The BLM plans to spend $22 million evaluating about 670,000 acres, or more than 1,000 square miles of land, in Nevada, Arizona, California, Colorado, New Mexico and Utah in search of sites with at least three square miles of good solar exposure, favorable slopes, access to roads and transmission lines, and minimal environmental impact.

Salazar estimated that the areas could generate nearly 100,000 MW, and announced his intention to have 13 commercial scale solar power plants under construction by the end of 2010. BLM is already considering environmental reviews for two NextLight Silver State arrays in Nevada, totaling 407 MW. (For comparison, typical coal-fired power plants in the U.S. are 500 to 700 MW in size. One megawatt of coal-fired capacity will power 400 to 900 homes, depending on their location and demand for air conditioning.) The BLM has already begun the process of developing environmental impact statements for three solar projects in California, including two by Stirling Energy Systems totaling 1,600 MW of capacity, and the 400 MW Ivanpah project by BrightSource Energy.

BrightSource Energy CSP plant (pictured on the right), which uses an array of small, flat mirrors on heliostats that track the sun and focus its rays on a central "power tower" where the generator is located.

Applications for 10 MW or larger plants would be fast-tracked under the new program, which will radically streamline the permitting and development process and assume responsibility for one of the most burdensome aspects of getting utility scale solar plants built: environmental reviews.

The BLM has been struggling to process a backlog of pending applications for 470 renewable energy projects, including 158 commercial solar projects totaling some 97,000 MW—enough to power 29 million homes, and equivalent to 29% of the nation's electricity demand, according to the agency.

At present, zero permits have been approved. Progress has been impeded by concerns over species protection, availability of water (primarily for the cooling cycles of the power plants), and a maze of approval processes in multiple government agencies with overlapping jurisdictions.

Projects nearing approval will be expedited under the plan, and existing applications for projects in approved areas will be given priority.

"With coordinated environmental studies, good land use-planning and zoning, and priority processing, we can accelerate responsible solar energy production," Salazar said.

Minimizing Environmental Risks

Environmental reviews have been especially troublesome, since utility scale solar projects require large (10-15 square mile) areas to be "walled off." But isolating even a five square mile tract can impact wildlife corridors and drainage. Many projects have been put on hold over concerns about endangered and protected species including the Mojave ground squirrel, the desert tortoise, the California kit fox, and the Yuma clapper rail.

In March, California Senator Dianne Feinstein threatened to propose legislation that would designate more than 800,000 acres between the Mojave National Preserve and Joshua Tree National Park as a national monument and off-limits to development, because it contains desert tortoise habitat, wildlife corridors, and endangered cactus. She wrote Salazar, requesting that 12 proposed solar projects in the area be stopped.

At the Concentrating Solar Thermal Power 2009 conference San Francisco, CA last month, I came to understand just how challenging the environmental aspect was in a presentation by Charles Ricker, the Senior Vice President of Business Development for BrightSource Energy. Oakland, California based BrightSource is one of the world's premier CSP developers, with 2.6 gigawatts (GW) of commitments, equivalent to 25% of the world's solar thermal generating capacity.

Ricker related his company's long and torturous slog to build the Ivanpah project. After securing a power purchase agreement (PPA) for 300 MW with California utility PG&E and a 100 MW PPA with Southern California Edison, getting well along in the permitting process with the California Energy Commission (CEC) and BLM, raising capital, securing access to transmission lines, buying a Siemens turbine and a Riley boiler receiver, and negotiating a contract for construction that was to break ground later this year, the discovery of 25 desert tortoises in the area held up the whole works.

Avoiding such deal-killers will be a key focus of the new BLM process. The study will specifically exclude "sensitive lands, wilderness and other high-conservation-value lands as well as lands with conflicting uses" such as mining claims, according to the Department of Interior press release. "Areas with a known density of cultural sites" and those "of known Tribal concerns" will also be excluded.

Once a given area is approved for development, companies applying for projects will be able to incorporate the BLM clearances as part of the environmental impact studies required by the National Environmental Policy Act. Consequently, it should greatly reduce the cost of doing the environment evaluations, as well as the investment risk.

Fat Incentives

Helping to shoulder the burden of environmental clearing, permitting and approval is a critically important benefit at a time when raising the necessary capital continues to be a major hurdle. Banks are still very reluctant to lend for renewable energy projects. One presenter at the CSP 2009 conference explained that Florida Power & Light had to tap 12 banks to round up a lousy $350 million in financing for what was essentially a no-risk renewable energy utility project!

Another presenter noted that banks will still not finance storage systems for CSP projects because of their lack of a commercial track record. This is extremely unfortunate as thermal storage offers the potential for CSP plants to operate 24/7 and compete head-to-head with coal-fired and nuclear plants, providing round-the-clock "baseload" capacity. Numerous technologies including high pressure concrete, mineral oil, molten salts, and direct steam storage are now available or under development that could crack this all-important limitation and pave the way for utility solar to take over a large part of the nation's electrical supply load. Without storage, solar plants can't function when the sun is down.

In an effort to make utility scale solar projects more attractive to investors, a host of government incentives have been launched.

First, the new BLM process will be funded by $41 million dollars given to the agency under the American Recovery and Reinvestment Act of 2009 "to advance the nation's development and transmission of renewable energy on public lands."

The federal stimulus package also offered a package of incentives designed to further minimize the investment risk for commercial solar plants. A cash grant program from the Treasury covers 30% of the project cost with no limit, and functions like a tax credit. Better yet, Treasury must grant it if a project meets the application requirements.

Congress also appropriated $6 billion for a program administered by the Department of Energy that will subsidize the risk premium (10-15% of the total loan) to backstop the investment risk for projects that are ready to start construction by Sept 30, 2011.

