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Investing For The End Of Oil

By Robert Rapier on August 22, 2017

Regular readers may know that I reject the hypothesis that oil demand will soon peak. I have explained my reasons for this in earlier columns. See, for example, Electric Vehicles Aren’t Slowing Oil Demand.

I view such predictions much like the “peak oil” predictions of a decade or so ago, in which many serious people wrongly argued that global oil production was entering terminal decline.

In both cases — peak oil and peak demand — the predictions were accepted by a large enough segment of investors that they influenced oil prices.

Fear of peak oil was likely one factor that kept oil prices hovering around $100/bbl for longer than they should have. After all, if oil is going to become scarce, investors are going to be bullish on oil.

Peak demand creates the opposite scenario. It would mean that there’s going to be too much oil. Who needs oil when Elon Musk is going to fly down in his Iron Man suit and deliver affordable electric vehicles (EVs) to everyone? And who could be bullish on oil in that case?

In a nutshell, I do believe that peak oil demand will eventually occur as EVs, self-driving cars, and ride-sharing are adopted on a massive scale. I just estimate that the timing is more than a decade away. 

But investors always need to consider the possibility that their hypothesis is wrong. So, what if I am wrong? 

Let me set aside the reasons I doubt that a fast transition away from oil can occur, and just assume that it can. What would that mean? It means you should devote investment dollars to companies that are making EVs, companies that are making components for EVs, and companies that are involved in enabling self-driving cars. 

The most obvious example of a company in this space is probably EV manufacturer Tesla Inc (NASDAQ: TSLA). But Tesla is going to have to grow exponentially for years to justify its lofty market capitalization. Tesla’s investors are paying a hefty premium by just about every fundamental measure. If EV adoption is slower than anticipated, or if Tesla fails to deliver on its exponential growth projections, then the company’s shares will likely come crashing back to earth. 

Instead, consider companies that make the lithium-ion batteries used to power many EVs. The electronics giant Panasonic Corporation (OTCMKTS: PCRFY), for example, has committed to an investment in Tesla’s giant battery factor of up to $1.6 billion. Or, you might consider a much smaller (and riskier) option like Arotech Corporation (NASDAQ: ARTX), which among other things sells lithium-ion batteries.

There are also raw material suppliers, like specialty chemical producer Albemarle Corporation (NYSE: ALB). Albermarle is the largest supplier of lithium in the world and has already seen its share price more than double in the past two years. But be warned that the company also trades at a lofty PE ratio of 42. Beyond that, look to lithium miners, or producers and suppliers of cobalt, another critical element for lithium-ion battery production.

The good news is that most of these companies should thrive even if peak oil demand is many years away. The caveat is that growth won’t be as explosive if peak oil demand occurs in the year 2035 instead of 2022, for instance. Oh, and it can be tough to find a bargain in this space given the pervasive belief that peak demand is at hand. 

Next week I will discuss some of the companies that are working on another technology expected to disrupt our current demand for oil — the self-driving automobile.


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