Energy Outlook for the Next Decade: Part 2
Oil, Gas, Coal, Uranium, Renewables, Efficiency, Water, and Agriculture
Last week, I explored some of the big themes for the coming decade. For my final column of the year, I offer my specific outlooks for oil, natural gas, coal, renewables, uranium, efficiency, water, and agriculture.
Oil will probably spend 2010 rangebound between $60 and $75, but could fall lower if the deflationary recession persists.
As I discussed in Part 1, it will probably take until 2012-2013 for demand growth to push the current 4-5 mbpd of spare capacity back down to the 1% breaking point, but then we should see another price spike.
For reasons I have discussed previously, I'm no longer convinced that the next few cycles of oil prices will breach the $147 peak or the $33 low set in 2008. But if Cohen's diagram (see Part 1) is correct, then we should continue to expect higher highs and higher lows, with oil peaking somewhere around $160s and bottoming around the $50s in the next cycle (with an error bar of perhaps $20!).
The best way to play it will be to scale in on the descent and scale out on the ascent, rather than trying to time the tops and bottoms.
By mid-decade, I think the world will be convinced that the peak of oil is in the past, putting an end to that debate. The realization should kick off an intense round of competition to secure the remaining resources, drawing more Chinese money to Canada, Brazil, and Africa, and committing the U.S. to retaining its military foothold in the Middle East.
As much as I hate to say it, coal is poised for a long-term bull market. As oil, and then natural gas decline, the world will fall back on it as the cheapest hydrocarbon of last resort in the next decade. It will be the fallback feedstock for liquid fuels for cars, trucks, and airplanes, plastics, and industrial chemicals.
The world will groan under the CO2 output of the devil we don't know, but will choose it over the devil we do know: economic decline. Therefore I expect the better part of the coal boom to fall in the latter half of the decade, as emissions concerns are overridden by economic pressure. Coal-to-liquids, in particular, will be the recipient of heavy sponsorship from the military and aviation sectors.
The next decade outlook for natural gas is the most uncertain of all. The current glut in North America owing to the shale gas boom could be resolved in one of two ways: It will either continue through the decade, if long-term production rates are sustained at high levels, or it will crash around 2013-2014 if production falls rapidly after the initial burst of output, as some analysts believe.
There simply isn't enough data to make that call at this point, but my gut feeling is that there will be a short-term boom for the next few years, and a significant load will be shifted from diesel to CNG for transport trucks. Then supply will peter out before the end of the decade, with some ensuing panic.
Boom-and-bust cycles will characterize the North American gas market until prices stabilize above $7 per thousand cubic feet. LNG export capacity will continue to grow in the Middle East and Russia, but most of it will go to non-U.S. customers, and the North American market will remain largely domestic.
As a spate of recent news reports have recognized, the global uranium supply is running low. We've nearly worked through the stockpile of uranium from retired nuclear weapons, and the quality and availability of fresh ores to mine is falling. As I do not see any significant momentum toward next generation reactor designs, I believe light water reactors will continue to dominate the nuclear sector, which means another decade of high demand for uranium.
While uranium supply peaks or declines, demand will continue to increase as new reactors are built, particularly in China and India. Nuclear power will not add a significant amount of primary energy to the global mix, but uranium will be a hot commodity. It will see at least one, and maybe two boom-and-bust cycles in the next decade.
One no-brainer investment in this sector would be Cameco Corporation (NYSE: CCJ). They've been making good progress lately and I think they will succeed in pumping the water out of their Cigar Lake mine and putting it back into action.
The whole uranium producer group should be a long-term hold for the decade.
At this point, I can't really think of any reason to be bearish about agriculture. Fertilizer and grains will be hot throughout the decade as we try to feed the world's growing population and combat the decline of oil with biofuels.
The added pressure will only exacerbate the problems inherent in commercial agriculture, accelerating the boom in organic and local food production.
The encroaching desertification of California — along with price spikes in oil — will make it increasingly difficult to export its produce to the Midwest and East Coast (unless by some miracle we get very serious, very quickly about rail in this country). This will have wide-ranging and very long-term implications for U.S. food supply.
GMOs designed for drought tolerance and water efficiency plays in the ag sector will figure prominently. Both technologies will probably see a frantic investment bubble this decade. How long they can hold back the tide of climate change and desertification will remain an open question in the ‘10s.
The long-term trend for agriculture is much easier to identify. By the end of the century, nearly all of our food supply will have to be relocalized. Those who are paying attention, however, will realize it by the end of this decade.
Accordingly, farmland will continue to be a hot market throughout the decade, particularly in Africa, Asia, Central and South America, and possibly Canada.
Water will be one of the biggest investment areas — and socially speaking, one of the biggest pressure points — of the next decade, due to climate change and simple population overshoot.
This month brought three fresh examples of the issues we're facing:
- In a classic case of the energy-water nexus, the long-running drought in South America has reduced Venezuela's hydropower supply enough to force them to cut back on oil refining activity, with the end result that they'll have less heating oil to send to places like China this winter. China will make up the loss by burning more coal.