Additional financial incentive programs are available at the state level. Arizona will assess property taxes on a mere 20% of the depreciated property value. New Mexico offers a production tax credit against state taxes for 10 years, capped at 200,000 MWh/year, and a 6% "advanced energy tax credit." Nevada has an abatement incentive that will reduce normal sales taxes of 6.5% - 7.75% to just 2.6%, and reduce property taxes by as much as 55% for CSP projects; the incentives expire in 2049. Colorado offers a permanent property tax assessment that will value solar energy projects at the same level as comparably sized non-renewable facilities, giving them an assessed value that is far lower than the actual value on a sliding scale. Utah offers a sales tax exemption as well.

With policy and financial support at its back and the BLM clearing the path ahead, the future looks bright indeed for utility scale solar, the cheapest solar watts around. It's not easy to find publicly traded stocks that are positioned to benefit from the technology's next wave of expansion, but that's why we're here.

Until next time,

Chris

Energy and Capital

It's not just a climate change bill. It's also an energy bill. Initially, at least, this was supposed to be advantageous to the bill's passage. It has proven anything but.

Lost somewhere among the dubious estimates of how much this bill would cost citizens and the clever, punnish names being used to decry cap and trade is the more important part of this bill. . . for energy investors and for the country.

It's the energy part of the bill. And it's been all but ignored. The bill, after all, is called the American Clean Energy and Security Act. No cap or trade in the title.

Let's not forget that carbon (and other greenhouse gases) will eventually be capped or taxed. The Supreme Court has already granted the EPA authority to do this via its ruling on a multistate lawsuit. That gives the EPA power to regulate CO2 — with or without Congress.

Perhaps you missed this gem of policy detail that broke earlier this year.

While it won't be necessary to regulate emissions, Congress's help would be nice for changing our energy future by leveling the playing field for renewables.

That's where energy security will come from. That's where the money can be found. And that's what we should be focusing on.

The Energy Bill of 2009

The forgotten energy portion of this bill requires us to get 12% of our power from renewable sources such as wind and solar by 2020. It also mandates as much as 8% in energy efficiency savings.

But it won't just guarantee our use of renewables will more than quadruple, from about 2% of the mix today. This bill, when it emerges from the Senate, could be an energy piñata with something for everyone. And everyone seems to be forgetting that.

If it passes that chamber, it's likely to emerge more closely resembling an energy bill that quietly passed a Senate Committee earlier this month. That version includes opening up large areas of offshore drilling, funds for cleaner coal, and a new gas pipeline in Alaska.

A separate Senate bill considers capping emissions.

If the Senate tacks on their provisions to the House version — and strips the cap and trade title — we could actually see passage of a meaningful energy bill this year. One that placates both sides of the aisle. One that significantly boosts renewables while still making significant contributions to the oil, gas, coal, and nuclear industries. One that would leave the door cracked for the EPA to regulate emissions sans Congress.

And one that would make energy investors nice profits as it was enacted.

The Non-Energy Bill of 2009

Of course, that's the optimistic scenario. The energy bill could always fall victim to the pedestrian partisan process we're all accustomed to by now.

I'll admit I'd like to see the House version signed into law. It would be a certain boon to green investing. But that's a political unreality and — dare I say it — probably bad policy.

So, we're either going to get a non-partisan energy bill that actually makes progress on all energy fronts, or we're going to get nothing.

But, I'll let you in on a little secret: renewables win either way. Other sectors only win if national legislation is passed.

It's a bold claim, I know. But here's the reasoning. . .

A national renewable energy policy passed by Congress would cover all 50 states, which sounds impressive and certainly generates headlines. What goes unmentioned, however, is that 32 states already have some form of renewable electricity mandates — some more strict than the national policy could dream of being.

Maine's 40% renewables requirement by 2014, for example, makes Congress's 12% by 2020 look paltry by comparison.  And it will happen whether Congress acts or not.

By the way, 32 out of 50 is 64%, or about the percentage of Senate votes needed to pass legislation. Doing it at the state level could allow states whose senators would support the bill to proceed, leaving the remaining states to craft their own energy policies.

And that might not be a bad thing. States with good solar resources, like Arizona, could pursue a solar-intensive renewable energy standard. North Dakota could use more wind. And so on.

Energy policy could be tailored to individual states and could have better results than a blanket energy policy.

And renewables would still win.

Plus, you wait and see how many of those abstaining 18 states adopt progressive energy policies when 1) they see how well it works in other states, 2) they realize long-term energy prices would be lower with renewables, 3) fossil fuel prices once again reflect their looming scarcity, and 4) the executive branch sidesteps the legislative process to limit emissions.

We may not need a massive energy bill when 50 smaller ones can accomplish the same thing.

The bottom line here is that we should be focusing on the energy part of this bill. Doing a good job of that, even if it means nixing cap and trade at the moment, would do much to help secure our energy future, increase efficiency, and help stabilize long-term energy prices.

Those are all good things. And they can be even better for investors. The Alternative Energy Speculator is proving it day in and day out. That growing group of thousands of investors averaged more than one cleantech win per week for the entire first half of the year.

And that is just the beginning of a decades-long trend. Hundreds of opportunities will arise, but here's a peek at the next three.

Call it like you see it,

Nick

When it comes to the actual resource, water is getting harder and harder to come by.

It's a profitable trend that I've been following for quite some time.

The premise is elementary: There is a limited amount of freshwater on earth.

Increased withdrawals to support booming populations and agricultural needs coupled with lax conservation practices and industrial pollution have led to a serious problem.

Add to that years-long droughts in the American Southwest and Southeast, and water is the new hot topic.

I've been saying this would happen.

Water Problem & Profitable Solutions

Truth be told, the water industry isn't very exciting.

For years the industry has lumbered around, offering decent dividends but not much else. But falling supply, incessantly rising demand, and a failing infrastructure are changing all that.

Now that the stimulus has allocated $20 billion to improving and updating our water infrastructure the industry and investors are buzzing with excitement.

All the standards still apply. Engineering and planning firms like Veolia (NYSE: VE) and Tetra Tech (NASDAQ: TTEK) will do well by designing new water treatment facilities. Companies like Jacobs Engineering (NYSE: JEC) and Layne Christensen (NASDAQ: LAYN) will do well building the new facilities. And companies like Northwest Pipe (NASDAQ: NWPX) and Badger Meter (NSYE: BMI) will do well supplying pumps, pipes, and parts.

