Tuesday, December 9, 2008

Highway Right of Way (ROW) Solar

During a recent work meeting with the western renewable energy zones group, it became clear the recent push for renewable energy in the western US has major wildlife and environmental implications.

The main issues of public land managers and wildlife stakeholders are the new roads and infrastructure placed on previously undisturbed public lands. The western US has huge potential for renewables such as solar, wind, and geothermal. Just like the fossil fuel energy booms of the past, the rush to build these renewable power plants on public lands would adversely effect wildlife corridors and ecosystems.

These issues have me thinking more about the economic and environmental benefits of the distributed nature of solar technology. Wind and geothermal power only work in particular areas of the US, in most cases far away from the end electric user. Also the wind and geothermal resources are mainly on undisturbed public lands.

Solar, on the other hand, can work anywhere. Some solar application works best in high light, hot areas like the desert southwest, whereas other solar applications work best in cooler defused light areas of the country. I started to think about all the land masses in the US that are already disturbed or used, and could be levered as solar energy resources.

Commercial Rooftops

New solar firms like Solyndra produce thin film solar technology especially for commercial rooftops. In only commercial applications we could supply the US with 25% of all our electric needs from these rooftops. Solyndra has entered into a contract with ENERGY STAR®-certified cool roof systems from Carlisle Construction Materials. This combination of the reflective roofing membrane with Solyndra's solar systems, increases the output of the Solyndra PV system up to 20%.

The above estimate of 25% of the US electric grid is based on the approximate efficiency ratio of 15% for Solyndra's PV system. These solar thin film technologies are still in the early stages of development, so over time we should see significant improvements in efficiency and cost.

Already solar thin film firms can produce solar energy at grid parity. These cost breakthroughs in solar have been achieved by focusing on the cost side, not the efficiency side. These new thin film solar technologies are less than half as efficient as silicon based solar cells, but can cost 80-90% less to produce. My article on solar economics describes in more detail the different solar technologies and the economic considerations.

So with commercial rooftops, the US could replace more than 25% of the grid. What about other brownfield land solar development? While driving many hours across the desert southwest on interstate I-15 it hit me.

Highway right of way solar - ROW solar

On both sides of I-15 all one can see is scrub, weeds, debris, and power lines. Highway departments must keep their right of way clear of invasive weeds such as Russian thistle(tumbleweed), cheat grass, etc. Mowing or pesticide spaying operations are the most common methods. Instead of spending all those tax payer dollars trying to control photosynthesis, why don't we use photosynthesis to create electricity along these highways?

By designing the proper alignment of solar systems along these highway, land managers could also funnel wildlife away from dangerous highway crossings and into safe wildlife corridors. In the desert southwest, miles of small fences are built along highways to protect the desert tortoise from getting killed by cars. Larger structural solar systems could also protect larger animals such as cattle, deer, and antelope. These larger animals also cause many serious accidents and human deaths on our highways.

How much acreage are we talking about? The first estimate to consider is the amount of land that highway departments currently manage. This is a small subset of all right of way highway acreage. Road Ecology: Science and Solutions written by Richard T. Forman in 2002 is a good source of information on managed right of way land along our nations highways.

Forman's book states that California manages 230,000 acres of right of way on 15,000 miles of highway, about 15 acres per mile of highway. In the US we have about 4 million miles of roads, or 60 million acres of right of way to manage. On many sections of highways in the western US, the highway right of way is contiguous to federal land like the BLM. By using a small amount of this BLM land, we could easily double the amount of land available for solar energy.

Depending on the particular solar technology, one needs 2-4 acres of land to place a 1 megawatt solar power system. So a conservative estimate for US highway solar would be 20 million megawatts of total capacity.

In 2006 the existing US capacity for electricity was about 1 million megawatts. So just in the disturbed land along our nation highways, we could have almost 20 times more capacity then currently installed. Here are some energy figures from 2007:

The U.S. electric power industry's total installed generating capacity was 1,089,807 megawatts (MW) as of December 31, 2007.

Total U.S. electricity generation was 4,159,514 gigawatt-hours (GWh).

The capacity of different power plants will produce different amounts of total electric generation. A coal or natural gas fired plant can run almost all the time. A solar power plant may only average 8 hours a day of energy generation. So the real effective electric generation for the 20 million megawatts of highway solar capacity would be about 7 million megawatts of full generation capacity. This is 7 times the electricity we currently consume in the US.

