Will Alternative Energy Rescue Us From Oil Dependence?

For years now, we've heard about our need to develop alternatives to crude oil as our main source of energy, in order to reduce our dependence upon foreign oil. These alternatives fall into two categories: Fossil-fuel alternatives and renewable alternatives. Let's look at each.

Fossil Fuel Alternatives

Chief among these are natural gas and coal, both already in wide usage. Can they replace oil as a primary source of the world's energy?

Coal

Coal, as most of us know, has a long history as a source of fuel for ovens, steam-powered vehicles, and, more recently, electrical power plants. Its primary advantage is that, despite extensive mining over the past two centuries, there is still a great deal of coal left to be mined, both in the U.S. and worldwide. Coal is relatively plentiful and, at the moment, relatively cheap. So far, so good.

There are only two problems with coal: mining it and burning it. There are two ways to get coal—opencut mines—large, surface “strip” mines—worked by huge earth-moving machines, and deep, underground coal mines. Opencut mines are, by their very nature, vastly destructive to the land.

Underground mines, while largely out of sight, are famously dangerous to the health of the men who work them. There is no way to mine the world's coal and avoid the tremendous human and environmental costs associated with its extraction.

Moreover, cheap coal, like cheap oil, is relatively close to the surface. This is true of both opencut and underground mining. Such convenient deposits represent only a small fraction of the world's available coal, and as they are depleted, the cost of mining coal will rise dramatically.

Lesser-quality coal means more coal must be burned for the same energy payoff, leading to even greater pollution than before. Coal emits more “greenhouse gases” than other fuels. It receives the lion's share of the blame for acid rain. All this led the influential Economist magazine to feature coal on its July 6, 2002 cover, with the headline, “Environmental Enemy No. 1” because of its suspected contribution to global warming.

Coal can even contribute to nuclear proliferation; A large coal-burning electrical plant produces enough radioactive material each year to create two atomic bombs. This would obviously be a concern in an age of war and terrorism.

Coal is dirty—in more ways than one—and to date, technology has not progressed to the point of dramatically reducing its environmental dangers.

Natural gas

Natural gas, on the other hand, has the lowest carbon content of the major hydrocarbon fuels, thus it releases the least pollution. This is why the vast majority of electrical plants proposed in the last five years have been gas-burning plants. It is versatile; vehicles can be adapted to use it, and gas has become the home-heating fuel of choice for new construction in recent years.

The problem with natural gas is its availability. There is wide agreement within the energy community that U.S. natural gas production has peaked. More and more gas wells have had to be drilled to produce less gas than before. Because of gas's advantages, demand keeps increasing, and despite frantic attempts by the energy industry to ramp up supply, reserves are falling dramatically. As a result, the price of natural gas is skyrocketing.

Can't natural gas be imported? Not easily. Natural gas cannot be transported in gas form, so it must be liquefied, a costly and risky process. Then it needs to be shipped by specially equipped tankers to natural gas ports, of which there are only a handful in the U.S.

The hazards of this process are considerable, and the huge storage tanks of explosive liquefied natural gas at these facilities are natural terrorist targets. Thus, building new gas ports would be extremely costly, time-consuming and politically difficult. No one—in the U.S. or out—wants one of these ports in their backyard, especially since Sept. 11.

Add to this the costs and dangers of hauling tens of thousands of truckloads of highly flammable liquefied natural gas along our already-choked interstate highway system, it becomes obvious that to retool the U.S. (or any major industrialized nation) for natural gas you'd be staring down logistical difficulties of mammoth proportions (no pun intended).

Renewable energy

The four major renewable energy sources are nuclear, solar, wind and hydrogen. Each, at various times, has been credited with possessing the potential to wean us off of oil, and fossil fuels. Let's briefly consider the potential of each to achieve this goal any time in the foreseeable future.

Nuclear

In the 1950's, hopes for nuclear energy were running very high. Peaceful uses for nuclear power were just being developed, and the future seemed bright. But nuclear has it limitations. It is successfully used in electric plants, but has yet to be adapted to vehicles (the way some Americans drive, this is no doubt a good thing). So even if there were no other difficulties with nuclear power, it could never replace oil.

And, of course, there are other problems with nuclear: safety problems. The three main areas of concern are the threat of plant malfunctions, as what happened at Three Mile Island and Chernobyl, the threat of terrorism, both to the plants themselves and in the possible theft of nuclear material to make weapons, and of the disposal of nuclear waste.

