Seeking Alpha

Joseph L. Shaefer's  Instablog

Joseph L. Shaefer
Send Message
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
My company:
Stanford Wealth Management LLC
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
  • The Truth About Fossil Fuels & Renewables (Part II)  2 comments
    Aug 7, 2009 6:13 PM | about stocks: IMO, CHK, EOG, ECA, NRP, PVR, KOL, PKOL, MMP, EEP, BWP, KMR, BPL, EPD, APL, SGLP, GE, CCJ, AAUKY


    As many thoughtful commenters contributed after  Part I of this article appeared,  there are inescapable realities we must address if we are to strike an intelligent balance between quality of life, real cost of energy, and an environment that is in balance.

     

    The first reality we must square is our love of our way of life with our environmental goals.  We take for granted the freedom to drive to work, fly to meetings, visit friends and family no matter how far-flung, and drive to the mountains, the beach or other weekend and vacation destinations.  We want to leave our computers on standby for ease of starting up the next morning, to keep our homes warm in winter and cool in summer, and to enjoy our flat screen TVs, electric blenders, Wii devices, and so much more.  Don’t look now, but what we have is exactly what 1 billion Indians and 1.3 billion Chinese and another 3 or 4 billion people across the planet want.

     

    The second reality is that we are quite schizophrenic about our energy usage.  We don’t want to be dependent on foreign oil, but we also refuse to allow drilling on the millions of acres of public lands in the US or offshore.  We say we despise the oil companies because we pay $3 a gallon for gas, but we haven’t allowed any of these companies to build a new refinery in the U.S. since 1976.  There are reasons a-plenty for companies  to agree not to build much-needed capacity: refineries are not particularly profitable, obstructionists fight planning and construction every step of the way, and government red-tape makes the task an all but impossible to succeed, decades long experience in frustration.

     

    The last refinery built in the US was in Garyville, Louisiana, in 1976.  The cost of building a new refinery is between $2 billion and $5 billion and experience has shown that any company that wants to build a refinery to process heavy tar sands or shale oil will have to fight self-appointed “protectors of the earth”  for many years in the courts, then they have to apply for as many as 800 local, state and national permits. With the long-term rate of return on capital for refineries of just 5 %, why bother?  In normal times, they can make that in T-Bonds without nearly the hassle.  

     

    So instead we allow resources to lie fallow right here in North America and we spend hundreds of billions to import oil from the Middle East, Russia, Venezuela and others – most of whom take great delight in watching our self-destruction.  It’s disingenuous at best to rail about the Russians cutting off natural gas to Europe or Chavez in Venezuela expropriating US-owned energy infrastructure when, if we simply use what we already have in abundance, we wouldn’t give a rodent’s posterior what Putin or Chavez were doing to run their own countries into the ground. 

     

    Are there problems with drilling in American offshore locations?  You bet.  Is it easy to refine American and Canadian oil sands?  Not on your life.  Is it as cost-effective to extract natural gas from American shale as it is to import it as liquefied natural gas (NYSEMKT:LNG) from Dubai?  Ummm  -- well, actually, yes it is. 

    But all these entails hard choices – like moving lots of rock and putting it back later.  Like ensuring that reforestation of denuded areas and best practices in soil management are put into practice.  Nature seeks balance.  If we only observe what Nature itself has done for eons and seek to duplicate it, we’ve solved fully half the carbon emissions problem.  More on the solution later.  For now, Walt Kelly, ardent conservationist and creator of “Pogo” said it best: We have met the enemy and he is us."

     

     

    The third reality, like it or not, is that the world’s demand for energy will grow by 30-50% over the next 20 years.  We can talk all we like about conservation and Congress can waste its time and our money mandating mercury-filled flourescents, but the rest of the world will continue to be profligate.  By the time I retire, we will need everything from every source that every energy firm can deliver. We’ll need it from oil, natural gas, coal, nuclear, wind, solar, geothermal, biomass, conservation and as-yet-unknown possibilities.        