You can do well by investing in them.

But even more exciting than the brick and mortar business of water management is the next wave of water opportunities.

Water 2.0

Technology has advanced so far that computers can now be used to conserve water.

This opens up a whole new world of water investing.

Lindsay Corp. (NYSE: LNN), for example, makes a crop irrigation system that farmers can monitor and move remotely from their homes via embedded GPS technology, ensuring each acre gets no more water than it needs.

Other advancements are making farm equipment incredibly savvy. New John Deere (NYSE: DE) tractors are equiped with sensors that tell farmers exactly how much water and nutrients a crop should receive based on data accumulated and analyzed in real time.

And NPR just ran a story on a company called PureSense, which makes underground sensors to monitor soil moisture and other factors. Farmers can check the status of their crops with an iPhone application.

Indeed, desperate water times call for desperate water measures. And more than a handful of them will prove profitable for informed investors.

I'll continue to cover this trend, as I have been for years, here at Energy & Capital and at our sister site, Green Chip Stocks.

Call it like you see it,

Nick

Can you blame me?

Production from the oil sands is one of the reasons why Canada remains the largest source of oil for the U.S. The sky was the limit for Alberta as oil made its run to $147 per barrel. And it wasn't just the U.S. that had its sights set on oil sands production. I distinctly remember how all the signs in our hotel were written in both English and Chinese.

What a difference a year can make. As I'm sure you know, Alberta was hit extremely hard when oil prices collapsed to $30 per barrel in late 2008. Once oil prices fell below $40 per barrel, I was told time and again it was the end for Canada's oil sands.

I didn't buy it.

The fact is they've been producing oil there for decades. I knew if these companies were able to keep running when oil was much cheaper during the early 1980s, they would survive 2008's price shock.

Sure enough, oil prices managed to rebound in 2009. Now we're back at $70/bbl oil, and I think we're about to see another revival in oil sands production. However, this revival won't be focused on the massive mining operations that give the oil sands their dirty reputation. Furthermore, the next generation of the oil sands could make investors a small fortune.

I'll get to that in just a moment.

Canada's Alberta Oil Sands

It's no secret Alberta has had its fair share of trouble. When Alberta announced its 20% royalty hike a few years ago, companies started to look for better opportunities elsewhere. With the huge potential of the Bakken play in southeastern Saskatchewan, companies soon flocked to Alberta's neighboring province.

Recently, Alberta fought back, revising its royalty program (for the fifth time since 2007) in order to boost drilling activity. The Alberta government recently extended two drilling incentive programs to March 2011.

That's a start. But let's get back to the oil sands. . .

A few weeks ago, I found myself in a heated debate over the future of the oil sands. And one thing soon became clear to me: this gentleman knew absolutely nothing about where oil sands production was headed. All he could focus on was how the dirty tar sands were plaguing the environment. Hence, the oil sands were an abomination that must be stopped.

To a certain extent, he was right. The massive surface mining operations involve an energy-intensive process that leaves a huge environmental footprint. Granted, he wasn't aware of the reclamation projects underway.

The problem, however, was that he knew practically nothing about oil sands extraction. If he were a little better informed, then he might have been able to see the oil sands in a different light.

For starters, only about 20% of the entire oil sands resource is too deep to be mined. And that, dear reader, is the key to realizing its potential.

You see, the next generation in oil sands extraction is not with those surface mining pits, but rather using in-situ methods like SAGD (Steam Assisted Gravity Drainage). In SAGD, steam is injected into a deposit in order to heat up the thick bitumen. Lowering the bitumen's viscosity will allow it to flow towards producing wells.

I wouldn't be so quick to lump these in-situ methods in with those devastating surface mining operations. In fact, in-situ operations leave approximately the same environmental footprint as conventional operations (not to mention they use 20% less water than the mining projects).

Now, that's not to say there aren't still obstacles to overcome. The SAGD method, for example, emits more greenhouse gases per barrel than mining and is still an energy-intensive project.

Naturally, there are more in-situ methods being developed for commercial production. Petrobank's THAI process immediately comes to mind, which involves a fire flood underground and upgrading the bitumen underground. The THAI process is projected to recover between 70-80% of the oil-in-place, compared to the 20-50% recovery from current in-situ methods. Furthermore, the THAI process uses a negligible amount of natural gas and water.

Considering 97% of Canada's oil reserves come from the oil sands, I think it's safe to assume development will continue. Unless, of course, you'd like to see our dependence on OPEC oil rise.

Need more proof of an oil sands revival?

Look no further than Section 526. . .

Section 526

Section 526 of the Energy Independence and Security Act of 2007 had some strong implications for the Canadian oil sands. Section 526 targeted unconventional petroleum sources with greenhouse gas emissions greater than conventional sources. In other words, Section 526 prohibits the government from purchasing fuels with a higher carbon intensity than gasoline.

On June 17, the U.S. Senate Energy and Natural Resources Committee voted for a bill that could put the oil sands back in our good graces. One amendment passed by a voice vote stated U.S. refiners would not be in violation of Section 526 by buying crude oil produced from Canadian oil sands.

With oil prices on their way to $80 per barrel, any weakening of Section 526 will undoubtedly boost oil sands activity. And I expect those smaller companies developing new in-situ recovery methods will come out on top in the next round of oil sands' profits.

Until next time,

Keith Kohl

Energy and Capital

Editor's Note: I guarantee you the investors who will make a fortune in the next oil sands revival aren't sitting on their thumbs waiting for opportunities to come to them. My readers at the $20 Trillion Report just banked a solid 20% from one of those small in-situ companies. And truth be told, they're just getting started. Perhaps it's time you joined them. Simply click here to learn more.

First we must know where we're going.

Credible models show that by the end of this century, essentially all of the fossil fuels on earth will be consumed—oil, natural gas, and coal. Presumably, whatever fuels do remain at that point will be reserved for their highest and most valuable purposes like making crude oil into plastics and pharmaceuticals, not burning it in 15% efficient internal combustion engines.

