America's Energy Myth: Busted

04/15/2013 9:45 am EST

Focus: ENERGY

Marin Katusa

Chief Energy Investment Strategist, Casey Research, LLC

Looking beneath the surface uncovers huge holes in the argument that the US will be energy self-sufficient at any foreseeable point in the future, says Marin Katusa of Casey Energy Report.

Nancy Zambell: Thank you for joining me. My guest today is Marin Katusa. He is the Editor of the Casey Energy Report and he just wrote a fantastic article on different energy myths.

Marin, do you want to talk first about the myth that the US is going to be self-sufficient in energy within a few years? I've been hearing this a lot, but you don't think that's true. Why is that?

Marin Katusa: In the mainstream media, you hear that America will be energy self-sufficient by 2035. That was all based on a report by the International Energy Agency (IEA).

So what we did was we actually went onto the IEA Web site. We paid for and bought this 300-plus-page report and went through it in great detail with a magnifying glass. Our whole team tried to look at it with an open mind and use the data that the IEA used. We were using their own numbers and their own data.

The conclusion of the report was that America will become self-sufficient for energy. We basically busted that whole conclusion, and we call them myths. There are three main reasons why we believe-using the numbers that they've used, with their own logic and data-that they are wrong.

The first one is, they are basing it on a 40%-plus increase in the fuel efficiency of vehicles. That's not just hybrids or electric vehicles-that is existing gasoline vehicles.

Using the US Corporate Average Fuel Economy (CAFE) standard, they are hoping for an increase in over 40% in fuel efficiency. That has not been able to be done to this point, and yet they base a lot of their numbers on this hopeful forecast.

No. 2, we also think that they are wrong when they say that Americans will use a lot more ethanol fuel, which should displace the use of crude oil. If you go through the basic numbers, the amount of ethanol fuel the IEA requires to support its consumption is currently unrealistic without a major increase in corn production, so there's another issue.

The big killer to this whole argument is that the IEA expects the amount of power generated by renewable energy to triple in the next 20 years. As we go through the numbers, we show that it's just not possible.

Even with production tax credits, renewables have not been able to triple in production in the last 20 years. So how will they do it in the future when these construction loan guarantees are now questionable, and also the tax credits are questionable? What we basically come down to is, we busted their myth using their own numbers.

Nancy Zambell: One of the other things that they talked about is that energy consumption is going to be greatly reduced by 2035. Do you want to discuss that?

Marin Katusa: That was the first myth that we talked about. The report says that the energy consumption in the United States will be lower in 2035 than it was two years ago. Let's just think about this logically. Has the United States ever used less energy from one year to the next?

Nancy Zambell: I think your report said that in recessions, that sometimes happens, right?

Marin Katusa: Correct. We traced it back to before 1980, and during recessions there's a very minor blip, but it always recovers. The IEA report is basically saying the corporate average fuel economy-which we call the CAFE standard-are going to be 40% more efficient than they are today. They're basing this whole premise on technology that's not here yet.

Nancy Zambell: I know that they're talking about electric cars, and everybody likes electric cars because they're sexy; it's exciting; it's cutting-edge technology. But the truth is, that they're just not catching on as fast as people want them to, and there are several reasons for that, right?

Marin Katusa: Let's just look at the facts. In 2012, less than a half a million units of these gasoline electric hybrids sold. That represents a little above 3% of the total vehicle market just in the US. It's not growing.

For the numbers that the IEA is using, they need an order of magnitude difference to increase this year. We've traced the first quarter of 2012, and it's not growing from 2011. Basically, the people who bought these sexy electric cars have already bought them. And they're not cheap.

Nancy Zambell: No, and then you have the problem of plugging them in. We don't have much infrastructure yet, except maybe in California.

Marin Katusa: That's another thing that we talk about. The ranges of these electric vehicles are not like a gasoline engine, where you can go anywhere and fill up with a tank of gas. There's a downtime charge to these.

And not only is the infrastructure not in place where you can just park anywhere and plug in your vehicle, but also what people don't realize...in California it works well because it's warm weather. If you go up north to Minnesota or anywhere else north of California, because it's a colder environment, your electricity conduction isn't as efficient as it is in California. This wasn't mentioned in the report either.

Nancy Zambell: That's interesting. Let me ask you one last thing about solar capacity. We keep hearing that solar is getting cheaper. I know there are still subsidies around, and that IEA expects to increase our photovoltaic capacity from something like four gigawatts to 68 by 2035. You don't think that's true either, do you?

Marin Katusa: The reality is, right now the world average price to generate solar electricity is about five times the cost of coal, and over five times the cost of nuclear energy. Natural gas has changed the game because it used to be a lot more expensive, but with the shale revolution and the technologies developed, gas is now relatively on par with coal.

The government subsidies were a major reason why the solar sector was able to grow, and the irony of all of this is the solar industry accounted for roughly 10% of all the federal subsidies for electric generation in 2010.

If solar is able to lower its cost to be a little bit above wind-which is about 10 cents per kilowatt-hour by 2012-it could possibly achieve a 68 gigawatts target in the following 15 years. I said it could.

Reaching that goal hinges on two major factors. The first is the ability of solar power to lower its cost by a good 60% in seven years. The second major thing to remember is the government needs to continue its subsidies.

Both of those factors are up in the air, so that's why we said for the solar aspect, it's plausible. We can't say it's not going to happen, but we just say that goal is dependent upon two major things.

Nancy Zambell: What does it look like in terms of the government subsidies? It seems to me that I'm not really hearing anything about it in Congress; people are just not interested in it anymore. Would you say that's accurate?

Marin Katusa: I think what's happened is that Obama's Green Dream has turned into Obama's nightmare. The reality is, look what happened with the solar companies-Solyndra, Nevada Geothermal (Vancouver: NGP). It's just been a disaster, and the government is trying to avoid more disasters, so that the construction loan guarantee program for all these "green" projects has not been extended yet.

It terminates at the end of 2013, so will it get a one-year extension or a two-year extension? We don't know yet. But these are multibillion-dollar projects. You can't plan a project that takes five or ten years to build without knowing what the government's stance on all this is.

So that's another major issue that we discuss in our report. It gets into the realities of developing these long-term development projects, and the government doesn't have a long-term plan that they're sticking to. There's a lot of possibility for error here, so we're advising investors to be very careful in the solar and wind sectors.

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