In summary, right of way highway solar is a great solution to our nations energy needs, as well as reducing costs to manage these right of ways. Another benefit would be to help wildlife managers create wildlife corridors for both human and wildlife safety. Lets preserve our undisturbed public lands by implementing solar technologies on these existing managed lands.

Monday, November 10, 2008

US renewable Infrastructure and employment plan

It is a shame China beat the US in announcing a major infrastructure investment plan:

"The spending announced today, of which 100 billion yuan is earmarked for this quarter, will cover low-rent housing, infrastructure in the rural areas, as well as roads, railways and airports, the State Council said. The government will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan."

The funds, equivalent to almost a fifth of China's $3.3 trillion gross domestic product last year, will be used by the end of 2010. The US has 14 trillion GDP, so a 2.5 trillion package would be the equivalent.

US Infrastructure Plan

With a long term US infrastructure plan, the US will see immediate job creation and real wages start to rise again. Corporations will start seeing increases in revenues and profits. This plan will last about 5 years and create millions of jobs a year. Total 5 year cost will be about 2 trillion, or 400 billion a year. This infrastructure plan needs to be diverse so we just don't create construction jobs, but new jobs in every area of the economy. Here are the 5 US infrastructure mandates:

1) Renewable energy development
2) Power grid enhancements
3) Housing redevelopment
4) Highway and bridge construction
5) Transportation - non oil based US vehicle fleet

This is not busy work or bridges to nowhere. The US has neglected its infrastructure for the past 15 years and is now losing its competitive abilities in a dynamic global economy. These 5 infrastructure projects will create immediate jobs.

Once the first 400 billion is funded and the bids go out the construction and engineering firms like Flour Corp, Foster Wheeler, GE, CAT, etc. will start creating new teams for these projects. These firms will hire engineers, IT specialists, project managers, project financial analysts, HR personnel etc. They will also need new computers loaded with new software such as Auto-CAD, Oracle, SAP, Vista, etc.

IT infrastructure orders will go to firms like EMC, Cisco, IBM, and HP. The US will see new orders for cranes, bulldozers, excavators, road building equipment, specialty tools, etc. These firms will start hiring again, reducing unemployment and increasing real medium wages in the US. Foreclosures will fall, consumer spending will increase, as will consumer sentiment.

The US needs a purpose, a mandate, a direction forward. This direction will be energy independence and leading the world into the renewable energy future. Importing oil from the Middle East must end in 5 years. This huge wealth and job transfer to foreign countries has crippled the US economy. The US can be the leader in solar, wind, bio-fuel and geothermal technologies, then sell these technologies to the rest of the world.

Renewable Energy Plan

I would prefer to see the US set up a per unit pollution taxation system with a 120% decrease in income taxation. This tax shift from income to polluting energy sources would help move the US to free competitive energy markets. With this tax shift the US would be putting the economic incentives in the right place and use much less inefficient polluting energy sources and use more renewable sources. Also individuals would not try to avoid or hide income. This tax shift program would reduce the federal deficit since we would not need subsidies for renewable energy and by broadening the tax base, allow for more efficient revenue collection for the US.

While the above tax shift would work over time, the US needs more immediate action for job creation. The renewable energy plan would be to convert the top 100 most inefficient, polluting power plants in the US to renewable and clean power plants. These most inefficient power plants should have been decommissioned many years ago.

Here is an informational article on the top 50 most polluting power plants in the US. When the clean air act was passed in 1970, The electric utility industry persuaded congress not to impose strict pollution controls on older power plants, because they promised these plants would be replaced by newer, cleaner plants.

These promises were never realized and now we are still stuck with these inefficient polluters. By converting the top 100 oldest, dirtiest power plants to solar, geothermal, wind, fuel cell, etc., the US would create many high paying jobs, huge investment into renewable and clean technologies and achieve much lower pollution levels.

Solar technology is finally starting to explode. Helped by new thin film solar manufacturing technologies, several solar firms can now produce solar power that is competitive with current utility grid pricing. Here is an article I wrote about solar economics.

Utility Grid infrastructure.

