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Energy Costs and Energy Policy: Advantage USA

A recent poll indicated that less than one-quarter of Americans think the country is headed on the right track, among the lowest readings in recent memory.

To be sure, the US faces numerous headwinds, and US economic policy is open to a number of valid criticisms. As an American, I cringe at the state of the nation's public finances, the size of our national debt and the eroding value of the US dollar.

But when it comes to energy, the US is in a far stronger position than almost any other major industrialized power. The US economy is relatively sheltered from rising energy prices and has a comparatively benign domestic energy policy, at least for now.

US Advantage: (Relatively) Cheap Energy

Americans spend a lot of time complaining about gasoline prices approaching $4 per gallon, which means that readers frequently ask what impact $4 or $5 per gallon gasoline will have on the nation's economy. Every investor has also seen the statistics about how much money the US spends on importing oil and other energy commodities from abroad.

But a graph of oil prices doesn't capture the full energy costs borne by a country; households consume more than just gasoline and oil. In the US, only about 35 percent of primary energy consumed comes from oil; coal (23 percent), natural gas (20 percent) and nuclear power (8 percent) also figure into the energy mix. Changes in the price of gas and coal can have profound effects on the cost pressures consumers experience.

As of the end of 2010, US energy use amounted to slightly less than 9 percent of GDP. That's roughly one full percentage point below the average cost of energy in 2008, when crude oil prices approached $150 per barrel and natural gas exceeded $13 per million British thermal units ( BTU ).

The situation is much worse in most countries, which also face higher prices but lack access to inexpensive coal, natural gas and electricity.

US Advantage: The Shale Revolution

The US is the world's largest producer of natural gas, producing almost as much natural gas as the entire Middle East and Africa combined. This resource wealth stems largely from the development and commercialization of a number of unconventional shale gas fields such as the Haynesville Shale of Louisiana and the Marcellus Shale in Appalachia. In fact, the Haynesville is now the largest gas field in the US, overtaking the Barnett Shale in early 2011.

With the US producing all-time record quantities of gas, the oversupply has depressed prices. The US has no real need to import natural gas in the form of liquefied natural gas ( LNG ). In fact, the country is regarded as a market of last resort for LNG cargoes because North America has more capacity to store gas than most other gas-consuming regions of the world. In total, the US imports less than 10 percent of the gas it consumes, with virtually all of those imports coming from Canada.

In North America, natural gas costs less than one-quarter what oil costs on an energy-equivalent basis. The gas-to-oil price ratio is currently hovering near all-time lows.

Compare that to other major economies around the world. In Europe the largest single source of gas imports is Russia, and most contracts with Russia are so called take-or-pay deals indexed to crude oil prices. European utilities must accept delivery of a contracted volume of gas or pay a penalty; with European gas markets well supplied in recent years, these penalties have grown significantly. With oil prices on the rise, natural gas prices in the contracts could jump to between USD13 and USD15 per million BTUs from USD8 in late 2010.

As a result, European gas buyers are accepting as little natural gas as possible under the contracts they've signed with Russia and are seeking to procure supplies from elsewhere in the form of liquefied natural gas ( LNG ), a super-cooled and compressed form of natural gas suitable for transport by ship.

The recent tragic earthquake in Japan likely will push up demand for LNG; Japan imports all of its natural gas in the form of LNG. Germany will also need to import gas to offset the loss of electricity output from the seven reactors it closed in the wake of the Fukushima accident.

LNG is a top new theme in The Energy Strategist and a major beneficiary of the shift in global energy consumption in the wake of the tragic earthquake in Japan. We just added a company that's a world leader in the production, transport and supply of LNG to the newsletter's model Portfolio. For more details, readers can check out the March 23, 2011, issue The Fallout by signing up for a risk-free trial subscription to The Energy Strategist .

US Advantage: The Saudi Arabia of Natural Gas Liquids

NGLs may not receive as much media attention as crude oil or natural gas, but they're vital energy commodities. When NGL prices are low, producers leave some NGLs in the natural gas stream to be burned with methane--a common practice for ethane the most prevalent and lowest-price NGL. But NGL prices are elevated by historical standards, while natural gas prices remain depressed. In this environment, producers maximize returns by removing the NGLs from the raw natural gas and selling each component separately.

