Doug Casey on Energy, Optimism, and Opportunity

(Interviewed by Louis James, International Speculator)

L: Doug, we talked last week about what you called the trade of the decade, which was to short long bonds and go long on precious metals. These are the kinds of bets we make in The Casey Report and the International Speculator, but we have a whole division of our company dedicated to the energy sector. So, the question we've had from some readers is, do you still like energy plays, or do you think this isn't the time to be speculating on energy?

Doug: I have to be bullish on energy, notwithstanding the fact that the Greater Depression will curtail a lot of energy use. In thinking about this, the obvious place to start is oil. And though I find the idea philosophically distasteful, I do believe that Peak Oil, as a geological theory, is correct.

Most people misunderstand the meaning of Peak Oil. It doesn't mean that we're going to run out of oil, it simply means that, as M. King Hubbert predicted, the easy, "light sweet" oil is basically gone. In the 1950s, he said that oil production in the continental U.S. would peak and then go into irreversible decline in the early 1970s - and it has. He also said that this would happen in the world at large, starting around 2005. That also appears to be happening.

This doesn't refer to unconventional oil sources, like shale oil, tar sands, oil-from-coal, and deep-ocean deposits, of course.

This ties into why I say I don't like the idea of Peak Oil, philosophically; it seems to imply that the world can actually run out of oil. It won't. We won't run out of anything -- at least as long as the price mechanism is allowed to operate. This is why it's foolish to rely on the popular media for information - entirely apart from the fact that few reporters have any technical knowledge at all, they have a natural inclination to fear monger and promote man-bites-dog stories.

You have to keep in mind that oil is just a hydrocarbon. What does that mean? It means that it's a compound made of hydrogen and carbon. Carbon is very common on the surface of the earth, there's plenty of oxygen in the atmosphere, and hydrogen is the most common thing in the universe - with the possible exception of stupidity. There are lots of hydrocarbons in the world - plants, including algae, contain them. Transforming hydrocarbons into useful fuel is simply a matter of applied technology.

 

L: And a matter of economics. We know how to synthesize hydrocarbons in the lab, it's just more expensive than getting them from oil wells at the moment.

Doug: Yes. That's quite correct. Fortunately, as technology advances, methods of doing things inevitably become more efficient. And cheaper. The supply of hydrocarbon fuels is a non-problem for the future - as long as the market is allowed to function.

 

L: So, even though you dislike the misperception some pundits spread about Peak Oil, you do subscribe to the idea that the "easy oil" production has, is, or will soon go into serious decline, and that will drive prices up.

Doug: Yes, exactly. And eventually, higher prices will make it economic to mine more oil sands like those in Canada, produce more shale oil like that the U.S. has, and process more heavy oil like that in Venezuela. Given present trends in usage, there are hundreds of years of oil out there. We're never going to run out of it. Unfortunately, we also have unlimited supplies of hysteria about Peak Oil, even though the problem only applies to light, sweet crude at this time.

The stone age didn't end because we ran out of stones; the same will be true of the oil age. Nonetheless, I think it's likely that as we go through a transition, the price of oil is going to go much, much higher. That's only partially because of the supply constraints due to Peak Oil. It's also due to places like India and China and much of the third world just starting to get into the modern economy.

Until the entire structure of production changes, and it will, the modern economy is built on the availability of cheap light, sweet crude. Automobiles, airplanes, petrochemicals - all these things are based on cheap crude. That's going to come into short supply, and that's going to make oil prices go much higher, until adequate capital and attention is devoted to switching to other sources.

 

L: Okay, but that doesn't sound imminent. Why should anyone buy into energy plays until Peak Oil has manifestly and permanently raised prices - especially in the face of more economic slowdown ahead, which should have a negative effect on demand?

Doug: Because you want to Buy Low so you can Sell High. By taking time to build a good portfolio now, before prices go up, I think it's quite possible to make significant profits on oil companies.

