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By Marin Katusa,
Chief Strategist, Casey Research Energy Team
Casey Energy Opportunities
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. [That is just over a 58 day
supply-Editor] 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 States doesn't have
the capacity for domestic energy production. Administration after
administration, Republican as well as Democratic, is simply choosing
to legislate it away. First they designate the land above one of the biggest,
cleanest coal deposits in the world a national monument, then they rope off
huge swaths of offshore waters to drilling, and threaten stringent new
mining laws, derail hydroelectric projects, and before you know it, 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 States 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 Energy
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 Power
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.
Continue
to 2nd column
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Solar Power
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 Energy
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.
As Casey Research Managing Director David
Galland likes to say, “There has never been an economy so
heavily politicized as the current one.” Therefore, anticipating
how a market sector will be faring is not enough anymore… you
also need to be able to foresee what Washington and/or the Fed
is going to do to influence that industry.
Get Casey Research's FREE special report,
"Obama’s Newer Deal", a
brief guide to the policies and stances you can expect from the
new administration… and how it affects you as an investor. By
clicking here.
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