Commodities, Cap and Trade and Natural Gas 23 comments
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There's a lot of hubbub surrounding H.R. 2454, otherwise known as the "cap and trade" program. Personally, I think most of the criticism against cap and trade misses the mark. Few people have talked about the fact that cap and trade programs require inter-country cooperation to be effective, but enforcement mechanisms have not been clearly defined or tested. What will the U.S. do, for example, if China "cheats" on carbon emissions? China, after all, uses mostly coal for its energy needs. Perhaps we'll have some version of the International Atomic Energy Agency (IAEA), but for carbon checks. I suspect any heavy-handed enforcement will strain relations between countries, but a heavy hand is exactly what is necessary to convince everyone to play by the rules.
In any case, I jumped into commodities earlier this week (a few days too early), and am happy to hold UNG, FCG, WMB, WPZ, GSG, COP, and DBC. If approved, President Obama's cap and trade program will reduce coal and require more natural gas and solar power. Thanks to environmentalists, America may finally be able to reduce its dependence on foreign oil.
As I've already pointed out, the "cap and trade" program is not perfect--the government may end up artificially increasing certain commodity prices by transferring subsidies from coal to other energy sources. Even so, I'd rather subsidize clean energy than environmentally harmful energy sources.
Owners of Market Vectors Coal ETF (KOL) might want to assess the impact of the cap and trade program very carefully. Although it provides some exposure to Chinese coal companies, all coal companies will remain an uncertain bet as cleaner energy becomes more viable. After all, why would power plants use coal when they can use natural gas? From the EIA:
In the electric power sector, natural gas is an attractive choice for new generating plants because of its relative fuel efficiency and low carbon dioxide intensity. Electricity generation [will account] for 35 percent of the world’s total natural gas consumption in 2030, up from 32 percent in 2006.
You might still be wondering, "Why natural gas? Why not nuclear, wind, or solar companies?" Elementary, my dear Watson--it's the simple process of elimination.
First, America has far more natural gas than petroleum. Many Americans already know we have more natural gas than oil, but I am very surprised to see so many people overestimating cap and trade's foreign policy implications. If you think switching to natural gas will crush foreign regimes, don't kid yourself--the Middle East still has the world's largest supply of natural gas. I am willing to bet that in ten years, Russia and Iran spearhead a new natural gas "OPEC." That's okay--America won't ever be as reliant on natural gas imports as it has been on petroleum imports. In fact, Canada will probably be the largest foreign beneficiary of increased natural gas use.
Second, wind power looks D.O.A.--T. Boone Pickens, its most visible proponent, has scratched the idea, at least in Texas. That's not a good sign for the Pickens Plan.
Third, solar power is more complicated than it looks because it requires lots of empty land to put all the solar panels a power plant requires. Solar panels are most effective when powering relatively small structures, like houses and outdoor emergency phones. In any case, I don't know of any solar power plants that can supply power on the same scale as traditional power sources. (I am not an expert on solar power, so I appreciate being corrected if I am wrong.) At least for now, solar will not displace natural gas, but will probably work in conjunction with it.
Fourth, nuclear power suffers from a major image problem. Chernobyl will force legislators to hedge their bets on other energy sources and/or slowly adopt nuclear power.
I hope I've adequately explained why I believe natural gas has a bright future. If we're weaning ourselves from "dirty" energy like oil and coal, and solar and wind power have years to go before effective nationwide use, what's left? Aside from nuclear power, which suffers from a NIMBY problem, there's just natural gas. (Please don't get me started on ethanol--the idea of driving up food costs to get oil is untenable--and both Alan Greenspan and Charles Munger agree.)
Mind you, I do not expect natural gas prices to rise immediately. Even if the Senate approves the cap and trade bill, also known as H.R. 2454 (American Clean Energy And Security Act of 2009), it will take years for demand to dent the current supply of natural gas.
Why, then, am I buying natural gas and commodities companies now? Two reasons: one, current natural gas prices seem relatively low; and two, if Congress removes certain subsidies for natural gas companies or does not supply them with adequate incentives, companies will halt or reduce natural gas drilling, which will reduce supply and increase natural gas prices.
You might ask why I own ConocoPhillips (COP), an oil company. Petroleum will continue to be an important resource (petrochemicals, etc.), and many oil companies also have natural gas interests. In addition, oil companies sell an essential product and pay high dividends (unusual in our current era of 1% money market rates). I also don't mind buying anything Warren Buffett owns.
