Why Invest in Oil Over Alternative Energy

The world’s population keeps growing—we are at almost 7 billion—and more people need more energy. For investors, the question is not whether energy is the right investment, but which kind. Oil is still the prime source for energy, followed by coal and gas, and I propose that at least for the next decade or two, oil and gas will remain in this top position.

As for coal, I am somewhat less enthusiastic because of its lower energy density (by mass) and the inability to distribute it via pipelines. However, most importantly, I believe that the increasing focus on so-called alternative and renewable energies will, at least in the short run, not just fail to decrease but probably increase world consumption of fossil fuels.

Alternative energy has become all the rage lately, dominating politics and the media. However, for one, alternative energy technology still has to prove whether it can actually deliver the NEGs (Net Energy Gains, i.e., the energy produced minus the energy expended to develop and manufacture the alternative energy technology) and EROIs (the Energy Return On [Energy] Investment factors) its manufacturers and proponents promise. But even if it does, research and development of alternative energy technology and construction of alternative energy plants will at least require extra energy in the short run.

Take wind power, for example, which appears to be hyped the most lately: The idea is to derive energy stored in the naturally occurring movement of atmospheric particles (wind) via turbines. To keep weight low, wind turbine blades are manufactured from light materials such as aluminum alloys (the manufacture of which requires high amounts of energy) or fiberglass composites. Of course, a (horizontal) wind turbine has other components beyond the rotor blades, e.g., the tower upon which the rotor sits, the motor/generator, and so on. Aside from the energy it takes to manufacture the materials needed to build the turbines, there is also transport, including trucking of the raw materials to the material suppliers’ processing plant, trucking of the processed materials to the turbine manufacturer for manufacture of the windmill components, and trucking of the components to the destination of the turbine. Assembly and erection requires further energy. In short, as with conventional types of power plants, a wind farm starts way in the negative before it generates its first Watt.

Moreover, operating a wind farm requires energy as well. Aside from maintenance, once running, wind farm operators can be faced with the following dilemma: Wind turbines generally work most efficiently in certain RPM ranges—indeed some are designed to run at a fixed, constant speed. However, wind power is intermittent, i.e., wind constantly increases or decreases, often rapidly. The problem is to decide when to let a wind turbine drop to an inefficiently low speed (including a full stop).

If the wind picks up again soon, it is worth to artificially keep the blades spinning by feeding energy into the turbine—i.e., the wind energy generator becomes a big motor-driven propeller that uses up energy for a while—as opposed to dropping into the inefficiently slow zone and letting the turbine pick up again naturally. However, if the wind stays away for too long, keeping the turbine running becomes the inefficient solution. Unfortunately, this kind of short term behavior of wind has been found mostly unpredictable.

Politics may also get in the way of trying to make the (objectively) right decision, as wind farm operators and politicians who backed such farms do not like them sitting there idle for the public to see, so the temptation to keep the blades running by force may be greater than scientifically founded or ecologically desirable.

Wind farms have gained some unpopularity as well. Some find them an eyesore, and the reflections from shiny blades spinning in the sun can even cause epileptic seizures. Indeed, the movement of the blades can also create unwanted Doppler effects for radars, and wind farms can interfere with air traffic control and could even disguise enemy aircraft in a time of war. Raptors and other migratory birds—including endangered ones—which favor areas of steady wind that are attractive for wind farming as well, can fail to see the spinning blades and get hacked into pieces to the dismay of animal rights activists. Some neighbors of wind farms also complain about noise.

Solar power—the other predominantly advocated alternative renewable energy source—has some similar problems. The manufacture of the solar panels made up of photovoltaic cells, which, in turn, are made of semiconducting materials like silicon, is energy-intensive, and creates toxic waste. Like wind farms, solar panels also depend on the weather, need to be kept clean to work properly, and are not considered pretty by everyone.

Moreover, their efficiency leaves much to ask for: In the not to distant past, a solar cell could not even produce enough energy in its lifetime to bring back the energy that was required to produce the silicon needed to manufacture the cell. Only recently do manufacturers claim that the cells are thin enough (i.e., require little enough silicon) and have a lifetime long enough that they will bring back more than the energy it cost to produce them. However, even those need 3-4 years to just get back to par. Indeed, much of the pro solar power advocacy is based on expected higher efficiency to be developed in the future. In the meantime, all of this will require more energy, not less.

