Peak Oil Book and Implications for Stocks

Jelly Roll Capital Equity Research

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Reviewing A Thousand Barrels a Second

Last weekend I happened to pick up a copy of Peter Tertzakian’s book A Thousand Barrels a Second, an overview of our energy history and the coming challenges of Peak Oil. Tertzakian, the Chief Energy Economist at ARC Financial, a private equity firm focused on energy-related businesses, cuts through much of the rhetoric surrounding the current energy challenges and delivers a straightforward analysis of the problems, causes, and possible solutions. Because of the importance of energy stocks in today’s market and the volatility seen in energy-related commodities contracts, a working knowledge of the Peak Oil theory and its consequences is essential to all investors and especially to anyone buying oil, gas, or alternative energy stocks.

From a reader’s standpoint, the only complaint with Tertzakian’s book is that it can be slow to develop - he spends the early chapters rehashing historical energy transitions, and although that allows him to make useful analogies and points later on, I found myself wondering when the real discussion of today’s energy problems would begin. Still, when Tertzakian begins his breakdown of the world’s oil dependence, I found myself turning the pages just as I would with any of my favorite fiction authors.

One of the primary reminders Tertzakian presents is that the likelihood of a “magic bullet” solution to replace oil is highly unlikely, as almost all potential energy sources appear to have been mapped out. Many of the technological breakthroughs that will one day come on-line are still decades away from commercial-scale development, and the marginal efficiency and conservation improvements that will be made in the meanwhile will not be enough to hamper demand growth and restore a comfortable crude oil supply cushion. The more viable way to address energy demand comes from synthetic fuels and other crude substitutes that are now becoming economically viable due to elevated crude prices. Two names that come to mind in this area are Headwaters (HW) and Sasol (SSL), the latter of which Tertzakian specifically mentioned for its coal synfuel technology. I believe that coal synfuels will play a large role in meeting marginal energy demand in the future, which is why I am optimistic about the futures of stocks like HW, SSL, and certain coal companies like Alliance Resource (ARLP).

Of course, this book in many ways directly addresses the future of “Big Oil” - integrated majors like monthly Top 25 picks Exxon Mobil (XOM) and Marathon Oil (MRO), upstream oil companies like Vaalco (EGY) and Grey Wolf (GW), refiners Tesoro (TSO), Frontier Oil (FTO), and Western (WNR), and drilling services and infrastructure companies like Patterson-UTI (PTEN) and Global Industries (GLBL). Independently of Tertzakian’s analysis, I have liked several of these stocks over the past year or two, as I believe high oil prices are unlikely to fade anytime soon. Tertzakian’s presentation of the progress being made in reducing and/or replacing oil consumption makes me believe that many companies in the energy sector are going to continue to generate massive cash flows through the end of the decade. Given the reasonable level of present valuations for the above-mentioned stocks, the scenario I envision implies that many of those stocks will continue to march higher as more people realize that cheap energy may not be the guarantee it once seemed to be.
One caveat Tertzakian presents regarding oil majors is their competition against government-backed oil companies in places like Saudi Arabia, China, Russia, and India - which now make up the majority of large oil producers. These deep-pocketed pseudo-corporations have a much more important goal than mere profit; in many cases they are also entrusted with ensuring the access and availability of strategic energy sources. With this goal in mind and easy access to capital, government-backed companies can be much more aggressive in bidding on energy claims and will likely contribute to a floor under oil prices.

Largely absent from A Thousand Barrels a Second is any discussion that goes in-depth into natural gas (Tertzakian says that is another book in itself) or alternative energy sources not meant to displace oil. Because power sources like hydroelectric, wind, and solar power would primarily be used for electricity generation, their mention is infrequent - a few of the problems with each that prevent a particular source from being the energy panacea are pointed out, but this book’s focus is definitely on oil and refined byproducts.

With the numerous insightful answers - and questions - A Thousand Barrels a Second raises about oil dependence and possible solutions to that addiction, I believe it is an excellent starting point for those interested in understanding the world’s current energy situation and future.

If you are interested in reading A Thousand Barrels a Second, you can follow the affiliate link below to learn more about the book and how to order it. Even if you aren’t up for doing so right now, I encourage you to check out other local bookstores or your library to try to find a copy, as I believe this book will help you become a more worldy person and intelligent investor.