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by Benjamin Stein, Associate Analyst, Research 2.0
Everyone is jumping on the eco-friendly bandwagon with increased awareness of clean technologies and renewable energy. Today, huge SUVs are dÃ©classÃ© and fuel efficiency is the new black (along with surfing the web in your car). Â As gasoline consumption is becoming viewed with ire, you wonâ€™t want to be seen in public driving anything but a hybrid. You might be harassed by your neighbor because your Chevy Volt is only a series hybrid â€” a gas guzzler in comparison to his pure electric Tesla Model S â€” and the guy next doors scoffs at both of you because his Fisker Karma sports a sustainable interior of bamboo woven â€œleatherâ€ seats. The Karma owner didnâ€™t mention his car is a series hybrid too which utilizes a gas-powered generator to extend its range because he is part of the â€œEco-Chicâ€ â€“ the elitists of the green energy movement. There are many kinds of EVs, and for every class of EV there is a tree-hugging celebrity to serve as a poster boy or girl for the model.
The Hollywood Hunk with a Battery in the Trunk
George Clooney is relatively young and successful; ordinarily, a tough decision for him is whether or not to buy a BMW or Mercedes. Heâ€™s cool and has a poker face that would make any car salesman go running in the other direction. Although, in this case, salesmen shouldnâ€™t be worried since spending $49,900 isnâ€™t really an issue for people like George. Georgeâ€™s type doesnâ€™t care about the economics of EVs or whether there is any real value in electricity as an alternative to gasoline. George has a reputation to maintain â€“ no better way to do that than to buy the latest and greatest Model S from Tesla. The Model S conveys luxury and the driver derives a subdued sense of eco-satisfaction from this kind of vehicle. Clooney isnâ€™t so much buying the Tesla because heâ€™s trying to save the rain forest but more so because the Model S is a â€œgot to have itâ€ purchase. Tesla cemented their positioning as the “performance” EV with their roadster which graces the highways of Silicon Valley. For buyers like George who are “too sexy for their EV” the Tesla is likely to be the best fit until models from Ferrari and Maserati begin to appear in a few years.
Research 2.0 just published a research report on Tesla which is available via this link (PDF) on SharesPost. Registration is required if you have not already done so but it’s free.
The PHEV Poser
Al Gore is part of â€œEco-Chicâ€ â€“ he represents the elitists and snobs of the global warming movement. Al will shout from the top of the mountain about how the polar ice caps are melting while he cranks up the air conditioning in his Belle Meade mansion. Goreâ€™s mansion in Nashville consumes energy at 20 times the national average. Fiskerâ€™s Karma is just the right kind EV for people like Al. In fact, Fisker coined the phrase â€œEco Chicâ€ and it represents a tier of interior specifications for their flagship EV. Buyers can choose to have the wood trim carved from sunken, rescued, or fallen timber and the vehicles glass is made from recycled sand, whatever that is. Fisker also uses a â€œ100% sustainable manufacturing strategyâ€ for the leather interior. On the surface Gore looks virtuous but we know he doesnâ€™t follow through. The Karma has a similar faÃ§ade in that the Karma is a series hybrid that relies on a range extender that isnâ€™t fully independent of fossil fuels. The $88,000 Karma is more of conversation piece than an actual solution for mass-produced, widely available electric vehicles.
The Green Collar Guy
Larry David, from the HBO series â€œCurb Your Enthusiasmâ€ is like many typical drivers who drive 40 or fewer miles to work every day. In fact, this is true for 90% of Americans and Larry doesnâ€™t have to go far to get to his Los Angeles area office. We all know Larry has driven a Prius in the past but heâ€™s trading in his malfunction prone vehicle before itâ€™s too late. Â He’s not likely to spring for a Tesla but Larry is willing to pay around $40,000 or less for models such as the Chevy Volt, Nissan Leaf, and BYD F3DM. For Larry and many drivers like him, cost will be a large part of their buying decision because the drivers in this segment usually spend between $22,000 and $32,000. Even with a $3,400 tax credit, justifying spending the extra cash is a stretch. If we do some quick math we can see an average driver of a gas-powered vehicle who drives 12,000 miles a year at 25mpg will spend $1200 in gasoline. The same driver in a series hybrid with an 8 gallon tank and a 16 kWh battery will pay $776 a year in fuel and electricity cost, a $424 savings. Larry might pay as much as $36,600 for a Chevy Volt after a federal tax rebate â€“ $10,600 more than a comparable fully gas powered vehicle just to be in the eco friendly club â€“ kind of a tough sell to the cost curbing crowd.
Cars, especially in America, are a very emotionally-charged and social purchase. Â Many investors fail to see the diversity of possibilities that electric car technology will offer. Â The Tesla roadster is certainly not a go-slow station car. Â At the same time city dwellers may gravitate toward more utility-style vehicles not even described here. Â Investors today are looking to play this trend with infrastructure suppliers like A123 Systems (AONE – $14.64) even if the economics of these companies are far from clear.
Although our Tesla report is available only on SharesPost other research on A123 Systems and BYD can be found in our online research library. Â (Membership required but free upon approval.)
