Five Oil and Alternative Energy Developments to Watch

by: David Jackson
  1. Cheap goods from China are driving industrialization in other developing countries, leading to broadly rising oil consumption elsewhere in addition to China's own rocketing demand. The latest evidence: Chinese motorcycles that sell for only $440 are raising productivity and living standards for farmers in Laos. As a result, a village of 150 families has 44 Chinese motorcycles. Bullish for the oil ETFs -- (NYSEARCA:OIL), (NYSEARCA:USO) -- and the steel stocks -- (NYSE:AKS), (NYSE:NUE), (NYSE:RS), (NYSE:RYI), (NASDAQ:STLD).
  2. The United Nations reported an "unforseen and unprecedented decline" in the global food supply. The UN's food price index rose more than 40% in 2007, hitting developing countries whose food bill rose by over 25%. Wheat and oilseed prices are at an all-time high. What's this got to do with energy? Rising agricultural commodity prices are bad news for the ethanol producers. Perhaps the agriculture ETFs will outperform the alternative energy ETFs over the next five years.
  3. Exacerbating the situation: ethanol production is boosting demand for corn and diverting production from other crops. A lobbyist for the Grocery Manufacturers Association, complaining about rising food prices, says that ethanol has a "magic effect" on politicians, a polite way of saying that incentives to produce ethanol from corn are irrational and distortive. This isn't the first time that doubts have been expressed about the economics of producing ethanol from corn. Bearish for the ethanol theme stocks.
  4. The future isn't all grim for ethanol, though. Congress passed a bill mandating the U.S. to use, by 2022, 21 billion gallons a year of ethanol or other biofuels produced from biomass, such as straw, tree trimmings, corn stubble and even garbage. Ethanol stocks shot up, with investors ignoring the fact that "no fuel of the type in question" has ever been produced commercially in the U.S.
  5. Whenever a sector is hot, the supply of capital rises and competition intensifies. So it's not a surprise that the alternative energy IPO pipeline is busy. Two of the latest: Gushan Environmental Energy Limited is the largest commercial biodiesel producer in China. Orion Energy Systems provides high intensity fluorescent lighting for major corporations. Hopefully enthusiasm for alternative energy IPOs will end more happily than the frenzy over optical communication IPOs at the height of the tech bubble. I'm still short Avanex, which crossed $250 per share in early 2000; now look.
  6. Full disclosure: Short AVNX at the time of writing.