By Dan Denning

“Consider a world like this, so different from the ordered one of a fraction of a second earlier, where the solid infrastructure of carbon and hydrogen atoms was arranged in an elegant lattice, then blown to pieces. In a cataclysmic instant, what was stable is reactive — electrons flash in and out of existence, molecules in the vapor are chopped apart or broken in half. Hydrogen atoms convert to water vapor, further heating the gasses instead of quenching the heat; stable molecules ‘crack’ as temperatures reach 1,200-1,400 degrees Celsius. More oxygen-charged air rushes into the vacuum, and we watch the flame build.”

– Joe Jackson, A World on Fire

“I would like to live long enough to see the effects of global warming. I’ve got an inside tip that it’s all a load of crap!”

– Homer Simpson

The quote above is from a book I picked up late last summer in Colorado about the “discovery” of oxygen by Joseph Priestly and Antoine Lavoisier. Both men isolated oxygen as the “currency” in life’s “basic economy”; or as author Joe Jackson puts it, “Each single breath sparks a slow combustion, the essential burning that provides the heat needed to keep us alive.”

What oxygen is to the body, energy is to the economy. That’s why current debates about how much energy we have left locked in fossil fuels are so important. Can we find more? Can we use it more efficiently and lengthen our lease on energy-intensive industrial life? Or clearing my throat here, are we on the verge of another great enlightenment in the physical sciences, the edge of epic breakthroughs, none greater than the discovery of some new and plentiful source of energy that does not force us to abandon the economy and the institutions that have sprung up around the oil age?

We’ll find out. Ben Franklin – a pretty nifty innovator himself – personified the spirit of the age. Franklin wrote that he “was born too soon.” Of scientific progress, he wrote, “It is impossible to imagine the heights to which it may be carried…the power of mind over matter.”

That’s what it’s really come down to, hasn’t it? Will innovation triumph over the physical realities of more expensive energy? You may have read John Mauldin’s letter this weekend quoting the work of Peter Huber and Mark Mills. Huber and Mills talk about “The Bottomless Well” of energy. I’m always grateful when John reviews a book, because it saves me the trouble of having to read it.

According to John, Huber and Mills are the leading voices of the “innovation will save us crowd.” They make some interesting points, too…namely, that improvements in the efficiency of heat engines (internal combustion) are achievable. However, by their own admission, increased efficiency actually leads to more energy use, not less. This creates a problem and an opportunity, as I’ll show in a moment.

But there appears to be one glaring omission to their argument. It’s this: Electricity does not generate itself. For large economies, that means use of hydrocarbons, or, in some distant Hollywood/DARPA future, an economy based on uranium.

As an investor, the technology lead is to investigate and invest in the companies making more efficient heat engines, especially diesel. But the story doesn’t end with greater efficiencies and new technologies. Remember, increased efficiency leads to greater resource demand, not less. Let’s follow the logic through that more efficient engines lead to greater demand for electricity.

It means greater reliance on fossil fuels for power generation, doesn’t it? After all, most electricity generation comes from natural gas and coal, with hydroelectric and nuclear chipping in. Even if Huber and Mills are right about the advent of more efficient cars powered by electricity, they are still, indirectly, arguing for fossil fuels. Where else will electric power come from?

Huber and Mills suggest that the largest costs in electric power generation are not the fuel, but the capital infrastructure and distribution. Yet by their own math, raw fuel accounts for half the cost of electric power generation with natural gas and one-third with coal.

Let me ask you a question. If natural gas is a depleting resource (as our own Department of Energy admits), then using natural gas as the basis of future electric generation is a sucker’s bet. Your chief fuel input becomes a larger and larger percentage of the total cost as gas gets more expensive. Perhaps this is why so few new natural gas-fired plants are being built…and why the Army Corps of Engineers and the Department of Energy see a huge increase in coal-fired electric production, and a decrease in gas-fired.

Won’t the price of coal go up as it becomes the dominant source of electric power generation in the West, and in China, and in India? Although bituminous coal has fewer BTUs than anthracite coal, it is, at least in the Western United States, much closer to the surface. That means you can use big machines to scrape it out, instead of thousands of unionized workers.

I suppose that more capital investment in coal might eventually lower the price of coal. But a lot of that depends on what other uses we can find for coal. We know it will take on (or resume) its leading role in electric power generation. But with gasification and liquefaction…it may begin to take on some of oil’s role in fueling transportation, which accounts for a huge chunk of American energy use.

Coal is versatile like that. In fact, I’d venture to say it’s the most versatile of the hydrocarbons left in abundance – except, of course, for oil. But coal we have. Oil we don’t. I vote for coal. After drilling in the Outer Continental Shelf, increased coal production is the next phase of America’s Last Great Energy Boom.