5 Must Read Articles in Oil and Alternative Energy

1. Oil rising to $125 a barrel in 2008. Veteran market commentator Byron Wien correctly predicted that oil would hit $80 a barrel last year. Now, he says that people still underestimate the seriousness of the energy situation. "China and India are consuming less than two barrels of oil per person per year while we consume 26 barrels, Western Europe consumers 13 to 15 barrels, Japan, Korea the same amount. As China and India increase their consumption, even if the two and a half billion people there only increase their consumption a quarter of a barrel of oil per year, there's no way the world can meet that demand. So I think the price of oil is going a lot higher." Combined with further declines in the dollar, he predicts that rising demand for oil will drive the price to $125 a barrel. The easiest way to play rising oil prices is with the oil ETFs, such as the United States Oil Fund, LP ETF (USO), the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) and the Claymore MACROshares Oil Up Tradeable ETF (UCR).

2. Sugar versus ethanol stocks. In the latest Barron's roundtable, money manager Felix Zulauf recommends playing rising demand for ethanol by owning sugar rather than ethanol stocks. The price of sugar has fallen 50% since February 2006 to 11 cents a pound, he says, below production costs of about 14 cents in Brazil and India, the two largest producers. Zulauf claims that sugar production is therefore on the decline, while demand is rising due to ethanol. Brazil produces 5 billion gallons of ethanol a year, and plans to increase that to 8 billion gallons in the next three years. Flex cars account for 22% of Brazil's total fleet, and the goverment wants the percentage to rise to 30%. And Brazil exports ethanol to the U.S., Japan and China, all of which are raising their demand. "In the past", says Zulauf, "when sugar started rising from a price below the cost of production, it rose 100% or more, on average." His target price is 20 cents. Note that according to Zulauf a 30% increase in the price of sugar (far less than the increase from 11 to 20 cents he's predicting) would eliminate ethanol's price advantage over gasoline. Sugar futures are therefore a better play on ethanol than the sugar-based ethanol producers such as Cosan (CZZ). Investors who can't access sugar futures may consider two commodity ETFs: the PowerShares DB Agriculture ETF (DBA) and ELEMENTS Linked to the MLCX Biofuels Index ETF (FUE).

3. Coal prices to double -- good for alt energy stocks. As if the rise in oil and sugar prices isn't enough, Citigroup forecasts that the annual contract price for thermal coal will reach $100 per metric ton in the 2008-2009 financial year, up from $55 per ton now, while the price of coking coal may hit $200 per ton from $95 now. The cause? Snowstorms in China, floods in Australia, and power crises in South Africa. These supply disruptions, according to Citigroup, will result in dramatic price increases when combined with sharply higher exchange rates in producing countries and cost increases. Rising coal prices should keep interest in alternative energy stocks high. You could buy the alt energy ETFs, or just go straight for the new Van Eck Market Vectors Coal ETF (KOL).

4. The future of the car industry. Carlos Ghosn, CEO of Nissan and Renault, is widely perceived as the most talented executive in the auto industry. Jim Kingsdale summarizes Ghosn's views on the auto industry: auto industry growth is coming almost entirely from emerging markets, where adoption of cheap cars will raise demand for oil. "When asked, “how are you going to meet the challenge from China and India in…low cost cars?” Ghosn had an interesting answer. He said that rather than try to “de-cost” a western car model, he has bought a company that currently makes motercycles which they can now “upgrade” to an automobile." Kingsdale himself predicts that rising oil prices will accelerate the transition to electric cars and alternative energy sources, and points to Israel which recently announced a plan for new electrical generation via solar technologies, widespread adoption of electric cars, and a 500,000 location electric refueling infrastructure. Don't dismiss Kingston's views without first checking his investment track record.

5. AMAT the alt energy stock? Semiconductor equipment leader Applied Materials (AMAT) aims to "offer customers one-stop shopping for cutting-edge solar panel manufacturing". According to Jennifer Schenker, "the company has gone on a shopping expedition in Europe, tapping into the Continent's deep expertise in alternative energy. In July, 2006, it bought a US-based company called Applied Films -- which has major operations in Alzenau, Germany -- for $464 million (€313 million). Last August, it acquired Switzerland's HCT Shaping Systems for $483 million. And on Jan. 31, it sealed a deal to take over Italy's Baccini for $330 million. All the acquired companies brought advanced panel-making technology to Applied's portfolio." AMAT was recently named Green Energy Innovator of the Year by Platt's Global Energy Awards, and Barron's featured it among recent tech stock picks. If you want to understand AMAT's solar business and the extent to which the stock could benefit from it, read AMAT's most recent conference call transcript.