     

    Fourth, eschew the “We’ll do it all with clean sunshine and a gentle breeze, man” types.  There are no near-term alternatives to oil, natural gas, nuclear and coal. Like it or not, the world runs on fossil fuels, and it will for years to come. DOE forecasts that fossil fuels will supply about 78% of total US energy demand in 2030 – about the same as it does today. Willpower, rhetoric, wishing or a new hope for change will not change this fact.  If you believe you can wish the world green, get over it.  It’s all about thermodynamics, costs, and hard choices that grownups have to make.

     

    Remember MEOW? (Jimmy Carters “moral equivalent of war.”)  30 years on, after $30 billion in government subsidies and a $26 billion a year government bureaucracy (DOE), alternative energy is still a hope.  That's $30 billion pumped into ethanol, MTBE, hydrogen cars, etc.  Of course, the elites who think they can overturn the laws of thermodynamics and economics by clever rhetoric, breads, and circuses, won’t stop spending our money willy-nilly on the next ethanol screw-up. 
     

    Here are some hard economic facts.  To replace one 1,000 MW gas-fired power plant, you’d need 500 state of the art wind turbines spread across 40,000 acres or 250 high-efficiency solar facilities taking up some 20,000 acres.  Why are gas, oil and coal so much more efficient, needing just a few acres to produce all that energy?  Thank Mother Nature.  Think of fossil fuels as giant “batteries.”  They’ve been compressed for eons by Mother Nature into compact pools, pockets, mounds, shale and bitumen (also called tar sands or oil sands.)

     

    To try to turn something as scattered as photons in sunlight or the kinetic and capricious energy of wind requires colossal investment to concentrate that energy as efficiently as Mother Nature has already done with fossil fuels.  Fossil fuels are batteries.  Every time. They work.  In compact form. 

    Wind power, today, when we need to address the problem, is every bit as consistent as is the wind when you fly your kite.  Some days it works, some days it doesn’t.  Solar power, today, is every bit as efficient as the day you decide to get a tan and it rains.  That’s not to say we shouldn’t continue to enhance the collection capabilities in these areas – just a reminder that they aren’t like batteries you can dig out of the drawer and know they will work every day, rain or shine, daytime or night-time.

     

    We need all the wind, solar, geothermal, biomass and hydroelectric supplementation that we can afford. But let’s think of it rationally; today and for the foreseeable future, these sources will supplement the giant batteries Nature has created, they will not provide a cost-effective alternative.

     

    Fifth, I can’t even dignify carbon cap and trade with valuable ink and space.  This is simply another porky fiasco like ethanol, MTBE, and hydrogen-powered cars that will accomplish nothing and cost hundreds of billions or trillions.   And it is doomed to fail unless we have viable alternatives -- not just supplements like solar and wind, but genuine replacements-- to the giant batteries known as fossil fuels.  Something that can be provided in massive quantities at a price that won’t bankrupt us. 

     

    The final reality is that taking the actions presented in cap and trade and many of the Kyoto protocols would likely have no discernible effect on global climate. 

    Better we should improve energy efficiency from production to transmission to usage in home and office and use two sources of fossilized batteries, three if you count uranium as a battery (and I do) that this nation has in abundance: (1) We have the largest deposits of coal of any nation on earth, enough to last 200 years at current rates of consumption.  (2) We don’t have natural gas pockets like Iran and Russia but we have every bit as much that is trapped in Rocky Mountain, Upper Midwest, and Southeastern US shale.  With the recent technological advances and enhanced drilling techniques we’ve developed for this resource, we have roughly 100 years proven reserves.  (3) Add to these two an energy source the US military has used safely for over half a century -- clean nuclear power -- and we have the batteries and the atoms to hold us in good stead until we can bring the “supplementals” up to real “alternative” levels.

