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May 13, 2004

Alternative Energy - down, out and forgotten?
by David Chapman

It was an entire generation ago on October 17, 1973 that Saudi Arabia and a number of its oil-producing neighbours shut down oil supplies to America in response to the Arab/Israeli war known as the Yom Kippur War. Since then the Middle East has been a cauldron of conflicts (Iranian hostage crisis, Iran/Iraq war, Gulf Wars 1 and 2 and the never ending Israeli/Palestinian war) and terrorist activity. Oil, war and terrorism they all seem to be interconnected.

The importance of this conflicted zone is not to be underestimated. World oil demand, currently sits near 80 million barrels per day, over 29 billion barrels a year (Estimated global reserves of conventional oil - about 800-1000 billion barrels although anywhere from 3000-8000 billion barrels counting unconventional sources, which may be expensive to extract, can not be pumped to the surface, deep ocean, or environmentally sensitive zones etc.).

While Chinese demand is pushing up the numbers it is the USA that consumes 20 million barrels a day or 25% of the worlds total with only 5% of the world's population. Oil is a strategic commodity and securing the sources is a stated policy of the US Administration no matter who is in charge. The Mid-East is estimated to hold upwards of two-thirds of the world's known conventional reserves. The USA obtains roughly 25% of its imports (or 14% of its total) from the Mid-East underscoring the area's importance as a swing producer.

It seems that everywhere we turn today oil prices are dominating the headlines both print and television. Oil prices are hitting the highs seen at the time of Gulf War 1 in 1990 and the Iranian Hostage crisis in 1979. In real terms of course it is no where near those levels as oil would have to reach towards $60 to equal the 1990 highs and $80 to $90 to reach the heights of the late 70's. Record high gasoline prices are also kicking in coupled with dwindling refinery supplies and recent write downs in reserves by some major oil companies.

Rising oil prices act like a tax on the economy hitting every sector including transportation (trucking, airlines), tourism (airlines, autos), consumer (autos, home heating) and business (heating, oil based products). Cries are rampant of gouging by oil companies and price fixing. Demands are made to do something about it. North Americans are used to paying the world's lowest price for oil and gas and anything that prevents them from going anywhere, anytime in their SUV's is taken personally.

Numerous analysts keep saying that prices should come down because Saudi Arabia can pump more or that more production will come on stream to compensate for growing demand. Clearly while oil plays less of a role in the economy then it did back in the 1970's it still plays an extremely important role and rising prices slows economic growth, contributes to rising interest rates and inflationary pressures and is a significant contributor to the recently announced record monthly trade deficit in the US.

It is moot whether the price temporarily comes down because Saudi Arabia might pump more or oil or others come forward to take up some slack. The ability for oil producers to pump more oil is limited and much of the oil that can be added comes from the sensitive Mid-East, an area wracked in war, terrorism and uncertainty. That US troops currently sit in Iraq only a short hop away from Saudi Arabia is also moot as ongoing rebellions in Iraq demonstrate that it doesn't take a whole lot to disrupt supplies, pipelines and oil infrastructure.

In our article on "Energy Wars" (April 16, 2004) we noted from Paul Michael Wihbey, President of GWEST and writing for First Energy Capital that instability in Iraq, Venezuela and Saudi Arabia are key areas of political instability that are going to continue to drive up the prices of conventional oil. And considerable higher prices are required to tap fully into the huge potential unconventional reserves in the Canadian Oil Sands and the Venezuelan Shale Fields and other places.

So what happened to alternative energy led by hydrogen fuel cells in all this chaos and price increases? It seems to have fallen off the radar screen. Well it is still there with numerous companies including the major automobile companies, oil companies, power companies, other giants such as General Electric and numerous small independent companies building and even selling alternative energy solutions. Fuel cells are being used but so far use is limited although one sits right in Times Square New York in a shiny new building called the Conde Nest. Fuel cells are being applied not only to automobiles but cell phones, batteries, laptops and host of other products.

