Cutting Through the Energy Myths

Since crude prices have moved into the stratosphere, the world of oil has become awash in myths and other misinformation about the causes and potential cures for the run-up. The biggest problem with these myths is that they subject policymaking to politics, rather than to economics and engineering. And for Fools, they make targeting an appropriate allocation for energy assets a hit-or-miss proposition.

Let's consider some of the more pervasive energy myths, so that just maybe your approach to energy investing will become less random.

The Saudis can save us.
Maybe, but maybe not. Ever since Houston investment banker Matthew Simmons published Twilight in the Desert, the world has become progressively more skeptical about the Saudis' real producing power. Last week, an unusually thoroughly researched BusinessWeek piece on the subject concluded that "… Saudi Arabia appears likely to fall well short of the daily production it has targeted in the near term."

In fact, given what we know about the world of energy today, our best bet may be to depend on the good efforts of Suncor (NYSE: SU  ) and Canadian Natural Resources (NYSE: CNQ  ) to ramp up oil sands production in Canada.

If we leave market forces alone, energy will straighten itself out.
While I'm as much of a free marketer as the next person, my response to that contention is simply: Hogwash. There almost certainly are viable energy solutions out there, but they simply won't take effect on their own.

For instance, T. Boone Pickens maintains that using natural gas as our primary transportation fuel will cut our energy expenditures meaningfully. But without a decided -- and nonpolitical -- nudge from the highest levels, it's unlikely that the likes of Chesapeake Energy (NYSE: CHK  ) and Anadarko (NYSE: APC  ) will become our go-to transportation fuel suppliers.

Alternative energy can replace oil and gas quickly.
Nope. Solar, wind, biofuels, and other alternatives can help to lessen our dependence on frequently unfriendly or unstable nations for our energy supplies. In fact, Mr. Pickens purports to have a meaningful wind project on the drawing boards.

But for the lifetime of any Fool reading this article today, oil and natural gas will continue to fill a significant portion of our energy needs. That, of course, means that, at least for the intermediate term, we'll need to do everything possible to encourage increased exploration and production.

Draining the Strategic Petroleum Reserve (SPR) would lower crude prices.
Wrong again. The SPR was set up as an emergency supply of crude. It now holds slightly more than 700 million barrels of oil. If we begin liquidating it tomorrow, we'll be done with it not long after my Tennessee Volunteers have lost to the University of Georgia in October. Then what will we do for an encore?

Big Oil is sitting on leases that it doesn't intend to develop.
This one actually is somewhat true, but not in the perverse way that industry critics contend. Buying a lease is the first step to hoped-for production. But once the seismologists are turned loose on a lease, lots of acreage proves to be unworthy of a drill bit. Rest assured, the oil companies, from ExxonMobil (NYSE: XOM  ) to the smallest independent, are working as hard and as fast as they can to find and produce oil and gas.

We can achieve energy independence.
That's a comforting thought, but it's also unrealistic. Today we consume more than 20 million barrels a day in the U.S., but we produce only about a quarter of that. We'll always be beholden to a combination of outside sources and the development of various types of alternative energy.

Higher oil prices are largely the work of "speculators."
I've dealt with this before, and there continues to be little evidence that anything is trumping basic supply and demand in driving up crude prices. Indeed, I suggest that, as earnings season unfolds in the next couple of weeks, you note how many oil companies report lower liquids production than they rang up just a year ago.

It's customary for some folks to find a culprit or a conspiracy lurking behind every negative event. But as to crude prices, there are two dangerously diverging trends at work here: Global demand is increasing dramatically, while many of the world's largest fields are getting long in the tooth and losing their producing oomph. That means that we have to run faster just to keep up with today's production levels, which shouldn't lead to optimism about lower crude prices.

Tying it all up
So by all means, continue to pay careful attention to the good work being done in the solar arena by my capable colleague Toby Shute. And beyond that, watch intriguing solar plays such as Solarfun Power (Nasdaq: SOLF  ) . But please, oh please, keep your investing eyes glued to the oil patch as well. My favorite name from the group above is Motley Fool Inside Value selection and natural gas all-star Chesapeake Energy.

Chesapeake is a big hitter among Motley Fool CAPS players, with more than 4,600 investors expecting it to outperform the market. Why not weigh in with your opinion?

For related Foolishness:

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. He does welcome your comments. The Motley Fool's disclosure policy is never shrouded in myths.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 17, 2008, at 2:31 PM, sun7 wrote:

    "But for the lifetime of any Fool reading this article today, oil and natural gas will continue to fill a significant portion of our energy needs. ...

    ...

    Famous last words?? This type of sentiment completely ignores scientific and global technology trends. And all for the benefit of short investors (discussion topic du jour).

    Now we know what it was like to be an investor at the turn of the 20th century - which makes sense since its the turn of the 21st century.

  • Report this Comment On July 18, 2008, at 9:24 AM, cjwirth wrote:

    According to energy investment banker, global oil production is now declining, from 85 million barrels per day to 60 million barrels per day by 2015.

    During the same time demand will increase 14%. This is like a 45% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always be higher than production; thus the depletion rate will continue until all recoverable oil is extracted.

    Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment.

    We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from "outside," and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems.

    This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: http://www.peakoilassociates.com/POAnalysis.html

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