Finally, there is nuclear power. Sometimes promoted as a “clean” energy, it is not a renewable energy and not entirely clean, as the fuel rods have a limited lifetime and become radioactive waste when discarded. An even bigger problem is safety, though.

When lawyers assess risk, they multiply the probability of the damage by the potential amount. While nuclear technology has become impressively “safe” in terms of the extremely low frequency of accidents that lead to leakage of radioactivity, the problem is that it will never be 100% secure, but with the damage that a single accident can potentially cause, one accident can already be one too many. Selling nuclear energy as a solution to the public is therefore difficult and becomes a NIMBY (not-in-my-back-yard) problem.

To sum it up, I believe that oil (and probably also gas) will continue to be a considerable and primary source of energy for years to come. Individual investors can bet directly on the oil price through ETFs that invest in futures, such as the United States Oil Fund (USO), or can indirectly bet on oil by buying shares of oil companies, such as Exxon Mobil (XOM), ConocoPhillips (COP), or BP (BP). One should also look at infrastructure companies like TransCanada (TRP). This list is meant to be exemplary, not limiting.

Indeed, many of these companies sell themselves more and more as general “energy” rather than oil companies, and at least some of them can be expected to double-dip in the alternative energy profits: once by constructing and operating alternative energy plants, and then again from the increase in energy demand caused by the energy it requires to build and run alternative energy technology. This holds true even if you've got oil right in your name, such as British Petrol, whose BP Wind Energy unit constructs wind farms.

As much as I would like to say that the most recent drop in the oil price in the last few days presents a good opportunity to get in, the truth is that markets are notoriously unpredictable in the short term and I would not want to use today’s oil price as a selling point by itself. The real message is not to buy too much into today’s alternative energy hype, and to cash in in the future, when public perception of this overhyped field has been corrected.

Disclosure: No positions.

References:

For world population growth, see U.S. Census Bureau, International Data Base, www.census.gov/ipc/www/idb/worldpopgraph.php.

For world energy consumption data, see U.S. Energy Information Administration, www.eia.doe.gov/ (see specifically “World Energy: Consumption, Total Energy” (Excel table) at www.eia.doe.gov/pub/international/iealf/...; and “World Energy: Consumption: Consumption, By Fuel” (Excel table), www.eia.doe.gov/pub/international/iealf/...).

Dyan Machan, “World’s Greatest Investors—What They’re Saying Now: Robert Rodriguez,” Smart Money, Aug. 2009, p. 44.

“Alternative Energy: Is it plane?,” The Economist, Nov. 8, 2008, p. 98-99.

Paul Johnson, “The Nonsense of Global Warming,” Forbes, Oct. 6, 2008, p. 25.

Steve Forbes, “Windbags,” Forbes, June 16, 2008, p. 32.

Charles A.S. Hall et al., “Peak Oil, EROI, Investment and the Economy in an Uncertain Future,” in Biofuels, Solar and Wind as Renewable Energy Systems: Benefits and Risks (2008), p. 109-32.

BP alternativenergy, “Largest wind farm in Midwest to be expanded,” July 16, 2009, www.bp.com/genericarticle.do?categoryId=....

Comments

[CaptainJJack:]

I remember talking to a physicist a number of years ago about carbon and generating electricity.

He said to imagine that you were standing in front of a coal fired plant, and watch as a steady stream of coal cars dump their fuel. For a typical plant this amounts to thousands of cars dumping coal each year.

Now, imagine standing in front of another power plant of the same size where natural gas cars were streaming in. There would only be one fourth the number of cars, in terms of carbon delivered.

Now think about a nuclear plant. He said it would take only a few carloads (I think he said two) for an entire year, and these would have only minimal carbon.

Nuclear power plants are very safe, but nuclear power is not. The problem is that bad guys will eventually make a bomb.

It may take a while, but with a half life of thousands of years, the opportunity will arise. Even with probabilities less than 1 in 10,000, there will be plenty of time.

