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FUTURE ENERGY HOW THE NEW OIL INDUSTRY WILL CHANGE PEOPLE, POLITICS, AND PORTFOLIOS
BILL PAUL
John Wiley & Sons, Inc. ffirs.qxd 1/8/07 3:53 PM Page ii ffirs.qxd 1/8/07 3:53 PM Page i
FUTURE ENERGY ffirs.qxd 1/8/07 3:53 PM Page ii ffirs.qxd 1/8/07 3:53 PM Page iii
FUTURE ENERGY HOW THE NEW OIL INDUSTRY WILL CHANGE PEOPLE, POLITICS, AND PORTFOLIOS
BILL PAUL
John Wiley & Sons, Inc. ffirs.qxd 1/8/07 3:53 PM Page iv
Copyright © 2007 by Bill Paul. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. Wiley Bicentennial Logo: Richard J. Pacifico No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data:
Paul, William Henry, 1948– Future energy : how the new oil industry will change people, politics and portfolios / Bill Paul. p. cm. Includes bibliographical references and index. ISBN: 978-0-470-09642-0 (cloth) 1. Petroleum industry and trade—United States. 2. Petroleum reserves—United States. 3. Energy policy—United States. 4. Energy development—United States. I. Title. HD9565.P32 2007 333.8'2320973—dc22 2006034739 Printed in the United States of America. 10987654321 ftoc.qxd 1/8/07 3:53 PM Page v
Contents
Preface vii Acknowledgments ix Author’s Note xi
CHAPTER 1 The New Oil Industry 1
CHAPTER 2 Terrorists, Nationalists, and Shock Absorbers 31
CHAPTER 3 Substitute Liquid Fuels, Part One: Biofuel 55
CHAPTER 4 Substitute Liquid Fuels, Part Two: Unconventional Fossil Fuels 81
CHAPTER 5 The Power of Efficiency 101
CHAPTER 6 Every Drop of Oil We Can Get Is Important 127
CHAPTER 7 The New Oil Economy? 145
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vi CONTENTS
CHAPTER 8 The Complete List of 100 Companies to Watch 163 Why the Chevrolet Corvette Should Be the Symbol of the New Oil Industry
APPENDIX A 2012 U.S. Biofuel Market Forecast 179
APPENDIX B Primer on Why Gasoline’s True Cost in 2006 Was More than $11 a Gallon 181
APPENDIX C Valuable Energy News Web Sites 191
Glossary 195 Notes 205 Index 217 fpref.qxd 1/8/07 3:53 PM Page vii
Preface
Hundreds of millions more people in the world are expected to be driv- ing cars and trucks in 25 years’ time, but the world is already struggling with high prices, national insecurity, and environmental anxiety as it tries to meet current demand for oil. Not since demand for whale oil deci- mated the supply of whales has demand so threatened to exceed available supply. Oil companies are running just to try to stay in place. But the new discoveries are smaller than the old ones and the amount of new crude is insufficient to replace reserves at the rate we are using them up. The world is living on past discoveries as it watches its most important oil fields get dangerously long in the tooth. Besides these physical ailments, the world has big psychological prob- lems. Oil-consuming nations whistle as they walk past the graveyard, hoping there won’t be a sudden cutoff in the flow of oil from the region of the globe most likely to erupt in violence, the Middle East, or a rapid falloff in production by key oil fields because of years of inadequate maintenance. People hear shocking statistics on the toll that oil and other fossil fuels are taking on the environment and, consequently, on their health, but then go fill up their tanks with gasoline because they don’t have a choice. Soon, however, the world will be presented with a golden opportunity to solve its energy-related problems. An energy technology revolution is starting to brew in America and throughout the world. This revolution will create a “new” oil industry that holds the promise of energy inde- pendence for the United States and other nations, at the expense of na- tionalists and terrorists who use oil as a sword of Damocles against the West. This revolution also holds the promise of moderate prices and a
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viii PREFACE
cleaner environment. It may even hold the promise of a new method of wealth creation, a way for the average joe to make money. To fully realize the tremendous potential of this revolution, skillful political leadership that emphasizes compromise over confrontation and the national interest over special interests will be required. Shaping and directing this energy technology revolution will be one of the challenges, if not the biggest challenge, faced by leaders in Washington, Beijing, New Delhi, Tokyo, London, and other energy capitals. Although an oil- man, President George Bush has shown in his speeches that he gets what the energy technology revolution is all about. What’s needed now is a Manhattan Project–style program for developing these new technologies in order to wean the world off its deadly dependence on imported oil as quickly as possible. This energy technology revolution will present a major opportunity for investors all over the world. But first they will need to know what disrup- tive new technologies are being developed, what companies are develop- ing them, and what other companies will be called upon to implement them by providing the infrastructure of the new oil industry. This book presents a list of 100 companies to watch. Though detailed, this list should be viewed by investors as a starting point for further investigation. flast.qxd 1/8/07 3:54 PM Page ix
Acknowledgments
I would like to thank my friend Stephen Blauweiss for creating the charts for this book. I would also like to thank everyone who contributed so freely of their time, information, and/or enthusiasm.