Consider the following world model for all fossil fuels:

Source: "Olduvai Revisited 2008," The Oil Drum, by Luís de Sousa and Euan Mearns. Cumulative peak is Data sources: Jean Laherrère for natural gas, Energy Watch Group for coal and The Oil Drum for oil. [This is an exceptional study and I recommend it to my readers!]

By the end of this century then, a mere 90 years from now, we'll need to have an infrastructure that runs exclusively on renewably generated electricity, biofuels, and possibly nuclear energy. That's where we're going.

Fortunately, there is more than enough available renewable energy to meet all of our needs, if we can harness it. Unfortunately, we're starting from a point at which less than 2% of the world's energy comes from renewables like wind, solar and geothermal.

Hydro provides about 6%, and nuclear about 6%, but for reasons too numerous to get into here, some of which my longtime readers have already heard, I don't believe either source will increase much in the future, and both could actually decline.

Our challenge then is to make that 2% fraction grow to replace about 86% of the world's current primary energy, in 90 years or less.

We are currently at peak oil, a short, roughly 5-year plateau which goes into terminal decline around 2012. All fossil fuel energy combined peaks around 2018, less than a decade from now.

All strategies for accommodating the fossil fuel decline require decades to have any significant effect. The now-iconic study "Peaking of World Oil Production: Impacts, Mitigation, & Risk Management" (Hirsch et al., 2005) demonstrated that it would take at least 20 years of intensive, crash-program mitigation efforts to meet the peak oil challenge gracefully. Another study, "Primary Energy Substitution Models: On the Interaction between Energy and Society," (C. Marchetti, 1977) showed that it generally takes decades to substitute one form of primary energy for another, and 100 years for a given source of energy to achieve 50% market penetration.

Therefore, we are going to have to accomplish most of the renewable energy revolution in a scenario of ever-declining fuel supply. In just 50 years, we'll be working with about half our current energy budget. So in fact we may only have about 50 years to build most of the new renewable energy and efficiency capacity we will need to get us through the end of the century.

Another important factor is that exports will fall off much faster than total supply. (See my article on the oil export crisis from last year.) Foucher and Brown (2008) have shown that the world's top five oil exporters could approach zero net oil exports by around 2031. Net energy importers like the US could be increasingly starved for fuel as decline sets in and accelerates, and net energy exporters could wind up shouldering much of the burden of new manufacturing. This factor means that we will have to front-load as much of our development as possible.

The final and most important factor is population. The few population models that actually take fossil fuel depletion into account assume that global population increases roughly out to the global fuel peak, and then stabilizes at that level or declines naturally while economic development promotes lower fertility rates and renewables and energy efficiency increase to fill the gap of declining fossil energy. I understand why this assumption is made—because the alternative is too ghastly to contemplate—and for the immediate purpose of this article I will go along with it. I will note however that history and scientific observation of populations suggest some sharp episodes of decline are more likely, and in my estimation we will end this century with a considerably smaller population than anyone forecasts, at some level well below today's.

How, then, can we replace or offset through efficiency at least 40% of our current energy supply with renewables in the next 50 years, while fuel prices are rising and the global economy is flat or shrinking due to a lack of fuel?

Seven Paths to Our Energy Future

A proper model for achieving this goal would be a very large undertaking, the sort of thing that should be done by a team of experts with a budget. (Is anybody at the Department of Energy listening?) But I can identify some key pathways that are, in my estimation, no-brainers. Because the solutions going forward will be quite different for each country, I will limit my recommendations to the US.

1: Rail. Rail should be Priority 1, and should be granted the largest portion of public funding. We should begin as quickly as possible with light urban rail, and work over the next 40 years to build a comprehensive high-speed long-distance rail system.

Rail is by far the most efficient form of overland transportation we know, and moving people out of their cars and freight off the roads will yield real and immediate savings in liquid fuel consumption. Not only will this help alleviate America's need for rapidly declining oil exports, it is a proven, fairly low-tech, sustainable and workable solution that would allow renewably generated electricity to be phased in over time with minimal disruption.

2: Rooftop Solar PV. Utility scale projects like giant solar farms in the desert and giant wind farms in the Midwest (or offshore) all face serious hurdles in siting, permitting, environmental impact, and transmission capability. Rooftop photovoltaic (PV) solar systems face no such issues and can be deployed right now, building capacity incrementally over time. PV has been proven in the field commercially for over 30 years and, speaking as a former residential and small commercial solar designer, I know that it can provide 50-100% of the needs of most small buildings.

Rooftop PV also has a capital advantage. Whereas utility-scale solar and wind projects need to secure large power purchase agreements in order to raise enormous amounts of capital that will be tied up for decades, small rooftop PV systems are purchased outright by the end-users, assisted by ratepayer-funded incentive systems. Simply getting projects done is considerably easier.

From a funding perspective, rooftop PV is arguably one of the easiest sources we can develop, and options are proliferating. Cities like Berkeley and San Jose are offering municipal bonds to finance local projects, which keeps the financing small, local, and low-risk. Third-party financing companies are springing up all over the country, making it possible for home and business owners to put solar on their roofs with no out-of-pocket expenses and pay them off at the same rates or less than they're already paying to utilities, with nearly zero risk to all parties. End-users enjoy an additional benefit of having a known, fixed cost for their future power, even as fossil fuel prices skyrocket.

Another very important advantage is that rooftop PV is distributed, which contributes to the resiliency and robustness of the grid. In most modern neighborhoods, no grid upgrading is needed to support rooftop solar systems. More distributed power generation also means fewer points of failure: a cloud over here is compensated by clear sky one mile away. It also enables micro-islanding, which would allow most of the grid to stay up when there is an outage, instead of taking vast chunks of the country's grid down along with it as we have seen in the recent past.

Utilities also win with rooftop PV, because it means they don't have to spend an enormous amount of effort and money in search of enough clean, green kilowatt-hours to meet their renewable portfolio standards, nor spend it on beefing up their grids. It essentially costs utilities zero to take up energy produced this way; in fact it can be a net benefit to them because the homeowner ends up paying for the new smart meters they plan to deploy across their grids anyway (at a cost of tens of millions of dollars).

