Energy sector time to turn around?

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HenrySouthernCal
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Energy sector time to turn around?

Post by HenrySouthernCal » Thu Dec 21, 2017 11:51 pm

I have been thinking of buying into Vanguard Energy Fund Investor Shares (VGENX) for some time. The sector has been falling behind the overall market for quite a long time due to low inflation and low energy price. The fund did rally last several days to turn into a positive 2.23% YTD return after stayed down for most of year. People bought the fund 10 years are just barely even now. Oil price is recovering well, popular forecasters are saying natural gas will still stay down for extended time due to oversupply. With the tax cut bill just passed legislation and the economy is strong and global growth is expected pick up next year, I wonder what is the outlook for energy sector in 2018 and beyond.

stlutz
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Re: Energy sector time to turn around?

Post by stlutz » Fri Dec 22, 2017 12:50 am

Right now it's too easy to bring more supply to the market anytime the price of oil ticks up. I think it's hard to get big margins in this market any longer.

More importantly, however, is that all of my historic oil price forecasts have been wrong. The price of oil is determined by people who think about it all day, which I don't, and even they are wrong.

As such, I'm content to hold energy shares at market weight. If I was you, I'd do the same unless you do have some secret insight to the price of oil that the rest of the market is not privy to.

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Re: Energy sector time to turn around?

Post by HenrySouthernCal » Fri Dec 22, 2017 1:03 am

We just have lost decade for energy sector. What kind of return should we expected for the next 10 years. Vanguard research puts 3-5% annualized return on overall U.S. equity market, I hope energy sector do better than that.

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triceratop
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Re: Energy sector time to turn around?

Post by triceratop » Fri Dec 22, 2017 1:09 am

HenrySouthernCal wrote:
Fri Dec 22, 2017 1:03 am
We just have lost decade for energy sector. What kind of return should we expected for the next 10 years. Vanguard research puts 3-5% annualized return on overall U.S. equity market, I hope energy sector do better than that.
Lost decade? If you listen to Peter Thiel we have had effectively no technological process in energy since the 1970s. This doesn't mean energy as a market sector hasn't gone anywhere. It is to say that a lost decade having occurred isn't indicative that the next decade will see a change.

This is all meant to say: It is hard to say what the future holds, even harder to predict this better than public markets, and therefore I recommend not making active bets towards individual sectors. It doesn't matter that you "hope" the energy sector will do better.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Valuethinker
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Re: Energy sector time to turn around?

Post by Valuethinker » Fri Dec 22, 2017 5:55 am

triceratop wrote:
Fri Dec 22, 2017 1:09 am
HenrySouthernCal wrote:
Fri Dec 22, 2017 1:03 am
We just have lost decade for energy sector. What kind of return should we expected for the next 10 years. Vanguard research puts 3-5% annualized return on overall U.S. equity market, I hope energy sector do better than that.
Lost decade? If you listen to Peter Thiel we have had effectively no technological process in energy since the 1970s. This doesn't mean energy as a market sector hasn't gone anywhere. It is to say that a lost decade having occurred isn't indicative that the next decade will see a change.
I'd be fascinated to read Thiel's justification for saying that. Thiel is a smart guy, but something of a contrarian-- and I am not sure this is justified in this case. I think the consumer tech sector has conditioned people that radical change happens in 5 years.

But that's not even true in tech. The internet launched in the late 1960s, but was the late 1990s (and many innovations later) before it became essential. It takes a long time for new innovations to be fully deployed.

Off the top of my head:

- fracking has revolutionized the future oil and gas supply situation, particularly in terms of turning the US from an energy importer to an exporter (it still is an importer on a net basis, but might not be in the future). And fracking has hardly been tried outside USA, as yet

I cannot understate how revolutionary fracking is in terms of oil & gas supply. Read Dieter Helm's books (Carbon Crunch & Burn Out)

- solar and wind technologies have fallen in cost to the point where they are actually below the cost of new fossil fueled capacity. That's a revolution. And both have seen steady technological improvements after invention for the space programme in the 1960s

Solar and wind were zero, basically zero, on the US electricity generation scal say 13 years ago. Now they are significant, and account for more than half of all new capacity installations.

Given how slowly energy production sectors move, both of these things count as revolutions.

- batteries and energy storage is becoming a thing. Existing battery technologies (Lithium, primarily) are way ahead of what was available in the 1970s. And we seem to just be getting going on this

- LEDs lights have revolutionized lighting. You can see the impact on total household demand for electricity in many countries. And we are not anything like done on this -- lots of older lightbulbs still around.

- smart meters, smart grid, etc - just getting going. The fusion between the Internet and the energy system is just beginning

- Electric Vehicles - again something that is just beginning. But it has moved (and Musk has moved it, primarily) an amazing distance in 10 years
This is all meant to say: It is hard to say what the future holds, even harder to predict this better than public markets, and therefore I recommend not making active bets towards individual sectors. It doesn't matter that you "hope" the energy sector will do better.
Yes. It's very easy to catch a falling knife. Retail, for example, is in structural change in the USA-- a lot of value-oriented contrarian plays (Kmart, Sears etc.) have hit walls.
Last edited by Valuethinker on Fri Dec 22, 2017 6:04 am, edited 1 time in total.

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Re: Energy sector time to turn around?

Post by Valuethinker » Fri Dec 22, 2017 5:58 am

HenrySouthernCal wrote:
Thu Dec 21, 2017 11:51 pm
I have been thinking of buying into Vanguard Energy Fund Investor Shares (VGENX) for some time. The sector has been falling behind the overall market for quite a long time due to low inflation and low energy price. The fund did rally last several days to turn into a positive 2.23% YTD return after stayed down for most of year. People bought the fund 10 years are just barely even now. Oil price is recovering well, popular forecasters are saying natural gas will still stay down for extended time due to oversupply. With the tax cut bill just passed legislation and the economy is strong and global growth is expected pick up next year, I wonder what is the outlook for energy sector in 2018 and beyond.
Sector timing does not work.

FWIW the big thing is the US energy market is integrating with the global one, to a greater extent. That's true of natural gas, now that the US has some export capability. Oil it always has been integrated (via a global price which has roughly been the same since domestic oil prices were decontrolled in the 1970s).

NG prices in the US will stay down, but perhaps not to the lows that have been reached-- global LNG prices are much higher. Additional (excess) supply is largely the province of more oil drilling, that produces gas as a byproduct.

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Re: Energy sector time to turn around?

Post by Top99% » Fri Dec 22, 2017 9:18 am

You might want to read the book "Burn Out: The Endgame for Fossil Fuels" by Dieter Helm before putting money in the energy sector. While there is some speculation in the book I found it pretty compelling overall. But not compelling enough that I would *short* the energy sector.
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Re: Energy sector time to turn around?

Post by asif408 » Fri Dec 22, 2017 10:21 am

I have no idea what the future holds, but I've owned an energy fund since last year. I'm a believer in reversion to the mean, and I tilt to sectors of markets and whole markets that have the poorest previous 5 and 10 year records. Energy is down at the bottom of that 5-10 year list along with emerging markets and precious metals equities, all of which I am overweight in.

And I'm sure someone will come up and give the railroad example when it comes to owning sectors. But I just don't see technology changing that quickly that the stocks that make up energy funds will disappear anytime soon. I would expect a gradual transition, and possibly the addition of new energy stocks from alternative energy sources in the future.

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Re: Energy sector time to turn around?

Post by Valuethinker » Fri Dec 22, 2017 11:02 am

Top99% wrote:
Fri Dec 22, 2017 9:18 am
You might want to read the book "Burn Out: The Endgame for Fossil Fuels" by Dieter Helm before putting money in the energy sector. While there is some speculation in the book I found it pretty compelling overall. But not compelling enough that I would *short* the energy sector.
One of the great business books of 2017. Thought provoking. (underlining mine)

I agree one doesn't want to therefore short the sector, or take a bet against it in any way (more than the stock market as a whole has).

Helm is careful not to give a timescale. We could argue tobacco smoking is on its way out, but tobacco companies have made big returns for shareholders over the last 30 years. And as a civilization we are more addicted to oil than we are to tobacco.

But his vision of the future I found pretty compelling. One of those books that really changed my mind (confirmed some prejudices, but also made me see consequences I had not considered).

Some countries are pretty vulnerable in the world he foresees - Saudi Arabia and Russia top of that list.

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Re: Energy sector time to turn around?

Post by Valuethinker » Fri Dec 22, 2017 11:04 am

asif408 wrote:
Fri Dec 22, 2017 10:21 am
I have no idea what the future holds, but I've owned an energy fund since last year. I'm a believer in reversion to the mean, and I tilt to sectors of markets and whole markets that have the poorest previous 5 and 10 year records. Energy is down at the bottom of that 5-10 year list along with emerging markets and precious metals equities, all of which I am overweight in.

And I'm sure someone will come up and give the railroad example when it comes to owning sectors. But I just don't see technology changing that quickly that the stocks that make up energy funds will disappear anytime soon. I would expect a gradual transition, and possibly the addition of new energy stocks from alternative energy sources in the future.
Railroads had a terrible time. But post the deregulation under President Carter they have had a pretty good time, with radical improvements in productivity via changes in working practices etc. Warren Buffett has acquired 2 major railroads in the last 20 years or so (and probably would not be allowed to acquire a 3rd).

Looking at what has happened in North American freight, and in passenger rail in Europe and now perhaps China, I would say we are in the second (or third?) golden age of the railways.

