by Kevin Kerr
Opportunities abound for investors in the energy market right now, just
looking at what's being set in motion globally. The end of the age of oil
will not be a disaster if we are prepared for it as investors and consumers.
Acceptance is the first step.
Aside from water, the world is most thirsty for oil.
Since the last major oil crisis in the 1980s, there's been tremendous
population growth, with no less than one-third of that population beginning
to industrialise their economies. Look at China, home to 1.3 billion people,
and India, with more than another billion.
Both these economies are growing fast, and they must have oil.
Then add the United States's oil addiction to the mix, with our ever larger
gas guzzlers and our seemingly insatiable desire for bigger and better,
whether it's cars, boats, houses, amusement parks, shopping malls, or
whatever.
Combine this demand with dwindling global supply, the ongoing threat of
terrorist attacks, the fact that there has not been a major oil find in more
than 36 years, natural disasters such as last year's hurricanes along the
Gulf Coast, and continued geopolitical tensions, and don't be surprised if
oil reaches $150 a barrel, or more. How can you capitalise on this?
It's always important to have vision, to see beyond the short-term outlook
and predict what can and may happen in the future. It's essential to know
which seasonal and geopolitical factors will drive demand. Do your homework!
Learn to decipher and understand industry reports such as the Energy
Information Agency weekly inventory report.
Oil is the lifeblood that moves things, that keeps the whole world
functioning and growing. In the last 100 years we have become very spoiled -
we've been used to easily obtained, easily moved, and easily processed
petroleum, crude oil, and natural gas. We have simply come to expect that
they will be there forever, or at least for our lifetime. Oil, among other
things, spurred the development of the internal combustion engine, which
does the work of a thousand people. Oil essentially constitutes a major
workforce throughout the world.
This virtually invisible workforce has allowed the world's population to
grow to over 6 billion. Not only that, it has allowed us to plough millions
of acres of land, to produce fertilizers, to transport people and goods,
even to wage global wars and to set up global communication systems. Our
dependence on oil, and energy as we know it, is similar to an addict's
powerful affliction. The world's craving for oil is just as debilitating.
At this moment the United States doesn't have an energy source that would be
as easy to produce and transport as oil. Nuclear power can produce
electricity, but the remaining rich uranium ore will last for decades, not
for centuries. Renewable energy can probably never cover the current levels
of global energy consumption or even U.S. consumption.
So what is a practical solution right now?
Recovery from oil addiction is possible, and the long- term, easy-to-reach
answer may be in a fuel source that is right under our feet - coal. Coal is
cheap and reliable and much cleaner-burning than it use to be. As the world
goes through painful withdrawal from oil dependence, coal may help. It seems
that the market feels this way to as coal prices have been soaring over the
past year.
Clean coal technology (CCT) is employed when coal arriving at a power plant
contains other by-products that need to be taken out before it can be used.
A facility like this uses a number of processes to remove unwanted minerals,
which makes the coal burn cleaner and more efficiently.
Coal has often been stereotyped as a dirty and less desirable product of the
energy industry, but not anymore. As the world searches for energy
solutions, coal is at the forefront, and new, clean-burning coal technology
means it's highly likely that coal will be around for some time to come.
It turns our turbines and runs our assembly lines . . .
it powers the Internet, our databases, and company networks. When we read in
bed, turn on the air- conditioning, look at the night time skyline, it's
there.
And we take for granted that it will always be there, every time. But when
more and more people, in more and more countries, start making that
assumption, you have a situation. Right now, one in every three people
doesn't even have electricity. And already, our electrical grids are
overtaxed and electricity demand is higher than it's ever been.
What happens when the rest of China and India hop on to the power grid?
In China alone, electricity demand is 150 percent higher right now than it
was when China first started
to boom, back in 1980. Worldwide electricity demand
is expected to explode by another 85 percent before
the year 2020, faster than demand for any other kind of energy.
What happens when the world population hits 7 billion?
