There has been a lot of buzz over the last year or so about alternative energy. Rightfully so, given oil’s ever upward march in price. You can find many reasons to invest in green companies, but many seem to be rooted in emotion, rather than any analytic thought process.
Often times the reasons presented take the guise of “being green” or “saving the planet.” Being green is all well and good, I for one would choose a cleaner source of energy if all other things were equal. Herein lies the problem. All other things are not equal.
Alternative energy is just that – alternative.
Wind, solar and ethanol sound great, but they just aren’t practical on a large scale.
As such, I consider investing in alternative energy companies to be a bad idea for the general investor for two basic reasons:
- Alternative energy is not (yet) profitable.
- Once alternative energy is profitable, it will likely be the big fish in the pond that capitalize.
Before I cover point #1, I’d also like to add that the alternative energy companies themselves are often small and very speculative. If you want to speculate on that next home run, that’s one thing. But that’s speculating and not investing.
Here’s an excellent article titled: Why Exxon Mobil doesn’t care about alternative fuels that details some of the problems.
On Ethanol:
“Take out the 51-cents-a-gallon federal subsidy, and the true cost of U.S.-produced ethanol is equivalent to paying $6 a gallon for the same energy as gasoline, calculates Michael B. McElroy, Harvard professor of environmental studies.“
While gas prices have gone up considerably over the past two years, we’re still not at the $6 mark. As I write this we’re hovering a little below $4 per gallon for regular. It’s also possible that by the time we reach $6 a gallon, inflationary pressures will have also raised the $6 target to something like $8 or $10 per gallon for ethanol.
That’s also not factoring in the increase in food costs caused by using food for energy, so I think the true cost of ethanol is much higher as an impact on the cost of living.
On Solar and Wind:
“Solar-generated electricity is still way costlier than juice from traditional coal- and gas-fueled plants. Wind power is narrowing the gap but is difficult to scale up.“
Solar and wind power are great ideas – in theory. Unfortunately we just don’t have the technology to scale these source out to a point where they are feasible replacements for fossil fuels.
On Peak Oil:
We’ve also heard a lot about peak oil. I reviewed a book about the coming economic collapse that peak oil is prophesied to bring about. Much of the speculation on peak oil is predicated on the “fact” that we are already experiencing a decline in available oil and we will need to find a viable alternative in the next 5-10 years or we will experience the horrible calamities foretold in that particular book.
I don’t buy into the idea that western civilization as we know it is going to come to a crashing halt over night, as many peak oil enthusiasts like to portray. It’s a nice plot for a “sci-fi channel original” movie on apocalypse Fridays, but I think the truth lies some where between endless oil for eternity, and a sudden halt to oil extraction.
I guess I’m not alone:
“Exxon is certain that oil, gas and coal will remain the world’s dominant energy sources for decades to come.
That belief drives the company’s critics crazy. But Exxon’s projections are not radical. A forthcoming report from the U.S. Climate Change Science Program cites three of the most widely used models for climate change analysis: one from MIT, another developed jointly by the Pacific Northwest National Laboratory and the University of Maryland, and a third created by Stanford University and the Electric Power Research Institute. The studies do not agree on everything but they do agree on this: Fossil fuels will remain the planet’s No. 1 energy source through the 21st century, supplying 70% to 80% of the total by 2100, vs. about 90% today. Exxon forecasts only as far as 2030; in that year, it projects, primary energy sources such as coal, oil and gas will account for 81% of global demand. “
“Beyond Petroleum”:
Once upon a time BP stood for “British Petroleum.” It was only once green became a good marketing scheme that it suddenly stood for “beyond petroleum.” But this belies another economic truth, beyond the importance of marketing. Namely, that once a product or service becomes profitable, it is the big fish in the pond who tend to capitalize most.
We saw this in the mid to late 90′s with Internet technology. Once the Internet was recognized as the market-changing force that it was, Microsoft no longer viewed web browsers as a toy technology of startup Netscape. Bill Gate’s realized the importance of browser technology and acted quickly to usurp Netscape’s market share, ultimately surpassing them and using their Internet Explorer technology as an extension to their popular Windows Operating System.
This is just one example, but you see it happening in BP’s green strategy. Once wind or solar power becomes economically viable (and profitable), the big guys like BP will have either perfected the technology themselves or acquired the smaller companies that have perfected the technology.
Some will argue that this is precisely why you should buy the small to micro cap alternative energy stocks – to profit when they are acquired by the big fish.
While this is true, it is also true that most of those companies will end up as little more than a failed experiment and that finding the right needle out of this haystack requires much diligence and effort. And that’s assuming the underlying business model of alternative energy is viable.
Long term investors are probably better off researching BP plc, (formerly British Petroleum) (BP), Chevron Corp. (CVX), Exxon Mobil Corp. (XOM), Conoco Phillips (COP).
Technorati Tags: Alternative Energy, Green Energy, Investing, Oil, Peak Oil,
Oil Rig by Dawn Allynn
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Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
Great post, but I’m not sure I draw the same distinction between speculation and investing as you do. All market investment is speculative to some degree- the reward only comes because there is a certain degree of risk.
The fact that many alt energy companies are not yet profitable doesn’t dissuade me too much, provided that the company is well managed, financially stable and is showing growth and progress towards profitability. Even if these companies never become the dominant energy providers, their technologies and IP can often make them ideal targets for take-over by the “big fish”. That, to me, makes for a good investment.
As for the future potential of alternative energies, I don’t think anybody is suggesting that technologies such as wind and solar will replace traditional energy sources. Instead, they offer promise to supplement production and supply a growing market niche.
Thanks for another thoughtful post- keep ‘em coming!
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Great post. I’ve never really thougth of alternative energy from an investor’s perspective. I agree with you that Alternative energy is well alternative and it will take a LONG TIME for it to be the main source of electricity.
Look, you cannot believe what an oil baron – like Exxon is telling you. Come on! They sell oil products remember – so they will always back oil as the world’s number one energy source.
Yes, solar and wind power is really expensive to produce – but think of it this way – as more people adopt it and more solar cell and wind turbines are produced, economies of scale will bring down the price. And when that happens, everybody will be jumping on the band wagon and investing in the alternative energy companies.
But like any smart investor would do – you need to look at both the company financials, their projected profits, and see how they have been fairing in the market to really know whether it is worth investing in them.
Nice writing. You are on my RSS reader now so I can read more from you down the road.
nice post look forward to reading more
I disagree with the idea that alternative energy is a bad idea. It is true that is not profitable but as long as we don’t start using them it will never be a good option.
Everything needs to start somewhere. Just like the internet companies back in the 90′s. The big question was how these internet companies are going to make money. Alternative energy is no different at this stage.
Alternative Energy is the way to go. dont we just hate those air polluting non-renewable fossil fuels.
We should concentrate more on Alternative Energy sources like hydrogen and solar because fossil fuels are already depleted and they are polluting the environment.
Every government should focus more on Alternative Energy so as not to be too dependent on Oil and avoid air pollution as well.-;,
Alternative Energy will never work because its to much cost-effective. Solar, geothermo, Electric cars, hydro cars and hybrids are all ideas that will soon go down the drain. And quiet frankly I’m getting sick and tired of the people in California talking about Zero-Emission vehicles. Exon will still get there money because the parts for these alternative cars are being made from oil. It’s true, about 89% of the car-parts manufactured for the electric cars and so on are brought-about from oil. It’s time we focus our energy on real issues. Besides listening to these so called, indolent alternative companies.