In 2002, the U.S. Department of Energy stated:

"There is growing evidence that the U.S. transmission system is in urgent need of modernization. The system has become congested because growth in electricity demand and investment in new generation facilities have not been matched by investment in new transmission facilities. Transmission problems have been compounded by the incomplete transition to fair and efficient competitive wholesale electricity markets. Because the existing transmission system was not designed to meet present demand, daily transmission constraints or `bottlenecks' increase electricity costs to consumers and increase the risk of blackouts."

Now add into the picture large wind and solar power coming on-line over the next 10 years, with no grid infrastructure to support efficient distribution of these new power sources. Like funds for renewable energy, every dollar the US invests into the power grid has a large multiplier affect on the economy.

Millions of new high paying jobs will be created, increasing demand for these US industries: steel, natural gas, construction machinery, IT equipment, machine tools, cement, engineering, finance, etc. This huge increased in demand will lead to more jobs and higher wages in all these industries.

Housing Redevelopment

The US infrastructure plan will fund states to redevelop older, deteriorated residential neighborhoods. These neighborhoods have high foreclosure rates, high crime rates, and are causing financial hardships for cities, counties and states around the US. Many options exist with the proper funding.

This would involve converting these neighborhoods to job training centers, industrial parks, recreation facilities, renewable power plants, etc. As these new facilities are developed, local municipalities will finally start receiving tax revenues from these properties and now have the funds to cycle back into the community. This will also create jobs, and increase wages.

Highway and Bridge

The 100 approach would work here as well. Replace the lowest rated 100 bridges with new bridges. Redesign and rebuild the 100 weakest metro transportation systems in the US. This work has been neglected for decades. These projects would create demand in the above industries mentioned, but also the construction industry would start hiring again.

Employment up, wages up, US GDP up, and revenues into the US treasury up. This is the way to balance the federal deficit in the long run. In 5-7 years we could balance the federal budget.

Transportation Vehicle Fleet

Many have heard T. Boone Pickens talk about using natural gas for the US vehicle fleet. "Its cleaner, more efficient, cheaper, and we own it!" My article goes into more detail about implementing T. Boone's plan.

In Utah people are buying natural gas at the pump for under a dollar a gallon. The conversion kits to make your car or truck a natural gas vehicle cost about $1200. In 7 years we could move 50% of our vehicles onto natural gas and stop importing 500 billion dollars a year of foreign oil. This huge wealth transfer out of the US is severely hurting our economy.

A simple mandate could be as follows. By the year 2015, no new vehicles with oil based propulsion systems are sold in the US. By the year 2022, no vehicle oil based fuel at filling stations. During this time, the US could start a vehicle recycling program to help lower income drivers switch to the new vehicles. The first step is to have natural gas available throughout the US.

GM and Ford Reinvestment Plan

The US could save GM and Ford with the mandate to convert to natural gas and battery technology. GM and Ford would install natural gas filling stations at all their dealerships with US investment. These dealerships would also sell and install the natural gas conversion kits and be certified by the government to do so.

This infrastructure fund would help car owners finance the conversions. The US could help GM and Ford build factories in the US to mass produce new trucks and cars with these new non-oil based propulsion systems.

This above plan would save the US auto firms without wasteful bailouts. This investment in the transition to new technologies would create millions of jobs. As solar and wind power is funded, natural gas would be more available for the transportation industry.

With new shale extraction technologies for natural gas, the US has over 100 years of fuel even with the increase in demand from the US vehicle fleet. Instead of the US funding foreign countries with oil imports, we would tap into our own massive natural gas reserves creating millions of new high paying jobs in the process.

Infrastructure Blueprint

This is a blueprint for a plan, an infrastructure plan that will move the us forward and out of the current recession. The US infrastructure plan could take many other forms and directions. Now is the time for a national dialog on this subject. This blueprint focuses on energy independence, energy efficiency, middle class job creation and developing the new technologies that create high paying jobs for decades to come.

Friday, November 7, 2008

Solar technologies and economics

As renewable energy has become cheaper to produce and traditional hydrocarbon energy sources are getting more expensive, for the first time we are seeing that the future of energy in the US is renewable energy. I am especially excited about solar energy. Some solar technologies are already cheaper than natural gas fired utility grid pricing.

