Seeking Alpha
Oil & gas, dividend investing, research analyst
Profile| Send Message|
( followers)  

Because of the stock market’s dramatic drop in 2008, investors, commentators, and analysts are all discussing whether or not the days of investing for the long term in American equity markets are over. Despite mutual fund companies’ best attempts in advertisements and commercials to convince us otherwise, I believe long term investing in the American stock market is a failed strategy. One can make an argument for long term investing in energy stocks and gold, but little else.

As I have said before in previous Seeking Alpha articles, the future doesn’t look good for the S&P500. Anyone who makes a long term bet on an S&P500 index fund (no matter how small the management fees) is surely to lose money over the long haul. In fact, over the past 10 years, after inflation and the falling dollar are taken into account, the S&P500 is substantially in the red. In fact, just recently the S&P500 was at the same level it was in 1997, over a decade ago.

I contend the major reason behind this woeful performance in the S&P500 over the past decade has been, and will continue to be, American dependence on foreign oil. Importing 70% of our oil requirements in an era when worldwide oil supply will not keep up with worldwide oil demand is a poor (pun intended) and dangerous economic strategy.

I know, I know, current gasoline prices are back under $2/gallon and are actually $1.55 in my neighborhood. However, no one should be deceived here: the current low price of oil is not due to some new huge supply coming online or that the peak oil theorists are wrong! Today’s low oil price is simply due to a dramatic fall-off in worldwide oil demand as the financial crisis rolls around the globe. Assuming the US and the world economies can claw their way out of the hole we’re in today, I can assure you low oil prices are a temporary phenomenon which will last only until economic growth is revived.

Any American who has already forgotten $145/barrel crude and $4.50/gallon gasoline is simply short-sighted and in denial of America’s oil crisis. After all, despite oil at $145/barrel, worldwide oil supply never got much above 86 million barrels a day. Due to the current financial crisis and the low price of oil today, many oil exploration and production projects are being delayed or canceled. However, existing oil reservoir depletion rates don’t rest and large reservoir discoveries have slowed drastically in the last 20 years. All this means the next oil super spike could likely make this year’s look relatively mild.

Energy, particularly oil in the US, is the lubrication of the economy. It provides our main source of transportation fuel. Oil is used in the production of chemicals and plastics. It is used for home heating and for many industrial uses. Currently, oil is quite simply indispensable and irreplaceable to the US economy.

There has been much research and many articles correlating a country’s access to energy as being a main factor in determining its economic vitality and economic evolution. The great oil fields of Texas and Oklahoma were a significant factor in the Allies' WWII victory. Similarly, the lack of oil was a strategic impairment to both Nazi Germany and Japan. The US was able to capitalize on the Axis’ lack of fuel oil, which was known to US generals, as it was the main factor driving those two countries’ war strategy toward the latter stages of WWII. Therefore, access to oil is critical both economically and from a national security perspective.

So, where am I going with all this? Well, I am worried. I had great hope that Obama would be a big change from the oil centric energy policy of the Bush administration. Sure, Obama has made some comments about wind and solar energy. He has also spoken of electric and hybrid automobiles. Now, before I continue, anyone who has read my energy policy can see that I am also a big fan of wind and solar energy. I am also a big supporter of electric cars and Project Better Place. We need electric cars, and we need wind and solar energy to power them. And we need to be working full steam ahead on these projects. But currently there are some problems here.

First off, electric vehicles are simply not available yet in mass quantities for middle class Americans and it will be awhile yet. The current crisis has caused a cut-back in funding for solar and wind energy projects. Additionally, I still don’t see government recognition or solutions to upgrading the nation’s electric grid and getting this alternative energy from the wind and solar sources to large demand centers.

While these problems are being worked on, US dollars continue to leave the country to wind up in the hands of unfriendly countries such as Saudi Arabia, Iran, Iraq, Venezuela, and Russia. Common sense says the US needs to reduce its foreign oil dependence as quickly and economically as possible. Common sense also tells us that we will need all alternatives to oil powered transportation if we are going to reduce the tremendous energy content of 14-15 million barrels of foreign oil.

My question is a very simple one: why in the world isn’t the US embracing natural gas powered transportation? In spite of a very prestigious economic team including a plethora of PhD's, I have yet to hear one Obama economic adviser even mention natural gas transportation as a priority. Nor have I heard any Congressmen question the “big” three auto CEOs about natural gas cars and trucks. Why? Since the economic case to use natural gas for transportation is so obvious, there must be some technology, cost, or environmental reason why policy makers are not supporting such a common sense solution. Let’s discuss these issues one at a time.