- Much of East Africa received only 5% of its normal rainfall in November, putting millions of people at risk of starvation.
- A new report found that the aquifers supporting the Central Valley of California, a region that produces 8% of the U.S. food supply, have lost more than 30 cubic kilometers of water (about 8 trillion gallons) since 2003 due to drought, reduced water exports from the Sacramento Delta, and too much groundwater pumping.
Water desalination and purification have long been a major investment focus in the Middle East, but the American Southwest, Australia, Africa, and South America will join them this decade as new markets in desperate need of solutions. Technologies running the gamut from personal water treatment to city-scale water desalination will benefit from this potentially enormous market.
Efficiency is by far the low-hanging fruit in our declining energy future, and this will be the Decade of Efficiency. Consider this simple metric: It takes $4-$5 in solar PV to generate the same amount of energy that $1 in insulation measures will save.
Cash for Clunkers and Cash for Caulkers were only the beginning of a long decade of incentives for higher efficiency. Not just cars and buildings... but appliances, combined heat and power applications, district heating from co-located waste heat generators, and dozens of other approaches will be vigorously pursued. By the end of the decade, I expect the efficiency of U.S. appliances and vehicles to approach what Europe enjoys today.
The largest niche in efficiency will be retrofitting homes with insulation, caulking, windows, and solar generation. Small businesses doing energy auditing and building efficiency upgrades — like San Francisco's Recurve, who have figured out how to scale their businesses — will be home runs. By the end of the decade, I also expect building efficiency, good passive solar design, and low water use to be mandatory elements of architectural college curricula.
Building the smart grid will be a top priority for this decade, along with at least the first part of a long-distance national HVDC grid. Not only will it enable the growth of renewable power, but it will be a saving grace in helping us cut the waste and make the most of our existing grid power supply.
Renewable energy is still at the beginning of at least a 30-year secular bull market, and the decline of fossil fuels means the sky's the limit for its growth outlook. I doubt that we'll see again in our lifetimes the kind of growth that will happen in this next decade. I'm talking a once-in-a-century bull market here.
Solar and wind will continue to be the dominant technologies and receive strong investment, led by China and a few other projects like Masdar City and then moving into widespread adoption in the U.S. and the unsolarized parts of Europe (France, I'm looking at you!) by the end of the decade.
The intermittency problem of wind and solar will be largely solved this decade, as new storage solutions come to market. Hundreds (perhaps thousands) of companies, small and large, have been working on a whole array of approaches to the problem, and I expect a few winners to emerge this decade. My bet that that a combination of vehicle-to-grid technology, flywheel storage, and large battery arrays or ultra capacitors will be the early winners. But there are many others, including stationary micro- or nano-scale hydrogen storage (but not hydrogen vehicles), pumped water, and compressed air.
If regulatory and financing hurdles can be overcome — and I think they can in the next ten years — concentrating solar power (CSP) also holds enormous potential for cracking the storage problem at grid scale in solar-rich regions.
As high as my long-term hopes for it have been, I reluctantly conclude that the geothermal sector will continue to see sluggish growth for at least the first half of the decade, due the difficulty of raising financing, regulatory, and underwriting hurdles and technical issues.
Uncertainty over whether "enhanced geothermal" (deep, hot rock) projects cause earthquakes has shut down two major projects this month. The AltaRock Energy project north of the Geysers in California — the first major test of enhanced geothermal in the U.S. — was terminated immediately after another major project in Basel, Switzerland, was permanently shut down in response to a government study showing it was responsible for damaging earthquakes in 2006 and 2007.
Likewise, it appears marine energy technologies are still lacking the research and development support they need to reach commercial viability. I do expect at least one or two of them to get there by the end of the decade, but I don't see them taking much market share.
The list of x-factors that could utterly change the outline I've offered here is so long that it questions the wisdom of even trying to attempt a decade-long outlook. Disease, war, natural disasters, monetary policy, drought and climate change, geopolitics, sovereign default, energy failures... you name it, it's in the mix.
The one constant we can be sure of is human nature. I'm digging into some ancient history in search of clues to the future, and I suggest that you do, too.
As we teeter on the peak of the biggest wealth bubble in human history and stare into the abyss, we would do well to learn the lessons of the past. Ours will not be the first empire to crumble, and there is nothing new about how or why it will happen. The only difference is the distance we have to fall.
It's been a tough year and a wild decade, and I'm sure most of you will be happy to put it behind us. The next decade will be considerably harder, but it will force us to rethink our values and chart a more sustainable course into the future, as well as present some of the greatest wealth-making opportunities of all time.
For example, my colleagues Sam Hopkins and Nick Hodge are venturing out into emerging markets like Peru, China, and Morocco to find clean energy investments that will allow developing countries to leapfrog carbon-intense, rich-world energy habits. And as they report from the field, subscribers to their Green Chip International stock recommendation service will benefit.
Again, my mind is drawn back to Dickens' critique of the British aristocracy in light of the French Revolution. The coming decade, as then, could be the best of times, it could be the worst of times.
One thing is guaranteed: It will not lack for excitement.
Until next time,
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