FORECAST: PARTLY CLOUDY
by Kevin Kerr
The Daily Reckoning
March 19th, 2006
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 industrialize 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 everlarger 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 capitalize 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.
By using spread trades and options in the energy markets, traders can maximize profit potential while limiting downside risk. (Spread trades are exactly what they sound like. The most common spreads are those between the different trading months, such as December/January spreads or, as we call them, DEC/JAN spreads. Basically, you are simply trying to trade a price differential between the months. There are many different types of spreads but this kind is the most common.)
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 internalcombustion 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 plow 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, too: 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 nighttime 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 onto 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 broadbased 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.
for The Daily Reckoning
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Editor's Note: Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation's top commodities gurus, Kevin's expert opinions are routinely featured in the country's premier media outlets.
The above was taken from Kevin's soon-to-be-released book, A Maniac Commodity Trader's Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider's view of what he calls "the last bastion of pure capitalism on Earth." Whether you're a novice or an experienced trader, Kevin's down-to-earth, clear-cut guidance will make you more savvy, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you. The book is available for pre-sale here:
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