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Re: Energy sector time to turn around?

Post by nedsaid » Fri Dec 22, 2017 12:07 pm

Valuethinker wrote:
Fri Dec 22, 2017 5:55 am
triceratop wrote:
Fri Dec 22, 2017 1:09 am
HenrySouthernCal wrote:
Fri Dec 22, 2017 1:03 am
We just have lost decade for energy sector. What kind of return should we expected for the next 10 years. Vanguard research puts 3-5% annualized return on overall U.S. equity market, I hope energy sector do better than that.
Lost decade? If you listen to Peter Thiel we have had effectively no technological process in energy since the 1970s. This doesn't mean energy as a market sector hasn't gone anywhere. It is to say that a lost decade having occurred isn't indicative that the next decade will see a change.
Nedsaid: This statement is clearly wrong. The energy sector in the United States has been about nothing but innovation and technological progress in recent years. Hydraulic fracking and horizontal drilling are big game changers. We also have the ability to extract oil from previously old and exhausted oil fields. Innovation is producing supply.

I'd be fascinated to read Thiel's justification for saying that. Thiel is a smart guy, but something of a contrarian-- and I am not sure this is justified in this case. I think the consumer tech sector has conditioned people that radical change happens in 5 years.

But that's not even true in tech. The internet launched in the late 1960s, but was the late 1990s (and many innovations later) before it became essential. It takes a long time for new innovations to be fully deployed.

Off the top of my head:

- fracking has revolutionized the future oil and gas supply situation, particularly in terms of turning the US from an energy importer to an exporter (it still is an importer on a net basis, but might not be in the future). And fracking has hardly been tried outside USA, as yet

I cannot understate how revolutionary fracking is in terms of oil & gas supply. Read Dieter Helm's books (Carbon Crunch & Burn Out)

- solar and wind technologies have fallen in cost to the point where they are actually below the cost of new fossil fueled capacity. That's a revolution. And both have seen steady technological improvements after invention for the space programme in the 1960s

Nedsaid: Solar and wind will become more important. Technology will continue to make these more viable over time but I am thinking that we are ahead of ourselves here. Still drawbacks to solar and wind. I recall that T Boone Pickens had to abandon about a $2 billion investment in wind power because it was too intermittent and unreliable to plug into the electric grid. A promising but still immature technology. We have rushed to this with a lot of subsidies when the old fashioned ways of generating electricity are still cheaper and more reliable.

Solar and wind were zero, basically zero, on the US electricity generation scal say 13 years ago. Now they are significant, and account for more than half of all new capacity installations.

Given how slowly energy production sectors move, both of these things count as revolutions.

- batteries and energy storage is becoming a thing. Existing battery technologies (Lithium, primarily) are way ahead of what was available in the 1970s. And we seem to just be getting going on this

Nedsaid: We need to figure out a way to recycle the batteries. Ditto for solar panels. There is an environmental cost to everything. Hopefully the renewable sources will be easier on the environment than the older energy sources. Dams are hard on fish. Birds fly into the wind turbine blades. There are ways around these problems but there is more than a zero environmental impact.

- LEDs lights have revolutionized lighting. You can see the impact on total household demand for electricity in many countries. And we are not anything like done on this -- lots of older lightbulbs still around.

Nedsaid: This will be a revolution, particularly with LED lighting. I was disappointed with compact florescent bulbs. I was scared of having one break, I have read conflicting advice on how to deal with this, anywhere from sweeping it up with a broom and airing out the house to calling the hazmat team. Compact florescent bulbs also emit mercury vapor. I had an expensive LED bulb give out, it didn't last any longer than the old incandescent bulbs, hopefully that was an outlier.


- smart meters, smart grid, etc - just getting going. The fusion between the Internet and the energy system is just beginning

Nedsaid: The fusion of the internet with about anything is a famously bad idea. Anything networked over the internet can and will be hacked. I read an article about how automobiles can be hacked from a laptop. Our electrical grid is now famously vulnerable to hacking. Someday, my refrigerator will stop working because of some computer virus contracted over the internet. I have little enthusiasm for the internet of things.

- Electric Vehicles - again something that is just beginning. But it has moved (and Musk has moved it, primarily) an amazing distance in 10 years

Nedsaid: Musk is a pioneer and he is advancing the technology of electric cars. Again, I think he is ahead of his time. My guess is that his ideas will eventually be successful but that his company Tesla will fail. Good idea too soon. Electric cars are still too expensive but time will take care of that.

I have to laugh a bit is that the electricity needed to power the cars has to come from somewhere. Some people seem to believe electricity is generated at the power plug. They forget you have to spill water over a dam, burn coal, generate steam with a nuclear pile, or some other way of powering a turbine.

This is all meant to say: It is hard to say what the future holds, even harder to predict this better than public markets, and therefore I recommend not making active bets towards individual sectors. It doesn't matter that you "hope" the energy sector will do better.
Yes. It's very easy to catch a falling knife. Retail, for example, is in structural change in the USA-- a lot of value-oriented contrarian plays (Kmart, Sears etc.) have hit walls.
A fool and his money are good for business.

Valuethinker
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Re: Energy sector time to turn around?

Post by Valuethinker » Fri Dec 22, 2017 12:42 pm

nedsaid wrote:
Fri Dec 22, 2017 12:07 pm
Valuethinker wrote:
Fri Dec 22, 2017 5:55 am
triceratop wrote:
Fri Dec 22, 2017 1:09 am
HenrySouthernCal wrote:
Fri Dec 22, 2017 1:03 am
We just have lost decade for energy sector. What kind of return should we expected for the next 10 years. Vanguard research puts 3-5% annualized return on overall U.S. equity market, I hope energy sector do better than that.
Lost decade? If you listen to Peter Thiel we have had effectively no technological process in energy since the 1970s. This doesn't mean energy as a market sector hasn't gone anywhere. It is to say that a lost decade having occurred isn't indicative that the next decade will see a change.
Nedsaid: This statement is clearly wrong. The energy sector in the United States has been about nothing but innovation and technological progress in recent years. Hydraulic fracking and horizontal drilling are big game changers. We also have the ability to extract oil from previously old and exhausted oil fields. Innovation is producing supply.

I'd be fascinated to read Thiel's justification for saying that. Thiel is a smart guy, but something of a contrarian-- and I am not sure this is justified in this case. I think the consumer tech sector has conditioned people that radical change happens in 5 years.

But that's not even true in tech. The internet launched in the late 1960s, but was the late 1990s (and many innovations later) before it became essential. It takes a long time for new innovations to be fully deployed.

Off the top of my head:

- fracking has revolutionized the future oil and gas supply situation, particularly in terms of turning the US from an energy importer to an exporter (it still is an importer on a net basis, but might not be in the future). And fracking has hardly been tried outside USA, as yet

I cannot understate how revolutionary fracking is in terms of oil & gas supply. Read Dieter Helm's books (Carbon Crunch & Burn Out)

- solar and wind technologies have fallen in cost to the point where they are actually below the cost of new fossil fueled capacity. That's a revolution. And both have seen steady technological improvements after invention for the space programme in the 1960s

Nedsaid: Solar and wind will become more important. Technology will continue to make these more viable over time but I am thinking that we are ahead of ourselves here. Still drawbacks to solar and wind. I recall that T Boone Pickens had to abandon about a $2 billion investment in wind power because it was too intermittent and unreliable to plug into the electric grid. A promising but still immature technology.

We have rushed to this with a lot of subsidies when the old fashioned ways of generating electricity are still cheaper and more reliable.
You are late to the party on this one. Lazard's estimates for Levelized Cost of Electricity (LCOE) show onshore wind now cheaper than gas fired. Solar (utility scale) pretty close. It's already happened.

https://www.lazard.com/media/450337/laz ... on-110.pdf

Of course the US has anomalously low gas prices. Other countries these crossover points came sooner, and solar and wind costs have been lower. Notwithstanding the US geographically has superb solar and wind resources.


- batteries and energy storage is becoming a thing. Existing battery technologies (Lithium, primarily) are way ahead of what was available in the 1970s. And we seem to just be getting going on this

Nedsaid: We need to figure out a way to recycle the batteries. Ditto for solar panels. There is an environmental cost to everything. Hopefully the renewable sources will be easier on the environment than the older energy sources. Dams are hard on fish. Birds fly into the wind turbine blades. There are ways around these problems but there is more than a zero environmental impact.
Who said anything about zero environmental impact? There isn't a human activity on this planet that has zero impact. It's all relative:

- dams are hard on fish, (not always), but the prospects from more dams are nearly zero in the developed world (pace Canada) and the balance in the developing world is they don't benefit the local inhabitants enough

- wind turbines. Plate glass windows literally kill over 1 billion birds a year in North America. No one is arguing for giving up plate glass windows. Domestic cats kill several billion-- ditto. Agricultural monoculture is a greater cause of bird depopulation than almost anything. Wind turbines? They kill less than 1000 as much as plate glass windows. Most species of birds appear able to adapt. There are a couple of species of bats where there is a real problem.

- battery recycling? Not heard anything about problems recycling lithium batteries-- in fact my municipality requires they be set out separately, so they can recycle. Old car batteries are being recycled for home power storage units.