How about 8 billion? Or 9 billion, as the United Nations is predicting?
Hospitals without life-support machines. Grocery stores without
refrigerators.
Shopping malls, office towers, and neon gone dark.
Printers and fax machines that don't hum. Trains that don't run, phones that
don't ring, computers that don't blip or announce new e-mail. . . because
there is no e- mail; there is no Internet. The global grid is down.
And where it's still up and running, it's pockmarked with dead zones that
have made the whole network slow to a crawl. Even the electronic stock
tickers on Wall Street have flickered out.
Without billions of dollars invested in new electricity resources right now,
imagine brownouts, blackouts, shutdowns, and worse on a scale 10 times
greater than anything we're seeing today.
This all sounds scary and not quite real. It doesn't have to be real if the
biggest and most ambitious economies in the world kick in right now with
several hundred billion dollars to jump-start a whole new era of electricity
investing.
The good news is that the total $16 trillion headed for all the energy
markets - including the $10 trillion that will go into electricity - is
still just a fraction of the total global gross domestic product
(GDP) - only about 1 percent. So making the investment is not only very
possible, it's nearly certain.
The electricity markets are still in their infancy in the commodities world.
As with so many other up-and- coming opportunities, you just have to be
ready to seize those chances when they come. Speaking of opportunities,
alternative energy is another area investors are focusing on, and one of the
biggest is solar power.
The idea of using the sun to solve the earth's energy needs is hardly new;
it's been used since the dawn of time. What is new is the technology and
research money that are breathing life into the industry. The rallying cry
for quick and easy solutions to our nation's oil addiction spurred immediate
interest in alternative energy, from nuclear to ethanol. Solar power faces
some challenges, to be sure, but there are some solid players who certainly
bloom in this sector. Just add
sunshine and a little ingenuity, and watch the
profits grow.
Since the 1970s, the solar power industry has come a long way. We've reached
a point where solar power is no longer a gimmicky, peculiar energy source;
it's now more of a necessity.
The solar energy industry has made enormous progress in the past 20 years,
finding new solutions to the ongoing problems of high costs and massive
regulatory barriers
- but there are still roadblocks. Solar technology has become more
affordable, due mainly to higher demand and the goal of eliminating
dependence on foreign oil.
Manufacturing processes have been streamlined and continue to become more
cost-efficient with the help of government subsidies, consumer rebates, and
tax credits. As oil prices continue to increase exponentially, it seems
inevitable that a convergence of the cost of conventional and alternative
energy costs will occur. Many companies in the solar sector seem to be
focused on the development of improved solar efficiency through broad based
applications that can be put to practical, immediate use.
Now, one thing that is very important to investors in any sector is the fact
that every trade has flaws. In the case of solar power, there are several.
Although there is so much good news for solar power, there are challenges,
too. For example, there's the lack of silicon, which is needed for making
solar panels. A silicon shortage has limited the supply of the panels and
frustrated potential buyers. Orders take several months to complete, and
prices, after years of floundering, have increased by as much as 15 percent.
The real winners are those companies that benefit from the lack of silicon,
primarily producers of less efficient, yet available, thin-film solar
panels. Of course, other beneficiaries include companies that have emerging
technologies, such as plastic solar cells.
Worldwide, the solar market has exploded, growing by 40 percent annually in
just the last five years. Germany and Japan alone use 39 percent and 30
percent, respectively, of the global solar panel stockpile. The United
States is a distant third, at only 9 percent of the global solar panel
supply, according to various energy information sites. California is likely
to drive that stat much higher as demand grows exponentially in that state
and others, too.
Regards,
Kevin Kerr
for The Daily Reckoning
Bill Bonner in London:
Uh oh...here come the clowns.
"The impact of losing 2.2 million homes, I suspect, will be in a lot of
areas of our cities and towns that are already pretty hard hit, so we
clearly want to look at it."
