TORONTO (ResourceInvestor.com) -- In recent months, legendary oil baron, T. Boone Pickens has become increasingly vocal about his view that peak oil is upon us and high prices are here to stay.
According to Business Week, the 77 year-old magnate has made more money betting energy prices would rise in the last five years than he did in the preceding half century working in the oil patch. Today, Pickens is the Chairman of BP Capital Management, a hedge fund that manages roughly $2.5 billion (about a third of that number is Pickens' personal wealth), and has been delivering for its investors in a big way.
If an investor had put up $1 million at the fund's inception in 1999, the stake would be worth a whopping $28 million today. When hedge funds get it right, they really get it right!
Boone Pickens started his career in the early 1950's as a roughneck in oilfields in Oklahoma and Texas. He then became a geologist for Phillips Petroleum until 1954. In 1956, Pickens founded Mesa Petroleum and Petroleum Exploration with two other partners.
The next few decades witnessed massive growth for these companies, which ultimately emerged as Mesa following several mergers. The company became the nation's largest independent domestic producer of oil and gas, and one of its biggest gas producers.
Pickens achieved real notoriety in the 1980's after repeated attempts (some involving greenmail) to takeover major oil companies because of his conviction that acquisition opportunities in the marketplace were more profitable than exploration and production.
Addressing the 11th National Clean Cities conference last month Pickens said, "Global oil [production] is 84 million barrels (a day). I don't believe you can get it any more than 84 million barrels. I don't care what [Saudi Crown Prince] Abdullah, [Russian Premier Vladimir] Putin or anybody else says about oil reserves or production. I think they are on decline in the biggest oil fields in the world today and I know what's it like once you turn the corner and start declining, it's a tread mill that you just can't keep up with...So, when you start adding the reserves in these countries, you're not even replacing what you're taking out."
A little back of the envelope math was also quite enlightening, "84 million barrels a day times 365 days is 30 billion barrels of oil a year that we're depleting. All of the world's [oil] industry doesn't even come close to replacing 30 billion barrels of oil. We don't spend enough money to even give ourselves a chance to replace 30 billion barrels. It may be because the prospects are not there. I rather imagine that's what the answer is to that."
If we have achieved peak production but demand continues to grow with massive emerging economies in the far east and population growth, how will we achieve balance?
"Now you see the projections for the fourth quarter of '05, I mean like tomorrow; it is 86 to 87 million barrels of oil a day required. China [and] India [are growing fast. Our economy is going down a little bit, but it doesn't seem to be shutting off demand for gasoline, oil, natural gas, whatever. But around the world... just assume that the (U.S.) economy is slowing, but China is still ramped up; it is still 86, 87 million for the fourth quarter...Now we've got some pretty good inventory, those will be... I think...they'll be gone in the third quarter. I can't wait to see how this is all going to play out."
According to Pickens, the truth about the growing oil problem will not come from conventional sources. "The majors, they talk about plenty of oil and that they can produce more, but if you look at ExxonMobil, ChevronTexaco, BP (British Petroleum), all the production [is] going down every year. They don't replace and they don't add to production, but they say there's plenty of oil around.
"Now why would they say that? One of the chief economists with one of the major oil companies... I was at a conference where he was... we were talking and I asked, why do they say that? And he said, can you imagine what would happen if one of these major oil company's CEO's got up and made a speech and he said, 'We're running out of oil'? I said there'd be panic and he said, 'That's right. They're not going to make the statement. They're going to say there's plenty of oil around."
At the conference Pickens was calling for $60 oil by year-end. We have already seen it, and the forward curve is looking at even higher prices. As recently as Tuesday, Pickens told the Reuters Energy Summit, "I think people are scratching their heads as to whether the world will accept $60 like it did $50...You could go to $70, but at some point it's going to cost on the demand side. Sixty may slow everything down."
Like Simmons, Pickens doesn't believe that the oil sands are an effective substitute. Pickens said Tuesday that huge development costs and a tight labour supply will prevent the Alberta oil sands and other unconventional means of production from covering the shortfall in supply. That said, Pickens holds a big stake in both the Canadian Oil Sands Trust [TSX:COS.UN] and Suncor Energy [TSX:SU].
According to Boone, "You add about a million a day [of oil sands production] for about $40 billion per million, that's about $360 billion dollars to add 9 million barrels a day...Could it be done? The money could be available for that. I'm not so sure if the human resources could do it."
In terms of other unconventional production sources, Pickens believes that with high oil prices and government assistance, the possibility for a bona fide shale play to develop in the Rocky Mountains is distinctly possible.
Resource Investor has now published three stories about peak oil, from authorities the likes of Matt Simmons, Henry Groppe and now T. Boone Pickens. Clearly the threat is very real and is still under-appreciated on Wall Street. In fact, many analysts are still calling for $25 oil, something they have been doing for the past 3 years, even as prices more than doubled, and more recently as the futures curve moved from backwardation into contango.
If $60 oil is here to stay, all sorts of opportunities are created for investors, not only in the shares of oil industry companies with more cash flow than they can handle, but also in some of the alternative routes for energy. If one's portfolio has no exposure to black gold and is only negatively affected by its drag on the economy, the time to work it in as a hedge may be now.
If Pickens has managed to multiply his capital 28-fold in 6 years, it is probably incumbent upon readers to listen up.