- solar panel recycling? By volume this is a trivial amount of waste material, even against e-waste in total. But solar panels last 25+ years, so recycling is not a big issue-- one just moves the panels to another site where productivity requirement is lower. There will, in time, be a market shipping used panels from the first world to the emerging markets.
- LEDs lights have revolutionized lighting. You can see the impact on total household demand for electricity in many countries. And we are not anything like done on this -- lots of older lightbulbs still around.

Nedsaid: This will be a revolution, particularly with LED lighting. I was disappointed with compact florescent bulbs. I was scared of having one break, I have read conflicting advice on how to deal with this, anywhere from sweeping it up with a broom and airing out the house to calling the hazmat team. Compact florescent bulbs also emit mercury vapor. I had an expensive LED bulb give out, it didn't last any longer than the old incandescent bulbs, hopefully that was an outlier.
In actual terms of light produced, LEDs have become the majority light source in domestic situations (the bulbs that get switched to LED are the ones which are used more). On reliability-- they follow the "bathtub curve" of electronic reliability, so you do get early failures. Some brands are worse than others.

http://blogs.berkeley.edu/2017/05/08/ev ... ouseholds/

As I said, a technological revolution. And in roughly 10 years.
- smart meters, smart grid, etc - just getting going. The fusion between the Internet and the energy system is just beginning
Nedsaid: The fusion of the internet with about anything is a famously bad idea. Anything networked over the internet can and will be hacked. I read an article about how automobiles can be hacked from a laptop. Our electrical grid is now famously vulnerable to hacking. Someday, my refrigerator will stop working because of some computer virus contracted over the internet. I have little enthusiasm for the internet of things.
But it's happening. And smart meters are a big part of it. In any case, the actual Distribution and Transmission network is already open to the internet, because that's how the utilities monitor and control the system.
- Electric Vehicles - again something that is just beginning. But it has moved (and Musk has moved it, primarily) an amazing distance in 10 years

Nedsaid: Musk is a pioneer and he is advancing the technology of electric cars. Again, I think he is ahead of his time. My guess is that his ideas will eventually be successful but that his company Tesla will fail. Good idea too soon. Electric cars are still too expensive but time will take care of that.

I have to laugh a bit is that the electricity needed to power the cars has to come from somewhere. Some people seem to believe electricity is generated at the power plug. They forget you have to spill water over a dam, burn coal, generate steam with a nuclear pile, or some other way of powering a turbine.
And there are various calculators online to let you work out how clean your electricity is. Believe me, for anyone interested in EVs, this has been argued to death (I have a widget that tells me how clean the UK electricity grid is at any particular moment).
This is all meant to say: It is hard to say what the future holds, even harder to predict this better than public markets, and therefore I recommend not making active bets towards individual sectors. It doesn't matter that you "hope" the energy sector will do better.
Quite-- I agree. I was reacting to the "energy sector has made no technological progress" line of argument.

In fact, it has. There's a revolution going on around us. The basic technology for energy production has been the same for 100+ years: oil out of the ground for transport, electricity from boiling water coming down a centralized grid to the individual consumer. Fossil fuels for domestic heating. Nuclear had a small rise (from zero around 1955 to about 8% of world electricity c. 2000). Natural gas has been the only major new fuel (taking market share from coal since 1945).

But the last 20 years or so has seen some quite dramatic changes. One on the oil and gas supply front. But others on the way we can generate energy, and on the use of energy.

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Re: Energy sector time to turn around?

Post by magneto » Fri Dec 22, 2017 2:04 pm

Look for a moment at the materials and objects you are wearing and those surrounding you.
A high proportion is derived from oil, or uses oil in some way during manufacture.
We are surely not going back to coal as a feedstock?

The main transport role for oil will undoubtedly be less, but this investor sceptical a few decades back about the rush to diesel as a clean fuel, is equally sceptical that electric is the only long-term way forward for transport, with the notable important exception of city-centre niche applications. The power to weight ratio and climate temperature considerations weigh inter-alia heavily against electric as the exclusive means of transport.

Just a little while back we were being wound up by talk of 'peak oil'. Today the reverse.
"At times like these, it pays to remember there have always been times like these", someone said.
,
In the opinion of this investor a Commodities Income Fund, including both Oils and Miners, is a wonderful diversifier, tracing out a very different path to the main Stock indices.
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Re: Energy sector time to turn around?

Post by goblue100 » Fri Dec 22, 2017 2:29 pm

magneto wrote:
Fri Dec 22, 2017 2:04 pm
Just a little while back we were being wound up by talk of 'peak oil'. Today the reverse.
"At times like these, it pays to remember there have always been times like these", someone said.
,
In the opinion of this investor a Commodities Income Fund, including both Oils and Miners, is a wonderful diversifier, tracing out a very different path to the main Stock indices.
+1
I own Vanguard energy. Does a part of me wish I had just put it in VTI or the SPY that last 8 years? Sure. But, I'm an energy consumer. If my consumption costs go down, I can live with a small portion of my portfolio under performing. If my energy costs skyrocket, hopefully my tilt offsets that. I certainly understand people who don't tilt, but if you want a tilt, energy makes some sense to me.
Some people are immune to good advice. - Saul Goodman

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Re: Energy sector time to turn around?

Post by nedsaid » Sat Dec 23, 2017 12:44 pm

My thinking is that loading up on the energy sector when energy prices was down used to be one of the smartest moves an investor could make. Energy prices always rebounded, it was so simple and easy, it was like taking candy away from a baby. Times have changed, and the technology we have discussed plays a big role.

The hydraulic fracking and horizontal drilling are two techniques that are harvesting oil once thought to be unreachable. I am reading articles that say these techniques are getting more and more efficient and that the frackers can make money at $45 a barrel. OPEC tried driving the frackers out of business by flooding the oil markets but once oil prices starting inching up again, the frackers starting gearing up again. It is possible there is a permanent ceiling on oil prices and that we may never see $100 a barrel oil again. Plus, alternative and renewable sources of energy are emerging and becoming more economical.

I however don't share Valuethinker's boundless enthusiasm, I can't forget T Boone Pickens and his big losses on his wind farms. Again, he lost $2 billion. The "green" energy boom is mostly fueled by large susidies and pretty much the only green I see is government cash. This is a big criticism of Elon Musk, that his fortune is built on government subsidies. No doubt the technology is advancing and no doubt solar and wind will be an increasingly important part of the energy picture. Government is excellent at basic research and letting the research go where it may.

What is happening is that policymakers are trying to pick winners far in advance and normally what happens are expensive boondoggles. What a policymaker might think is a great idea might be rejected by the public. I am reminded of the live dog food commercials on the Today show where the dogs would turn their nose up at the dog food. No amount of marketing muscle can make the dogs like the dog food. I think of President Jimmy Carter's shale oil research back in the late 1970's, an expensive waste of money. The idea was great but technology was not advanced enough to make shale oil economical. Now we are seeing new technologies developed almost 40 years later that might make Carter's vision a reality but without the billions spent on boondoggles.

I suppose a government could have gotten really excited about Leonardo da Vinci's helicopter design. A nation's entire GDP could have been thrown into trying to produce these things but we needed the technology for the internal combustion engine and many other things first. A 15th century version of Elon Musk could have made some progress but many great ideas are just ahead of their time.

A lot of great ideas start from people seeing a need and doing some tinkering to see what might meet that need. Innovation doesn't happen just because governments throw mountains of cash at it. I do think basic research is a great use of public funds, what I am saying is let the research go where it may. The problem with the public sector is that bad ideas just never seem to die, we just throw more and more money at questionable ventures hoping that they will eventually work. The private sector will abandon bad ideas and look for better ones.

The green energy stuff we are doing now will reap dividends, much as the Space Program and military research does but with a lot of very expensive mistakes. I think we will see a lot of abandoned wind and solar farms as someone in a garage somewhere or some kid in Taiwan will invent something that will do the same thing much cheaper and much better. Again, T. Boone Pickens abandoned his. He was really excited about wind energy, made a real good effort, but the utilities didn't let him hook up to the power grid.

So despite my raining on the Green Energy parade, the technology is advancing and we will see cleaner and cheaper power. Even I am in favor of that. I am just dubious of the claims that wind power and solar power are so cheap. We are getting there but in my view aren't there yet. Ironically, the hydraulic fracking has made natural gas cheap and utilities are replacing dirtier coal with cleaner natural gas. My suspicion is that this phenomenon has been the lion's share of cleaner energy.

Anyways, back at the ranch after my lengthy digression, I think that the world of energy has really changed. Not sure that putting big bets on Oil and Natural Gas will work this time. Sort of like what happened when we started powering our ships with oil rather than coal. We might be seeing the same kind of fundamental shift. I have no doubt electric cars will be in our future but so far consumers aren't buying. Still too expensive.
A fool and his money are good for business.

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Re: Energy sector time to turn around?

Post by HenrySouthernCal » Sat Dec 23, 2017 4:25 pm

Technology improvement has two facets effect. It reduced traditional reliance on fossil fuel, but in the same time it can reduce the production costs of energy sector, so its profit can go higher. I recently bought $24K worth of Total SA ADR share (ticker TOT), it has 5.3% dividend yield which I love. In recent company earning release early November, it said its break-even oil price is now down to $20 per barrel, so at current market oil price it can make huge profit. Natural gas drillers in Appalachian basin right now are losing money or making tiny profit even with very cost efficient production, I don't think this can last forever, every company is supposed to make some economic profit for the amount of work. Natural gas price is artificially kept low due to market psychological perception, warmer winters and lack of pipelines to deliver natural gas to serve broader markets. Once all the pipelines are built, and we have a few years of very cold winters in a row, things can change. At some point we will realize again the earth only has limited supply of oil and gas, and it will run out at some point. Technology just delays the process by creating other alternative sources.

