Trends and Themes in Energy

There are three investment themes that will stand the test of time – energy, agriculture, and healthcare.  Why these three?  There are several mega-trends at work currently that will impact these three sectors of our economy and those outside the U.S.  One is rapid population growth in the developing countries and population decline in the developed countries.  Another is the transitioning of societies within the developing and developed countries, which impacts how humans live and interact with their economies and ecosystems.  I will address the energy sector in this blog (Part 1 of 3) and agriculture and healthcare in succeeding blogs.

As I have mentioned in previous blogs, there is portable energy and non-portable energy.  Non-portable energy is energy that cannot be consumed while in motion.  Examples of them would be nuclear (naval ships and submarines are exceptions), coal and solar (panels have been installed on vehicles, but primarily to power an automobile's electrical system) and wind.  Portable energy would include petroleum and petroleum-related products and natural gas (compressed natural gas – CNG, is beginning to be developed).

The reason that gasoline and diesel are almost exclusively used as portable energy, is because the energy per unit mass is far greater than any other practical fuel source (uranium is the highest, but not used for public transportation for obvious reasons).

Source: http://www.schoolphysics.co.uk/age16-19/Mechanics/Dynamics/text/Energy_density_of_fuels/index.html

Non-Portable Energy

The world is changing profoundly with regard to energy and energy consumption.  Several forces are at work, whether we like it or not.  The first is carbon emissions.  A global consensus is focusing on reducing carbon emissions.  Economies, corporation, and people are moving in lock step to reduce their carbon footprint.  They have heard the message, so the global warming crowd should rejoice in the fact that it is being done, though not as quickly as desired.  Natural gas production has increased over the past 10 years due to hydraulic fracturing of productive geologic formations, thereby reducing prices enough to cause a seismic shift away from coal to natural gas.  This switch is the major cause of carbon emission reduction in the U.S.  Should a carbon tax be applied, the consumer would be better served if the government were to tax carbon emissions, rather than let Wall Street capture the profit, though one could argue about the efficiency and utility of either. 

Second, the Fukushima Daiichi nuclear power plant disaster derailed the global nuclear renaissance.  While it is a bump in the road for nuclear power, we will not likely be able to do without it.  However, it is going to take additional time to rebuild public confidence.

Third, clean energy (solar, wind and hopefully others) is growing rapidly, despite it being uneconomic even with government subsidies.  High-cost solar companies have failed, while low-cost Chinese solar companies have succeeded and grown rapidly, causing solar panel prices to fall.  This has made solar panel installation more affordable, though paybacks are still years off.  Clean energy has not been without its critics, including environmentalists.  Even they have criticized solar farms for disturbing desert tortoises and wind farms for disrupting the migratory paths of birds.  We cannot have it all ways, especially when it severely limits economic growth and job growth. 

Fourth, the baby boom generation is beginning to return to its 1960s-1970s roots from living off the land to living off the grid.  While this is a minute percentage of the baby boomer generation, it is growing. 

Fifth, energy conservation is beginning to take hold.  I find that there is still low-hanging fruit to be picked.  This can be accomplished through new energy-saving products or retro-fitted products with intelligent power devices that scale back energy consumption or cut it off.

To summarize the changes in electrical production and consumption or trends:

·      Carbon emissions – down or moving lower in the U.S. (if anyone is to gain on this, it should be government versus Wall Street),

·      Natural gas production – up and prices down,

·      Coal production – down and adjusting downward until steady state is met,

·      Nuclear power generation – down or in steady state,

·      Solar and wind energy – up and prices down,

·      Conservation – increasing, and

·      Living off the grid – increasing.

Utilities will evaluate the energy sources available to them and their costs, before committing to major capital expenditures.  In Minnesota, Duluth-base Minnesota Power long relied almost exclusively on coal generation.  Last month, it announced that it would close one coal burner and convert two others to burn natural gas.  They would also add wind power and hydro and probably a new natural gas-fired generator.  The result will be to decrease coal dependency over time to one-third coal, and increasing to one-third natural gas and one-third renewable energy.  Other utilities will be moving in the same direction depending upon their input percentages of resource availability, such as hydropower, geothermal power, tidal power, nuclear reactors already in operations, etc.  These are large shifts away from the traditional coal-fired power generators of yore and long over due.

Portable Energy

Gasoline and diesel are still the major choices of transportation fuels, because of their higher energy density relative to other portable energy.  Natural gas is being considered and promoted by various entities, but storage and distribution remains an obstacle in building out the infrastructure.  

Oil production is up in the U.S. due to hydraulic fracturing of shale and sandstone.  This new drilling technique has been a panacea for job growth in North Dakota.  While oil production has increased there and else where, it has not returned to the high of 1970, when we produced 9.637 million barrels of petroleum per day.  The Energy Information Administration's (EIA) most recent data show that production is down 41% from that high to 5.648 million barrels per day.  This is barely above what we produced in 2003.  Mileage mandates are needed to close the gap.  Additionally, other fuel sources are needed to augment existing production, such as compressed natural gas (CNG), hybrid technology, or the elusive hydrogen fuel cell.  In any event, mileage mandates should encourage the development of new technologies.

The oil drilling renaissance that the U.S. has experienced, has created numerous positive outcomes:

·      Increased oil production (EIA, from 5.644 million barrels per day in 2003 to 5.648 million barrels per day in 2011, after bottoming in 2008 at 5.000 million barrels per day),

·      Improved the petroleum trade balance due to increased petroleum exports, which helped shrink the overall deficit by 21% in December to $38.5 billion, the smallest in three years, according to the Commerce Department on February 8, 2013),

·      Decreased demand for foreign imports,

·      Created high paying jobs from rig hands to engineers,

·      Lowered energy costs (natural gas), and

·      Increased energy security, causing companies like Dow Chemical and Royal Dutch Shell to build chemical plants in the U.S.  This could be the beginning of a “reshoring” renaissance of companies relocating manufacturing facilities and hence excellent paying jobs back to the U.S.

Subsectors within energy that should benefit from the mega-trends and societal shifts over time are: natural gas companies, solar companies, energy conservation device companies.