Post on 15-Jan-2016
Fidelity Monitor
Investing In The Coming Era of Energy Scarcity
Jack Bowers
Fidelity Monitor
Is Gasoline Cheap or Expensive?
Cost per Pint:
Regular Unleaded Gasoline $0.44Budweiser (on sale) $0.74
Beer is easier to make, and a pint of it has onlya fraction of the energy content of gasoline.
So why does gasoline sell for less?
Reality: We’re still in the age of cheap energy.
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Why Oil Importing Nations are Filling Their Strategic Petroleum Reserves to the Brim
• The IOCs (ExxonMobil, BP, Shell, Chevron, Total)have been losing access to reserves for decades. This trend has accelerated with higher oil prices.
• The NOCs (Saudi Aramco, PDV, PetroChina, Pemex)
are mostly state-owned monopolies. If global supplies
are disrupted, some may suspend exports to make sure
their own citizens are not subject to hardship. It couldbe every country for itself.
1949 2005
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Greed is Not Good When it Comes to Nationalism
• When countries nationalize their oil resources, economic incentives go out the window:
Exploration & Development budgets are cutBest employees leave for private jobsSubsidized motor fuels encourage consumption
• Iran (4th largest producer) already imports half of itsgasoline; has begun to ration to control
consumption. • Mexico (5th largest producer) has constitutional limit
that forces government to explore and produce with antiquated technology. Cantarell field is fading fast.
• Venezuela (8th largest producer) has seized assets
and is diverting oil revenue to social programs.
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Geological Constraints • U.S. oil output peaked in the early 70s, about 7 decades
after big oil strikes began. Production has gone in half.
• On a global basis, annual oil production has exceeded
new discoveries since the mid-1980s, and relies heavily
on several dozen very large and old oil fields. • Nearly all of the world’s super-sized fields have been
discovered and significantly depleted. It takes dozensof smaller fields to replace a giant.
Ghawar
KirkukCantarel
Daqing
BurganBolivar Coastal
The world’s top six oil fields account for nearly 15% of
global production, but their average age is 64 years
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Emerging Country Demand Is Growing • Car sales in China will soon hit 5 million/year.
• Taking a cue from Ford’s Model T, India’s Tata Motors
plans to introduce a $2500 car in 2008.
• If per capita oil consumption in China and India climb to
Mexico’s level, it’s similar to a doubling in U.S. demand.
U.S. 25.1 barrels per yearMexico 6.6 China 1.8India 0.8
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Liquid Fuel Alternatives Slow To Materialize
• Biofuels: Limited to about 10% of demandEthanol production consuming a third of U.S. corn
supplyMost vehicles can’t tolerate ethanol blends above 10% Food prices going through the roof
• Oil Sands: Will take a decade to get to 15% of demand Canadian operation resembles mining, not pumping
Requires lots of people, natural gas, and water
• Natural Gas Liquids: Best hope but capital intensiveIt could take three decades to build up infrastructure
• Hydrogen-powered vehicles will never be viableHydrogen is too costly to produce, store and transport
• We’re just getting started on electric transportationHigh battery costs will limit volumes during next five
years
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How Expensive Can Oil Get?
• 50% chance that oil will sustain $100/barrel in 2008Global oil production topping out despite high pricesEven with slow economy, diesel running short of
demandOPEC struggling with domestic consumption, aging
fields
• It could get really ugly after 2012 Deep water projects stall out
Dozens of large, aging fields slip into declineAuto sales set records, but world forced to live on less
• Price of oil ultimately driven by demand, not supplySome Europeans currently pay equivalent of
$220/barrel • Wind, Solar, and Nuclear will help little in the short run
Electrical Grid faces its own shortage of capacityReplacing gas cars with electric vehicles takes 30+
years
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What to Expect in the Next 10-15 Years • Higher inflation from energy-intensive goods/services
FoodElectricityWaterFertilizerTransportationShippingBasic Materials (concrete, rubber, plastic, paper,
metals)
• Real returns from cash turn negative Money market funds already losing 2 or 3
percentage points of purchasing power
• Lower multiples on stocksStill best for keeping ahead of inflation
• Most energy and soft energy groups will outperform
But alternative energy will likely disappoint
Fidelity Monitor
Best Way To Structure Your Portfolio
• Dedicate 80% of your portfolio to conservative funds
• Keep remaining 20% in an energy sectorSelect Natural Resources (75% energy, 25%
materials) Select EnergySelect Energy ServiceSelect Natural Gas
• Consider opportunities in soft-energy groups Select Consumer Staples (food and beverages)
Select Industrial Equip (efficiency play) Select Materials (chemicals and metals)Select Transportation (freight and railroads) Select Utilities Growth (electric utilities)
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Why Asset Allocation Funds Make Sense
• Slow and steady approach not the most exciting way to invest, but actually the most foolproof way to grow your portfolio.
• Better than buying CDs, because it keeps you ahead of
inflation after taxes are paid.
• Far less risky than betting on growth stocks, emerging markets,
or other vehicles that can inflict so much damage that you maynever recover.
• Derives benefit from asset class rebalancing. • Ideal for retirees; conservative portfolio geared for 10% annual
returns will likely sustain a 4% liquidation rate indefinitely.
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The Power of Conservative Strategies And Long-Term Compounding
• Fidelity Puritan has realized a 60-year annualreturn of 11.7% by investing in a 60/40 mix ofvalue stocks and bonds.
- $1000 invested now worth $750,000
- 85x gain in purchasing power even after discounting for 4% inflation
• Even at 10% per year, a portfolio quadruples in valueevery 15 years!
Fidelity MonitorFidelity Monitor
Conservative Funds Enjoy the Sweet Spot on the Efficient Frontier
10-year risk versus reward, all Fidelity funds
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
0.00 0.50 1.00 1.50 2.00 2.50
Risk (Relative to S&P 500)
Fidelity MonitorFidelity Monitor
How To Take The Conservative Path
• Follow Fidelity Monitor’s Growth and Income Model10% annual return over 14-year periodOnly about two-thirds as volatile as the S&P 500
• Stock/Bond FundsFidelity BalancedFidelity PuritanFidelity Global Balanced
• Stock/Bond/Cash FundsFidelity Asset Mgr 20%, 30%, 40%, 50%, 60%, 70%, 85%
• Lifecycle FundsFidelity Freedom 2010, ‘15, ‘20, ‘25, ‘30, ‘35, ‘40, ‘45, ‘50