But, the genie is already out of the bottle. The bomb materials will not likely come from the US, they will come from North Korea, Pakistan, Iran, or Russia.

I say that Nuclear should be on the table. I understand the risks, but they have to be weighed against losing the snow pack in the rockies and the corresponding loss of water in the Colorado and the Ogallala aquifer, as well as the loss of snow pack in the Cascades and Sierras and the impact on our fruit and vegetable crops.

Sep 03 09:02 AM

[Michael D.:]

New nuclear technologies produce little waste, as they actually re-burn the waste from first-pass generation. What is left is non-fissile, and not weapons grade. Of course, they've been doing this in Europe for 20 years.

Sep 03 09:09 AM

[buoy:]

You miss the point of alternative energy. Technology is now available to ADD energy into the grid. Thus, reducing dependency on any one source. Something the US seriously needs to be looking at.

Sep 03 09:10 AM

[john s. gordon:]

author mentions coal and pipelines in the same sentence.
there have been a few cases where coal-slurry pipelines have been used, where it made economic sense on a site-specific basis.
> jack

Sep 03 09:18 AM

[Ferdinand E...:]

Good article, but your comments about nuclear are wrong. I can also mention that there is a lot of hype about wind and solar, but they have a role to play in the optimal solution.

Sep 03 09:19 AM

[Andy1234:]

Well.......We know that energy is going to increase.....as long as the world population increases.

Rather than trying to determine which fuel source....or energy source is the best for the future.....wouldn't it be prudent to invest in companies that sell electricity......I mean.....they are going to sell more energy.....and they will more than likely always choose the best source of energy in terms of environment, cost, government regulations, etc. That seems to be the best play here. Even better....find one that will have a favorable currency exchange rate if you think the dollar is going to fall out.

I do play different energy sources......and I agree with the author.....but its always best to diversify amongst the energy sources....uranium, oil, coal, NG. There is bound to be some HUGE winners in this arena long term.

And if energy is going to become more scarce in the future (especially liquid fuel)...wouldn't it also make sense to look at vehicles which require liquid fuels of high energy density and look at these areas. Which industries use high amount of trucks or huge machinery that might not be able to operate any other way....its possible that if energy prices increase....the cost of mining, producing food, etc will increase substationally......even the cost to build homes. Its possible that investments directly into these commodities will do well in the long term as well. Lots of opportunities!

Sep 03 09:25 AM

[nolaig:]

thing about nuclear energy is that you need water, china has a shortage of drinking water that they cant afford to pollute at any cost. This is why they are going down the road of alternative energy. they will be the leaders of the next generation of clean energy.

Sep 03 09:29 AM

[31October:]

All this about wildly spinning blades cracks me up. I have been to wind fields. There are no flocks of dead birds littering the ground. The blades sound like "whoosh! whoosh! whoosh!" hardly a screaming jet. The blades here are made with balsa, not energy-intensive aluminum. Somebody somewhere always has to come up with a B-S excuse why we can't...

Wind and solar are perfectly complemented by natural gas generators. Natural gas is as green a any fossil fuel could hope to be, the turbine generators can spool up and down qickly to counter the unstable wind & solar supply; and we have an abundance of it. Combine those 3 with any form of kinetic energy storage, and you have extremely low carbon, zero toxic, zero particulate electricity.

Why does everybody want to make a practical, clean, flexible, and screamingly obvious solution so ridiculously difficult?

The author's summation is wrong. We do not get our electricity from crude oil. Everybody knows that. Electrical generation and transportation fuel are different. People should be VERY long on oil, but the reasons have nothing to do with the non-sequitars into wind.

Sep 03 09:41 AM

[jerrydd:]

While you are right about oil being a better investment, your points on RE are not very good.

First the price of oil is going up fast as soon as the world economy recovers so that makes it a great investment if bought at reasonable prices which will drop for a few months but after that, up with a bullet.

On RE yes much is hype and much is in a bubble, overpriced now but that doesn't mean it's not the future, higher fossil fuel prices will see to that.

Also oil, coal is massively subsidized now so it doesn't really show it's true cost which is about $1.50/gal higher for US oil and coal should be 100% higher to pay their socialized costs of Persian Gulf military, oil wars, tax breaks, pollution, balance of payments, etc for oil and land clean up, destruction, air, water pollution all in our income taxes, health care costs, etc. And this doesn't even include CO2 costs.

