Sorry Greens, Fossil Fuels Are Here to Stay

"We can never do merely one thing." This quote says everything about why I recommend oil and gas, coal and nuclear to you, even though I wish with all my heart that America could rely upon solar power, wind power, and other green energy sources. I believe oil, gas, coal, and uranium will make you rich, whereas a feel-good infatuation with "alternative energy sources" like wind, ethanol, and solar, to the exclusion of extractive fuels, will prove to be an enticing but wealth-robbing cul-de-sac.

The words in our headline are those of the brilliant American biologist Garrett Hardin. Born in Dallas in 1915, Dr. Hardin is one of those Renaissance Men that America produces in abundance. He studied life sciences and geology at the University of Chicago by day and drama at the Chicago Musical College by night, and earned his PhD at Stanford. He took his first career position at the Carnegie Institute where he decided it did little good to increase the world's food supply without slowing the increase in the number of mouths to feed. "We can never do merely one thing," he said. Dr. Hardin's statement leads to an immediate demand that we search any action or inaction for its unintended effects. It also forces us to ask the question "and then what?" in order to guesstimate possible consequences. It emphasizes: Actions have consequences. Inaction has consequences.

What does this have to do with our current investing choices? Absolutely everything! It is also why I must recommend fossil fuels over green fuels. The latter make me feel good but are too often pie in the sky. The consequences of fossil fuels are dire and known. The consequences of green fuels are glossed over, unknown, and possibly dire. Why not go full-court-press to harness, say, wind, solar and biomass, and let nature do it all cleanly and efficiently? Ah, because "we can never do merely one thing."

Take ethanol, for example. The current ethanol morass demonstrates what happens when politicians override science and the marketplace. Archer Daniels (ADM) and other agri-giants discovered that corn was more profitably sold to higher-paying ethanol refiners than to consumers or to farmers and ranchers for cattle, hog, and chicken feed. So now the price of America's favorite veggie has skyrocketed to 10-year highs, our beef, pork and chicken cost more, more Mexicans are crossing into the U.S. illegally because they can't afford corn tortillas, the staple of their diet, in Mexico, and some U.S. cattle and hog farmers are going bankrupt and selling out to developers who build more houses farther out of the city making for longer commutes and more energy usage. We can never do merely one thing!

Here's another example: U.S. companies are prohibited from drilling anywhere within 200 miles of the Florida coast. But Cuba doesn't play by the same rules. So China's state-owned oil company, Sinopec (SHI), has signed an oil exploration deal with Cuba and moved huge drilling platforms to within 50 miles of the Florida Keys, an area where U.S. companies aren't allowed to drill and where a single spill from Sinopec could wreak environmental devastation upon U.S. beaches. Since Congress "protected" us from U.S. oil companies, we now risk spills from others who play by different rules and we are forced to depend upon Arab oil. Smart. Real smart.

Well, then, how about something tres en vogue like wind power? The UK's Dr. James Lovelock is a towering contemporary of Garrett Hardin's and an equally famous scientist and big-picture ecologist. Here is what he says about wind energy: "To supply the UK's present electricity needs would require 276,000 wind generators, about three per square mile, if national parks, urban, suburban and industrial areas are excluded. . . [T]he intermittency of wind means that, at best, energy is available from wind turbines only 25 percent of the time. During the remaining 75 percent, electricity has to be made in standby fossil fuel power stations; worse still, the power stations have to be kept idling [even] when wind energy is available . . . The most recent report from Germany put wind energy as available only 16 percent of the time." Then there's all the millions of birds we'd kill by having those blades spinning at warp speed.

So what do esteemed environmentalists like these men recommend? Fossil fuels, cleaned both at the source and at the smokestack. And nuclear. Dr. Lovelock notes that an advantage of nuclear is how easy it is to deal with the waste it produces. "Burning fossil fuels produces [54 trillion pounds] of carbon dioxide yearly. The same quantity of energy produced from nuclear fission reactions would...occupy a sixteen-metre cube." Lovelock is so confident of our ability to store this radioactive material safely that he has offered to accept all of the waste produced in a year from a nuclear power station for deposit in a concrete pit on his own small plot of land. He says he could use the heat from its decaying radioactive elements to heat his home.

