What Makes the Wheels on the Bus Go 'Round and 'Round?

What do a bus in Beijing, the Ronald Reagan Presidential Library, offshore oil production platforms in the Gulf of Alaska and a luxury ski resort in Russia have in common? They all need electricity…and they want that power to be on-site and self-contained. Byron King explores…

Imagine a municipal bus that’s powered by an electric motor, crawling along the crowded streets of Beijing. What does this bus have in common with the Ronald Reagan Presidential Library, in Simi Valley, California?

Or imagine offshore oil production platforms in the Gulf of Alaska or the North Sea. What do these offshore platforms have in common with a luxury ski resort near St. Petersburg, Russia?

When you first think of it, there’s not much commonality between a city bus in China and a large presidential library in the U.S. And how do you begin to compare an austere and remote offshore oil platform with a fancy resort in Russia? Heck, the Russian resort probably has chandeliers and Faberge eggs on the shelves.

What do these things have in common? Well, they all need power. More specifically, they all need electricity. And for one reason or another, they need or want the power source to be on-site and self-contained.

The Beijing bus happens to be an electric hybrid vehicle. A hybrid vehicle uses an engine to power an electric generator. The electricity from the generator powers a motor that turns the wheels. And the wheels on the bus go ’round and ’round.

But even better, this bus puts out ultra-low emissions. That’s because reducing engine emissions is critical in China, where pollution is so bad. The electricity that powers the bus comes from an on-board device called a "microturbine." In the case of the Beijing bus, this is a small engine that burns compressed natural gas. The gas spins a turbine and generates electricity. And it moves that bus.

OK, but how is the Chinese bus similar to the Reagan Library? Well, the Reagan Library also gets its electricity from microturbines. There are 16 microturbines at the Reagan Library, delivering over 95% of the power that the large building uses. (Large? Hey, the Reagan Library houses an entire Boeing 707, the former Air Force One, in a gigantic hangar section.)

The microturbines at the Reagan Library burn natural gas. The gas comes from the regional pipeline system. So yes, the library buys natural gas. But it hardly ever has an electricity bill. Even better, the heat from the turbines actually gets recycled to run the library cooling system.

Yes, you read that right. At the Reagan Library, the heat runs the cooling system. I know it seems strange, kind of like Reaganomics did at first. But hey, it works. And the library has much lower electric costs than if it bought power from the Southern California grid. The microturbines eliminate all but a small electrical connection to the larger grid. The process is highly efficient.

And how about that ski resort near St. Petersburg? It too is off the electric grid. But without a reliable source of power, the Russian resort is out of business. So the resort uses a series of microturbines that burn natural gas (and it being Russia, sometimes kerosene). These microturbines are the sole source of power and heat for a luxury hotel and other facilities like chairlifts and water pumps.

Out in the Gulf of Alaska and the North Sea, many offshore platforms now obtain power from rugged microturbines. These platforms are no ski resorts or stately libraries. These platforms are serious industrial facilities, exposed to salt water and the heaviest storms that Mother Nature can blow at them. And there are earthquakes in Alaska.

Traditionally, almost all offshore platforms have used diesel generators to crank out power to run the on-board systems. Things like oil pumps, lighting and signaling devices, and crew quarters. This requires that the platform operators send out diesel fuel by barge to the platforms. Then they have to pump the fuel into holding tanks.

As you can imagine, hauling, pumping and storing diesel fuel at sea is a logistical pain in the neck. Not to mention it’s an oil spill waiting to happen. But now microturbine systems on the offshore platforms burn wellhead gas. That is, the microturbines burn natural gas that comes straight from the wells drilled into deep hydrocarbon formations. There’s no more diesel fuel handling. And the energy cost for an offshore platform is now a negligible element to the operators.

Oh, and by the way. In all four applications I just listed – bus, library, resort and offshore platform – the microturbines run almost continuously. They require maintenance about once per year. Maybe twice, just to be on the safe side.

So what’s going on with these microturbines? They are clean. They don’t need much maintenance. And you can use microturbines to run large buildings and industrial facilities, not to mention city buses in Beijing.

Well, this is nothing short of a new energy revolution. Microturbines are clean, green, energy-efficient and adaptable to a wide array of applications.

