How to profit from the alternative energy boom

published 18 September 2009

Who's still worried about Peak Oil?

In the last couple of months, you could easily have got the impression that the world is positively swimming in the stuff.

Every time an oil company turns around these days it seems, it hits black gold. There have been huge finds in the Gulf of Mexico, off the coast of Ghana and Sierra Leone, and off the coast of Brazil.

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Time to dump your hybrids and get back in your Hummers (as our American cousins might say)? Well, perhaps not

Why we're still facing an energy crunch

The slew of recent oil discoveries is good news for a world fearful of running low on energy. But it doesn't mean we can just ditch the search for alternative energy, or expect petrol prices to fall off a cliff next week.

As Fiona Maharg-Bravo points out on Breakingviews.com, the proximity of the recent finds is probably just coincidence, but there has been a more general "pick-up in the pace of discoveries after the dry decades in the 1980s and 1990s". Technology has improved; regulatory environments in the countries involved are more oil-company friendly than they once were; and oil companies are also hopeful that the oil price will stay around about current levels, which helps to "justify expensive projects especially wells in deep water."

However, fields take a long time to develop. And in any case, as Ann-Louise Hittle of Wood Mackenzie warns the Financial Times, supply forecasts already factor in "yet to be discovered fields." If you were to find several more discoveries the size of the basin stretching from Ghana to Sierra Leone (revealed by US company Anadarko and UK partner Tullow Oil this week) then that might help, she says. But it still wouldn't be enough alone to prevent a future energy supply crunch.

And that's important. Some theories go so far as to suggest that it was the high and spiking oil price, rather than the credit crunch, that was the major factor in tipping the global economy into recession. The jury's out on that one as far as we're concerned the oil price didn't help the wider economy, but Lehman Brothers for example, would have toppled regardless. But that's not to say that a soaring oil price couldn't derail any future recovery.

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In the short term, we suspect that the oil price is more likely to go lower before it hits anywhere near $100 a barrel again any sign of a double-dip recession will see to that. However, life goes on, and in the longer run, until we find an alternative, high and spiking oil prices are likely to return, particularly as 'emerging' market countries become ever more wealthy.

So what's the best way for investors to play the energy story right now? Well, we'd still be happy to hang on to oil majors such as BP. It's not as cheap as it was, but it's still yielding more than 6%, which is hard to turn down.

Our much more speculative tip from July, Falkland Oil and Gas has shot up recently due to good news from peer, Desire Petroleum, which has managed to secure a drilling rig to hunt for oil in the region. But Falkland Oil and Gas is one of those all or nothing stocks that will either end up rocketing, or dump its investors in the poorhouse. So as long as you're only betting with money you can afford to lose, it's still worth a punt.

How you can profit from the alternative energy boom

But if it's smaller, more speculative companies you're interested in, you might be better looking at those producing the raw materials that are needed in the alternative energy sector. After all, regardless of what happens to the oil price in the short term, there is too much interest and money riding on the 'green' energy sector for it to slide back into obscurity. And as Hittle says, despite all the recent finds, "if action is not taken on the demand side" then we'll find it hard to avoid another spike in the oil price at a future date.

Some fortunes are already being made by investors in this area. Rising demand for lithium, for example, an important component of electric car batteries, has already seen the price of those companies producing the metal shoot up. But lithium is not the only metal set to boom. Lesser-known metals such as cobalt and neodymium are also vital to make key components for electric cars and wind turbines for example. And what's more, their prices have yet to take off. You can find out more about these and other strategically important metals set to boom in this week's issue of MoneyWeek, out today (If you're not already a subscriber, subscribe to MoneyWeek magazine).

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.