Life After Oil - HSBC Investments - Uranium Shortage

The green lobby has long been encouraging us to reduce our energy consumption. Most
of what they have been saying has been right all along and the long-term environmental
sustainability of civilisation must become a higher priority. The rational majority would
much prefer to use green energy than pollute the atmosphere, but in recent years, green
consumers must have been driven by charity rather than market forces, as the dirty old
way has been the cheapest. Early in the 20th century, the industrialised world was
fuelled by coal and when cleaner and cheaper oil became available, we left the coal in
the ground and moved forward. Once again, progress is moving us towards the next
great step in energy generation, driven by the rising price of hydrocarbons. Our
response will be to adopt new technologies, most of which have been around for years.
Expensive oil is here to stay as the world?s urbanised population continues to grow
while the growth in oil production slows to a trickle. Green energy technologies were
uneconomic when oil cost $20 per barrel but are now competitive. The goodness of our
hearts is unlikely to change our habits but price will. It is this factor, aided by policy, that
will drive change.
Iceland is a small country, poor in fossil fuels yet rich in renewable resources. They have
to import oil but believe that a better way lies ahead. Under the guidance of Prof Bragi
Arnason of Reykjavik University, Iceland plans to harness the nation?s plentiful supply of
geothermal energy with the goal of being fossil fuel free by the year 2040. He points out
that the sun?s solar energy is capable of delivering 3000 times the world?s current energy
consumption. Naturally only a small amount can be harnessed but by the second half of
the 21st century, solar energy will become a primary energy source. In the meantime
Prof Arnason says that Iceland will focus upon hydrogen. Renewable techniques can
generate electricity but the challenge is storage and transport. Hydrogen is clean,
sustainable, relatively simple to produce but bulky. Fortunately, hydrogen can be
liquefied for storage, but at additional cost. With the oil price at $60, hydrogen
production costs about the same as petrol, but the higher efficiency of fuel cells (60%)
over the internal combustion engine (20%) means that hydrogen is more cost effective
in tomorrow?s cars than petrol is in today?s. Iceland will lead the world in the shift from
hydrocarbons to renewable resources and serve as a useful test bed for the world to
watch and learn.

Wind is another energy source that has progressed from the experimental stage to the mainstream. The world leader in wind
turbines is Denmark?s Vestas, which until recently, was run for 18 years by Svend Sigaard. Over the period, he saw employee
numbers grow from 60 to 9500, turnover from Eur 14 million to Eur 2.6 billion and turbine output from 75 kW to 4.5 MW. In
layman?s terms that means a large turbine can now power 9000 computers or a locomotive. By comparison, a typical nuclear
power plant would generate 1200 MW. The obvious problem with wind power is its cyclicality, where the wind strength can be
too high or too low, causing a halt in production. However, the cost of production over time is highly predictable in sharp contrast
to that of fossil fuels. The financial risk of wind power is low which will be clearly demonstrated by the next oil shock. The problem
of producing cyclical power could also be solved by technological improvements to the grid which aim to manage demand. Just
as Easyjet prices persuade us it is best to begin our holiday at 0630 hrs on a Tuesday, so too could smarter pricing change our
energy consumption habits. People will pay any price to watch the cup final but may think twice about when to heat the swimming
pool or smelt aluminium. No doubt, the innovators will develop storage technologies either for the home or the mass market that
buys when the wind blows and sells when it stops.
In 1905, Albert Einstein led the foundations for the theoretical understanding of photovoltaic solar energy. A hundred years later,
Germany?s Solarworld AG has announced that 2004 marked the most successful year in the history of solar power and
installations have more than trebled in Germany alone. Solar power can feed the grid as demonstrated by BP Solar who have
built a plant in Shenzhen, China that generates one megawatt-enough to power 2000 computers. While that is still an expensive
megawatt, a more immediate and compelling use is for the image-conscious supermarkets to cover their roof tops in solar panels
so as to appeal to caring customers. Whole Foods in California have installed 14,000 square feet of PV cells on one of their store?s
roof?s that generates 20% of the energy needs. Supermarkets are energy hungry as they need to refrigerate all the food but a
home?s needs are far more modest. A typical home in the same area could reduce their electricity bill by 56% by installing a simple
system. That said, it will still cost $50,000 but as with all technologies, the price will drop as consumption rises. To put it another
way, the return on capital of a PV cell on a roof in southern California is 4.8% including tax benefits. That is just a stone?s throw
from being economic and when mass production drives down prices, the entrepreneurs will carpet the state in solar cells.
Alternative energy is not new and is rapidly becoming a real part of our economy. What has changed is the higher prices for fossil
fuels which have seen a seismic shift in demand so that the chance of lower prices in the future is looking increasingly remote.
Higher prices build the long-term case for vast investment in renewable sources and from the capitalist view, their greatest quality
is their financial predictability. We know how many kilowatt hours a solar panel, wind turbine, geothermal or hydro electric
scheme will generate in ten years time and how much that will cost whereas we have little idea what lies ahead for oil or coal.
Nuclear energy is another option that will play a vital role but the decisions on that are left to governments. Besides, if the world
turned nuclear there would be a uranium shortage within a generation.Sheik Yamani, the former head of OPEC, famously said, ?The stone age did not come to an end because we had a lack of stones,
and the oil age will not come to an end because we have a lack of oil?. The last drops will be left behind as we make way for the
new. Investors constantly face moving goal posts and just as the last great technological era has matured, it is already obsolete
for those seeking super-normal returns. Technology investors should let go of their microchips and embrace the energy
innovation around us. Electricity needs to be made, stored, distributed, sold, taxed and converted for transport. The options are
endless and the potential for profit is vast. In 1998, oil briefly slid below $10 per barrel. At that price, many producers lost money
but as it rose again the high operational gearing meant oil share prices went through the roof. The operational gearing is shifting
away from the oil producers and towards the new technologies where growth rates are exponential. Alternative energy investors
have a great opportunity ahead and the green credentials that come with it are an added bonus.
Written by Charlie Morris