Stefanie Kammerman, the Stock Whisperer, to tell you the Whisper of the Week: GLD and SLV in my week...
The disaster in the Gulf has killed the chance for a national energy policy: here are the winners and losers, if I'm right
05/14/2010 8:30 am EST
There are the 11 rig workers who died in the fire. The reputation of BP (BP), the owner of the oil, Transocean, the owner and operator of the rig, and Halliburton (HAL), the company that at the time of the explosion was pouring the concrete that was to seal the well. The wetland ecologies of the Gulf coast. The fishermen and shrimpers who make a living from these waters. The towns and communities that depend on the Gulf for their economic life blood.
And somewhere in that list of casualties you should add national energy policy.
Certainly any national energy policy that’s built on cap and trade or a carbon tax or any other mechanism for fighting global climate change is now dead. And maybe even the kind of smaller, focused energy bill that Senate majority leader Harry Reid (Dem.-NV) started to talk up last weekend.
One of the strange consequences of the Deepwater Horizon disaster is that it has reduced the chances for any kind of comprehensive energy plan in the near future to between slim and none
Not because the United States doesn’t need a national energy policy. We do. Desperately. The disaster in the Gulf of Mexico just makes that clearer.
But because of the politics of energy in Washington.
The disaster has made opening up new areas of the U.S. continental shelf for oil drilling, as proposed by the Obama administration and its Republican opponents before the explosion, politically impossible. And without increased drilling as a bargaining chip to offer there’s no way to build the coalition necessary to pass an energy bill that focuses on fighting global climate change like the Kerry/Lieberman legislation that the Senators from Massachusetts and Connecticut introduced on May 11.The 987-page plan once included provisions for expanding offshore oil exploration and production, but those were stripped out of the version introduced on Wednesday and replaced by a provision that would give states the right to veto any drilling plan. That would have the effect of limiting drilling off the Atlantic and Pacific coasts.
Hard to see how Kerry and Lieberman can bring oil state Democrats and any Republicans at all on board with that language.
I can see a chance for a bill that creates something like a scaled-down version of a national energy policy but not the version that Reid highlighted over the weekend as his alternative to the Kerry/Lieberman plan. Reid seemed to indicate that he’d like to move forward on a reduced plan modeled on the legislation the Senate Energy and Natural Resources Committee approved last June with four Republican votes.
But I don’t see how even that bill flies in the post-Gulf disaster environment. The smaller plan in that bill would include a national mandate that utilities generate a percentage of their electricity from renewable sources, stepped up energy efficiency standards, incentives to build out the power supply grid, and subsidies and loans for energy production from such low-carbon sources as solar and wind.
And it also included provisions that would expand oil and gas drilling in the Gulf of Mexico. That was a critical feature in gaining the bill the votes it needed in committee. With those drilling provisions stripped out, as is likely in today’s post-Deepwater Horizon explosion environment, I think this bill too goes nowhere.
Smart politicians could cobble together a new coalition that used support for policies to encourage the use of natural gas as the new bargaining chip to replace the drilling bargaining chip.
And I think smart politicians could recast an energy bill to harness some of the post-Deepwater Horizon anger. An effort that appealed directly to our national interest in increasing domestic security by reducing dependence on foreign oil and on increasing U.S. competitiveness and employment could work.
Smart politicians are always in short supply, however, and I think the odds against this effort are pretty formidable. Not impossible. But unlikely. As long as politicians are still focused on using the emotions of the moment to bash some target.
Here’s how a handicap the likely winners and losers in the post-Deepwater Horizon disaster environment.
- Winner: nuclear power. The industry has $18.5 billion in loan guarantees from the federal government in place and another $36 billion guarantees are in the administration’s proposed 2011 budget so the industry really doesn’t need comprehensive energy legislation to move from planning to construction. A favorable regulatory environment is about all the additional support the industry needs to push ahead and that is pretty much guaranteed. The stocks to look for in this sector are those of companies building the reactors such as Shaw Group (SHAW), Fluor (FLR), and Flowserve (FLS).
