Presentation on theme: "Fidelity Monitor Investing In The Coming Era of Energy Scarcity Jack Bowers."— Presentation transcript:
Fidelity Monitor Investing In The Coming Era of Energy Scarcity Jack Bowers
Fidelity Monitor Is Gasoline Cheap or Expensive? Cost per Pint: Regular Unleaded Gasoline$0.44 Budweiser (on sale)$0.74 Beer is easier to make, and a pint of it has only a fraction of the energy content of gasoline. So why does gasoline sell for less? Reality: We’re still in the age of cheap energy.
Fidelity Monitor Why Oil Importing Nations are Filling Their Strategic Petroleum Reserves to the Brim The IOCs (ExxonMobil, BP, Shell, Chevron, Total) have been losing access to reserves for decades. This trend has accelerated with higher oil prices. The NOCs (Saudi Aramco, PDV, PetroChina, Pemex) are mostly state-owned monopolies. If global supplies are disrupted, some may suspend exports to make sure their own citizens are not subject to hardship. It could be every country for itself. 19492005
Fidelity Monitor Greed is Not Good When it Comes to Nationalism When countries nationalize their oil resources, economic incentives go out the window: Exploration & Development budgets are cut Best employees leave for private jobs Subsidized motor fuels encourage consumption Iran (4th largest producer) already imports half of its gasoline; has begun to ration to control consumption. Mexico (5th largest producer) has constitutional limit that forces government to explore and produce with antiquated technology. Cantarell field is fading fast. Venezuela (8th largest producer) has seized assets and is diverting oil revenue to social programs.
Fidelity Monitor Geological Constraints U.S. oil output peaked in the early 70s, about 7 decades after big oil strikes began. Production has gone in half. On a global basis, annual oil production has exceeded new discoveries since the mid-1980s, and relies heavily on several dozen very large and old oil fields. Nearly all of the world’s super-sized fields have been discovered and significantly depleted. It takes dozens of smaller fields to replace a giant. Ghawar Kirkuk Cantarel Daqing Burgan Bolivar Coastal The world’s top six oil fields account for nearly 15% of global production, but their average age is 64 years
Fidelity Monitor Emerging Country Demand Is Growing Car sales in China will soon hit 5 million/year. Taking a cue from Ford’s Model T, India’s Tata Motors plans to introduce a $2500 car in 2008. If per capita oil consumption in China and India climb to Mexico’s level, it’s similar to a doubling in U.S. demand. U.S. 25.1 barrels per year Mexico 6.6 China 1.8 India 0.8
Fidelity Monitor Liquid Fuel Alternatives Slow To Materialize Biofuels: Limited to about 10% of demand Ethanol production consuming a third of U.S. corn supply Most vehicles can’t tolerate ethanol blends above 10% Food prices going through the roof Oil Sands: Will take a decade to get to 15% of demand Canadian operation resembles mining, not pumping Requires lots of people, natural gas, and water Natural Gas Liquids: Best hope but capital intensive It could take three decades to build up infrastructure Hydrogen-powered vehicles will never be viable Hydrogen is too costly to produce, store and transport We’re just getting started on electric transportation High battery costs will limit volumes during next five years
Fidelity Monitor How Expensive Can Oil Get? 50% chance that oil will sustain $100/barrel in 2008 Global oil production topping out despite high prices Even with slow economy, diesel running short of demand OPEC struggling with domestic consumption, aging fields It could get really ugly after 2012 Deep water projects stall out Dozens of large, aging fields slip into decline Auto sales set records, but world forced to live on less Price of oil ultimately driven by demand, not supply Some Europeans currently pay equivalent of $220/barrel Wind, Solar, and Nuclear will help little in the short run Electrical Grid faces its own shortage of capacity Replacing gas cars with electric vehicles takes 30+ years
Fidelity Monitor What to Expect in the Next 10-15 Years Higher inflation from energy-intensive goods/services Food Electricity Water Fertilizer Transportation Shipping Basic Materials (concrete, rubber, plastic, paper, metals) Real returns from cash turn negative Money market funds already losing 2 or 3 percentage points of purchasing power Lower multiples on stocks Still best for keeping ahead of inflation Most energy and soft energy groups will outperform But alternative energy will likely disappoint
Fidelity Monitor Best Way To Structure Your Portfolio Dedicate 80% of your portfolio to conservative funds Keep remaining 20% in an energy sector Select Natural Resources (75% energy, 25% materials) Select Energy Select Energy Service Select Natural Gas Consider opportunities in soft-energy groups Select Consumer Staples (food and beverages) Select Industrial Equip (efficiency play) Select Materials (chemicals and metals) Select Transportation (freight and railroads) Select Utilities Growth (electric utilities)
Fidelity Monitor Why Asset Allocation Funds Make Sense Slow and steady approach not the most exciting way to invest, but actually the most foolproof way to grow your portfolio. Better than buying CDs, because it keeps you ahead of inflation after taxes are paid. Far less risky than betting on growth stocks, emerging markets, or other vehicles that can inflict so much damage that you may never recover. Derives benefit from asset class rebalancing. Ideal for retirees; conservative portfolio geared for 10% annual returns will likely sustain a 4% liquidation rate indefinitely.
Fidelity Monitor The Power of Conservative Strategies And Long-Term Compounding Fidelity Puritan has realized a 60-year annual return of 11.7% by investing in a 60/40 mix of value stocks and bonds. - $1000 invested now worth $750,000 - 85x gain in purchasing power even after discounting for 4% inflation Even at 10% per year, a portfolio quadruples in value every 15 years!
Fidelity Monitor Conservative Funds Enjoy the Sweet Spot on the Efficient Frontier 10-year risk versus reward, all Fidelity funds Risk (Relative to S&P 500)
Fidelity Monitor How To Take The Conservative Path Follow Fidelity Monitor’s Growth and Income Model 10% annual return over 14-year period Only about two-thirds as volatile as the S&P 500 Stock/Bond Funds Fidelity Balanced Fidelity Puritan Fidelity Global Balanced Stock/Bond/Cash Funds Fidelity Asset Mgr 20%, 30%, 40%, 50%, 60%, 70%, 85% Lifecycle Funds Fidelity Freedom 2010, ‘15, ‘20, ‘25, ‘30, ‘35, ‘40, ‘45, ‘50