It is important to note that I hold all of my commodity-based shares in a retirement account to minimize taxes. Owning UNG in a regular account creates tax implications because of its partnership structure. I am not certain, but apparently, UNG does not pay out distributions, but imputes income to its investors anyway. Any more information on UNG's tax issues would be appreciated. (Feel free to leave a comment, especially if you're a CPA.) UNG's tax structure doesn't affect me because I hold my shares in a retirement account, but I am still curious.
Regardless of whether H.R. 2454 passes, the future of the energy industry is clear: the winner will be either nuclear or natural gas. I am choosing natural gas because it has a higher chance of widespread adoption. Fairly or not, nuclear power will always be linked to Chernobyl, Three Mile Island, and Davis-Besse, which reduces its appeal.
Disclosure: I own UNG, FCG, WMB, WPZ, GSG, COP, and DBC. I have recommended to family members to sell KOL if they own any shares.
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This article has 23 comments:
Just because politicians say the debate is over about human caused global warming, does not mean that there is man made global warming
Many reputable scientists in the debate have been silenced, and if they dispute the existence of global warming they are labeled "heretics" and would lose there government funding and with it their careers.
We have made great progress in cleaning up the environment since the 1970's, and will continue to make progress as technology and the economy allows.
If we continue down this road of Chicken Little and "The Sky is Falling" mentality, the world economy as we know it will be a distant memory..
What this bill will accomplish is making American factories and refineries less competitive because there will be a new input cost that we unilaterally have imposed on ourselves. The effect will be to "shrink the oceans". While some American goods held a competitive advantage as far as selling them in America b/c they are produced locally, this additional cost will erase that advantage and make foreign products relatively more competitive b/c the cost of transporting them will be offset by carbon costs.
The main point of this vis a vis your article is that this bill will definitely INCREASE our dependency on foreign refined products. Domestic refiners run on very slim margins (most of the time) and this additional cost will have to be passed through to consumers. Consumers will, of course, look to buy their products for the lowest price which will now, in a larger sense than before, come from somewhere else that hasn't handcuffed itself with this new additional cost.
The cap and trade idea at this point in time is completely unfeasible and will be a disaster. It will put the final nail in the coffin of some struggling American factories and refineries and will increase Hugo Chavez's influence on our daily lives. Not to mention that it is a huge (largest in American history?) tax on the middle class, whether they want to call it that or not. Obama wants us to "be like California" who has the lowest carbon usage per capita in America. I'm sure a North Dakota resident is all over not using their heater in the winter and folks in Dallas will be happy to shut off their A/C's in the summer so they can be more like California which, incidentally, despite having the best possible climate (meteorological) for being “green” is still bankrupt.
www.sustainablenuclear...
I think it is easy to see where the author stands on carbon emissions from his first paragraph. The term cap and trade is usually referenced as a negtive comment, to make the restriction of carbon emissions seem like expensive, overbearing government control. This slants his article for coal & oil companies and against 'clean energy' development.
Natural Gas is the cleanest burning of the fossil fuels. We already have an infrastructure for transporting the fuel. I do admit there can be improvements to make it more available as a transportation fuel. T. Boone Pickens has a lot of money tied up in natural gas. A lot less money recently, as the market has dropped.
The large wind farm that Mr. Pickens planned, has been changed a bit due to financing issues, not wind power issues. T. Boone Pickens is an oil man. He's a billionaire because of oil & gas. His collateral was his oil and gas holdings that dropped to <50 % of their value compared to last year. So his financing disappeared.
He has a large order for wind turbines from General Electric that has not been cancelled. Pickens is not out of the wind business. He has adjusted his plans to meet the new market reality.
Instead of building the biggest wind farm in America and relying on government aid and subsidies, to increase the national power grid infrastructure, he now plans to build 5 or 6 smaller wind farms closer to several metropolitan areas. These locations have yet to be announced. This new plan will reduce the need to build up transmission since the power source will be closer to the user. This would be closer to a distributed power plan as opposed to a central power generation plan.
This brings up my next point...Solar power has tremendous potential for distributed power and centralized power generation. While it's true that a roof top solar installation is probably beyond the average homeowner's skill level. It is not complicated. There are many companies that install small scale solar and/or wind systems for homes and businesses all across the nation. These distributed electrical power generation systems do not strain the power grid, they reduce the demand on the grid, because the power is generated close to the demand for power. The value of this distributed system is validated by Mr. Pickens' actions.
Large scale solar instalations are planned for sparcely populated areas with adaquate solar insolence. The US Air Force has the site of the largest Photovoltaic Solar installation in America at Nellis Air Force Base. It is a 'centralized' type system, but local demand will use the majority of the supply. Thus reducing demand on the national grid.
