alternative energy sources
As I wrote last Thursday, the aftermath of the fiscal cliff deal requires some restructuring of energy sector holdings.
We are currently in a brief period between crises. Nothing was resolved in the eleventh (and a half) hour compromise.
The truth is there are still three huge fights on the horizon - revisiting the sequestration (automatic spending cuts) portion of the fiscal cliff, spending versus taxation in the budget, and raising the debt ceiling.
All will hit by early March.
So the reprieve gained on New Year's Eve will be brief.
The spike after the accord was huge. Unfortunately, as we witnessed late last week, the market rally has no legs. VIX (volatility) has been abnormally low, but that will be drifting up, to accelerate as we get closer to the next round of legislative paralysis.
We cannot predict how protracted this next round will be, but early indications are hardly encouraging.
That's why investors need to be more defensive and identify energy components that are more likely to withstand the gridlock and even profit from it.
Overall, you should divide the energy sector into four segments:
- Processors/Distributors; and,
Here's what you need to know...
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The Path to Energy Independence is More Rocky Than It Seems
You might have seen yesterday's headline in the Wall Street Journal: "U.S. Redraws World Oil Map."
As the article explains, U.S. oil production is now on pace to surpass Saudi Arabia by 2020. This would make the United States world's largest oil producer. We're already the second-largest natural gas producer, according to 2010 EIA estimates.
It's all thanks to the U.S. shale boom that has unlocked billions of barrels of oil and trillions of feet of natural gas from the Appalachian Mountains to the Pacific Coast, from the Bakken in North Dakota to the shale fields of southern Texas.
But all of this fracking has caused some serious economic and environmental problems.
And while I greatly advocate increased drilling and domestic production, we still must address a wide-range of problems now plaguing the shale oil and gas sectors.
After all - with apologies to Voltaire and Spiderman - with such great fortune comes greater responsibility.
That's why I am in the third day of what has become a very interesting conference here in Pittsburgh. It was convened to set the agenda moving forward to deal with the almost invisible aspects of shale oil and gas drilling.
In fact, for the first time, the conference's primary focus will be on the negatives caused by the drilling.
We also have questions surrounding the amount of water required to frack these formations (the process needs a lot of water to break open rock and release hydrocarbons), as well as the ongoing public health fears from the chemicals used.
Now, we are seeing parallel economic problems as well.
In the Marcellus basin, researchers are now recording some of these shortcomings and placing them in four basic categories.
The real concern is that these four problems - in infrastructure, labor, local inflation, and the environment - will remain well after the drilling (and the revenue) has moved on.
So before you decide to declare "energy independence", take a look at some of the downside that may come along with it.
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Oil Prices are Higher, But It Won't Be Much Help for Alternative Energy
Normally, when gas and oil prices accelerate on both sides of the Atlantic, alternative energy sources come into focus and become a big part of that "energy independence" discussion.
Well, not this time.
During the run up to mid-$4 gas and $147 a barrel oil in 2008, many assumed these costs would continue to advance. That made alternative sources - especially renewables such as solar, wind, biofuels, and geothermal - more attractive to investors, politicians, and energy enthusiasts.
Alternative sources are more expensive than conventional oil, gas, or coal. They are, however, more environmentally friendly. Paying those higher costs was regarded as a tradeoff for cleaner energy sources and a reduction in emissions.
Today, that view has changed.
U.S. Oil and Gas Squeezes Alternative Energy ProspectsIt's part of the reason why I've recently avoided alternative energy companies like First Solar (Nasdaq: FSLR), Canadian Solar (Nasdaq: CSIQ) or SunPower Corporation (Nasdaq: SPWR) in my Energy Advantage portfolio.
The economic downturn has made reliance on more expensive energy sources a difficult proposition to accept. Renewables are hardly a convincing argument anymore, especially during a sluggish economic recovery.
Yes, increasing oil and gas prices should reduce the spread between conventional and renewable, thereby providing stronger arguments for change. And proponents argue that alternatives provide an enhanced advantage given that they can also be domestically produced.
Just don't bet on these arguments holding up this time. Here's why.
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An Unlikely New Supporter for Alternative Energy
During a biofuels conference at Mississippi State University last week, Navy Secretary Ray Mabus announced that his branch would be leading the charge to lessen the U.S. Department of Defense's (DOD) dependence on fossil fuels.
This involves a rather large chunk of traditional fuel usage.
On average, the federal government consumes about 2% of the fossil fuels used in the United States - and the DOD accounts for about 90% of that.
With the Obama administration emphasizing a move to alternative and renewable fuel sources, Mabus is signaling that the military is on board - sort of.
The Trouble with Foreign OilAs a former governor of Mississippi and ambassador to Saudi Arabia, Secretary Mabus knows something about the position of oil in American foreign policy.
He noted during the conference that, for every $1 rise in the cost of crude oil, the Navy has to come up with at least $32 million.
So when the Libyan crisis hit earlier this year, and oil spiked $30 a barrel, that translated into almost $1 billion of additional costs to the Navy. It's no wonder, then, that Mabus is committed to meeting 50% of the Navy's onshore and fleet fuel needs with non-fossil sources by 2020.
Additionally, in what is now mantra from both sides of the political aisle, reliance on foreign oil sources presents a national security problem.
"When we did an examination of the vulnerabilities of the Navy and Marine Corps, fuel rose to the top of the list pretty fast," Mabus said. "We simply buy too much fossil fuel from actual and potentially volatile places. We would never allow some of these countries we buy fuel from to build our ships, our aircraft, our ground vehicles - but because we depend on them for fuel, we give them a say in whether our ships sail, our aircraft fly, our ground vehicles operate."
The push seems serious enough, and it does reflect similar statements coming from other branches of the military.
But questions remain: What are the alternative sources? How much volume can each genuinely give to the effort? And what are the possible drawbacks of such alternatives?
Biofuels to the RescueFrom the Navy's perspective, biofuels have shown some serious promise.
In certain theaters of operation, bio additives are already in use for both jet fuel and lighter vessel options. And the initial results have been quite encouraging.
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State of the Union: How to Profit From President Obama's New Clean Energy Challenge
In last week's State of the Union address, U.S. President Barack Obama issued a national challenge: Take the 11.5% of the U.S. electricity that emanates from clean-energy sources and boost it to 80% by 2035.
As with any game-changing direction - landing a man on the moon in a decade, bringing an end to the Cold War, curing cancer, or weaning our economy off of coal and crude oil - leaders such as President Obama provide the enticement.
But the market has to figure out how to get it done.
U.S. Clean Energy Investment Puts Upward Pressure on Rising Food Prices
In U.S. President Barack Obama's State of the Union address Tuesday, he highlighted clean energy investment as a key component of America's future, one that will be reflected in his budget proposal for fiscal 2012.
"With more research and incentives, we can break our dependence on oil with biofuels, and become the first country to have a million electric vehicles on the road by 2015," the president said in his speech to members of Congress. "[I]nstead of subsidizing yesterday's energy, let's invest in tomorrow's."
This commitment to clean energy investment increases the importance of biofuels like ethanol, made from corn and other agricultural products. About 40% of U.S. corn is used to make ethanol, and increased ethanol production leads to higher corn and food prices.