The Story of Energy

What would the world do without energy? Computer access would be virtually impossible; businesses would shut down – life, as we know it, would come to a standstill. Addison Wiggin explores the options that the U.S. has to make sure an energy crisis of those proportions will never come to light…

The story of energy is the story of survival…

First came fire. Then oxen pulling plows. Sun converted crops to food energy. Water and wind energy churned mills. Milled grain fed more oxen and horses. The horses pulled more plows.

The story of energy is the story of civilization…

First it was just wood, dried dung and straw that put heat in our homes. Then we had coal and furnaces. Coal made steam – steam powered factories, trains and boats. It turned turbines, which gave us electricity.

The story of energy is the story of wealth and power…

Coal energy also turned iron into steel. Steel gave us skyscrapers. We turned on the lights and then cooled them with air conditioners. Overtime at the office became possible. Power lines built suburbs. Electricity cooled delivery trucks, warehouses and supermarkets. It kept the ice cream cold in our freezers.

World Demand for Coal: Without Energy . . .

Without energy, England never would have had its Industrial Revolution. America wouldn’t be breadbasket to the world. And there would be no tech revolution. No Internet. And no television.

Texas oil barons, industrial tycoons and Arab sheiks all made their fortunes on the back of the world’s power resources. So did carmakers and military contractors, the phone companies and computer companies, Bill Gates and Microsoft. Even Warren Buffett, who does his math with a paper and pencil, makes his money investing in companies that need ready access to power to survive.

Some experts even say that if you cut the average energy consumption per person to 1,600 kilowatts per year, life expectancy is cut in half – to 36.5 years.

With the world population adding 250,000 new people every day…or 1 million new people every four days…even the minimum amount of electricity needed to sustain an exploding population is a heck of a lot of juice. No energy crisis is more critical to a society than one in which the lights go out.

Over 95% of the demand for coal over the next three decades will come from the electricity market. And China and India will be responsible for 70% of that new demand.

That’s great news for the United States. And for China, Australia and Canada, where you’ll find most of the world’s untapped coal reserves. There’s enough coal just in the known reserves to burn – at current rates – for another 300 years.

And all of it is miles away from the volatile Middle East.

In North America alone, we’ve got 254 billion tons of proven coal reserves – more than 25% of the world total (compare that to Saudi Arabia, with 24% of the world’s oil).

World Demand for Coal: The Problems with Coal

But there are a few problems with coal.

One problem is that it doesn’t burn clean. When England was the center of the Industrial Revolution, coal fueled the steam engines. The sky was black with soot. A layer of smog blanketed the streets.

In China, coal fires the power plants. China gets 70% of its electricity from coal-fueled power plants. Since China has lots of coal, it only makes sense.

But having coal isn’t the problem. Burning it is.

With three-quarters of China’s 400,000 megawatts of installed electrical power capacity coming from coal, China’s skies are also turning black with coal smoke. Seven of the world’s ten most polluted cities are in China. Acid rain is a serious problem.

But this isn’t just a problem for the tree-huggers. China needs to keep a steady flow of foreign investment money pouring in. With the pollution problem, it risks losing a lot of that money.

World Demand for Coal: Clean-Coal Technology

So Chinese and U.S. companies are both making huge leaps with clean-coal technology. It’s coal, but reprocessed in different ways to burn clean. With so much coal in the ground…every breakthrough in clean-coal technology could be worth billions to energy investors.

One of the ways to burn coal cleanly that’s getting a lot of attention is called coal liquefaction, or liquid coal. The coal gets crushed into tiny particles, mixed with hydrogen and certain liquids and comes out as synthetic oil that burns much cleaner than regular coal.

Almost any coal-burning power plant can also burn oil. But liquid coal is also getting a lot of attention for another reason…

Dry coal is hard to transport. You can move it in trucks. You can move it on trains and barges. You can even do it by conveyor belt. But one thing you cannot do is move it through a pipeline.

Most of China’s huge stash of raw coal is in the North. But most of China’s big factories and economic centers are in the South, where there is no coal. And the train system in China can only move a little less than half of all the coal that needs to be shipped!

Even though there’s plenty of coal in the North to burn, the South has to actually import coal from other countries. But once coal can be liquefied cheaply and fed through pipelines that will change.

Right now, the cost of getting a barrel of coal or coal oil ranges between $22 and $28 dollars. That may be a lot more than the Saudis pay to get their oil out of the ground. But with regular oil selling above $50 a barrel – suddenly, liquid coal looks like a bargain!

The Chinese plan to replace 10% of their oil imports with liquid coal by 2013. And it will also have huge advantages for running power plants that Chinese trains and trucks can’t get to as easily or regularly.

