This month The Oil Drum (TOD) is closing its doors and is going to archive status after eight years of operation. From its inception in 2005, TOD became the primary “go to” site for people looking for information on energy issues, and for answers every time oil prices spiked. Because oil prices spiked a lot beginning in 2005 (with Hurricane Katrina), TOD’s readership grew rapidly.

The site was sufficiently influential that its closing has been written about in the Wall Street Journal, Forbes, Financial Times, and in industry publications such as Platts. As a Financial Times article noted, over the years the mainstream media frequently quoted TOD contributors, and the reason was the high quality of the energy discussions on the site.

I had a history with TOD that I detailed in my farewell post there, The Way I Saw Things. I became involved with TOD shortly after its inception and remained involved to a limited degree up until the end. I want to share my abridged story because my interactions with TOD readers had a huge influence on the way I view the energy industry and human behavior. This in turn has influenced my investment philosophy.

In 2005, the year TOD was formed, I was working as a chemical engineer at the ConocoPhillips refinery in Billings, Montana. I worked in the group that was responsible for optimizing refinery economics. We determined which crude grades should be purchased, and then tweaked the refinery based on that crude slate as well as whether margins were higher for diesel or for gasoline.

At that time the Montana government was in the midst of trying to implement an ethanol mandate for the state, and our refinery manager knew I had some background with ethanol from my graduate school days at Texas A&M University. So whereas other refineries in the state were sending their plant managers to speak, mine asked me to testify before the Montana state legislature.

Around the same time, I read James Howard Kunstler’s book The Long Emergency and Matt Simmons’ Twilight in the Desert — both books that I found flawed in some ways, but which nevertheless inspired me to get publicly involved in energy discussions because of the specific risks the authors identified. As I processed the information in these books, I began to frequent The Oil Drum and engage with other readers.

I had started a blog called R-Squared — a play on my initials but also a term frequently used by engineers — to document and archive my research as I prepared my testimony. I found so much misinformation related to ethanol that I began to write essays debunking these claims. (These would eventually land me at #5 on a Top 10 Ethanol Enemies list.) At some point Kyle Saunders, a political science professor at Colorado State University and one of TOD’s founders, asked me to become a contributor and share some of my articles at The Oil Drum, because he wanted some contributors with energy industry experience.

I was (and am) of the opinion that resource depletion is a serious threat. But my experience in the industry also led me to believe that in 2005 global oil production was not yet reaching its peak. This would prove unpopular with some TOD readers, and a vocal minority reacted with hostility to the evidence I presented.

This experience taught me that some people have such entrenched beliefs that there is little hope of reasoning with them. Increases in oil production were rationalized away or openly disbelieved, while supply disruptions were inevitably promoted as the beginning of the end. I began to see that many people will rationalize in order to support preconceived notions, which can also be a blind spot for investors.  

Usually my contributions were about how the energy industry really worked, but I also spent a lot of time debunking claims around various biofuel technologies. I highlighted the problems at Range Fuels early on, and think I was the first to publicly proclaim that their claims weren’t credible long before they went bankrupt.

My debates and discussions with readers helped form my opinions. Along the way I coined the term “XTL” to describe various (biomass, coal, or natural gas) “to-liquids” technologies in which the carbon source is converted to synthesis gas and subsequently to liquid fuel by the Fischer-Tropsch process. This term is frequently used in industry today.

I also coined the term “Peak Lite” to refer to a situation with consequences expected from peak oil, but that isn’t a true peak because production is still rising. After all, the most important consequence of “peak oil” is that there is not enough oil to meet demand, sending prices soaring. But that situation doesn’t require a production peak to occur; rapidly increasing demand in the developing world can produce the same conditions: Not enough oil to meet demand at a certain price point, forcing prices to rise (to the benefit of many oil producers).

Another way to think of peak lite would be to consider it as peak oil as a function of price. For instance it appears that the world has already passed peak $25/bbl oil. If oil prices were at that level, we would see oil production at a much lower level and declining rapidly. But supply and demand work together to set prices, and I think many 2005 peak oil proponents underestimated the effect higher prices would have on oil production. Higher oil prices spur additional oil production and investments in new technologies.

I was considered a bit of an optimist in that I was not in the early peak camp, but I still took the idea of resource scarcity — whether through geology or global competition for resources (i.e., Peak Lite) — very seriously. I was particularly concerned that those who were vocally proclaiming peak oil in 2005 were severely risking credibility if that was shown to be another incorrect prediction of the timing of peak oil. I was worried about the boy crying wolf too many times, and when oil production rose from 2005 levels many used this in an attempt to discredit the very idea of peak oil.

I ultimately found myself more at odds with a large segment of TOD readers, and as a result I spent more time writing for other venues. I was also sidelined for a while because I was asked to write a book along the way (Power Plays: Energy Options in the Age of Peak Oil), which, despite the name is not a book about peak oil.

In the end, I wasn’t contributing as much to TOD, but I did contribute half a dozen articles in 2012. I contributed the #1 most read and #7 most read articles of 2012, and I was the only contributor with two articles in the Top 10 for the year.

I still visited TOD almost every day, and I will be sad to see it close. Many of the issues that made it such a popular venue are still alive and well. Competition for resources within a growing population is still very much a threat, as evidenced by oil prices above $100/bbl and sensitive to so many Mideast headlines. But there are many paths that we may take in our hunt for resources, and there will be many opportunities — and threats — along the way.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Oasis Leads Resurgent Drillers

With crude at a two-year high near $110 a barrel, expectations of discounts based on slowing global growth appear to have all but evaporated. But the market’s infatuation with the small and mid-cap drillers with the best leverage to higher crude prices may have a lot further to go.

Over the last three months, the SPDR S&P Oil & Gas Exploration and Production ETF (NYSE: XOP), which tilts toward the smaller producers, is up nearly 4 percent while the S&P 500 has merely managed to break even.

But not even the XOP has been able to keep up with Aggressive Portfolio holding Oasis Petroleum (NYSE: OAS), which is now up 40 percent year-to-date. The stock has rallied 12 percent since last week’s announcement that Oasis would spend $1.5 billion to expand its Bakken acreage by 50 percent via four separate transactions. The deal will provide an immediate 27 percent boost to production.

Analysts were enthused, partly because Oasis appears to have scored a bargain relative to the valuation of the acreage it owned previously. Deutsche Bank upgraded the stock to a Buy and bumped the price target from $45 to $55, citing the reasonable price paid and the additional growth opportunity acquired as well as Oasis’s relatively unleveraged balance sheet. Sun Trust Robinson Humphrey, RBC Capital Markets and KLR Group issued upgrades as well, while Cannacord Genuity and Jefferies boosted their price targets, the latter to $68.

We’re boosting our buy below target as well, to $50, and calling OAS a Best Buy. On a trailing Enterprise Value/EBITDA basis Oasis is still a bit cheaper than Aggressive Portfolio Best Buy Continental Resources (NYSE: CLR), even though Oasis has been growing just as fast from a smaller base. Patient buyers may get a bargain on the next retreat to the 50-day moving average, currently just below $41.

— Igor Greenwald