The major difference between the financial and the energy world is that our current energy capital IS NOT replaceable; it is by it's very nature "non-renewable". As a result, our job as managers of our planet's energy portfolio is to create an "energy balance sheet" that has the proper mix of fossil fuels and renewable energy sources.

Energy Capital VS Energy Income

Peter Lynch

Energy Capital vs Energy Income


by Peter Lynch

One of the things that are a serious concern for most astute investors, especially in times of high stock market volatility and rapidly changing international events is the preservation of investment capital. Without adequate capital, private industry, investment and innovation will slow down and the economy along with them.

So, in the financial world, adequate capital is the foundation of any healthy growing entity. Capital is the basis of a business and the necessary ingredient for generating an income stream of ongoing revenues, profits and future growth. Another way of phrasing it would be to say that you have to possess a strong balance sheet (capital, assets etc.) to be able to grow a business properly and at the optimal speed.

In the world of energy, this basic capital to income relationship also holds true. There are just different words that are used. I look at basic capital in the energy world as our vast amounts of stored energy in the form of various fossil fuels - coal, oil and natural gas. If you think about it, fossil fuels are really just places where energy is "stored", until it is ready to be utilized. Energy income may be viewed as energy sources, which are more "renewable" and can be replaced when needed.

The major difference between the financial and the energy world is that our current energy capital is NOT replaceable; it is by its very nature "non-renewable". As a result, our job as managers of our planets energy portfolio is to create an "energy balance sheet" that has the proper mix of fossil fuels and renewable energy sources.

We should not be using "limited" fossil fuel assets for jobs that can be done by unlimited renewable assets. For example: fossil fuels should NOT be utilized for low energy uses, such as home or building heating. Does it seem like a "good idea" to burn something at thousands of degrees to produce heat at 75 degrees for your house? This could be much more efficiently accomplished with a simple solar panel that produces 160-degree heat, with little or zero emissions as an additional benefit.

The main problem, as I see it, is a lack of education on the part of the American public. I truly believe that people will "do the right thing", IF they are appraised of the true facts and costs of all the alternative courses of action.

For example: Now that the Presidential election is over, the polls tell us that the three top concerns of the American people are:

  1. Terrorism
  2. Iraq
  3. The Economy

I would agree that this is a fairly accurate picture of what Americans are concerned about. I am also concerned about each of these areas and would like to see something positive done as soon as possible to remedy these problems. However, before a solution to a problem can be applied, I think it is very important to understand the "true cause" of the problem. It is my opinion that the "true underlying cause" of all three of these problems that concern American citizens most is: the worlds total dependence on fossil fuels.

1. Terrorism - Terrorism is rooted in the mid-east (where most of the OIL is). The terrorists don't want us there, because we are on their "holy" ground. We are there because of OIL.

2. Iraq - Iraq is the third largest producer of OIL in the world. I realize that Saddam was a very bad guy, but so are half of the rulers in the third world and we are not "liberating" their countries, because they have no OIL.

3. The Economy - The economy is growing very well at this time. But if you want to cause a major problem with the US economy just cut off its supply of OIL. I realize that energy is a much smaller percentage of our economy than in the 1970's (therefore it is "theoretically" less of a problem), but our supplies of oil are much more limited, much less secure and the margin of error is razor thin today. Hence the overall risk of a disruption or slow down of our oil supply is much greater than the 1970's.

All of this is the result of us failing to properly understand how to balance our worldwide energy portfolio and how to properly structure our energy balance sheet to include assets that will grow and not assets that will decline. We all have to recognize the fact that things (in the energy arena) are changing and we must face them directly and move to solve the problem. Unfortunately, it is becoming quite apparent that we (the developed world in general and the U.S. in particular) are taking the same shortsighted approach to "financing" our energy future. We are depleting our "energy capital" (oil, gas and coal) by utilizing them at a far greater rate every year, with very little thought given to the long-term (50+ years) consequences. These "natural" resources are finite in nature and by their very definition are NOT renewable. As a result, we are presently trapped in an upward price spiral which cannot cease unless the basic laws of supply and demand change (unlikely) or we shift our strategy and thinking to one of energy capital preservation and rational energy utilization.

Our current thinking in the U.S. is to use as much as we want, based upon the FALSE premise there will always be enough or we will just find more. There is little thought given to conservation or for the welfare of future generations. This is precisely the thinking that got us into this tenuous situation and it will certainly NOT be the thinking that will get us out of this predicament.

" We can't solve problems by using the same kind of thinking we used when we created them". Albert Einstein

As long as we insist on being dependent on a non-renewable energy source we will continue to have price increase after price increase. It is like building a house in a valley that floods every time it rains. When it rains, the basement floods (big surprise). Complaining about the flooding will do nothing to solve the problem. It is a much better idea not to build your house in the valley, but to move to higher ground. We must take immediate steps to preserve our energy capital and develop our energy income stream from renewable sources such as solar energy, wind and biomass.

From an economic point of view this "renewable" strategy will result in the following beneficial changes:

• We will break the price/energy spiral. This will have a stabilizing effect on the economy and a depressing effect on inflation and energy market price volatility. As a result, the future energy situation will become far less uncertain, especially considering that the majority of our future energy needs will have to come from the unstable Middle East region.

• The stock market and other capital markets will react favorably to this long term decrease in uncertainty. This will stimulate capital spending, create hundreds of thousands of new jobs and enable the U.S. to rebuild its deteriorating industrial base on a renewable foundation.

Assuming that the U.S and the world will eventually choose this rational alternative, investors need to start to look closely at the industrial corporations that will benefit from this transition from non-renewable sources to renewable energy sources. When this transition begins, it will be one of the biggest investment explosions in the history of the modern world. There will be huge losers and equally great winners. The "trick", as always, will be to determine which is which. Hint: the ones to avoid are the ones that are resisting the on coming wave of change!

When the wind of change blows, some build walls, others build windmills - Chinese proverb

We are already seeing a very small demonstration of what could happen, when we look at the hybrid vehicle marketplace. Toyota recently introduced a small hybrid car, the Prius. The introduction started out slowly, but soon the entire production was sold out. Toyota doubled production and is completely sold out; there is now a 6 to 9 month wait. Toyota has recently announced that it will introduce two new hybrid models per year until their entire auto and truck line is hybrid. Toyota is an example of a company that is NOT resisting change, but is out in front leading the change. In addition to Toyota, many other car companies are planning hybrid cars for 2005, 2006 and beyond model years.

What has happened here will happen in other market sectors. It will begin slowly but once it starts, the growth will be dramatic and the opportunity for investment profits will be enormous.

Many of these companies may be located in some of the following industry groups: solar equipment, Photovoltaics, conservation/insulation, waste heat recovery, co-generation, high efficiency electrical equipment, hybrid vehicles, energy applications of nanotechnology, biomass production, energy management devices, "green" home builders, wind turbine companies and many more.

From my point of view, this transition is inevitable and the renewable wave will be irresistible once it starts rolling. We are at the very beginning a powerful growth curve and the fastest growing sections are ahead of us.

Investors should begin to "educate" themselves and possibly start to develop a "watch" list of companies that may benefit from this transition. They may also want to start a list of companies to avoid, these will be the companies that are resisting change and will surely be left by the wayside as this worldwide transition unfolds.

Mr. Lynch has worked, for 27 years as an independent equity analyst and private investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for the past 17 years to the Photovoltaic Insider Report, the leading publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He is currently a consultant to a number of companies, among them DayStar Technologies (www.daystartech.com), a small public company developing the next generation of Photovoltaics. He can be reached via e-mail at: solarjpl@aol.com.


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