Archive for the ‘Alternative Energy’ Category

How the rich make their killing from soaring oil prices?

Sunday, June 1st, 2008

Take a look at this article from the news media: Opportunities in crisis as oil stocks dwindle,

A new oil shock that is sweeping the world has sent airline tickets soaring, car drivers reeling and retailers bemoaning the shrinking purses of customers. It is an oil shock of rare proportions.

It is in such events that investors thrive: surely there is an opportunity here for an investor to make a profit from the rising oil price?

Well, how would the rich profit from the soaring oil prices?

There is one rule of thumb that all investors, especially the budding ones, should take note: by the time you get to read about profit opportunities on the media, the biggest and most lucrative killings have already been made. What remains are the leftover scraps. The best investors hop on to the long term major trend long before the mainstream media screams about it. As early as the end of 2006, we had already whispered about the future of oil prices at Is oil going to be more expensive?. The world-class investors who are making a killing from soaring oil prices now would have made their move two years ago.

So, now that mainstream media are talking about how to profit from soaring oil prices, what will the world-class investors be looking at right now? No doubt, they will be thinking steps from the crowd. We believe they will be casting their eyes on alternative energy.

Back in April last year, we examined the idea of alternative energy- see our currently evolving guide, How to profit from rising energy prices?. In particular, take a read at Part 3 (Centralised or Distributed Power) of the “Smart money in alternative energy” series to see how the future of energy will look like in the long run. Regardless of whether you believe the former model (centralised power) or the latter model (distributed power) will be the outcome of the future, there is one problem for the investor: currently, there is no certainty on which forms of alternative energy (e.g. wind, solar, geothermal, nuclear, clean coal, biofuels, etc) will be implemented or commercially successful in the future. By the time the world work them out, the most lucrative profits would have already been made.

But how would the best investors invest in alternative energy? Remember the concept of the asymmetric pay-off strategy in our guide, How to profit from a stock market crash?? The same applies to alternative energy. We do not know which alternative energy will be the winner, but we know that the winner (or winners) will probably win a whopping big victory (or victories). The losers may end up discarded and forgotten (we believe ethanol will probably go the way of the losers). Therefore, the way to invest in alternative energy will be to allocate fractions of your capital into each and every alternative energy candidate that you believe will have good chances of winning. Eventually, one or more of the candidate will win so big that your combined losses on the losers will pale in comparison to the combined wins.

Obviously, this strategy will work only for those who have large enough capital.

Smart money in alternative energy?Part 4: avoiding the duds using EROEI

Thursday, April 12th, 2007

Continuing from yesterday?s article, Smart money in alternative energy?Part 3: centralised or distributed power?, today we will look at a very simple but very important concept for evaluating alternative energy businesses?Energy Return On Energy Investment (EROEI). Understanding of this idea is certainly helpful to prevent you from wasting your time by even considering outright bad investments.

According to the Wikipedia, EROEI is the

… ratio between the amount of energy expended to obtain a resource, compared with the amount of energy obtained from that resource.

Simply put, if in order to produce one unit of energy, more than one unit of it is expended, then this process is an energy sink. That is, that process is unviable as an energy source.

A very good way to illustrate this concept is via an example of a real life alternative energy business. There is a company in Australia that is in the business of producing electricity through the burning of garbage as fuel. Is this a viable energy business? Well, consider this: in order to burn garbage as fuel, you need to assemble vast quantities of garbage from all around town and transport them to the power plant. This means garbage trucks are required to drive to each household to collect the garbage. What does garbage truck run on? Petrol. Thus, by the time all the garbage is put together at the power plant, a lot of energy is already consumed in the form of petrol consumption by the garbage trucks. Obviously, the energy produced through the burning of the garbage is less than the energy that had been previously consumed. In this case, the EROEI tells us that this process is an energy sink and is unviable as an alternative energy business in the long run!

So, watch the EROEI!

Smart money in alternative energy?Part 3: centralised or distributed power?

Thursday, April 12th, 2007

Today, continuing from Smart money in alternative energy?Part 2: the solution or solutions configuration?, we will look at just one tiny facet within the complex energy problem?the generation of power. Assuming that in the long run, the generation of electricity through conventional fossil-fuel burning power stations is unsustainable due to environmental and fuel supply issues, what can be done? We do not really know for sure because we are not scientists and engineers. But we have some worthwhile ideas to offer.

