Here's a little energy investment 101: when oil moves up, so does the dollar. Energy bulls bet on increasing momentum, whereas gold bugs amass hard assets for the day the dollar collapses. Well, that's the way it used to be; global energy markets have become so schizophrenic that this once self-evident correlation is about as reliable as India's power grid. But one indisputable fact remains, as Porter Stansberry pointed out in his Dec. 13 interview, "End the Ban on US Oil Exports": "One of the biggest drags on the U.S. dollar over the last several decades has been the trade deficit resulting from petroleum imports." Wacky oil and gas differentials aside, outsourcing energy production has taken its toll on the national budget and the dollar itself.
But if the U.S. doesn't rely on international imports, could it make do with domestic supply? Potentially, argues Rick Rule in his Nov. 27 interview, "A Global Perspective on U.S. Energy Independence." Responding to the I.E.A.'s predictions that the U.S. could reach self sufficiency by 2035, Rule responded, "We stand a very good chance. . .the U.S. is endowed with spectacular natural resources and we remain the epicenter for extractive and exploration technology. Our advantages in terms of the cost of capital, the application of technology and our legal apparatus are uniquely suited to unlocking the potential of our geology." Even John Williams of Shadowstats.com sees some upside here: "If domestic oil production could replace foreign production, you could still have a positive domestic demand environment. I'd push for that as much as possible."
So if we need the goods, and we have the goods, the next logical step would be to scout out the domestic producers who can come through with supply—at the highest margins possible, experts suggest. There's no shortage of recommendations on mid-, micro- and large-cap producers who may fit that bill, and investors with a bullish outlook on domestic oil and gas would do well to keep checking in with The Energy Report to hear why Josh Young invests exclusively in mature oil fields ("There is an old adage: 'The best place to find oil is an oil field.'"), why Darren Schuringa looks to MLPs to generate returns on investment in North American oil and gas infrastructure ("Consistency is very important for investors, especially for those who are looking for alternatives to fixed-income instruments.") or how John Stephenson chose the energy stocks that yielded 30% growth for his portfolio year over year ("Look for producers who are good at managing the cost side of the business.")
Fracking: Miracle or Mirage?
But the energy independence story doesn't end here. Weaning the U.S. economy off petroleum imports doesn't begin and end with domestic oil and gas production. For one thing, U.S. regulations haven't exactly made for an open season on extraction (or transport). Stansberry commented: "We have archaic laws about oil because we had long believed that oil was a strategic resource and that the world was going to run out of it in the short term. Unless we change our laws to allow exports of crude oil, none of this magnificent new supply is going to aid our economy at all."
One expert, Bill Powers, made waves in his Nov. 8 interview "U.S. Shale Gas Won't Last 10 Years," when he delivered a scathing critique of various public and private organizations that, he argues, drastically overstated the extent of U.S. reserves. (He nonetheless sees a bullish future for energy producers scraping the bottom of the barrel.) Powers represents a minorty voice in the shale debate, but even those who are bullish on North American reseves understand that the roads to returns include complications. How can investors plan for the detours?
The U.S. Energy Mix
One horizon we'll continue to watch is the outlook for uranium producers. Nuclear power is still a controversial subject, but its proponents point out its ability to deliver low-emissions energy in vast quantities—cheaply. Germany may still be saying "Nein danke," to the power source (although it's fine with purchasing it from its neighbors) but sector analysts argue that Japan istelf is moving toward a broader restart, and China, Russia and emerging economies around the world are by no means turning their backs on the efficient energy source. Could the U.S. cover a greater share of its energy needs through nuclear power? Analysts David Talbot and Alka Singh see brighter times ahead in the space, both emphasizing the looming expiration of the U.S.-Russia Megatons to Megawatts program and the need for new producers to fill the supply gap. A number of U.S. producers have been getting their ducks in a row to commence with large-scale, low-cost uranium production.
Whether you believe in peak oil or simply the absence of cheap oil, diversifying your assets is a sound investment move—both from a public policy and private investment perspective. U.S. energy production is already a fairly diverse mix from state to state, as a quick glace at the Department of Energy's interactive map shows. For this reason, The Energy Report will continue to deliver expert opinion on a spectrum of energy sectors, from oil and gas E&Ps to the service companies that keep them operating, to innovative players in the energy technology and alternative energy spaces and promising natural gas, uranium and coal producers ready to deliver to domestic utilities.
A number of our expert interviewees suggested that risk-hungry investors may want to place their bets further out on the energy supply horizon with alternative energy plays that could likewise reduce dependency on foreign oil. Biofuels have earned some support from energy investors, in part because they do not necessitate a nation-wide shift to electric vehicles. But it just may encourage the transition away from petrol imports. As analyst Ian Gilson commented in his June 12 interview, "Enzymes and Algae May Spur a Biofuel Boom," "Biofuels are really many industries. . .but they share some common ground in that they could reduce our dependence on foreign fuels."
Raymond James Analyst Pavel Molchanov echoed the multifaceted nature of alternative energy companies in his March 29 interview, "How to Play the Cleantech Energy Boom," noting that many names in the space are very diversified, so it can be hard to find a pure-play investment. For potential investors, Molchanov emphasized that "Within every industry, there are companies that are in a better competitive position than others. So we have to look at everything case-by-case. It's very hard to make a universal, far-reaching call regarding whether a particular subsector is now the right or wrong place to invest. For example, the solar industry is facing a lot of headwinds and yet there are still companies in that space that are quite profitable and successful."
As we move into 2013, we'll face the global economic forces that ultimately result in upside and downside momentum, continuing the conversation with the experts that share their wisdom with The Energy Report and its readers—you. Exciting, isn't it? Many happy returns in 2013.