Bad Energy Bill Is Good for Pipelines

01/15/2008 12:00 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

James Jubak, senior markets editor for MSN Money, says the recently enacted energy act won't solve the nation's energy problems but can help investors make money.

Bad energy policy can be great for company profits and investor returns.

[Among other things,] the Energy Independence and Security Act, [signed into law late last year]:

  • Requires cars and light trucks sold in the United States to deliver a fleetwide average of 35 miles per gallon from the current 27.5 miles per gallon by 2020.
  • Sets new energy-efficiency standards that would phase out incandescent light bulbs in favor of compact fluorescents and other energy-efficient bulbs by 2014.
  • Mandates an increase in the production of biofuels, such as corn-based ethanol, to 36 billion gallons by 2020.

In other words, aside from the rather timid increase in miles per gallon by 2020, this is a recipe for doing nothing meaningful in the next five years, all but guaranteeing oil prices will stay north of $80 a barrel this year.

I do, however, have one good thing to say about this law, which combines the worst of Washington special-interest politics with the desire of the average politician to avoid rocking the boat while seeming to do something for "the people." It is a superb guide to making money in the energy sector over the next five years:

Buy oil-service stocks, coal producers and transporters, movers of water, and surprisingly, producers of electrical cable, owners of pipelines, and solar stocks.

Delay long enough and you have to launch a budget-busting crash project to fix a problem that has reached crisis dimensions. And you don't have the option of casting around for alternatives to the existing delivery infrastructure. In a crisis, you've got to use the parts at hand.

This delay-induced-crisis dynamic is making the 100,000 miles of US pipeline much more valuable. The pipeline companies are just about salivating at the opportunities the energy crisis presents for them.

Pipelines could be built to include a north-to-south flow and to distribute oil and gas from new production areas, such as the Rocky Mountains.
 
[Then] there's the potential flow of new fuels, such as ethanol and biodiesel. Both fuels present pipeline challenges. But blending and changes in design are likely to conquer those problems around the time the shipped volume of these fuels grows large enough to economically interest pipeline owners.

[Finally,] pipeline operators might play a (still vague) role in getting wood chips or saw grass, the raw materials of ethanol made from cellulose, to production plants.

My pipeline pick is TransCanada (NYSE: TRP) for the depth of its Canadian system, its north-south orientation, its lead in the Alaska natural-gas pipeline project and its liquefied-natural-gas facilities and pipelines, which give the company access to a growing global market. (It closed above $39 Monday-Editor.)

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