There are various way to delineate the current solar technologies:

Photovoltaic(PV) vs thermal (concentrated solar power - CSP)
Silicon based solar vs non-silicon based solar

I feel the silicon vs non-silicon is the best way to divide the solar technologies. Most all residential and commercial solar PV systems have been Si based. Si based technologies were born in the semiconductor age, and the material science about Si has flourished.

The main problem with using Si based solar for large scale power is that Processing silica (SiO2) to produce silicon is a very high energy process - at current efficiencies, it takes over two years for a conventional solar cell to generate as much energy as was used to make the silicon it contains. Like all other energy sources - the concept of net energy is the crucial factor. You can also read my article on peak oil economics.

Besides full cycle cost, the other factor is efficiency. Basically this is the joules of energy that hit an area of the earth vs the joules of energy in electricity that solar can provide. Energy efficiencies have run from 5% to about 20% for most current practical solar technologies.

Si based solar has been more efficient PV than other materials, but now that gap has closed. Several thin film non Si solar systems have achieved 15% efficiencies, at full cycle costs that are over 80% cheaper than Si solar. So one can see it is the combo of efficiency and cost that determine if solar is cheaper than fossil fuels. This article about Heliovolt, A thin film spin-off technology from NREL demonstrates these factors. NREL just achieved 40% efficiency this year using new thin film technology. NREL will spin this technology out to the free markets if it shows economic progress. Many of the private solar thin film firms got their technology from NREL.

My economic research shows that thin film solar and concentrated solar power(CSP) are now cheaper then natural gas full cycle pricing. Concentrated solar firms are broken down by thermal solar(CSP) vs concentrated photovoltaic(CPV). A main difference between the CSP firms and thin film firms is that CSP firms have focused on efficiency. Here is a list of concentrated solar firms:

Abengoa Solar
Brightsource Energy


That leaves us with thin film solar technologies. Read Nanosolars 3 generation of solar for a quick review of the history of thin film. Below are my recaps of the main thin film technologies:

CIGS: copper, indium, gallium, selenium. This thin film is getting a lot of press lately. This appears to be the technology that will be one of the solar winners.

Benefits: High absorptivity, low cost. Falling cost as in Moore's law will continue.
Negatives: relies on some rare materials - indium, gallium. Smelting of ores such as zinc require energy to extract. Would material cost rise if 20% of grid went solar?

CdTe: cadmium, telluride.
Benefits: High absorptivity, low cost.
Negative: Toxic cadmium. This is a toxic material and is the death sentence for CdTe being widely used IMHO. First Solar uses this thin film technology.

GaAs; Gallium arsenide.

Benefits: Insensitive to heat, low cost.
Negative: long term high cost of material if solar used 20% of grid.

Amorphous thin film silicon

Benefits: the bonding defects best for thin film. Much thinner mean less Si used.
Negatives: refining to 99.9999% purity is very energy intensive- High cost.

Here are just a few of the thin film solar firms that are well funded, and are currently ready to deliver economic solar solutions:


The solar industry is moving towards having customers use an implementation partner to install and maintain the solar systems. You would supply the land, and sign a power agreement, No upfront cost. Here are some of the implementors:

Phoenix Solar
AEE Solar
Akeena Solar

Another important discussion are the various market segments for solar, so we could have many "winners". An example would be the difference between residential roof top applications (need high efficiency), and large scale brownfield solar plants where land is cheap, used, with little other uses (low efficiency would be fine - if it's cheap per watt).... Here is a quick list of markets I see:

1)Residential roof top
2)Residential land
3)Commercial rooftop
4)Commercial land
5)Small town/rural solar municipal plants
6)Brownfield land - Right of way for US roads, and US power lines, and railroads.
7)Large scale greenfield power plants.
8)Specialty (Military, satellites remote locales, drilling, etc...)

Below are some articles that should interest city state, and county officials that are looking at solar. During the next five years we could see a revolution that changes the way we look at energy - and creates million of jobs in the process.

