Oil, Gas, Electric Cars, the Market and the Economy 34 comments
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The economy, the stock market, and our understanding of the future direction for energy and transportation may all be on the brink of major changes . This letter will open a discussion of these ideas.
A Very Tough Month
Before turning to the future, I must confess that the immediate past month was most painful for the EIS portfolio. Oil prices hit a violent downdraft in July, which especially impacted my “options on futures” strategy. It declined in value by about 33%. Since the purpose of these options is to provide portfolio insurance against rapidly increasing oil prices, and since the insurance is focused on the 2012 and longer time frame, when I think it is most likely to be needed, I am not all that concerned. Most insurance costs money and so far this policy actually shows a profit.
What was more troubling in July was the sustained downturn in oil and gas related equity prices. Stocks led commodities on the way up, so the weakness in oil and gas stocks that we continue to see now does not bode well for the near term future of the commodity prices.
In any event, the total EIS portfolio declined in value by 21.8% for the month, leaving it up only 4.3% year to date. Of course, many hedge funds and portfolios are down on the year, some by over 20%. The S&P is down 13.8%. So I take a little comfort from the fact that the EIS portfolio has positive returns to date this year.
On the Brink of Fear
For the past year since starting the web site I’ve believed there a radical change in store for the global economy caused by the peaking of the global oil supply. I’ve often written that when oil becomes truly scarce the underlying assumption of our economy - namely unending economic growth - will come crashing to earth and along with it will come stock prices and standards of living.
I still believe that is true and I believe the timing is only a year to four at the most away. But until recently my sense was that until extremely high oil prices bring down the global economy things might be pretty good; we might go sailing into the storm with flags flying high. Unfortunately, that scenario does not seem to be working out.
On July 28th I sold a large percentage of the EIS portfolio’s stocks and all of the energy strategy’s natural gas options. I posted an essay called “Playing Defense” in which I wrote:
If recent weeks’ energy stock losses were simply a severe correction only in energy stocks, this might well be a buying opportunity for the group. But such is not the case. Rather, this energy correction comes in the context of a general market decline that has been eating away at portfolio values almost continuously since August of 2007 . The combination of dramatic losses in energy stocks, very weak recoveries by them, and the continuing slide in the general market suggests to me a deeper significance than just an ordinary correction in energy stocks. In short, I think the market may be signaling that there is an increasing risk that economic weakness may be spreading geographically and demographically threatening much more serious losses ahead.
I cut back the portfolio - and have since then shorted the broad market as a hedge against my existing positions - for reasons that were spelled out in detail in the essay cited above. I won’t repeat them all here. The essence is that the credit crisis that is tied to the housing bubble and related mortgage meltdown is continuing to grow. It may do a great deal more harm to the economy even before energy shortages caused by peak oil become a reality in one to four years. If peak oil comes at a time when the economy is weak to start with, I am afraid that we may see an economic era dawn that will be most unfortunate.
I don’t do independent economic analysis but I listen to people who seem to be the most knowledgeable in macro-economics. I like the work of John Mauldin and Paul Krugman, neither of whom is optimistic. And I certainly respect the work of Meredith Whitney, the financial services analyst at Oppenheimer who has been so right about banks over the past year. Her Fallout in Financials interview Tuesday on CNBC was absolutely chilling. She foresees credit problems extending to ordinary consumers and housing prices falling in the next year or two by as much as they have already fallen in the past year. That, my friends (as McCain would say), is not a happy picture.
The only macroeconomic forecast I have made (other than parroting my betters) is that I think the growth rates in China and other Asian economies are likely to fall substantially over the next year. As I wrote recently, the extraordinary growth seen in China and India faces several headwinds including shortages in electrical capacity, worries about inflation that may keep their interest rates high, and in the case of China, limits to the amount of air and water pollution caused by uncontrolled growth that will be tolerated. The negative implications of a serious erosion of Asian growth rates for the OECD economies would be substantial.
A recent report from Bloomberg discusses part of the basis for my opinion:
State Grid Corp. of China, which more than 1 billion people rely on for power, said electricity shortages have worsened because of inadequate coal supplies. Forty-six percent of the power stations connected to the distributor’s grid have coal stockpiles below the “caution line,” or seven days of consumption, data from the company showed today.
