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Crossroads – Peak oil or awash in it?

It is no longer news to suggest that the world stands at an energy crossroads. But the signs at this intersection can point in all manner of directions, reminding me of the scene of the Scarecrow standing by the yellow brick road and pointing the way to Oz.

How does one make sense of these disparate reports?

The Canadian Association of Petroleum Producers expects oil production in Canada will more than double by 2030 (Oil and Gas Journal 6/10/2013). They further predict that 77% of this production will come from the oil sands, up from 56% today. The total output from the oil sands alone is forecast to triple and major Canadian banks are warning that the industry faces a serious challenge in getting this oil to market as pipelines near capacity. I expect this report will have many Canadians either sadly shaking their heads, or thinking ‘over my dead body’. According to Enbridge lawyer Richard Neufeld, “Should the (Northern Gateway) pipeline be rejected, the whole country will face the economic consequences. How about a decision from the U.S. that it will no longer need Canadian oil? Canadians would be facing, we suggest, an economic catastrophe of unprecedented proportion.” He made no mention of environmental catastrophes.

‘Peak oil’ projections have been pushed back as vast new fossil fuel reserves are unearthed in the Bakken formation of Saskatchewan, Manitoba, North Dakota and Montana. There are more such discoveries being evaluated in many other regions of North America and further abroad. But did you notice that although huge supplies are coming online, the price at the pump remains very high? This is in part a reflection of the added financial costs in getting these hard to exploit reserves to market.

While the world now seems awash in oil, Tim Morgan, the head of global research at a London investment firm, has released a report entitled Perfect Storm: Energy, Finance and the End of Growth, in which he posits that economic growth is over and Western society may be on its way back to a pre-industrial state. At the heart of his dark vision is the theory that the economy should be viewed in terms of its ability to extract and use energy, the cost of which is now many times more than the ‘cheap’ oil that fuelled the global economy for so long.

While oil producers clamour over the supply, and foreign governments take stakes in Canadian oil sands through their own national oil interests, a host of US cities and other pension managers are committing to pursue a policy of fossil fuel divestment. Indeed, there is a growing body of research pointing to the increased risk to an investment portfolio in owning these companies. Consider that fossil fuel companies are in large part valued by their ‘proven reserves’. However, if those reserves were to be fully exploited the world would likely heat up to the boiling point as a result. In a report recently published by HSBC Bank, if countries agree to pass regulations strong enough to keep global warming within a 2˚C limit, then 75% of these reserves will have to stay in the ground and companies like BP, Shell and Chevron could lose up to 60% of their value.

These are all signs that point to a future of confrontation, migration, environmental degradation, and a world divided into energy haves and have nots.

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Fortunately there are other signs at these crossroads.

Perhaps the most efficient arbiter of future trends is the stock market, like it or not. So it is most interesting and constructive to consider the success of Tesla Motors, which trades on the NASDAQ under the symbol TSLA for over $100 per share, up more than 240% this year alone. Based in Palo Alto, California, the company designs and manufactures electric vehicles and electric vehicle power train components. Consumer Reports is calling the Tesla Model S the “best car we have ever tested.” The Street magazine says “The Tesla Model S is now the undisputed king of the automotive world.” Tesla has expanded what they call their Supercharger network, which enables drivers to recharge their vehicles and travel long distances, for free, indefinitely. This network covers California and Nevada on the west coast and the Washington to Boston region on the east coast. Within six months they plan to connect most of the major metro areas of the US and Canada. And within a year, Tesla charging stations will allow drivers to crisscross the continent without spending a cent on fuel.

Ashley Seager writing in The Guardian (June1, 2013) argues that renewables “have seen such dramatic price falls in the past few years that they are threatening to upset the world as we know it and usher in an almost unprecedented boom in the spread of cheap, clean, home-produced energy.” Solar has already reached “grid parity’ in sunny California and Italy, and onshore wind is now the cheapest form of energy on earth according to General Electric, Citibank and others. On top of this is a revolution in “distributed” (ie non-grid energy) that is seeing whole towns in Germany and elsewhere go completely renewable. Indeed Germany now gets 25% of its electricity from renewables and that proportion is increasing monthly.

While obstacles still need to be overcome, these signposts herald an era of economic prosperity that could reach all corners of the globe should the trickle-down effect of abundant renewable energies be fully realized. And the performance of an investment portfolio will very much depend on which energy path the world chooses to follow.

(This article was originally published in The Island Word on July 1 2013)

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