Day 179: The End of Oil?


The Mother's Little Helper portfolio was UP today +$3,913.55 (+0.52%).

Overall GAIN YTD: +$167,933.82 (+28.76%)

According to CNN Money our benchmark index, the S&P 500 is up +8.91% Year To Date (http://money.cnn.com/data/markets/sandp/).

The oil economy is coming to an end. The biggest oil companies in the world, with the exception of Exxon Mobile and Chevron, are preparing for a global shift in energy consumption, the largest since the industrial revolution.

Innovations that are driving down fuel consumption and looming legislation that will tax carbon output are not only diminishing demand for oil but also increasing demand and likely subsidies for electric vehicles. Once upon a time countries grew as their energy consumption grew, but those were the days of cheap oil. As air and water quality become more important than cheap oil, electric vehicles increase not only their range but also the power and load capacity, demand for oil will continue to drop. But what about plastics and all the other needs for crude oil? Plants, lots and lots of beautiful plants. BioPlastics are already in use in billions of plastic bottles and other products. Polyethylene terephthalate (PET) is a partially plant based plastic that is derived from sugar cane. Add in wind, solar, hydro electric, wave motion, hydrogen and new energy sources yet to be developed it's not to hard to see the end of oil.

Not too long ago we were discussing IF electric vehicles were viable and had a place in the world. Now we're discussing WHEN they will displace the internal combustion engine and the oil economy as we know it. Cost and range are the only factors that will matter. As cost comes down and range goes up more and more consumers will adopt EV's.

Anyone who has ever looked at a stock chart or created a business plan knows all too well that these hockey stick shaped curves don't materialize too often. However, the chart below is where we're at and headed. Even with a big miss, say a decade or so, the chart below still makes one thing perfectly clear, this change is coming fast, really really fast.

So how does all this impact our portfolio. It's time to take a hard look at oil and decide where this commodity belongs in a portfolio. Does it belong in there at all? I think the answer is yes, but timing will be everything, and that's a skill that few people should exercise in the stock market. Exxon Mobile and Chevron are the only two oil names in our portfolio and both are near the bottom in terms of year to date performance, and they are the only two major oil companies that see no end to oil demand. The folks at those companies aren't stupid, so I'll go with 'They're lying'. The first question is when will Peak-Oil demand occur? The International Energy Agency says Peak Oil demand will occur in 2020 in their most aggressive scenario. StatOil and Royal Dutch Shell are saying 2030. BP and Total SA are estimating 2040. Suffice to say that nobody really knows when peak oil will occur, but with a narrow range of 2020's to 2040's it's time to start making plans. Looking at the chart above, that is pretty much in line with EV sales. The next question is when to buy or sell oil investments. Nobody can pin point a date, but what I'm looking for is the IPO of Saudi Aramco. That IPO will signal the beginning of the end. That's the day when the Saudi's turn oil producing assets into trillions of dollars that can be invested else where and that's when oil will hit it's last peak before falling to levels so low that no one will want to pump the stuff out of the ground.

Mohammed bin Salman, the new crown prince of Saudi Arabia has set the stage to transform the world biggest oil producer into a financial state that no longer depends on oil. The oil economy is dead.

In 2015 the prince’s advisers showed that Saudi Arabia was burning through its foreign reserves faster than expected, and insolvency was only two years away. Oil revenue had fallen dramatically resulting in a $200 billion budget shortfall. On that day it became clear, the Saudis’ only viable export can no longer pay the bills. The new prince unveiled his “Vision for the Kingdom of Saudi Arabia, The 2030 Plan” a historic plan with broad economic and social changes. With this plan Saudi Arabia will have the world’s largest sovereign wealth fund, which will eventually hold more than $2 trillion in assets. The prince further plans to take Saudi ARAMCO public in what may be the largest public stock offering in history, but will only sell off “less than 5 percent” of Saudi Aramco. Aramco will be turned into the world’s biggest industrial conglomerate. The sovereign fund has plans to diversify into non-oil assets. These sweeping changes will make investments the source of Saudi government revenue, not oil. And all this too is happening fast.

“From the first 12 hours, decisions were issued,” says Prince Mohammed.

“In the first 10 days, the entire government was restructured.”

- Mohammed bin Salman

Stay Invested,

Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell share withing the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
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© 2016 by Clay Baker all rights reserved