THE OUTLOOK: As oil prices continue to rise, alternative energy companies will
find their growth rates are limited only by their ability to supply increasingly
voracious markets. HOW TO PROFIT: Invest in alternative energy companies.
While oil prices have exploded in recent years, the critical relationship behind
the uptrend-a narrowing gap between demand and supply-is intensifying. The
upshot is that there is every reason to expect the uptrend in prices will
continue and even accelerate going forward.
Don't count on conservation as the answer. In the 1970s, oil prices climbed
18-fold before meaningful conservation took hold. Even then only developed
countries conserved, while developing countries continued to consume oil at a
growing pace. Today, developing countries-including China and India, with their
massive energy needs-make up a far bigger part of the world economy than in the
1970s.
Only one aspect of the energy picture has remained intact-a general indifference
to alternative energies. This, too, is due to change. For only alternative
energies have the ability to supply the world with the additional energy
essential for growth without the raging inflation that sky-high oil prices would
bring on. Thus, alternative energies will be a huge growth industry, creating
tremendous opportunities for investors.
We expect that demand for viable alternatives-which include wind, nuclear, coal
gasification, liquefied natural gas (LNG), and tar sandswill more than match
potential supply for years to come. Growth rates for alternative energy
companies will be limited only by their ability to supply a voracious market.
For some companies, this will mean growth of more than 30 percent a year for the
next five years or more. For others, supply constraints will mean somewhat
slower growth. Regardless, growth will be accompanied by sharply expanding P/Es
as investors embrace the alternative energy sector.
The alternative energy with the greatest long-term potential is wind. Over the
past several years, wind energy has grown by 30 percent a year in the U.S., yet
still accounts for just a fraction of 1 percent of overall energy usage-meaning
the current growth rate not only is sustainable but could accelerate to 35
percent or more.
The nation's largest wind generator is FPL. The company's non-regulated
businesses-including nuclear, gas, and wind-account for about 30 percent of
overall profits. Wind represents about a third of this 30 percent, or 10 percent
of overall profits. But 35 percent growth in wind-and this could prove
conservative-would push the utility's overall growth rate well into double
digits for this decade, with growth continuing to accelerate after that. The
company's combination of growth, income, and safety is hard to match, and we
continue to strongly recommend this unique investment.
The energy source that could make the most immediate impact is liquid natural
gas (LNG). When natural gas is liquefied, importing it becomes a lot more
feasible. The best estimates are that worldwide over the next five years LNG
could account for the energy equivalent of 3 million to 3.5 million barrels of
oil a day; within 25 years, the figure could rise to 9 million barrels a day.
Much of this supply, however, will compensate for declining natural gas
production. For instance, over the next five years the U.S. will need the
equivalent of 1.3 million barrels of oil just to replace our declining gas
production. The situation is comparable in Western Europe. In other words, LNG
won't solve our energy needs but will be a critical supplement.
Another source of non-conventional energy will come from Canadian tar sands,
which by some estimates contain as much oil as Saudi Arabia. The problem is that
developing the reserves is difficult and costly. Today the tar sands generate
around 1 million barrels of oil a day. Eventually yearly production probably can
increase by some 200 thousand barrels a day. While this won't make much of a
dent in our energy problems, it will provide dynamic growth for companies with
major stakes in the tar sands. Indeed, these companies are perhaps the world's
only major oil and gas producers with the ability to raise production over the
long haul. Thus for each, profit growth will be multiplied by rising prices and
rising production.
Nuclear energy carries a lot of baggage, including public resistance and waste
storage concerns. Still, in an energy-starved world, nuclear energy will seem
preferable to insufficient energy. Because of the tremendous amount of skill and
experience needed to manage nuclear plants, new facilities will go to the most
established players.