[Disclosure: R2 covers both Tesla and A123 but neither is in the R2 Model Portfolio or owned by the author of this post.]
Last week we published our March Thought Leader Interview with Arthur Kroeber, an expert on China and Managing Director at Dragonomics Research & Advisory. It offered some real insights into China from political, economic, technological and practical perspectives.
In addition to several ideas that I expected I found some surprises and excellent long-term considerations including:
- China already has the cleanest coal burning technology and will extend their lead because that have so much coal.
- There’s really not much business at stake for Google in China, it dwarfs what they have to lose from a lost of trust if they don’t do the right thing there.
- A very big looming question is whether or not the government can make the trade-off between control of the financial system (which they rely on to control the country) and greater efficiency and long-term growth.
- Electric vehicles seem like they would be a natural fit for an increasingly urban China but lack of any garage or home charging space means that most of the growth will be in the form of public vehicles.
- The real technology know-how continues to exist only in Taiwan and this is likely to be true for a long-time to come.
- Demographically China will begin to see the number of new workers decline each year. It will still be a big number but it will put upward pressure on wages (increasing consumption) and drive increases in efficiency.
There is plenty more where that came from in the report and as usual the picture of China from afar is way too simplified to be useful. Only by digging in and seeing the details can any useful predictive picture emerge.
R2 Members received this report via email last week and it is available online in our research library.
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There is an increasing number of discussions and recommendations about being short or long oil.Â A number of innovative ETF vehicles have been springing up to provide ways of playing oil long or short, even leveraged in either direction.Â At the same time the usual suspects are out there encouraging individuals to try their hand in the futures market.
To be up-front we are long DUG which is a leveraged short on a number of oil and gas related stocks.Â A fair number of people have come out and questioned this as an "investment."Â Â In the short-term of course it is not.Â Nobody can be right in the short-term without inside information or luck.Â (We’re up 20% in DUG but that’s just luck, see below for the true long-term story.)Â But if one is looking out a few years and running a diversified portfolio vehicles like DUG and others can come in very handy.
First of all they are a hedge.Â If you don’t have something to hedge against falling oil prices then don’t pretend this is a reason to be involved.Â We invest fairly actively in next-generation energy technologies from batteries, to new power generation to infrastructure.Â These investments are all qualified for our portfolio on oil at $150, or $100, or even $70.
However if oil goes down sharply we have seen that everything goes down with it; solar, wind, power management, and so on.Â By being short "old" energy and long "new" energy we can insulate a bit during short-term swings.
Long-term we do think that being short oil here is an investment.Â There’s a 100+ year data set on our ability to adjust to any high commodity price over time and drive it inexorably lower (on an inflation-adjusted basis) time after time. Oil will be no different.Â It’s beyond the scope of a blog post but those interested should certainly pick a copy of The Ultimate Resource by Julian Simon.Â Â Â Â We also don’t yet publish much of our energy work to individuals but for now can highly recommend the work that Tom Konrad the teamÂ does over at altenergystocks.com.
There are plenty of good posts out there arguing for weakness in real estate.Â The listings we get every week tell the same story.Â At least in the Boston area we see numerous price reductions and most sales below offering prices.Â
Lately however a number of new listings and price reductions made us realize that at least in the North East we might see additional pressure to unload properties that are especially old and inefficient when it comes to energy use.Â We’ve seen some listings we might have jumped at two years ago but now won’t even look at them because they would cost a small fortune to heat and power.
For those around during the NYC real estate crunch in the late-80’s it was the high monthly maintenance charges on some apartments that made them almost impossible to sell.
Energy prices are already high and if you believe forecasts from people like Goldman Sachs they will go higher this winter (oil at $95 according to them.)
Bulls might say that this would also increase demand for newer, more efficient properties which is a valid point.Â However the overall impact is likely to be driven more by the increase in supply and the greater incentive for sellers to reduce prices and unload these properties.
We don’t think anyone can really forecast the economy or the real estate market but having lived through the NYC experience we think time is on the side of the buyer these days and should remain the case for another year or so. Unless super-low interest rates reappear soon the scenario should play out as many expect.
Today there may be more value in viewing energy as a technology rather than a natural resource industry. There is a strong theory proven by historical events that energy (and other raw materials) decline inexorably in cost over time. Despite our intuition, natural resources (energy included) are not in any way finite or scarce. Our notions about declining supply and scarcity are deeply rooted in our individual experience of shrinking production from an oil well and sparser lodes of ore from existing mines. However these individual notions are the opposite or our collective experience throughout history. The implications are not only lower energy costs going forward, but also great advances in innovative solutions and new technology.
Julian Simon, noted professor at Maryland University and senior fellow at the Cato Institute, spent several decades researching and documenting these findings, which include the impacts of human population growth on raw materials cost, pollution and bio-diversity. His work, while controversial, has never been disproved. Despite the truth these theories do not garner as much attention from analysts, economists and investors as near-term price fluctuations and old-fashioned notions that black pools of oil left by the dinosaurs will run out and leave us with secular increases in energy costs.
