Nuclear power was gaining a lot of momentum prior to the terrible disaster at Japan's Fukushima powerplant in March.
But since then, atomic energy has come under increased scrutiny and once again drawn the ire of environmentalists who were just warming up to its carbon-free emissions.
The German government's decision to close all of its existing nuclear reactors by 2022 shows that this shift in sentiment is gaining traction. And it increases the likelihood that the nuclear-powerplant building boom that had seemed at hand will be set back.
Without a doubt, this new reality will lead to global energy shortages and much-higher energy costs.
But for us as investors, the real issue is this: Which sectors will step up to alleviate the shortfall resulting from the inevitable disappearance of nuclear power?
Nuclear Power Political Considerations
As the recent development in Germany so clearly illustrates, one key difficulty about major energy decisions is that far too many are political in nature.
Too often, rational scientific analysis and cost-benefit analyses are ignored as hard-line environmentalists push their own agendas. Many of the environmentalists' objections are valid – at least as far as they go. But more and more, those objections seem to include every source of energy that actually works.
Windmills are objectionable because they look ugly and kill birds. Geothermal energy is objectionable because it causes earthquakes. Even solar energy is objectionable because of the vast acreages of land required to house the solar panels.
In a rational world, since the environmentalists raise loud and politically salient objections to everything (except technologies that are truly economically non-viable), they would be ignored. But in the world we live in, every government has an environment minister and many of the world's legislators depend on the environmental movement for financing and manpower.
In the case of nuclear power, the Fukushima disaster has strengthened the naysayers' credibility – if for no other reason than it exposed some of the industry's long-standing, but misguided beliefs about nuclear plants. That means we, as investors, must figure out which sources of energy will take up the slack as the use of nuclear power declines.
Replacing Nuclear Power
Figuring out which energy sources will offset the decline in nuclear power output requires three calculations:
- First, a calculation of the cost of an energy source – as it now exists – in its economically most practicable uses. However, much as we may like solar power, we are not about to get solar-powered automobiles; likewise, oil-fueled power stations are inefficient on many grounds.
- Second, a calculation that demonstrates whether the cost of that energy source is likely to increase or decline. With oil and hydro-electric power, for instance, the cost is likely to increase: The richest oil wells have been tapped and the best rivers have been dammed. With solar, on the other hand, the cost could decline, given how quickly the technology is advancing.
- And third, an estimate that includes our best guess as to whether hard-line environmentalists will win or lose in their attempt to prevent its use.
On nuclear energy, the environmentalists appear to have won – at least for the time being. Their victory probably extends to fusion power, if that ever becomes economical.
Conversely, their battles against wind and solar power are futile, as there are no scary disaster scenarios involved.
I regard the German decision to abandon nuclear power as foolish, and it should make us very cautious when investing in large-scale German manufacturers, which may be made uncompetitive by excessive power costs. But as an investor, I think it opens up a number of profit opportunities.
After all, we have to get power from somewhere.
As investors, we must look for energy sources that will most likely replace lost nuclear power output. They include:
- Shale gas.
- Tar sands.
- And solar energy.
Let's look at each of the three – and identify the best ways to play them.
Shale Gas: Potential damage to the environment caused by "fracking," which is the process by which shale gas is extracted, has not impeded this industry's growth. Natural gas has grown increasingly popular, as it is relatively cheap and clean, and readily abundant in the United States.
A recent study by the Massachusetts Institute of Technology (MIT) suggests that natural gas will provide 40% of U.S. energy needs in the future, up from 20% today. You might look at Chesapeake Energy Corp. (NYSE:CHK), the largest leaseholder in Pennsylvania's Marcellus Shale, which is trading at a reasonable 9.5 times projected 2012 earnings.
Tar Sands: The Athabasca tar sands in Canada contain more oil than the Middle East. And at an oil price of $100 per barrel, it is highly profitable to extract. Of course, extraction makes a huge mess of the local environment, but environmentalists seem to have lost that battle – reasonably enough, in view of the "energy security" implications of dependence on the Middle East. A play I like here is Cenovus Energy Inc. (NYSE: CVE). It's a purer Athabasca play than Suncor Energy Inc. (NYSE: SU), but it's currently pricey at 16.5 times projected 2012 earnings. Suncor's cheaper at only 11 times projected 2012 earnings – so take your pick.
Solar Energy: Of the many new energy sources that have received so much taxpayer money in the last five years, solar is the one with real potential. Unlike with wind farms, where there is almost no opportunity for massive technological improvement or cost reduction, there is great potential upside with solar power: The technology and economics of solar panels and their manufacture is improving steadily.
Indeed, solar power seems likely to be competitive as a source of electricity without subsidy sometime around 2016-2020, if energy prices stay high.
There are a number of ways to play this. You can select a solar-panel manufacturer like the Chinese JA Solar Holdings Co. Ltd. (Nasdaq ADR: JASO), or a rectifier producer like Power-One Inc. (Nasdaq: PWER). JA Solar is trading at a startling forward Price/Earnings (P/E) ratio of less than 5.0, mostly likely because of the Chinese accounting scandals, whereas Power-One is also cheap at less than seven times forward earnings and is U.S.-domiciled. Again, take your pick, depending on which risks you are comfortable with.
Although it was Germany's coalition government that decided to phase out all nuclear power by 2022, it's no secret at all that the current global anti-nuclear movement was kicked off by the March 11 disaster in Japan.
But this is a secret.
You see, Japan is what investment experts like to refer to as an "inflection-point catalyst" - a force that can help turn the financial markets upside down.
Perhaps that doesn't surprise you.
But this will.
You see, there are six other "inflection-point catalysts" at work right now.
And they are going to turn the global markets ... upside down.
To have so many forces all pulling in one direction at one time is a real rarity. But it's happening now.
Investors who see and understand the forces at work have a chance to make, well, buckets of money (pardon our crassness). But what really concerns us is that investors who don't stand the chance of being slaughtered by global market forces that they may not even know exist.
Money Morning was created to serve, and to protect - to help our readers identify the best profit opportunities, while avoiding the buzzsaw-like risks that abound in our increasingly complex global financial markets. For that reason, we want to share our secret with you - in a free report called "Lambs to the Slaughter: What to do as These Seven Inflection Points Turn the Markets Upside Down." Just click here to get it - and then take the time to read it.
What you don't know can hurt you.]
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Japan Disaster Update: Crisis Investing Strategies From Money Morning's Top Experts.
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Germany: Nuclear power plants to close by 2022