Inflation Hits Home

Everyone is hearing about rising inflation. Besides the sky-high petrol prices, it’s been mostly subtle – a few cents here and there.

When it hits home is when my favourite “deal” becomes less of a bargain…My favorite coffee roaster in Mountain View on Dana Street just raised it’s prices this month. A latte goes for $2.45 (from $2.15). And my bare-bones hair dresser now charges $6 (from $5). Ouch. In Singapore, inflation is at 7% and Malaysia raises petrol prices by 40%. Even oil-exporting countries are not spared.

Is this a symptom of how rising energy prices will dramatically alter the way we live?

Oh, and crude oil hits another record today, closing at $138/barrel.

The World Awakens To Realities of Peak Oil

In the Wall Street Journal today, the International Energy Agency (IEA) is said to be revising its forecasts of oil supply. Here is an excerpt:

For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

For decades now, the IEA and it’s US government counterpart (EIA) has forecasted continuing increased oil product that kept pace with economic growth. 2008 will mark the year when these agencies (and major newspapers) finally admit that supplies will be harder to come by. There seems to be a growing awareness amongst investors about the inevitable shortages, driving the prices up.

Today, crude oil is at $135/barrel. It was just at the beginning of this year that oil prices breached the $100 barrier. Where will the limits be? Not until the world can demonstrate demand elasticity sufficient to offset the declines in supply. Right now, although gasoline consumption in the US is down, there is still little short term declines in oil consumption.

In recent months, I have reconstructed my portfolios to target energy investments. I have now broad holdings in oil exploration and production, drilling and services, rail – they have all done exceedingly well. This is probably a small consolation – I was able to identify the trends just months before the market did.
It might matter little if the entire economy is wrecked and there is widespread depression – but why not make hay while the sun shines.

I’ve been participating the the Motley Fool’s CAPS rating system as player ‘akok‘. Here, I share my picks for the impending realities of declining oil production – its not difficult to predict winners or losers. Just extrapolate fuel prices to twice its current level – I’m sure we’ll see $10/gallon gasoline or $300/barrel oil in the next five years (or sooner). Figure out which industries which consume lots of energy, but do not contribute to energy production while serving discretionary consumer spending (e.g., airlines, automobile manufacturers) – these are the losers.

One key risk is the form government intervention will take place. Already the US Congress has voted to stop filling the Strategic Petroleum Reserve – a vain gesture that only saw prices jump 2% the day it was announced. Truckers are demonstrating in front of the White House. President Bush has made two visits to Saudi Arabia to plead for higher production (and received a measly 300,000 b/day for his trouble). There’s always the risk of daft populist measures (like price controls, placing controls on oil futures markets, or *gasp* nationalizing the oil majors) – anything to appease the wrath of an angry population when the bounty of cheap oil is taken from them.

Another NY Times Article on Peak Oil

Another article by Jad Mouawad of the New York Times on how the rising oil prices have not spurred additional production. I think he’s a closet Peak Oil evangelist. As oil prices continue to break records, there does not seem to be an end in sight. Nevertheless, recent highs may be attributable to strikes in Nigeria and Scotland leading to panic buying of oil.

Here’s another take on my strategy for peak oil – it’s not elegant, but it makes sense to me: Last supplier standing dictates the price.  Find suppliers with calls to long term supplies of oil, and hang on to them.  Once production decline begins, oil prices may skyrocket.

The downside to this could be that government intervention may occur once supplies begin to decline.  Part of that action may be to penalize oil speculators/investors.  Can’t see how this can happen except under extreme circumstances, but who can foretell the future?

Peak Oil – further ruminations

Peak Oil has finally made it to US mainstream news. The New York Times has published an article titled “The Future of Oil” which although does not use the term “peak oil”, nevertheless calls out that oil supply is clearly overstretched. The columnist Krugman lent his weight with a broader swipe at industrial growth founded on cheap resources – “when an ever-growing world economy pushes up against the finite limits of a planet”.

Sadly, it has not yet made its impact on the political debate. Two of the three leading US presidential candidates are entertaining the thought suspending gasoline tax to provide relief for drivers – a short sighted effort which does nothing to address the root cause of the problem that oil production is now supply constrained. As all populist leaders, they must await a crisis before mustering the political will to act. The US would never have embarked on the Manhattan Project without Pearl Harbor.

On a personal level, I’ve ascended a little from the depths of despair. Declining oil production will be painful, but we are all in it together. If it’s painful for someone earning $100K/year in Silicon Valley, it must be much much worse for others in poorer places. It is no surprise that the food crisis of 2008 earned a special report in the Economist.

I spent the better part of the last four months rebalancing my investment portfolios. At least I have been forewarned (not by much). There are several resources out there that are useful for those who seek options and these are a few that I visit regularly:

• The Oil Drum. Unlike other peak oil websites, it does not focus purely on apocalyptic prophecies. It has a number of contributors who make some interesting observations about peak oil.
• Alternative Energy Stocks. Interesting ideas about possible suppliers of alternative energy.
• Energy Investment Strategies. A direct take on how to profit from the trends in energy production.

I have now placed a third of my portfolio in energy related stocks, with an emphasis to suppliers with sufficient reserves of oil, transportation alternatives and other energy suppliers.

Surprisingly, I expect a bubble around the oil prices driven by speculative interest. Broad admission of limited supplies will drive a gold rush to energy producers and costs of oil even higher. Already, there are calls on US government intervention, which will become a reality when gasoline prices reach $10/gallon.