China, facing its sixth year of electricity shortages, mothballed at least 2.9 percent of its coal-fired generating capacity as of July 25 as fuel supplies dwindled, State Grid said. Coal shortfalls may worsen in winter as power demand stays high and hydropower output falls to a seasonal low, it said.
Finally in terms of macroeconomics, there is this: one idea I’ve heard that makes perfect sense is that the greatest anomaly to date is what has not happened to consumer spending. It has not rolled over. Despite falling home values, rising unemployment, stagnant wages, rising food and energy costs, and now falling stock prices, the U.S. consumer has continued to spend. The notion is that the consumer has been running on fumes. She’s maxed her credit card. She’s ignored reality, pretending that things will get better as they always do. She is living in the past. That is likely not to be the case going forward, particularly as the effects of recent Federal handouts wear out. To me this notion that consumer spending, 2/3rds of the U.S. economy, is likely to begin declining is the most worrisome of any aspect of the current economic climate.
If the global economy goes into a substantial downturn we can expect both lower stock valuations and lower oil prices near term. That prospect entails a potential double-whammy for the energy investment sector that has prospered so handsomely for the past several years.
All of the above thinking led to my decision on July 28th was to step aside from the stock market to a large extent. I kept my substantial position in Canadian Oil Sands Trust for both tax and fundamental reasons. I also maintained positions in deep off shore drilling companies, the business of which is unlikely to be anything but robust going forward regardless of global economic conditions or the price of oil. But now I am starting to hedge those positions. The clouds seem to be getting darker each day.
Car Talk
It seems that people finally are starting to understand that the energy problem is not about alternatives (especially ethanol, which is counter-productive). It’s about making cars and trucks operate on electricity that is generated by alternatives. We can have all the cheap renewable electricity we want - and I’m convinced we will have it in a surprisingly short time - but the electricity will do no good for solving our peak oil energy crisis if cars don’t run on electrons.
Over the past month I’ve been surprised to learn that the pleasant vision I had come to think would eventuate in a few years, lithium ion batteries powering plug-in hybrid electric vehicles (PHEV’s), may be an illusion. It seems that neither the cost nor the safety of large scale li-ion batteries is secure, which would explain why Toyota and Honda are planning for their next generation of HEV’s and PHEV’s to contain upgraded versions of the NiMH battery currently in use.
If the next five years of HEV and PHEV development are dominated by NiMH and not Li-ion batteries, two investment implications fall out. First, the lithium franchise of SQM becomes less compelling. Second, there will be a substantial need for more Rare Earth Elements that are used in NiMH batteries. One of my readers has kindly been educating me about these vital elements, their growing scarcity, and an investment opportunity related to them. I will be writing about all that soon.
Another potential option for bringing an affordable electric vehicle to market quickly is the ultracapacitor route being pursued by a small Canadian firm, Zenn Motors (Zero Emissions, No Noise). I’m intrigued by this possibility of an electric car with the range and power comparable to gasoline powered vehicles and the ability to recharge quickly. I’ve bought a few shares of Zenn (ZNNMF) and plan to learn more about the company and the EEStor ultracapacitor on which Zenn’s new product is based and in which Zenn has an equity interest.
Apparently EEStor is a very secretive private company about which two things are “known.” First they are funded, supposedly, by Kleiner Perkins, the highly successful Silicon Valley venture firm. And second, they recently got an ultracapacitor order from McDonald Douglass for a military aircraft. The buzz is that somehow EEStor’s proprietary technology allows for very rapid recharging while also allowing for slow discharge of its stored energy. If true, the product would seem to operate like a battery but one that is easily recharged. Moreover, the cost is said to be “low.” Whether true or not, the president of Zenn, who has been privy to inside knowledge of EEStor, seems to be betting his company on it.
The sum and substance of all this car talk is that the place to focus one’s attention in the “alternative energy” space is on batteries. An effective, cheap, safe battery system is what stands between our society being squeezed to death by high oil prices or being able to progress to the next level of clean, affordable, and independently produced personal transportation.
I think there is no question that the next five years will see cheap renewable electricity being produced from wind, thermal solar, PV solar, geothermal, and possibly wave technologies. But I have a lot of doubts about whether a new battery technology will allow all this electricity to do us any good in terms of solving our addiction to oil.
What About Natural Gas?
