The Independent Market Observer

5/29/13 – U.S. Energy: Beyond Fracking

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on May 29, 2013 9:59:42 AM

and tagged Market Updates

Leave a comment

I have written about energy before, but, based on the number of recent news stories on the topic, I think it’s worth taking another look at just how much the energy landscape has changed over the past couple of years.

Last summer, I wrote that, with so many new technologies brewing, it was almost certain that at least some of them would pan out. I wrote about the shift of narrative, recalling a meeting with clients in Massachusetts where I actually sparked an argument about which solar program was better. I wrote about how fracking would be a transition phase.

All of that is indeed happening, and happening now. Let’s start with Tesla, the only new U.S. car company to make it in decades. Tesla isn’t out of the woods yet, but, with a 99 rating from Consumer Reports for its newest car and its stock taking off, it’s clearly the company to beat for electric vehicles. Regardless of whether or not Tesla itself makes it, the notion of electric cars as vehicles you actually want to drive has come of age. By making it an aspirational object, rather than a sacrificial object, Tesla has changed how the entire population views the electric car.

Let’s move on to utility generation of energy. Today alone, there are several stories on this topic in the Wall Street Journal and New York Times. To start with, utilities are getting on board with different energy technologies. The CEO of American Electric Power, for example, sees distributed solar—generated by panels on homes and businesses—as both a threat and an opportunity, the WSJ reports. AEP and other coal-burning utilities are either exploring or actually investing in installing such systems. When utilities, a notoriously conservative industry, are looking to move from a proven model like coal to a new one, you know the trend has legs.

Also in today’s Journal, utilities are looking at Wyoming for wind energy. Two different investor groups are planning wind farms to generate power and ship it to California. What makes this interesting is the proof of concept either would provide, if they succeed. The other interesting thing is that one project is driven by billionaire Philip Anschutz. When serious, wired money starts to enter an industry, the chances of success improve sharply. Once either of these projects gets the infrastructure in place, there is absolutely nothing to prevent massive scaling across the central U.S.

In the realm of less-proven technologies, one of the smartest venture capitalists around, Vinod Khosla, is doubling down with his own money on companies that, among other things, turn wood into oil. Along the same lines, the European Union is starting to move toward burning biomass—that is, wood—rather than fossil fuels. Renewables can mean more than wind and solar, and this is the type of conceptual shift that will drive further change. There are now 20 biomass power stations in the U.S. alone, with more planned.

Make no mistake, some or even all of these ventures might fail. The reason Khosla is writing checks himself is that other investors have pulled back. The solar industry is also facing problems right now, as companies have collapsed very publicly and Chinese solar manufacturers are apparently producing defective panels, which will probably hurt the industry in the short term, according to the New York Times.

And yet, given the expansion in interest we’ve seen in the past year alone, this is a trend in its very early stages. Along with fracking, it is changing the world of geopolitics as OPEC wrestles with the impact of lower U.S. demand and increasing supply.

Alternative energy is one of the long-term trends that will increasingly support U.S. growth. It won’t have a substantial impact in the short term, but when we check in again next year, I would give long odds we’ll be even further along.


Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®