What Will Happen When Oil is No longer a Viable Energy Source?

“I’ve been drunk, but never two nights in a row.”

– T. Boone Pickens

T. Boone Pickens’ new memoir, The First Billion is the Hardest, is better than I thought it would be. Based on reviews I’ve read, I thought it would spend a lot of time on Pickens’ plan to reduce U.S. oil dependency. I always find such discussions a bore. But that part of the book was only 10 of 250 pages.

Mostly, it’s memoir material, with some peeks into the future as T. Boone sees it evolving. The most interesting parts, to me, were some nuggets from his career, his views on natural gas and his large investment in water.

Pickens is 80 years old now, and he’s accomplished an awful lot in his career. He started Mesa Petroleum with $2,500. Five years later, he took it public, and Mesa earned $435,000 in profits on revenues of $1.5 million. Not a bad start at all. After only eight years as a public company, Mesa generated $92 million in sales and $15 million in profits. It helped make him a rich man.

Along the way in the book, Pickens offers various “Booneisms” such as: “Chief executives who themselves own few shares of their companies have no more feeling for the average stockholder than they do for baboons in Africa.” Or this: “As my father used to say, ‘There are three reasons we can’t do it. First, we don’t have the money, and the other two reasons don’t make a damn.'”

He complains about the bureaucratic nature of Big Oil and its track record for dumb deals. “I’ve said that giving the good old boys of Big Oil excess cash flow,” Pickens writes, “is like handing a rabbit a head of lettuce for safekeeping.” Pickens points to Mobil buying Montgomery Ward as part of its plans to diversify. What a bust! In 1984, Fortune focused on the seven worst mergers of the decade. Four of them involved oil companies. I think big oil companies have gotten smarter since – or maybe just less dumb.

He also talks about his career in deal making, finding deep values in the oil patch and making millions taking them over. He eventually gets out of the oil business and starts BP Capital in June 1997. What follows is an incredible ride. By May 1998, the fund lost $24 million and had only $13 million left. By January 1999, it was down to $2.7 million – down 90%.

It was practically out of business. No one would’ve blamed Pickens for changing things or giving up. Some investors left him, but most stuck with him. It paid off big for those who stuck to their guns.

In 2000, he rung up one of the best years anybody has ever had anywhere – up $252 million, a 9,095% gain! I love Pickens’ grit and determination in all this, sticking it out and coming back.

Plus, Pickens offers peeks into the future. A couple of topics piqued my interest: natural gas and water.

“Natural gas is the fuel of the future,” Pickens writes. I agree with him. Natural gas is our second largest resource, behind only coal, and it burns a lot cleaner than coal does. Pickens’ big vision for natural gas is as a transportation fuel. The logic is pretty simple. “[Natural gas] is the highest-priced fuel in the United States when used for power generation, but it’s cheaper than gasoline or diesel when used for transportation.”

Pickens is talking his book, as they say. He owns Clean Energy, which runs fueling stations for natural gas and builds more every year. Even so, he makes a good case. I was not aware, for example, that there are 8 million natural gas vehicles on the road worldwide already. He also points out that 25% of all transit buses burn natural gas – a use that’s growing 25% annually.

I had a hard time imaging who would want to own a natural gas vehicle when fueling stations are so sparse. It’s kind of like being one of the first people to buy a telephone. But I recently read a review of the only natural gas-powered car in America at the moment: the Honda Civic GX.

It was a positive review. Though the range is limited to only 200-220 miles, the car comes with a GPS locator to find the nearest fueling station for you. Refilling also costs about half of what it would cost you for gasoline, though the car itself sells for a third more than a gasoline-powered Civic. Tax credits help offset that somewhat, and the EPA estimates the payback is about 2 1/2 years. Meaning after that, you’re even with the conventional gasoline vehicle. There are also home fueling systems that go for about $5,000 and let you tap into your gas lines at home (assuming you have gas). You get tax credits for that too.

Anyway, this is the way these things get started. Pricey in the beginning, but as technology improves and more people adopt, the price will go down. I think there is a good future in natural gas-powered vehicles.

In addition to his stance on natural gas, Pickens writes that he is a large owner of permitted groundwater in the U.S. His investment here follows the same key principle he’s used throughout his career: There is profit in scarcity.

Pickens owns land in Roberts County, Texas, a place so rich in water, he jokes it’s the only place he couldn’t drill a dry hole. It’s not difficult to pump 1,000 gallons per minute. This land lies above the Ogallala Aquifer, one of the largest in the U.S., covering over 174,000 square miles across eight states.

Pickens plans to sell water to parched regions in Texas, like Dallas or San Antonio, where water supply is becoming an issue. “We can deliver water faster and more cheaply than any other option on the table,” he writes. “It’s not a matter of if, but when, and I’m betting it’s soon.”

I’m thinking along the same lines as Pickens on water, too. This all ties back to the agriculture theme, as well. In fact, The Economist recently ran a story called “Running Dry: The World Has a Water Shortage, Not a Food Shortage.” It’s a simple idea. As world populations and incomes rise, expect to see meat consumption also rise. Meat takes more grain and water to produce – exponentially more.

In a post-finance world, where the mortgage gravy train is dead in its tracks, these are the kinds of ideas – essentials like grain and water – that will attract new money.


Chris Mayer
for Markets and Money

Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in Markets and Money. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.

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2 Comments on "What Will Happen When Oil is No longer a Viable Energy Source?"

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Coffee Addict
Chris (if you read this) T.Boone’s book may make an interesting Christmas pressie. Clearly, LNG and LPG will be key (if interim) fuels when oil based petroleum prices itself out of the transport fuel market. An advantage of LNG is that you can do your fill-up at home! A quick google will identify home compressors already on the market. Other key delevopments are, I understand, liquid gas injection (to provide more power) AND Gas/Electric hybrids. Hyundai plans to introduce an LPG/Electric (Elantra based) hybrid to the South Korean and Australian markets in 2010. To follow in T.Boone Pickens footsteps one… Read more »

Pickens continues to be a forward thinker, as he plans past oil.

He’s announced a revolutionary alien technology as the next step in the campaign for US energy independence.


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