish reasons, to make profits. But partly you should do it to help fund research toward the solution.
Solar Power Stocks Look Good
Which brings me to solar power. I've been writing about solar power stocks on and off since late 2005. Suntech Power (STP), SunPower Holdings (SPWR) and JA Solar (JASO) have all been recommended at one time or another ... and I still like them long-term.
But my favorite solar power stock is still First Solar (FSLR), which I've mentioned in Cabot Wealth Advisory at least 20 times in the past year. Is that overkill? Not if it helps you make money!
First Solar was the top-performing stock in Cabot Market Letter last year; it's gained 380% from our buy in March until now. Along the way, we've taken partial profits three times, reducing our position to lower portfolio risk. The stock had a 50% correction in January 2008, but we stuck with it, and now it's blasted right back up to its old high!
Here are four reasons for owning the stock today.
1 The company boasts triple-digit growth of both revenues and earnings.
2 The potential for future growth of revenues and earnings is immeasurable, particularly given the end of cheap oil
3 The company is bringing costs down so rapidly that it's targeting electric grid parity in some locations for 2010!
4 The stock is strong, revealing that growing numbers of investors share the same vision.
Getting down to the details, one of the differentiators of First Solar is that it uses only 1% the expensive silicon that other solar cell manufacturers use in their cells. Instead, it uses a more advanced, second-generation, cadmium-tellurium (CdTe) thin-film technology that makes its cells substantially less expensive to manufacturer.
Also, First Solar doesn't target the individual homeowner market. Last year's big success came from selling to corporate users, and this year the company is working on selling to utilities!
Admittedly, First Solar is expensive. Its price/earnings ratio is 193 on trailing earnings, though "just" 108 on future earnings. But that's the price of investing in a leading growth stock. Also, earnings will be reported within a few weeks (no date has been announced yet), which will surely cause some volatility ... up or down. Longer-term, however, First Solar's prospects are more attractive than any other stock in the market today.
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Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
P.S. To read the full report on Peak Oil, go to http://www.peakoilassociates.com/POAnalysis.html