Green isn't enough. Black and gooey is still necessary. We still need to extract oil and gas, and we need to use coal both to burn and for much cleaner and less-polluting coal-to-liquid technology to power our homes, our cars, and our industry. We have more coal than any nation on earth. Why are we importing oil from the Middle East when we can as cheaply and more cleanly convert coal to liquid fuels? Also, there is zero uranium in the Mideast. Zero. There are piles of it in the U.S. and in Canada, our biggest trading partner. So why aren't we building a nuclear plant a week? Sure, we'll need to store the radioactive waste safely. But today we're storing our excess carbon dioxide in the bubble of air we breathe. How much worse could it be?!?!

One way to avoid importing oil and clean up the environment is to use Coal-to-Liquids [CTL] technology, where pollutants are removed at the source. And the undisputed leader doing this for nations worldwide is Sasol (SSL) I for one will not give up on coal. 154 new coal-fired power plants are currently in various stages of development in the US. In 2003, there were zero. Worldwide, there are plans to build over 1000. Ah, but how to make coal - which puts out twice the carbon dioxide per energy unit than natural gas does - cleaner? Enter Sasol, the world's largest producer of synthetic fuels, both CTL and GTL (Gas-to-Liquids.) SSL is in the catbird seat. Even if oil prices remain flat, the cost of CTL/GTL fuel will remain lower than oil. And here's the real kicker: three of the world's four biggest energy users also hold the most coal reserves! (The U.S. is #1, China is #3 and India #4.) If ever there was a slam-dunk for investors willing to hold for longer than settlement date, this is it!

While we're at it, let's find smarter ways to extract the oil from the tar sands in Canada (like using the stripped-out carbon dioxide from CTL to inject underground to "bubble" oil to the surface) and the oil shale in the Rockies. Of the world's total oil shale, 89% is in Colorado, Utah, and Wyoming, USA. Two companies likely to benefit from drilling in these areas are Nabors Ind. (NBR) and Precision Drilling (PDS). NBR is the largest land-drilling company in America. You may not be as familiar with PDS. In addition to drilling, PDS provides catering services, distribution of oilfield supplies, and the manufacture and refurbishment of drilling and service rig equipment. PDS owns 230 land drilling rigs, all located in the Canadian tar sands. That makes it both more risky (geographically) but also more of a pure play. PDS alone accounts for nearly a third of the active drilling rigs in Canada.

And if you don't mind (or relish) being less than au courant at vacuous Hollywood look-at-me parties, you could always buy some dirty old oil companies like Exxon Mobil (XOM), Conoco (COP) or Royal Dutch Shell (RDS.B), the companies that power the Hummers that brought them to the party and allow them to fly on private jets between their Manhattan pieds-a-terre and the beach house in Malibu.

Full disclosure: Long PDS and RDS.B at time of writing.

Comments

[xander]

logic does not work on the enemies of capitalism

[dolfen]

Unfortunately its analysis like the above that will keep us mired in the fossil fuel conundrum. As long as we continue to justify the use of fossil fuels and support them with huge tax incentives and supports the longer we'll continue to find ourselves either dependent on foreign sources or we'll be destroying the environment exploiting them at home. Only when we decide that this oldparadigm is no longer valid and invest our resources in developing clean alternatives will we divorce ourselves of a technology that is destructive not only environmentally but socially and politically as well. Clean sustainable energy will revitalize our economy, our people and mostly it will return us to an independent and robust energy supply that's decentralized, renewable and without all the baggage associated with fossil fuels and nuclear energy. By developing and assisting in the deployment of these technologies we can lead the world to a new age of clean and peaceful energy. I'm afraid though that this will require inspired, forward thinking leadership and financial institutions that are willing to sever their dependency on a fossil fuel
economy.