Whatever you want to do, you need power. When you are close to a power line, you can tie right in. But if you are off the grid, or if you just want to be more in control of your own destiny (like at the Reagan Library), you look for new ideas.

And one of the newest ideas is to use microturbines, or compact turbine systems.

Microturbines run at high speeds. They are compact (about the size of a large refrigerator) and put out a lot of power. Microturbines are "agnostic" when it comes to the fuel they burn. That is, you can power them with natural gas from the ground or even biogas from a landfill. Or you can use propane, butane, kerosene or just plain old diesel.

So when you boil it all down, microturbines deliver power and electricity with impressive efficiency, and very low levels of emissions. You can use a microturbine at a remote site like an offshore platform or a Russian ski resort. You can put one in the basement of a building like the Reagan Library to generate power on-site. Or you can run a city bus with a microturbine.

Sure, you need some sort of fuel to spin the turbine. But if you do it right you can free yourself from the grid and dramatically lower your total energy consumption and cost.

Until we meet again,

Byron W. King
for The Daily Reckoning
July 30, 2008

P.S. If you want one of these amazing microturbines there’s are several manufacturers – but one American company will be the best way for you to profit. 

Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments, and editor of Energy & Scarcity Investor.

Last week, a headline in Canada’s Globe and Mail spoke of a miracle.

"Record crude prices force US oil company into Chapter 11." We read the headline twice. It was no mistake. Even with the sunniest skies in the oil industry in more than 33 years, the Tulsa-based oil marketing company, SemGroup, still managed to find a puddle deep enough to drown itself.

Yesterday we reported Merrill’s $5.7 billion in write-downs. Even with the smartest people on Wall Street running things, the firm couldn’t avoid big losses. And last week, Fannie and Freddie had our attention. The twin mortgage lenders had been playing the game with a deck stacked in their favor; still, they couldn’t seem to win.

How could this be? What would cause seasoned businessmen to go so wrong? For once, the president of the United States of America seemed to have it right. He said Wall Street had gotten "drunk." The party got a little out of hand, he might have added. Some lamps got broken, and a fight broke out in the parking lot. And now the financiers needed to "sober up," continued the president.

The metaphor is as good as any. But if we were filling out a police report, we’d still have some questions. We’d want to know who supplied the free booze…and why. No one asked us, but in the following paragraphs we provide the answer anyway.

During the last two decades, the percentage of the U.S. economy devoted to consumer spending went up and up and up – from 67% of GDP to 72%, a huge increase. Consumers got a taste of excess spending – and they liked it. Then, they were urged to drink more by the same people who provided the alcohol – the feds. In a consumer economy, they reasoned, growth came from consumer spending. If consumers didn’t spend enough, growth slowed. So, in order to boost GDP growth, it was sometimes necessary to "stimulate" consumers to spend more – by giving them more of what they least needed, more Jim Beam-style credit.

A particularly stimulating environment following the mini-recession of ’02 produced a particularly thrilling party. The Fed knocked down its key rate to 1% – and left it there for a year. Extremely low lending rates caused house prices to soar. Consumers found that they were not only able to borrow against the inflated values of their houses, but to "take out" equity, believing they would never have to put it back. As it developed, householders were able to borrow an additional $6.8 trillion, of which $4.2 trillion was spent on consumption.

But everyone thought house prices would continue to go up. In today’s news, for example, we discover that IndyMac – which just went broke – used mortgage finance models explicitly based on ever-rising house prices.

The whole consumer economy functioned in much the same way as Wall Street. Profits were booked when sales were made – not when the item was paid for. Whether the consumer bought an eggbeater or a split-level in the suburbs, the salesman gave himself a bonus when the deal was signed. Someone else would have to worry about collecting!

Case/Shiller report that house prices fell 15.8% in May, from a year before. Now, the collateral for mortgage finance is falling in price and buyers are not settling up as expected. (Of course, we haven’t seen any real estate agents offer to give back their commissions or any appraisers returning their fees…)

And now that the collateral is falling in price, the poor consumers are getting a little sore. Unless some new scam is found that will keep them spending money they don’t have, they’re going to have to cut back. In fact, as house prices go back whence they came, it seems likely that consumer spending as a portion of GDP will too. And guess what? If consumer spending were to go back to 67% of GDP, it would mean a drop of about $700 billion in spending per year – enough to wipe out all "growth" completely.