Before we go into that, let us review the present conventional arrangements in power generation. Currently in most countries, electricity is generated centrally in power stations and then distributed to the rest. Let us call this the ?centralised power generation? model. One of the problems we can think of with this model is that a lot of energy is lost in the transmission of electricity from the power station to the destination.

There is an alternative (and more radical) model that we believe may possibly be a better idea for a world of scarcer energy and global warming. Instead of having power generated centrally, why not distribute the generation of power into a network of nodes? Let us call this the ?distributed power generation? model. The advantage of this model is that with locally generated power at the nodes (even homes can be nodes), there is no wastage of energy from the transmission of electricity. Also, from a security point of view, this model is not vulnerable to a single terrorist strike.

You have to understand that these two alternative models are not mutually exclusive. Think of them as a spectrum, with each end as one of the models. Now, the question is, which end of the spectrum will the future be likely to be? Those thinking in terms of the centralised power generation model will concentrate on technologies like nuclear power, clean coal, ethanol and so on. Those thinking in terms of the distributed power generation model will concentrate on technologies like solar, fuel cell, wind and so on. Therefore, your vision of the future will determine which alternative energy investments you are more likely to evaluate.

Which model do you think the future is likely to be?

Smart money in alternative energy?Part 2: the solution or solutions configuration?

Tuesday, April 10th, 2007

Yesterday, in Smart money in alternative energy?Part 1: current energy quandary, we mentioned that:

Hence, the world is now facing a mounting energy problem, which if not solved, will sooner or later lead to a crisis. The good news is, opportunities are found where crisis are. As investors, we have to train our mind to see such opportunities.

Nowadays, as you keep your eyes and ears open, you will easily notice that energy seems to be a hot topic in the business world. Buzzwords including ?alternative energy,? ?renewable energy,? ?bio-fuels,? ?ethanol,? ?nuclear energy,? ?clean coal,? ?conservation,? ?solar energy,? ?wind energy,? ?geothermal energy,? ?hydro-energy,? etc are often mentioned in the press. No doubt, a lot of hot money are pouring into energy related projects and businesses. Therefore, when you see this, you should be under no illusion that we are still basking in a world of forever readily available and plentiful energy.

We (along with the above-mentioned hot money) believe that in the long run, with everything else being equal, energy is going to be more costly. This will have an impact on our current way of life. To put it simply, the problem is that there is not going to be enough environmentally friendly energy to satisfy everyone in the planet. For those who believe in the theory of Peak Oil, their views will be even bleaker indeed.

At this point in time, the world?s energy problem has yet to filter down into the consciousness of the average layperson on the street. When that day comes, it means that this issue is finally making an impact (whether positive, negative or neutral) so real and visible that its effects can be felt in everyday life. As investors striving after atypical excellence, it will be too late to do anything by then. Thus, now is the time to take action.

Now that we understand the problem, what about the solution? This is the tricky part.

Before we plunge into it, the next step is to understand the nature of the solution. Now, we wish to impress upon you one very important concept that you should remember if you cannot recall anything else in this article. That is, this problem is not simply the problem requiring the solution. It is a multifaceted configuration of problems (e.g. Peak Oil, supply constraints, geopolitical instability, environmental concerns, global warming, skyrocketing demand, costs, etc) that require a complementary multifaceted configuration of solutions. Thus, its complexity is not something we (nor anyone else, we believe) can fully understand, let alone address.

In the following articles, we will look further at the energy issue from the perspective of an investor. Stay tuned!

Smart money in alternative energy?Part 1: current energy quandary

Monday, April 9th, 2007

If you have followed us for a while, you will know that we are generally cautious about investing in stocks right now. As we said in Another sign of the business cycle top:

In a business cycle peak, company profits as a whole are as good as it can get. If you expect the profit trend to continue and pay a premium price for stocks in anticipation for higher earnings next year, chances are, you will be disappointed.

Therefore, if you intend to invest in stocks, you have to be very selective in your choices of businesses to invest in. To do that, you cannot merely extrapolate the status quo into the indefinite future and base your decision on that. Instead, you will have to look beyond the current state of affairs and understand the underlying forces that are driving today?s current macro trends. Only then will you be able to anticipate the coming changes for tomorrow and invest accordingly.

Today, we will talk about one of the macro trends?energy.