[Jay Goss]

Gospel and brilliant!

[jack kreg]

JL Shaefer, excellent and very forward looking article.
Another important factor in your article is that building dozens even hundreds of nuclear and coal to liquid fuel plants will employ Americans to build American assets. In 20 years, we could marginalize the Middle East oil.
The Greens solution continues the flow of our power dollars to the Middle East. The fantasy of re-newable energy is what keeps us chained to the Middle East. I, for one, would employ Americans to build American energy assets.

[hlfein]

Excellent article. But comments are meaningless without knowing the qualifications of the author. For instance, if you don't understand classical thermodynamics. you have no basis upon which to form an opinion one way or the other. Nature is the way it is, not the way we wish it to be. Go back to school, learn physics, chemistry, thermodynamics, and engineering, and then, maybe, you'll have an opinion on this subject worth noting.

[TJF]

Not one single mention of the costs of global warming.....? How is that possible?

[widicusf]

Truly a one sided take on events...I can only agree that corn based ethanol is fools gold--developing the rest of the RE portfolio mentioned is simply unavoidable for those who can think beyond quarterly profits.
As long as you plan to die in the next 5 years the analysis makes sense. Also assuming you have no kids, grandkids or care about anything except yourself. For those of you who are still around in 2015 and have progeny, expect them to be appalled that we once burned inputs as valuable as oil and NG...question like, "what were you thinking?" should be expected.
btw-I am not a "green"...ju... someone who considers more than his own personal well being.
When the grid is attacked and is put out of commission for 6-12 months (this will happen--only a question of time), you will see lines at the solar installers office...NOT the gas station. Make no mistake, the U.S. grid can be compromised by a crew the size of those who took part in 9-11.

[masterclockman]

I'm more in agreement with dolfen. I'll add this: We have to save what fossil fuels we have left for the producing of important products only. We can't continue wasting and burning through it with car engines. There are already people working on the solar hydrogen alternative which was derailed by cheap fossil fuels back in the early 1900's. We'll have a growing economy, just changing out and converting existing engines.
If this isn't done fast enough, instead of buying stock in SSL, NBR and PDS. I recommend buying RTN, GD, LMT and BA, all defense stocks. Yeah, we'll need it buddy, we'll be fighting over the last drop of oil. So get ready to have your kids harvested for the coming energy wars if we don't change fast.

[maximax]

This article is not forward looking. If oil shale and the like are supposed to have a strong future, then high altitude wind farms and wave power are no worse in terms of likelihood and feasibility. But the latter two were ignored in the article, possibly because they are not only available 25% of the time, and thus do not fit the agenda. Or maybe they do. Personally I would not (yet!) put my money in these companies either, as the technology is not yet very mature (although it works in principle). These remarks about keeping radioactive waste in the backyard and that the emissions from nuclear energy generation fit into a 16-metre cube, were it to produce the same amount of energy as fossil fuels, do not exactly promote the authors qualifications (e.g. converting uranium into usable fuel is energy intensive).

But ethanol is indeed mostly a cul de sac, and alternative energy is a risky area for investment, especially when compared to traditional energy sectors, were high oil prices in the short to medium term are bound to produce interesting investment opportunities (prob the same with coal and gas prices).

[Dr. CoalNugget]

Great article Joseph. I have held SSL shares for over a year and they have performed superbly given the way the market in general has performed. The US has to make the best use of what it has in abundance (Coal) or we are imposing unnecessary pain on ourselves. It would be no different than the countries in the middle east making the best of what they have - that would be plenty of oil. I propose that our politicians stop listening to ignorant huffing and puffing from tree-hugger types who would like to see us all rollerskating to work. Today's energy companies and our universities a full of smart people who can figure out how to use fossil fuels without ruining the environment,if they can get a chance. It seems that serious discussions about making the best use of our fossil fuels always gets side tracked by extreme and impractical "green speak." I am tired of it and I sure I am not alone during a time when gas is approaching $4 a gallon.

