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Fuelhardy

Published by: Emerging Trends
Author: Richard Karn
Published: July 2007
Price: 225 euro

"Fuelhardy" constitutes the most comprehensive work produced by the Emerging Trends Report to date and is intended to present an enduring evaluation of the transportation fuels sector in the US. 45 pages of documented research are supported by 9 charts and 3 original tables covering:

The transportation fuel situation in the US;
A country by country look at our top suppliers;
The growing global policy risks attendant to resource nationalization, resource mercantilism, and the rise of sovereign funds;
Our prediction regarding how the US will respond to increased pressures on oil supplies;
Our investment approach, including the areas and stocks to invest in now and to stay in for the foreseeable future, those to monitor, and those to avoid entirely;
As well as an additional 25 pages of Source Material and Further Reading.

Introduction

Let us for a moment adopt the sunniest of outlooks for the transportation fuel sector in the United States and assume all of the programs either underway, under development or proposed are successfully implemented.

Let us for a moment accept:

that ethanol produces a positive Energy Return on Energy Invested (EROEI); that is, it releases more energy than is required to produce the ethanol itself;
that carbon dioxide capture and sequestration is not so prohibitively expensive as to render coal-to-liquid fuel technology uneconomical;
that substantially higher fuel economy standards will be mandated, freeway speeds reduced, and that automobiles will be properly serviced and maintained;
that the roll-out of plug-in hybrid electric vehicles (PHEV) and electric vehicles (EV) will be on schedule, in volume and at the price points projected--all fed by vast solar arrays and wind farms;
and that Peak Oil, the point at which global oil fields have had half of their reserves extracted and go into irreversible production decline, is irrelevant as the theory can only be confirmed considerably after the fact-- and hasn't been yet.

While we are suspending disbelief, let us accept that the roughly 35 years of uniform bi-partisan inaction spanning seven administrations and resulting in a near doubling of our dependency on imported oil can be undone by these actions. ...and perhaps had we earnestly embarked on these projects 15 or 20 years ago, we'd be free today to continue our feckless fuelhardy ways.

But the reality is America's transportation fuel supply is anything but secure, for we are just starting to undertake these projects now and the viability of at least half of the list above is by no means assured. More disturbing, even if all of these projects are successfully implemented, it will require at least a decade, and more probably two, to "make a sharp reduction in (US) dependence on imports"; and in the meantime we are but one country of many competing for a disproportionate share of a shrinking global pool of oil.

We have placed ourselves in a position where we are relying on sources of oil the Emerging Trends Report (ETR) simply does not believe will be available in the quantities we will require in but a few years' time. Increased global consumption and competition for available supply is running headlong into barriers erected by production constrictions and reinforced by resource nationalization and resource mercantilism.

If the American public wishes to avoid being blind-sided by a `crisis' 35 years in the making, two smug misconceptions simply must be dispelled:

They (oil-producing nations) love our dollars more than they hate our (fill in the blank): freedom, capitalist system, culture, sexuality, politics, foreign policy, hubris, duplicity, habit of propping up despots for access to oil, or all of the above.
And this wave of nationalizations will pass as it always has because in the end those doing the nationalizing will run their oil sectors into the ground, then either abscond or be deposed, and the International Oil Companies (IOCs) will be invited back in under favorable terms to get oil production back up to speed, thereby restoring the status quo.

Unfortunately OPEC and the BRIC (Brazil, Russia, India and China) economies have been busy rewriting the rules of the Great Game, most notably designating oil and natural gas as strategic assets rather than the mere commodities we take for granted. There is now and will continue to be a market for oil we imperiously presume is earmarked for the USA. Sophisticated oil field technology can be purchased on the open market, often from American companies that are more than willing to pick up where the increasingly impotent IOCs left off. And a coordinated effort to politicize energy, keeping oil prices high by restricting supply and doling it out on a most-favored nation basis, is increasingly undermining free market operations, OECD countries' primary defense against targeted embargoes. That is the new reality Americans have been studiously ignoring, and though it will add urgency to the projects mentioned above, there is little that can realistically be accomplished in the intermediate term to offset coming increases in both oil prices and volatility as Americans are neither prepared nor disposed to conserve oil.

And with all due respect to the US Congress, comedy aside, the ETR does not think sound-bite solutions such as threatening to sue OPEC on anti-trust grounds really carry much weight these days.

Since the release of our first report on Halloween of 2005, the ETR has endeavored to identify avenues of long term investment, position clients early, and aside from three specific recommendations, to eschew sovereign risk by only investing in the US, Canada, Mexico and Australia. Globally, emerging markets have been on fire and our annualized 40% return seems paltry by comparison. But we have steadfastly adhered to this conservative, low stress approach because we place a large premium on sleeping well at night.

This notion of sleeping peacefully will become increasingly important as governments seize all manner of producing assets without recourse or recompense. And nowhere will the ETR approach manifest itself with more impact or greater long term profitability than in the realm of transportation fuels. In preparation for this eventuality, we have compiled a comprehensive 45-page report, which concludes with a portfolio of 29 stocks completely devoid of sovereign risk balancing best-of-breed companies with those offering innovative technologies, solutions and services that will prosper in the years ahead.

Testimonials

Dr. Ferdinand E. Banks:

"Fuelhardy" is "not only interesting but extremely important, and deserving the widest possible circulation."

Jerry Mercer:

"You and your team are to be commended for the outstanding research that you have put together. It is refreshing to have timely, competent, relevant data with a macro perspecitve and micro technical competencies. Economic talking-heads get lost in balance sheets and emotions, where you and your team go beyond the headlines to find the fact-based patterns that are emerging."

David Fuller of Fullermoney.com:

Fuelhardy

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