Another type of 'centralized' solar generation is a 'concentrated solar thermal' plant. Instead of photons being harvested from sunlight, the thermal heat of the sun is used. Mirrors concentrate the sunlight to heat a liquid to high temperature. The liquid in turn is used to generate steam pressure to drive electrical turbines, just like a coal or natural gas plant uses steam to drive their turbines. This high temerature liquid can also be stored for later use(on demand, or dispatiable power). There are several CSPs in operation world wide, but the use of storage is now just being implemented in the southwestern US.
Dispatchable power refers to power on demand. When the electrical power being generated at a centralized location is not enought to meet the demand, power generation must increase immediately or a 'brown out' or 'black out' may occur. Natural gas has played the role of a back-up or a dispatchable power source for coal fired power plants because it is easy to fire up the NG burners to make more steam on demand.
Hydro power is another example of dispatchable power. An operator opens a valve in the dam to run water through a turbine. An almost instantanious response to electrical demand.
Concentrated solar thermal is a clean, 'dispatchable' electrical power source. Concentrated Solar Thermal has the potential to be 'centralized' or 'distributed' power.
In my opinion, there are too many dangers to consider nuclear. But, that's another whole article.
1. Reducing demand for foreign oil from the petro terrorists!
2. Job creation. Weatherization and energy efficiency improvements are more labor intensive than material and technologies. Energy efficiency is more cost effective than increasing the energy supply. Again, immediately reducing demand for foreign oil!
3. This bill provides the means to lower cost energy for our children & grand children. Building wind and solar installations will take labor and capital expenditures, but it will provide the infrastructure to generate electricity from free, unlimited energy sources, the sun and the wind.
Please take a look at who's against American Clean Energy. It is the rich and powerful fossil fuel lobby. The 'Cap and Trade' retoric is a distraction.
this is the most irrational statement that I have ever read.
Substitution of NG for American Coal equals reduction foreign use for cars and trucks??
We have the environmentalists to thank for this NON-existent reduction in imports of foreign oil.
Sure, NG power plants are inherently cleaner burning, but what does that have to do with importing foreign oil.
I dont think that you proof read your article before posting, or_____?
1. Reducing demand for foreign oil from the petro terrorists!
This is patently FALSE. All this will accomplish is making domestic production of the petroleum products derived from foreign oil more expensive. The easier and cheaper way to offset this cost is NOT to spend billions on upfront capex and develop comparably inefficient wind and solar; it is to import more LNG, more heating oil, more diesel fuel, more gasoline and more distillates.
2. Job creation. Weatherization and energy efficiency improvements are more labor intensive than material and technologies. Energy efficiency is more cost effective than increasing the energy supply. Again, immediately reducing demand for foreign oil!
WRONG! This will lead to job LOSSES for Americans. If a factory is using energy to create widgets in America and it will now either directly pay for its carbon production or pay for it indirectly through higher energy bills and the same rules do not apply to foreign-produced widgets, then (assuming there is still demand for the widgets) at least some portion of the widget sales will transfer to the foreign producer who is now, artificially, relatively more competitive. This will for certain lead to job losses across all affected industries which will include any industry that uses energy to create its products so long as they are transferable.
3. This bill provides the means to lower cost energy for our children & grand children. Building wind and solar installations will take labor and capital expenditures, but it will provide the infrastructure to generate electricity from free, unlimited energy sources, the sun and the wind.
Because of this bill, our children and grandchildren will be handed over a country so heavily burdened with debt that all of our hard earned savings will be evaporated through inflation. The right answer, assuming you believe either that carbon emissions are a potential problem or that we are truly in peak oil, is to continue to use the cheapest, most efficient forms of energy while also incentivizing the private sector to develop renewables through subsidies, not by taxing ourselves back into a deeper recession with additional massive national debt that can only be repaid by printing dollars.
Please take a look at who's against American Clean Energy. It is the rich and powerful fossil fuel lobby. The 'Cap and Trade' retoric is a distraction.
The rich and powerful fossil fuel lobby? What? If that is so, then it must be the single most ineffectual lobby in the history of lobbies. When is the last time you saw congress do something for the benefit of the risk takers who help provide our country with the energy we need to survive? Never! Last year, when the companies were able to earn ROI’s that approached ½ of the tech and healthcare and biotech industries, what did we hear? Windfall profit taxes! The people who are against the cap and tax bill are those who think about things from an economic stand point, not an ideological one.
Thus, America can reduce oil consumption by relying more heavily on natural gas for industrial use (24%) and residential/commercial building use (6%). 30% is a significant slice of the energy pie.