What the chairman of the Senate banking committee wants to look at is the
same thing that Wall Street was eyeing yesterday...the thing was so
disagreeable it sent the Dow down 242 points...and, according to the English
papers, upset stock markets all over the world.
And... "it's going to get uglier," said Angelo Mozilo on TV yesterday.
The whole U.S. mortgage industry - with over $10 trillion outstanding - is
already not prepossessing sight. It faces a 'liquidity crisis,' the CEO of
Countrywide Credit, the nations' number one mortgage lender, told viewers.
There are more than $1 trillion in 'subprime' mortgages outstanding. Many of
these are turning out as anyone with half a brain might have expected -
badly. And yet, the mathematical geniuses who package and trade these
things seem to have been caught unawares.
Take a look at the ABX index, where
subprime-collateralised debt is traded. The ABX, says the New York Times,
"tracks how much it costs to insure a group of BBB-minus bonds based upon
subprime mortgages. The Index is a derivative which falls in value when the
cost of insurance rises, so it can be seen as a proxy for the value of the
underlying bonds".
With defaults in the mortgage business mounting, insurance costs have
increased dramatically, sending the index into a spiral down. It has
declined approximately 30% since January 1, 2007, and 7.4% literally
overnight during the recent subprime crisis.
Yesterday was not exactly ugly...but nor was the picture as placid and
pretty as it has been for the last few years. Mortgage payments are getting
later...nearly 5% of them are delinquent. Among subprimes, the delinquency
rate has jumped to 13.33%...with subprime ARMs (adjustable rate mortgages)
at 14.44%.
Of the entire mortgage market, about a third is insured by the U.S. federal
government - that is, about $360 billion worth. But according to Martin
Hutchinson's calculations, if the US housing market goes down just 15% - a
rather modest decline for such an immodest boom - the mortgage industry and
its backers, lenders and investors would suffer a capital loss of about $1
trillion, with about a quarter of that amount in loans guaranteed by the
federal government's bagholder - Freddie Mac.
Freddie Mac, unfortunately, has only about $79 billion to draw on...which
would leave it a little short.
Seeing the handwriting on the wall and reading it without moving their lips,
its executives announced that they would tighten standards. Henceforth, it
would be harder to lay defective mortgage credits onto the feds. Thus
Mozilo's comments. A 'liquidity crisis,'
after all, doesn't arise in the desert. Where there is no credit, no one
expects credit. Where there is a flood of it, on the other hand, people come
to rely on it. And where there is excess credit, people come to rely on it
excessively.
How quickly a market can go from excess to shortage! We now see what can
happen to the entire 'flood of liquidity' that buoys up everything from the
prices of Bombay apartments to the art auctions at Christie's. It can
disappear in a trice. Then what happens to all those assets? Simple, they
sink back to more reasonable prices...and then (because markets tend to
over-react in both directions) to prices that are unreasonably low. So, you
see, dear reader, there is much to look forward to.
But let us return to the US Senate, just to laugh at the clowns. The gap
between what the feds' insurer has on hand...and the loss it is likely to be
asked to cover...is approximately $150 billion. Small change, to be sure.
But where will it get the money? And it is not as if the entire rest of the
financial picture will remain as soggy as it is now - even as the mortgage
industry dries out. We saw yesterday that the Dow is likely to follow the
mortgage industry. And the economy, too, it likely to feel the dry breezes
blowing off the mortgage financing badlands. Just as the consumer's water
line is connected to the community reservoir, so is his individual consumer
spending firmly attached to community house price trends. Come the parching
winds and it is likely to curl up and blow away.
Still, the Daily Telegraph reports that "American politicians are
considering an emergency bail-out of
2.2 million borrowers struggling with their mortgage payments."
Are these the same politicians that are already adding half a trillion to
the US national debt in the next two years? But anything is possible. If the
government - against all odds - can bring peace and prosperity to Iraq,
surely it can stop a liquidity crisis...can't it?