The other potentially game changing development according to some true believers is using natural gas to power cars and trucks. As I wrote, some leaders are increasingly advocating this route. The question, I think, is how many North American vehicles could be converted to natural gas before the demand for gas pushed up its price closer to energy equivalency, after which there would be little point to the exercise.
I don’t know the answer to that question, but I suspect it may be “not that many.” While natural gas supply is expanding in North America, I doubt that it can expand enough to handle a large amount of passenger transportation before the price would rise to the point at which it is no longer economical to spend a few thousand dollars to add a natural gas capacity to one’s car.
My guess is that demand for gas to generate electricity will increase as unstable renewable sources like wind and solar increase their penetration. That new gas demand by itself is likely to strain natural gas supplies over the next five years without accounting for even a single passenger car converting to natural gas. In sum, I am not a believer in the natural gas “solution” to our peak oil problems. I think we need to find the right new battery to solve this problem.
Meanwhile, here’s hoping that I will be proved wrong in my pessimistic expectation for the next phase of the economy and the stock market.
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This article has 34 comments:
User215308 is right: even if you solve other electric car problems, charging fast is still a huge problem. Let's say you want to charge and equivalent of 10 gallon of gas, adjusted for better efficiency of electric car. That's about 70 kWh. Let's say you want to to it in 5 minutes. That's 14 kWh per minute, or 840 kW. At standard 200V it's more than 4000 amps. You need thigh-thick conductors to run this current safely. Or you switch to high voltage and make recharging a highly dangerous business.
thefitzman.blogspot.co...
Not all ethanol is created equal. Corn based ethanol is counter productive. It is forced on American consumers because of politics/special interest that are relevant to the US market only.
Sugarcane based ethanol is a viable supplement.
>>>Peak oil is crap theory. There is a lot of oil in the
>>>ground. It's harder to reach than what we had 10 years
>>>ago...
Uhh, the Peak Oil Theory says that there's plenty of oil in the ground, but the challenge is getting it out of the ground and producing it at an increasing rate.
MIT just announced a huge breakthrough this week.
Read here: www.fuelcellsworks.com...
Also Monash University has created a new fuel cell design for cars that could be a game changer. The whole world is working on the fuel cell and is probably just a few discoveries away from putting together a viable product
www.fuelcellsworks.com...
Fuel cell wise I would suggest we are at about where the internet was in 1993.
Certainly one can imagine the global economic condition getting worse, much worse. But absent more solid evidence I think it more likely that the credit-bust pig is indeed passing through the python. It is a bigger pig (and a longer python) than was imagined at the first swallow in July 2007, but that’s par for the course.
Recovery will come in six months. No, I don’t mean in February 2009, I mean six months from today, whenever today is. That’s the standard prediction, which, repeated often enough, eventually comes true.
The US faces a Financial Crisis first and foremost. Everything else is negligible. That is technology will be used in the future. If funding is available.
Banks are still not lending to each other, not one has clue to what the other may announce the next day let alone a few weeks/months into the future. Keep an eye out on LIBOR.
The Dollar rally will give Foreign Banks a chance to bail out of some of the Fiat money currently be created as the Fed tries valiantly to refinance the Entire US. The Fed does not have unlimited resources. At some point, the US dollar will give way to the increasing reality of the size of the Actual Finances needed to stabilize the system.
tyklakewalker: Last time I checked sugar cane gorws only in Florida, Louisiana and Hawaii domestically. We should replace middle east oil dependence with brazil ethanol dependence ??? Further: You make lemonade with lemons: The midwest agriculture grows what it can given the long and harsh winters and the hot and humid summers. It ain't Hawaii and it ain't California there. You need to look at land effeciency and corn is pretty darn good for that.
Jim - I don't understand how you missed the big selling point on NG? Instead of sending $700 billion a year over to the middle east we're keeping the jobs and money here in America where they belong. We are the Saudi Arabria of NG here so why not use what we have in our own backyards?
I wouldn't count on this.
Electric reserve margins have been falling in the US at a rate similar to New Mexico.
Look at ERCOT Projected Peak Demand: 2008-2025 foil
www.prosefights.org/pn...
Renewable energy sources may be only able to supply a fraction of energy we currently consume.
Then there is EROEI for these renewable energy sources.
"You may have heard people talking about economic systems. You may also have heard of the energy of systems. The laws of thermodynamics state that the amount of energy in any system is finite—additional energy must come from outside. What you probably do not hear a lot about are the grim implications the laws of thermodynamics have for our economy.
