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 $0.44Budweiser (on sale) $0.74

Beer is easier to make, and a pint of it has onlya fraction of the energy content of gasoline.

So why does gasoline sell for less?

Reality: We’re still in the age of cheap energy.

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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 couldbe every country for itself.

1949 2005

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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 cutBest employees leave for private jobsSubsidized motor fuels encourage consumption

• Iran (4th largest producer) already imports half of itsgasoline; 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.

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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 dozensof smaller fields to replace a giant.

Ghawar

KirkukCantarel

Daqing

BurganBolivar Coastal

The world’s top six oil fields account for nearly 15% of

global production, but their average age is 64 years

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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 yearMexico 6.6 China 1.8India 0.8

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Liquid Fuel Alternatives Slow To Materialize

• Biofuels: Limited to about 10% of demandEthanol production consuming a third of U.S. corn

supplyMost 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 intensiveIt could take three decades to build up infrastructure

• Hydrogen-powered vehicles will never be viableHydrogen is too costly to produce, store and transport

• We’re just getting started on electric transportationHigh battery costs will limit volumes during next five

years

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How Expensive Can Oil Get?

• 50% chance that oil will sustain $100/barrel in 2008Global oil production topping out despite high pricesEven with slow economy, diesel running short of

demandOPEC 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 declineAuto sales set records, but world forced to live on less

• Price of oil ultimately driven by demand, not supplySome 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 capacityReplacing gas cars with electric vehicles takes 30+

years

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What to Expect in the Next 10-15 Years • Higher inflation from energy-intensive goods/services

FoodElectricityWaterFertilizerTransportationShippingBasic 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 stocksStill best for keeping ahead of inflation

• Most energy and soft energy groups will outperform

But alternative energy will likely disappoint

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Best Way To Structure Your Portfolio

• Dedicate 80% of your portfolio to conservative funds

• Keep remaining 20% in an energy sectorSelect Natural Resources (75% energy, 25%

materials) Select EnergySelect Energy ServiceSelect 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)

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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 maynever 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.

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The Power of Conservative Strategies And Long-Term Compounding

• Fidelity Puritan has realized a 60-year annualreturn of 11.7% by investing in a 60/40 mix ofvalue 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 valueevery 15 years!

Fidelity MonitorFidelity Monitor

Conservative Funds Enjoy the Sweet Spot on the Efficient Frontier

10-year risk versus reward, all Fidelity funds

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.00 0.50 1.00 1.50 2.00 2.50

Risk (Relative to S&P 500)

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How To Take The Conservative Path

• Follow Fidelity Monitor’s Growth and Income Model10% annual return over 14-year periodOnly about two-thirds as volatile as the S&P 500

• Stock/Bond FundsFidelity BalancedFidelity PuritanFidelity Global Balanced

• Stock/Bond/Cash FundsFidelity Asset Mgr 20%, 30%, 40%, 50%, 60%, 70%, 85%

• Lifecycle FundsFidelity Freedom 2010, ‘15, ‘20, ‘25, ‘30, ‘35, ‘40, ‘45, ‘50