More news:
------------------
Adrian Ash, reposing in Kent:
- Happy birthday to the Reflation Rally! The global mega-trend in cheap
money turned four years old last Sunday. And my, hasn't she grown...
- What, you missed the celebrations? Quick, grab a party hat and a slice of
cake. And here, tie this balloon to your wrist. Mind it doesn't burst!
- The love-child of scared central bankers and bear- weary investors, the
Reflation Rally was born back when the Challenger tanks first rolled into
Basra. Spring
2003 was when cheap money got cheaper - so cheap, in fact, that the dash for
cash following the Tech Stock collapse finally turned tail.
- Only a fool would hold money paying less than inflation - and only an
idiot would sit out the bull market in everything else. The Reflation Rally
quadrupled crude oil prices, and took the Dow to fresh all-time highs. It
put a floor - at last - under Tokyo land prices. The yield-premium on junk
bonds shrank almost to nothing. Copper rose five times over.
- The FTSE recovered 6,000...the Dax climbed back to
2001 prices...UK house values doubled again...and gold shot more than 150%
higher.
- But no one likes a know-it-all, and the Reflation Rally became annoyingly
precocious. This wünderkind could pump stocks in Mandarin as easily as write
"buy"
notes in German. Her sales patter in Dutch matched her Korean
mortgage-market analysis.
- Shadey-looking Russian balance sheets, Icelandic bonds, credit-default
swaps on Ukrainian chicken-farm debt...you name it, the Reflation Rally
could talk it up with a smile. She welcomed investors the world over to the
cheap money bonanza each day - greeting them with a cheerful G'day,
ohiogazaimasu, dobré ráno, bonjour and good morning, America - without
missing a beat.
- The sun never set on the Reflation Rally, and her bull-market energy
brought joy to billions. Even those poor schmucks holding gold! "2003
provided an exception to the rule that gold prices tend to vary inversely
with those of financial assets," noted John Hathaway of Tocqueville Asset
Management as the Reflation Rally celebrated her first birthday. The trouble
was, 2004 proved an exception too - as did 2005 and 2006.
- The action in 2007 so far only serves to beg the question more urgently
still. Just what happened four years ago to kill gold's "safe haven" appeal?
It joined the same trend as stocks, real estate, emerging markets and
high-yield bonds - upwards...ever upwards.
- Now everything is plunging again, gold's started falling in sympathy! What
gives?
- Investec Australia today blamed gold's decline - down towards $640 per
ounce - on "worries that we might have another risk aversion sell-off". But
gold shines when risk aversion increases, or so everyone says. It's the
classic "safe haven" - or at least, it was until 2003.
- Has something gone wrong with the data? In a word, yes. Gold's magical
powers really did desert it four years ago this week. And the kryptonite
that zapped its powers - forcing it to rise with everything else - was the
plunging cost of money.
- In 2003 the European Central Bank (ECB) cut Eurozone base rates from 3.75%
to 3.0% - and left them there for the next 30 months. Across the Channel in
London, the Bank of England slashed its lending rate to 3.5%, a forty-year
low. Three-month rates on the Swiss Franc - recently cut free from all
gold-backed security - were pushed below 0.75%.
- In Washington, the gabby Greenspan Fed cut Dollar interest rates all the
way down to a half-century "emergency" low of 1%. And to complete the
bonanza of giveaway money, the Bank of Japan in Tokyo stuck with cheap money
so cheap, it was free.
- By the middle of 2003, the world's five leading currencies paid such
little interest, only a fool would hold cash. So the alternatives - every
alternative - shot higher, all at the same time. For the first time since
anyone bothered to crunch the data, that meant gold rose together with
stocks, bonds and real estate.
- Does that mean gold won't protect you against falling stock, bond and
property prices today? Short-term, we guess, gold may continue to struggle.
Too many hedge funds went "long" of gold in the futures market for it to
escape a whipping. They need cash to repay their investors. Taking profits
in gold is pushing it down.