     

    Today, gas and nuclear alone provide 40% of our productive energy generation – and are the two cleanest of the Compressed Fuel Giant Batteries (very compressed in the case of uranium.) In France, nuclear is 75% of power generation.  You don’t hear the French moaning about OPEC holding them up, do you?  (Many other things, but not this!)  And before anyone makes fun of France, how dumb are we to continue to forbid the building of oil and gas refineries and nuclear plants, and to make drillers jump through hoops to deliver clean natural gas to us???!!! 
     

    As for nuclear, Three Mile Island and The China Syndrome jolted that industry off-track just as it was gaining widespread acceptance.  Yet China Syndrome was pure fiction and Three Mile Island resulted in no deaths or injuries to plant workers or members of the nearby community and, as far as we can tell with continuous monitoring of the area ever since, no problems with succeeding generations.  Still, it provided an image, incorrect though it may be, of Armageddon.   

    That plant and the surrounding area is still continuously monitored by NRC, DOE, EPA, muckrakers, and No-Nukers.  And there is still no evidence of any ill health effect.  What Three Mile Island did accomplish was actually positive: sweeping changes for the better in “emergency response planning, reactor operator training, human factors engineering, radiation protection, and many other areas of nuclear power plant operations.”  It also resulted in research that led to pebble reactors and the next generation of even safer nuclear facilities.

     

    Again, it’s all about trade-offs in an imperfect world.  If you hate the idea of a clean, quiet, no-emission nuclear plant, what is your alternative?  40,000 acre wind farms that produce a smidgen of the power?  20,000 acre solar arrays that produce a smidgen of a smidgen of what nuclear does?  Freezing in the dark?  Living in caves? 

    I’m tired of hearing platitudes like “War is not healthy for children and other living things.”  What’s your alternative?  Living in gulags in a dictatorship?  Or “No nukes, no nukes, no nukes.”  What’s your alternative?  Importing ever-increasing amounts of oil from tinhorn dictators so they can fund terrorism against us?  You’re willing to spend billions and see thousands die as a result of a terrorist event that we created by funding our enemies, but not to build a nuclear reactor that would keep US dollars in the US?

     

    The nice thing about coal, gas and nuclear is that they don’t even need much in the way of infrastructure.  Coal and nuclear are running at 75% or less capacity right now and natural gas-fired plants at less than 50%.  If you really want to cut carbon emissions now, not when two guys in their garage find the solar Holy Grail, you could advocate switching from coal and oil to natural gas and nuclear.   At less than 50% capacity, simply running natural gas plants at 75% could change our carbon footprint in the short term by more than any cap-and-trade lobbyist-funded boondoggle.

     

    If we want to gain energy independence now, we have only to

    • Level the playing field.  End subsidies for oil, natural gas, nuclear, solar, wind, geothermal, et al.  Gore everyone’s ox at the same time and let the advocates for each prove their worth in the marketplace.  (Speaking of Gore, given his conflict-of-interest holdings in alternatives, I imagine he’d fight this tooth and nail!) 
    • Make the tough decisions as to whether we as citizens want to drill offshore, in ANWR, or elsewhere versus importing more and more oil from those who are using our money to do us harm.  Decisions are not made in a vacuum.  It isn’t “no new drilling and reduce our dependence on foreign oil.”  That’s dreamy stuff for starry-eyed tourists. 
    • If we opt to allow drilling for natural gas (the cleanest of the fossil fuels and one which we have in abundance) and oil (which we have in less supply) and to build nuclear facilities and natural gas pipelines, refineries and other essential infrastructure (while still building cost-effective wind and solar farms), then we must reduce the regulatory nightmare to do so.  Why 800 different permits from scores of local, state and national entities?  What do they do for their $26 billion a year at DOE if not fulfill their charter to “reduce America’s dependence on imported oil?”  If it’s anything other than that, I know a quick way to reduce the national deficit by $26 billion a year.
    • My opinion: Build American nuclear plants, switch as much as possible to American natural gas, and use American coal for the rest.  Reforest wherever possible to create carbon sinks that attract and convert these emissions, and use regenerative agricultural practices to sequester even more carbon.  According to an article in Soil Science here, soil – plain old earth, dirt, terra firma – is a great carbon storage medium, and contains more carbon than all terrestrial vegetation and the atmosphere combined.  For this last, we must change our agricultural practices to be more in line with organic gardening precepts but the health benefits would probably, coincidentally, save us a few hundred billion in health care costs, as well!  And finally, after using more US natural gas and US/North American uranium; less but still significant US coal; continuing research and buildout in renewables like solar, wind and geothermal; and reforestation and natural sequestration; a little population control wouldn’t hurt, either.