Meanwhile, New York City says it’s facing a budget gap of $2.3 billion. And the Bush administration is leaving a deficit of nearly half a trillion dollars for the next person fool enough to want to live in the White House.

And we know what you’re thinking, dear reader: criticize, criticize, criticize…that’s all we do here at The Daily Reckoning.

"What can be done about his situation?" asked one earnest listener at the Vancouver conference last week. "What would you do if you were elected president?" she went on.

"I would ask for an investigation of the voting machines," was our reply. "Besides, there’s no solution for some problems. When you borrow too much, you’re going to suffer when you pay it back; that’s just the way it is."

*** What’s going on in the rest of the world? As you may remember, we’re not negative here at The Daily Reckoning summer headquarters. Far from it. We’re positive things are going to Hell in a hand-basket.

In Britain, word on the street is that mortgage approvals are running at their lowest level in 10 years. Retail CBI sales, meanwhile, are collapsing to a 25-year low.

And in France, consumer confidence is at an all-time low.

But the news is not bad everywhere.

While we think this is a good time to unload U.S. stocks – remember the Trade of the Decade still stands: Sell Stocks, Buy Gold – it may be a good time to buy stocks elsewhere. Vietnam, for example. Vietnamese stocks were battered much harder than those in the United States – with the average share cut in half from its peak. But whereas the United States is wobbling on the top of the financial pyramid…Vietnam is wobbling at the bottom. Wages are low. Investment in factories and infrastructure is high. Inflation is high too – but it’s not necessarily anything Vietnam can cure, since it is largely imported, not domestic. Of course, we have no idea what direction Vietnam is going, but we like betting on underdogs…and Vietnam is such an underdog investors get fleabites.

And how about the BRICs – Brazil, Russia, India and China? These four countries are the world’s biggest nations…and its fastest-growing economies. But they are very different one from the other. Brazil and Russia are resource exporters. India and China are resource importers. When the price of oil goes up, so do Brazil and Russia. India and China tend to go down on higher oil prices. And vice versa.

All of these countries suffer higher rates of inflation than the United States. Inflation is 14% in Russia, 12% in India, 8% in China, and 6% in Brazil.

The way to stop inflation, by the way, is to put the key-lending rate well above the inflation rate. In the late ’70s, for example, Paul Volcker pushed Treasury yields up to 15% – 18%, in order to stop inflation, then running about 10% in the U.S. Britain had a similar experience, though its inflation rates were twice those of the United States.

Yesterday, India announced a hike in its key rate – designed to try to curb inflation. Instead of lending at 7.5%, the central bank said it would henceforth lend at 8%. But of these major nations, only Brazil is really fighting inflation seriously. As mentioned above, the inflation rate in Brazil is about 6%. But Brazil’s central bank lends at 13%.

When you are investing for the long term, you have to take a long look ahead. It’s hard enough to guess about what will happen tomorrow, let alone what the world might look like in 10 years. Still, a cheap country with plenty of energy, plenty of water, plenty of food, and a sound inflation-fighting monetary policy seems a better bet than a country with none of those advantages.

We’ll bet on property in Brazil (which has some of the best beaches in the world)…and stocks in Vietnam.

*** Elizabeth drove up to the house about midnight last night. With her were the two youngest boys – Henry, back from a summer job in Ireland, and Edward back from summer camp in Scotland. We were watching a movie when she drove up – one that was almost suicidally depressing. This is England, it was called, about a paki-bashing group of skinheads from Liverpool during the ’80s.

"I can’t understand what they are saying," said Sophie.

"You’re lucky," Maria replied. "But neither can we, actually. This film needs subtitles. They’re speaking of dialect of English that must be unintelligible – even to most English people."

The only word we all understood began with an ‘f’ and was almost always used in the present participle-functioning-as-an-adjective-or-adverb form of the verb. Since that word was at least half the dialog, we didn’t miss much.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning