Confused About Energy? Try This Approach


We may well be whistling past the energy graveyard.

You'll recall that five years ago, concern about our waning supplies of fossil fuels was all the rage. Today, with a surfeit of natural gas, ballyhooed production cuts for this cleanest-burning of the fossil fuels, bulging crude-oil storage, massive availability of coal, and slipping oil and gasoline prices have shifted our focus to other considerations -- the failed recall efforts in Wisconsin, the funneling of details about our nation's clandestine activities to The New York Times, and so on.

Our certainty about conventional energy supplies is nothing if not cyclical. Demand may remain relatively inelastic, but the availability of fossil fuels -- or at least our notions thereof -- tends to bob about like a cork in a storm.

Steady as she goes? Not quite
So just when we think we're set with oil and gas availability for the lives of our grandchildren's grandchildren and beyond, along come a couple of naysayers refuting the perceived endless caches of major fossil fuels. It's enough to elicit shrieks of "Enough, already!"

First comes writer and professor Michael Klare's new tome, The Race for What's Left. In it, the author states emphatically that mankind is in the process of seeking the last of the available resources of energy, minerals, and even arable land that our generous planet has to offer us. He further notes that acquiring the last of these resources typically won't take us to vacation spots; take for instance the ventures ExxonMobil (NYS: XOM) and Norway's Statoil (NYS: STO) have started with Russia's giant Rosneft to explore the frigid Russian Arctic.

No more Spindletops
Clearly the days of turning a drill bit to the right a few times near Beaumont, Texas, and watching black gold blast several stories into the air (as occurred in 1901) are over. Instead, rigs and their workers will probably be plying their trade in, for instance, Russia's Kara Sea, which is capped by ice for three-quarters of the year. Of course, there's the recent beneficence of the Eagle Ford in southern Texas and the Bakken formation in North Dakota, but operating in those venues will almost certainly involve fending off increasingly overzealous incursions from environmental groups.

As Klare notes, the search for oil in remote and technically challenging venues carries with it substantially higher costs, along with materially increased prospects for environmental catastrophes. Perhaps even more daunting is his difficult-to-contest observation that staking claims in, for instance, the Arctic, could easily lead to strident geopolitical stands and, ultimately, military conflicts. Recalcitrant Russia has laid claim to about half of the Arctic area, and even the traditional tranquility between the U.S. and Canada could conceivably be challenged by squabbling over drilling rights in northerly climes.

I find it hard to agree with Klare's prediction that our oil supplies will be "gone or substantially exhausted" by 2035. I do concur, however, with his notion that we "need a new paradigm." In his mind, that would involve renewables, while I'd prefer a boost in across-the-board use of natural gas, especially as a transportation fuel.

Thoughts from a major energy user
But even gas could be planning a surprise for us. For now, as you know, its prices have tumbled like an out-of-control ski bum. But while Chesapeake (NYS: CHK) and others have significantly trimmed production, it just may be that we're in a window that will close and boost prices dramatically in the next three years or so. Perhaps you came across The Wall Street Journal's weekend article, "The Natural Gas Skeptic," on the thoughts of Tom Fanning, CEO of giant utilitySouthern Company (NYS: SO) .

With the Environmental Protection Agency thwarting the use of coal as the primary fuel for power plants and nuclear continuing to struggle for acceptance, Fanning believes the role of gas is likely to expand: "If conventional coal is not going to get done, and there's only a few people who can do nuclear ... you're left with gas and, heaven forbid, renewables."

But as I have argued to Fools in the past, with our ability to complete gas liquefaction -- something Cheniere Energy (NYS: LNG) expects will occur in middecade -- U.S. gas prices could experience an arbitrage effect that will buoy prices to somewhere between current levels and the $16 price in Japan.

Fanning puts it this way: "You're going to see a harmonization of world-wide gas prices." But probably in part for that reason, along with the traditional volatility and unpredictability of all energy sources, he's hedging his bets. As he puts it: "Believe me, I think gas will be the dominant resource going forward. But I'm not willing to subject my customers to the risk of betting it all on gas."

Would that our administration were as balanced and willing to hedge its bets as Southern Company. Another article in the abovementioned Journal, "Solar Firm's Big Push for U.S. Loan," reported last week yet again on the Johnny-One-Note approach by the Obama administration to funnel your tax dollars into "heaven forbid" renewables. Clearly, that program has been encased in all manner of questionable practices and relationships. But then, you already knew that.

The Foolish bottom line
The overall message here is one of far more uncertainty than you likely knew about in the wider energy picture. But how can you play that foggy picture in a manner that's likely to benefit your portfolio? My first response is simply to look in detail at ExxonMobil, the big enchilada of Big Oil. With each share of the company, you access a smorgasbord that includes the largest U.S. gas producer, an oil operator active around the globe, and even work on renewables, including the conversion of algae to fuel.

At the very least, given our current -- albeit largely unrealized -- state of flux, I'd urge you to include the giant company on your individual version of The Motley Fool's My Watchlist.

At the time thisarticle was published Fool contributorDavid Lee Smithdoesn't own shares in any of the companies named above. The Motley Fool owns shares of Chesapeake Energy Corporation C.Motley Fool newsletter serviceshave recommended buying shares of Statoil A, Chesapeake Energy Corporation C, and Southern. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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Originally published