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Author’s Note
The material in this book is presented for information purposes only. Under no circumstances does the information in this book represent a recommendation to buy, sell, or hold individual stocks, groups of stocks, or any other investments. The author does not own stock in any of the companies on the “companies to watch” list.
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CHAPTER 1 The New Oil Industry
A newspaper article in the spring of 2006 said that economists believe that if gasoline were to reach $5 a gallon in the United States, “an entire industry would develop aimed at cutting costs and finding new sources of energy that could alter the economy in unforeseen ways.”1 While Americans may or may not see $5 gasoline, in point of fact this new industry is already taking shape. It is being fueled—though only in part—by crude and gasoline prices that have risen rapidly over the past few years, climbing above $70 a barrel and, in the United States, $3 a gal- lon, respectively, at the start of the 2006 summer driving season. In addition to high prices, this new industry—really a “new” oil indus- try because conventional oil production will continue to play a vital role for the foreseeable future—is gaining momentum because of two of the most widespread fears in the world today. The first is the fear of govern- ments everywhere over their lack of energy security, as reflected in Presi- dent Bush’s now-famous statement that the United States is addicted to imported oil. Call it energy insecurity. The second is the fear of people everywhere over the health of the planet, as reflected in 2006’s tidal wave of media interest in global warming. Call it environmental anxiety. It was further reflected in a statement made by a European energy planner that combating climate change should be central to the world’s global energy strategy. He made the statement to none other than members of the Or- ganization of Petroleum Exporting Countries (OPEC)—the global oil cartel.2 Neither of these global fears is about to disappear, and even if,
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2 FUTURE ENERGY
near-term, the price of oil pulls back due, say, to a recession, long-term (over the next 25 years) the world is expected to need vastly more energy than it consumes today, putting a continuous strain on existing sources of supply. Indeed, the U.S. Energy Information Administration (EIA), the inde- pendent statistical and analytical agency within the U.S. Department of Energy, has forecast that global petroleum consumption is expected to grow strongly, reaching about 118 million barrels a day in 2030, 3 com- pared with roughly 84 to 85 million barrels a day currently. The Paris- based International Energy Agency (IEA), which acts as an energy policy adviser to more than two dozen countries, has said global oil demand could reach 99 million barrels a day by 2015 and 116 million barrels by 2030.4 Even some oil company executives seriously question whether such increases are achievable. Chronically high prices plus pervasive geopolitical risk plus environ- mental fears equals a recipe for change, for a radical restructuring of the oil industry. To be sure, it is both tempting and comforting to think that when oil prices fall precipitously—as they did in the fall of 2006—America’s and the world’s oil problems are over. No doubt there will be several more sharp price declines over the next quarter century due to factors such as seasonal patterns, depressed overall economic conditions, and overspec- ulation. However, in addition to rising worldwide demand for oil, the upward pressure on oil prices should be maintained over the long haul by the financial and psychological fallout from a number of confluent conditions:
• The rising cost of discovering, extracting, and refining crude oil. • Increasing reliance on other hydrocarbon sources that are more ex- pensive to exploit, particularly coal and tar sands. • The growing concentration of America’s critical energy infrastruc- ture in the hurricane-exposed Gulf of Mexico. • The generally accepted assessment that the war on terrorism is only in the first round. • Rising demand specifically in oil-producing countries that effec- tively reduces the amount of oil available for export. • Growing concern that conventional oil production may have or could soon peak. ccc_paul_001-030_ch01.qxd 12/21/06 2:51 PM Page 3
THE NEW OIL INDUSTRY 3
“There are substantial risks going forward,” Kevin Petak, director of energy modeling and forecasting at Energy and Environmental Analysis, Inc., a consulting firm in Arlington, Virginia, told me during an inter- view conducted after oil prices started going down in the fall of 2006. To what extent the new oil industry succeeds in making nations en- ergy secure and the planet healthier is going to depend on political de- cisions made in Washington, Beijing, and other world capitals. It will depend especially on how effectively governments coordinate the new oil industry’s different sectors, which will need to compete without los- ing the inherent synergism. With proper guidance, the new oil industry appears to have the potential to solve many, if not most, of the world’s energy- related problems. But no matter how good a job governments do, the new oil industry should succeed in helping to bring down the price of gasoline by simulta- neously increasing supply and decreasing demand. The former will be achieved through the introduction of liquid transportation fuels that can substitute for gasoline refined from crude oil, while the latter will stem from greater use of fuel-efficient hybrid engines and other improvements in the efficiency of vehicles. Unfortunately, it is going to take time for all this substitution and effi- ciency to permeate the market—maybe 10 years or longer, though a lot will depend on governments’ policies. Until that day, even with the world pumping as much crude as it can, the medical condition known as “pain at the pump” is unlikely to disappear.