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E-M:/ The smart money looking at implications of end of cheap energy



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http://www.fortune.com/fortune/investing/articles/0,15114,1139979-1,00.html


INVESTOR'S GUIDE 2006


ENERGY PROPHET

The Rainwater Prophecy

Richard Rainwater made billions by knowing how to profit from a crisis. Now he foresees the biggest one yet.

FORTUNE
Tuesday, December 13, 2005
By Oliver Ryan

Richard Rainwater doesn't want to sound like a kook. But he's about as worried as a happily married guy with more than $2 billion and a home in Pebble Beach can get. Americans are "in the kind of trouble people shouldn't find themselves in," he says. He's just wary about being the one to sound the alarm.

. . . when he gets worked up, he says some pretty far-out things that could easily be taken out of context. Such as: An economic tsunami is about to hit the global economy as the world runs out of oil. Or a coalition of communist and Islamic states may decide to stop selling their precious crude to Americans any day now.

...

The next blowup, however, looms so large that it scares and confuses him. For the past few months he's been holed up in hard-core research mode­reading books, academic studies, and, yes, blogs. Every morning he rises before dawn at one of his houses in Texas or South Carolina or California (he actually owns a piece of Pebble Beach Resorts) and spends four or five hours reading sites like LifeAftertheOilCrash.net or DieOff.org, obsessively following links and sifting through data. How worried is he? He has some $500 million of his $2.5 billion fortune in cash, more than ever before. "I'm long oil and I'm liquid," he says. "I've put myself in a position that if the end of the world came tomorrow I'd kind of be prepared." He's also ready to move fast if he spots an opening.

. . .

"This is a nonrecurring event," he says. "The 100-year flood in Houston real estate was one, the ability to buy oil and gas really cheap was another, and now there's the opportunity to do something based on a shortage of natural resources. Can you make money? Well, yeah. One way is to just stay long domestic oil. But there may be something more important than making money. This is the first scenario I've seen where I question the survivability of mankind. I don't want the world to wake up one day and say, 'How come some doofus billionaire in Texas made all this money by being aware of this, and why didn't someone tell us?'"

. . .

"Peak oil" theorists posit that global production is at or near its historic ceiling and will begin a long, inexorable decline. They worry that America is not ready for the downturn, for skyrocketing prices and even shortages. Savinar's site's opening line is, "Civilization as we know it is coming to an end." Rainwater has been checking it every morning since September, when his personal anxiety alert level moved to orange. "I can almost pinpoint the date," says Moore. "It was right after he read that book."

In August a friend gave Rainwater a copy of The Long Emergency, a dystopic view of the future written by ex-Rolling Stone writer James Kunstler, otherwise known for his passionate dislike of suburbia. Taking peak oil as a given, Kunstler argues that Americans have been "sleepwalking" through the end of a "100-year fossil fuel fiesta." The problem, he points out, is not that the world will run out of oil tomorrow, but rather that the lack of growth in oil production will wreak havoc on a global economic system predicated on perpetual expansion. Kunstler's "long emergency" is a decidedly unpleasant interval during which the world ­and Americans in particular ­must adapt to a post-oil regime of scarce energy and economic stagnation, a time of likely wars and the disappearance of all-American things like Wal-Mart and cul-de-sac homes 45 minutes by minivan from the office.

Rainwater doesn't completely buy into Kunstler's doom and gloom. "It's the Z scenario," he says. But at the same time, he worries that Kunstler isn't wrong enough, and he's been buying extra copies of the book and passing them around to the many titans of capitalism who are his protégés. It's not the first doomsday book in Rainwater's life: His big bet on oil in the late '90s was kicked off by a work called Beyond the Limits, the sequel to a '70s sensation called The Limits of Growth. Written by three professors armed with an MIT-bred computer called World3, the Limits books projected that, left unchecked, human population would, within 100 years, overshoot the capacity of the planet to serve up sufficient vitamins and minerals­let alone absorb all the waste and pollution­to keep everyone healthy. Rainwater took the book to heart. "Right after I read it, I said, 'They've figured it out, I'm going to follow this thing.' "

. . .

In the 1940s and 1950s, a Shell geologist named M. King Hubbert observed that the production from any given oil field follows a bell curve, with annual volumes increasing until half the oil in the field is depleted, and declining thereafter. Basically, the bottom oil is harder to extract. King reasoned that production from all U.S. fields would follow a similar curve and predicted in 1956 that total U.S. oil production would peak in the early 1970s. His analysis caused a furor and was widely disparaged, but proved correct. "Hubbert's Peak" entered the lexicon of oil analysis­one of the great geological I-told-you-so's. Forty-nine years later, a growing number of noted geologists and industry analysts suggest that the global oil supply may now be topping out, a claim that has been met by skepticism from yet other geologists and economists who say higher prices will spawn both more discovery and improved recovery from existing fields.

Rainwater sides with the imminent peak crowd, and can rattle off facts to back up his argument. "In 1988 there were 15 million barrels a day of shut-in production" ­meaning surplus that could be tapped­ "and the world was using about 55 million barrels of oil. Today the world is using over 80 million, and there's no shut-in production left. We've used it up, through the combination of depletion and growth." In other words, the spigot can't be opened any wider.

What concerns him most is the conflict that he thinks an oil shortage will precipitate. ...

That morning Rainwater had been surfing the web, researching greenhouses in his quest to further ensure a steady flow of food through the winter. At his prodding, Moore has installed an emergency generator and 500-gallon storage tanks for diesel fuel and water. When Rainwater says that he's thinking about opening a for-profit survivability center, it's not entirely clear that he's joking.

. . .




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