I agree that natural gas will not entirely replace oil use in the industrial sector any time soon; however, the cap and trade program provides incentives to reduce oil use in the industrial and residential/commercial building sectors. If the program is successful, American will reduce its reliance on oil for at least 30% of its energy consumption. As such, my comment stands.
Makes me wonder if you're paying attention. Look at the prompt month Henry continuation chart and compare it to UNG; its not working. Besides the roll issue, there is the unit creation/redemption issue that ended up halting trading this week on UNG. If you want exposure to NG, own one of the shale producers that did good forward hedging when prices were $10+ last year; those guys are NOT shutting in production.
Then consider that if you don't drill with a number of years, you lose the lease to the land. Given the prices paid for some of the lease blocks, there is much hesitancy to lose these blocks.
Finally, you do not seem to understand that the pipeline infrastructure of the US remains rather limited. This puts large constraints on the CNG vehicle initiatives, as well as limiting the number of combined cycles you can build. After all, if you can't get firm gas, you can't run your unit. Expansions are occurring, but it takes time.
And your NG plant still has carbon to take care of, and its not *that much* less than a coal plant.
You are incorrect; much hydro is run-of-river and is dependent upon scheduled flows. Even reservoir hydro has limits as to how much draw-down can be done at a time. Pumped storage however *is* dispatchable and can run AGC which is a huge benefit.
On Jul 09 04:10 PM Mad Hedge Fund Trader wrote:
> It's the easiest short term fix on the emergy problem, and you can't
> beat the price. You may recall my advice to abandon natural gas at
> $4.30 in the face of giant new discoveries in shale formations (see
> “Cash out here at $4.30) and “Huge Discoveries . Since then, the
> Midwest has suffered its wettest spring since 1871. It rained 25
> inches in Chicago the first half of the year, drowning golf courses,
> and sending the mosquito population exploding to Biblical plague
> proportions. Let me assure you, I have absolutely no ability to predict
> the weather, except that my combat scars itch when a storm is coming.
> Cold weather means no air conditioning, which means cratering natural
> gas demand and a new two month low of $3.37. But when you see a parallel
> contract like crude soar to new heights, and NG fail a half dozen
> times to get off a five year low, you know rough weather is coming.
> The crude/gas ratio players really got carried out in body bags on
> this one, as one record after another was shattered, taking it to
> a stunning 19.4:1. Natural gas has been the worst performing investment
> this year, the ETF (seekingalpha.com/symbo...) falling a
> mind blowing 54% since January. Best to wait for natural gas to find
> its new, lower, range before entertaining a position.
On Jul 09 01:11 PM jack kreg wrote:
> "reduce coal and require more natural gas and solar power. Thanks
> to environmentalists, America may finally be able to reduce its dependence
> on foreign oil."
> this is the most irrational statement that I have ever read.
>
> Substitution of NG for American Coal equals reduction foreign use
> for cars and trucks??
>
> We have the environmentalists to thank for this NON-existent reduction
> in imports of foreign oil.
>
> Sure, NG power plants are inherently cleaner burning, but what does
> that have to do with importing foreign oil.
>
> I dont think that you proof read your article before posting, or_____?
On Jul 09 10:26 AM Jimbo wrote:
> I am an investor in Natural gas and believe it has a bright future.
> Nuclear energy is getting a bum rap. ALL nuke plants in the U.S.
> have a steel reinforced containment dome to prevent the very thing
> that happened at Chernobyl. To the best of my knowledge, NONE of
> the nuke plants in the Soviet Union had domes. The reason for this
> is that those peace loving Commies, unlike the War Mongering Americans,
> wanted to be able to remove the roof and extract weapons grade material
> in the event those War Mongering Americans started a war. There are
> many other specific facts concerning the Chernobyl incident that
> make it very unlikely anything like that meltdown would happen in
> the U.S, but, as the Greenies might say:"never let a good crisis
> go to waste".
How about a little forethought for the grandchildren and less greed about wanting everything now.
There is an inference in the authors article that we could shut down coal plants and start natural gas. Do that and figure out how demand drives the price of natural gas in a few years let alone the future reduction in gas reserves.
On Jul 10 05:17 AM johnbee wrote:
> Americans contribute 5 times or more pollution to the world per person
> than the emerging economies. The US can hardly expect others to pull
> back their fossil fuel energy output until the US cuts their own
> drastically and the only way to do that is with non fossil fuels,
> and that excludes natural gas. It may well be more expensive to produce
> wind and solar energy but in 20 years time the US would have little
> need to import fuel or to protect its supplies with expensive armies.
>
> How about a little forethought for the grandchildren and less greed
> about wanting everything now.