Natural gas companies too. Natural gas is a very different market from oil, because it's a more localized market. Unlike oil, natural gas is not easy to transport, so prices tend to be set on a local, rather than international, basis.

Of course, natural gas can be made liquid, for easier transportation, but that's expensive. And there are other problems with LNG [Liquid Natural Gas], mainly the NIMBY problem.

 

L: Not In My Back Yard.

Doug: Yes, and, unusually in this case, not entirely without reason. There was an LNG disaster back in 1944, in which an above-ground LNG storage tank in Cleveland, Ohio, blew up, completely leveling about a square mile of Cleveland in the process. It's a very famous disaster - it looks like a small atom bomb went off.

Partly for this reason, and the disappearance of light, sweet crude, I think the world is going to go to more and more battery-powered, all-electric machines of all sorts. And the most important source of the electricity that will charge those batteries will likely be nuclear power.

There's never been any question among thinking people that the safest, cheapest, and by far the cleanest form of energy is nuclear. The whole controversy about nuclear power is another example of the limitless supply of hysteria. It's a shame you can't run a car on hysteria.

 

L: That's true, but some people seem to be seeing the light. I heard a scrap of congressional testimony the other day, in which the environmentalists were sounding pro-nuclear.

Doug: That's true, some are. Not all environmentalists are ignorant and incompetent. They are not all stupid or evil. Some of them actually intend well for their fellow humans. Some even like people more than birds and bees and bunnies.

 

L: Yes, and you know all five or ten of them!

Doug: Yes. [Laughs]. I think even my friend Amory Lovins of The Rocky Mountain Institute is coming around. The future in nuclear isn't in large, gigawatt-size plants but in very small ones, smaller than those in nuclear submarines. These are plants that can be buried, that have no moving parts, need no additional fuel, and can be run completely maintenance-free for five to ten years, and produce enough electricity to power about 20,000 homes. They only cost about $25 million each, which means that any town of about 10,000 people or so could have basically infinite and extremely cheap power. It will be local, safe, clean, and cheap - it will revolutionize what can be done in third-world countries, island jurisdictions, etc.

 

L: I hadn't heard that - this is licensed already? In the U.S.?

Doug: It's in process. The technology was developed by the government's nuclear labs at Los Alamos and was licensed last year to a company called Hyperion, which says it already has orders and will be in production in 2013. The amazing thing is that this is not widely known. There's not much press coverage, but it's in the science magazines. This is really the biggest innovation going on in the energy field right now.

Of course, solar technology is advancing as well. It's still comparatively uneconomic but will continue developing and becoming cheaper. Once the nanotechnology revolution hits, it's conceivable that highways will be paved with photovoltaic materials. Roofing panels could become power generators as well.

 

L: Any flat surface people build could be spray-painted with photovoltaic material and potentially become a solar power source.

Doug: Right. Surfaces that would be there anyway. And it's even better than that. ExxonMobil has invested $600 million in genetically altered algae that basically excrete oil.

So, there is no energy problem. The only problems are political. It's perverse that people look to government to solve these problems when the institution of government is usually the cause of most of the problems.

 

L: Sounds great - I can't wait to see it happening. But meanwhile, how do we invest?

Doug: Biotech oil, solar, nanotech - all of these things make for interesting speculations. And there are lots of others - capturing the energy of ocean tides and ocean currents. Mounting giant solar collectors in high earth orbits and beaming the power down by microwaves. The trouble is that most are still in the R&D stage, basically science projects. That makes it impossible to apply Graham & Dodd-style analysis to investing decisions. That is to say, it's almost impossible to find companies that have five years of growing earnings, are trading close to book value, etc., etc.

One underappreciated technology is geothermal, relying on the heat of the earth's mantle to heat water and generate power. It's even more ecologically friendly than nuclear, and even lower cost. Another is run-of-river hydro, which avoids the huge capital costs and potential risks of conventional dam-generated hydroelectricity.

Geothermal and R-O-R Energy investments, in addition to oil, gas, coal and others, are covered extensively in our Casey Energy Opportunities letter...which I believe we're renaming soon.