Feed-in tariffs (FiTs) that pay a premium for kilowatt-hours generated by rooftop PV have been employed with great and immediate success in Germany and Japan, to the point where both programs will be largely phased out within the first decade. Support for a national FiT in the US is still weak, but I believe it could become a reality if the public were educated about the success it has enjoyed elsewhere in the world.

3: Alternative Vehicles. Since reconfiguring our urban topology around transit and deploying light rail will take decades, we will need some transitional solutions that still allow us to get around in cars for a good many years. All-electric and plug-in hybrid electric vehicles are a two-fer: They can take advantage of growing renewable electricity supply, and they can function as a giant, distributed battery for intermittent renewable sources using vehicle-to-grid (V2G) technology. In time, V2G could provide the final link that allows renewable energy to fully displace fossil fuels.

We will need to begin building the electric vehicle charging infrastructure as quickly as possible to accommodate these new vehicles, but it needn't be any more complicated than deploying a new row of parking meters. This I think is a good and proper use of public funding. The automakers themselves should be able to find adequate funding via the private sector, with perhaps a modicum of federal support for research to jump start next-generation development of batteries and propulsion systems.

Compressed natural gas vehicles are another transitional solution that would take advantage of domestic gas supply while cutting demand for imported crude.

Biofuels may also play a role, although I continue to be skeptical about how much they can truly achieve once net energy (EROI) and food-vs.-fuel tradeoffs are taken into account. Corn ethanol fails these tests, but to the extent that cellulosic biofuels pass them, they could take a substantial bite out of our demand for petroleum. Still, it will take a decade or more to scale it up to significant levels.

Before the global economic downturn, our replacement rate was about 14 million new cars and light trucks per year. We have about 250 million such vehicles now. At that rate (we're well down from it now), it would take 18 years to replace the fleet, but we probably won't maintain that rate while the economy shrinks and fuel prices rise. Therefore we should concentrate on a rapid, near term deployment of alternative vehicles, before it gets prohibitively expensive and difficult to do so, even if they wind up having all the sex appeal of a mass produced WWII Jeep.

Ideally, we will only have to replace a fraction of the current fleet, with the rest of the traffic having been moved to rail.

4: Efficiency. Most of the efficiency gains we can make are thermal: reducing the energy it takes to heat and cool buildings. These gains ultimately translate into less coal and natural gas demand, so they will do little to reduce our demand for oil, which must be our first priority. In the long run however, efficiency must make up for any shortfall in renewable energy production, so it must be pursued continually over many decades.

More efficient regular gasoline and diesel vehicles also belong in this category, and may reduce our dependence on oil if they are sufficiently efficient and the gains aren't nullified by the Jevons paradox. In my view, anything under 25 MPG is simply pathetic at this point, and undeserving of any federal support. Incentives for more efficient ICE vehicles should be geared to produce the greatest possible gains in fuel economy, not the watered-down "Cash for Clunkers" bill we got, which will ensure another several years' worth of inefficient SUV production.

5: Utility Scale Renewables. Rooftop PV may be able to fill the short-term supply gap if aggressively pursued, but in the long term we'll need every renewable kilowatt-hour we can get. We'll need large solar plants across the Southwest, and huge wind farms in the Midwest and offshore. Geothermal and marine power can also make major contributions in time, but they're babies now, and will need public guarantees and funding to reach the level where they are commercially viable technologies.

6: A Beefier, Smarter Grid. In order to carry all the new renewable power, we're going to need a bigger, more resilient, and smarter grid. The good news is that we already have most of the technologies we need in this area. All that we lack is the will and the funding to put it in place. In the same way that it took federal funding and initiative to create the interstate highway system, the grid will also probably need to be nationalized and its enhancement funded publicly in order to meet this challenge.

A key element of the new grid will be long-distance high-voltage direct current (HVDC) power lines to transmit the power from the large utility scale projects to the cities where it's needed. This must be on the short- to medium-term agenda since it must be ready to take on real capacity within 20 years and be nearly full-blown within 40 years.

7: Keep Drilling. If we back off too much too soon from oil and gas production, it could leave us without adequate or reasonably priced fuel to accomplish this transformation, and sink the entire effort. I think we'll need as much oil and gas (and to a lesser extent, coal) as we can possibly produce in order to pull it off. Just imagine how difficult it will be to produce a solar panel or a large wind turbine using only renewably generated electricity to mine the raw ores, crush them, transport them, smelt them down and turn them into stock, transport them again and turn them into end-products, then transport them a final time and install them. I think it's safe to say that we have no idea how to do all that without liquid petroleum fuels.

The twilight years of hydrocarbon fuels are essentially upon us, but we'll need them more than ever as they peak out and decline. We will have to keep drilling, and the oil business will have to be able to turn a fair profit.

At the same time, I have long maintained that after a nearly a century of commercial operation, the petroleum businesses should be able to get by on its own, without public subsidies of any kind. If that means the price of fuels goes up, then so be it. We're going to have to start paying a fair value for those finite, rapidly disappearing resources some day, and price increases will only encourage efficiency and alternatives.

Just Do It

Turning these conceptual pathways into action will not be easy, and we may be forced into action before we have perfect clarity about where we're going and what it's all going to cost. Yet I have no doubt that if we move on these seven pathways as quickly as possible, we will make progress in the right direction. There will be time to fine-tune it later.

Over the long term, the economics of energy are clearly in favor of renewables. The costs of producing and burning fossil fuels can only increase, and the costs of renewable energy will fall for decades before stabilizing.

Finding the money to rebuild so much of our infrastructure will no doubt be a challenge. But if we're willing to put a $2.5 trillion debt burden on the future to bail out the financial system, and untold trillions more to provide military protection for the oil resources that remain, perhaps it's just a question of priorities. I have no doubt that the money would be better spent on building an energy infrastructure that will actually sustain us.

