Running Out of Oil With No Alternative for a Century? Don't Bet on It

It's hard enough to use fundamental information like economic or corporate performance to forecast stock prices. Throwing the analysis into reverse and predicting developments in the real world from activity in the stock market may be just as fruitless, but researchers at the University of California at Davis give it the old college try. They conclude that the world will run out of oil a century before something cleaner and greener replaces it - or at least that investors expect things to work out that way.

As reported in New Scientist, Nataliya Malyshkina and Deb Niemeier studied share prices of oil and renewable-energy companies to estimate when investors expect new technologies to enter widespread use. Their conclusion: 131 years. That's precisely 100 years after oil will run out, the researchers say, citing current trends in consumption and estimates of proven reserves.

"Our results suggest that there is a danger that crude oil will be depleted before it can be replaced by viable substitutes," New Scientist quotes them saying.

Maybe. Maybe not. If Malyshkina and Niemeier based their findings on investors' forecasts, estimates and assumptions about the energy industry and the wider economy, it would be iffy enough, but they actually base their conclusions on what they infer investors to be thinking.

"Investors put far more money into the traditional oil companies than into alternative energy companies," Malyshkina said. "Therefore, investors believe that in the near future the traditional oil business is going to do better and to occupy a considerably larger share of the energy market than alternative-energy companies."

Well, of course that's true - for the near future. It's not clear how the researchers extrapolate their data into the middle of the 22nd century. Even less clear is why. Investors are famous for thinking anywhere from a few microseconds to a few months ahead. They're not inclined to ponder the prospect of the Jetsons being unable to gas up their SUV (space utility vehicle).

That's probably for the best because investors often do a poor job of even short-term prognostication. Anyone who has ever seen a stock go haywire because a quarterly earnings number came in a penny or two off from what Wall Street analysts had expected knows that. The reason is simple: Even brilliant, knowledgeable people can have trouble making sense of the information they've got, let alone information that comes along out of the blue, and not everyone working on Wall Street qualifies as brilliant and knowledgeable.

Long-term forecasting is even harder because there are so many more unknowns. One of those is often a subject of gross underestimation: human progress. We were supposed to have run out of food, energy and other natural resources long ago, yet we're still here, still eating, still heating our homes and going from place to place.

If the Davis researchers have compiled their data correctly, it suggests that investors are underestimating the speed at which alternative energy sources will supplant fossil fuels. New oil reserves will be discovered, but ways of making alternative energy commercially viable are likely to be discovered even faster. Betting on the future usually pays off more than betting against it. A strong specialty mutual fund, such as the Firsthand Alternative Energy Fund (ALTEX), seems like a good way to place that bet.