- But today's dash-for-cash comes after four years of cheap money. And here
in spring 2007, confidence in government-approved cash continues to leak
away. Tapped by negative real interest rates on the world's five leading
currencies, faith in paper has been slowly ebbing since 2003.
- The bear market in money created the Reflation Rally in assets.
Government-led and central bank-sanctioned, it has halved the value of
Dollars against gold.
Sterling and Swiss Francs have both dropped more than 40% versus the metal.
The Euro's fallen by 30%, and the Japanese Yen has sunk to one-third of its
value since the Bank of Japan slashed its interest rates to 0.10% in Sept.
2001.
- Call it a flood of liquidity...a flood now washing the ink out of Mervyn
King's "promise to pay" on the notes in your wallet.
- This slump in the value of money will roll on for as long as interest
rates fail to outpace inflation. And with the US subprime collapse now
calling the entire financial world into crisis, don't expect a sharp rise in
real interest rates anytime soon.
------------------------
And more thoughts from Bill...
*** "The real worry lies much deeper than share prices," writes Anthony
Hilton in the Evening Standard in London.
The real worry, Hilton believes, is that we don't know what to worry about.
"This is the first truly modern financial crisis, the first born of the age
in which we live. For the past five years, cheap money from America and Asia
has been lent and re-lent with less and less concern about whether it will
ever be paid back, because new financial products - credit derivatives -
allowed those lending the money to insulate themselves from the possible
loss by selling the risk of default to other people."
"Three out of four mortgages that are made are made by a person who is not
employed by a bank or savings and loan," added Fed governor Susan Bies in
February. Ms.
Bies meant to look on the bright side. All this extra activity by extra
participants, she thought, made the whole lending world less risky. The
risk, such as it is, was thought to be spread around.
But to whom? How? And how much? And how might it be brought under control?
We don't know the answer to any of those questions save the last one. To the
first three, the appropriate responses are 'we don't know' three times. But
to the last one the answer is: it will be brought under control by the
natural contraction of the credit expansion. That same "liquidity crisis'
that now threatens subprime will someday threaten the whole mortgage
industry...and then the whole economy. Always has. Always will. What goes
up, comes down.
Still, the 'we don't know' answers probably hide bigger problems and more
expensive resolutions than we are used to. In the old days, if credit seemed
to be expanding a little too quickly, it was brought into line quickly too.
The Fed merely instructed member banks to tighten credit. Banks, then, were
the source of credit. When they tightened, the easy credit disappeared. Now,
credit comes from many sources - some of them relatively unknown to the
average investor as well as to the average banking regulator. The potential
uncontrolled run-up of credit is much greater (which is what we have been
seeing for the last few years). But so is the potential uncontrolled rundown
too (a preview of which we just saw). That there is more to come is the
opinion of Mr. Hilton, shared by your editor.
*** We love democracy. It is more entertaining than any other system of
government...and you can laugh at it without going to jail (at least, you
could before the passage of the Patriot Act).
Our friend Michel tells us about a hot
election campaign:
"...One promises change without disruption...another promises disruption
without change...: Umaru Yar'Adua (Democratic Peoples' Party), Chief Emeka
Odumegwu Ojukwu (Progressive Grand Alliance), Orji Uzor Kalu (Peoples'
Progressive Party), Chris Okotie (New Democratic Party), and don't forget
General Muhammadu Buharih (Peoples' Party) et Alhaji Atiku Abubakar
(Congrèssional Action). This last candidate is affectionately nicknamed the
""glutton for money" and is particularly critical of the government's
record,
namely: the disappearance of the railroads, the 28 million children who are
missed by the school system (out of a total of 34 million supposedly in
school), malaria, leprosy and tuberculosis rising to double digit rates,
spectacular increase in kidnapping, and importing 100% of the oil needed in
the country, despite the fact that the nation is the world's third largest
oil producer!"
Which is this example of democracy in action?
Nigeria...
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