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Wednesday, March 17, 2010

Oil at $25 per Barrel? A Bull market in Coal? Are these things possible?

Oil BarrelImage by yuan2003 via Flickr

What if oil went to $25 per barrel, and stayed at that price for decades?(see- New Technology)

What if the price of natural gas dropped 50%?(see-increased supply)

What would these two events do to the economic outlook of North America, and the world, for the next 50 years?
Are thes
e events even possible?
Are they likely?
Are they "pie in the sky" theories?

In a recent article ( see World changing technology ) we discussed a new, technological breakthrough, by a small California Company, Carbon Sciences, which may allow large emitters of CO2 to not only capture it, but turn the CO2 into gasoline.

Now researchers at the University of Texas at Arlington (UTA) have claimed that they can produce a synthetic crude oil, directly from coal (of which the United States and Canada hold almost 50% of the World's supply) for just over $28 per barrel and they intend to bring that price down.

As if that announcement wasn't eye opening enough, they claim that they can do this with no measurable pollution result. Researchers also state that the process will work just as well with oil sands and shale deposits. As if that isn't enough to get investors attention, they advise that, although it can be refined in traditional refineries, this synthetic oil is best refined in micro refineries which can be built for 25% of the cost of today's refineries. The United States Government has already approved construction of one such micro refinery to test the UTA Lab's breakthrough technology.

The coal being used is one of the cheapest, Lignite, which is found in abundance in Texas and around North America. Texas lignite coal sells for $18 per tonne. The coal conversion technology uses one tonne of coal to produce 1.5 barrels of crude oil. One barrel of crude produces 42 U.S. gallons of gasoline. In other words, $18 worth of coal yields 63 gallons of gasoline: 0.28 cents per gallon! In other words, if this technology proves out, both the USA and Canada (as well as many other democracies around the world which have abundant supplies of coal, will own centuries worth of cheap energy, and become net exporters of that energy!

Without having first hand knowledge, I will wager here, that the oil industry has a big stake in this technology and who better to develop such innovation than the deep pocketed U.S. oil companies. It is in their financial interests to keep the good ole US of A hooked on it's product(s). As both China and India grow their middle class, energy production needs to use every resource.

As Natural Gas companies ramp up production from traditional finds as well as giant shale deposits which exist all over North America, the price of that resource continues to drop. North America has the largest deposits of Natural gas in the world today, and that resource alone could power North America for hundreds of years.!

So how do we, as investors, digest this new information and how can we make it work for our portfolio's?

In the short term, until new technologies are accepted and come on stream, the price of oil will creep up as this shaky recovery takes shape. However, as these technologies get proven and are adopted large scale, the price of oil could sink dramatically (still several years out). If oil can be produced from a cheap, abundant supply of coal, on shore in North America, without damaging the environment, then the whole dynamic changes. I'm not an economist, however here are some possibilities that come to mind:

1. Coal mining would intensify throughout North America, creating blue collar jobs in small communities currently devastated by the economic down turn, with the resultant economic spin offs to equipment suppliers and construction companies, to those mining companies.

2. A new boom in refinery construction would also create hard hat, engineering and tech jobs, as well as create the same sort of spin offs to suppliers.

2. Oil sands production will halt, because you cannot dig bitumen for processing at $25 per barrel. (Even though the UTA process works on bitumen as well as coal)

3. Investments in OPEC oil resources would be severely tested as demand from it's largest customer, the USA, begins to drop dramatically.

4. As more power plants can be built using cheap oil and Natural gas (as well as nuclear and wind energy), the demand for Electric Vehicles (EVs) will grow, along with the demand for Lithium which will be used to store energy.( A contrarian argument can be made here for the growth of Hybrid vehicles instead of electric, because of cheaper gasoline.

5. Shipping oil via tankers may drop significantly.

6. Railways will be winners as coal and natty gas are shipped throughout North America and more petroleum based products are again made on this continent and shipped trans continent. (Warren Buffet you old investor you!)

7. The usd will continue to slide, until these events begin to unfold, at which time it will strengthen once again.

8. Industry will return, at least in some form, to North American communities powered by cheap energy.

9. Huge, energy market speculators, like JP Morgan, will no longer be able to hold the American consumer hostage by holding tankers full of oil offshore and spiking the price so they can sell into the inflated market.

10. New Fuel Cell Stack, Power plants powered by plentiful natural gas will be built, reducing co2 emissions, and helping to "electrify" the transportation industry along with Wind Energy.

These are only some of the possible outcomes, and I am sure that more learned readers than I can come up with a myriad of possibilities. No matter how you slice it, if these technologies take hold, along with the Fuel Cell industry, the Lithium boom , Wind energy and Solar, and the advent of the Electric car, the economic outlook for this continent will brighten once again, as we lead the world in production and possibilities.

More: A Eureka moment at Texas University - The Globe and Mail

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