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Joseph L. Shaefer
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Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. Joe retired as a senior executive at Charles Schwab and Co. to found Stanford Wealth Management, LLC, in 1990. He also spent 36 years in a very different leadership... More
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Bringing Home the Gold
  • The Truth About Fossil Fuels and Renewables (Part I) 0 comments
    Aug 6, 2009 6:54 PM | about stocks: XOM, CHK, IMO, ECA

     

    There beats not a heart among us that wouldn’t rather see our electricity generated, and our transportation, manufacturing and recreation powered, by renewable sources of sparkling clean energy like solar radiation and wind power.

     

    Of course, just by using the term “radiation” in context with “solar” I’ve made some greens distinctly uneasy.  But that’s what it is, of course.  Those of us who are farmers or gardeners have seen the precious results of this irradiation to bring forth new growth and new life.  Certainly we cannot be squeamish about the word when all life on earth depends upon it.  Yet what we call a thing defines it not equally among all listeners, but creates battle lines that, for some, are intractable.

     

    For instance, many younger Americans have been raised to believe that we left Eden and descended into the 7th Level of Fossil Fuel and Nuclear Radiation Hell under the Greatest Generation and Boomer stewardship, from which it must be their mission to deliver us and Save the Planet. 

    Blind obeisance to climate change may disappoint, however.  It presumes that Man is so much more powerful than Nature that we can safely presume we alone in this universe created global warming (a now discredited term still lurking under the new name of “climate change”) and we alone can solve it.  Other bulbs in this cosmic chandelier accept that we are at least partially responsible and therefore must do all we can to reduce our own footprint.

     

    I count myself among the latter.  I believe climate change (which is, in itself, something of an arrogance that really implies “climate control” and “climate manipulation”) might be a laudable goal but I must also ask the harder questions.  Will the cost justify the results?  What might we have done with those billions or trillions that would have done gone far to ease pain and suffering, reforest the world’s deserts, restock the world’s oceans, feed the hungry, cure cancer and Alzheimer’s, and so on?

     

    If you agree these sorts of hard questions should be asked and hard decisions made, prepare to be excommunicated from the current body politic.  Nothing less than social and natural-world engineering are the primary goals of the current political thinking.  In social engineering, our President has stated, "When you spread the wealth around, it's good for everybody."  Or as another similarly-inclined thinker on economic issues decreed, “From each according to his ability, to each according to his needs…” 

     

    An example of this social engineering gone awry: Cash for Clunkers, which makes sense for people with a 10 or 15-year old car they were on the fence about trading in.  But it also has created abuses like this one:

    Citizen A, let's call him the Ant, saves his money, buys smart, and owns a car that already gets more than 18 mpg. Thanks to his foresight and frugality, it's held its value rather well.  Citizen B, let's call him the Grasshopper, ran out and bought a Hummer when they first came out 'cause it made him look cool. Its value fell like a rock.  Today, Ant gets no tax incentive / free handout from his fellow taxpayers because he bought intelligently.  Grasshopper gets to take money out of Ant's pocket to dump his early-model 12 MPG Hummer and to subsidize his latest folly (as long as it gets 18.1 MPG.) 

     

    Ah, but in this case, there is also a higher goal, that none may dare challenge: we are using less fossil fuels this way, which “everyone knows” is the cause of global warming, so we get to accomplish social and natural-world engineering.  How arrogant have we become?  Do we actually presume that we know enough to make life-and-death decisions that will affect the health and well-being of countless generations to follow?  Are our leaders leading or following the votes of the next generation of voters?  Who’s following who?

     

    This sort of thinking also ignores or defies countless eons of history as well as more recent experience with the subsidized ethanol fiasco.  Some may look back to pre-fossil fuel days as idyllic.  They weren’t.  When wood was the primary fuel, forests were routinely destroyed, the deforested land took up less carbon from the atmosphere, and the air reeked of carbon by-products.  When whale-oil lamps were added to the mix, we not only nearly destroyed these leviathans, but our interior air was dangerous in the short term and deadly in the long term.