Liquid coal has huge appeal outside China, too. Over the last 12 months, energy companies in the United States announced plans to build over $100 billion worth of new coal-fired power plants. And U.S. coal production is about to hit a record 1.2 billion tons…with Peabody Energy Corp., America’s biggest coal producer, promising to double its production by 2010.


Addison Wiggin
for The Daily Reckoning

April 26, 2005 — Ouzilly, France

P.S. Liquid coal will play a huge role in the future of China, the United States and India. And you could make a fortune on the right investments.

Addison Wiggin is the editorial director and publisher of The Daily Reckoning. Mr. Wiggin is also the author, with Bill Bonner, of the international bestseller Financial Reckoning Day and a frequent guest on national radio and television programs. Look for the sequel to Financial Reckoning Day – Empire of Debt – in October 2005.

"If you can fog a mirror, you can get a home loan," said mortgage analyst to the LA Times.

In the past, being able to fog a mirror was a necessary requirement for credit. Only now has it become sufficient. If the present trend continues, soon lenders will not even bother to hold up the mirror.

Of course, here at The Daily Reckoning we have such open minds. We don’t see any particular reason why the dead should be denied mortgage credit; they would probably be at least as of a good risk as much of the living population. Maybe better. At least there is no chance of the dead skipping town…living their house a wreck when they do.

We are, obviously, on the cutting edge of new developments in the credit industry. But judging from the ads accompanying yesterday’s article on CNNMoney, we are not far in the lead.

"Borrow up to $250,000," says the advertisement. "Less than perfect credit is OK…No income verification…No Home Equity requirement…24-hour approval."

You will probably want us to divulge the name of the advertiser, won’t you dear reader? So you can immediately call them up…and, using the name of your neighbor’s pet dog, get them to send you their "Platinum Equity Card." But we will keep silent. If you want to take advantage of these poor dopes, you will have to find them yourself.

At home, as abroad, the problem must be the same one that Ben Bernanke described: a glut of savings. People must have so much money saved up that they are looking for ways to get rid of it. Thank God for the American consumer. No matter how much Asians save, the schmucks in North America happily take it and ask for more. If a man can breathe, he can borrow.

Asians lend to their bankers. Their bankers lend to U.S. institutional borrowers – notably the U.S. Treasury. The easy money from abroad encourages low interest rates in the United States…so low that large borrowers can get money at rates barely above inflation. They can then lend it out to smaller borrowers at slightly higher rates. Throughout the system, the glut of savings from Asia…and the not-completely-coincidental low-lending rates of the U.S. Fed…drive down both the cost of credit and the return on it. Even the highest yielding money funds pay less than 3%, and borrowers whose only asset shows up on a mirror or a window pane can take out enough money to buy a new house.

We can’t help but think there is disappointment built into this delightful show. We suspect it comes near the end. As we explained the other day, it is all very well that the world financial system matches up borrowers with lenders, but the matchmaking really only works if it produces satisfying results. If you match a princess with a frog…and the poor girl bends down to give the animal a smooch, something remarkable better happen, or there will be regrets. Reproaches. Maybe lawsuits.

Just as a traveler is never really sure he’s had a good trip until he gets home, you never know if a loan is a good one or a bad one until the money makes its way back to the lender. That is where the disappointment is likely to come.

"Are lenders too lenient?" asks CNNMoney. We will know when the money gets ready for the return portion of the trip. Our guess is that not as much will make it home as people expected.

Almost one in four of the houses bought last year were second homes…or investment houses. Also last year, the amount owned in home equity lines soared 42% last year, and the median down payment slipped from 6% in ’03 to only 3%.

"The boom in interest-only loans – nearly half the state’s home buyers used them last year, up from virtually none in 2001 – is the engine behind California’s surging home prices," says the LA Times. Which means that there are many households in California that watch interest rates carefully. Even a small increase forces spending cuts in other parts of the family budget.

Meanwhile, cometh this lament from BusinessWeek:

"Credit-card rules that raise minimum monthly payments could hurt banks and debt-burdened consumers alike

"Like a lot of Americans, Robert and Jill Proctor of Kansas City, Kan., are getting hammered by credit-card debt. When Robert lost his job two years ago, the thirtysomething couple ran up $35,000 on 10 different cards just to pay everyday expenses like groceries and gas. Even after Robert found work last year as a country club manager, their combined income just covers monthly outlays for two cars, a mortgage, and credit-card bills on top of household expenses.

"Says Robert, who makes minimum payments on the cards with the biggest balances as he struggles to pay off the smaller ones first: ‘If they tack on more charges, we’ll be stuck.’