The successful pathways are the profitable pathways. Think rail, small solar PV, alt vehicles, efficiency, utility renewables, grid, and drill, baby, drill.

Until next time,

Chris

Energy and Capital

Investor's Note: The path to energy independence is going to take time, patience and a lot of investment. After last year's eruption in the financial markets, the door wide open has been blown wide open for investors. My colleague, Ian Cooper, has posted winner after winner for his readers. Recently, he's identified a perfect storm developing in the energy markets that will drive a new wave of profits. Simply click here to cash-in on this opportunity today!

Nick

You'd be surprised how many times I was asked this question over the weekend. It started with a few emails that began trickling into my inbox. By the time I was able to respond, the floodgates had opened. Considering that gas hydrates have been making headlines recently, I should have seen it coming.

It's not often you find me this skeptical over a new source of energy. I would even bet a few of you thought I was headed on another tirade against LNG. I've always been clear to my readers about my concerns over liquefied natural gas.

Not much has changed. I still think it is nothing more than a sinkhole for your hard-earned money, but we'll save that argument for another time.

To be honest, the first thing that comes to mind about gas hydrates has nothing to do with natural gas. Instead, it was the Green River oil shales.

Think about it for a second. . .

Here we have two massive deposits of oil and natural gas that may never be commercially developed.

The problem in both cases is the lack of technology necessary to develop these resources. A best-case scenario would still mean we're decades away from commercial production. That date is pushed further back when you consider how far oil and natural gas prices plunged since last July.

For the sake of anyone still scratching their heads in confusion, here's a brief rundown of the situation.

Gas Hydrates

It's been nearly three years since I last mentioned the possibility of developing methane gas hydrates.

At the time, I had said "The current state of methane hydrate technology appears very disheartening, and production from these hydrates is more suitable in science fiction."

So what exactly are gas hydrates?

According to the USGS, gas hydrates are a crystalline solid consisting of a gas molecule surrounded by a cage of water molecules. These hydrates are found in ocean-floor sediments at depths of more than 500 meters. The gas hydrates are able to form under the cold temperatures and high pressures found on the ocean floor.

In other words, we're talking about chunks of methane-filled ice that scientists are able to collect.

And even though the amount of methane gas hydrates can't be pinpointed, the higher estimates suggest there are more than ten times the amount of gas hydrates than currently known reserves for conventional natural gas.

Not too shabby.

And as I mentioned earlier, methane gas hydrates have been making the headlines lately. . .

The Ice that Burns

Last November, a U.S. research team reported that approximately 85.4 trillion cubic feet of natural gas could be potentially recovered from gas hydrates located in Alaska's Northern Slope. Remember, that's how much can be developed and produced.

Don't confuse this number with the 1995 USGS assessment, which came out with a staggering 590 trillion cubic feet of natural gas. The 1995 estimate was an assessment of "all volumes of gas" rather than what could be technically recoverable gas.

To put that in perspective, the world uses approximately 100 trillion cubic feet of natural gas per year, and the U.S. consumes nearly a fifth of that amount—a little over 20 trillion cubic feet of natural gas per year.

Another recent development came from the Gulf of Mexico. Several drillers announced that they had found large deposit of methane gas hydrates on the floor of the Gulf of Mexico.

Of course, there's a catch when it comes to gas hydrates, and a very specific reason why I can't too excited over its potential.

Gas Hydrates: Wishful Thinking or Future Production

Right now, developing the world's deposits of gas hydrates seem like nothing more than a bit of wishful thinking.

For starters, the technology is to commercially produce gas hydrates may be decades away. Personally, I can think of much more profitable plays for natural gas investments.

The emergence of prospective shale basins over the last several years is too difficult to ignore. Now factor in the new advances made in horizontal drilling and hydraulic fracturing techniques. I know these shale plays aren't new to my readers. More importantly, we're able to bring that production to market, unlike the methane ice lying at the bottom of the ocean. 

It makes sense the U.S. would develop those unconventional onshore fields before extracting gas hydrates off the ocean floor. Also imagine how many more advancements those shale drillers will make by the time we're technologically proficient enough to commercially recover gas hydrates.

While the development of gas hydrates may be only a matter of time (a long time, in this case), there are simply better opportunities out there available for investors.

Until next time,

Keith Kohl

Energy and Capital

Editor's Note: Let's be honest with ourselves, do we really want to wait around for decades while scientists try and develop the technology needed to commercially produce gas hydrates? I didn't think so. But my colleague, Ian Cooper, has been taking advantage of a perfect storm developing in the energy market. I suggest you take a look at these profits for yourself.

While a major biofuels conference, the Fuel Ethanol Workshop and Expo, took place down the road in Denver this week, Colorado's Pike Research issued its new assessment of how food, waste, and farmable feedstocks can become an integral part of the world's transportation fuel mix.

From an estimated $76 billion market size in 2010, Pike projects $247 billion in biofuel sales by 2020.

And the progression towards that point includes 3 major market-oriented research watersheds:

• Waste grease conversion into fuel (i.e. vegetable oil to biodiesel) will advance to a commercial level in 2010.
• Jatropha, an energy-rich plant that grows wild in warm countries like India and Mexico, will have a "significant impact" in 2014.
• Finally, biodiesel derived from algae will become commercially viable in 2012 and strengthen further through 2016.

-Sam Hopkins

A comforting 30% gain in the major stock market indexes since the March lows has given renewed confidence to the "green shoots" trumpeters who dominate the airwaves and the press.

But grayer and wiser heads in the investing community—like Dave Rosenberg, John Mauldin, Nouriel Roubini, Gary Shilling, Peter Schiff, and Dave Cohen—have a more bearish view. The financial sector must now deleverage, they argue, which means liquidating assets, repaying debt, saving instead of borrowing, and contracting in general. In their view, the process will take years, not months, and what we have seen since March is a classic bear market rally.

Consider the data Rosenberg offered in a commentary this week in support of his deflationary thesis:

• Residential real estate still sports a 12-month supply of unsold inventory, and housing starts have staged a very weak recovery this spring.

