Seeking Alpha
Growth at reasonable price
Profile| Send Message|
( followers)  

Summary

  • Longtime students of China well know that it deploys an effective strategy proved over millennia: display weakness over strength to hide the strength.
  • By December 2015, China probably will have nearly 4 times as much electrical transmission cable as the U.S. Here, as with rare earths technology, China is no slouch.
  • I ruefully recommend aggressive hedges against the possibility that America falls further behind. Invest in gold and also silver, an alternative to the buck and important for solar energy.

Measuring global economies according to their purchasing power, the World Bank recently stated that China will likely become the world's largest sometime in 2014, if it has not already achieved that mark. This comes as no surprise to me. As historians can attest, for more than 1,500 years, through the 18th century, the Middle Kingdom was, by most accounts, the world's largest economy.

More interesting than World Bank projections, however, was global reaction to the story.

Chinese officials insisted the numbers were flawed and meaningless, given the country's relatively low ranking per capita income. I take that protest with a grain of salt: longtime students of China well know that it deploys an effective strategy proved over millennia: display weakness over strength to hide the strength.

In the U.S., most newspapers withheld the story from their front pages, and commentary often amounted to a giant "So What," words used in several headlines. As perhaps best-articulated by Financial Times columnist Martin Wolf, pundits based their "so what" on the massive discrepancy between Chinese and Western per capita incomes, credit boom challenges facing China, U.S. military might and U.S. technological leadership, and the fact that U.S. productivity outpaces that of China by 5-to-1.

I take no issue with the numbers, neither from the World Bank nor the "So What" commentators. If investors believe in the U.S., however, they should bet heavily on all things infrastructure-especially energy infrastructure. I like General Electric (NYSE:GE), Schlumberger (NYSE:SLB), Honeywell (NYSE:HON), Fluor (NYSE:FLR), and National Oilwell Varco (NYSE:NOV). According to Value Line, not one of these exceptionally well-managed companies trades above the average stock market multiple-in other words, they are cheap-despite mostly strong long-term growth records. That most investors eschew the better-than-average projected growth of these companies is bad news for America. It means we have no plans to expand our energy infrastructure.

I rest the guts of my argument on statistics that far too many ignore. China will likely surpass the U.S. on a per capita basis in one sector where per capita measure probably matters most-electrical transmission cable. By December 2015, China probably will have nearly 4 times as much electrical transmission cable as the U.S. By that time, China will have augmented its transmission cable network with the equivalent of America's entire current transmission grid. Moreover, here as with rare earths technology, China is no slouch. The heart of the transmission network is ultra-high voltage wire, where China has proved the capability of 1000kV wire. Besides having far greater transmission capacity than the U.S., technologically China has also far surpassed us with the establishment of state-of-the-art grid interlinks, including a trial area already 398 miles in length.

Ultra-high voltage wire comprise the guts of a smart transmission grid, to connect grid regions and let the country seamlessly integrate multiple electricity sources (e.g. solar, coal, natural gas, wind). China has leapt past America and many other countries, and is now the world's largest renewable energy manufacturer and user. Its drive to also produce the most electric cars, smart meters and charging technologies coexists within a plan to leave the rest of the world in the dust via construction of a 21st century energy infrastructure. Alone during the decade ending in 2019, China will spend trillions of dollars, likely exceeding the trillions in capital America invested to win WWII.

Still we hear cries of "So What." China wastes more money on an unneeded infrastructure than we have wasted on recent wars. By this zany logic, we're even. Why does China waste money, it reasons, and why should we worry: American ingenuity and free markets have created a new, unprecedented energy boom of the kind that requires no fancy infrastructure. In a ham-handed imitation of British headlines, Foreign Affairs labeled its latest cover story "Big Fracking Deal: Shale and the Future of Energy."

Mind you, the journal wrote this, plus the introduction to several related articles on hydrocarbon extraction from shale, without ironic intent: this attitude helps explain China's ferocious desire to hide its undeniable strengths. I detract nothing from fracking qua fracking. If anything, I'm surprised that American oil and gas production has grown so fast for so long. I expected production to plateau as early as next year. Now, I admit that oil and natural gas production could grow through 2019.

Nevertheless, these new hydrocarbon sources can never provide a backbone of America's future energy supplies. Even if we produce 11 million barrels of oil daily-far more than the most optimistic forecasts-we must still import several million barrels of oil a day. More important, unless we could repeal the laws of physics-never mind supply and demand-hydrocarbons are finite, and their production will eventually peak, an inevitability we'll see sooner the more energy we use.

Repeatedly, I have warned readers of the vagaries of fracking, but recently I became aware of another problem, a potential vicious circle. Fracking produces light oil, usually most desired as it requires less refining. The trouble is, the U.S. lacks sufficient light oil refining capacity. That is why U.S. oil prices are lower than in other parts of the world. By law, America cannot export oil. Of course, low U.S. oil prices are a boon to refiners, but miserly for fracking producers whose costs continue to rise. They need high oil prices to pursue their lofty goals. The only way out for such producers is to allow exports, a route that could seriously harm refiners, and of course, the American public.

If, as America so fervently hopes, our goal is to buy time for a transition to new energies, I see no signs of that happening. The American Society of Civil Engineers [ASCE], a 160-year old organization with a reputation for integrity, reports that our electric transmission infrastructure is in a state of terrific disrepair. To sufficiently update the current infrastructure so that the system no longer faces potential critical failures, utilities would need to invest an additional $100 billion by 2020, and nearly $750 billion by 2040-even before accounting for almost all investments required to create a smart grid.

The U.S. should invest immediately. The bottom line: the hydrocarbons the U.S. produces come with ever-greater cost. As shown in the Wikipedia table of U.S. Energy Returned on Energy Invested, fracking requires more energy per unit of energy produced than does solar, hydro, or wind. To summarize the ASCE study on infrastructure, current U.S. know-how can make the rails run, but not much more.

Energy Returned on Energy Invested, source: Wikipedia

So I return to infrastructure bets. To stocks mentioned above, I'd add more in one successful industry-rails. Trains are necessary for fracking-to transport oil, but also to deliver liquids necessary to extract it from the ground. Two favorites remain Union Pacific (NYSE:UNP) and Wabtec (NYSE:WAB)-the latter, perhaps the company best able to keep the railroads in stellar condition.

One final note: with so much of the world reliant on energy, and with America's continued hegemony in so many areas, including defense, reliant on a U.S. energy transition it has yet to begin, I must ruefully recommend aggressive hedges to insure investors against the possibility that America falls further and further behind. In that category I include precious metals-especially gold (NYSEARCA:GLD) but also silver (NYSEARCA:SLV). The latter provides a potential alternative to the buck and also plays a critical role in solar energy platforms.

Source: China's Dream, Our Nightmare: How To Invest, How To Hedge