Full disclosure: no positions in any stocks mentioned.

Comments

[Rhodomontade]

Good roundup. I'd never heard of KOL.

[gabby]

David,
Nice analysis. GS downgraded the coal sector on Fri. 2/15, but the merits of that call has been viewed with great sceptisim -- especially by me. (Took it as a buying opportunity). WSJ had a very interesting article on Coal to Chemicals - China is at the forefront. Coal is being converted for the production of plastics, fertilizer and believe it or not -- pharmaceuticals.

Zulauf, has it wrong on sugar. Sugar futures are unbelieveably speculative. All the experts are divided as to whether sugar will be up or down. Buying sugar futures guarantees that you won't be sleeping at night. If you like sugar try DBA, which has a sugar component - along with wheat, corn & soybeans or RCI - Rogers Sugar Income Trust. I'm still very bullish on CZZ. Check out the price action today for CZZ on the Bovespa. In terms of ethanol, we will see an enormous capitulation on employing vital grains & foodstuff for ethanol. We are only starting to see food inflation, Asia has been especially hit with shortages. And, in the short term, cellulosic is not yet widely & cost effectively available. Sugar cane ethanol is well positioned.

Link follows on the Coal to Chemicals story -- GL, gabby

URL for this article:
online.wsj.com/article...

[DavidJackson]

Hi Gabby,

Helpful comments, as usual. And feel free to leave other links that you think are interesting. Getting the list down to 5 leaves out too much...

[oilsands]

Very fine compendium. I was especially interested in the points about Israel's plan to eliminate oil dependency, something America should be doing. There are so many alternatives, which added together can spell good bye middle east. Finally people are lookihg to the unlimited
potential of the ocean, like the gulf stream. Our biggest limitation is lack of imagination. Amat's approach is also very interesting. Now if the US Congress and Presidential administration would just match some the subsidies that go to aircraft and roads, we could really get some results in the alternatives to oil.
Coal to chemicals is actually a very, very old story.

[gabby]

Oilsands,
The alternatives area is already super funded with subsidies. There is a 51 cent/gallon tax credit for US ethanol producers and a 54cent/gallon tariff on Brazilian ethanol. Gov. subsidized research and tax credits for cellulosic.... We actually need to encourage free market competition. That would be greatest and most efficient inducement. Diverting foodstuff, grains, vegetable oils isn't viable. I like your hydro power suggestion and I also like wind power. T.Boone Pickens is involved with wind.

Coal to chemicals maybe a very old story but the growth in China will be exponential.

gabby

[gabby]

David,
Can't think of any links off hand. Like everyone else, I scour Bloomberg, Reuters, Financial Times and enjoy the InvestorVillage message board very much.

www1.investorvillage.c...?

CZZ is up today on the Bovespa -- 3% at this writing.

www.bloomberg.com/mark...

Last week, CZZ announced buying out a production mill in Brazil (expanding their capacity) and also that Credit Suisse has taken a 5.21% interest in CZZ. I'm not trying to pump CZZ -- just find it interesting and a sensible way to play ethanol with the added benefit that - If sugar prices go up they divert less product to ethanol & make "hay" on the sugar price. Disclosure -- I own some CZZ, bought KOL shortly after it debutted (got it under $40) and bought ACI on Friday. Also own some Xstrata (for about 18 months). I'm bullish coal for a number of reasons.

gabby

[oilsands]

gabby, you're absolutely right about the ethanol susidy and it being a poor idea when we need food. I always mentally exclude ethanol as a viable alternative. Forgot to mention that. I was thinking of solar, where tas incentives have lapsed, and things like wind, geothermal, hydro in many forms, etc. I truly hope you are right about China making a quantum leap in coal to chemicals for a number of reasons.

[oilsands]

PS to gabby, free market is great and I am really encouraged lately by discussion of many companies vying for the grid parity prize.
Also, emphasis on making the grid itself more efficient will be part of the story.

[Tom B]

Science Friday reported recently on the idea of non-photovoltaic production of electricity using the sun. Photovoltaics are expensive-ish to make and have 20% conversion as pretty much the upper limit. The idea they discussed was concentrating sunlight with mirrors to superheat a fluid and using that fluid to make steam, turning traditional steam turbine generators. Sounds plausible to me-- all just a big engineering problem instead of a big science AND engineering problem.


www.sciencefriday.com/...

