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Bill James

Bill James

Bill received a BS in 1972 from West Point with concentrations in math, physics, chemistry, and engineering. He was an NCAA All American Wrestler and…

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Net Energy, the Key to Energy Investing

Life requires energy. No choice. Investing in energy is obvious. Understanding the keys seems critical.

Keys:

1.    Net Energy is the Long-Term Key. Net Energy is the equivalent of take home pay, or after tax profits. It is useful energy: relative to the energy required to deliver said energy to the economy. Net Energy is expressed as a ratio such as oil in the 1970s of 25:1. Oil has depleted below 5:1. As Net Energy drops below 5:1 the resource drops off the Energy Cliff. Here is link to an excellent presentation on Net Energy.

Net Energy and Disposable Energy

2.    Infrastructure is the Short-Term Key. Infrastructure for applying energy is capital-intense, generally requiring half a century or more to change. Oils' Net Energy is falling over the Energy Cliff but the extensive oil-powered infrastructure supports oil's use and creates an overshoot risk.

Until key dates of 1935 and 1956 solar infrastructure dominated the American economy. In 1935 there was a vibrant distributed energy industry that had sold 600,000 windmills against the headwinds of WWI and the Great Depression. The Rural Electrification Administration forced the companies in this industry into bankruptcy by subsidizing the central grid.  Similarly, The Federal-Aid Highway Act of 1956 removed efficiency as a market force, driving railroad companies into bankruptcy with thousands of miles of railroads abandoned. Freight railroads average 480 ton-miles per gallon; over 100 times the efficiency of highways.

The importance of infrastructure can be seen in a 150-year graph of oil prices. In my opinion, the 10x productivity gain of railroads was the catalyst for commercializing oil and coal between 1860-1880.

Infrastructure Effect on Oil Prices

Related Article: Technical Analysis of the Global Oil Market

3.    Socialism is a temporary Trump Key, considering a century is temporary in infrastructure terms. The definition of socialism is government control of the means of production. Mobilizing to fight WWI, the Federal government monopolized/socialized communications, power, and transportation infrastructures as "natural monopolies." Unintended consequences incrementally unfolded during the 20th century. Federal policies made oil the lifeblood of the US economy. Citizens were taxed as the Federal government provided welfare to in the form of Interstate Highways. At 1.4% of US roads and carrying 25% of car-miles, Interstates cause post WWII cities to sprawl. To be economically competitive, Americans must buy cars and gasoline. States, forced by Federal standards were made colonies to car and oil companies.

Life requires energy. Oil is finite. The US hit Peak Oil (light blue line) in 1970. To protect an economy based on its highway monopoly, the Federal government unintentionally implemented policies that exported American economic strength to import foreign oil (dark blue). As costs of trade deficits and wars to defend foreign oil increased, these costs were socialized into national debt instead of capitalized into gasoline prices. The $billions given to auto companies in the 2008 Bailout is a continuing example of socializing costs. National debt's (GOLD) increase from $0.36 to $16 trillion is highly correlated with oil imports. Socialisms influence will wane as debt collapses government’s ability to control. In that collapse there is a substantial risk of price controls and nationalization of oil assets.

Peak Oil & Debt

Long Term:
Net Energy is the best long-term guide for energy investing. Unfortunately, few energy companies publish the Net Energy of their reserves. Investors should demand such disclosure and the rate at which those resources are depleting.

Fracked oil exemplifies risk of Net Energy and depletion. Net Energy is estimated at about 3:1; off the Energy Cliff. A typical well looks OK as it produces about 86,000 barrels the first year. But then it depletes by about 46% the second year. Reference Running with the Red Queen.

Solar and Wind have excellent Net Energies, over 20:1. Unfortunately, no solar company I know of has found their Crossing the Chasm market niche. As railroads were the catalyst for the shift in energy systems from biofuels (hay and wood) to fossil fuels between 1860-1880, I believe transportation will be the catalyst for shifting from fossil to solar.

My investment (JPods, Inc.) is in Personal Rapid Transit (PRT); computer networks integrated with ultra-light urban railroads to move people, cargo and trash using 1/10th the energy of highways. Solar/wind collection integrated into the rail infrastructure gather 5,000 to 30,000 vehicle-miles of power per mile of rail per day. PRT networks can afford the high cost of solar/wind because mobility efficiencies approach the 480 ton-miles per gallon of freight railroad. Integrating solar/wind makes transportation durable against blackouts from grid failures.

Buying Gasoline Traffic

The ability of PRT to apply computer networks and robots to leverage the 20:1 Net Energy of solar/wind and 100x efficiency gains of railroads indicates there will be breakaway companies in this industry. They will build the Physical-Internet™. Choosing the winning companies will be as complex and rewarding as choosing Microsoft, Apple or Google in 1984.

Related Article: Is it Time to Buy China?

As background on PRT, here:
•    Link to Congressional Office of Technology Assessment Study PB-244854 (1975).
•    Link to New Jersey Legislature Study 2007.
•    Link to YouTube of Morgantown, WV PRT. This network has delivered 110 million oil-free, injury-free passenger-miles since 1975.
•    Link to ULTra at Heathrow.
•    Link to YouTube of H-Bahn.
•    Link to YouTube on JPods’ approach to the PRT business.
•    Lean Thinking applied to the mobility process.
•    Attached letter from Senator Byrd and Case in 1974 as they struggled with consequences of the last oil crisis:

Insights from 1973 Oil Embargo

By. Bill James




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