Marin county wants solar
Sunedison solutions
Tucson solar coming
Solar winery project
Tracy City Council wants to go solar
Cochise County Planning solar
Sutter Health system to install solar
Gainesville Regional Utilities plan
Solar grid pricing
Colorado hospital going solar
LA county orders solar rooftop
Farm gets 2mw solar
High real cost of pollution

Monday, October 20, 2008

Global Capital Asset Death Spiral

About a year ago the US market started seeing large asset write downs in the housing and financial markets. Since then, this crisis has spread to almost every asset class in the US. Auction Rate Securities [ARS], like student loans back fully by the US government that can't be sold. The Auctions for these cash equivalent assets have no bids. The same is true for all types of structured investment vehicles [SIV], like packaged mortgage securities [CMOs] and debt securities [CDOs]. Homes prices have falling over 10% on a national basis, the most since the great depression. Equities all over the world have fallen 20% or more.

Money is not rotating in and out of different asset classes. We are seeing a global Capital Asset Death Spiral [CADS]. As the FASB rules require firms to mark to market assets in markets that have no bids or liquidity such as ARSs, CDOs, and CMOs, these firms must write down their asset bases. Many of these financial firms will now be forced to sell assets - good and bad, for whatever price they can get - 20, 30, 40% of book value. So now good and bad assets have very low prices set on them forcing other firms with similar assets to also write down their asset bases, on and on and on...

Firms need to sell assets at reasonable prices to raise cash - not borrow money or dilute shareholders

Recent news of the Freddie (FRE) and Fannie (FNM) government takeover does little to stop the CADS. Institutions around the world are being forced to raise capital since their asset bases are being destroyed since there is no market for previously liquid assets. These firms do not need cash, they need to sell their assets(at, or near current book) for cash. If this asset death spiral continues, the US will move from a recession to a 1930's type depression.

One could argue that we need to allow free markets to solve this problem. I would agree with this if the asset death spiral were caused by free market systems. As I will explain, the previous credit bubble and current asset death spiral were caused to a great degree by actions and inactions of the federal government.

The large credit bubble created from 2003-2007 and CADS had the following causes:

1) Historic low 1% fed funds rate
2) Poorly targeted tax cuts for the wealthy
3) No lending oversight or evaluation
4) FASB mark to market rules

My theory is fairly simple. Too much liquidity chasing an ever shrinking yield. After the US depression in 2001-2002 the federal government lowered the funds rate to 1% and kept it there. Wealthy investors were stumped. With short and long term risk free yields at pathetic low levels cash was getting very hard to invest. Investors were still hurt from the stock market crash, so these investor would not put their cash in equity markets. Then the US gave large tax breaks to these wealthy investors, giving them even more cash per year to handle. What to do with all this cash?

The combination of historic low yields, fear of equities, and a poorly targeted tax cut had created a HUGE increase in the demand for a stable return on all this cash. Can you say SIV, or CMO? Where you have demand supply will not be far behind. The larger banks and investment firms increased the creation of these SIVs with CMO and, CDOs to satisfy the large increase in demand for yield. A 5-6% yield will do just fine in this now low yield environment. Banks would now bundle 1000's of mortgages to create these new higher yielding financial vehicles.

To satisfy this large increase in supply of SIVs, lending standards had to fall. There is no other way to meet this new demand for yield, much to the glee the home builders, mortgage lenders, house flippers, etc.

The US solution - The Asset Investment Fund

We need a resolution trust type fund to invest in the US economy. An original funding of 300 - 500 billion would be needed. This fund would buy CDOs, CMOs, ARSs, developed land, raw real estate, and foreclosed property. These assets would be help the the government 5-7 years then slowly sold back into the market, probably at a profit for the US taxpayer.

The US can borrow money very cheaply , below 4% currently. Our trading partners such as Saudi Arabia, Russia, China, Canada, etc. would help as a strong US economy is in their best interest as well. The average yield of the assets purchased by the US investment fund would be greater than 6%. A positive spread of 2% could be realized for the US. Remember the money needed for this fund will be borrowed cheaply, not come from taxpayers directly.

By investing in these assets, the US will initiate market liquidity and create stable pricing environments for capital assets. This will help the US avoid having to infuse billions of dollars in GSE bailouts and avoid the many FDIC insured bailouts in the future. By investing 300 billion upfront, the US could avoid over 300 billion in bailouts over the next 2 years!

But what about the poor US taxpayer?