For oil price to crashed to low 20s a few years ago, there are many explanations I won't want to get into too much here. One reason I personally felt strong is the slowing Global especially Emerging Market economy such as China. Back in 2015 and early 2016 the global market had worry of hard-landing of Chinese economy, the bottom oil price just coincided with peak worry on Chinese economy. The growth of EM and stabilization of China this year has helped a lot on recovery of oil price. If we see another year of 20+% EM market stock index return in 2018, I just can't think out a reason energy price won't move up. China and India accounts for more than 2.5 billion world population and they are 2 fastest economies in the world now.

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Re: Energy sector time to turn around?

Post by Park » Sun Dec 24, 2017 8:46 am

asif408 wrote:
Fri Dec 22, 2017 10:21 am
And I'm sure someone will come up and give the railroad example when it comes to owning sectors.
https://www.top1000funds.com/coverage/i ... investing/

"In a bid to assess the performance of new technologies over the long term, and in fact whether backing new technology is a recipe for good performance, the analysis shows that railroads were the only transportation industry to outperform the market in the period 1900-2014.
“$1 invested in railroads in 1900 generated $62,019 against the market of $39,134, compared to roads that produced $10,436 and air that produced $7,194,”

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Re: Energy sector time to turn around?

Post by Top99% » Sun Dec 24, 2017 9:39 am

nedsaid wrote:
Sat Dec 23, 2017 12:44 pm
Anyways, back at the ranch after my lengthy digression, I think that the world of energy has really changed. Not sure that putting big bets on Oil and Natural Gas will work this time. Sort of like what happened when we started powering our ships with oil rather than coal. We might be seeing the same kind of fundamental shift. I have no doubt electric cars will be in our future but so far consumers aren't buying. Still too expensive.
I do agree that the timing of a transition to a greatly reduced reliance on fossil fuels is unknown but likely to be slower than the optimists think. For one thing, increased prevalence of EVs will put downward pressure on fossil fuel prices which could act as a negative feedback factor in EV adoption.
Already 50MPG hybrid Honda Accords, Toyota Camrys and Chevy Malibus are price competitive per mile with EVs in some markets. The question is when it will start picking up steam and what some countries/companies will do when it does. For example, will the Saudi's try and unload mass quantities of their crude oil out of fear of it becoming a stranded asset? That is my main takeway from Dieter's book. I could see fossil fuels following a similar path to legacy telecom networks. There are still lots of Nortel/Lucent telecom switches out there and they are still used but they are a shadow of their former self. If demand for fossil fuels fell even 50% the impact would be yuugge.
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Re: Energy sector time to turn around?

Post by nedsaid » Sun Dec 24, 2017 10:07 am

Top99% wrote:
Sun Dec 24, 2017 9:39 am
nedsaid wrote:
Sat Dec 23, 2017 12:44 pm
Anyways, back at the ranch after my lengthy digression, I think that the world of energy has really changed. Not sure that putting big bets on Oil and Natural Gas will work this time. Sort of like what happened when we started powering our ships with oil rather than coal. We might be seeing the same kind of fundamental shift. I have no doubt electric cars will be in our future but so far consumers aren't buying. Still too expensive.
I do agree that the timing of a transition to a greatly reduced reliance on fossil fuels is unknown but likely to be slower than the optimists think. For one thing, increased prevalence of EVs will put downward pressure on fossil fuel prices which could act as a negative feedback factor in EV adoption.
Already 50MPG hybrid Honda Accords, Toyota Camrys and Chevy Malibus are price competitive per mile with EVs in some markets. The question is when it will start picking up steam and what some countries/companies will do when it does. For example, will the Saudi's try and unload mass quantities of their crude oil out of fear of it becoming a stranded asset? That is my main takeway from Dieter's book. I could see fossil fuels following a similar path to legacy telecom networks. There are still lots of Nortel/Lucent telecom switches out there and they are still used but they are a shadow of their former self. If demand for fossil fuels fell even 50% the impact would be yuugge.
My personal view, is that if the transition from fossil fuels happens, that it will be slow. I know coal is hated as an energy source but we have it in abundance here in the United States and it is a reliable energy source. Oil was a big improvement but oil never replaced coal. I did read a few articles on abandoned wind farms and it made me wonder if the renewable energy such as wind and solar is a bit of a fad. If we could just get solar to provide us the energy for hot water, that alone would be a big energy savings. Somehow, I just don't see our future powered exclusively with wind and solar.

Again, the good old fracking providing abundant supplies of natural gas seems to be the biggest advance in cleaner power. So far, wind is an expensive boondoggle and I suspect the big solar farms are heated down the same path. Somehow, I think the revolutionary new clean energy will be something else. Fusion?

One of the drawbacks with hybrids is that replacing the batteries is pretty expensive. If you want to drive a car a long time, gas powered vehicles might actually be cheaper in the long run.
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Re: Energy sector time to turn around?

Post by Jeff Albertson » Mon Dec 25, 2017 12:18 pm

Lawrence Wright has a long article on Texas oil in the current New Yorker, 'The Dark Bounty of Texas Oil'.
https://www.newyorker.com/magazine/2018 ... -texas-oil
The rest of the state has followed Houston’s economic lead, and Texas is at last starting to become less reliant on oil. In addition to its wind-turbine farms, the state has expanded in manufacturing, aviation, aerospace, defense, and biotechnology. Austin has America’s fourth-largest concentration of startups. San Antonio has become a center for cyber-security, with more than eighty firms in the city. Although Texas has only nine per cent of the nation’s population, it accounted for at least a quarter of the new jobs created between 2000 and 2014. The infamous boom-and-bust cycle is less severe. The Federal Reserve Bank in Dallas reports that oil and mineral-related revenue makes up only five per cent of the state’s total tax collection, half of what it was in the nineteen-eighties. One of the state’s most respected economists, Angelos Angelou, argues that low oil prices are actually good for the state economy, a proposition that would have been heresy only a few years ago.
Maybe God, in His wisdom, will decide not to send Texas one more oil boom.

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Re: Energy sector time to turn around?

Post by arcticpineapplecorp. » Mon Dec 25, 2017 12:39 pm

just own the total stock market index fund and get the appropriate ownership of the energy sector. Currently energy (defined as oil and gas) makes up 7% of the fund. It's also 7% of the total market. Why do you want more than that? To invest based on sectors means you're taking sector risk. Why take sector risk when you can eliminate sector risk through diversification by owning the whole market? If your sector underperforms the market as a whole, you've not been compensated for having taken the extra risk. Don't take risk you don't have to take. If instead you own the total market index fund, and if the energy sector does well,then 7% of your money will do well. If it doesn't...well, at least only 7% of your money didn't do well. What do you know that the market doesn't know?

https://personal.vanguard.com/funds/rep ... 2210124794[*]
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Re: Energy sector time to turn around?

Post by minesweep » Mon Dec 25, 2017 1:06 pm

I'm much better at predicting the past than I'm at predicting the future.

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Re: Energy sector time to turn around?

Post by HenrySouthernCal » Fri Jan 12, 2018 7:47 pm

Just some update after I started the thread in later December. So far this year the first 2 weeks has been great for energy sector, there are big money rotating into the sector. Vanguard Energy fund returned 6.31% YTD, the third best just behind Capital Opportunity Fund (6.55%) and International Growth Fund (6.52%).

I haven't got a chance to got in the sector fund as it went up so quick in short time frame. I'll stand by to buy on dip this year as I still have large position on muni MMF. In the same time I already purchased 3 individual energy stocks at 4th quarter of 2017 and they are doing very well this year. So my need to buy into sector fund is not high, even if I indeed buy on dip, it won't be large holding in my account. Those are in my taxable non-retirement account, I do limited trading and some market timing there looking for great opportunity so I can hold more than 10 years. My retirement account is following more rigid rules, thus rarely traded or re-balanced.

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Re: Energy sector time to turn around?

Post by Wakefield1 » Fri Jan 12, 2018 8:24 pm

It looks like the Dow Utilities Index stocks are "missing in action" from the Wall Street Party.

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Re: Energy sector time to turn around?

Post by DanMahowny » Fri Jan 12, 2018 8:33 pm

asif408 wrote:
Fri Dec 22, 2017 10:21 am
I have no idea what the future holds, but I've owned an energy fund since last year. I'm a believer in reversion to the mean, and I tilt to sectors of markets and whole markets that have the poorest previous 5 and 10 year records. Energy is down at the bottom of that 5-10 year list along with emerging markets and precious metals equities, all of which I am overweight in.

And I'm sure someone will come up and give the railroad example when it comes to owning sectors. But I just don't see technology changing that quickly that the stocks that make up energy funds will disappear anytime soon. I would expect a gradual transition, and possibly the addition of new energy stocks from alternative energy sources in the future.
Great post, and I agree completely. I invested heavily in Oil/Oil Services and Emerging Markets around 16 months ago. I'll hold for the next 10 years.

Seems many people predict the death of oil, saying "it's different this time". The more I hear that, the more I'm convinced otherwise.
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Re: Energy sector time to turn around?

