Publisher's Note: Justice is taking a few days off for a family event. We've asked Taipan's Senior Research Director, Sara Nunnally, to step in. Justice will be back next week. But in the meantime, enjoy Sara's insightful look into the Gulf oil crisis, and what it could mean to you and your investments.
How many cleanup and well-cap plans have gone wrong with the BP oil spill disaster in the Gulf of Mexico? So many that a spoof of BP's efforts has gone viral… a video of a coffee spill in a BP boardroom.
You can view it here, and it would be even more comical if the situation weren't so dire.
Everything that BP has done to try to stop crude oil from gushing out of its deepwater well has failed… And even our most conservative-leaning editors here at Taipan think there's nothing we can do to stop the oil spill… that we'll have to let the well run dry. (FYI – you can get Taipan Daily's regular editors' insights into situations like the BP oil spill. Just sign up for Adam Lass and Justice Litle's investment commentary.)
That would be a disaster of epic proportions… both environmentally and economically.
The Macondo Prospect, the site of the explosion, was said to have held 50 million barrels of recoverable crude oil. At a current price of $75 a barrel, the prospect was worth $3.75 billion at crude oil-market value.
Now, BP has to shell out tens – possibly hundreds – of billions of dollars in order to clean up this mess.
The United States drilled these deepwater wells to enhance our domestic energy security. Had we not allowed this risky offshore drilling, we would have been buying even more foreign crude oil at higher prices from folks that are, at best, fair-weather friends.
It doesn't take a genius to figure out that energy policy will once again tap the shoulder of alternative energy resources.
But investing in energy during what amounts to an "energy crisis" in the Gulf can be a tricky situation. In fact, the PowerShares Global Clean Energy ETF (PBD:NYSE) has lost 20% since the explosion on the Deepwater Horizon.
So here are three things to take into consideration for an alternative energy investment opportunity in today's atmosphere.
Watch Crude Oil Prices
The higher crude oil prices climb, the more attractive alternative energy sources look. While wind power solutions are quickly coming to par with natural gas energy, other resources are still pretty expensive, like solar panels and hybrid automobiles.
That crude oil prices haven't spiked due to this Gulf oil spill disaster is due to global economic pressures. We're slowly recovering from the Great Recession, with unemployment still near 10% and consumer spending still highly anemic. Europe is still reeling from "Debt-gate" in Greece, which sent global markets spinning.
In fact, crude oil prices fell pretty hard in May… from above $90 a barrel to below $70 a barrel.
But as we continue to see an economic recovery, we'll see crude oil prices start climbing. We have yet to see the true impact of this Gulf oil disaster on crude oil prices.
Since hitting a low in late May below $70, we've seen crude oil prices rally back to $80 a barrel. If we see crude oil prices stabilize at $75 that will give alternative energy investments some traction to begin trending higher.
Target Long-Term Potential
With alternative energy, you have to think like Buffett, and think in years and decades. The "flash in the pan" technologies might not survive our current economic situation. You want to look at proven technology with large market potential.
I'm thinking of wind power in the U.S. At the end of 2009, after one of the roughest economic recessions in generations, installed capacity reached 35,000 MW of wind power. That's up from 25,000 MW in 2008!
But even that kind of growth takes our wind power capacity to only 2% of our total energy generation capacity.
That leaves a lot of room for growth.
We can also look at battery technology… a market that will grow to $22.8 billion a year by 2012. With the introduction of hybrid cars across all manufacturers, the push for plug-in electric vehicles, and even the IPO of electric vehicle maker Tesla stirring up a lot of interest, this market is just starting to bloom.
Be a Splitter, Not a Lumper
Back a few years, all alternative energy was hot on the investment scene. It was my bread and butter. You could almost throw a dart and hit a company gaining value. Not so anymore.
Now you have to consider individual alternative energy companies just like any other stock investment you make… And that means you have to be a splitter, not a lumper. Translation? Use your due diligence for individual stocks, not baskets of companies.
Look outside of alternative energy ETFs.
This goes against things I've said in the past, but today's economic crisis has proved that we need to overhaul our portfolios to include only the best opportunities.
These ETFs make it very easy to invest in alternative energy across sectors (read wind, solar or energy efficiency technology), across market caps and across countries. Many alternative energy companies are overseas, and the easiest way to invest in them might be through an ETF.
But you might also be getting some bad choices when picking up an ETF like PBD (mentioned earlier) or the PowerShares WilderHill Clean Energy ETF (PBW:NYSE) or other choices.
That said, these ETFs can be great places to start looking for opportunities in alternative energy. If you go through their holdings, you'll find alternative former energy stars like Vestas Wind Systems (VWS:Copenhagen) and First Solar (FSLR:NASDAQ). These guys went gangbusters on their respective sectors a couple years ago.
The Big Picture
These three tips can help you navigate the alternative energy sector. There are so many choices available for investors now, and the Gulf oil spill will push alternative energy to center stage. But – as with all investment sectors – not all alternative energy companies are created equal.
You don't want to jump on the bandwagon with just any investment.
It's important to remember this, as alternative energy will experience a bit of a renaissance because of the environmental disaster in our Gulf waters.
Article brought to you by Taipan Publishing Group. Read the original artice here. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.