[globalmacro]

Seems like a relatively sharp group of people here. On the topic of alt energy stocks, does anyone have any unique thoughts on Suntech Power (STP)?

[optiondragon]

Great article.

[optiondragon]

Please keep us in the know for more important fundamental market moving info like this. So much info to rifle through these days.
ACI, BTU (Cramer's fav), CNX, PCX, ANR are my favorite coal plays to focus on going forward based on those forward looking prices.
The car change is much needed!
Globalmacro, i have an analysis on STP earnings and at wangshappytrading.com for earnings tomorrow.
Coal to chemicals, wow very informative and interesting thanks Gabby.

[gabby]

Hey thanks to all the comments here. I am not able to comment on solar, I had stopped following, not because i don't value/believe in it, but there is a limit to what I can effectively follow. FWIW, tonight on Fast Money (2/19 -5:20pm ET). Tim Seymour reco'ed Brazil - specifically CZZ as a way to play Castro retiring. The reco has more substance than you would think. Lula has established ties w/Castro, Cuba has a historic capability w/sugar production, CZZ has considered opening plants in the Caribbean. This is all a little too intellectual to translate to investment right now, but things look to be moving in a good direction. And i didn't sell any of my CZZ on the increase today.

Optiondragon, I look forward to checking out your site. In the meanwhile, your coal plays sound really good.

GLTA,
gabby

[EnergyDiversification]

The range of ideas and views about energy sources on this board reflects the diversified and/or scattershot approach to energy in this country. That may be good or bad. However, as long as there is such a divergence of views, we need to hold off on the calls to just "do something!"

The reality - as reflected above - is that a lot of alternatives are being pursued. Very smart people cannot all agree on the answer, so rather than having the government just "do something" and push one solution, perhaps we ought to accept that this is a long process.

The reality is that nuclear power works, and works on a large scale. If we had to just "do something" right now, nuclear power would be the safest bet. There are risks and problems with it, which justify a more diversified approach. But with that in mind, I think you have to step back and respect that this is not an immediate process.

If anyone thinks we're just going to stick a new President in there, slap some solar panels on our roofs, and stop using oil -- good luck.

The problem is not lack of imagination. Its too much imagination without real consideration of what can actually work. I've heard solar fairy tales for 30 years. "We'll be all solar by 1990." I'm not anti-solar now, but you sure have to keep things in perspective. There are always Pollyannas with big promises -- who stand to make a lot of money by selling out.

Why is it that all of these great, cheap, large scale solutions always demand government subsidies? There are so many cellulosic ethanol players out there now promising that $1 production costs are *already* achievable with their technology. Then why do we need subsidies? Actions speak louder than words.

We are still in the R&D phase -- let's accept that and acknowledge that these are venture-stage investments in most cases.

[Tom B]

"I've heard solar fairy tales for 30 years. "We'll be all solar by 1990.""

Oil wasn't $100/barrel in 1990.

"There are so many cellulosic ethanol players out there now promising that $1 production costs are *already* achievable with their technology. Then why do we need subsidies?"

Corn for Ethanol is evil-- in terms of carbon footprint AND waste of arable land. Cellulosic ethanol may be less so, but, from a green POV, I think we need to shift over to electicity-- and that may mean nukes, but not ONLY nukes. Offshore wind looks good. Cape wind has been held back more by NIMBY's than technology. I doubt gleaming white turbines 5 miles offshore is going to "wreck my view".

[DavidJackson]

Guys, I'm starting to prepare the next edition of "5 Must Read Stories in Oil and Alternative Energy". Any recommendations for articles I should discuss and link to?

[T Muller]

David,

Outstanding piece. valuable information. I think it's really helpful blending news an d analysis/opinion from both SA and external sources. Much better than a compilation of just news or just analysis. I think it's also meaningful to see what the mass media is reporting on a topic combined with broker and individual investor viewpoints. I think that's that's the power of the web and in many aspects, SA- getting the full perspective on a particular item to better grasp market sentiment and its effect on asset prices.

I don't have any specific recommendations; you do a great job finding and discussing content. There is plenty out there, especially natural gas since it's started to run up after being so sluggish causing oil/gas multiple to be way off historical norms. There's a good bit of discussion surrounding oil/gas connection, if any..etc.

I look forward to your article. perhaps SA could do more of this for other industries as well. The housing tracker is great!.