Post by CppCoder » Fri Jan 12, 2018 9:22 pm

Fossil fuels are nowhere near death. There are still over a billion people on the planet that do not even have electricity. Demand growth is driven by non-OECD countries, so demand (and emissions) reduction you see in developed countries is mostly irrelevant. Electric vehicles will not supplant oil because the majority of fuel consumption in transportation is from heavy equipment, not consumer light duty vehicles. Despite Tesla's (vaporware?) announcement, no one seems to have solved the energy density problem for heavy duty vehicles. Besides all of that, there is still growth in chemicals. "As my former boss used to say, hydrocarbons are such useful molecules. It's such a waste that we choose to burn them." What that all means for prices and profitability is anybody's guess, but the industry is not going anywhere for a while.

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Re: Energy sector time to turn around?

Post by heyyou » Sat Jan 13, 2018 12:41 am

Energy sector time to turn around?
I faltered at "sector" then again at "time."
From hard experiences, I know that I don't know, and more reward is from more risk. So far, patience with broad index investing has been good enough. Why would I want to take more risk than that? DW and I are comfortable instead of rich, but that suits us.
Good luck on trying to get more, sooner than others.

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Re: Energy sector time to turn around?

Post by aristotelian » Sat Jan 13, 2018 9:35 am

I was thinking of buying an energy sector ETF with a bit of play money, for what it's worth. Seems like it may have bottomed out, but you never know.

Does anyone know of an energy ETF that contains alternatives? VDE apparently only has fossil fuel stocks, as far as I can tell.

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Re: Energy sector time to turn around?

Post by Valuethinker » Sat Jan 13, 2018 11:10 am

CppCoder wrote:
Fri Jan 12, 2018 9:22 pm
Fossil fuels are nowhere near death. There are still over a billion people on the planet that do not even have electricity. Demand growth is driven by non-OECD countries, so demand (and emissions) reduction you see in developed countries is mostly irrelevant. Electric vehicles will not supplant oil because the majority of fuel consumption in transportation is from heavy equipment, not consumer light duty vehicles. Despite Tesla's (vaporware?) announcement, no one seems to have solved the energy density problem for heavy duty vehicles. Besides all of that, there is still growth in chemicals. "As my former boss used to say, hydrocarbons are such useful molecules. It's such a waste that we choose to burn them." What that all means for prices and profitability is anybody's guess, but the industry is not going anywhere for a while.
Couple of points:

About 2/3rds US oil demand is drivers of light vehicle (can't source right this minute but I did research this in about 2006)

Africa will not electrify using fossil fuels any more than Kenya gave 13 million phone user landlines. Grids already exist in Africa there is just an absence of people who can pay for them. Instead it will come from the bottom up. Solar arrays w batteries that electrify homes and then villages.

Africa is fossil fuel poor except for South African coal and Nigerian oil and gas plus some other bits. The Nigerian pipe network is constantly broken and raided. The offshore resources will generally to exports to earn valuable foreign exchange.

Solar is cheaper per kw than new gas fired power stations, in African conditions. These countries won't industrialise the way we did any more than South Korea or Taiwan (or Israel) repeated what Britain did 1750 to 1850.

Yes the shift out of fossil fuels will take time. Yes these companies will be around a long time. But the forces which will displace them are also apparent.

On chemicals natural gas is the preferred feedstock as it is far cheaper. But plastics waste is now entering the food chain via the oceans. So plastics use is also beginning to hit a limit.

Do read Dieter Helm's Burn Out. It really does sketch out where this world is going.
Last edited by Valuethinker on Sat Jan 13, 2018 11:18 am, edited 2 times in total.

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Re: Energy sector time to turn around?

Post by Valuethinker » Sat Jan 13, 2018 11:12 am

aristotelian wrote:
Sat Jan 13, 2018 9:35 am
I was thinking of buying an energy sector ETF with a bit of play money, for what it's worth. Seems like it may have bottomed out, but you never know.

Does anyone know of an energy ETF that contains alternatives? VDE apparently only has fossil fuel stocks, as far as I can tell.
The renewable energy ETFs suffer from the problem that there are few pure plays. GE and Honeywell are both big renewable energy companies, but huge in other activities.

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Re: Energy sector time to turn around?

Post by Valuethinker » Sat Jan 13, 2018 11:19 am

Valuethinker wrote:
Sat Jan 13, 2018 11:12 am
aristotelian wrote:
Sat Jan 13, 2018 9:35 am
I was thinking of buying an energy sector ETF with a bit of play money, for what it's worth. Seems like it may have bottomed out, but you never know.

Does anyone know of an energy ETF that contains alternatives? VDE apparently only has fossil fuel stocks, as far as I can tell.
The renewable energy ETFs suffer from the problem that there are few pure plays. GE and Honeywell are both big renewable energy companies, but huge in other activities.
Generally renewables do more to disrupt the incumbents than they do to make profits themselves. Think what the internet has done to recorded music.

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Re: Energy sector time to turn around?

Post by TravelforFun » Sat Jan 13, 2018 11:27 am

Top99% wrote:
Fri Dec 22, 2017 9:18 am
You might want to read the book "Burn Out: The Endgame for Fossil Fuels" by Dieter Helm before putting money in the energy sector. While there is some speculation in the book I found it pretty compelling overall. But not compelling enough that I would *short* the energy sector.
I read the book which made sense to me so I sold my energy mutual fund at a loss. That fund is now making a great comeback but I have no regrets because I used the sale proceed to add to my technology sector fund.

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Re: Energy sector time to turn around?

Post by just frank » Sat Jan 13, 2018 1:23 pm

nedsaid wrote:
Sun Dec 24, 2017 10:07 am
My personal view, is that if the transition from fossil fuels happens, that it will be slow. I know coal is hated as an energy source but we have it in abundance here in the United States and it is a reliable energy source. Oil was a big improvement but oil never replaced coal. I did read a few articles on abandoned wind farms and it made me wonder if the renewable energy such as wind and solar is a bit of a fad. If we could just get solar to provide us the energy for hot water, that alone would be a big energy savings. Somehow, I just don't see our future powered exclusively with wind and solar.

Again, the good old fracking providing abundant supplies of natural gas seems to be the biggest advance in cleaner power. So far, wind is an expensive boondoggle and I suspect the big solar farms are heated down the same path. Somehow, I think the revolutionary new clean energy will be something else. Fusion?

One of the drawbacks with hybrids is that replacing the batteries is pretty expensive. If you want to drive a car a long time, gas powered vehicles might actually be cheaper in the long run.
Ned, respect your posts a lot, but the above is simply misinformed, and might have passed for a reasonable opinion in about 2012. The penny dropped with the US electrical utilities (that renewable energy was cheap and getting cheaper, not going away, and would radically change how they did business) in 2013.

The EIA has some nice cost numbers (current and projected near future) in a report:
https://www.eia.gov/outlooks/aeo/pdf/el ... ration.pdf

Quick question...how many utility-scale (MW-class) wind turbines are there in the US? How much power do they generate?

Answers: >50,000 huge turbines, and about 7% of all the electricity used in the US. Not capacity, energy. More than all the hydropower darns in the US. Quite a 'fad'.

Among 1000s of separate wind projects will some be ill-sited, pick a bad vendor or installer, etc. Of course. The vast majority are cranking power into their local grids at contracted rates below the going rate (typically 2-3 cents/kWh in the last couple years), leading to reduced residential rates in those markets while paying back their original private investors.

As for solar cost....cost for solar PV modules are now down to <$0.50/Watt **unsubsidized** for large volume orders (as in a utility-scale project).

In a sunny location (like the US SW), the annual output of a PV module is its capacity * 1600 hours, so 1 W of panel would make 1.6 kW/yr. On a 10 year investing horizon, your $0.50 panel makes 16 kWh. IOW, with a 10 year simple amortization, the PV module cost works out to be ~3 cents/kWh. The (current) tax credit would reduce hardware costs by 30% and make that 2 cents per kWh. Of course, there are other costs to a solar plant (mounting, inverters, wiring, etc), and you need some cheap land (ideally, something like an unwanted brownfield, or the roof of a Walmart, etc), but that is how the math works. But on the other hand....the panels will last much longer than 10 years, and require no maintenance.

Of course, you might say, if that were true, people would be building these utility-scale solar plants all over the US and the world. And they are. Utility-scale solar has been growing at a >50% CAGR for the last several years...around the world, including many emerging market countries where there is a lot of sunshine, but no subsidies at all. The panels are selling as fast as people can build the factories to build them.

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Re: Energy sector time to turn around?

Post by CppCoder » Sat Jan 13, 2018 4:57 pm

Valuethinker wrote:
Sat Jan 13, 2018 11:10 am
Do read Dieter Helm's Burn Out. It really does sketch out where this world is going.
I do suspect he has an opinion on the matter. Here's another

http://corporate.exxonmobil.com/en/ener ... gy-outlook

Both are biased. I suspect one is biased toward selling books, and one is biased toward long term profitability. Plenty of authors also wrote how we'd hit peak oil and be in trouble by now, and then we became oversupplied. As with investing, I suspect it is hard to predict the future...

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Re: Energy sector time to turn around?

Post by nedsaid » Sat Jan 13, 2018 6:56 pm

just frank wrote:
Sat Jan 13, 2018 1:23 pm
nedsaid wrote:
Sun Dec 24, 2017 10:07 am
My personal view, is that if the transition from fossil fuels happens, that it will be slow. I know coal is hated as an energy source but we have it in abundance here in the United States and it is a reliable energy source. Oil was a big improvement but oil never replaced coal. I did read a few articles on abandoned wind farms and it made me wonder if the renewable energy such as wind and solar is a bit of a fad. If we could just get solar to provide us the energy for hot water, that alone would be a big energy savings. Somehow, I just don't see our future powered exclusively with wind and solar.