Just because investors invest in stupid RE projects because they are not wise doesn't mean RE is too expensive or not our future, just not good for investing on a large scale.

Other than PV, Geothermal, river/tidal, most other RE, the profitable ones is small business, not big. Home size wind, solar CSP in real mass production will be far cheaper the fossil fuels or nukes as done now and will limit fossil fuel prices once wide spread which will take 10 yrs. The price of fossil fuels will force that.

Home wind is now under $2k/kw with inverter and solar CSP in mass production is under $3k/kw. so for under $10k, a home can make all their energy needs for it and transportation for 50 yrs. You can argue all you want but the tech is simple, inexpensive, just needs to be done. Sadly for investors not much there to invest in other than installing them on their homes.

Many more details but I can't take that much time though my past posts spell much of it out for those wanting more info.

So invest in oil but only for 5-8 yrs, after which it will stabilize, even drop as RE, EV's and NG takes over.

Sep 03 09:45 AM

[31October:]

P.s.: Nuclear should be on the table as an ingredient in the energy casserole. France is a terrible place to live, but when I was there, it was physically very clean because of the nukes.

And I want to back up jerrydd - My brother in law has a boat powered entirely by tidal power. I made a little money trading OPTT, but maybe I should have kept it. It's free power. (But I gotta differ with him on oil as a long-term investment. Limited resources vs. growing population with increasing mobility sounds like a great investment to me. :-)

Again, do not let the arguments against wind / solar / nuclear obfuscate legitimate reasons for crude-based stock picks. We don't burn west Texas intermediate for electricity.

Sep 03 10:20 AM

[Mad Hedge F...:]

xcbn. Crude has been trading like a 3X short dollar ETF. If you look at pure supply/demand considerations, oil should be trading in the $40-$50 range, not the $65-$75 range that we have seen. That means that a $25 speculative premium can be laid purely at the door of the big hedge funds. The big oil producing countries, seeing Obama’s policies leading to a weak dollar for as far as the eye can see, are also ditching their bucks as fast as they get their hands on them. That is why the Gulf sheikdoms were one of the biggest buyers of crude near last year’s $148 peak. This leaves industry insiders clueless about the price direction of their products, not an easy way to run a business. They understand rig counts, tanker deliveries, and depletion rates, not commitment of traders reports, Bollinger bands, and Fibonaccis. No doubt it was their carping that brought regulators to pressure Deutsche Bank to shut down its double long oil ETN (DXO). Of course, this all means the consumer is getting shafted, paying $3.39/gallon at the pump, instead of $2. This premium is causing a drag on the economic recovery as well. Europeans and Japanese who are paying up to $10/gallon are wondering what we are bitching about. Bring on a “W” recession and poof!, that premium disappears, as it did last year.

Sep 03 10:32 AM

[Advill:]

8 rivers in the world provides for 1.5 billion people in the world, losing Himalayas glaciers means an extraordinary problem for at least 1 billion.
All what can be done must be, perhaps one of the biggest mistakes of President Bush was ignoring this problem for too long.

Regards


On Sep 03 09:02 AM CaptainJJack wrote:

> I remember talking to a physicist a number of years ago about carbon
> and generating electricity.
>
> He said to imagine that you were standing in front of a coal fired
> plant, and watch as a steady stream of coal cars dump their fuel.
> For a typical plant this amounts to thousands of cars dumping coal
> each year.
>
> Now, imagine standing in front of another power plant of the same
> size where natural gas cars were streaming in. There would only be
> one fourth the number of cars, in terms of carbon delivered.
>
> Now think about a nuclear plant. He said it would take only a few
> carloads (I think he said two) for an entire year, and these would
> have only minimal carbon.
>
> Nuclear power plants are very safe, but nuclear power is not. The
> problem is that bad guys will eventually make a bomb.
>
> It may take a while, but with a half life of thousands of years,
> the opportunity will arise. Even with probabilities less than 1 in
> 10,000, there will be plenty of time.
>
> But, the genie is already out of the bottle. The bomb materials will
> not likely come from the US, they will come from North Korea, Pakistan,
> Iran, or Russia.
>
> I say that Nuclear should be on the table. I understand the risks,
> but they have to be weighed against losing the snow pack in the rockies
> and the corresponding loss of water in the Colorado and the Ogallala
> aquifer, as well as the loss of snow pack in the Cascades and Sierras
> and the impact on our fruit and vegetable crops.

Sep 03 11:07 AM

[robdoc:]

Wow! Interesting article with very interesting points. There is not, however, that much to back it up.

You state about wind farms:
"Some find them an eyesore, and the reflections from shiny blades spinning in the sun can even cause epileptic seizures. Indeed, the movement of the blades can also create unwanted Doppler effects for radars, and wind farms can interfere with air traffic control and could even disguise enemy aircraft in a time of war."

Where is the data? This reads like a child's book wherein you are trying to introduce another new horrible villain.

It's a good thing that there are no bad consequences that could come from oil and other non-renewables (read with a fair dose of sarcasm).

Do you really want the counterpoint to your points to be: baby seasbirds surrounding by unctuous tar that prevents them from respiring, my 20 year old friend that had the top of his skull blown off in Iraq to protect your oil profits, and environmental calamity movies. ?

Sure there are a variety of costs to any mode of developing energy. Please attempt to include the real costs of ALL energies presented.

Sep 03 11:14 AM

[long_on_oil:]

The carbon tax is similar to a tariff and it is proven tariffs never work in the long run. In order to bring solar down to oils price level the government will have to tax us for the difference, thus the carbon tax.

It may be just me but why are we still calling oil a fossil fuel? There is nothing fossil about it when it is found 6 miles below the ocean floor. At least that is what common sense tells me. Like the recent BP find plus the find off Brazil.

Sep 03 12:00 PM

[Valley Boy:]

The county governments at the Mt. Diablo area windmill farms can tell you about the kill rates for raptors. The raptors hover over their home range in the rock outcrops while scouting for prey in the grasslands below. That is where the windmills are placed. The ecological upshot: the less raptors, the more rodents---bad for farmers.
The wind turbines should be moved somewhere else.

Sep 03 02:13 PM

[long_on_oil:]

The cost per kilowatt hr of wind farms is enormous compared to an electric plant running on natural gas. ValleyBoys post should be heeded by everyone. Move the turbines to the junk yard and lets get serious about using natural gas to produce electricity.

Sep 03 05:36 PM

[observer00:]

Notice risks of fatalities were not mentioned for oil and gas industry activities as well as costs for needed facility decontamination/decomm... once the facility has completed its life cycle (i.e., no more oil/gas). Seems rather one sided. Interesting, considering there has never been a fatality at a U.S. commercial nuclear facilty as a result of radiation exposure and more of the fuel is being efficiently "burned".

Sep 03 07:21 PM

[RWCMom:]

We need them all. Solar & wind are important options for those who can afford them and want some control over their costs instead of being at the mercy of utilities. The other piece of this picture is conservation. I like to invest in companies that are developing more efficient motors and any company that is reducing their use of natural resources in operations or production. Using organic material, buy more local products with less inherent transportation.

Sep 03 08:42 PM

[erewhonman:]

On wind power I think you were trying to make it out as having a net energy deficit on cradle to grave accounting when all the input and operation energy usage is considered. What garbage! But you have brought a new dimension to gonzo journalism

Sep 04 03:00 PM

[tigris72poo:]

Good points but you ommited two critical reasons that make oil a more attractive investment than RE:
1. Most of the oil is used for transportation fuels and almost 100% of transportation is fueled by liquid hydrocarbons. It will take many years and billions to change the infrastructure and produce enough electric or hybrid cars to make a difference.
2. Free market principles work because one way or another somebody has to pay the true cost of AE whether the end-user r the taxpayer. So unless the price of oil goes much higher all of these AE sources will be of limited use. I learned that in 1979 when after the big jump in oil caused by the Iranian crisis my boss asked me to research photovoltaic cells. My conclusion was the best way to play it was buy oil stocks. Thirty years later my conclusion is unchanged.

Sep 08 10:29 AM