Natural gas vehicles (NGV) are an old and proven method of transportation. Fleets of buses, cars, and trucks have been proven to be reliable and cost effective in cities across the country and across the world for decades. There is no rocket science here. Most any car or truck in America can be converted to run on natural gas by simply installing a more robust fuel tank (the natural gas must be under pressure) and a different fuel delivery system – there is no change to the basic gasoline powered internal combustion engine.

Oil exporters like Iran and Brazil are quickly converting their cars to natural gas so they can sell more oil to America. If oil exporters are doing this, why isn’t the world’s largest oil importer doing likewise? There is no huge “re-tooling” investment needed as the big 3 would have you believe. Not only are they making natural gas vehicles today, but it is basically the same engine! Only the gas tank, the fuel delivery system, and the engine controller are affected. Also, it is not a range issue that is often raised with electric cars – a typical NGV like the Honda Civic GX has a range of 200 miles. So, from a technology perspective it is clear: NGV’s are a mature, reliable and viable form of transportation

From a cost standpoint, when gasoline was $4/gallon, most areas of the country could run a vehicle on natural gas for less than half the cost of gasoline on a mile per mile basis. Today, on an energy equivalent basis, natural gas can be found from $0.70-$1.10 /gallon equivalent in many parts of the country. However, when you throw in the unsuccessful oil war in Iraq (Iraq’s government voted last week to demand a US withdrawal by 2011 with no long term military bases allowed on Iraqi soil) and the fact that natural gas is produced domestically, natural gas is in reality an even cheaper alternative.

Switching 10% of US cars and trucks to natural gas would create many thousands of domestic jobs in the oil patch, pipeline business, and refueling stations. Every dollar spent refueling a car or truck with natural gas would be a dollar staying in the USA instead of going to our enemies overseas.

Now, the natural gas powered Honda Civic costs more than the gasoline powered Civic, by about as much as the tax rebate. Add to that the cost of the home refueling station (the “Phill” by Fuelmaker) of $4k and the cost of a natural gas powered vehicle has some initial pain. However, mass production of these vehicles and a second source for the home refueling appliance would bring the cost of both the vehicles and the appliance down considerably. So, NGV cost is not an issue, and in fact would save consumers money on every tank refill.

From an environmental angle, NGVs are a big improvement over gasoline powered cars and trucks. According to the EPA, compared to traditional vehicles, vehicles operating on CNG have reductions in carbon monoxide emissions of 90-97%, and reductions in carbon dioxide emissions of 25-30%. Nitrogen oxide emissions can be reduced by 35 to 60 percent, and other non-methane hydrocarbon emissions could be reduced by as much as 50 to 75 percent. In addition, because of the relatively simple makeup of natural gas in comparison to gasoline, there are fewer toxic and carcinogenic emissions from natural gas vehicles, and virtually no particulate emissions. While NGV aren’t the environmental Holy Grail of a fully electric car, there is no doubt that switching from gasoline powered cars and trucks to NGV will be a positive development.

From an availability standpoint, we have a big problem. Currently, the only NGV sold to the general public in any volume that I can see is the Honda Civic GX, and that is only available in California, New York, and Utah. Interestingly enough, Utah leads the nation in friendly natural gas transportation policy by providing tax incentives, refueling stations, and natural gas conversion shops. Read about Questar Gas support for NGVs.

So, we have a chicken and egg problem with NGV availability. The auto makers and dealers don’t want to stock and sell NGVs because consumers won’t buy them unless there are places to refuel them. Entrepreneurs and natural gas utilities don’t want to build natural gas refueling stations if there are not enough NGVs refueling at the stations to make them economically viable.

This is where we need the government to take action. A good start would be to require natural gas providers to build enough natural gas refueling stations along the interstate highway system such that a person could drive coast-to-coast, east to west, north to south, in a NGV. Since the range of NGV is roughly 200 miles, this would require a minimum of one station per every 50 miles or so along the interstate system. Once the number of NGV and refueling stations reached critical mass, entrepreneurs around the country would take over as the profit incentive would be there. We just need to jumpstart the system.

Why on earth should the government bail out the auto makers with our tax-payer dollars without first requiring them to build nat gas vehicles, or at least require them to sell the same ones they sell in Europe and Asia in the US? The government should also require each “big” 3 auto company to design and manufacture a nat gas refueling appliance for the garage in order for competition to reduce the current high cost of the sole sourced “Phill” appliance.