Again, the good old fracking providing abundant supplies of natural gas seems to be the biggest advance in cleaner power. So far, wind is an expensive boondoggle and I suspect the big solar farms are heated down the same path. Somehow, I think the revolutionary new clean energy will be something else. Fusion?

One of the drawbacks with hybrids is that replacing the batteries is pretty expensive. If you want to drive a car a long time, gas powered vehicles might actually be cheaper in the long run.
Ned, respect your posts a lot, but the above is simply misinformed, and might have passed for a reasonable opinion in about 2012. The penny dropped with the US electrical utilities (that renewable energy was cheap and getting cheaper, not going away, and would radically change how they did business) in 2013.

The EIA has some nice cost numbers (current and projected near future) in a report:
https://www.eia.gov/outlooks/aeo/pdf/el ... ration.pdf

Quick question...how many utility-scale (MW-class) wind turbines are there in the US? How much power do they generate?

Answers: >50,000 huge turbines, and about 7% of all the electricity used in the US. Not capacity, energy. More than all the hydropower darns in the US. Quite a 'fad'.

Among 1000s of separate wind projects will some be ill-sited, pick a bad vendor or installer, etc. Of course. The vast majority are cranking power into their local grids at contracted rates below the going rate (typically 2-3 cents/kWh in the last couple years), leading to reduced residential rates in those markets while paying back their original private investors.

As for solar cost....cost for solar PV modules are now down to <$0.50/Watt **unsubsidized** for large volume orders (as in a utility-scale project).

In a sunny location (like the US SW), the annual output of a PV module is its capacity * 1600 hours, so 1 W of panel would make 1.6 kW/yr. On a 10 year investing horizon, your $0.50 panel makes 16 kWh. IOW, with a 10 year simple amortization, the PV module cost works out to be ~3 cents/kWh. The (current) tax credit would reduce hardware costs by 30% and make that 2 cents per kWh. Of course, there are other costs to a solar plant (mounting, inverters, wiring, etc), and you need some cheap land (ideally, something like an unwanted brownfield, or the roof of a Walmart, etc), but that is how the math works. But on the other hand....the panels will last much longer than 10 years, and require no maintenance.

Of course, you might say, if that were true, people would be building these utility-scale solar plants all over the US and the world. And they are. Utility-scale solar has been growing at a >50% CAGR for the last several years...around the world, including many emerging market countries where there is a lot of sunshine, but no subsidies at all. The panels are selling as fast as people can build the factories to build them.
I don't know, I had a guy come to my door wanting me to sign up for greener electricity from my local electric utility. It would cost a bit more than what I was already paying. Much of the alternative energy we have here is wind power. He should have been offering me a discount. Green energy at the consumer level is still more expensive for me.
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Re: Energy sector time to turn around?

Post by just frank » Sun Jan 14, 2018 7:24 am

triceratop wrote:
Fri Dec 22, 2017 1:09 am
HenrySouthernCal wrote:
Fri Dec 22, 2017 1:03 am
We just have lost decade for energy sector. What kind of return should we expected for the next 10 years. Vanguard research puts 3-5% annualized return on overall U.S. equity market, I hope energy sector do better than that.
Lost decade? If you listen to Peter Thiel we have had effectively no technological process in energy since the 1970s. This doesn't mean energy as a market sector hasn't gone anywhere. It is to say that a lost decade having occurred isn't indicative that the next decade will see a change.

This is all meant to say: It is hard to say what the future holds, even harder to predict this better than public markets, and therefore I recommend not making active bets towards individual sectors. It doesn't matter that you "hope" the energy sector will do better.
In terms of fossil fuels, there has been both massive technological progress and ongoing depletion of the resources from the easiest to harder, a process that has been going on since petroleum first was developed 150 years ago.

Since the 1970s there has clearly been progress in enhanced recovery of old, often considered depleted fields (like those in Southern CA), offshore drilling (shallow and deep), and the development of tight and shale oil plays (the Permian basin has been developed for decades before fracking)...and the net effect is to minimize/reduce production costs and enable the delivery of a cost effective product to meet existing and almost monotonically rising global demand.

This has clearly been a long cyclical process....when you could extract oil from hand dug wells in Pennsylvania, and make a profit, that is how it was done. Periods of high prices have historically led to extraction technology innovation and deployment, followed by (typically) a couple decades of low prices. We seem to be at the beginning of one such 'low-price' cycle now, starting in 2014...the previous one started in 1985 (triggered by enhanced recovery and shallow offshore drilling tech) and lasted nearly 20 years before rising global demand and depletion brought prices back to the point where innovation was again possible (and inevitable).

But based on this historical analysis...the oil business could easily be very competitive, marginally profitable, but not lucrative for another decade or so.

If the forecast peak in global oil demand manifests before then, the good old days for oil may be history. Or folks could buy the sector for short-term speculation.
Last edited by just frank on Sun Jan 14, 2018 8:43 am, edited 2 times in total.

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Re: Energy sector time to turn around?

Post by just frank » Sun Jan 14, 2018 7:54 am

nedsaid wrote:
Sat Jan 13, 2018 6:56 pm
I don't know, I had a guy come to my door wanting me to sign up for greener electricity from my local electric utility. It would cost a bit more than what I was already paying. Much of the alternative energy we have here is wind power. He should have been offering me a discount. Green energy at the consumer level is still more expensive for me.
In all likelihood, wind power in your area has already given you a discount by dumping cheap (and partially federally subsidized) power onto your grid and preventing your generation utility from making more expensive (and also partially federally subsidized) investments instead. Not to mention improving your local air quality and keeping the price of natural gas (that wind power displaces) low.

You're welcome. :beer

The guy was peddling plans based upon the selling of renewable energy credits (RECs) to customers. RECs provide another, state-level trading scheme for states to meet their mandates to, for instance, develop 10% renewable energy in MA by year 20XX, etc. Overall the REC and SREC (solar) mandates and markets have been very successful at fostering the development of renewable energy....and cost nothing to consumers that do not buy the RECs.

The current high price of RECs is a reflection of high customer demand (both corporate and homeowners)...the people that voted in the mandates are also buying the RECs, putting their money where their mouth is. Corporations (like Apple and Google) are buying RECs to reduce their carbon footprints (in some accounting model), and passing the cost onto all consumers, so you are paying there. I would suppose, however, that the boards of those enterprises have greenlighted this greenwashing move based upon projected sales returns, and looking at surveys that climate is a significant issue for Millennial customers they hope to have on the hook for the next 30 years. Ah well, sometimes one generation is forced to buy products geared and priced for another generation. Capitalism.

On RECs, the prices vary widely. Wind in TX is so overbuilt that their RECs are almost worthless. I can buy '100% wind' power here in PA for the same amount as conventional power, and feel smug about it, I suppose. But it is a bit of fake (IMHO)...the only thing that happens is a minute amount of money is sent to TX, pocketed, and no new wind power developed, nor shipped 1500 miles to my home. Alternatively, I can buy local RECs made by wind farms in PA, 150 miles from my home, which are dumping power into my local grid, for a bit less than 2 cents/kWh upcharge over conventional. Since PA is still developing its wind resources (unlike overbuilt TX) these 2 cents go to an enterprise that is actually making wind power and dumping it into my local grid, and (maybe) developing new resources to meet a (rising) renewable energy mandate voted in by ratepayers in my commonwealth.

But its ok, you do not need to vote for or pay for such renewable energy. Others in the US and overseas will happily pay for its development and deployment, and you can just enjoy the cheap sustainable energy and lower rates. Progress.

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Re: Energy sector time to turn around?

Post by Valuethinker » Sun Jan 14, 2018 8:56 am

CppCoder wrote:
Sat Jan 13, 2018 4:57 pm
Valuethinker wrote:
Sat Jan 13, 2018 11:10 am
Do read Dieter Helm's Burn Out. It really does sketch out where this world is going.
I do suspect he has an opinion on the matter. Here's another

http://corporate.exxonmobil.com/en/ener ... gy-outlook

Both are biased. I suspect one is biased toward selling books, and one is biased toward long term profitability. Plenty of authors also wrote how we'd hit peak oil and be in trouble by now, and then we became oversupplied. As with investing, I suspect it is hard to predict the future...
Actually, not -- re motivations. Professor Helm makes his money by being a Professor at Oxford University (that's like a Department Chair in American universities) and by consulting.

So his bias is intellectual, towards the correctness of his logic. If he is persuasive, no doubt he gets more consulting gigs (although I imagine his time is the really big constraint, he just wrote a 250 page report on the Cost of Generation for the UK government). But he has to be right to be successful.

Exxon has to stay in the oil and gas business- they don't have any other one. But note that Shell and BP are back in the renewables game. Shell has a reputation, dating from the late 1960s (where they imagined a world of superhigh oil prices, *before* the first Oil Crisis of 1973), of thinking about the future. Shell is tilting their portfolio towards gas, and is investing in renewables.

The fact that the Saudis are going to IPO Saudi Aramco (the largest IPO in world history, if it happens) is itself very interesting. They don't see that their vast oil reserves will have infinitely rising future value.

https://www.bp.com/content/dam/bp/pdf/s ... r-dale.pdf

Chief Economist of BP on the future price track of oil & gas.