My take is that $200/barrel is very likely by end of 2009, and even by end of 2008 if investors crowd into the market. What price would it force US consumers (and others elsewhere) to realize that behaviours need to be modified if we are to survive the next two decades?

Ultrasounds of Baby No. 2

R had her appointment with the ultrasound machine today at KP. The technician spent 30 minutes measuring all aspects of the baby from head to toe. We were very thankful to hear that everything was in working order – heart, fingers, cranium and all the major bones.

We asked not to be informed of the gender. We believe in accepting God’s gift as they are – having a boy or girl will not change the way we will love our child.

Project Better Place – Tackling Peak Oil

I haven’t written a lot about Peak Oil. For one thing, it’s full of apocalyptic visions of a future where unaffordable oil (you think $100/barrel is high?) brings about a catastrophic collapse of civilization. 2007 may be remembered as the year when climate change took center stage in the world media, but few realize that there are more imminent dangers – our assumptions of continuing access to cheap fossil fuels are about to be challenged.

Shai Aggasi’s Project Better Place is one of many startups that have tried to tackle this head-on. What I like about this:

• They understand the problem – although some of their message contains elements of climate change, the key is that cheap oil is running out.
• Agassi has persuaded a national leader (Israel) and an automobile manufacturer (Renault/Nissan) to back his plans – that’s an amazing feat accomplished in a short space of a year.
• The idea brings electric vehicles one step closer to the mainsteam.

Check them out:

• Project Better Place
• Video – message made simple for 5th graders

More Resolutions for 2008

Two weeks into the new year and I’ve decided to add a few more items to my annual objectives:

• Exercise more regularly. Winter is a dismal time to exercise, but I’ve not been regular at other times either. My 15 min bicycle ride to work hardly counts. I’m thinking of fitting a lunchtime ride into my routine – at least once a week. Would also like to learn to be more hands-on with the bike.
• Read more. I’m spending far too much time on the Internet. I plan to close each day with a chapter and to work on a book summary as a means of active reading.

And a list of other goals:

• More outdoor activities – hiking, camping.
• Work on my photography skills. It’s been a long while since I took creative photos – it’s been mostly of G.
• Organize my photos and videos.
• Pick up some container gardening.

Happy New Year, 2008!

2007 has come and gone. It was a quiet transition – we are still recovering from our Christmas vacation in Sonoma. If anyone wants a peek at the photos, they are available at Picasa

Here are some key highlights of 2007:

• Watching Gabriel grow. He started saying “Please” during our vacation in Singapore, and he now runs and walks everywhere.
• ST’s continued restructuring. Uncertainty rules the day and I’m not the only one with lots of questions.
• Exploring California. We had great trips to Sequoia, Yosemite, Los Angeles, Angel Island, Sonoma
• Visit to Singapore – not long since we left, but still missed everyone

What’s coming in 2008? Here are two major goals:

• Preparing for No. 2 – we’re cautiously optimistic but realizing this will be another big change.
• Getting a GC processed.
• Invest cautiously – expecting energy prices to continue rising and economic fundamentals to change.

Peak Oil

Over the past couple of months, I have been following the relentless rise in energy prices (petrol is now $3.50/gallon). Seeking the cause of this, I unearthed some troubling news which is an epiphany of sorts.

“Peak oil” – a term used by some geologist who foresee the imminent peaking of world oil production. A good reference is the Hirsch Report. The report forecasts that geological constraints will result in falling oil production as most of the major oil fields are past their peak production lives.

Given that the past three generations have grown up in a world of increasing mechanization driven by the availability of cheap fuel, the peak oil seems like the end of a golden era. Oil is probably the most convenient form of energy that makes possible modern transportation – especially automobiles and air travel. It also drives the wheels of industry allowing for mining of minerals and agriculture on a scale unprecedented before in human history. But the earth’s largesse is now reached its limits – what will this mean for the future?

While noone can predict how fast the supply of oil will be reduced, or what it’s exact effects will be, any rational analysis will conclude that the effects cannot be rosy. The worst case scenarios include a total breakdown of civilization and a return to pre-Industrial society. Optimists might hope for technological advances that will yield efficiencies and allow us to retain a semblance of modern life.

In the past year, since Al Gore’s “An Inconvenient Truth”, the attention of the media has been fixated on Global Warming. What is likely is the reality of reduced oil production will likely force a reduction in carbon emissions anyway, and that the impact of that happening will hit us far sooner than rising ocean levels or climate changes. I am fearful that in the next ten years, oil prices will increase ten-fold. Air travel will be hard hit and other fuel-intensive sectors of the economy slow down.

What can I do? Well, some events are likely to happen. Higher inflation, as the cost of goods are pushed up by rising fuel prices. Commodity and energy prices will rise driven by shorter supplies and inelastic demand. Renewables can only meet a fraction of our current needs, and even then the generation of wind turbines and solar panels require a technological infrastructure that itself will be heavily strained.

This is a life-changing realization that I must act now to protect my family and our future. Nothing like this has ever happened before and I can’t believe how few people are aware of this impact.

Expecting No. 2!

Last week, R and I had our doctor confirm that she was expecting No. 2! Due in Jul ‘08, we’re really excited about the news. Being parents to G has been a great experience filled with joy and laughter for us. Despites anxiety about costs of living and being able to cope with two young ones, I wouldn’t trade the our time for the rest of the world.

Christmas is almost upon us. This year, we are headed to Guerneville, in the Sonoma county north of San Francisco. R’s family will be spending Christmas with us and we’re glad to share the holidays with loved ones.