 

L: That's right. The name will be changing later this month to Casey's Energy Report. It's also my understanding that the subscription price will be increasing in September, and that active subscribers at that time will remain at the current price. Those interested can click here to learn more.

Doug: While I'm on the subject... I know this will sound a bit like an infomercial, but it's still true: anyone who wants the very best advice on how to invest in energy today should attend our Casey Research Energy & Special Situations Conference. That'll be on September 18 to 20, at the Westin Tabor Center in Denver, Colorado.

I'll be there, and so will Marin Katusa, our energy investment wunderkind. Every conference we've done has sold out, and this one will offer especially critical information specific to the current investment environment. I encourage those interested to sign up and come discuss their ideas and questions on the subject with us.

 

L: I'll be there too. Here's a link for those interested:

Casey Research Energy & Special Situations Conference

or Text Link: http://www.caseyresearch.com/crpmkt/crpSolo.php?id=147

Doug: Right. One investment I would make now is to go long on quality uranium plays. The sector is oversold, and there are great opportunities in it now. A few years ago, there were only five or ten uranium companies worth thinking about, but by the time the recent uranium bubble burst, there were maybe four or five hundred uranium companies - or at least companies that called themselves that. It takes some effort to sort through the wreckage to separate the undervalued opportunities from the walking dead, but that's exactly what Marin and our Energy team are good at doing.

For example, Denison Mines (T.DML), one of the companies in our Casey's Energy Report portfolio, was one we bet on back before uranium shot up to $140 in 2007. At the time we first recommended the company, uranium was selling for less than $7 a pound. By the top of the bubble, our subscribers were able to take profits at gains of up to 1,497.5%. I kid you not; I have a letter from a subscriber who paid off his mortgage with his profits from that play.

 

L: I remember - the company used to be called International Uranium at the time. What about in the oil patch?

Doug: I have to say that I'm not wildly enthusiastic about the big companies. Take Exxon, for example. I remember that in 1982, at the bottom for the stock market, and oil had come off a lot too, you could buy Exxon at that time for a dividend yield of 10%. Since then, Exxon has gone up, up, up - so, now, in spite of increases in dividends, it yields only about 2.3%. So, recognizing what a bargain looks like, I would say it was a bargain in 1982, but not particularly today. Now, the thing with the big companies is that they have lots of money and are politically well connected, which are pluses, but on the other hand, they are also political targets. And, at a certain point, they just get too big to be managed effectively.

I like the little companies. Well-run ones are not so likely to run into political trouble. And it's possible to get 10 or 20:1 on your money with them, which is not possible on Exxon. Even though Exxon is a relatively well-run business for such a large company, it's so big, I don't see how the president or chairman can even know what all of its assets are - forget about how to manage them. Sometimes things just get too big. So, even with all the extra risks involved, I prefer to stick with the little companies that are run by the kind of serially successful people who are members of our Explorers' League (on the minerals side).

 

L: You know I won't disagree, but for people who agree with your general view on energy but are more risk-averse than you are, would you recommend the big companies? Or do you think the big, slow-moving dinosaurs are just big targets that are not as strong and safe as they look?

Doug: Well, since I think the stock market in general is greatly overpriced, based on the fact that dividend yields are low and interest rates have only one way to go, which is up, that will put even more pressure on them. So, despite the fact that I'm looking for oil to go to $200, $300, or more per barrel, I think you're just better off with well-run small companies than with the dinosaurs... it's ironic, the companies exploiting dead dinosaurs have become dinosaurs themselves.

 

L: That makes sense. Same thing for gas?

Doug: I wouldn't buy Gazprom....

 

L: Okay then. I look forward to hearing more from you on how to play the energy markets at our conference.

Doug: See you there, and talk to you next week.

P.S. As we go to press, Doug is meeting with Marin Katusa, David
Galland, Louis James, and Olivier Garret at Marin's house in Croatia.





Posted 08-05-2009 1:42 PM by Doug Casey