I can already hear the fear mongers. A US investment/bailout will just hurt the US taxpayer. If the asset death spiral continues, the US will not have many taxpayers left. State and local municipalities will not be able to raise funds as bonds can't be sold and home prices continue to fall. We will continue to see local government declare bankruptcy along with many regional banks. The remaining banks will be unable to fund ANY projects, even ones with solid cash flows. With no financing available jobs will continue to be lost, creating more home foreclosures and the death spiral continues....

This investment fund will restart the financial systems and help create jobs and insure a solid taxation revenue base for the future. This is the definitive issue in the US economy.

Authors note: I first published this article on Seeking Alpha on Sept 9th, 2008 - before any US bailout was announced.

Fear, greed and loathing in Las Vegas - The US Housing market - then and now.

I have always been very interested in economics. The interpretation of the behavior of millions of individuals all making decisions simultaneously is fascinating. Macroeconomics is incredibly complex, but if we can glean some trends, above average returns in equities are possible. First, I will present my theory of how we have arrived at today's housing economy.

Las Vegas - circa 2004

I visit Vegas many times every year. I only live a few hours away, and the drive is quite pleasant. Sometime in 2004, I was having dinner at a PF Changs. I always go right to the bar since I hate waiting to eat, and I meet some real characters while dinning. On this particular evening, there were 3 young kids(anyone below 30 gets my kid moniker) eating and drinking next me. They were all boasting of there latest real estate deals and profits. As a former slum lord, Having bought and sold many rental properties, I was keenly interested in there discussions.

Not to my surprise, they were very willing to tell me about there recent killings in the Vegas real estate market. These young Turks were buying several new homes at the same time, then flipping within a few months for 50K profits per home. These guy were fun, and I enjoyed our conversations. I have found that ground level info on the economy is very valuable - our government should try this approach. On my drive back into the desert, I dismissed there claims as just some lying, and one upping each other.

Las Vegas - circa 2005 - 2006

I'm back in Vegas, at the same PF Changs. The bar is packed - in fact Vegas is packed and vibrant. I can't believe the amount of desert being scrapped for more boxes - this can not continue I scream! I am wrong. At the PF's bar, I meet more 20-30 somethings and everyone is talking real estate. Everyone is a flipper and dealer - Can everyone be lying? I start to investigate. I am surprised to find people buying more than one property at the same time. This was done years ago, before the computerized records age. Banks would know real time that people are lying on there mortgage applications - right? HM I guess not.

These new homes are not rentals. These buyers had very little cash, and their jobs were fairly low paying - they could not even qualify for one of these homes - but they were buying 2 or 3 at a time..... The tools used by our house flippers: ALT A, subprime, interest only, negative amortization, teaser rate loans, and basically ZERO due diligence from lenders. This was when I started buying puts on some of the home builders. I picked KB Homes as my target for a hedge against my long portfolio.

How could this happen? a Macro interpretation

I started to analyze this crazy home financing system. My theory is fairly simple. Too much liquidity chasing an ever shrinking yield. After the US depression in 2001-2002 the federal banks lowered the funds rate to 1% and kept it there. Wealthy investors were stumped. With short and long term risk free yields at pathetic low levels - cash was getting very hard to invest.

Investors were still hurt from the stock market crash, so these investor would not put their cash in equity markets. Then the US gave a large tax break to these wealthy investors, giving them even more cash per year to handle - what to do with all this cash? The combination of historic low yields, fear of equities, and a poorly targeted tax cut had created a HUGE increase in the demand for a stable return on all this cash.

Can you say SIV, or CMO? Where you have demand - supply will not be far behind. The larger banks and investment houses increased the creation of these SIV's with CMO and, CDO's to satisfy the large increase in demand for yield. 5-6% yield will do just fine in this now low yield environment. Banks would bundle 1000's of mortgages to create these new higher yielding financial vehicles.

To satisfy this large increase in supply of mortgages, lending standard had to fall - there is no other way to meet this new supply - much to the glee of my box flipping buddies back at the PF Chang bar in Vegas.....

Year of reckoning - 2008

Where is the US economy today? We are in a recession, and it may be a longer than average one. Housing is not the main issue - it is the credit collapsing due to the lending system finally falling apart. In conclusion, the US government has helped create the current housing bubble, and the current credit meltdown. As far as housing, my calculations show that home prices have already fallen back to base affordability levels. The measure to use is simple - the monthly mortgage amount for new homes adjusted for sq. footage versus monthly incomes.

