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Clear Thoughts
What Fuels this Country?
| Oil, coal, fear and greed. |
Sometimes when we listen to politicians, we wonder who the last advisor to influence them was and what the real issue was at the heart of the matter. These days there is yet another political witch hunt, adding to the many in our past; this one concerns energy companies and their record profits. Congress is calling energy company executives to testify before committees once again to try to portray them as ruthless profiteers at the expense of the average citizen.
Oil companies are famous for investing in new technology, seeking out new sources and, if you read the ads from British Petroleum (BP), discovering new sources of energy. In the New York Times today a reporter astutely pointed out that Exxon Mobil (XOM) is spending a lower percentage of profit on research and new projects than it historically has, and the author opines that the company is returning too much profit to shareholders. Writing this post, I look at the aligned interests of business and the country, with an eye on history and free market economics as guidance.
One of our analysts recently published a Clear Research Note comparing the surge in energy prices to a gold rush. To paraphrase and summarize, the lesson is that it is sometimes better to serve the prospectors than to be one. He was referring to the oil services industry which has thrived as well as, if not better than, the oil companies. Natural gas has risen to new highs and investing in coal companies has been quite profitable as well.
Market forces drive innovation. Government and industry can team up at the University and company levels and promote research and development. Further, government could reduce energy demand by increasing taxes on energy usage, although we do not advocate this as a long term solution. Perhaps market forces and necessity will win out here. In a potential indication about the direction we are heading, over the past 24 months the number of venture funds focused on new sources of energy has risen dramatically. The sense that new energy sources could become more commercially viable in the future is growing. We are becoming more and more aware that current energy sources are becoming more fragile as energy prices escalate.
The increased demand for energy is global with the economies of India and China growing more rapidly than many previously estimated. Do we make more energy efficient cars, electric generators, appliances, and even iPods? Do we seek out, invest in and create new renewable sources of energy? This analyst believes the answer is yes and that our country is in a position to help itself and the world. Business and infrastructure investment in modernization and innovation will happen, either through incremental improvements of existing technologies, or through invention. This is inevitable, due to market forces well beyond the direct control or influence of the government. As an analog, just look at the nearly $1 billion market for iPod accessories: where there is demand for new products, entrepreneurs will act, delivering what consumers want and creating new jobs and wealth along the way.
As a commodity becomes scarce, its price rises, and as prices rise, market forces drive innovation through a mixture of evolution and revolution. Why do we still create so much of our electricity with coal and not alternative fuel? Why is nuclear power not safe yet? When will we run out of oil, coal, natural gas and other fossil fuels? The answer is that we will not run out of fossil fuels in the lifetime of my five year old daughter, and the safety and proliferation of nuclear energy has not yet increased because the market has not demanded it yet. Intellectually we think it could be someday technologically feasible, within a risk-reward scenario, that nuclear power plants will be safe enough to be in our backyards. Obviously that is still a long way off.
Focusing back on the current energy situation: one theory on Alaska is that we in the U.S. are so smart that we are not only hoarding oil from around the world in our strategic reserve, but we are purposely waiting to tap into the oil in the Alaska wildlife refuge. Oil in the future will be far more scarce and strategic, and technology in the future will make accessing the Alaskan reserve more environmentally prudent and cost effective. Perhaps one day dreams of cars, appliances and electricity running just on corn-based energy will come true and become commonplace. Science may even discover how to split water molecules and release the enormous energy potential from the most abundant substance in the world.
Some points worth remembering are that fossil fuels will one day run out, and that our current way to convert them to energy is hurting our planet. As the energy landscape changes, companies offering innovative energy solutions will tap the vast depth of the equity markets to finance their growth and research. Like the coal, oil and gas companies before them, and the enormous sub-industries that service them, these companies will create jobs and wealth. Among these innovators there will be winners in financial performance, and those companies will undoubtedly be recognized by our algorithms and we will be investing in them for the benefit of our investors.
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