Alternative Energy Got You Down?

If there's one big goal in the political, social, and economic realm over the past decade, it's this: develop alternative energies. Our historical reliance on oil -- that is both from the Middle East, and in a finite supply -- serves as excellent motivation to make changes.

There are several avenues by which we can harness the power of the earth, but today, I'm going to focus on two of them: natural gas and biofuels. I'll help put them in the context of our overall energy situation and explain why they're recently out of favor in the marketplace. At the end, I'll offer a special free report on a way to profit from the energy field.

We are energy... exporters?
As fellow Fool Morgan Housel has been trying to point out for some time, Americans don't have a very good grasp on what our energy situation looks like today. We tend to stick to the narrative that "all of our energy comes from the Middle East," even when the picture has been rapidly changing.

In fact, just 9.2% of our oil comes from the Middle East. "The U.S. imports more than twice as much petroleum from Canada and Mexico than it does from the Middle East. Add in the share produced domestically, and the majority of petroleum consumed in the U.S. comes from North America." It hasn't always been this way, and there are important shifts taking place. For the first time in more than a half-century, American is now a net exporter of fuel products.

Natural gas
But just as our prospects for energy independence are improving, some believe that forces are working to counter the trend. For instance, the once highly touted Natural Gas Act has failed to make much progress in Congress. Passage would have offered financial incentives to companies that purchased natural gas vehicles and funding to help build out infrastructure.

Though passage certainly wouldn't have hurt the natural gas movement, I don't think it's going to be abandoned anytime soon. Even without financial incentives from the government, there are plenty of reasons for companies to consider a transition to natural gas.

Natural gas prices are at an all-time low. This is due both to an unseasonably warm winter and the rapidity with which natural gas is being extracted through new fracking methods.

Shares of companies that are involved in the extraction process have been hit hard. Chesapeake Energy (NYSE: CHK  ) , the nation's top natural gas extractor, is down 40% over the past year, and the company has announced intentions to cut back on production. Heckmann (NYSE: HEK  ) , a company making a play to be the leader in disposing of wastewater created by fracking, is down 36% during the same time frame.

But if you take a systems-thinking approach to the situation, you'll see long-term relief is on the way. As the price of natural gas has plummeted, industry has added motivation to transition to the fuel. So while those involved in the production of natural gas have suffered, those who consume it have benefited.

Westport Innovations (Nasdaq: WPRT  ) , creators of a natural gas engine for cars, trucks, and semis, is up 44% over the past year. And Clean Energy Fuels (Nasdaq: CLNE  ) , which hopes to build out the nation's first "natural gas highway," is up more than 50% just this year.

The bigger point here is that though companies on each side of the equation are experiencing different movements in their stocks, they are vitally important to one another. Over the long run, companies such as Chesapeake and Heckmann will be buoyed by the demand created from Westport and Clean Energy.

Biofuels
Back on April 3, Solazyme (Nasdaq: SZYM  ) , which can produce oils from patented micro-algae, got a boost because of a joint venture announcement that promised to boost production. But since then, shares of the company -- along with competitor Amyris -- are down more than 20%.

But instead of overproduction or low prices, the reason for the downfall is uncertainty regarding government subsidies. Because the production of biofuels is in the early stages, the costs at this point are very high, and the benefits are still fairly low. Many experts question whether the country will come anywhere close to the congressionally mandated 36 billion gallons of biofuel production by 2022.

The decision to back ethanol subsidies, which many consider a failure, has left a bad taste in the mouths of many politicians. And when you consider the fact that we are becoming less reliant on foreign oil every day -- thanks, in part, to natural gas -- and the political will to keep funding biofuels seems to be eroding.

I will be the first to admit that the case for biofuel stocks is far riskier than natural gas plays. But I think the government would be doing a great disservice by not developing a mix of viable energy alternatives. The future is unknown, and the more options we have, the better.

Is any of this actionable?
As far as investing goes, I think it's worth weighing your own appetite for volatility when it comes to investing. Personally, I've backed my belief in Westport and Solazyme with my own money -- but neither holds a position of more than 3.5% of my overall portfolio.

As exciting as these developments are, one thing's for sure: Our reliance on oil isn't going anywhere soon. If you'd like to learn how to profit from prices rising at the gas pump, I suggest you check out our special free report: "3 Stocks for $100 Oil." You can get the report today, for a limited time, absolutely free!

Fool contributor Brian Stoffel owns shares of Westport and Solazyme. You can follow him on Twitter, where he goes by TMFStoffel.

The Motley Fool owns shares of Heckmann, Solazyme, and Westport Innovations. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Clean Energy Fuels, and Chesapeake Energy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (6) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2012, at 7:55 PM, NYCDOG wrote:

    I too own WPRT, and think it's got a fine technological edge to be a leader in a developing field of natural gas solutions. I am particularly encouraged by the partnerships it has formed with solid companies. I cannot, however, share the author's undisguised enthusiasm for massive involuntary taxpayers "investment" (to use the pols' favorite word) to top-down government management of the energy sector, replete with draconian mandates. Has Solyndra and others taught us nothing, not to mention bureaucrats dismal record here and abroad of "picking winners and losers" vs free market choices? I don't know if he's old enough to remember the citizenry's contribution to the black hole of "synfuels" back in the dismal late '70s. I, on the other hand, am.

  • Report this Comment On April 19, 2012, at 11:39 AM, Patastic wrote:

    WPRT will find a market for their technology because natural gas prices are low enough to make it ECONOMICAL for owner/ operators to voluntarily make the switch from gasoline/ diesel.

    But if you are depending on the shifting political winds to determine the fate of a company who's technology is not ECONOMICAL, you are a fool indeed. Of course, if they can convince the government to keep giving them "free" money, you might get a short term gain. Long term, its a loser.

