While I sympathize with permabears who argue that there will be no meaningful economic progress until the sovereign debt crisis is resolved, I do think we are at a point where it is worth accumulating many stocks that are cheap and disliked. Moreover, I find a repeat of 2008 unlikely, as I think the Fed will step in on any major weakness - assuming the market does not do so first.
And when I think of what sectors are ripe for massive transformation and the huge opportunities for investors such transformation inevitably create, ranking very highly is everything related to transportation. And an obvious starting point for understanding the transformation in transportation is oil - the fuel we use for transportation, which is clearly having production issues. Oil production has plateaued at 75 million barrels since 2005. As such, the value network surrounding transportation fuel is ripe for transformation.
Those studying this situation are widely aware that there are two options for getting past the peak oil dilemma: Vehicles running on compressed natural gas or electric vehicles. Which one is going to win?
I believe the answer could be both, but if there is one I'm inclined to speculate upon, I would certainly go with electric vehicles. There are three reasons for this:
- Nuclear power is simply going to be the most efficient form (as measured by energy density) of energy production. I believe we are transitioning away not just from oil, but from fossil fuels in general and toward atomic energy - as doing so is needed for reasons of economic and environmental sustainability. Atomic energy reactions used to create electricity for electric vehicles is the future I regard as most likely when considering the big picture of transportation and energy.
- Natural gas prices may be cheap in the United States now, but I find it unlikely this situation will persist; indeed, I think natural gas could be getting ready to rally. From this perspective, natural gas loses much of its economic appeal.
- Recharging stations for electric vehicles are far more prevalent than natural gas re-fueling stations.
This last point is especially important. To a certain extent, the network effects play a role in determining the popularity of natural gas or electric vehicles; the more fueling stations there are, the easier it becomes to roam freely with your EV relative to natural gas. Markets characterized by network effects are often winner take all markets, where the first mover is the winner. Many Internet services see this phenomenon, which is why Paypal is the dominant payment network, eBay (EBAY) is the dominant auction network, and Google (GOOG) is the dominant Internet advertising network. From this perspective I believe that whichever fueling network - EV or natural gas - gains a foothold first will determine which fuel will be the energy source for transportation in the future.
A look into the data of natural gas networks vs. electricity networks is very instructive at this point. Take a look at the table below, courtesy of the U.S. Department of Energy.
A common criticism of EVs is that they are allegedly too costly. Here is an example of a common critique. Virtually all such critiques make the mistake of comparing electric vehicles to current gasoline-powered vehicles that are commonly used, and assume that the transition to electric or natural gas vehicles occurs independently and without changes in transportation habits.
I find this to be a fatal assumption. The fact of the matter is that the world is undergoing massive urbanization, and as we move to more densely populated cities, we will also be moving more to mass transportation systems, walking and bicycling and relying less on personal automobiles. Mass transit and delivery vehicles are where the transformation in transportation fuel will get its foothold, from which point it can rapidly innovate. Yes, government is subsidizing automobiles meant for individuals that run on natural gas or electric batteries, although I find this to be the wrong spot to focus on. Rather, thinking about urban transportation and commercial shipping are better endeavors to focus on for those who want to invest in the transportation fuel of the future.
In terms of how to speculate upon this view, I'm not yet comfortable with an electric vehicle manufacturer - although I remain on the lookout for one I think can pull it off. This is an area where I would prefer to see a new entrant that creates a new type of customer, with a transportation need currently not met by existing automobile manufacturers. Google (GOOG), for instance, has been working on a self-driving car and testing it with blind drivers. That is a prime example of a new vehicle for a new customer type - and the kind that could be conducive to electricity as its fuel source.
But for now, I just view this as part of my speculations on rising electricity demand created by nuclear reactors using uranium as fuel - and thus am invested in uranium miners (URA) like Cameco (CCJ), Uranium Energy Corporation (UEC) and Uranerz (URZ). And while I'm obviously not much of a believer in natural gas as a fuel source, I do think it could be worth incorporating select natural gas companies into one's portfolio, as quality companies could rise even if the sector as a whole does not experience great growth. Clean Energy Fuels (CLNE) is the one natural gas company I've got on my watch list (see my previous coverage).