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In his State of the Union Address, President Bush outlined his policy initiatives on energy.

Briefly:

  • Reduction in gas usage/increase in fuel economy.
  • Increase in strategic oil reserves.
  • Increase in domestic oil production.
  • Increase in renewable and alternative fuels.
  • Time frames although expressed, will be massaged by politics and popular/consumer opinion.

    After many years of rhetoric and the formation of altruistic goals, can we proceed substantially in reducing our dependence on foreign oil? If so, what trends will the market embrace?

    1. Solar and wind energy, in a viable quantity, require huge installations. Efforts to grow this area will be hindered by environmentalists and the not in my backyard mentality.

    2. Biodiesel is in its infancy and has sprouted up as a cottage industry. Many concerns have been expressed about its cost and suitability with current diesel engines.

    3. Ethanol is costly to produce and must pass on the cost to the consumer. It competes with a food source for humans and livestock. Current corn prices have provided an incentive to store corn as a hedge giving rise to artificial shortages. Other cellulosic sources such as wood pulp, weeds, and grasses need many more years of technological advances to become viable.

    4. Fuel economy is an area we can make huge strides in quickly. Fuel cells put but a tiny dent in the overall picture. We need manufacturers to redefine their mission statement to include economy and drivers to drive less.

    5. Coal provides 40% of our electric distribution. We have as much coal as Saudi Arabia has oil. Clean coal technology as well as Coal to Liquid processes are nearing viability.

    6. Domestic oil production has stepped up the pace and we will feel the online relief in the near term.

    The market will tend to treat such companies as Evergreen Solar (ESLR), Suntech Power (STP), Pacific Ethanol (PEIX), VeraSun (VSE), Aventine (AVN), and not to mention the fuel cell companies, as risky. If one is inclined to invest in this area, a better choice may be PowerShares Wilderhill Clean Energy ETF (PBW). These stocks will rise and fall on rhetoric. Large corporations such as General Electric (GE) or Archer Daniels Midland (ADM) are steady growers with a stake in alternative energy, but little will be added to the bottom line.

    The better trend to bet on is coal and domestic oil. Peabody Energy (BTU) and Headwaters (HW) in the coal sector. Most large integrated oil produces and oil service companies in the oil and gas sector. A good play on oil services is the Oil Services ETF (OIH).

    The more things change, the more they stay the same. We will lessen our dependence on foreign oil, although at a slower pace than hoped, with a viable alternative. That alternative is our domestic coal and oil.

    Source: An Inconvenient Truth: Changing Our State of Energy