Alternative Energy

Jesse writes:

It is my thought that if the Democratic party takes office, it may be of some value to hold alternative energy stocks, both in the short and long terms. There could be a short-term spike due to a renewed government investment in R&D; in these areas.

A Democratic administration would not necessarily be better than a Republican for alternative energy stocks. I’m currently researching them for The Kelly Letter’s portfolio, where we already own one company making a big splash in the solar industry.

What I’ve found is that the price of oil and the performance of alternative energy stocks is closely correlated. When oil’s expensive, the allure of other forms of energy goes up. Their prospects look brighter so, therefore, the prices of companies working on them rise on the increased interest in the sector.

The price of oil is a short-term factor. No president has much control over it, regardless of party affiliation. Also, when oil prices are rising and green energy investments are rising with it, oil investments still tend to be the better performing of the two sectors.

For instance, the proxy I use for green energy investments in the letter is PowerShares WilderHill Clean Energy (PBW).

PBW is up 19% so far this year. That’s good, except that PowerShares Dynamic Oil & Gas Services (PXJ) is up 29%. If you’re good at stock analysis and believe you can beat a general grouping of stocks in the sector, as we do here at The Kelly Letter, then you might have chosen the oilfield services company we bought, which is up 37% year-to-date and 56% since we invested.

That skill wasn’t necessary to do better than the alternative energy companies, though. Index vs. index, oil came out better than green energies in an environment of rising oil prices.

Here’s a list of green and alternative energy ETFs, and here’s a ranking of natural resource sector ETFs by year-to-date return, which clearly shows the outperformance of the oil patch.

What to make of all this?

First, ignore who’s president when deciding where to invest your energy dollars. Pay attention to the price of oil. The Kelly Letter’s projection for oil prices is for strength in the near term, weakness in the medium term, and strength again in the long term.

Second, understand that the short-term performance of alternative energy stocks looks to be as dependent on the price of oil as oil stocks themselves.

Third, when alternative energy stocks do well, oil stocks tend to do even better.

Now, some will see this as the entirely wrong approach. Shouldn’t we invest where we hope to see the world heading, not in an energy source that’s destroying the planet?

Let me share a dirty little secret with you. We could already be living without gasoline. Talk long and seriously with anybody deep inside the oil business and you know what they’ll mention? That electric cars have been possible for the past 100 years, and that the only reason we’re still puffing around in oil-burning models is that powerful entities want to sell every last drop of oil — and you can be sure they’ll find that last drop.

Ever been inside a warehouse? Look at the vehicles there. Forklifts and other machinery are all electric, as they have been for decades. Some of the machines can go days or a week with no re-charge. Anybody who’s ever operated one has wondered, couldn’t this just take me home tonight? Ten years ago, it did take some people home. One day, such a car might do so again, and in style.

If you live long enough, watch what happens when the last barrel of crude is pumped, shipped, and refined. The next day, miraculously, there will be another form of energy available and, lo and behold, the cars that can use it are built and ready to go. Amazing timing!

What’s more, guess who’s going to be selling that new form of energy? It won’t be GreenFuel Technologies, much as we all admire their algae aspirations. It will be a familiar roster of names: BP, ChevronTexaco, ExxonMobil, Shell, and the gang.

You didn’t really think such established corporations were oblivious to the end of the oil age, did you? Each one of those companies has entire departments dedicated to future scenario building, and they’re phenomenally good at it. They have contingencies for nuclear wars wiping out oil fields, political coups shutting down shipping lanes, meteor impacts, and most assuredly the end of a finite supply of oil. That last one is the easiest to foresee.

They are the ones spending the most amount of money on alternative energy sources, and they will buy any small company that creates the holy grail before they do. They are not oil companies, per se, they’re energy companies. Oil just happens to be the world’s current source of energy.

In the end, the very best way to make money off alternative energy might be through buying the firms that environmentalists see as the enemy: traditional oil and gas companies.

In any event, the end of oil is a long ways off and the likelihood of a viable alternative appearing in the short term is remote. Corn ethanol? Forget it. It takes 1 unit of fossil-fuel energy input to get 1.3 units of corn ethanol output. Prairie grass cellulosic ethanol has a 1:2 ratio, and biodiesel a 1:2.5 ratio. Cane ethanol is better at a ratio of 1:8, but it, too, has drawbacks.

“If alcohol is now considered a ‘clean’ fuel, the process of making it is very dirty,” Sao Paulo Public Ministry prosecutor Marcelo Pedroso Goulart told National Geographic. “Especially the burning of cane and the exploitation of the cane workers.” This from the country of Brazil where 85% of cars are flex models that can burn gasoline or alcohol. Recently, with alcohol running cheaper than gasoline, almost nobody in Brazil is running on gas.

Yet, it remains a petroleum economy. Magic bullets are hard to find. We’re all rooting for the algae pump to end our dependence on oil, but that’s not where to put your money yet.

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