[jpkgo]

hmmm,,, give me a trillion dollar subsidy like the one the oil & gas business has had to work with the last 50 years and i'll give you a sustainable national energy plan on time, under budget and at full employment. we won't have to defend it overseas either to the tune of another $3 trillion (and that's just iraq,,,).

yes, fossil fuels will be with us for many, many years and there's lots of money to be made in them thar hills - that's not the point. the question is how are we going to spend down the one-time endowment of it we've been given as a planet? because when it's gone, it's gone and it's starting to look a whole lot more like a precious dwindling resource to use wisely than a God given entitlement to support the "american way of life".

[samcat]

Great article, especially in the way he discusses his evaluation of thinking beyond stage one and going further from multiple points of view.

[31 October]

I, too, am a fossil fuel investor. But there is one detail left out, one incorrect assumption, and one ridiculous statement put into the piece. The US oil companies get tax subsidies, which two presidential candidates have promised to cut. That risk should be factored in. Shale oil is expensive and hideously damaging to extract. Therefore, it is only a good backup for other sources [just like alternative fuels] and the writer should not assume it will be a profitable solution. Finally, the comments about wind were just wrong. I have been to the wind fields in the American West and the German North. At no point do they "spin at warp speed" to kill millions of birds. [In extreme wind conditions, birds hunker down anyway.] "The most recent report from Germany put wind energy as available only 16 percent of the time." Again, incorrect. When I was in Hamburg, they produced 16% of the time, 24 hours per day, as opposed to 30% production, 11 hours a day for solar. Guess who wins. But the point is moot: Fossil fuels do rule the foreseeable future.

[pwa canada]

While well written, I find the comments poorly researched and ill informed. Wind energy can make a huge contribution to the global energy supply. While intermittency might be an issue in a specific area, the more wind energy is installed over a large geographic area, intermittency becomes less and less important. In fact a study done in Germany has indicated that if you use a grid interconnected area from Morocco to Scotland to Russia (about 6,000 km in distance) one could power the entire grid with wind energy with only 14% hydro storage. The key is really increased investments in so called "super grids" that can be HVDC in order to bring online stranded wind energy resources. Such resources exist in many areas. In the US it is North Dakota that in itself could deliver as much as 45% of US electrical demand from wind energy if sufficient transmission capacity is installed. I am an investor in Sasol (SSL ...ADR NYSE) not because I believe in fossil fuels, but because I believe that Synfuels will play a critical role in lowering the carbon intensity of fossil fuels. If you gasify coal you will went a huge amount of CO2 in the process. With electrolytic hydrogen from renewables you can utilize ALL the carbon in coal and hence reduce dramatically the GHG intensity of fossil fuels. It is for this reason that I hold SSL since they are the world leader in gasification technology and have a huge amount of upside for this reason. We are increasingly entering the reality of a carbon constrained world, renewables such as wind, energy efficiency and GHG intensity reduction of fossil fuels are key to stabilize global CO2 levels. So to make a long story short, I am all for SSL as a pick, but for different reasons than the author of this article

[Ervin]

You are obvious mistaken about the intentions of green. We are not in it to make money or for an investment. I don't think we can compete with Exxon. We are here to make sure that our grandchildren can breathe. As for your assertion that it would take 276,000 windmills to power England and we would still need fossil fuel backup: Can you say "hydroelectric&qu... The Thames could easily power all of London and most of the rest of England without building a single dam. We can't displace all the fossil fuels at once. Try it one home at a time. Befor you attempt to educate people with you vast knowledge and wisdom, try a little research. Italy has entire cities powered by solar energy. One of the largest manufacturers of any kind in the world has numerous plants (industrial plants) that they no longer have to buy electricity (to the tune of thirty million dollars a year per plant) because the plants are now solar powered with solar panels they build themselves. You may have heard of "Pirelli". They make way more than just tires. Maybe you should check their website. You would very obviously learn something. And please spare us your ignorance, bordering on stupidity. How much did Exxon pay you for this article?