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Fidelity Monitor

Investing In The Coming Era of Energy Scarcity Jack Bowers. Fidelity Monitor. Is Gasoline Cheap or Expensive? Cost per Pint: Regular Unleaded Gasoline $0.44 Budweiser (on sale) $0.74 Beer is easier to make, and a pint of it has only a fraction of the energy content of gasoline.

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Fidelity Monitor

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  1. Investing In The Coming Era of Energy Scarcity Jack Bowers Fidelity Monitor

  2. Is Gasoline Cheap or Expensive? Cost per Pint: Regular Unleaded Gasoline $0.44 Budweiser (on sale) $0.74 Beer is easier to make, and a pint of it has only a fraction of the energy content of gasoline. So why does gasoline sell for less? Reality: We’re still in the age of cheap energy. Fidelity Monitor

  3. Why Oil Importing Nations are Filling Their Strategic Petroleum Reserves to the Brim • • The IOCs (ExxonMobil, BP, Shell, Chevron, Total) • have been losing access to reserves for decades. • This trend has accelerated with higher oil prices. • • The NOCs (Saudi Aramco, PDV, PetroChina, Pemex) are mostly state-owned monopolies. If global supplies • are disrupted, some may suspend exports to make sure • their own citizens are not subject to hardship. It could • be every country for itself. 1949 2005 Fidelity Monitor

  4. Greed is Not Good • When it Comes to Nationalism • • When countries nationalize their oil resources, • economic incentives go out the window: • Exploration & Development budgets are cut • Best employees leave for private jobs • Subsidized motor fuels encourage consumption • • Iran (4th largest producer) already imports half of its • gasoline; has begun to ration to control consumption. • • Mexico (5th largest producer) has constitutional limit • that forces government to explore and produce with • antiquated technology. Cantarell field is fading fast. • • Venezuela (8th largest producer) has seized assets • and is diverting oil revenue to social programs. Fidelity Monitor

  5. Geological Constraints • • U.S. oil output peaked in the early 70s, about 7 decades • after big oil strikes began. Production has gone in half. • • On a global basis, annual oil production has exceeded • new discoveries since the mid-1980s, and relies heavily • on several dozen very large and old oil fields. • • Nearly all of the world’s super-sized fields have been • discovered and significantly depleted. It takes dozens • of smaller fields to replace a giant. Ghawar Bolivar Coastal Burgan The world’s top six oil fields account for nearly 15% of global production, but their average age is 64 years Cantarel Kirkuk Daqing Fidelity Monitor

  6. Emerging Country Demand Is Growing • • Car sales in China will soon hit 5 million/year. • • Taking a cue from Ford’s Model T, India’s Tata Motors • plans to introduce a $2500 car in 2008. • • If per capita oil consumption in China and India climb to • Mexico’s level, it’s similar to a doubling in U.S. demand. • U.S. 25.1 barrels per year • Mexico 6.6 • China 1.8 • India 0.8 Fidelity Monitor

  7. Liquid Fuel Alternatives Slow To Materialize • • Biofuels: Limited to about 10% of demand • Ethanol production consuming a third of U.S. corn supply • Most vehicles can’t tolerate ethanol blends above 10% • Food prices going through the roof • • Oil Sands: Will take a decade to get to 15% of demand • Canadian operation resembles mining, not pumping • Requires lots of people, natural gas, and water • • Natural Gas Liquids: Best hope but capital intensive • It could take three decades to build up infrastructure • • Hydrogen-powered vehicles will never be viable • Hydrogen is too costly to produce, store and transport • • We’re just getting started on electric transportation • High battery costs will limit volumes during next five years Fidelity Monitor

  8. How Expensive Can Oil Get? • • 50% chance that oil will sustain $100/barrel in 2008 • Global oil production topping out despite high prices • Even with slow economy, diesel running short of demand • OPEC struggling with domestic consumption, aging fields • • It could get really ugly after 2012 • Deep water projects stall out • Dozens of large, aging fields slip into decline • Auto sales set records, but world forced to live on less • • Price of oil ultimately driven by demand, not supply • Some Europeans currently pay equivalent of $220/barrel • • Wind, Solar, and Nuclear will help little in the short run • Electrical Grid faces its own shortage of capacity • Replacing gas cars with electric vehicles takes 30+ years Fidelity Monitor

  9. What to Expect in the Next 10-15 Years • • Higher inflation from energy-intensive goods/services • Food • Electricity • Water • Fertilizer • Transportation • Shipping • Basic Materials (concrete, rubber, plastic, paper, metals) • • Real returns from cash turn negative • Money market funds already losing 2 or 3 • percentage points of purchasing power • • Lower multiples on stocks • Still best for keeping ahead of inflation • • Most energy and soft energy groups will outperform • But alternative energy will likely disappoint Fidelity Monitor

  10. Best Way To Structure Your Portfolio • • Dedicate 80% of your portfolio to conservative funds • • Keep remaining 20% in an energy sector • Select Natural Resources (75% energy, 25% materials) • Select Energy • Select Energy Service • Select Natural Gas • • Consider opportunities in soft-energy groups • Select Consumer Staples (food and beverages) • Select Industrial Equip (efficiency play) • Select Materials (chemicals and metals) • Select Transportation (freight and railroads) • Select Utilities Growth (electric utilities) Fidelity Monitor

  11. Why Asset Allocation Funds Make Sense • • Slow and steady approach not the most exciting way to invest, • but actually the most foolproof way to grow your portfolio. • • Better than buying CDs, because it keeps you ahead of • inflation after taxes are paid. • • Far less risky than betting on growth stocks, emerging markets, • or other vehicles that can inflict so much damage that you may • never recover. • • Derives benefit from asset class rebalancing. • • Ideal for retirees; conservative portfolio geared for 10% annual • returns will likely sustain a 4% liquidation rate indefinitely. Fidelity Monitor

  12. The Power of Conservative Strategies • And Long-Term Compounding • • Fidelity Puritan has realized a 60-year annual • return of 11.7% by investing in a 60/40 mix of • value stocks and bonds. • - $1000 invested now worth $750,000 • - 85x gain in purchasing power even • after discounting for 4% inflation • • Even at 10% per year, a portfolio quadruples in value • every 15 years! Fidelity Monitor

  13. Conservative Funds Enjoy the Sweet Spot on the Efficient Frontier 10-year risk versus reward, all Fidelity funds Risk (Relative to S&P 500) Fidelity Monitor Fidelity Monitor

  14. How To Take The Conservative Path • Follow Fidelity Monitor’s Growth and Income Model 10% annual return over 14-year period Only about two-thirds as volatile as the S&P 500 • Stock/Bond Funds Fidelity Balanced Fidelity Puritan Fidelity Global Balanced • Stock/Bond/Cash Funds Fidelity Asset Mgr 20%, 30%, 40%, 50%, 60%, 70%, 85% • Lifecycle Funds Fidelity Freedom 2010, ‘15, ‘20, ‘25, ‘30, ‘35, ‘40, ‘45, ‘50 Fidelity Monitor Fidelity Monitor

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