Normally, when oil and gas prices accelerate on both sides of the Atlantic, alternative energy sources come into focus and become a big part of that "energy independence" discussion.
Well, not this time.
During the run up to mid-$4 gas and $147/barrel (bbl) oil in 2008, many assumed these costs would continue to advance. That made alternative sources—especially renewables such as solar, wind, biofuels and geothermal—more attractive to investors, politicians, and energy enthusiasts.
Alternative sources are more expensive than conventional oil, gas or coal. They are, however, more environmentally friendly. Paying those higher costs was regarded as a tradeoff for cleaner energy sources and a reduction in emissions.
That view has changed. And it's part of the reason why I've recently avoided alternative energy companies like First Solar (NASDAQ:FSLR), Canadian Solar (NASDAQ:CSIQ) or SunPower Corporation (NASDAQ:SPWR) in my Energy Advantage portfolio.
It is hardly a convincing argument anymore, especially during a sluggish economic recovery. The economic downturn has made reliance on more expensive energy sources a difficult proposition to accept.
Yes, increasing oil and gas prices should reduce the spread between conventional and renewable, thereby providing stronger arguments for change. And proponents argue that alternatives provide an enhanced advantage given that they can also be domestically produced.
Just don't bet on these arguments holding up this time. Here's why.
The main difference in the current environment is the huge unconventional oil and gas reserves existing in the United States. Both are energy "game changers," transforming the energy balance and expectations of sourcing well into the future.
I'm speaking here of shale and tight oil and gas, coal bed methane, bitumen, heavy oil and oil sands. Each of these requires much greater commitments of energy to produce energy (so the "Energy Returned for Energy Invested," or EROEI, is worse) that do conventional oil and gas.
That means there is a cost premium added to the overall increase in oil and gas prices now underway.
The caveat is the amount of reserves available. The large amount of unconventional oil and gas existing on the American market, buttressed by synthetic oil flows from the oil sands in Canada, is transforming the energy balance.
And this transformation is dramatic.
Foreign Imports Wane in New Era of American Energy
In 2012, the U.S. is likely to import a smaller amount of its daily crude oil needs than at any time in decades. Preliminary figures could put that as low as 49% of domestic demand. To put matters into perspective, we were looking at 67% only three years ago.
The picture for gas is even more optimistic.
Five years ago, I remember sitting in a policy meeting at which the consensus pointed to 15% of U.S. gas needs being imported as liquefied natural gas (LNG) by 2020. Today, we are poised to see American LNG exports comprising some 9% to 12% of the world market in 10 years or less.
Shale gas alone has provided what looks like a century or more of gas reserves; very little was estimated in the early 2000s. Today, the U.S. market could increase gas production by 25% each year for the foreseeable future without tapping anything beyond what we already know is extractable.
Now nobody will do that, of course. It would destroy the market and drive every operator out of business. But knowing that it could be done is a major restraint on prices. Those prices will rise over time as major new demand sources for gas are phased in. These include:
- The significant ongoing shift from coal to gas for electricity production;
- Greater reliance on gas for feeder stock in petrochemical manufacturing;
- The coming LNG export push; and,
- Increasing use of natural gas as a vehicle fuel.
All of which brings us back to today's subject.
Undercutting the Alternative Energy Argument
With the movement to exploiting unconventional domestic sources of oil and gas, one of the primary arguments in favor of alternative energy is undercut. Absent any major breakthrough in technology (inverters for example, that would dramatically decrease the loss of electricity from solar and wind generation), the cost differential will remain.
Despite the rise in oil and gas prices, alternatives will still be more expensive to utilize, even before considering the infrastructure expenses for delivery and support that would have to be introduced. The rise of shale gas and oil, along with the large volumes of other unconventional reserves present, make a move to alternatives less likely.
Concerns about the economic recovery remain paramount, given the major position held by energy – both its availability and its cost. Once concerns about a double dip are over, Europe appears to have its house in order and financial cliffs are avoided, we may approach this differently.
And genuine considerations about environmental stewardship may again become central to the discussion. But some of those concerns have come into focus with the recent announcement that carbon emissions have reached a 20-year low in the United States.
This month, the U.S. Energy Information Agency cited "low-priced natural gas" as the primary driver of the steep emissions decline, as natural gas is replacing more-carbon intensive coal as a greater source of electricity generation.
This does not bode well for the prospects of alternative energy.
Kent Moors
Oil & Energy Investor