• Every major industry posted a decline in May. Industrial production had its seventh decline in a row in May, to a level last seen 11 years ago. The Institute of Supply Management (ISM) index, a measure of manufacturing activity and a proxy for tech spending, is still falling.

• Employment slid in May to greater depths than were seen in the last two recessions, and "real organic personal income" fell for the second time in the last three months. Ultimately, recessions don't end without rising employment, meaning consumers with money to spend.

• Prices are generally still falling. The Producer Price Index (PPI), used to evaluate wholesale price levels, is down 37% year-over-year "to a 50-year deflation low of -5.0."

There are other signs that this spring's green shoots may be browning. The Consumer Price Index (CPI), the Labor Department's key measure of inflation, has fallen 1.3% over the past year, the largest decline in nearly 60 years, mainly due to the 27.3% crash of the energy index component.

Meanwhile, the consumer remains beaten and bruised. As my colleague Steve Christ pointed out this week, U.S. household net worth fell by $1.3 trillion in the first quarter, and household wealth is down 21.6% from its 2007 peak. Commercial real estate is contracting painfully, with prices plunging and vacancies and defaults soaring. Meanwhile, consumer credit defaults are still rising, even as rising interest rates have snuffed out the resurgence in home-buying.

Liquidity in the credit markets remains a problem as well. Banks simply aren't lending out the Fed's forced injection of fantasy capital. Indeed, they are entirely intent on paying it back as quickly as the Fed will let them, on the heels of secondary stock offerings and other measures they have taken to raise capital and reduce their exposure. (For a personal anecdote, I called Discover last week to take advantage of a recent 1.8% promotional offer on balance transfers they had sent me, and was told that they aren't accepting any more balance transfers right now, from anybody, period.)

On the whole, I think the case for deflation and contraction is well made.

Commodity Inflation

At the same time, food and energy prices have been rising rapidly. Oil has rocketed from the low $40s to the low $70s in just four months, a roughly 71% gain. Soybeans rose about 50% over the same period, with most other grains gaining similarly. Normally, this would suggest inflationary fears, and indeed it has apparently drawn hedge fund money off the sidelines, out of bonds, and back into energy and commodities. (Energy analyst Dave Cohen did a great study of speculation in the current commodity cycle this week in "Bad Signs, New Bubbles.")

I don't want to make too much of the commodity resurgence, however. The market continues to price oil inversely to the dollar, and the dollar's fall has been echoed almost perfectly by oil prices:

The dollar's decline can be viewed as the proper result of printing trillions of dollars out of thin air, without new assets to back it—the inflationary thesis.

Indeflation

On the whole this year is looking a great deal like last year across the energy and commodities sector, with the same sort of inflation. But there is an important difference this year: The economy and the consumer are sick, very sick. Gasoline at $3 was a nuisance last year, but this year it really hurts.

Perhaps we should be zooming out on this picture, and considering the affordability of oil. Consider this 60-year chart from the blog of "Mr. Excessive," which tells quite a different story:

The affordability of oil, as measured by the S&P500, peaked in 1999, and has been in decline ever since. Oil prices began rising sharply at that time, as the early effects of peak oil began to be seen. Global conventional oil production has been flat since 2005, despite a tripling of prices.

So is it inflation or deflation?

My pal Gregor Macdonald argued this question elegantly on his blog in April, and in a conversation earlier this week asserted, I think rightly, that it's not an either-or question. In fact, we're seeing inflation (of prices) and deflation (of assets) simultaneously. Investor guru Doug Fabian has termed this "indeflation" and Izabella Kaminska of FT Alphaville has called it "compartflation."

Instead of just looking at the dollar and inflation, we should consider that, as former International Petroleum Exchange head Chris Cook argued on The Oil Drum, energy is the only real currency. Our fiat money is but a distorted representation of it, and that energy is declining in real terms as oil, natural gas, and coal all become progressively harder to extract and of lower energy content.

Are We At An Inflection Point?

We now appear to be bumping our heads against an invisible ceiling, where the decline in real energy meets our pain tolerance for high prices. When gasoline hit $4 last year, it created real demand destruction because people simply couldn't afford it with their evaporating dollars. Likewise, the spike in natural gas and coal prices ultimately translated into such high prices for basic building materials like cement and steel that demand was curtailed.

It now seems possible that we have reached an inflection point in economic history, where the price at which energy is high enough to sustain new production is the same price at which things become too expensive, leaving us no option but to downsize.

Until we understand this key point, we are going to continue to go through wrenching cycles like we experienced over the last year. Spiking energy and commodity prices lead to destruction of the economy, which then gathers itself at a lower overall level until prices spike again, and back around the wheel we go. As energy declines, the ceiling will get lower and lower, and it will take more and more money to buy the same things.

No amount of tinkering with monetary policy can change that. Unlike money, Btus can't be printed out of thin air.

Unfortunately, neither the Fed nor Congress seems to have learned this lesson.

The Fed still thinks that tweaking interest rates, buying bonds, forcing banks to keep the fantasy money, hiding the stress test results and the like can somehow ease us into a manageable recovery.

A few bright bulbs in Congress suggested this week that we exchange 70 million barrels of light sweet crude oil from the Strategic Petroleum Reserve (SPR) for an equivalent amount of lesser quality heavy sour crude, in an effort to dampen oil prices. Aside from being a fundamentally bad idea, I continue to believe such a move would be utterly ineffectual. The maximum official rate at which the SPR can be drawn down is four million barrels per day, but I suspect the actual rate would be far lower. In any case, the price difference between the two grades of oil is fairly small, and the value of the swap would virtually disappear within a flow of 84 million barrels a day of globally priced oil.

The other bit of new legislation, a "Cash for Clunkers" bill that passed yesterday, also appears to be completely toothless. I supported the idea until I learned the anemic requirements of this bill, which would offer $3,500 vouchers for a mere 2 mpg gain in fuel economy for light trucks and SUVs, and $4,500 for a 5 mpg improvement. Cars would only need to gain 4 to 10 mpg to qualify.