Rates are close to historic lows, and the sq. footage of new homes are at historic highs, and incomes are still rising. Will home prices continue to fall? Probably. Lenders are still trying to raise capital, not lend, and US consumers do not wish to buy an asset that is still falling.

Future US economy 2008 - 2009: what's next?

I know many love to hate the home builders and related stocks. Many traders have made hefty profits shorting this industry over the past 6 months. The days of making easy money with these shorts are over in my opinion. We will get at least one US housing bailout package before the end of the year.

The US housing bailout could be as follows. 300-500B of lower level tranches of CMO debt to be purchased and held by the US government. Also the GSE's need to lend money - 5.5% 30 yr, to refinance the weaker loans with 2006-2007 vintages, and slow down the foreclosure process.

The third leg of the bailout would be the Federal government helping states and cities raise bond funds to purchase distressed homes in hard hit communities and take them off the market - maybe affordable housing. Even without a bailout, making additional money on shorting the home builders will be increasingly difficult.

To value any equity, one needs to look at 15 years of future cash flows discounted back into today dollar. Contrary to popular belief, There will be another housing up cycle.

This is an election year, and the politicians will be tripping over each other to show how much they care about us. If the US economy is a weak as I suspect, and as weak as all the bears on wall street think, then this above housing bailout will probably happen. And if the economy is really not as bad as we think - no bailout, but no more profits for shorts either way.

Baseline economic projection is a recession for most of 2008, followed by slow but steady recovery in 2009. I think the recession started in Dec. 2007.

Authors note: I first published this article on an equity web site called CAPS in Motley fools in Feb. of 2008.

Peak Oil Economics

Oil prices, US oil independence and basic economics

I just listened to the another politician screaming about opening up ANWR for oil development.

Implementing Pickens Plan for Public Energy Policy

First, let me applaud T. Boone Pickens for putting all this energy, time and money into a very important issue. His plan is to use wind power to replace 20% of the US electric grid, freeing up natural gas to be used in the US transportation fleet. First lets recap a few points of Pickens' to ponder:

  • US oil production peaked in the 1960s and 1970s.
  • US oil production is now at 5 million barrels a day, the lowest output in over 50 years despite record real prices - the US consumes over 20 million barrels per day.
  • The US consumes 25% of the world's oil, with only 4% of its population.
  • The US will send $700 billion dollars out of the country per year to buy oil.
  • Projected over the next 10 years, the cost for oil imports will be $10 trillion — the greatest transfer of wealth in the history of mankind.
  • World oil production peaked in 2005 at about 85 million barrels per day.

Much of the $700 billion the US spends to buy foreign oil does not go to unstable countries. Canada and Mexico are two of our largest suppliers. But billions of dollars do go to countries that may fund anti-US activities. Bottom line: $700 billion is leaving the US economy.

How has the US boxed itself into this nasty oil corner? The answer is the power of the monopoly. Over the past 100 years the US has built (with tax payer dollars), an enormous vehicle transportation infrastructure based on only one energy source - oil. This oil infrastructure monopoly will not allow competition, as the barrier for entry is just too high.

Free market systems no longer work with a publicly funded monopoly in place. We already have many cheaper alternatives to the oil based vehicle. One can fill up a natural gas vehicle for under $2 a gallon. Electric vehicles cost less than $1.50 to charge.

Eventually economics will force the US energy vehicle infrastructure to move away from oil, but during this time we are putting ourselves at a huge national security and economic risk. A small conflict in the Middle East could close the Straits of Hormuz for months. This would not only create huge price jumps in oil products but create fuel shortages and rationing that would send the US into a long-lasting depression.

We can not dig or drill ourselves out of this problem

T. Boone Pickens has been saying this for over a year. The only result will be a bigger to crawl out of. Almost every drilling rig is in use. Drillers can't find workers to work on their existing projects. Listening to many energy conference calls, I hear the same thing: There are no workers available for this type of work. Here are some recent comments from Stacy Locke, CEO of Pioneer Drilling, a San Antonio-based contract land drilling company:

The labor market is extremely tight for all energy personnel. It is extremely challenging. You can't just hire a truck driver and make him a tool pusher.

A tool pusher, the top hand on a drilling rig who supervises the crew, is the worker most in demand. In the past, it could take a rig worker 10 years to rise to the tool pusher's job. Working up from floor hand to derrickman to driller could take five years.

