Has Peak Oil Arrived?

About 10 years ago, OPEC sources indicated Saudi Arabia needed to sell a barrel of oil at $18 to break even. Two years ago, data from ratings agency Fitch (which cares because it evaluates sovereign debt) estimated Saudi Arabia’s breakeven had risen to $26. In January, Fitch pegged breakeven for the country at $68 a barrel. If it costs more to produce oil, it clearly is harder to get. And Saudi Arabia is the primary low-cost oil producer on the planet.

OPEC members like Venezuela and Iran are estimated to need oil over $95 to break even on their costs. Other OPEC members are even dropping out: Indonesia abandoned the organization in 2008 because it can no longer export oil-it needs to import it to meet its own growing domestic demand. Our only respite from skyrocketing oil prices right now appears to be the slumping global economy, which has eased demand downward so we (and most of the government and most business leaders) don’t see the problem at the gas pump or in utility bills. But we will, soon.

So how does an investor act on the belief that peak oil is imminent? The temptation could be to buy oil stocks, but that overlooks one crucial characteristic of the stock market: It is forward looking and puts a premium on the price of stocks in expectation of future growth. And if the market believes there isn’t much of a future for oil companies in the business they are best at-even if prices are currently high-then why should their shares enjoy large price to earnings multiples? They won’t.

The way to play the coming energy crunch is to invest in the companies that have the products that will replace oil in the energy network. As Editor of Cabot Green Investor, I see dozens if not hundreds of promising technologies and advances that will not only alleviate the stresses of peak oil but also improve our environment and the quality of our air and seas. Today, I want to discuss the opportunity I see in one specific sector of Green: solar.

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