Tuesday, August 09, 2005

Ben Bernanke Ain't Gonna Like This.

Dallas Morning News: Is there a bubble in energy investing?


The idea of regarding energy as a separate portfolio asset began just before I wrote The Coming Generational Storm (MIT Press, 2004) with economist Laurence J. Kotlikoff.

In the book we lay out the liabilities our government is creating for the future with Social Security and Medicare. We suggest those liabilities will be paid for with large amounts of inflation and newly printed money.

We came to the conclusion that energy should be treated as its own asset class because the British thermal unit is the ultimate "currency" of industrial society.

The producers of paper currency are working hard to create a global oversupply, while the producers of BTUs are having difficulty meeting demand and replacing reserves.

Unlike the dot-com bubble, oil companies have real assets, real earnings and solid dividends – and below-market multiples of earnings, book value and cash flow. They look like a cautious, value-oriented investment, which is why I bought shares of many energy companies, to create a kind of reserves-based index.

An energy development of Internet proportions could change the prospects of oil prices.

That development could be a breakthrough in efficient solar power, successful fusion power, sudden acceptance of nuclear power, or some development that would lead to a dramatic reduction in hydrocarbon demand.

Is it likely? I hope so.

But I'm not holding my breath.