The crux: more oil exploration, or real investment in alternatives for oil?

We are now at the crux. The US could try and build new rigs, train new workers, and spend huge amounts of money for more oil infrastructure, or the US could spend that money and focus to move vehicles away from oil, and create the infrastructure for renewable energies such as solar, wind, biofuels, and non-oil infrastructure creating American jobs and stop sending $700 billion to foreign countries.

Should the US open up more offshore areas for oil and gas exploration? This should be on the table as part of a REAL US energy policy. But as discussed above, this will have almost no effect on global oil prices as we do not have any more spare oil infrastructure to increase supply. Another reason more drilling in the US will not effect pricing are the concepts of net reserves, and well to wheel efficiencies.

Concept of net reserves

This is very important. Everyone should watch the move "There will be blood". It depicts how digging for oil works in a free market system. The easy oil gets sucked dry first. Back then, oil would just explode into the sky. Now we need to pump millions of gallons of water down the hole to bring up an ever shrinking amount of oil. It takes a lot of energy to pump water around.

60 years ago, it may have taken 1 boe(barrel of oil equivalent) to bring up 100 barrels of oil. That a 99% energy efficiency drill ratio. So the net reserve of that well would be 99% of the total recoverable amount. Now to get that 100 barrels out of the ground it may take 50-100 boe to extract, a 50% or less ratio. So actually reserves figures are meaningless, its the net reserves after you calculate the boe to extract the oil.

I am actually worried about negative energy drill ratio's. It is very possible we will see more energy used than the energy content of what is extracted. How can this be? Simple - natural gas is used to drill, and pump for oil. Since the price of NG is less than 50% of the price of oil based on energy content, we could be losing energy and still making economic profits. This scenario is devastating for the US energy picture, as we could be throwing away a precious US resource - natural gas.

Well to wheel efficiencies

This is an important concept when discussing a comprehensive US energy policy. In most studies, the electric engine is twice as efficient(full cycle) as the oil based combustion engine. This means the US will use half as much total energy, and reduce pollution by half if we move to electric engines. With the above economics of net oil reserves discussed above, this huge efficiency benefit from alternative engine types(electric, and NG) will continue to increase, as oil extraction requires more and more energy.

Pickens' plan implementation

His plan calls for natural gas vehicles, but electric vehicles may be an even better idea. From a free market approach, the US should not try and pick which alternative engine will be used. The US should just make it so the current oil based engine is not used, and let economics decide which is the best replacement. There are two methods that could work in a 10-15 year time frame.

US mandate

A simple mandate could be as follows. By the year 2015, no new vehicles with oil based propulsion systems, are sold in the US. By the year 2022: no vehicle oil based fuel at filling stations. During this time, the US could start a vehicle recycling program to help lower income drivers switch to the new vehicles.

The energy consumption tax approach

Shift away from income taxation into energy taxation. This would actually be a tax reduction plan. Income tax avoidance is growing, and now is 20% of the economy in my opinion. This 20% illegal underground economy currently pays very little in taxes. These tax cheaters will now pay more taxes.

By shifting to gasoline taxes - US workers will have more disposable income after paying these new energy taxes, since their wage taxes would be reduced by more then they pay in new consumption taxes. The US could set the gas tax as follows:

Set minimum gasoline prices:

  • 2009 - $5.5
  • 2010 - $6.0
  • 2011 - $7.0
  • 2012 - $8.0

To offset the regressive nature of consumption taxes, the US could change the wage tax structure. Currently, low income earners pay 15.3% SS wage tax, and since the tax stops at around 100K, high wage earners pay a much smaller %. A new structure could be the first 12K of w-2 with a zero SS tax rate, then 15% up to 150K of w-2 income. With the above consumption tax revenue, the income tax rates could be lower at all levels.

I think the US should use both methods concurrently. With the new minimum gas prices, the alternatives would finally be funded from the private sector. The fear of the oil infrastructure, and lower oil and gas prices once these alternative get funded has stop any real funding in the past, and will continue to do so in the future. By setting the minimum price to the consumer, new companies will be funded, and stimulate the economy.

Authors note:
I first published this article on Seeking Alpha on July 16th, 2008