     

    Today, the articles we read are about renewables, so it’s easy to believe they constitute a rather large proportion of the fuels that cool and heat our homes and light our highways on a cold winter night.  If you are a vehement believer in that catechism, you might want to avoid viewing the table I’ve created below.  I computed the percentages from the raw numbers of quadrillions of BTUs reported by the Department of Energy’s Energy Information Administration. 
     

    For all our wishing, and all our government’s use of taxpayer funds diverted from somewhere else to create massive subsidies for something some bureaucrat -- but not necessarily the marketplace -- thinks is desirable, there has been little change in the energy mix.  Why is this? 


    Mostly because most people, and certainly those who provide the electricity for our homes and the fuel for our transportation, realize that the money would be better spent on making the current fuel mix less dirty, than on conflict-of-interest ethanol, heavily-subsidized wind, and currently pie-in-the-sky (but way cool “Popular Mechanics”-type) stuff like using the tides for power. 




     

     Basically what the chart above tells us is that from 1989, which I selected because it was the first year solar power ever registered in greater than one one-thousands of a per cent, to 2000, the end of the Clinton years, to 2008, the end of the Bush Jr. presidency and the most current full year, the marketplace and the citizenry haven’t changed usage much.  Fossil fuels as a group declined about 4%, with oil tumbling and coal and natural gas filling the void.  Nuclear has quietly risen about 3 1/2%, and alternative fuels in the aggregate, after all those solar, wind, hybrid automobile, and ethanol subsidies, is just under a per cent higher than it was 20 years ago -- and there's nothing "new" about 80% of the re"new"ables category -- it's mostly still burning wood and damming rivers, just like it was in 1989 (and for a half-century before that.)

     

    We’re still burning about the same amount of wood, though we now toss a lot of edible corn into the most expensive way our government could possible find to produce a fuel additive for gasoline.  You’d think with all the hot + air that Congress and environmentalists wagging their finger at us have expended, that solar + wind would amount to more than just under 2% by now.  God knows we have paid for it.

     

    The largest renewable sub-sector after wood and other biomass is the same one we have been using for more than a century and the one renewable energy source that is currently cost-effective without subsidies.  Regrettably, hydroelectric carries its own environmental disadvantages.  Unlike say, Norway, which derives 97% of its electricity from hydro, we don’t have a 1000-foot granite-pooled waterfall every few hundred feet.  So we resort to dams, which prevent fish from spawning and change the vegetation and erosion characteristics downstream.  Go ahead – just try to build an energy-efficient renewable resource dam-and-turbine in this country.  The same greens who lambast oil, gas and coal will prevent you from building that dam.

     

    My interest in pointing all this out is two-fold:

     

    (1) To suggest where the most cost-effective and attractive solutions lie right now, today, as we continue to make strides in alternative energies in order to reach the point where the marketplace adopts them both because they are environmentally more desirable as well as at least being closer to competitive with fossil fuels, and

     

    (2) to suggest which investment sectors are likely dead ends and which are likely to offer steady gains.   An ancillary benefit may be that we will know the next time some advocacy group is trying to pull the wool over our eyes.  I read recently, for instance, that “wind has expanded by 44.7 percent” in just one year.   Well, yes, that’s true, but that means it went from 0.4% to 0.7%.   That’s great, and I’m delighted to see it.  But since I believe people have come to depend upon steady reliable power,  I wouldn’t short my Exxon (NYSE:XOM), Encana (NYSE:ECA), Imperial (NYSEMKT:IMO) or Chesapeake (NYSE:CHK) just yet!

     

    When I began my career in the brokerage business in 1972, our firm’s analysts put out a report about the world running out of oil.  This was the first time I remember reading about peak oil.  Since then, we have more than doubled our estimates of the oil, gas and coal remaining under the earth’s crust and have barely begun to explore in parts of Africa and under the world’s seas. 


