Saturday, October 16, 2010

Book Report - The Impending World Energy Mess

Robert Hirsch is perhaps most well known for writing the famous "Hirsch Report" in 2005, which was the first official US Government report, written for the US Department of Energy, which publicly acknowledged the threat of peak oil and the potential catastrophic effects it could have on the US economy.  Along with the two co-authors of the Hirsch Report, Dr. Hirsch recently published a book aimed at the general public entitled "The Impending World Energy Mess".

Generally the book does a very good job synthesizing all of the various complexities associated with peak oil, from the overestimation of OPEC reserves (pg. 33), to the summary of current peak date forecasts (ch. 7), the challenges to mitigation strategies (pg. 130), the Energy Return on Energy Invested of alternatives (ch. 13), and the obstacles to scaling up alternatives (ch. 14).  It is very comprehensive in the way it takes each alternative, one by one, and analyzes their market potential and the challenges and risks of their adoption.

One criticism of the book is that the authors chose to treat climate change with a good deal of skepticism.  Obviously the "climategate" scandal shed a lot of negative light on the way scientists build their climate models.  Correlation of temperature changes to greenhouse gas emissions does not necessarily imply causation and anyone who's familiar with modeling - for example, financial modeling - knows that the modeler can adjust the countless assumptions to make their model come to pretty much whatever conclusion they desire.  So while there may be a great deal of skepticism (much of it funded by the largest greenhouse gas emitters) about the anthropogenic roots of global climate change, there is little doubt about the basic scientific measurements confirming global warming since the beginning of the industrial revolution.  So the problem comes down to the simple question: "are you confident enough with your skepticism of the anthropogenic roots of global climate change to risk doing nothing and potentially endanger all future generations of life on earth?".  Which brings us to the "precautionary principle".  For a group of authors who so competently apply the precautionary principle to the problem of peak oil, it's disheartening to see them completely ignore it for climate change.  Certainly, the militaries of the world (including the United States, Canada, Germany, China, & Russia) understand the issue and have been actively building contingency plans for wars resulting from global warming and peak oil.  If our militaries are taking the two problems seriously, perhaps we should as well.  After all, the solutions to our energy security problem, our peak oil problem and our climate change problem are the same: become more efficient in our use of energy, transition our transportation infrastructure to be less dependent on fossil fuels, and build massive new sources of renewable energy.

In chapter 16, the authors name specific countries as peak oil winners and losers, and their conclusions largely mirror the Peak Oil Proof Portfolio:
  • Winners: Oil Exporting Countries
    • Russia
      • I recommend RSX in the Peak Oil Proof Portfolio
    • Canada
      • I recommend EWC in the Peak Oil Proof Portfolio
    • Saudi Arabia
    • Mexico
      •  Hirsch fails to recognize Mexico's 2006 peak and massive 13% decline rate since
    • Norway
      • I recommend GXF in the Peak Oil Proof Portfolio
  • Losers: Oil Importing Countries
    • United States
      • Major economic downside potential as China spends US dollar reserves on oil
    • China
      • Massive recent oil investments (in US Dollars) may help mitigate problem
    • Japan
    • India
    • South Korea
    • Most of Europe - specifically Germany, France and Spain

    On a side note, I had the opportunity to sit in on a discussion panel two nights ago with Michael Nash, the director of the new movie "Climate Refugees".  He told a story of a night he had in China a few years ago where he had a few drinks with some Chinese officials after randomly sharing a cab with them.  He asked them what they really thought of the way the United States was handling its energy security and climate change policy.  The officials responded that they would love nothing more than for the US to have another 10 years of political impasse over energy policy - that while the US has been squabbling over building an energy bill, China has gone from being a developing country to the world's largest consumer of energy and the world's largest producer of wind turbines and solar panels.  The Chinese officials rightly deduced that if the United States waits any longer to get serious about its energy problem, that not only will the US be in severe economic trouble, but that it will be buying the solutions to its problems from the Chinese rather than building them domestically.  As Dr. Hirsch accurately surmises in the book, "the risk of widespread economic disaster is so great that immediate action is mandatory."  If the US politicians don't get serious about creating a comprehensive energy plan to transition the US economy towards energy alternatives, the United States could end up as the "biggest loser" of the above list.

    Additional investment advice is given in chapter 18, including:
    • Avoid holding long-term bonds
    • Consider investing in inflation-protected TIPS bonds
    • Invest in commodities as a hedge against energy-induced inflation
      • I recommend GLD and SLV in the Peak Oil Proof Portfolio
    • Avoid investment in consumer goods companies
    • Consider short sales of stocks
    • Invest in countries which are energy secure
    In chapter 11, the authors also recommend their preferred technologies which countries could adopt in an Apollo-style "crash program" to mitigate the effects of a worldwide oil production decline.  Since each technology carries with it significant technical and political risk, I believe it's best to invest broadly in oil (VDE) and alternatives (PBD) and avoid trying to pick technology winners and losers.

    As for the Peak Oil Proof Portfolio, it's up 4.16% since its inception, vs. 3.07% for S&P 500.