     

    How to Invest --  & In Which Energy Sources

     

    Where to begin?  I am primarily a buyer of natural gas companies, coal leasing firms, and natural gas pipelines.  In my opinion, among the best of the natural gas firms are Chesapeake (NYSE:CHK), Imperial (NYSEMKT:IMO), EOG (NYSE:EOG) and Encana (NYSE:ECA). 

     

    In coal, I stick with the coal leasing firms, which have no labor costs or accident liabilities but simply own mineral rights under land which is leased to coal producers.   My two favorites are Natural Resource Partners (NYSE:NRP) and Penn Virginia Resources (NYSE:PVR).   Vis a vis my comments about the amount of coal and natural gas we possess right here in the US and Canada, NRP has enough coal property under lease to fill its current contracts completely -- until at least 2040!  I don’t own but you might take a look at two coal ETFs, as well -- Market Vectors Coal (NYSEARCA:KOL) and PowerShares Global Coal (NASDAQ:PKOL).

     

    In the pipeline arena, there are some old favorites I first recommended more than 10 years ago, like Magellan Midstream (NYSE:MMP), Boardwalk (NYSE:BWP), Enbridge Energy (NYSE:EEP), Kinder Morgan (NYSE:KMR), Buckeye (NYSE:BPL), Enterprise (NYSE:EPD), Atlas Pipeline (NYSE:APL), and SemGroup Energy (SGLP).  SGLP is slightly different than the others in that it specializes in crude oil and liquid asphalt cement.  It transports these to refiners for processing into final products.  I see it as a pipeline and an infrastructure build-out play.

     

    Nuclear is a tougher business for me to recommend specific companies in because uranium is about the only “pure play.”  Reactor builder Areva (OTCPK:ARVCF) is primarily owned by the French government so they’re our partner, like it or not, and may make decisions based on politics rather than economics (unlike our government, of course!)  GE is a big player in next-generation nuclear as well as desalination and a number of other key areas – but their credit and off-balance-sheet exposure keep me away.  In uranium, there will always be another prospector with a “story.”  They’re a dime a dozen.  Cameco (NYSE:CCJ) is the biggest producer.  It, along with Anglo-American (AAUK), are the only two I’ve ever made money on.    Your mileage may vary…
     

    Full Disclosure: We are long small positions in ECA, IMO, CHK, NRP, PVR, MMP, BWP,  and  APL.

    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.

     

Back To Joseph L. Shaefer's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (2)
Track new comments
  • Sonic
    , contributor
    Comments (13) | Send Message
     
    I am no chemist, nor am I a geologist; however, a nifty presentation at chrismartenson.com suggests that our "200 years of coal" is true in terms of tonnage, but not so much in terms of BTUs, especially when you consider the energy that will go into recovery as each ton becomes progressively lower and lower grade and harder and harder to collect.

     

    Oh BTW...for the record: "Global Warming" A.K.A "Human Induced Climate Change" is a *theory*.
    8 Aug 2009, 11:24 PM Reply Like
  • Sonic
    , contributor
    Comments (13) | Send Message
     
    Good, practical article though. I enjoy your posts!
    8 Aug 2009, 11:24 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.