The US shale gas revolution is also a boon for NGL supply; many of the most promising US gas shale fields are rich-gas fields that also contain large quantities of NGLs.

The increased availability of NGLs enables US petrochemical producer to better compete with international companies on price.

Some of my favorite plays in the US NGLs market are master limited partnerships ( MLP ) involved in processing gas to produce NGLs, transporting NGLs or storing NGLs. Most of the MLPs that Roger Conrad and I cover in MLP Profits offer yields in the 5 to 8 percent range

US Advantage: Low Oil Import Share

Before you laugh, consider that the US is the third-largest oil producer in the world, trailing only Saudi Arabia and Russia. The US produces over 7 million barrels per day, more oil than all of South America combined. And US oil production has actually increased over the past couple of years.

The US produces about 40 percent of the oil it uses domestically, roughly the same share as China. But there are two big differences between the US and China when it comes to oil: US oil production is on the rise, while Chinese oil consumption continues to grow at a much faster pace than US demand. Over time, China's dependence on oil imports will increase; the US imports will either stay roughly the same or decline.

The moratorium on deepwater drilling in the Gulf of Mexico was officially lifted late in 2010, but the government has only recently started issuing actual new drilling permits. It will take time for activity to ramp up, and the delay has hampered US oil production.

Nevertheless, offsetting production from other sources should ensure that US oil output increases slightly while deepwater drilling recovers.

As I showed in US Shale Oil Plays , shale oil is a big part of this story. Prospective investors should note the huge difference between oil shale and oil produced from shale reservoirs, often called shale oil. See the article, Oil Shale versus Shale Oil , which I wrote for Investing Daily , for a more detailed explanation of the two.

US Advantage: Renewable Energy Policy

Commentators frequently complain that the US is falling behind the rest of the world in alternative energy technology and needs to invest more. Some cite Germany as an example of a country with a good approach to energy policy.

That's pure rubbish. If the German experience is any indication, falling behind in alternative-energy technology is a good thing. Alternative energies such as solar and wind power may be popular investment stories from time to time, but they're hopelessly overhyped and overrated by politicians and investors alike. The glowing media coverage they receive doesn't reflect their value as energy sources or their utility in terms of reducing global pollution emissions.

Germany subsidizes solar, wind and other renewables using a feed-in tariff (FiT) structure. These subsidies guarantee that solar and wind power producers will earn an above-market tariff for any electricity they produce and sell to the grid. The structure was set up under Germany's Erneuerbare-Energien-Gesetz (EEG), or Renewable Energy Act, passed in 2000 and revised on a few subsequent occasions.

EEG fees started out small but are expected to explode over the next few years, largely because of rapid growth in German solar electricity capacity. Solar power installations earn a high FiT because the technology is many times more expensive than most other source of power and would never be built if it weren't subsidized. And despite the big jump in capacity built, solar power still generates less than 1 percent of the country's electricity.

As these high FiT rates are guaranteed for 20 years, this spate solar construction sets up two decades worth of ever-rising EEG fees--fees that are ultimately passed on to the German consumer in the form of higher electricity rates. For the record, Germany's electricity rates, already the second-highest in Europe, are roughly $0.36 per kilowatt-hour (kwh), compared to an average closer to $0.08 to $0.09 per kwh in the US.

Meanwhile, Germany's recent decision to shut down seven of its 17 nuclear reactors will spell greater demand for coal and natural gas. That spells more emissions of sulfur dioxide, nitrous oxide and carbon dioxide.

Many Americans complain that the US lacks a cohesive energy policy. That may be true. But no policy trumps an ill-conceived, expensive policy.

Elliott Gueis the co-editor of The Energy Strategist and is a regular contributor onInvesting Daily. For more on how Elliott is playing the global energy markets, sign up for a complimentary subscription to The Energy Letter along with a free copy of his latest report on Investing in Uranium

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Article Republished with permission from www.KCIinvesting.com and www.rukeyser.com


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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