Should You Invest In Green Energy?

Oil dropped below $114 today after hovering around $117 per barrel. But I still think the long term trend is up.

According to Kevin Kerr, editor of a commodities investment newsletter,

“The U.S. is filled with gas hogs, but the developing world is catching up. Last year, Chinese drivers bought 5.5 million cars, minivans and SUVs and 3 million commercial vehicles, up from just 1.6 million vehicles sold in 1997. Sales are expected to grow 15-20% this year. Looking down the road, China’s auto sales are expected to grow by 1 million vehicles annually through 2015.

“Meanwhile, India is poised to rocket past China as the world’s fastest-growing car market. Sales of passenger cars in India increased 12.17%, to 1.5 million, in this past year.

“As a result, China’s oil imports are expected to nearly double by 2020, and India’s oil imports are projected to more than triple over the same time period. So while $120 oil and $4 gas may seem expensive, it’s likely that in three years, we will have $250 crude and around $8 gas. I wonder if the ‘experts’ will still be debating whether oil prices are high by then.”

Seems like someone else agrees with my prediction of $8 per gallon gasoline!

Solar energy stocks have also been on a tear lately. I had shorted First Solar (FSLR) earlier this year and I closed out my position with a small profit. However, since then its spiked from $195 to nearly $295! I would’ve made a lot more money if I had just gone long! It’s currently sporting a very high PE ratio of 143. Despite its ~50% jump, I don’t feel comfortable buying stocks which have absurd valuations. As Buffett’s mentor Benjamin Graham believed, you should always look for a margin of safety. There’s no safety in over-paying for a stock.

But regardless of the increase in green energy stock prices, I think alternative energy sources will take a lot of research and time before they can replace oil as a major source of the world’s energy. Until then, I’m happy to keep holding on to my dividend-producing canroys.

For any of you that think ethanol is a viable long-term alternative, I strongly recommend reading Time Magazine’s article: The Clean Energy Scam.

[Amazon Rainforest surrounded by Sugarcane fields]

This is a picture of Brazil’s Amazon rainforest which has now been replaced by sugarcane fields to produce ethanol. Yes, its a cheap alternative to Oil, but it is in no way a better or a green solution. In the US, using a food source to produce energy is even more moronic. But until we start having our own food riots, I doubt the government subsidies will go away.

Oil Break $115 Per Barrel

Oil just broke through $115 per barrel today. While this may come as a shock to many , I’ve been preparing for it for the past 2 years. All the signs of an oil shortage have been visible in the media, but most people have either been ignoring it, been in denial or been too focused on what Paris Hilton or Brittany Spears have been up to!

China and India together have  a third of the world’s 6.66 billion people. If 10% of these 2.2 Billion people start buying cars, that’s 220 million new cars on the planet ready to start guzzling more gasoline. I think thats the current number of cars in the US, so effectively the demand on oil is set to double over the next few years. And along with Tata Motors new $2,500 car, you can be sure that eventually atleast 20% or more of India’s and China’s population will be driving cars instead of cycles or mopeds that give 247 miles/gallon. That 247 number is  not an exaggeration. Owners of Suburbans should refrain from crying right now.

Based on the growing prosperity in just these two countries, the demand for the world’s resources is growing at a furious pace. Unfortunately, oil is a key component of prosperity and the global supply of it is somewhat stagnant. Despite a few  new oil fields being found here and there, new reserves are not keeping up with the depletion. According to one report, all the oil in Alaska would last the US for only 6 months.

If you think that gas prices are high at over $3.50 per gallon (I just paid $3.95 for mid-grade for my wife’s Acura TSX), wait until summer. There are reports that the refineries are absorbing the cost of high oil prices right now (and some of them have hedging contracts in place to mitigate this high price), but within a few months they’ll be passing this burden on to the consumers. Oil prices at the pump could very well hit $5 and if this trend continues, it could hit $8/gallon. 

In the UK, petrol (that’s what the rest of the world calls gas) costs about 1 pound per litre, which equates to $7.50-8.00 per gallon. Now you Suburban owners can cry now if you like. Or you can start investing in oil related investments like Canroys and oil drilling programs.

