The Gas Prices Rollercoaster: Why Energy & Infrastructure Are Inextricably Combined

by David Fessler, Advisory Panelist, Investment U
Friday, January 16, 2008: Issue #917

President-elect Obama takes office in less than a week’s time. While many will be watching closely to see how he handles the ongoing financial crisis, I’ll be equally interested to see how he handles a far more ominous one: our ongoing energy and infrastructure crisis.

Regular readers know I believe energy and infrastructure are inextricably combined. We need cheap energy to fuel sustained economic growth. And we need infrastructure in place to move and dispense the energy from its source to its destination. Today I’m going to give you a perfect example of how the two are intertwined, and how one can play off the other to create a positive benefit for all.

In the face of gas prices that are less than half of what they were only a few months ago, it’s easy to think the “oil crisis” has passed. We can all return to “business and life as usual” – revert to our old driving habits – and just pay the lower price at the pump, right?

That would be a huge mistake. The real price we’ll pay will be our continued dependence on foreign oil. Last year, U.S. consumers and businesses spent over $475 billion hard-earned dollars for it.

Higher Gas Prices Are Around The Corner

With today’s lower prices forcing the cancellation or postponement of exploration projects around the world – and OPEC threatening more cuts – higher gas prices are just around the corner.

Just imagine for a minute, if – year after year – we took that nearly half a trillion dollars and reinvested it here. We’d have a stronger dollar, less susceptibility to economic downturns and recessions, and perhaps even a trade surplus as opposed to a trade deficit.

Well there’s one state that’s doing just that, setting an example the rest of the country should follow. As a result of their efforts, a growing percentage of money spent on auto fuel stays here. And car sales there are on fire. You see, these cars don’t burn gasoline. They run on a much cleaner fuel, one that’s found in abundance right here in the United States: natural gas.

We’re behind the natural gas as a fuel for cars curve, however. Worldwide, there are about eight million vehicles operating on natural gas. Here in the United States we only have 116,000. But Utah, with its estimated 6,000 vehicles, is breaking new ground. Even Utah’s Governor Jon Huntsman Jr. converted his state SUV to run on the clean burning fuel.

One word: cost.

Gas Prices In Utah – 85 Cents-A-Gallon

Natural gas prices at the pump in Utah are controlled, and are the cheapest in the nation, at the equivalent of roughly 85 cents-a-gallon. The other big advantage Utah has is the infrastructure to fill the cars. It’s fairly scarce in most other areas of the country.

And while natural gas is widely used in Europe at the consumer level, here its use is relegated to a few fleet vehicles. At the consumer level, it’s the classic Catch-22 situation. Carmakers – with Honda as the only notable exception – aren’t willing to make natural gas powered cars with so few filling stations available.

On the other side, filling stations don’t want to fork over the money to install expensive equipment to compress the gas, something that’s required in order to fill the tank on the car.

As is often the case, government intervention in the form of tax incentives or financing will go a long way towards breaking the logjam. California is leading the way, with legislation that offers a minimum $2,000 rebate to buyers of natural gas fueled cars.

Congress has legislation it will be considering this year that offers tax credits to consumers and producers alike, and mandates to install pumps at service stations across the country. The goal? Have the nation’s consumer fleet 10% powered by natural gas within 10 years.

Energy and Infrastructure Plays With a Natural Gas Bent

U.S. natural gas production remained stagnant for nearly nine years, and then in 2007, abruptly increased 9%. Improved drilling technology accounts for a large portion of the increase. Horizontal drilling and fracturing is fast becoming the preferred method of producing gas from difficult geological formations like shale.

And there’s plenty of it: Big shale deposits include the Marcellus, Bakken, Haynesville, Barnett and Woodford. Navigant Consulting, an industry consultant, estimates natural gas production can be ramped at least 50% to 30 trillion cubic feet per year between now and 2020, if necessary.

A simple way to play the gas game is to bet on one of the big producers, like:

• Chesapeake Energy (NYSE: CHK)
• Anadarko Petroleum (NYSE: APC)
• Or BP, PLC (NYSE: BP)

Once the gas is brought to the surface, it has to be distributed through our nation’s pipeline network. And that’s currently being expanded at a rapid rate to meet growing gas demand, primarily from utility customers. Take a look at three of the largest natural gas pipeline infrastructure companies in the United States:

• Kinder Morgan (NYSE: KMP)
• El Paso (NYSE: EP)
• Williams (NYSE: WMZ)

In summary, natural gas-burning vehicles represent a clean alternative to fossil fuels, and a good bridging solution until improved batteries enable meaningful numbers of plug-in electric hybrids. All the companies mentioned stand to score big if a serious natural gas auto mandate gets underway. And we’ll all be the better off for it.

Good Investing,

David Fessler

Today’s Investment U Crib Sheet

Over the past few weeks, Investment U has been increasing the content we have on our homepage. You’ll be seeing more changes in the coming weeks and months. But if you’ve missed a few of our recent articles, you can get caught up at any one of our archives:

• Investment U 2009 Archives
• Investment U Blackboard articles.
• Investment U Related Content.

Our Senior Analyst from The White Cap Report just released a breaking update to Investment U on an opportunity in oil with a situation called “contango.” Regardless of whether you’ve already heard about these unique (and fleeting) profit opportunities, we recommend you take a look. Read the full article – Contango: The Most Profitable “Buy-and-Hold” for 2009.

With “dirty” power sources like coal and petroleum not going anywhere for a while, it’ll pay to keep exposure to the energy we love to hate. But instead of getting mad, get even. Or, more correctly, “back to even,” with a gas rebate. Get the full story on how you can get your own gas rebates.

Last 5 posts by Investment U

• The New Crude Oil Benchmark That Could Change the Oil Market’s Price Dynamics - November 24th, 2009
• We Apologize for Interrupting the Gold Rally, But… - November 24th, 2009
• Why Gold Prices Could Fall From Here… And Two Ways to Play the Move - November 24th, 2009
• Momentum Trading: Five Guidelines for Supercharging Your Portfolio with Momentum Stocks - November 23rd, 2009
• Despite What the News Tells You, Crude Oil Prices Set to Fall - November 23rd, 2009