It appears to me that the energy market in the US at least is now irrational. I don’t really know why but here are current prices (per MMBTU) for different forms of energy

Coal – $2.27/MMBTU
NatGas – $4.38/MMBTU
Crude Oil – $13.46/MMBTU
Ethanol – $12.82/MMBTU
Gasoline/Products – $18.03/MMBTU
Electricity – $18-20/MMBTU (flyover country); $30-40/MMBTU (policymaker country)

These don’t all compete directly with each other (and some are inputs for others) but they should, in a free market, tend to either converge or spur innovation that would allow multi-uses for fuels (and hence tend to converge). Why isn’t that happening?

Coal – Clearly the cheapest fuel but for political/social reasons will not be expanding its use. Carbon emission costs are not priced into the market with the fuel directly but are somewhat priced in on the consumption side. Coal will continue to be used for electricity generation – and electricity may become more used for transportation. Currently for most of the country electricity is only a luxury transportation fuel. Politicians will unfortunately make sure that those parts of the country where electricity is cheaper (or can be much cheaper) do not attract immigration because they a)don’t want to lose personal power to currently depopulated places like the Dakotas or Wyoming and b)keeping the housing bubble inflated is priority one for pols and that can’t be done if people move from where they currently are. Given that political constipation, there is a large potential price upside for coal if not a volume upside – but very few investment opportunities. The Powder River Basin is the present/future coal center — but the biggest beneficiary of expansion/price there is actually the federal govt (via leases) and railroads (UNP and BRK.A and maybe, in future, CP) – not the miners (BTU,ACI,CLD).

Crude/Gas – Obviously the core of transportation energy but also obviously pretty damn expensive for the US. It really wouldn’t take a lot of innovation or even infrastructure buildout for natgas or biofuels to compete with crude at the margin. And it doesn’t even need to be some government subsidy. Personally, I am not sure the US government really wants to eliminate our dependence on imported crude. It ensures demand for reserve dollars (which helps fund deficit spending) and it provides a rationale for busybody wannabe empire administrators re the MidEast/China/etc. As well as slimy perpetual electoral rhetoric about how we need to “become independent” – which would disappear if we actually were to take steps to become independent. Absent change, oil price and investment opportunities will all be driven by overseas entities. There are plenty of them – but this post is focusing on the other stuff.

Ethanol/Biodiesel – Currently is priced comparably to crude-derived fuel. But that is very much dependent on the price of the source fuel. In the US, corn is the main feedstock for ethanol and corn is really cheap right now. Biodiesel has a variety of feedstocks. Long-term, biofuels are the sustainable liquid fuel for transportation but they will also require innovation in order to diversify the feedstocks so that the biofuel product remains somewhat stable in price. Short-term, the best investment opportunities are in the feedstocks themselves — but not because of fuel/energy but because of food problems. A topic for another post. Long-term, the best opportunities are in the enzymes/microbials that chew up those feedstocks and allow for things like cellulosic ethanol derived from much broader feedstock (garbage, forests, inedible grasses, etc) that doesn’t require expensive farmland to produce. Two companies in particular — Novozymes of Denmark (NZYM-B.CO or NVZMY) which is a legitimate dividend-paying growth company that already dominates the market for enzymes used in food/detergent/water treatment/pharma/etc and Codexis (CDXS) a riskier development-stage company. I’m gonna do a writeup on Novozymes. Too expensive right now but any stock market fall is a great opportunity to buy (and hold).

NatGas – is stuck. The price in the US is half of what it is in Europe. It can’t compete with coal. Greens/left in the US are off in lala land about wind/solar/walnuts and so don’t like natgas. And in order to really compete with liquid transport fuel, it needs some high-profile bully pulpit stuff and/or some big guaranteed orders (city fleets, corporate fleets, post office fleet, etc). Current price is profitable enough only to keep the gas pipeline full to the gills. The best opportunities for potential price-upside are UPL,RRC,ECA. The best opportunities for continuation of status quo are SE (pipeline), royalty trusts, oil sands stocks (need a high differential between crude/natgas), and nitrogen fertilizer companies or other non-utility natgas consumers. Topic for yet another post.


One Response to Energy

  1. htomfields says:

    The metabolic versatility of this enzyme (xtreme xylanase) will enable economic enzyme production, biomass pretreatment process versatility, and significant equipment and operational cost savings that could make affordable cellulosic ethanol a reality.

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