I’m a global warming agnostic. I’m perfectly willing to accept man made global warming as fact if the science is ever proven and equally willing to accept the possibility that global warming is a tempest in a teapot like the Y2K bug that drove billions in IT spending in the late ‘90s and had me stockpiling toilet paper and buying gold coins. It seems silly in 20/20 hindsight, but the fear was real at the time. It also taught me an important lesson: Investment advisors and politicians are not the only ones who spurn the vulgar exigencies of objective truth in an effort to enhance their reputations and fortunes. Evangelical environmentalists do it too!
I’m a believer when it comes to economics. I’ve been to Brazil and Africa and spent months in Southeast Asia. In the process I’ve met hundreds of intelligent, well-educated and incredibly hard-working people who are striving to build a better life. So I get the notion that 6 billion people around the world are working overtime to earn their piece of the lifestyle that 500 million of us already enjoy.
I’m also a believer when it comes to peak cheap oil. I used the following price chart from the Energy Information Administration a couple weeks ago but it bears repeating because it shows that oil prices were essentially flat from ’86 until they reached an inflection point in the late ‘90s and then began a steady upward climb.
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We are currently enjoying a sharp fall in oil prices amplified by a global recession. I have no doubt, however, that once the global economy emerges from the recession, oil prices will revert to trend and $70 to $80 oil is a certainty.
We’ve all seen the carefully formatted, highlighted and annotated graphs that analysts use to illustrate various theories about future oil production and prices. The following graph was built from global oil production statistics published by the U.S. Energy Information Administration. It presents a bare bones summary that highlights only one thing; the incredible disconnect between oil prices and oil production rates.
If the world had plentiful oil resources as some claim, production volumes would have skyrocketed during the early part of this decade. Since production only increased by 14.1% from 1997 through 2006 while market prices climbed by 260%, I’m convinced we can’t drill our way out of this mess. If peak oil advocates are right, and I suspect they are, double-digit gas prices are simply a matter of time. I paid 24.9¢ per gallon for my first tank of gas and forty years later prices peaked at about $4.40; so I fully expect to pay $10 or even $20 a gallon before I die.
Even if you believe global warming is hogwash, the immutable laws of supply and demand remain as fundamental drivers for cleantech, the sixth industrial revolution. In a free global market, the 500 million who need 20 gallons to fill their gas tanks cannot possibly outbid the 6 billion who need 2 gallons to fill a scooter. So unless we’re willing to rely on divine intervention, our only choices are maximizing energy production, reducing dependence on liquid fuels and minimizing waste. The only existing technology that can possibly get us there is energy storage; the beating heart of the cleantech revolution.
In early September, I published an article called Energy Storage Stocks; Performance, Cost and Bell Shaped Curves; an early effort to explain that a statistical analysis of energy storage needs in most applications would yield a normal bell shaped curve. In early October, I published an article called Alternative Energy, Regular Guy Stuff and Rainbow Stew; an effort to explain the common man’s response to alternative energy in general and energy storage in particular. The core message in both articles was that growth in energy storage would be driven by the choices of individual consumers and the market could be statistically described by a normal bell shaped curve where a small minority have modest needs, a large majority have average needs and a small minority have extreme needs. My basic premise was that every energy storage decision will boil down to a cost-benefit analysis where the value of the energy delivered to an application must exceed the cost of the original energy inputs plus the fully loaded cost of the energy storage system. My conclusion was that while companies at the performance extremes will enjoy an undue share of the publicity and glory, the companies that offer a cost-effective solution for the average user will book the lion’s share of the future revenues and profits.
There are tremendous opportunities in the energy storage sector, but not on the bleeding edge of storage technology. Companies like Exide (XIDE), Enersys (NYSE:ENS), C&D Technologies (CHP) and Axion Power (NASDAQ:AXPW) that make energy storage products for regular guys with average needs are sure to prosper and appreciate substantially as they shed an old-tech image. Companies like Ener1 (NASDAQ:HEV), Valence (VLNC) and Altair Nanotechnologies (NASDAQ:ALTI) may survive by selling expensive products to an extreme performance niche, but they’ve already had their 15 minutes of fame and 300% gains. Apple has always been the leader in PC performance while Microsoft and Intel focused on cheaper solutions for regular guys. Do I need to remind anyone who won the first 20 years of the PC wars?
Disclosure: Author holds a large long position in Axion Power (AXPW), recently bought small long positions in Exide (XIDE) and Enersys (ENS) and will likely make additional energy storage sector investments in the future.