The Energy Crisis

I think it's only in a crisis that Americans see other people. It has to be an American crisis, of course. If two countries fight that do not supply the Americans with some precious commodity, then the education of the public does not take place. But when the dictator falls, when the oil is threatened, then you turn on the television and they tell you where the country is, what the language is, how to pronounce the names of the leaders, what the religion is all about, and maybe you can cut out recipes in the newspaper of Persian dishes.
Don Delillo 1926-, American Author

While all the attention is being focused on just one part of the commodities market, the very important life sustaining force of any economy is almost being ignored. The US is the largest consumer of Oil and its Natural gas needs are expanding rapidly. We are going to take a look at the energy situation briefly today and look at it in detail in next weeks update.

Power plant construction is lagging behind what is really necessary to keep a growing economy healthy. Our national power grid is antiquated and can barley handle present loads, so forget about adding too much new capacity to them. This is a recipe for a disaster, already they have come out and publicly stated that we could face another power crisis like the one we had last year that shut down half the east coast. To make matters worse, nothing has been done to prevent such an event from occurring again. It's not only the power grid that needs a complete overhaul. Our domestic pipeline infrastructure is also underdeveloped so as demand for natural gas keeps increasing, it remains to be seen if these pipelines will be able to handle the extra demands.

The natural gas shortage is a crisis waiting to happen. Perhaps Warren buffet knows something as he has been buying gas pipelines through Berkshire Hatways subsidiary Mid American Energy holdings. We all know Buffet is famous for taking positions, months and sometimes years in advance of any major moves. He has been positioning his company to become one of the top controllers of natural gas supply in the US.

"Our current outdated network of electric generation, transmission lines, pipelines and refineries that convert raw materials into useable fuel has been allowed to deteriorate. Oil pipelines and refining capacity are in need of repair and expansion (this can be seen easily with the prices spikes in Gasoline we experience every summer, most of it is due to lack of refining capacity) Not a single major oil refinery has been built in the United states in nearly a Generation causing the kind of bottlenecks that to lead to sudden spikes in prices… Natural gas distribution is hindered by an inadequate network of pipelines. To match supply and demand will require some 38,000 miles of new gas pipelines along with 255,000 miles of distribution lines. Similarly an antiquated transmission grid prevents us from routing electricity over long distances and thereby avoiding regional black outs such as California's "

Energy prices are not going to drop any time soon. More than just being a function of inflation only, higher energy prices are going to be due to the result of demand simply overwhelming supplies. Even if we get all the crude oil we need, it still needs to be refined and our refining capacity is maxed out. So why don't we just bring the natural gas from say Russia that is loaded to gills with it, the answer is very simple there are no pipelines from here to Russia. Well what about Canada, they are close to us and have huge reserves of natural gas, but most of it is unexploited. Currently they supply approximately 15%-16% of our natural gas needs and they don't have the capacity to step up production significantly higher immediately. This will take time. The end result, it looks like higher energy prices are here to stay.

When written in Chinese, the word ''crisis'' is composed of two characters -- one represents danger, and the other represents opportunity
John F. Kennedy 1917-1963, Thirty-fifth President of the USA

President Bush recently committed the nation to ambitious goals of space exploration including manned missions to Mars in an attempt to inspire and mobilize Americans. How about a similar effort to develop 21st Century energy technology? Wouldn't this inspire and mobilize the nation? At the same time, a national energy development effort will create jobs and economic growth. There is no reason not to make the attempt. I suspect this isn't on the agenda because a national energy project would expose the critical vulnerability of the US as well as all industrialized nations to limited and unreliable energy supplies. An honest debate and referendum on energy policy would not serve the interests of the power elite; therefore it will not be addressed until a crisis develops. Then, those in charge will exploit the crisis to assume even greater power.

As Sol says, costly energy is here to stay. There are some positive benefits to this. In all markets, price conveys information and mandates action. Higher prices will spur exploration and development of previously uneconomic deposits such as the Athabasca Oil Sands in Canada and deep water oil. During the 1970's massive energy price increases mobilized the nation to significantly reduce energy consumption and imports, albeit temporarily. We can do it again. But not with the current "stick your head in the sand" mentality that pervades the country. It serves no purpose to continue energy gluttony at home and practice energy imperialism around the world. We are already witnessing the grim consequences of our energy quagmire. The ultimate resolution of our current course will be continued war in the Middle East and eventual conflict with China and India over dwindling energy supplies.

As investors, energy is a difficult play. Energy is highly politicized and volatile. The recent scandal with Royal Dutch shows that what you see may not be what you get when buying energy stocks. I prefer natural gas to oil. It is a more predictable market with mostly non-discretionary demand characteristics and production within North America. Much oil consumption is discretionary, meaning that we could reduce consumption considerably if we as a county decide to do so. This along with political uncertainty of oil producers makes oil riskier and more volatile. That said, I do believe that oil investments in general will outperform most other markets in the long run, but it will be like riding a rodeo bull.

We as a people have the power and the skill to find a permanent solution to reliable and sustainable energy production. Let's make an effort as both investors and as consumers to support alternative energy and energy conservation. Such a grass-roots movement could ultimately make a real difference.