Suffice to say that I still have very low expectations that our national leadership will offer any tangible, effective methods to significantly reduce our consumption of petroleum. I certainly do not see them coming to grips with the near-certainty that by 2012, the world's oil supply will go into terminal and relentless decline.

Looking internationally, finance ministers for the Group of Eight (G8) expressed concern over the influx of capital into the commodity sector after their meeting last weekend. In a communiqué, the group stated, "Excess volatility of commodity prices poses risks to growth. We will consider ways to improve the functioning and transparency of global commodity markets, including considering IOSCO [the International Organisation of Securities Commissions] work on commodity derivative markets." Ministers have asked the International Monetary Fund (IMF) and the International Energy Agency (IEA) to suggest new ways to monitor and regulate the oil markets, in an effort to limit speculation and dampen future volatility.

If done very carefully, such an effort could moderate the boom-bust cycles ahead, and give the world a crucial measure of slack in which we can sustain the long term investment horizon needed to transition to a renewable energy infrastructure. If done hastily or badly, it could starve the energy markets of capital, or cause unintended and probably worse effects.

I think that as it is now constituted, the market is inadequately equipped to face this inflection point of indeflation, and history is no longer a useful guide. We're entering uncharted territory while the risk of peak oil is still priced at approximately zero.

So what does all this mean for investors?

First, it means long-term investing in a diversified portfolio of stocks is probably not going to be a good strategy for a long time to come (if ever); it's time to play defense and look for low-risk yield. Second, it means that investing in oil and commodities will continue to be the name of the game for many years, but investors must watch the signs I have identified here carefully to know when it's time to dive in and time to jump out as we churn through these cycles under a dropping ceiling. And third, it means that we all need to learn to live at a lower level, eliminate debt, build savings, and buckle up for a long and bumpy ride.

There are still profits to be made, however. In fact, my colleague Ian Cooper recently published a detailed report that pinpoints exactly how this period of commodity inflation could hand you dozens of double-digit energy trades. If you're looking for the easiest gains in this market, then I urge you to read it. Just click here.  

Until next time,

Chris

Energy and Capital

California can't pay its bills—funding for education, healthcare and welfare have already been cut as the state's deficit continues to balloon to over $24 billion. In all reality, state-paid workers could soon be paid with IOUs.

The source of swine flu, now a global pandemic per the World Health Organization, lies right below Western states. And then there's the ongoing immigration and drug problems stemming from their southerly neighbor.

Indeed, Western governors have much to worry about and prepare for. Yet conversation at the recent three-day Western Governor's Association meeting was largely dominated by water issues. The topic is gaining such importance that several presidential cabinet members, as well as water experts from the Middle East and Australia, were in attendance.

According to the Associated Press, "Although many of the controversies in the West center around urbanization, natural resources and energy development, water - and often the lack of it - comes up again and again."

Alleviating water issues in the West and elsewhere is proving to be a very valuable, multifaceted business. And the gathering of minds at the recent governor's summit offered a bit of insight about where to look for profits.

Tributaries of Water Profits

One of the key panelists at the forum was preeminent water expert Dr. Peter H. Gleick, president and co-founder of the Pacific Institute, and someone whose work I've been following for some time.

With respect to "urbanization, natural resources and energy development," Gleick believes, "Water is connected to all those things." This is a theme I've conveyed to you in articles about the energy-water nexus.

To combat the compounding of problems, Gleick and policymakers are pushing numerous solutions that focus on both the supply and demand sides of the water issue. And each one has its own investment angle.

On the demand side, officials are pushing ubiquitous conservation. And this means water prices are going to rise.

Los Angeles has already given customers a monthly usage allowance. If they go over, their water rate nearly doubles. And the European Union's Water Framework Directive will heavily tax water after 2010.

Just as consumers are adapting to higher energy costs, so to will they adapt to higher water costs. Smart meters being used for electricity are being engineered to work for the water industry as well.

Retrofitting millions of homes and businesses with smart water meters will be big business. And some of the same names apply. IBM (NYSE: IBM) and Itron (NADAQ: ITRI) are involved in all things "smart."

But reducing demand is less than half the picture in this scenario. The big solutions—and the big profits—will come from altering water supply.

Oceans of Water Profits

Pretend for a moment that water is oil.

Conservation is great. But it doesn't really change the macro market. Tightening water use standards is like increasing CAFE standards: it makes headlines, but that's about it. It's a purely political victory—no automaker was doing cartwheels over having to make more efficient cars.

Now imagine changing the supply picture.

This is why throngs of investors get so excited about offshore oil, oil sands, and the arctic reserves. . . because it increases supply. And the companies that have access to the new supply make an absolute fortune.

The entire business of wildcatting was built on this premise.

And it's about to play out in the water sector on two fronts.

The first is water reuse. By actively treating and reusing water, rather than purging it into rivers and down storm drains, the supply picture begins to improve.

As water problems mount, a multi-billion dollar effort will ensue to revamp our water infrastructure, erecting many new treatment and distribution plants. Much money was dedicated to this in the stimulus, and related stocks are starting to feel the results.

Industrial water plays like Tetra Tech (NASDAQ: TTEK) and Flowserve (NYSE: FLS) are the main beneficiaries. Not to mention all the parts and pump suppliers that will provide the backbone for the expansion.

The second, and most lucrative, supply-side solution is desalination. If it were oil, desalination would be like finding limitless Saudi Arabias in your backyard. There's an infinite supply. . . oceans of water and oceans of profits.

It's why blue chip conglomerates are pursuing the technology full bore. GE and Dow have been in the desalination game for years. So has Siemens. They've been exploiting desalination in the Middle East where oil money and arid conditions have allowed it to prosper. But growing water issues are about to make desalination a global necessity.

A recent industry report by Lux Research stated the industry will triple in the next decade. Related stocks could fare just as well.

If fact, I've found one company whose technology is certain to succeed. Berkshire Hathaway and a handful of institutions agree with me—they've each bough millions of shares.

You can learn all about the technology, the company, and its profit potential right here.

Call it like you see it,

Nick