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Two new reports make it official: The alternative energy boom is officially on.
Interest in alternative energy sources has increased along with the price of oil over the last couple of years, but a couple of reports on the future of our oil supply have dumped a load of new fuel onto the already hot alternative energy sector.
Last week the International Energy Agency warned in its medium-term world oil outlook that an energy crunch looms as non-OPEC sources of oil decline faster than expected. UK production is expected to drop from 1.3 million barrels a day to 1 million bpd, while demand from India and China continues to increase. The result is that supply will be "extremely" tight around 2012, according to the report.
The IEA has been criticized in the past for overestimating future possible production increases. The fact the agency is revising its view, to bring it more in line with that of the peak oil crowd, was greeted by a big "we told you so" in that community. But the big reaction to the IEA's outlook was in financial markets where the stocks of solar energy companies were up 10% on average the day after the report came out. It seems investors are equating news about tight fossil fuel markets with buying opportunities in the alternative energy sector, and that's making it feel a lot like the early days of the dot-com boom.
Back then, of course, the idea was that the economic efficiency provided by networked computers justified the huge price increases in tech stocks. Today, theories about peak oil and global warming are providing a similar "back story" to the alt energy boom. And it is a boom - make no mistake. Last month, Plutonic Power Corp. (TSX: PCC) a Vancouver company gearing up to build several "run-of-river" hydro projects in British Columbia, moved from the Venture Exchange to the big board, while a company called Biox, a Canadian-based producer of biofuels, has just announced an IPO to raise fund for four new plants. Canada's most mainstream fund company, Investors Group, is pushing its Summa fund, which invests on the peak oil/climate change story, while esteemed Canadian hedge fund manager Eric Sprott, CEO of Sprott Asset management Inc., has developed what he calls a peak oil portfolio.
But it's not all big stock plays, gleaming windmills and cost-effective solar cells in this boom. Like any market phenomenon there are risks here, and the emerging boom around alt energy is no different. I had a conversation a couple of months ago with Fred Sturm, a fund manager with Mackenzie Financial Corp., who revealed he is dedicating more of his portfolio to so-called alternative technologies. "We believe a concern about energy security is conspiring with concerns about climate change to support sustained growth of renewable energy," said Sturm. But he tempered his optimism with a warning that the tightened supply is raising new political risks.
We've had conversations in the past about the commodity boom. But our most recent conversation was the first time he commented on the possibility of conflict around resource scarcity. Sturm points out that use of oil in the U.S. is around 25 barrels per person, while per-capita use in China is just two barrels. Considering the U.S., with a population of just 300 million (less than 3% of the world total) is already using one-quarter of the world's oil pumped daily, it's hard to see how the emergence of one billion Chinese drivers can ever be accommodated with what's left — especially if daily world production is set to plateau in the next decade. Says Sturm: "The reality in all of this is this: If the world wants to live like the West you can't see how this is going to happen. You do have to worry about fist fights over resources."
These newly emerging political risks lend the alt boom a qualitatively different feel than the dot-com boom. Whereas the tech bubble was all about the emergence of a shiny new digital utopia, the alt energy boom has a moral element born of an urgency and seriousness that wasn't attendant in the dot-com years. It's not about attracting eyeballs with flashy web tricks this time; it's about saving the world through demand reduction, economic productivity and new fuel sources. Consider one of the latest discussions among peak oil types: about an attack last week on a pipeline in Mexico by a rebel group from the south of that country. The peak oil take was that the violence is being fed by a slow disintegration of the country. The national government derives a good chunk of its revenue from the country's national oil company, PEMEX, which has seen its main oil field, Canterel, go into decline. That's causing the flow of government revenue to the areas furthest from the capital to dry up. The situation has been aggravated by increases in corn prices, which are being driven by the use of corn-based ethanol in gas tanks, and that's driving the breakdown in the social order in Mexico.
Slightly far-fetched? Perhaps. But you can be sure the peak oil community will be watching closely a report scheduled to be issued this Wednesday by the U.S. Petroleum Council, a group that represents the interests of the oil industry to the U.S. government. Two years ago, at the request of U.S. Secretary of Energy Samuel Bodman, the group undertook a study of energy supplies to 2030. It's largely expected the report will try to counter peak oil predictions (Lee Raymond, the former chairman of Exxon Mobil, is the chair of the council). But a leaked copy says the council thinks there are "increasing risks" to continued expansion of fossil fuel production, which critics cite as proof that even Exxon Mobil has shifted its position from one of "no worries." The fact that Rex Tillerson, the current CEO of Exxon Mobil, recently told the Financial Times that the company's internal model for future production assumes an approaching "plateau" in non-OPEC sources, is further proof of the shift in opinion among the most ardently anti-peak oil types.
Tillerson's comments, of course, put the onus on OPEC to increase production, meet new demand and make up for shortfalls outside the cartel. Can they do it? The official line from the cartel is that the world doesn't need any new supply; demand is being sufficiently met by current production. Peak oilers claim the explanation is a desperate cover story put out to hide an inability to increase production. They expect that story will have to change eventually and all eyes are on the next big OPEC meeting in September.
Should we panic? No need to, says Mathew Simmons, the Houston-based energy investment banker who has become a sort of spokesperson for the peak oil perspective. His appearances on Bloomberg and MSNBC are increasing in frequency, and in one of his latest interviews he suggested we would be able to deal successfully with the issues around peak oil.
"Over the next year or two peak oil will replace global warming as the thing we're all talking about," said Simmons. "[But] we can easily make it through. We just need to get moving."
And that's where the alternative energy boom comes in. As all of these various forces play out, as gas prices rise and electrical blackouts threaten, the story around the alt energy boom seems destined to catch on, and on, and on.
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