It is not industrially, socially, or politically difficult for Brazil to replace 50% of its gasoline requirement when that nation consumes only 8 billion gallons of transportation fuel per year. And it is helpful that Brazil has a tropical climate, in which a unique plant thrives, growing in the rain and under tropical conditions, and utilizing less than 1% of Brazil’s arable land. Good for Brazil! It is just that you cannot extrapolate Brazil’s program and scale it up to the massive and voluminous U.S. requirement for transportation fuel, certainly not by using corn.
The U.S. can do no such thing that Brazil is accomplishing. Circumstances are just plain different. So the U.S. is wasting its resources and time in a boondoggle effort to make significant amounts of transportation fuel from corn that will eventually prove to be futile. The American political class needs to stop viewing Peak Oil, and the ominous future energy situation of the world, as just another political issue. It is long past time to get rational and serious about developing a long-term energy policy for the country.
I hope that these comments have provided you with some food for thought, if not a desire for a stiff shot of Old Overholt Pennsylvania Rye Whiskey. Thank you for reading Whiskey & Gunpowder .
Until we meet again…
Byron W. King
Sent: Wednesday, January 17, 2007 9:44 AM"
And
"Most of the other questions in this list can be tied up into this one question: does the invention defy the Laws of Thermodynamics? If the answer is yes, then something is wrong.
What are the Laws of Thermodynamics?
1st Law—Energy can be changed from one form to another, but it cannot be created or destroyed. The total amount of energy in the universe remains constant, merely changing from one form to another.
2nd Law—In all energy exchanges, if no energy enters or leaves the system, the potential energy of the state will always be less than that of the initial state. This is also known as the law of entropy.
3rd Law—It is impossible to cool a body to absolute zero by any finite process. This is actually more of a postulate than a law. In any case, it has little application to our discussion and is presented here merely for thoroughness. "
cheers
I'm glad you caught on to the problems that would come with the wide scale use of lithium. And nickel is a desireable substitute, besides.
Not so for electric cars themselves. For a variety of reasons, they will be only "boutique" vehicles for the next few years at least.
So this brings us back to 40-50 mpg hybrids and CNG/LNG cars and trucks. The question remains, why not ALL of them?
If you have NG at your house, you can buy a Phill to refill it with CNG for $1-1.50 a gallon, depending on where you live. And LNG is already beginning to replace diesel in trucks as we speak.
And don't diminish the value of ANY of these substitute fuels for even a little bit of gasoline. If we were to use only 5-10% less, this would have a much more marked effect on gasoline prices than you might think.
Aug 04 11:50 AMnakedjaybird
Aug 02 03:46
PMjhm47 - you should maybe check on peak time-of-day electical demand - lest it's changed (and I have not looked at the numbers in a decade), residential occurs breakfast and dinner hours; summer A/C follows the heat and early evening; some winter peaking for air movers, etc.; and don't forget wheeling opportunity with east to west time of day change for the sun to pass over the US providing 4-5 hour peak movement.
As for storage potential, we have not begun much lest exhausted hydro storage, numerous underground vehicles (gas, air), thermal w/ and w/o change of state in salts, chemicals, etc.,), conversion storage (making/catalyzing recombination of h2/h2o), flywheels, giant capacitors, methane storage/splitting/fuel... all without even touching batteries.
nakedjaybird
Aug 04 11:30 AMlongoil - and to all of that I say:
None of what you say is stopping T. Boone from moving ahead with targeting wind power to replace 22% of the NG power generation, nor all the other countries opting for alternatives, as we speak.
And (as for investing) don't forget all the remote/undeveloped locales in many nations that can utilize solar and a small lead-acid or the like battery without infrastructure nor major storage (not unlike our railroad crossings and other remote power uses that already exist).
And, as I've said elsewhere/other times: having a real need for what we should maybe call BULK ELECTRICAL STORAGE will help bring it to fruition.
And as for vehicles, most favorable are hybrids. Those will really take off with efficient solid state waste heat conversion directly to electricity (which is developed for standard technology and getting close with nano-tech) by injecting biofuels into a burner (container) encapsulated by electical conversion devices and a small on-board battery or storage device - maybe even a flywheel (already demonstrated in busses, years ago).