Gouging At The Pump?

Isn’t it funny how the ruckus about high gasoline prices has disappeared? I no longer hear anything about it on the news, the politicians haven’t taxed Exxon-Mobile’s record profits, and I don’t get idiotic emails asking me to boycott gas stations for one day in a year.

Yesterday I was filling gas and I decided to actually calculate how much tax I pay on each gallon. Regular was $2.99 of which about 7.75% is sales tax, but there were a few other taxes added. All told, $0.92 was taxes, which works out to about 30% taxes on each gallon.

Sounds like the government is already getting the lion’s share of profits and they didn’t want anyone else to get in on the action!

Since I hate paying any form of taxes, I think I’m finally motivated to reduce my driving to cut down on my gas usage!

Investing In Oil

I spent most of Saturday listening to an investment presentation by some oil guys from Texas and Oklahoma. I come in contact with them on a previous deal. At that time I had shown their investment presentation to my CPA (who usually turns down every investment I show him) and he was so impressed, he decided to fly out and meet them. He’s become their accountant and is investing heavily in their current deal.

Incidentally, in the previous deal where I came across the oil guys, they were also investors like me in a gas pipeline deal in Texas. It was a pretty sweet deal and we should’ve gotten cashed out with a 30% profit after a year. Unfortunately our partner, Grant Wilson III, decided to swindle us out of the profits. After spending over a year with this jackass, subsidizing his travel and living expenses he just decided that he deserved all the profits and he’s disappeared. Luckily we got all our principle back.

We talked to a lawyer about our legal options. Apparently it’ll cost $25,000 to get a judgment against this crook and if he’s spent the profits, we won’t be able to collect anything. Spending $25,000 to maybe get around $60,000 doesn’t sound very appealing. Anyway, if you come across anyone called Grant Wilson III in Houston, who’s lived in Southern California and is originally from Boston, you should definitely keep your hand on your wallet at all times! The only positive thing in the whole deal is that I learnt a very important lesson about trust in business, and luckily it didn’t cost me much money.

But back to the original discussion about the oil men. Unlike Grant, who’s background is swindling people, oops, I meant to he was a lobbyist in Washington, these people actually have worked for decades in the oil industry. One of the principals has several patents and they all are extremely knowledgeable in various aspects of off-shore and on-land drilling and exploration.

They’ve basically put together a partnership deal where they find under-valued oil & gas producing properties with at least 10-12 years of production left. Usually its a distressed situation like an estate sale, lawsuit or defect in the title where the production has been stopped.

In the current “fund” (its called a fund but its really a partnership), they have 19 producing wells and will drill 2 more infill wells.

In normal deals that are “securitized” (sold as a security and governed by the SEC), dealer-brokers are involved and usually 30% of your investment goes to overheads like commissions, fees and marketing. Since only 70% of your investment actually gets invested you typically get low returns – in the range of 7-10%.

However, if you get an opportunity to invest directly with in a fund like this, where they aren’t paying any broker commissions, you can get a much better return. Assuming oil stays at $65 and gas stays at $6, my CPA thinks we can get a 24% annual return. If oil goes up, our returns go up too! And since about 40% of the return is considered return of principle, its not taxable. (Although it does lower your basis in the investment).

Unlike my other investments which have taken quite a while to start producing, this is supposed to start generating income with 60 days. Of course, I’m not holding my breath. But the fact that my CPA is investing alongside me and I felt I could definitely trust them gives me a lot of confidence.

I let you know how it goes.

Oil Hits $78 Per Barrel!


I’m not actually jumping with joy, but I’m still quite pleased. Every dollar that oil goes up, my returns from the oil well I’ve invested in go up along with it.

My calculations on the returns was based on my crude oil selling $55 dollars per barrel. With oil trading at $78 I can expect to sell my lite sweet crude for roughly $68/barrel. Thats a 23% increase in profits with no change in expenses or production!

Sure my gas expenditure goes up, and eventually it will push up the price of almost everything else, but so long as I keep my profits higher than the amount of increase, I’m ahead.

Its always good to hedge one bets and diversify a little bit.