Want To Avoid Oil's Gloom? Turn To The Sun, Says Outsider Nick Hodge

While some celebrated shale oil as a "boom," Nick Hodge derided it as a "Ponzi scheme." Today the shale sector quivers before the specter of falling oil prices, and the oil majors that have invested heavily in shale may be humbled. In this interview with The Energy Report, the founder of the Outsider Club and investment director of Early Advantage argues that nuclear energy is about to reassert itself, and that solar power is on the verge of becoming a major energy source. He also highlights one uranium and four solar companies with especially bright futures.

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The Energy Report: You call yourself an "outsider," and have founded an investment club of that name. In what sense are you an outsider?

Nick Hodge: Being an outsider stems from my upbringing. Both my parents were middle to lower middle class, and I never had anything given to me. I've always had to work for what I have, starting with a lawn-service business when I was 12 and working my way through college as a butcher. I look at the "mainstream" with a skeptical eye. I'm a contrarian. I'm not on the inside of big business, big banking and politics, and don't want to be.

The Outsider Club has been around for about a year now. I founded it after writing for several newsletters over the past decade about energy and speculative investments.

TER: What does being an outsider mean with regard to your views on energy?

NH: I'll give two examples. First is my belief in the peak oil theory. Second is my early adoption of a belief in renewable technologies, such as solar and smart-grid technologies.

TER: It would be safe to say you're not an admirer of our financial elite?

NH: That would be fair. I think it's a corrupt cabal: back-scratching, closed-door and manipulative. Until recently, one could call this a "conspiracy theory," but now I can point to the LIBOR and FOREX riggings, and to the laundering of money for terrorists and drug cartels by HSBC, as proof.

"Fission Uranium Corp.'s PLS project is the best unmined deposit of uranium in the world."

I'm not opposed to greed at the individual level per se, but when institutions and corporations are colluding to take the lion's share of the world's wealth—when only the 1% have gained since 2008, with the middle-class failing—I think that's wrong.

TER: Future energy needs are obviously dependent on the growth of the world economy. Do you think that we are going to muddle through our present difficulties, or is a reckoning in the cards?

NH: I think muddle is a good word. It's hard to forecast a reckoning, but there certainly are difficulties ahead. The World Bank has cut its forecast for global GDP growth to 3% for 2015 and 3.3% for 2016. Most of that growth will come from the U.S., while Europe's growth is forecast to be a mere 1%. Energy supply and demand is trying to find a balance. It's not going to come quickly.

TER: What are the causes of the oil price collapse?

NH: I would attribute 50 percent to a decline in growth and 50 percent to the quick ramp-up of U.S. shale production, which has reached 8.5–9 million barrels per day (8.5–9 MMbbl/d). That's getting close to our early 1970s peak of 10 MMbbl/d. A huge increase in production coupled with struggling economies is a perfect recipe for lower oil prices.

TER: What is the role of Saudi Arabia here?

NH: The Saudis are playing a long game. They know that continued production above their OPEC target of 30 MMbbl/d will shake out the shale industry, which they regard as a flea on the back. Their plan is working. We've already seen a couple of shale producers go into receivership.

TER: You've described the shale boom as a Ponzi scheme. Could you elaborate?

NH: From 2008–2012, four of the biggest shale producers, Chesapeake Energy Corp. (CHK:NYSE), Southwestern Energy Co. (SWN:NYSE), Devon Energy Corp. (DVN:NYSE) and EOG Resources Inc. (EOG:NYSE), actually lost money. This was at the peak of the boom. From 2008–2012, these companies expended $133 billion ($133B) in capital to buy equipment and drill holes, but they've regained only $80B in cash flow from operating activity. That's a $53M loss. These companies have taken on exorbitant amounts of debt to extract an unproven resource.

Then we have the production decline rates. An existing conventional oil field has a decline rate of 4–5 percent per year. By contrast, the typical Bakken well declines at 40 percent per year—10 times faster. By the end of 2013, the typical Bakken well was losing 63 thousand barrels per day (63 Mbbl/d). That's an escalator to nowhere, the classic definition of a Ponzi scheme.

"The Saudis know that continued production above their OPEC target of 30 MMbbl/d will shake out the U.S. shale industry."
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Disclosure: 

1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and ...

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