Back to Helm. I could see the big trends, anyone can, it's just where this is going that he draws together:

- carbon emission will get more expensive
- oil and gas will not be expensive, because fracking technologies revolutionize the extractability of same
- 3D printing offers the opportunity for relocalization of production (ditto cheap natural gas)
- solar power will get a lot cheaper due to technology change, and a lot more pervasive- -we are moving towards a world of zero marginal cost power production
- ditto energy storage technologies
- the grid becomes a 2 way entity, not just production at the centre transmitted and distributed towards the edge, but with production and storage at the edge flowing back the other way (this is part of the so-called "smart grid" which is also more flexible vis a vis demand)

He's careful not to give a time frame. But he then takes you through that world, what it will look like for: 1. energy producing countries (good luck, Canada & Russia ;-)) 2. fossil fuel companies 3. utilities.

I hadn't really thought through the end game on this.

The particular part that struck me was the electric utility model switches from charging per units supplied/ used, to broadband provider. Your utility provides you with capacity (how many kw, analogous to your download/ upload speed) and with connectivity (in the case of electricity, reliability of service) but the important issue is not kwhr (although there could be an additional tariff for use at busy times, analogous to your broadband link getting congested- -that's a time charge against you, rather than a monetary charge, and I pay a higher business broadband rate to have less congestion and (in theory) greater reliability). Because zero marginal cost of production electricity is pervasive (technologies like solar electric paint).

Rest assured, the electric utility industry will fight very hard to delay this. But the ones, and the countries, that embrace this first are the long run winners.

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Re: Energy sector time to turn around?

Post by CppCoder » Sun Jan 14, 2018 9:25 am

Valuethinker wrote:
Sun Jan 14, 2018 8:56 am
Actually, not -- re motivations. Professor Helm makes his money by being a Professor at Oxford University (that's like a Department Chair in American universities) and by consulting.
The UK title of Professor is equivalent to the U.S. title of (full) Professor. Department chair is not a title in the U.S. so much as it's a position. It's the administrative head of a department, e.g., the Department Head of the School of Electrical Engineering. In some places, it's a job that the department seeks a specific candidate to fill and in some places, it's a burden that rotates through the existing faculty because someone has to do it and nobody wants to. Maybe you were thinking of the U.S. title of Endowed (named) Chair?

I agree with you that the times ahead will be interesting and different. Exactly how so, though, I don't know. I suspect energy companies will adapt. To stay on point with the original poster, though, my assessment is that (even with inside information) I can't predict the future in this industry and hence would not recommend tilting to the energy sector over a diversified portfolio.

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Re: Energy sector time to turn around?

Post by triceratop » Sun Jan 14, 2018 4:30 pm

^ A department chair is more of a curse to one's research program than a position of recognition or nobility in the department. ValueThinker may also be thinking of Distinguished professor. Wikipedia doesn't cite any sources, but may be useful anyway? Professor
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Re: Energy sector time to turn around?

Post by just frank » Wed Jan 17, 2018 6:03 am

nedsaid wrote:
Sat Jan 13, 2018 6:56 pm
I don't know, I had a guy come to my door wanting me to sign up for greener electricity from my local electric utility. It would cost a bit more than what I was already paying. Much of the alternative energy we have here is wind power. He should have been offering me a discount. Green energy at the consumer level is still more expensive for me.
A case in point re renewables reducing your energy costs. A utility in Colorado solicited bids recently for new generation, and got a slew of solar and wind bids, many with associated battery storage, at costs lower than the operating costs of most of CO's existing coal plants.

Dave Roberts has a nice review:
https://www.vox.com/energy-and-environm ... rgy-future

(NB: while this author frequently discusses OT 'climate issues', this article is just about renewable energy)

basically 2.1 or 3.6 cents/kWh for wind or solar plus storage, respectively. These bids all came in from private investors who wanted to build the projects to sell the power on the states commercial grid.

If we wanted to be skeptical (lets) then we would say that the price reflects current subsidies.
For wind this is 2.2 cents/kWh PTC for 10 years, so probably we should add some fraction of 2.2 cents (depending on contract length and discount rate)...maybe wind+storage is 4 cents/kWh in CO unsubsidized.
For solar, this is a 30% capital discount. IF we assume the power cost is proportional to capital, than we should multiply by 150%, so solar plus storage is maybe 5.4 cents/kWh unsubsidized.

Ned, how does that compare to the 'cost of generation' on your electricity bill? My conventional cost of generation here (in the land of cheap natural gas and deregulation, is 7.22 cents/kWh, well above the unsubsidized figures above. Maybe you should complain to your local utility that they should put out an open renewable bid, so they can reduce your bill further!

The exciting thing n this news is the storage....that makes these sources somewhat dispatchable, or at least able to moderate themselves from putting large swings onto the conventional grid (from gusty winds or scattered clouds). One skeptical thing is that the plan does not list the amount of storage. Is it 1 hour (stability), 10 hours (dispatchable) or what? I suspect the former.

Anyway, low-cost bids and projects like this have been rolling in all over the world, and in California for a couple years now. Now it is happening elsewhere in the US.

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Re: Energy sector time to turn around?

Post by just frank » Wed Jan 17, 2018 7:10 am

Going back to the OP, what does the renewable revolution (mostly electricity) have to do with energy companies (mostly oil)??

A lot.

On electrical generation, until a few years ago, it was a LOT of coal and some (subsidized) nukes b/c gas and oil were both consistently more expensive and renewables didn't exist. A lot of gas-fired capacity existed, because it could be throttled, but its use was minimized due to the cost.

For a long time, oil and gas were interchanged in many applications (such as process heat for industry) so their prices per BTU were quite correlated...when one got cheaper, some swing users which switch to the cheaper one, coupling their supply/demand equilibria.

When fracking made gas cheap, and then cheaper, it eventually made sense to idle coal electricity plants and run the gas plant. No new construction required, literally just flipping a couple switches. This coal to gas switch started intermittently a few years ago...as gas prices fluctuated. When the gas plants started soaking up a lot of the gas supply, the price stabilized, went up, and the utilities switched the coal plants back on. In other words, gas is 'cheap' because it is now tied to (substituting) coal rather than oil.

(The previous substitution of oil and gas in process heat apps puts a floor under the price of oil, only occasionally touched so far.)

So, why don't we just switch off ALL the coal plants and switch to gas? B/c there is not enough gas supply to do that. Yet. Certainly there is enough gas supply (and anticipated future supply) that it makes sense to retire the oldest/least eff/most expensive coal plants....those are white elephants in the 'gas fracking' era. And so a huge number of coal plants have been retired, not to mention the ones that are now only rarely fired up (near demand peaks).

The net effect however, of all this has been to kill the future of the coal industry. Coal demand is dented, but not gone, and yet the market cap of those companies is wiped out. Why? won't gas just get expensive again, and coal will recover? Unlikely. B/c we are also fracking for oil, which is still worth a lot more than gas (because it is globally traded and powers a captive user: the fleet of light vehicles). Technically, every fracked oil well also makes gas. Sometimes more gas than oil. And a larger gas cut as a function of time. The net effect is that if we frack for oil (to make money) then we make a lot of gas as a byproduct (and dump it at the going rate whatever that is). And the supply of byproduct gas increases steadily for geological reasons.

So, coal and gas prices (per BTU) being correlated, and substituting for each other in a huge swing user (combined >60% of US electricity) means that coal from bankrupt decreasing demand coal miners sets the floor on the price of gas....and will for as long as anyone cares to predict/invest. And the rate of increase in (unwanted) cheap gas is a lot greater than the growth rate of electricity demand.

So, those energy funds have already lost a combined $300B in coal market cap. While from a technical perspective one might expect a recovery, on a value basis its not going to happen.

The cheap gas (as far as the eye can see) has other effects:
--it is making nukes look expensive, just as a large number of the nuke fleet hits retirement age, so their contracts do not need to be extended.
--it is making intermittent renewables look ok, since gas throttling can handle the fluctuations of renewables. So those are growing exponentially in the US and overseas. And getting cheaper as a result (learning curve).

As for the oil majors that make up most of the energy funds these days? They are all facing (and admitting) a future oil demand peak, largely because of the rise of electric cars, especially in China. Much of their valuation and growth model was predicated on the Chinese taking a US-like car ownership model (modulated by their higher urbanization). But EVs are more popular in China than in California right now. They have been making close to a million EVs per year for domestic consumption, more than the rest of the world combined. In ten years they will be shipping them en masse to their neighbor India. There goes the future of oil demand, which has nothing to do with US or EU or UN policy.

Poof.

The oil demand peak 'penny' is still dropping...its in mid-air in 2018. All the majors (except ExxonMobil) have admitted to it, and are debating the timing. The success and scaling rollout of EVs in the next few years will pull that date forward a bit. The problem: most majors are currently valued using expensive to extract underground oil assets. In a falling demand world, that oil will not get produced (economically) and is worthless. So the majors are all writing down...a process that will continue. How much each major gets written down depends (in detail) on their portfolio of assets. Exxon is late to the write-down game (they denied the need until the SEC recently threatened them, now they are grudgingly doing it), and is believed to need more write-down than the other majors. Something like 50% of their (current) assets are believed to be stranded.

So the future of your oil majors and your energy fund is now tied to the only fossil fuel whose demand is still growing...natural gas. But that is currently tied to the price of coal from bankrupt suppliers...and will be for a long time. Not a profit center.

