Fossil Fuel Wave

Posted: May 24, 2011 12:01 AM

I write these words from Hua Hin, Thailand, where I am enjoying a short holiday after interviewing the management of Singapore firm for possible investment.  Given that my last overseas trip was to Germany, where the Greens are in full march and hell-bent on covering every square mile of that beautiful country with 200-foot tall wind turbines, the juxtaposition of that desirable but utopian dream with the reality of taking a taxi today powered by Compressed Natural Gas (CNG) strikes full force.

The brilliant American biologist Garrett Hardin once said in regard to well-meaning types who want to do “the right thing” without fully researching the possible unintended outcomes, "We can never do merely one thing."  He was admonishing the then-ascendant Army Corps of Engineers, among others, for believing they could simply build levies and locks to “control” the Mighty Mississippi.  Recent events underscore the simple fact that Nature is more powerful than man and that we can never do merely one thing.

That is why I recommend oil and gas, coal and nuclear to our clients and subscribers.  Although I wish with all my heart that America could rely upon solar power, wind power, and other green energy sources. I believe oil, gas, coal, and uranium have known benefits and disadvantages (and will most likely enrich our portfolios) whereas a feel-good infatuation with alternative energy sources like wind, ethanol, and solar, to the exclusion of extractive fuels, will prove to be an enticing but wealth-robbing cul-de-sac – and one that may have unintended consequences yet unimagined.

The disadvantages of fossil fuels are trumpeted daily.  The advantages, however, include the fact that we get better every day at tapping what I consider the ultimate green resource: the giant storage batteries Mother Earth has taken eons to compress, compact, and place conveniently around the globe for us to use.  Once-green vegetation and other organic materials now lie under our feet as oil, gas, coal and uranium.  They are steady sources of energy while wind and solar are intermittent and not always easily transportable without significant loss of energy along the way.  They are typically available in locations far from population centers and thus require concentration of the energy before transmission.

I don’t dislike or disregard solar and wind.  Solar was the first form of power, heating and dehydrating meats before fire was controlled.  Heat from the sun, combined with a lesser temperature where it did not penetrate, created the winds that propelled early vessels across the seas.  They have a role to play, but to eschew the “energy batteries” already concentrated and ready for shipment would be folly.  We need to use every source of power available to us, particularly as we transition from using less fossil fuels / energy batteries to using more solar, wind, hydro, run-of-river, geothermal, etc.

If you doubt the folly of trusting our future to any energy source, alternative or conventional, which we don’t yet understand the complete dynamics of, look no further than ethanol.  Remember, just a few short years ago, when corn-based ethanol was to be the Great Replacement for conventional fuels?  Well, the current ethanol morass demonstrates what happens when politicians override science and the marketplace. Archer Daniels (ADM) and other agri-giants discovered that corn was more profitably sold to higher-paying ethanol refiners than to consumers or to farmers and ranchers for cattle, hog, and chicken feed.

So now the price of America's favorite veggie has skyrocketed to 10-year highs, our beef, pork and chicken cost more, and some U.S. cattle and hog farmers are going bankrupt and selling out to developers who build more houses farther out of the city making for longer commutes and more energy usage.  In addition, the “energy-in” and water wasted to produce ethanol have been shown to be far, far greater than the rose-colored glasses-wearing advocates (and agribusiness and farm state lobbyists) originally told us.  “We can never do merely one thing.”

Here's another example: U.S. companies are prohibited from drilling anywhere within 200 miles of the Florida coast. But Cuba doesn't play by the same rules. So China's state-owned oil company, Sinopec (SHI), has signed an oil exploration deal with Cuba and moved huge drilling platforms to the internationally-recognized marine demarcation line between countries and is now within 50 miles of the Florida Keys, an area where U.S. companies aren't allowed to drill and where a single spill from Sinopec could wreak environmental devastation upon U.S. beaches and the precious coral that protects Florida residents from the worst effects of hurricanes. Since Congress "protected" us from U.S. oil companies, we now risk spills from others who play by different rules and we are forced to depend upon Arab oil.  Not smart.   

Well, then, how about something tres en vogue like wind power? The UK's Dr. James Lovelock is a towering contemporary of Garrett Hardin's and an equally famous scientist and big-picture ecologist. Here is what he says about wind energy in his own nation: "To supply the UK's present electricity needs would require 276,000 wind generators, about three per square mile, if national parks, urban, suburban and industrial areas are excluded. . . [T]he intermittency of wind means that, at best, energy is available from wind turbines only 25 percent of the time. During the remaining 75 percent, electricity has to be made in standby fossil fuel power stations; worse still, the power stations have to be kept idling [even] when wind energy is available . . . The most recent report from Germany put wind energy as available only 16 percent of the time."  