- Winner: hybrid car makers and auto battery makers serving that market. The incentives here, as with nuclear, are already in place with scheduled increases in fuel efficiency standards. One of the easiest and most profitable ways to increase miles per gallon averages across a car maker’s fleet is to increase sales of hybrids. Companies to watch here are Johnson Controls (JCI) and A123 Systems (AONE). A123 shares have been hammered and then hammered some more recently. (For why the stock might be nearling a buy see my post http://jubakpicks.com/2010/05/13/update-watch-list-stock-a123-systems-aone/.)
- Winner: natural gas. At current low prices of less than $5 per million BTUs, natural gas doesn’t need subsidies to encourage utilities to switch from coal or oil to gas for generating power. If subsidies to encourage the use of natural gas in the transportation sector are part of any new energy plan that would be another plus. I’d look at low cost producers such as Ultra Petroleum (UPL) and pipeline companies such as Energy Transfer Partners (ETP) as picks in this sector.
- Winner: ethanol makers. If the U.S. government isn’t going to invest in creating the infrastructure necessary to increase use of natural gas in the transportation sector or to improve the national electricity grid so that electric cars become a key source of storage during nighttime periods of low demand (for how that would work see the Rocky Mountain Institute’s smart garage plan http://move.rmi.org/move-news/what-is-the-smart-garage.html ), then ethanol becomes an increasingly attractive alternative. Why? Because it is domestic: it replaces oil; and the farm lobby is very powerful. My guess is the drawbacks of corn-based ethanol would make any extension or increase in support to the U.S. industry politically contentious and that approval would require horse-trading that would include provisions to increase access of Brazilian sugar-cane-based ethanol to the U.S. market and increased support for pilot projects to produce biofuels from non-food crops. I’d keep an eye on Cosan (CZZ), one of the biggest producers of ethanol in Brazil. (For more on Cosan see the section on Brazil in my post http://jubakpicks.com/2010/02/05/how-to-build-a-global-portfolio-what-countries-do-you-want-to-own/ )
- Modest loser: land-based wind power. I think the costs of land-based wind power have come down enough so that with modest support from state mandates that utilities buy green power the sector will keep growing in the United States. However, the fastest growth isn’t coming from the United States but from overseas. It would certainly help if U.S. demand picked up enough to offset declines in the Spanish market, but I think global growth in countries such as China and India is robust enough to keep the sector humming. Of course, a lack of U.S. incentives will hurt domestic wind turbine players such as General Electric (GE) I’d look overseas in this sector to Vestas Wind Power (VWDRY.PK). The weak euro has made the company’s products significantly cheaper and with that advantage the company has signed new orders in China. (For more on other European stocks that benefit from the weak euro see my post http://jubakpicks.com/2010/05/11/looking-for-euro-stock-bargains-you-havent-missed-out-and-here-are-three-to-watch/ )
- Big loser: ocean-based wind power. The costs of offshore wind power are significantly higher than that of land-based systems. Without federal subsidies I don’t think utility rate payers will be willing to see their electric bills increase enough to make off-shore projects competitive.
- Big loser: solar. The global solar industry is facing a drop in demand later this year when the German government cuts its subsidies for solar power. With prices already headed lower because of a surge of new producers entering the market, the sector could sure use a boost from a pickup in U.S. demand. A stable, long-term schedule of financial incentives for solar power from the federal government would do the trick. But in the absence of that kind of domestic demand incentive, I think U.S. and European solar cell producers will struggle as they lose share to Chinese and other Asian producers able—or at least willing—to sell at lower prices.
Quite frankly, I hope my cynicism about Washington politics is excessive. I think a failure to produce a national energy policy is a mistake that costs the United States jobs and reduces our national security. So I sure hope my handicapping of energy sectors is wrong.
But I fear that just as you can’t be too rich or too thin, you can’t be too cynical about Washington.
Full disclosure: I own shares of A123 Systems, Cosan, Energy Transfer Partners, Flowserve, Johnson Controls, Transocean, and Ultra Petroleum.
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