It's about time. I have said in many past writings over the years that the U.S. is the global village idiot when it comes to energy policy. I'd like to reiterate that here. But there seems to be a change happening in Washington D.C. that is warming the heart of me, T. Boone Pickens, Jim Cramer, Harry Reid, and a whole new army of nat gas fans.
I have described the danger of trying to safely get to a post carbon world without a carbon bridge. The problem with solar, hydrogen, ethanol, and wind is that they take about as much fossil fuel to make these forms of energy as the energy it gives us. They do not displace much fossil fuel if any. There are exceptions, like sugar ethanol. However, until we have a good scientific handle on what is really worth a big infrastructure build, in net energy terms, we desperately need a good old fashioned high net energy bridge fuel -- like natural gas.
Even before the fracing revolution of the last 5 years, there was a span of about 25 years between the Hubbert calculated peak production of conventional crude oil and the corresponding peak for conventional natural gas. As we pass the oil peak, and I'm referring to oil from conventional pressurized reservoirs which takes relatively little energy to retrieve, the still climbing nat gas curve starts to form a criss-cross where we embark on the "bridge" to a stable energy supply for the next couple of decades. If you put all the forms of energy on a time-line, you see this bridge and its relation to the developing fuels of the future: (click on images to enlarge)
You basically have the huge separation by scale between the fossil fuels and the renewables. The fossil fuels are here and now, while the renewables are a tiny fraction of our supply and aren't going to replace fossil fuels any time soon. This is why President Obama's past mindless veto of anything with carbon in it is so dangerous. It prevents maybe a fraction of the CO2 that gets emitted by volcanoes and other natural sources, but surely cripples a massive share of our energy supply and keeps a post peak-oil bridge from being built for the civilized world.
As the chart shows, a twenty year bridge can be built on either coal or nat gas. Coal has two major problems-- it is dirty, and it is of questionable net energy. You can burn it-- as has been done for hundreds of years with decent net energy, but poison our globe. Or you can go the CTL route (Coal-To-Liquids) and put coal derived fuel into your gas tank without having to burn it. The problem with this is that the EROEI (Energy Return On Energy Invested) calculations I've seen for this process are all over the map, with most of them around 3.5 or so. This doesn't do much good in displacing crude -- you need around 6 or higher, nat gas and oil are estimated at 8-11 currently. CTL certainly needs to be developed, as Sasol (SSL) and others are doing. But we know that nat gas is 30% cleaner than the oil we're using and we know that the shale gas net energy, at least for now, is good. The recent tech breakthrough in fracing, by the way, pushes the nat gas peaking curve much further out into the future.
The combination of peak oil and gas fracing has radically altered the oil and gas markets. Traditionally, one could judge valuations of the oil or gas price by just multiplying gas by 6. But the last 5 years has seen the end of this age:
Click to enlarge
We are now entering an era of troublesome oil prices and cheap nat gas. I still see arguments that gas must rise because it's so out of sync with oil. But that won't happen until a massive switchover of usage happens from oil to gas.
Which brings us to The Nat Gas Act of 2011. This bill was introduced into the House mid year, and has now been sent to the Senate as of late November. It used to be mostly a Republican idea, but it is gathering strong bi-partisan support with Senate Majority Leader Harry Reid a key ring leader. This bill would give tax breaks to the purchase and usage of trucks designed to run on nat gas, and other gas infrastructure incentives. It's strengthening support is chronicled in DC Tripwire: NAT GAS Act: Is The Time Finally Right ? The last go around of the bill died in the Senate for lack of a "pay for" -- the now mandated equal and opposite treasury income measure for any proposed tax break given to anything. But as a recent article New NAT GAS Act-'It's Got a Pay-For' points out, that problem may now be history:
...users would pay back the federal Treasury for the cost of vehicle and infrastructure incentives via a surcharge on the fuel for their vehicles. The surcharge would ramp up by steps over a 10-year period, from zero in the first two years to 12.5¢ per gallon in the last two years. It would then expire
But does the bill even need a surcharge as a pay-for? The DC Tripwire article cited above gives a "back-of-the-envelope" cost of the bill (as of April, no CBO scoring) at around $3.5 billion a year. OK, it's estimated that implementation of the bill would create 400,000 good paying U.S. jobs. If you take an average pay for those jobs at $80,000 a year and a 30% tax rate, that works out to about $9.6 billion a year in added income tax revenue. That's 9.6-3.5 or $6.1 billion excess "pay-for". And that would continue even after the tax incentives would end.
But there's more. Large trucks use about 30 billion gallons of fuel a year. If you take the roughly $1.50 a gallon cheaper cost of running nat gas, that is $45 billion a year lower trucking cost that would go to reduced cost of everything we buy. That's $45 billion a year boost to consumer spending and taxable corporate revenues. The corporate tax rate times that $45 billion gets added to the aforementioned $9.6 billion.
However, there's even more. The 30 billion gallons a year times a 70% import rate times $3.50 a gallon for diesel is $73.5 billion a year now going to foreign producers of oil derived fuel that would now go to US domestic nat gas producers. You must figure the increased tax revenue from that in the real "pay-for".
All in all, it snowballs into the kind of numbers I saw on CNBC on their mid-day 12/18 show, where they said that every rise of 25 cents in fuel drops GDP growth by 0.2 %, which translates into $30 billion of consumer purchasing power. By that estimation, a $1.50 a gallon reduction in fuel cost for nat gas works out to $180 billion a year boost to overall U.S. consumer spending. These numbers make the surcharge pay-for look like irrelevant chump change.
How does an investor cash in on a possible implementation of this bill? Other than the general supply side boost, you could buy one of the companies that make the switchover paraphernalia for motors. There is Fuel Systems Solutions (FSYS), but the current favorite is Westport Innovations (WPRT). This company has a boatload of patents and all the big truck makers are starting to work with it. While FSYS makes components to go on an engine, WPRT sells the whole engine with joint ventures, like the one it has with Cummins CMI.
Both of these companies, Fuel Systems and Westport are-- shall we say-- cash-flow challenged. While Fuel Systems has produced good earnings over the last 5 years, it currently has a PE of 90 with a bad multi-year EPS trend in place. Westport, on the other hand, has been uniformly bad for 10 years, never turning a dime of profit. That could all suddenly change, of course, with passage of the Nat Gas Act. I have traded WPRT for a nice gain, but I've generally avoided anything to do with natural gas. But if the market in general and Westport in particular get their acts together, I may become a WPRT devotee.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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