16% of the time…  Wind power may make the young urban professionals who comprise the Green Party’s core constituency feel good about their environmental consciousness, but let’s see how happy they are with that figure when they only have heat in those cold Berlin winters 16% of the time! 

Green is desirable.  We all wish it were enough.  But wishes are not horses and we’ll all still be walking between cities if we pin our hopes on intermittent and diffuse (as in “unconcentrated”) sources of dependable energy for heat, light, transportation and more. 

Black and gooey is still necessary. We still need to extract oil and gas, and we need to use coal both to burn and for much cleaner and less-polluting coal-to-liquid technology to power our homes, our cars, and our industry. We have more coal than any nation on earth. Between our biggest trading partner, Canada, and the U.S., we have more than 100 years of natural gas available domestically.  Want to see oil prices plummet?  Stop buying the stuff.  It is not immune to the laws of supply and demand.  Using U.S. coal and U.S. and Canadian natural gas as CTL (Coal-to-Liquids) or CNG (Compressed Natural Gas) would go a long way toward reducing this nation’s dependence on Middle Eastern oil.  Let’s see how much terrorism they finance with oil at $40 a barrel!)

Why are we importing oil from the Middle East when we can convert coal and natural gas to liquid and compressed fuels?  Why do I have to take taxis in Thailand to see Indonesian natural gas being used?  Why not in America?  (For the conspiracy theorists looking to blame Big Oil, forget about it.  “Big oil” is really Big Energy – they are in coal, uranium, solar, oil, wind, natural gas, and whatever else allows them to buy at the best price and sell at a decent profit.) 

If you are interested in learning more about Coal-to-Liquids technology, where many pollutants are removed at the source, prior to burning, may I suggest you conduct due diligence on Sasol (SSL.)  Their forte lies in making coal -- which puts out twice the carbon dioxide per energy unit than natural gas does – cleaner.   Sasol is in fact the world's largest producer of synthetic fuels, both CTL and GTL (Gas-to-Liquids.)  And here's the real kicker: three of the world's four biggest energy users also hold the most coal reserves! (The U.S. is #1, China is #3 and India #4.) If ever there was a slam-dunk for investors willing to hold for longer than settlement date, coal is one of them.

While we're at it, let's find smarter ways to extract the oil from the tar sands in Canada (like using the stripped-out carbon dioxide from CTL to inject underground to "bubble" oil to the surface) and the oil shale in the Rockies. Of the world's total oil shale, 89% is in Colorado, Utah, and Wyoming, USA. Two companies likely to benefit from drilling in these areas are Nabors Ind. (NBR) and Precision Drilling (PDS). NBR is the largest land-drilling company in America. You may not be as familiar with PDS. In addition to drilling, PDS provides catering services, distribution of oilfield supplies, and the manufacture and refurbishment of drilling and service rig equipment. PDS owns 230 land drilling rigs, all located in the Canadian tar sands. That makes it both more risky (geographically) but also more of a pure play. PDS alone accounts for nearly a third of the active drilling rigs in Canada.

Finally, if you agree that natural gas from a Canadian pipeline is likely to be more secure, cheaper, and have less geopolitical payback,  than oil from some Middle Eastern dictator, you might take a look at Encana (ECA) or Imperial Oil (IMO.)  Those more speculatively inclined might want to research Petrobakken (PBKEF.)

It was a delight, on my 100-mile trip with my Thai driver, to see him fill his tank with CNG that cost a third of what the same volume (for miles driven) of gasoline would cost.  It’s just wrong that I have to come to Thailand rather than Texas to see it.

Feds to Spend $100 Mil on Mortgage Bailout in Illinois: Mike Shedlock
ETFs are the Real Culprit on Commodity Tumble: Jack Bouroudjian
Is Market on "Other Side of the Mountain?": Bill Tatro
Bank Failures Rise for 2011: Zacks Investment Research
This is What Stagflation Looks Like: John Ransom
Media, Muslim Family Sabotaged GOP in Colorado in 2010: John Ransom
Fossil Fuel Wave: Joe Schaefer

For Ransom's daily market commentary see the Ticker

Email John Ransom

Follow Ransom @ Twitter @bamransom