  • Report this Comment On April 19, 2012, at 8:04 PM, MrChapel wrote:

    I have to agree with NYCDOG here. Government should not pick winners and losers with taxpayer monies. They are not an investment back, or venture capital firm. Those kinds of firms have a responsibility to their investors to explain what is done with their invested capital and account for any losses, even going so far as to expect a lawsuit should said investors (who voluntarily invested their money with said firms) not like what they hear as excuses. Something the taxpayer can't do, now can they?

    For instance, what you don't see much is the actual price of the jet fuel Solazyme provides for the US Navy. JP-5 costs about US$ 4 a gallon. Yet, the contract this administration gave to Solazyme through an executive order costs about US$ 16 a gallon.

    Now, Brian, I may be very bad at math, considering I have spent the last 14 years working in the Global Custody, Clearing and Settlement sector of the financial world but I do think that 16 dollars is four times as much as 4. Maybe you can explain to me where the error is in that calculation because it's supposed to cheaper to use these biofuels, right? I mean, the current administration is harping on about how to save money and such? The same administration that hasn't delivered a budget, together with the Senate for going on 3 (THREE!!!!) years?

    Seriously, if I bought articles for four times the price as similar articles at another vendor, I'd be kicked out of my job so fast, it'd make my head spin. Sure, as an investor, you might be happy that the company is getting contracts and making your stock portfolio soar. But it's artificial because the product they sell has to be bought under a mandate. Not because it is the best and most affordable. It is just a long line in the same vein as Solyndra and any of the other green energy boondoggles that the taxpayer is forced to foot the bill for.

    So, please, Brian, explain to us poor, misunderstanding fool (small f) why this is a 'good' thing. Seriously, this article could have been written by your Fool colleague Travis Hoium, whose 'green energy' articles I've replied to several times with a multitude of official, easily obtained information that debunks them. Of course, when confronted, he never has the decency to answer my rebuttals. Or should that be that he suddenly has better things to do than get into a discussion? Hopefully, you will be man enough to actually defend your position with facts or gracefully admit you can't.

    For your edification, here is an article on this subject from Investor Business Daily:

    http://goo.gl/Zuh0y

  • Report this Comment On April 20, 2012, at 9:49 AM, TMFCheesehead wrote:

    Mr Chapel-

    I think the Navy's purchases are pretty clear. They consider energy independence to be a matter of national security. If they wish to free themselves of reliance on foreign oil, it takes investment dollars.

    Now, as natural gas becomes a more viable resource, that may change. Then again, by the time that changes, some of these biofuel companies may have ramped up to the point where their products are cheaper than oil.

    Time will tell,

    Brian Stoffel

  • Report this Comment On April 20, 2012, at 11:38 AM, MrChapel wrote:

    As you stated yourself, only a bit over 9 percent of US oil comes from the Middle East, the rest from the US, Canada and Mexico. Unless the administration attacks Canada because they don't like their maple syrup or starts to bomb Mexico City, I doubt you have to worry about national security implications of oil independence. That and the rising domestic production defeats your argument.

    Secondly, the administration is cutting the defense budget heavily, putting ships, aircraft and other equipment in storage or mothballs, yet they are spending four times as much for alternative fuel for the remaining vehicles? Spending quadruple the amount on alternative fuels means less money for the remaining necessities. I find it funny that when other military projects go over budget, like the F-35, everybody is up in arms but when it's green energy and using executive orders to force the military to use much more expensive fuel, nobody bats an eye. To be honest, it is hypocritical because like you admit, it is nothing more than government investment. The difference being that in the other projects, it is the military itself that sets the priorities of the projects and asks Congress for the budget to fund it while in this case, it's the administration that uses other means to do so, bypassing Congress. That is, IMHO, a circumvention of the law. Something you seem to not grasp, or do not want to see.

    I reiterate that using taxpayer monies to invest in companies is not a job for the government since there is no oversight, no responsibility towards the 'investors' aka the taxpayer unlike with venture capital firms or investment banks. The taxpayer, unlike investors in venture capital firms/investment banks have no recourse to recoup their investment. Another point you have not commented on in your rebuttal.

    Now, companies like WPRT and CLNE are doing it without government help, using their own money to set up an infrastructure, making alliances with other companies to expand their reach. Truck engines, filling stations etc. I applaud their work.

    As for Solazyme, I like what they're doing, but unless government intervention stops helping them, I will never invest in them. There is no incentive to actually lower the cost of production there. No company in their right mind will buy their fuels as long as it costs more than regular fuels. Airlines are already struggling with rising fuel costs of regular JP-fuel and that is about 4 dollars a gallon. Telling their shareholders that they're paying four times that will have their stockprice on an elevator to the bottom in no time.

  • Report this Comment On April 23, 2012, at 10:59 AM, kevingt wrote:

    It's annoying when people start to refer to oil from Canada and Mexico as domestic oil. Just because Canada and Mexico are our neighbors and we currently have a good relationship with them, that can change. What if we rely on Canada for all of our oil and then the Canadian administration gets upset about one of our policies and it turns into a tariff war? Never say never. 100% American-made is not the same as 100% North American-made. With biofuels, we can be completely energy independent and we wouldn't be at the mercy of any tariff, trade war, or even environmental challenges within that country - not so with imported Canadian sands oil. What if the Canadians suddenly revolted against the damages caused by the sands mining and they shut-down the operations? They're more progressive than the US and that too could happen. Imported oil is imported oil, whether it is from Canada or the Middle East. If you're importing it from another country, then you are not independent. Period. You are relying on there never being any change in that country. Canada and Mexico, just like Saudi Arabia, Iran, and Iraq, are foreign countries by definition and thus any oil we buy from them is foreign oil - not domestic oil.

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