    A few weeks later, these same analysts also sent out buy recommendations based upon the “certainty,” then all the rage among leading scientists (but not necessarily climatologists) that, because of our addiction to fossil fuels, the planet was rapidly cooling and we were all going to freeze to death unless we developed alternatives to oil.

     

    Since such an undertaking was far too important to be left to markets, government bureaucrats with degrees in public affairs, management, and human resources (but not climatology) declared themselves experts and intervened with monstrous taxpayer-financed subsidies for uneconomic forms of energy.  Anyone remember the 1977 National Energy Plan?  The promises of all-solar electricity generation by 2000?  Stalin would have been proud of these bureaucrats.  


    It seems  our current administration shares this fascination with all things grand, visionary, centralized and controlled by wise elites --  all with degrees and life experience in public affairs, community advocacy, diversity training, management, and human resources, rather than climatology, finance, or manufacturing.

     

    Their call to action today, however, is that the earth is getting hotter, not cooler; that humans, especially Americans, are the cause of it all; and that we’re all going to be engulfed by rising seawater unless we dump oil, gas and coal.   Sorry to remain a skeptic but I’ve heard it all before and witnessed firsthand the tragic waste of taxpayer money that could have funded health care, inmmigration reform, and dozens of other pressing programs.  Most climatologists seem to share that same empirical skepticism -- not disbelief or disagreement, just rational skepticism -- with many believing that the 20-year mini warming trend that began in 1978 peaked in 1998 and may in fact actually now be reverting to the mean. 

     

    It’s not my intent to foster a debate in these pages about global warming. I don’t say it isn’t so, merely that claims of a consensus among those who know the most about this subject (climatologists and meteorologists, not bureaucrats, journalists, biologists, physicists and well-intentioned college students) are overstated.  There is no consensus.  About all we really know for sure is that excessive carbon in a closed environment can allow more sunlight through than it releases back to the atmosphere and excessive aerosols in a closed environment reflect the sunlight before it reaches the earth.

     

    I don't advocate ignoring this problem.  My point is simply that we need to face the current reality as revealed in the chart above.  Unless we are willing to scrap all modes of transport that require fuel and ride our bicycles through the snow; turn our thermostats down to 50 degrees in the winter and up to 95 degrees in the summer; and do not travel, anywhere, ever, we are going to use Nature’s Ready-Made Batteries – fossil fuels that Nature has been pounding into usable form for millions of years.

     

    I wish that weren’t true, but wishing is a far cry from research, experimentation and implementation.  What concerns me is that politicians with no scientific knowledge have concluded, as a policy-making tool, that the solution to “global warming” is the same as the solution to balancing the national budget.   How convenient.  After giving hundreds of billions to Wall Street bankers, the government needs to tax somebody big time -- “cap and trade” would fill the bill.  So while real experts can’t agree about the climate science, the political science is clear: fear equals acquiescence.  The world will end unless we do x or y or z.

     

    In Part II, I’ll discuss some of the biggest players in both fossil fuels and renewables and propose a solution to reducing our carbon footprint that is based upon science and infrastructure well-known, well-documented, and readily available, and which can be implemented today, not tomorrow or next year...
     

    Full Disclosure: We and many of our clients are long ECA, IMO, CHK and a couple other energy producers, transporters, and refiners I'll discuss in Part II.

     

      

    The Fine Print:  As Registered Investment Advisors, we see it as our responsibility to advise the following:  We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

     

    Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – especially so you are not over-impressed by the fact that our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running.  What if this is the year we under-perform it? 

     

    It should not be assumed that investing in any securities we are investing in will always be profitable.  We take our research seriously, we do our best to get it right, and we “eat our own cooking,”  but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     

    Themes: Oil, Energy, Commodities, Long Ideas Stocks: XOM, CHK, IMO, ECA
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