Recent Events that Bring Energy Demands to the Forefront

The more I watch my portfolio (all commodities) go down, the more I realize that I am contrary thinking. I like oil and silver and natural gas. I practice what I preach and suffer when the dollar goes up and gold goes down. However, recent events bring the reality of the need for raw materials and natural resources, especially energy back to mind.

While almost comical, South Korea has actually told public workers to wear long johns to work. Recent temperatures have been at or near record lows and the energy demand has been three times average. With the temperatures to be between 8 degrees F – 22 degrees F in Seoul, the government has mandated that government buildings thermostats be set no higher than 18 degrees C (64.4 degrees F). Granted this is a small event, and a small aspect of their greater energy savings plan, but it is real.

Recently I wrote about oil sands. To focus on this fact for the moment, oil sands are inherently dirty oil. I mean literally dirty. It is filled with clay and sand and dirt that has to be removed. It is not efficient to produce oil from them until oil is about $90 a barrel. Why is this an issue? Because it is on the cusp of being necessary.

Deep Horizon, BP’s infamous off shore deep drilling platform, made the public aware of deep sea drilling. Technological advances have allowed platforms to float above oil reservoirs by GPS pinpoint positioning and micro-thrusters to keep operation directly above the target. This differs from them being anchored to the ocean floor. This, like the oil sands refining, is necessary because of the depletion of known reserves on terra firma. With sanctions being placed, even in the immediate time, still places the onus on finding more reserves. These sanctions will be lifted in the future because of demand.

The Alaskan pipeline, also previously written about, had a leak at one of its pumping stations on its 800 mile journey. The incident has been rectified, but brought to light that this system is antiquated and brings the question of “How much oil is left in Prudhoe Bay?” On January 18, 2011 the aforementioned leak was found. For 80 hours, 95% of the oil flow was shut off. Unless new oil is discovered and allowed to be drilled for in the Artic National Wildlife Refuge, the pipeline is scheduled to hit its minimum flowing capacity of 200,000 barrels per day in 2020.

Even New York State is hearing cases about natural gas fracking, and if it rules against the exploration only hinders domestic energy independence. Hydro fracking is not new, it is not unconventional and natural gas is inexpensive. Innovative heating methods like pellet stoves which can operate on special pellets manufactured from wood waste (i.e. sawdust) and cherry pits are becoming more mainstream.

Americans and the world are looking for new energy sources. Hydro-electric, solar, wind, algae are all superficial solutions as they will never get to the core energy use. New York City, Hong Kong, London need an immense amount. Nuclear energy may present the best option, but we are often faced with the “not in my backyard” mentality. It would take the entire surface of the world to be covered in solar panels to produce enough energy to run New York City of one day. Not efficient.

I love the alternative energy sources and see science working hard to create other sources, however, most cars will run on gas for the foreseeable future. Most homes will be heated by oil for the foreseeable future.

With all things considered, I see energy, especially oil going up for a very elementary economic reason: Although there is slightly waning demand because of alternatives there are greater users and the supply is shrinking. In 1977, 2020 seemed over a generation away. In 2011, 2020 is at most 3 presidents away. The California rolling blackouts were real and are a real possibility to happen again. The grid that went down in the summer of 2003 affected Ontario, Massachusetts, New York, New Jersey, Connecticut, Pennsylvania, Ohio and Michigan. 55 million people were affected.

We cannot live without energy but we are running out of conventional reserves and new technology is not progressing fast enough. So, on the investment side, I believe that the “primitive” supply and demand phenomenon of need energy and have limited supply means to produce, will only make oil, natural gas, uranium go higher.