Aug 06 12:52 PM
T. Boone for President.
Even tho he's half right by wanting to replace NG electrical power generation with WIND POWER and half wrong by wanting to burn NG in vehicles instead of biofuels, he understands the real problems; the real causes; and addresses the real actions that change the causes of the problems.
His head is where the sun shines and wind blows, as contrasted to ALL THE LEADERSHIP IN WASHINGTON.
By the way, hybrids burning injected biofuels in an container surrounded by solid state devices for direct conversion to electric (with no battery or capacitor) and 100% useful energy from all the fuel will be the winner.
Boone understands the real problems;
the real causes;
and addresses the real actions
that change
the causes of the problems.
His head is where the sun shines and wind blows,
as contrasted to ALL THE LEADERSHIP IN WASHINGTON (AND MUCH OF WHAT I READ ELSEWHERE!!!).
static.seekingalpha.co...
Congress can commit to only one Technology and has yet to select what it will be, thats all there is to it, the infrastructure needed for anything involving nat. gas or hydrogen will have to be built across the Nation. Fuel Cells can compliment not replace. The only and cheapest Tech. is electric. Congress has always selected the easiest, cheapest way out.
Don't expect anything new.
10,000 B.C., is what I expect.
"I think this is better than your half-assed idea is not what our country needs". If we can't come up with a consensus, then I really do believe we will all be dead meat.
I use my postings to instigate thought into the proposals brought forth. In other words, I poke as many holes as I can. The Postings on Jim K's site have probably some of the best minds I have encountered at any site on the WEB. If we can not come up with a consensus, who will?
That's why I have lost my way, so to speak. Its become all "pie in the sky" to me. Without laying out the groundwork needed, the retooling needed, the retraining of the workforce to work with a particular proposal, THERE is no proposal. ALL of the above is needed otherwise it will die before it starts.
I really expected a lot by now. But all I read is the same bickering that I read some 3 months, 6 months, 9 months ago.
I have owned Advanced Battery since they licensed their technology from Altair, Ivanhoe energy since they built their first prototype in Bolivia. I have ridden Hyperdynamics up and down through various political upheavals because of their vast leasehold. Nevtah, since they developed their technology with the Army Corp. of Engineers. OpenEnergy, because of proprietary technology with their SunCone, which would utilize the sun to desalinate water cheaply.
Altair was my best hope in the all electric arena, but they experienced a breakdown in their Battery Packs which may or may not have been remedied. But they appear to have gone a long way in the other direction. Their single megawatt batteries lent hope, the introduction and operational integration of 2 megawatt batteries leads me to believe they have finally turned the corner. If they can double that storage once again, then T. Boone's wind farm has hope also.
I haven't mentioned all of my follies but most of my Portfolio consists of CanRoys which allow me to invest in particularly intriguing tech. from their income.
One other mention is CRDC, they are currently training surgeons to work with their medical devices. This will be the next breakthrough for reducing cardiac expenses.
Yes, I think we should import sugarcane based ethanol from Brazil. If the US removed the import tariff on imported ethanol, other countries with suitable climates would be incentivized to grown sugarcane to produce ethanol. I think India, Central and South American countries would be, in general, better trade partners than middle east countries. The goal should be to diversify energy sources. Ultimately cars in the US could be powered by a combination of fuels. Some electricity produced domestically, some domestic and imported ethanol, some domestic and imported gasoline.
Sugarcane based ethanol is 5 times more efficient than corn based ethanol. Sugarcane based ethanol is a partial solution to a huge problem. We still need to reduce energy consumption while diversifying energy sources. Telecommute more, improve public transportation, etcetera. There is no one solution but I'm tired of sugarcane based ethanol being put in the same category as corn based ethanol.
On Aug 06 11:56 AM Dr. No wrote:
> Muddling Invester: I love your calcualtion and reality check. So
> how does the electro-magnetic field look like around a thigh-thick
> conductor at 200V and 4000Amps?
>
> tyklakewalker: Last time I checked sugar cane gorws only in Florida,
> Louisiana and Hawaii domestically. We should replace middle east
> oil dependence with brazil ethanol dependence ??? Further: You make
> lemonade with lemons: The midwest agriculture grows what it can given
> the long and harsh winters and the hot and humid summers. It ain't
> Hawaii and it ain't California there. You need to look at land effeciency
> and corn is pretty darn good for that.
David at www.hybrid-car-show.co.../