Mailbag: Bear Trader: Energy: Coal Gassification clarified

Observer wrote to Bear Trader:

Recently I came upon an article about the gassification of oil, and it appears there is a new plant that can do this. I wonder about how this would stack up in your analysis of energy efficiency. Warren Buffett is betting big bucks on the Great Northern Railway, and there has been strong movement or support in coal stocks or MLP in coal and natural resources---I wonder if coal is moving to the forefront, as corn, wind, and sun appear not to have the numbers come out for a decent return. What is your analysis??

Bear Trader Wrote:



Coal gasification, natural gas, oil, coal, coal derived liquids, nuclear, and all of the green "renewable" delusions have to be individually analyzed because over time they are all fungible.

"Fungible?" you ask. Indeed. The chemistry of "synthetic" production of hydrocarbons has been well understood for a hundred years. No real improvement can be expected over the Fischer-Tropsch synthesis used by the Third Reich seventy years ago and by Sasol today (Sasol makes gas and oil from coal and at other locations makes liquid hydrocarbons from natural gas. The process used is the same, differing only in details related to feedstocks.) So, you can make gas, oil, and coal interchangeably from gas, oil, or coal.

Current state of natural gas:

Gas well output in relatively impermeable geologic strata (the gas has to flow through the pores in the rock to get to the well bottom; there is a lot of gas in rock that doesn't flow enough gas to pay for the drilling) has been improved by forcing extreme pressure oil down the well (20 to 100 Tons per square inch). The rock breaks along sedimentary layers, oil creeps along these cracks, forcing them further open. This is an expensive process.

Lots of natural gas drillers put this brand new, just available tech into effect in 2008 as natural gas rose to $13.50. This resulted in massive increase in natural gas supply as these new wells came on line at nearly all the same time. The well drillers had to sell the gas for whatever they could get to keep the banks from taking everything, and now the natural gas price is about $5.75. The thing to remember here is that this deep rock hydraulic fracturing technology cannot break even with $5.75 gas; more like $10.00. One must realize that these wells won't flow for very long without a lot more hydraulic fracturing being done on them, and that won't last all that long either, since these wells simply have less natural gas per unit of ground area than we are used to. New wells will have to be drilled more often and over a larger area to maintain a constant output. Expensive.

So, I think Wall Street is wrong, and will be surprised by a sooner than expected rise in natural gas prices. Perhaps the equilibrium price is double the present price. Perhaps the peak will be three times. This assumes a continuation of the present U-6 unemployment rate of 18%. If times are better demand will be higher and so will peak prices.

Current situation of oil:

The most important factor is East Asia and other emerging markets. They have been exporting increasingly heavily in recent years, have more dollars, and more dollars to spend as a result, so being "more wealthy" in dollars means they find oil less expensive over time compared to us here in the USA. As a result their increase in oil consumption as a percentage over time is something like two or three times the USA - and I am including Uganda, Somalia, et al., in my calculations. Remember that China buys more cars every year than does the USA, and that China and India combined buy more than the G-7. Oil consumption is rising inevitably. Reserves coming on line are increasingly difficult to produce, under miles of ocean and rock, in the Arctic, and in the most extravagantly politically unstable places (notice how the Chinese deal with this in the Sudan).

The USA will have less and less influence over oil prices as both pricing and political power wane. The next upswing in oil prices will simply have to be lived with. Currently oil is about $80, Coby-Lamson thinks there will be a downswing followed by $100 / barrel next year. Could easily be. That's about $3.40 / gallon.

Nuclear: Cannot be increased rapidly. Lots of political opposition, rather mindless, Yahoo sort. (Swift, of course.)

Renewables: When output, initial cost, and maintenance cost are figured in, including grid improvements, (the necessary "smart grid" will become obsolete about every five - seven years due to technological change) simply cost more in fossil and nuclear energy (and human) than they replace. The only exception is properly done satellite solar power (which both Japan and China are working on seriously. Nero fiddles while Rome burns.)

Getting into Warren Buffet's head:

The purchase of the Burlington Northern - Sante Fe Railroad is a much bigger deal than just controlling northern tier coal. It means Buffet combined with the Union Pacific, controls trans-continental shipping. Chew on that one for a while. Not likely you will see price wars from those two.

The Word on the Street is that Buffet is going to take Goldman-Sachs private in 2010. See

http://blogs.barrons.com/stockstowatchtoday/2009/12/21/doug-kass-2010-predictions-goldman-goes-private-buffett-steps-down-and-tigers-back/

(Kass sees Israel making attack on Iranian nuclear weapon project sites by summer, causing heavy shock to USA economy; in this case I personally expect Iran to try to block Straits of Hormuz, that the US Navy gets involved with a large chance of loss of major US Navy ships. Certainly Ahmadinejad is figuring to try, and has had decades to put multiple plans in place. Real war. Maybe a few nuked cities here in the USA, certainly threats thereof.)

Remember that Enron and Goldman are/were big fans of "cap and trade", figuring to make hundreds and hundreds of billions profit a year trading CO2 rights. Now Goldman should emerge the game-controlling player in cap-and-trade. Buffet figures to make money on coal and coal cap-and-trade financial operations at the same time. After all, the use of coal is going to increase over time, and sizably, unless the politicians are willing to go to rotating blackouts. Electricity, because of cap-and-trade more than any other factor, will increase in price two to four times (in constant dollars) in the next five to ten years. Buffet will make an absolute fortune, just immense, maybe the first trillionaire if he lives so long.