These ideas strike people as objectionable or unsatisfactory because we don’t want to be complacent about our planet. Particularly in areas that inspire emotions like global warming and shrinking bio-diversity, people wrongly take these theories to mean that we should do nothing and the problems will simply go away. Simon’s Law says quite the opposite and acknowledges the collective power of society to focus on and solve problems by applying our best efforts to what is most important. There’s no reason to believe the outcome this time will be any different than it has been during the last few thousand years.
We will spare our readers a pile of statistics on inflation and energy prices but two things should be noted. The first is that the Department of Energy statistics on global supply and demand show that oil is a very orderly market; supply equals demand with very little difference, year after year. The second is that the recent increase in crude prices reflects more of a reversion to the mean from very low prices a few years ago. In 2003 crude was selling about the same price it did in 1983 ($26/bbl) despite the fact that inflation figures would allow crude to trade at more than double that figure and still be well within the envelope of a long-term decline in real energy prices. After four years of major increases (+22%, +41%, +19% and +25%) the 2006 average price of $58/bbl is still not abnormal. However we can’t resist pointing out that since 1949 we have never had four straight years of double-digit price increases and past declines warrant preparation for $30/bbl prices in the next few years.
Today we can already see the forces that Simon outlines beginning to drive the changes that will lead to a larger, more efficient energy industry. First and foremost is the huge wave of financial and intellectual effort now mobilizing into energy. Of course traditional energy companies themselves are stepping up their investments in exploration and production. Increases in extraction rates are coming from the application of newer 3D imaging techniques, steam injection, smarter drills, better pipes and a myriad of other tricks that are worth the effort at current oil prices.
Venture capital investments into innovations around energy more than doubled in 2006 to $1.8B invested in 183 companies. The increase was even greater in the alternative energy sub-segment, which jumped 272% to $727M in 39 companies. It’s easy to foresee another big increase in 2007 based on current levels of activity and enthusiasm for the sector. Thankfully for venture capitalists the virtuous cycle has just received a major boost from the $2B acquisition of Horizon Wind Energy by a Portuguese utility company. Large companies like GE, ADM, the automobile manufacturers and the semiconductor material and equipment providers are also shifting more of their spending on alternative energy sources.
The ultimate success of new innovation in energy depends on the development of a large and viable marketplace. Public attitudes and the political environment for creating incentives and subsidies for new forms of energy supply and conservation has probably never been better. This is necessary now because if one simply runs the numbers on making use of solar panels on a residential property they don’t suggest a very attractive return. Tom Evslin at Fractals of Change has done a complete analysis for his own situation taking account of installation costs as well as the ability to take advantage of higher time-of-day rates which gives solar an edge of wind. After all is said and done the current ROI appears to be about 2% in his circumstances. Of course over time we can expect the initial investment per watt of solar faceplate to decline.
More help is on the way from none other but our favorite financial innovators, the investment banks. In particular Goldman Sachs has created a structure whereby a large commercial customer can switch to solar without having to make any capital investment or worry about ongoing maintenance of the system (handled by a third party). They do have to sign a long-term supply agreement but at rates already lower than what they are paying now. Structures like this are so attractive that they can drive the commercial industry forward into solar with some force.
Local providers are starting to figure out that they can build franchises around this business in the residential sector. There are already emerging providers like Ready Solar springing up that provide a simple kit that can be easily installed by general contractors. Some utilities may enter this market as well as they have done in the past with energy efficient appliances. Small financial services companies are creating a package that includes analysis and financing for homeowners that takes into account the numerous incentives and tax breaks available in many states along with low-cost home equity financing. (What a great way to create jobs for all the unemployed sub-prime mortgage agents!)
There is also an attenuation of demand that comes from a huge number of small improvements from use of LED and fluorescent illumination to replace incandescent lighting, more energy efficient vehicles and hybrids, greater use of geothermal to cut heating and cooling costs and so forth.
Having been convinced that the future opportunities in energy innovation are here to stay and that they have everything to do with technology and investments we expect to see far more opportunities to make technology-oriented investments in the energy sector.
According to economist Julian Simon the costs for raw materials, food and energy decline inexorably over time in real terms. He backs it up well in his book The Ultimate Resource. The main point has to do with the human capacity to tackle the challenges to create additional capacity from existing or new sources and at the same time develop more efficient technologies to consumer fewer materials per unit of output.
It’s a powerful, well-researched argument and as a concept represents what we think of as a kind of Moore’s Law for energy. Maybe if true we should call it Simon’s Law to be fair.
The investment implications are pretty clear. Energy and raw materials have certainly been volatile of late and it’s hard to tell if it represents a return to the secular decline Simon would expect or we are still caught up in speculative fever that cooled down just as the weather warmed up for a bit.
Even if energy prices do revert to a long-term secular decline in real terms there continue to be good investment opportunities in alternative energy because the growth will end up being more about innovation than pure returns from higher average prices. For example the products that become possible if they can be efficiently run off solar or other sources can open up new markets independently.
We think this concept of an inexorable decline is an interesting one that will generate more posts here. Water is another area that looks very interesting. If T. Boone Pickens is going there now it could be the next area of major speculation and higher prices.