The Commodity Investor Q&A
With Matt Badiali
February 20 , 2008
Q: Does your research indicate that world oil production is peaking? – O.H.
A: No! The world has plenty of oil... if you're willing to pay $90 a barrel. Billions and billions of recoverable barrels of oil sit in the world's two major tar-sand belts in Canada and Venezuela. At the current oil price, that oil is more than worth harvesting.
But... did you mean to ask, "Is the supply of light, sweet crude dwindling?" Light, sweet crude is the easiest oil to refine, and yes, it's getting harder to find.
However, you need to be wary when you hear the words "peak oil" bandied about. A few special interests want to convince us the supply of oil is running low. For one, the OPEC countries have a stake in peak oil. How else can they justify the current price?
Second, some anti-oil folks think we can maintain our lifestyle burning horse manure and eating soy shakes. They actually want us to run out of oil so we stop drilling for more. The proliferation of this idea shows how little people understand the role of petroleum products in our society.
In this age of spin, you can benefit from a touch of science. You must use critical thinking to cut through the B.S. The first step is to know the source of the argument. Figure out how the person making the argument benefits, and you'll understand the direction of the spin.
Q: Are there any ETFs that invest in Jim Rogers' favorites for 2008: coffee, sugar, and cotton? – D.H.
A: Yes, investors can choose from several commodity ETFs that have positions in the "softs." Here is a quick list:
Name |
Symbol |
Makeup |
Greenhaven
Commodity |
GCC |
18% energy, 18% grains, 12% livestock, 24% metals, 29% softs |
PowerShares
Ag Fund |
DBA |
30% soy, 28% wheat, 23% corn, 16% sugar |
Van Eck
Agribusiness |
MOO |
8% Monsanto, 8% Mosaic, 8% Komatsu, 8% Potash Corp. |
PowerShares
Commodity |
DBC |
33% crude oil, 20% heating oil, 14% wheat, 11% aluminum, 10% corn, 10% gold |
iPath Ag
Total Return |
JJA
|
31% soy, 20% wheat, 16% corn, 11% soy oil, 9% cotton, 8% coffee, 7% sugar |
|
As you can see, several of these ETFs give you direct exposure to the price of the underlying commodities... Alternatively, you can invest indirectly in these commodities by buying the companies in the industry.
I'm not telling you to buy any of these products; this is just a start for your research. I recommend investigating each one to see if it meets your investment needs.
Q: How about the viability and long-term outlook of geo-thermal? – J.M.
A: I'm a huge fan of geothermal power. Geothermal power is simply harvesting the natural heat in the Earth and converting it to electricity. It's a simple concept that has suffered from technological lag.
During the 1970s oil crisis, geologists and engineers attempted to put that theory into practice. However, the turbines back then were too cumbersome to capture the energy efficiently. Then oil prices fell, and geothermal projects weren't economic.
But Iceland, which has little oil but a lot of geothermal energy, kept refining the technology. And the real breakthrough came from the aerospace industry. The light, strong alloys used in advanced airframes make excellent turbines.
The Department of Energy ignored geothermal for 30 years. It took a combination of high oil prices and some smart people to revive the industry. The Geysers field in California illustrates the economic potential of geothermal power. The Geysers currently produces around 1,000 megawatts.
To put that in perspective, the Tennessee Valley Authority's Kingston Fossil Fuel plant produces 1,140 megawatts, enough energy to supply 700,000 homes. The Kingston plant consumes 14,000 tons of coal per day to generate that much energy. At roughly $45 per ton, the plant's fuel costs more than $230 million a year. The Geysers has zero fuel cost.
Currently, five geothermal companies are listed on the Toronto Venture Exchange. They are all penny stocks and highly volatile, so invest with care. My three favorites are holdings in the S&A Prospector. Click here to read more about them.
Good investing,
Matt Badiali
