Reposting a new interview with my co-author Brian Hicks about our book, by journalist Marc Kramer of The Bulletin.

Experts Say Oil Likely To Go And Stay Up

 
By: Marc Kramer

The Bulletin

Like every American, I want to know why the price of oil is up, will it ever go down and what can take its place? My personal feeling is that the price of oil is up because traders, not usage, are driving up the price. I recently interviewed Brian Hicks, co-author of Profit from the Peak, about what we can expect of oil pricing going forward and what business opportunities will arise because of high costs. Mr. Hicks is the managing editor of Energy and Capital and The $20 Trillion Report. Mr. Hicks writes a weekly column for Wealth Daily concerning high-profit opportunities in the ever-tumultuous geopolitical environment.

Kramer: Why did you and Chris Nelder write Profit from the Peak?

Hicks: Chris and I have been students of Peak Oil for over 5 now years. We consider it to be the most significant crisis facing the world this century. There have been many books written about Peak Oil mainly presenting the negative consequences of the end of cheap oil.

But being inherently optimists, we wanted to present the other side of the issue … the opportunity. We believe that every crisis contains the blueprint for its own solution, and PO is no different.

The world is undergoing an epic energy shift. What happens today will impact our world for decades to come. And right now, the investment community is funneling billions of dollars into renewable and alternative energy. Some estimate that between $50 and $100 trillion has to be spent to solve this problem. Early investors are going to make a fortune. And we want to be there profiting the entire way. That’s why we wrote the book.

Kramer: Who is the targeted reader because it comes across as more academic than commercial?

Hicks: It does come off a little more academic than commercial and that’s because we wanted to present a cogent and comprehensive thesis regarding the opportunity PO represents.

But the targeted reader is any serious investor who’s looking for a beacon into the future of the world economy and the world energy complex. Energy is the largest market in the world and right now the entire sector is undergoing a metamorphosis.

Kramer: Are you surprised by the high oil prices?

Hicks: Not at all! When I was first introduced to the topic of PO in 2003, I was skeptical, much like today’s media. But I looked at the data and started to crunch the numbers and what I discovered shocked me.

The mere magnitude of the problem was overwhelming. For instance, today the world consumes 87 million barrels of oil per day. The IEA estimates the world will consume 103 million barrels per day by 2015. That’s a net gain in consumption of 16 million barrels.

So in other words, by 2015, we need to produce 16 million more barrels per day to meet demand. Saudi Arabia produces 8 million barrels per day. So to the put all of this in perspective, the world needs to find the equivalent of 2 Saudi Arabias by 2015. And that doesn’t even take into account the decline rates we’re seeing in today’s giant oilfields.

Cantarell – the giant field in Mexico (and the world’s third largest) – is now in terminal decline. It’s estimated that global decline rates are in the area of 4 to 5 percent, and many suggest that that’s an extremely lowball figure. But even at 4 percent, just to stay even we have to find a new Iran every year!

With demand skyrocketing in the face of a super tight supply, the price of oil has to go up. Price reflects supply-and-demand and right now the price is telling us that the market is tighter than a snare drum.

Kramer: When experts claim the reason the price is up is because of supply verses demand, are they talking about actual oil usage or traders bidding up the price because they believe there will be a scarcity of oil?

Hicks: They are talking about actual oil usage.

Kramer: Should we get used to $4 to $5 a gallon gas or will it eventually come down?

Hicks: Anything is possible. But I don’t see demand for oil dropping for years. For far too long, oil was essentially free. Let me explain …

There are 336 pints in every barrel of oil. So when oil was selling for $20 a barrel, which was seen as the healthy and normal price back in the 1990s, it was essentially $0.06 per pint. I don’t know of any other precious resource that sells that cheaply.

So because oil and gas were so cheap, we burned it up without a second thought. In December 2005, the world consumed its one-trillionth barrel of oil. The first trillion barrels were the cheapest oil for the planet. Now we’re beginning to consume the more costly oil, the stuff coming from the Canadian tar sands and deep water drilling. This oil costs more to get.

So not only we should we get used to $4 to $5 a gallon gas we should hope that it stays at this level because it could easily rocket to $8 to $12 a gallon, a price many European nations have been paying for years.

Kramer: What would have to happen for prices to go lower?

Hicks: You have to hit demand somewhere. The Chinese automobile market is doubling every 6 years. The Indian market is expected to grow just as fast. If you take China and India out of the equation, the price of oil would go down.

China and India, which represent over 2 billion people, are just now entering the modern age. They want the western lifestyle. In this backdrop, I don’t see how oil could possibly go down.

Kramer: You talk about other types of renewable energy, which one or ones have the most promise?

Hicks: I like solar and geothermal the most because the infrastructure for them already exists. You can put solar roof shingles and siding on your house or on top of an office building.

You can install a geothermal heat pump in your home. You can put a vertical axis wind turbine on your roof. These 3 things make the energy generation very local and concentrated. In other words, the footprint is very small.

Large wind farms like the one being built in Texas takes up too much land. I’ve visited 2 large wind farms in California and the land needed to build and operate these farms is enormous.

Kramer: Will we see a total conversion to hybrid cars and if so in what period of time?

Hicks: Well we’re seeing that transition right now, I believe. With the price of gasoline at $4 a gallon, consumers are buying hybrids. The market, in my opinion, is responding to the situation. I think within 5 to 10 years, all cars will be hybrids.

Kramer: What industries do you see as high growth because of the price oil?

Hicks: Without a doubt, railroads! It’s cheaper to transport goods via rail right now than by trucking or by car. And you’re seeing this reflected in rail stocks which have been some of the best performers in the market.

We’re also extremely bullish on industries that support telecommuting. More and more employees are working from home. So companies that sell video-conferencing or “telepresence” technology like some of the stuff coming out of Cisco are going to be in high demand.

Kramer: Which industries are going to get hurt because of the high price of oil?

Hicks: Anything dependent on oil or gas – airlines, trucking, shipping. Even restaurants and amusements parks. As the price of oil rises, this will cut into discretionary spending by the American consumer. The American consumer is resilient, but they’ll have to cut back.

Kramer: Will we see suburban communities building monorail systems as a way to reduce traffic?

Hicks: Potentially! But I have to admit, public transportation like that isn’t a part of the American genome. Americans are by nature independent. They love their cars because it represents freedom and excitement and adventure. I’m more bullish on hybrids that get incredible mpg than I am in monorails. Or even Segways.

Kramer: What is your biggest concern from economic standpoint regarding this current energy crisis?

Hicks: A sudden and severe supply disruption. A good example is a hurricane that blows throw the Gulf of Mexico and knocks out 20 percent of U.S. production. But my biggest fear is that in the very near future, the Saudis call the President and tell him. “Mr. President, Ghawar is in a catastrophic decline. We can’t produce anymore oil.”

Ghawar is the largest oilfield in the world. It’s been producing for decades. But some suspect that if Ghawar hasn’t already peaked, it’s very close to peaking. As our good friend Matt Simmons has so often cited, if Saudi Arabia peaks, the world peaks.

If and when that event happens, the price of oil will experience a super spike. And that’s something the world economy cannot absorb. I hope and pray that the price of oil goes up in a very tempered and measured manner. We need to buy ourselves some time. A sudden super spike in oil would cause social unrest a modern day Hobbesian world reminiscent of Haiti.

Marc Kramer, who is the author of five books and project faculty at the Wharton School of Business at the University of Pennsylvania, is a serial entrepreneur.