The most important ingredient that drives the efficiencies, comforts, automation and wonders of today?s modern way of life is energy. The trains, cars, ships and aeroplanes that transport massive quantities of people and goods over vast distances quickly require energy in the form of fuel. The heavy machines that do heavy physical work far beyond the scope of human labour require energy too. The powerful computers that process and store vast amount of data and information as well as automate mental labour requires energy in the form of electricity. The heating in winter and cooling in summer of our abode requires energy too. Take energy away and our modern way of life will very much grind to a halt and bring us back to the hard life of our ancestors. In fact, contemporary life rests on the premise of abundant and cheap energy. Therefore, whoever controls the supply and provision of energy controls power and wealth.

Currently, most of the world?s energy exists in the form of oil, coal and natural gas reserves, of which oil is the most notable. There are two significant issues with regards to these forms of energy: (1) availability and security, which are applicable to oil and (2) global warming, which is most applicable to coal. We will tackle each one of them in this article.

There are growing worries that given the growing competitive demand for oil from emerging nations (e.g. China and India), there would not be enough supply of it to satisfy everyone (see Analysing recent falls in oil prices?real vs investment demand). To compound this problem, according to some respected scientists and geologists, today?s global oil productions are at or near permanent decline (i.e. Peak Oil). Thus, whether you believe in the theory of Peak Oil or not, there is growing consensus that given everything else being equal, oil is going to be more expensive in the long run (see Is oil going to be more expensive?). Since oil is a major manifestation of energy, which in turn is the most important ingredient for our modern way of life, it implies that if nothing is being done with regards to this issue, then the quality of life that we currently know and enjoy will be significantly eroded in the future. Worse still, a significant portion of the world?s oil resides in the most politically and militarily volatile regions (i.e. Middle East), which puts a serious doubt to the security of oil supplies.

The cheapest alternative to oil will be to use coal in which the world has plentiful supply of and are not located in regions that can result in its supply being held hostage to military and political situations. Unfortunately, the world is facing another serious challenge that makes it highly unwise to burn coal for its growing energy needs?global warming. Scientists are still cracking their heads to think of ways to extract energy from coal without damaging the environment seriously.

Hence, the world is now facing a mounting energy problem, which if not solved, will sooner or later lead to a crisis. The good news is, opportunities are found where crisis are. As investors, we have to train our mind to see such opportunities.

Corn as food or as fuel?

Monday, February 5th, 2007

Back in November, in Can ethanol replace oil? we mentioned that ?diverting vast amount of agricultural produce from food consumption to ethanol production is unacceptable?the result will be mass starvation.?

In the United States, there is a trend of diverting corn output from food consumption to ethanol production. Needless to say, the result is an increase in corn prices. This price increase had a spill-over effect on neighbouring nations. For Mexico, since they import much of their corn from the US, the price of their staple food, tortilla, recently rose by over 400%. Since tortilla is a main source of calories for many poor Mexicans, we can be sure they would not like it as expressed by their recent protest: Mexicans stage tortilla protest.

We doubt corn has a great future as a fuel.

Can ethanol replace oil?

Wednesday, November 15th, 2006

Recently, due to worries over the prospect of sustained high prices of oil, there had been renewed interest in alternative energies (see our article: Is oil going to be more expensive?) One of the considerations for an alternative to petrol for powering motor vehicles is ethanol.

Indeed, Brazil is a working example on the successful use of ethanol as an alternative fuel. For years, cars in Brazil had been running on ethanol, which are derived from their vast sugarcane crop. In view of this, will there be a day when ethanol supplants petrol as choice of fuel for cars in a mass scale, thus reducing a big source of demand for oil? Before we can answer this question, let us examine what it takes for this to happen.

Ethanol is produced from the conversion of carbon based agricultural feedstock (e.g. sugar cane, corn, sugar beet). Currently, the world does not have a sufficient surplus of agricultural feedstock to produce enough ethanol to supplant petrol. Diverting vast amount of agricultural produce from food consumption to ethanol production is unacceptable?the result will be mass starvation.

In that case, how feasible is it to significantly increase the supply of agricultural feedstock for use in ethanol production? We believe it is not likely to be so. There are too many issues involved. We would not be able to examine every issue, but we will look at two of the most important ones. A commercially viable mass production of agricultural feedstock will require vast amount of land and water. Clearing vast tracts of fertile land (assuming that such land are available in the first place) to grow the same type of plants for extended period of time for this purpose will bring about its own environmental and agricultural issues. The next significant challenge will be the procurement of vast amount of potable and agriculturally-suitable water, which is a major issue in many parts of the world. In Australia, the naturally dry continent made worse by the drought is a case in point.

With these factors in mind, although ethanol will have its limited role to play in the world?s energy problems, we are not confident of it supplanting petrol in a mass-scale in the foreseeable future.