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One might think the United States would be charging hard on energy
security as well as border and other kinds of security in its Global War on
Terror campaign. Not so. For example, America
imports some 12 million barrels of oil per day, yet maintains a Strategic
Petroleum Reserve (SPR) whose maximum is 727 million barrels (and its
inventory is currently lower, 701 million barrels, because the government cut
off shipments to it last year in an effort to modulate gasoline prices.) The
math gets even more discouraging when you work in the fact that the SPR's
daily drawdown capacity is only 4.4 million barrels – so America
is completely unprepared for any worst-case scenarios, or even the bad-case
ones.
It's not that the United
State s doesn't have the capacity for
domestic energy production. Administration after administration, Republican
as well as Democratic, is simply choosing to legislate it away. Designate the
land above one of the biggest, cleanest coal deposits in the world a national
monument, rope off huge swaths of offshore waters to drilling, threaten
stringent new mining laws, derail hydroelectric projects, and America is
handing foreign suppliers its own barrel for the country to crawl under.
Speaking of administrations... how about the new one? Will President Obama's
promised green policies make a difference? As we laid
out in the November 2008 edition of Casey Energy
Opportunities, the short answer is no. In fact, we believe that if
Obama pushes through the goals as he's outlined, the United
State s is actually headed for a more, not
less, dangerous path. Green energy isn't enough to offset the pressure he
plans for the “dirty” energies. A bull market will come for the
traditional energies in the long run; the problem lies in the shorter term,
in the instability of America's
energy portfolio before the Obama administration realizes that nice girls
don't wear that much paint.
With this in mind, let's look at each power generation technology from an
investor's view.
Coal. However you slice it, the coal industry is in for
a hard time under Obama. He proposes a tough 100% cap-and-trade system that
will make coal plants uneconomical to run at almost any electricity or coal
price around now. This goes for existing as well as new plants, and
installing the latest-generation scrubbers will just be another route into
the red for many companies. Did we mention that coal generates almost half of
America's
electricity?
As a result, we expect coal prices and coal utilities to trade well below
their worth for the next few years. We're closing our position on a coal ETF
in our portfolio, which we recommended in February 2007 and took a free ride
on in June. But as time goes on, America will realize how overambitious
Obama's targets are and come back to the tried and true. With the help of the
coal industry's powerful coal lobby in Washington – not to mention all
the voters the coal industry employs – coal will catch fire once more,
and we'll reevaluate our position then.
Natural Gas. While a thermal-generation technology like
coal, natural gas is less likely to feel pain under Obama because of its
cleaner burning. And as natural gas is already one of the cheapest power
technologies available, the industry would weather a cap-and-trade system
better than coal. Natural gas is set to push to the forefront of the electric
world.
So far, so good. The next factor changes things a bit for the savvy investor,
however. Without Russia's heavy hand on the tap to deal with, prices should
shadow market patterns in United States. Due to the country's large natural
gas reserves and resources in both gas shale and coal bed methane, we predict
natural gas prices will drop in the near term. Thus we're avoiding all but
the best U.S. natural gas plays in the Casey Energy
Opportunities portfolio.
Nuclear. Obama's stance on nuclear energy is decidedly
neutral. He appears to recognize its benefits for domestic energy security as
well as its carbon-reducing qualities. He's also aware it's still a touchy
subject for many Americans, even with the Yucca Mountain waste disposal site
moving forward. We add this up to mean that nuclear reactors currently in
planning stages are likely to go ahead unimpeded by federal or state
meddling. This is good news for our uranium picks.
There's another bullish influence coming for uranium: the sunset of America's
current Highly Enriched Uranium (HEU) agreement with Russia in 2013. At best,
Moscow will demand to renegotiate the bargain-basement price it's now
obligated to offer under terms of the agreement. More realistically, it will
threaten to shop its converted weapons-grade uranium elsewhere –
another barrel over the land of the free – and Russia actually has
several incentives to do so. Sooner or later, the United States will return
to sources within its own borders, then from Canada.
Wind. Wind energy has much to gain from Obama's plan,
which, as it stands, has some $15 billion slotted for clean energy
initiatives. His target of “25% by 2025” would require roughly
double or even triple growth for the wind industry. Obviously this growth is
achievable only through government subsidies, which may or may not be
sustainable. Only a few areas of the United States, such as around the Great
Lakes and offshore in territorial waters, enjoy the steady stiff breeze that
wind farms require to be viable.
Offshore projects raise another hurdle: transmission lines. For fun, let's
run some numbers for President Obama. For wind power to supply 20% of
America's power by 2030, the country would need to build an estimated 12,000
miles of 765 kV transmission lines. At a cost to generate power of US$0.06
– about the same as geothermal – the transmission lines would
cost $2.6 million per mile (in today's money), or $31 billion total. That
figure would account for 21% of the total budget for clean energy
alternatives, or to put it another way, two years' funding for NASA.
A company with projects bearing very good wind reserves near an existing
transmission line is the only kind of investment we'd consider here. For now,
however... like T. Boone Pickens, who recently announced he's putting his
giant Texas wind-farm project on hold because of the credit crunch and
falling energy prices – we, too, are steering clear of wind energy.
Solar. Sun-powered electricity is a great long-term
energy provider. Despite advances in the technology, however, it continues to
be one of the highest-cost producers; and there will always be the issue of
what to do when the sun doesn't shine (and not just on cloudy days –
there's every night). And while the Mojave Desert isn't as remote as China's
Gobi, the incoming administration still needs to consider cost of
infrastructure when promoting solar farms. That said,
we still believe that our investment in two hand-picked solar stocks will
return good profits in the next few years.
Geothermal. Many projects generating electricity from
hot water would run into trouble if oil were to go below $50 per barrel. True
still, but geothermal continues to appeal nonetheless. First, oil is unlikely
to stay this low for long; and more fundamentally, geothermal's load factor
– as high as 95% -- pushes it far to the head of the renewables class
and comparable to natural gas and nuclear.
Its limitation is geographical. At the very best, only 10% of the United
States could be supplied with geothermal power, according to the Department
of Energy, and we find that figure optimistic. Geothermal currently
represents 0.35% of America's power generation.
We're willing to invest in geothermal companies because of the robust
economics and the fact that they're likely to do well under the cap-and-trade
system that appears inevitable. We want to pick those that have not only good
resources but also customers, so two top-quality geothermal companies are
currently in the Casey Energy
Opportunities portfolio.
Hydroelectricity. On the scale of energy generation
technologies, hydroelectricity tends to rate as reliable, and generally cheap
and environmentally benign. Like Europe, however, the United States has
little hydroelectricity left to exploit, and even the newer run-of-river
technology is unlikely to bump its contribution up much from hydropower's
current 10%.
Biofuels. Unlike the Casey Research Energy Team, Obama
is fond of this stuff. Biofuels are both heavily subsidized and currently
high-cost alternatives to reducing carbon – second generation (from
non-food organic material) and third generation (using algae) included.
However, the White House is soon to hold a former senator from Illinois, one
of the largest ethanol producers in the United States, so biofuels are likely
to hang around in some form or another. We'll keep our eye on research, as
well as industry developments in the near future.
Marin Katusa
Casey Research, LLC.
Caseyresearch.com
Also by Marin Katusa
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