"That’s just what’s about to happen. Because of a crackdown by the Office of the Comptroller of the Currency (OCC), most banks and credit-card issuers will ratchet up required minimum monthly payments over the next 12 months or so. In the future, the payments must cover all fees and interest and pay down at least some of the outstanding borrowing."

The Proctor’s can still fog mirrors. But will they be able to pay their bills?

More news, from our team at The Rude Awakening:


Eric Fry, reporting from Manhattan…

"Gold beckons us once again, both because the stock market has become unnervingly volatile of late, and also because gold has managed a mini-rally that has attracted very little attention. Perhaps the gold market is preparing – North Korea-style – to host a surprising display of power…or perhaps not…"


Bill Bonner, with more comments:

*** More Chinese whispers. "Talk in China is that the Yuan will revalue next month 3% to 5%," writes Karim Rahemtulla from Beijing, where he’s hosting a Supper Club venture capital foray into the bowels of the world’s next giant economic superpower.

"That’s the scuttlebutt from several Chinese traders, CEOs (party connected) and a couple of fund managers," Karim continues, "It makes sense – there is absolutely no sense of urgency over here, but they are seeing some pressure from the threat of tariffs on textiles. It will not be some huge revaluation – 5% would be high – 3% more likely to pacify ‘the West.’ take it for what it’s worth, if it happens, you will have the inside track on the number."

Intrigued we were, so we put Tom Dyson on the case. He’s currently mining our network of contacts on both sides of the Pacific trying to determine the eventual consequences of an unpegged yuan, both good and bad. (We’ll publish the Dysman’s conclusions bright and early in tomorrow’s Rude Awakening.)

*** And look at this. Long-time friend and Daily Reckoning contributor, Mark Skousen, has gone and had a business school named after him.

The Mark Skousen School of Business will offer students of Grantham University in Louisiana "the opportunity to experience Dr. Skousen’s unique blend of applied and theoretical courses in business, finance, and economics."

"Congratulations on a further expansion of Mark Skousen’s empire!" writes the Nobel laureate Milton Friedman. "He is an able, imaginative, and energetic economist. A firm supporter of free markets, Dr. Skousen has written extensively on how they work and the obstacles they face."

*** "People just can’t believe what has happened," began Elizabeth’s mother who is visiting. "In our area [the Hudson River Valley in New York], house prices have just gone crazy. Of course, you can see why. It’s a pretty place…and many people feel they like living out there where they still have access to the city, but without all the problems. But people who’ve been in my town for a long time have just gotten the shock of their lives. They just did a reassessment.

"A few years ago you could buy any house in town for what…about $70,000 or $80,000. These people who lived there for years never really had much money. Many of them are retired from modest jobs. So they still don’t have much money. But now they’re getting their houses – and these are just simple cottages built in the ’20s or ’30s – assessed at $600,000 or more. Some of them along the river are getting assessments of $1 million. And these poor people. Their mouths drop. They’re in shock. They have to pay the taxes!"

*** So far, only 1% of houses are in foreclosure. That rate is so low that analysts believe it means the property market is stable and healthy. What it really means it that house prices are still rising…and the money is still flowing. As long as prices are rising, buyers who get in trouble are able to sell out rather than go into foreclosure. Wait until houses stop selling…and prices stop rising…and credit is dear, rather than cheap. Wait until the money tries to get home, dear reader. Just wait.

[Ed. Note: We predict that the percentage of houses in foreclosure will rise in the not-so-distant future…but you don’t have to become a statistic.

*** Europe is in trouble. The French are about to vote "no" to the proposed constitution. What will it mean? A neighbor explains:

"People don’t really know what to expect from the constitution. They don’t really oppose it. They’re just grumpy about a whole bunch of things…and they don’t want to go along with the politicians. But, really, we don’t have any choice. Europe has to move forward. Now, it’s a collection of 25 separate countries…who can each do what they want. But we all depend on each other. Here in France, particularly, we need a united Europe.

"I know from talking to other farmers that they’re not going to support the constitution. But they’re making a big mistake. Because half of our incomes come from subsidies…and most of the money comes from other European nations. If we don’t keep going forward in Europe, we’ll start going backward. And that will mean these separate countries will go their own ways…and the subsidies will be in jeopardy. And I can tell you that without those subsidies there wouldn’t be any agriculture here in France; it’s too expensive."

We did not say anything. Our neighbor cannot imagine a farmer who is not on the public payroll. Nor can he imagine a system of government that doesn’t have a strong, centralized administration at its head. We, on the other hand, rather like the tentative, ambiguous and hesitant state of European politics. It is a little like the U.S. government before the Constitutional Convention. The country was never in weaker hands…and never in better ones.

The Daily Reckoning