Most likely, the oil majors will get their caps wiped out in the next few years, and they will continue to live as shadows of their former selves (like our current 'zombie' coal companies). The frackers will be swing producers and turn a little profit on oil, and produce enough gas byproduct to keep the oil majors down.

And if those oil majors think that gas demand will eventually grow enough to re-animate them....the exponential growth of cheap renewable energy, AND the cheap grid batteries enabled by the rollout of an EV fleet, will put a ceiling on gas demand going forward.

No way out.
Last edited by just frank on Wed Jan 17, 2018 7:17 am, edited 1 time in total.

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Re: Energy sector time to turn around?

Post by bottlecap » Wed Jan 17, 2018 7:12 am

How does the energy sector fit into your overall investment strategy and asset allocation?

I would follow that.

If you don’t have an answer to that, I would not invest in it.

JT

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Re: Energy sector time to turn around?

Post by Valuethinker » Wed Jan 17, 2018 4:10 pm

just frank wrote:
Wed Jan 17, 2018 7:10 am
Going back to the OP, what does the renewable revolution (mostly electricity) have to do with energy companies (mostly oil)??

A lot.

On electrical generation, until a few years ago, it was a LOT of coal and some (subsidized) nukes b/c gas and oil were both consistently more expensive and renewables didn't exist. A lot of gas-fired capacity existed, because it could be throttled, but its use was minimized due to the cost.

For a long time, oil and gas were interchanged in many applications (such as process heat for industry) so their prices per BTU were quite correlated...when one got cheaper, some swing users which switch to the cheaper one, coupling their supply/demand equilibria.

When fracking made gas cheap, and then cheaper, it eventually made sense to idle coal electricity plants and run the gas plant. No new construction required, literally just flipping a couple switches. This coal to gas switch started intermittently a few years ago...as gas prices fluctuated. When the gas plants started soaking up a lot of the gas supply, the price stabilized, went up, and the utilities switched the coal plants back on. In other words, gas is 'cheap' because it is now tied to (substituting) coal rather than oil.

(The previous substitution of oil and gas in process heat apps puts a floor under the price of oil, only occasionally touched so far.)

So, why don't we just switch off ALL the coal plants and switch to gas? B/c there is not enough gas supply to do that. Yet. Certainly there is enough gas supply (and anticipated future supply) that it makes sense to retire the oldest/least eff/most expensive coal plants....those are white elephants in the 'gas fracking' era. And so a huge number of coal plants have been retired, not to mention the ones that are now only rarely fired up (near demand peaks).

The net effect however, of all this has been to kill the future of the coal industry. Coal demand is dented, but not gone, and yet the market cap of those companies is wiped out. Why? won't gas just get expensive again, and coal will recover? Unlikely. B/c we are also fracking for oil, which is still worth a lot more than gas (because it is globally traded and powers a captive user: the fleet of light vehicles). Technically, every fracked oil well also makes gas. Sometimes more gas than oil. And a larger gas cut as a function of time. The net effect is that if we frack for oil (to make money) then we make a lot of gas as a byproduct (and dump it at the going rate whatever that is). And the supply of byproduct gas increases steadily for geological reasons.
All good stuff, just some additional points about power plant economics:

- new coal plants just cannot compete with new gas plants, because the capital cost of the latter is so much lower. Gas fired plants are basically factory built. You clear a site, throw up a steel shed, and the gas turbine & ancillary equipment comes by barge (the last bit, by road, can be the worst bit) and gets installed. Can do it in 18 months or less from scratch. Toronto did one in its port lands, in something like that time.

Compared to the multi year construction on site, and the huge capital costs, coal is just not competitive for new plants.

Gas plants have lower capital costs, lower O&M costs (see below) - -sticking point historically was fuel costs. But efficiencies have risen (from low 50s to low 60s since the early 1990s) and gas prices are much lower than they were 15 years ago, say.

- in addition, Operation & Maintenance costs are much lower for new gas plants. A shift on a gas turbine power plant can be 15 people. For a coal plant it will be several hundred. Repairs are generally cheaper too because the fuel feed etc. is less complex.

That also means if a coal plant drops below a certain number of generation hours a year, it is not economic. Because you can't afford to keep several hundred workers on payroll.

- coal plants also need certain stockpiles of coal, and that's more capital tied up. A CCGT just needs to be plugged to the gas main, it isn't the power company that handles the majority of the storage.

- pollution controls make the problem worse. Coal fired plants (new ones) need expensive emission controls just to meet existing standards (not new ones introduced by the last US Administration under Executive Orders- -I am talking legislation passed under the Nixon, Carter & Bush (the older) administrations). Gas is a much cleaner burn, so you don't need those controls -- sulphur, particulates, nitrous oxides in particular.

What happened with the US is when the laws were originally passed with the Clean Air Acts, old plants were grandfathered. So it became economic simply to keep the plants in operation past their 30-40 year designed life, since they did not need the higher rated emission controls. The result is the US coal-fired fleet is very old, and many of the plants have reached an age where they can no longer be economically kept running.

- of course all this falls apart if gas prices are more like what you pay in Europe or Asia. But in the US those prices are half of what Europeans pay, and c. 1/3rd of Asian prices (there has been convergence, I may be out of date a bit).

It's worth remembering that a modern gas fired station (Combined Cycle GT) is c. 61-62% efficient, and that's 2x the thermal efficiency of the US coal plants being phased out (I think the US fleet average is c. 33-35% efficient; there are quite new coal plants in Italy and Japan which run near 40-42% thermal efficiency, but not AFAIK in USA). Thus, even disregarding all the factors above, for the same unit energy coal has to be 1/2x the price just to be competitive.

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Re: Energy sector time to turn around?

Post by nedsaid » Thu Jan 18, 2018 9:15 pm

just frank wrote:
Wed Jan 17, 2018 6:03 am
nedsaid wrote:
Sat Jan 13, 2018 6:56 pm
I don't know, I had a guy come to my door wanting me to sign up for greener electricity from my local electric utility. It would cost a bit more than what I was already paying. Much of the alternative energy we have here is wind power. He should have been offering me a discount. Green energy at the consumer level is still more expensive for me.
A case in point re renewables reducing your energy costs. A utility in Colorado solicited bids recently for new generation, and got a slew of solar and wind bids, many with associated battery storage, at costs lower than the operating costs of most of CO's existing coal plants.

Dave Roberts has a nice review:
https://www.vox.com/energy-and-environm ... rgy-future

(NB: while this author frequently discusses OT 'climate issues', this article is just about renewable energy)

basically 2.1 or 3.6 cents/kWh for wind or solar plus storage, respectively. These bids all came in from private investors who wanted to build the projects to sell the power on the states commercial grid.

If we wanted to be skeptical (lets) then we would say that the price reflects current subsidies.
For wind this is 2.2 cents/kWh PTC for 10 years, so probably we should add some fraction of 2.2 cents (depending on contract length and discount rate)...maybe wind+storage is 4 cents/kWh in CO unsubsidized.
For solar, this is a 30% capital discount. IF we assume the power cost is proportional to capital, than we should multiply by 150%, so solar plus storage is maybe 5.4 cents/kWh unsubsidized.

Ned, how does that compare to the 'cost of generation' on your electricity bill? My conventional cost of generation here (in the land of cheap natural gas and deregulation, is 7.22 cents/kWh, well above the unsubsidized figures above. Maybe you should complain to your local utility that they should put out an open renewable bid, so they can reduce your bill further!

The exciting thing n this news is the storage....that makes these sources somewhat dispatchable, or at least able to moderate themselves from putting large swings onto the conventional grid (from gusty winds or scattered clouds). One skeptical thing is that the plan does not list the amount of storage. Is it 1 hour (stability), 10 hours (dispatchable) or what? I suspect the former.

Anyway, low-cost bids and projects like this have been rolling in all over the world, and in California for a couple years now. Now it is happening elsewhere in the US.
Sounds like Electric Utilities aren't a good bet either, though Warren Buffett is heavily invested. Let me check back in a couple of years to see if this renewable energy is for real. I have read the glowing reports but I am skeptical. Not everything I have seen is so optimistic. The thing is, if it all works, we will have cleaner air and water.

My understanding is that coal has a big problem with tailings, what is left over after you burn it. I remember back a few years ago, an environmental accident regarding this stuff.
A fool and his money are good for business.

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Re: Energy sector time to turn around?

Post by just frank » Thu Jan 18, 2018 9:54 pm

nedsaid wrote:
Thu Jan 18, 2018 9:15 pm
Sounds like Electric Utilities aren't a good bet either, though Warren Buffett is heavily invested. Let me check back in a couple of years to see if this renewable energy is for real. I have read the glowing reports but I am skeptical. Not everything I have seen is so optimistic. The thing is, if it all works, we will have cleaner air and water.
With the utilities it is a mixed bag. I think we will still need a grid, and that in a more distant future world where renewables provide most primary energy, it will all be electrical...so higher demand.

So, if you are tied to a bunch of uneconomic fixed generation assets...you have problems...if you are a nimble distribution company and/or invest well in new renewable technology (meaning at a good bid price, and with good tech) then you win.

Its just a good old-fashioned industry shake-up. Winners and losers, and presumably there are investment opportunities.

And I expect that there will be a 'hickup' when the subsidies come off...a rush to build right before, and a lull after.

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