Hydrogen fuel cells are actually becoming a viable alternative although few seem to expect that it might ever make up more than 5% or so of demand. Other sources of alternative energy are also on the verge of becoming available including Bioethanol a combination of oil and ethanol although the major problem here is cost. And cost is the major problem for all this as well as acceptance and prices high enough for oil and gas that it makes it viable to do the massive conversions that are required to change to an alternative source of fuel.

Trouble is every time oil prices rise sharply like they are right now the hue and cry starts to do something to bring down costs. And therein lies much of the problem. The consumer complains and big oil companies (and automobile companies) are not only big and monolith, they are powerful with a huge lobby. The current US administration is made up of people largely from the oil industry. So anything that might threaten big oil to become the next horse and buggy maker, efforts are channelled to securing oil supplies and finding ways to increase supply rather than alternatives.

There are subsidies to oil and conversely a lack of significant subsidies to alternative energy. There are insufficient efforts towards decreasing demand through additional taxes and bringing North American prices in line with the rest of the world (which would require at least a doubling even from these lofty levels). And of course one of the biggest benefits to shifting to alternative energy is a cleaner environment.

In looking at numerous alternative energy stocks it really does look like they are down, out and forgotten. Even as things look up for some like Ballard Power Systems Inc. (BLD-TSX) (www.ballard.com, 604 412-7929) they announce poor results and the stock takes a big tumble (possible double bottom?). Indeed it seems only a few weeks ago that some of them were looking up and then they suddenly look well& You read the title. But maybe all the uncertainty is positive as some of them are beginning to form decent bases.

Some possible picks are FuelCell Energy Inc. (FCEL-NASDAQ) (www.fce.com, (203) 825-6000) a developer of electrochemical and fuel cell technologies for power generation plants; Plug Power (PLUG-NASDAQ) (www.plugpower.com, (518) 782-7700) a developer of electrical generation systems and fuel cells for residential applications; Palcan Fuel Cells Ltd. (PC-TSXV) (www.palcan.com, 604 422-8868) a developer and manufacturer of 100 watt to 5 kilowatt PEM fuel cells and metal hydride hydrogen storage products for smaller vehicles; and Fuel Cell Technologies Corp. (FCT-TSXV) (www.fct.ca, 613 544-8222) a developer of small scale power systems for applications in residential, small business and remote sites. The latter two are clearly highly speculative and the former pair are higher risk.

DavidChapman.com
Technical Scoop

Charts and technical commentary by:
David Chapman of Union Securities Ltd.,
69 Yonge Street, Suite 600,
Toronto, Ontario, M5E 1K3
(416) 604-0533
(416) 604-0557 (fax)
1-888-298-7405 (toll free)

David Chapman is a director of Bullion Management Services the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete.

The information in this report is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does Union Securities Ltd. assume any responsibility or liability. Estimates and projections contained herein are Union's own or obtained from our consultants. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any securities and is intended for distribution only in those jurisdictions where Union Securities Ltd. is registered as an advisor or a dealer in securities. This research material is approved by Union Securities (International) Ltd. which is authorized and regulated by the Financial Services Authority for the conduct of investment business in the U.K. The investments or investment services, which are the subject of this research material are not available for private customers as defined by the Financial Services Authority. Union Securities Ltd. is a controlling shareholder of Union Securities (International) Ltd. and the latter acts as an introducing broker to the former. This report is not intended for, nor should it be distributed to, any persons residing in the USA. The inventories of Union Securities Ltd., Union Securities (International) Ltd. their affiliated companies and the holdings of their respective directors and officers and companies with which they are associated have, or may have, a position or holding in, or may affect transactions in the investments concerned, or related investments. Union Securities Ltd. is a member of the Canadian Investment Protection Fund and the Investment Dealers Association of Canada. Union Securities (International) Ltd. is authorized and regulated by the Financial Services Authority of the U.K.

Copyright © 2002-2008 David Chapman

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