 | The Investment U e-Letter: Issue # 606
November 13, 2006 Daniel Yergin: Mark Skousen Interviews the World's Foremost Oil and Energy Expert on the Biggest Threat to American Energy
by Dr. Mark Skousen, Chairman, Investment U
Daniel Yergin is the world’s top expert on oil and the energy crisis. As chairman of Cambridge Energy Research Associates in Cambridge, Mass., Yergin travels around the globe and consults with government officials and major oil companies. His firm has offices in the U.S., Moscow, Beijing, Paris, and Rio de Janeiro, among others.
Yergin is also the Pulitzer Prize-winning author of The Prize: The Epic Quest for Oil, Money and Power, and co-author of The Commanding Heights: The Battle for the World Economy, which was produced as a three-part series for PBS. Last week, I was in Guatemala for a private meeting of over 500 international scholars, and I had the chance to sit down with Yergin for a one-on-one interview. According to him, the oil market’s healthy. But there’s one factor that could quickly reverse the falling price of crude… “Resource Nationalism” Could Hurt Supplies Since I did not tape record my interview with Yergin, let me summarize our discussion… I first asked him about oil prices, which have fluctuated between $55 and $80 a barrel this year. What are the chances of us seeing $100 oil or more in 2006 or 2007, as some doomsayers have predicted? Yergin wanted to be optimistic and said that under stable political conditions, he expected oil prices to fall, not rise. The oil markets are normally competitive, he said, and they respond well to investment needs. The new technologies are there to create an abundance of oil and alternative energy.
But Yergin stressed a big “if” in his prediction: Beware of resource nationalism that could cut off supplies due to political factors. He told me that “resource nationalism” is growing in Russia, Iran and Venezuela, and could squeeze supplies.
Is the War in Iraq a major destabilizing factor, or can the markets safely ignore what’s happening there? His answer surprised me: “Our war in Iraq is not a major disaster. It’s an enormous disaster!” He felt that our engagement in Iraq had given Iran a victory against the West. It has emboldened its nationalistic powers in the Middle East.
What about Russia? Is it another threat to the West, or should we regard them as an ally? Yergin noted that Russia has recently regained its position as the #1 oil producer, and is flexing its muscle around the world.
Have World Oil Reserves Peaked?
After Yergin announced that oil production is increasing in Russia and other parts of the world in response to higher oil prices, I asked him about “peak oil.” Are we running out of oil? Yergin laughed. “This is the fifth time we’ve run out of oil! Yet we now have 60% more oil production since the last crisis,” he said. As far as world oil reserves, he thought it was more like a plateau than a peak. When M. King Hubbert made his prediction of Peak Oil in 1956, he failed to take into account the role of new technology, new markets and revisions in oil reserves. “I’ve never seen so much new technology and new venture capital being introduced in the past 40 years,” he said. He pointed to energy-related investments in oil sands, gas to liquid, ethanol, wind and solar, nuclear power, etc. As a result, we have had a substantial increase in capacity, 20% higher in the past decade. Moreover, the U.S. is twice as energy efficient as it was in the 1970s.
I commented that demand for nuclear plants is so strong that uranium prices have skyrocketed from $20 to $60 a pound in the past two years, and have yet to decline. Yergin was even optimistic about the U.S. and its interest in building more nuclear plants by 2010.
Are we headed for better times or worse times when it comes to energy? Yergin responded: “Markets work. The real risk, the real challenge is political. And that’s hard to predict.”
It’s important to protect yourself from uncertain political risks. Maintain holdings in commodities and gold, silver, oil and gas stocks as an insurance policy against bad times. Good investing,
Mark 
Today’s Investment U Crib Sheet - The price of oil peaked on July 17, hitting $80.70. Since then, it’s fallen 27%. Daniel Yergin, who believes prices could move lower still, isn’t the only optimist… Richard Arvedlund, 30-year Wall Street veteran and founder of Cypress Capital Management said in Barron’s (11/13/06): “Even with China and India using a lot of oil, we think the price of oil could drop to a range of $45 to $50 by this time next year.”
- Uranium, as Mark mentioned, keeps making fresh 52-week highs, as governments across the globe turn more and more to nuclear power. That’s great news for uranium suppliers… One company in particular is exporting the bulk of China’s uranium to fuel the country’s nine existing nuclear plants… and the 30 more that are under construction. Read the full report.
Shock Stocks - Isis Pharmaceuticals Inc. (Nasdaq: ISIS) delivered some “healthy” news today… The biotechnology company’s experimental drug, ISIS 301012, significantly lowers LDL cholesterol, according to results from its mid-stage trials. Shares climbed 25% on the news and a sharp increase in volume.
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