To summarize then, NGVs are viable from a technology, cost, and environmental perspective. NGVs are the fastest way to reduce American dependence on foreign oil. The biggest issues facing NGVs are their availability and lack of refueling stations. Both these issues can and should be addressed by Obama within his economic stimulus program. Now is the time! Why on earth would we spend more money on new roads without first spending money to insure Americans will be able to travel on those roads with American fueled vehicles? Why on earth should we be bailing out GM, Ford (NYSE:F), and Chrysler without first imposing the condition that they make NGVs available around the country and install a natural gas refueling station at every dealership? These are simple, common sense approaches to solving America’s biggest economic issue: reducing our reliance on foreign oil. These suggestions could begin making a serious dent in our foreign oil addiction with 12 months. Within 3 years, we could easily be saving millions of barrels of oil.

I can’t understand American indifference on this issue. No doubt the current economic crisis was caused in part by financial deregulation (albeit I call what Moody's, S&P, and Fitch did by slapping AAA ratings on repackages sub-prime debt by its real name: fraud). That said, I believe it is America’s addiction to foreign oil that has put the nail in our economic coffin. Think about it. When Jimmy Carter was elected President in the 1977, America imported 9 million barrels of oil a day. After Carter’s energy policies were enacted, the country reduced this amount by 50%. Now, in 2008, America imports between 14-15 million barrels a day, or 70% of our total oil usage!

This is an abomination. It is causing us to fight foreign oil wars and shaping a disastrous foreign policy that has the majority of the world viewing the US as the “most terrorist nation on earth”. Economically, as T. Boone Pickens so bluntly put it, it is the largest transfer of wealth in the history of the world (i.e. from the USA to foreign oil producers, most of whom are unfriendly toward us). So, we are funding both sides of the “terrorist conflict”. If it wasn’t so serious, such a flawed economic and foreign policy would be viewed as naïve, sophomoric, and laughable.

Meanwhile, China is taking a much wiser approach. Just last week it was reported that China is seeking to invest $10 billion dollars in Petrobras (NYSE:PBR) in an effort to gain access to the 80-100 billion barrels of newly discovered Brazilian oil. Makes a lot more sense than invading Iraq doesn’t it? The way the US has been behaving under Bush, Brazil’s officials actually expressed concern that the US will invade it at some point. It just shows how far the US has fallen in the eyes of the world. It’s all due to our over-addiction to foreign oil. So, why aren’t we adopting policies to fix our Achilles heel? It quite simply baffles me.

The larger point is this: I don’t care what industry the reader is in: Wall Street investor, banker, hotel owner, doctor, tourism, engineer, school teacher, lawyer – you name it, all Americans have a vested interest in supporting natural gas transportation. It is smart economic policy for every US citizen. All Americans will suffer a reduction in their standard of living (and are suffering now….) due to the lack of a US strategic long-term comprehensive energy policy. The US has enough natural gas reserves to power our transportation needs for the next 60-75 years.

So, let’s build hybrid and electric cars. Let’s build electric mass transit. Let’s power it with wind and solar energy. In conjunction with these efforts, let’s begin a simple, effective, and proven strategy to immediately and significantly reduce our use of imported oil: expand the deployment of natural gas powered cars and trucks. Nothing is more important to the future of our country, its national security, and its economic vitality.

Until the US addresses its addiction to foreign oil in a significant and effective way, there is no reason at all to be a long term investor in American equity markets and the S&P500. If the US doesn’t solve its dependence on foreign oil, US equity markets will continue the slide of the last decade and it will accelerate as the price of oil continues its upward climb. Americans will once again, as we did this year, suffer the twin ravages of a falling currency and rising inflation. The American economy (and equity markets) will sink into the abyss and America will join the long list of world power “has beens”.

America used to be a pragmatic country which embraced science, technology and prudent fiscal and foreign policies. We need to get back on track and begin implementing common sense approaches that benefit middle class Americans. America can only be strong if its middle class is strong. The middle class can only be strong if we throw off the shackles of foreign oil addiction. Time is running out. Contact your local, state, and federal politicians as well as the Obama team directly at http://change.gov/ and demand action to increase the availability of NGVs running on domestically produced natural gas. Help reduce the US addiction to foreign oil and at the same time boost your domestic investment returns. No matter how you look at it, natural gas transportation is a win-win for all Americans and for the American investment environment.

Source: Natural Gas Transportation Is a Win-Win Technology