These threats seem inherent in nuclear, and despite decades of effort, experts have found no way to significantly mitigate those dangers. Plant malfunctions are still possible. The threat of terrorism will be with us for many years. And while Yucca Mountain in Nevada has been proposed as a national nuclear waste depository, it remains controversial and there is still no agreed-upon location for the disposal of the nuclear waste that is produced, not only in the U.S., but around the world.

Given these limitations and genuine dangers, few energy experts believe nuclear will ever be able to replace, or even partially replace, our worldwide oil needs.

Solar

On the surface, solar power seems like a godsend. More energy is sent our way from the sun every day than the world will use in the next two decades. Solar panels themselves are inherently non-polluting, and, theoretically at least, can be adapted to power vehicles, home heating and electrical systems.

Sounds like a dream come true. And someday, it may well be. But the technology required to make that dream a reality is far from developed. The largest reason solar has not replaced conventional forms of energy is that no one has figured out how to make a solar cell efficient enough for most applications. Raising the efficiency of solar cells on a watt-per-dollar basis is essential to solar's success.

In recent years, solar technology has increased efficiency about 5% per year. At that rate, it may take 30 years or more for solar to be competitive with natural gas or coal, and perhaps more for it to replace oil.

There are other problems with solar. The manufacture of solar cells requires large amounts of iron, and produces large amounts of toxic waste. A worldwide solar revolution would require nearly all the available iron, based on current production. And, a willingness to look the other way concerning the high toxicity of its manufacture.

But perhaps the greatest limitation of solar technology is inherent in the source of energy itself: it isn't always sunny everywhere! Solar cells cannot produce energy except in bright, direct sunlight. Such sunlight is common in the American Southwest, but not everywhere else. True, solar electricity can be stored in batteries, but after they are drained of energy they require recharging. So a long period of cloudiness can effectively shut down a solar-based power system.

Moreover, electricity has never been successfully utilized on a large-scale basis for vehicles. So even if every developed and developing nation transformed their electrical transmission grids to solar-based systems—a daunting and expensive challenge to say the least—that would still leave open the question of how we are going to power the world's cars, trucks, farm equipment, airplanes and ships, which consume the most of the world's oil.

Given these shortcomings with current technology, we are clearly decades away from a solar-powered world.

Wind

Wind power has received less attention than solar but of all the renewable energy possibilities, it is becoming the most promising.

Unlike solar, wind turbine technology has increased efficiency dramatically in recent years. With new turbine technology, wind speeds below 10 miles per hour can now produce usable amounts of electricity. Wind is plentiful in many areas where and when clear sunlight is not as frequent.

replace natural gas- and coal-based electrical plants, an entirely new wind-based electrical transmission infrastructure must be constructed, along with some 500,000 new wind turbines—just in the U.S. alone. Best case, this would require decades to accomplish, and no such massive construction is underway. But even if this were accomplished, wind shares with solar the limitations of electricity itself. How do you power a farm combine on electricity? An airplane or container ship? For that matter, a two-ton pickup? No one knows the answer, but if there is one, we are surely decades away from finding and implementing it .

Hydrogen

The possibilities inherent in hydrogen power hit the mainstream in 2003 when General Motors drove their experimental hydrogen-powered vans to Washington, D.C. That year , President Bush proposed significant federal funding for hydrogen cell research.

Why the excitement? Because hydrogen is an element already in use to fuel the world. It's the hydro in hydrocarbon. Remember we said earlier that with hydrocarbon fuels, we burn the hydrogen and waste the carbon. We don't separate the two; we burn the whole thing, and use the one for energy and send the other out the tailpipe.

On the other hand, if your hydrogen source is water (the H in H 2 0), then your only waste product is oxygen. Hydrogen has already been proven to be a potent energy source, and water is surely very plentiful nearly everywhere around the world. Plenty of energy, with no pollutants, no shortages. No wonder everyone's excited.

So what's the problem? Simply this: in the natural world hydrogen is never found alone—it is always bonded to some other element, like carbon or oxygen. How do you split off hydrogen from the other element, create a net energy surplus and store that energy for practical use? That is the question.

Remember those hydrogen-powered GM vans we mentioned earlier? That hydrogen was derived from natural gas , one of the hydrocarbon fuels we're starting to run short of. That's obviously no solution at all. It is only when we are able to efficiently spilt hydrogen from oxygen in water that we can enjoy the worldwide hydrogen revolution many hope for.

The rub here is that quite a lot of energy is required to break the chemical bond between hydrogen and oxygen. That energy has to come from somewhere, be it sunlight or fossil fuels. Fossil fuels are the energy source we're trying to replace, so we're left with the challenge of using sunlight to efficiently break hydrogen off from oxygen in water. And no one is close to knowing how to do that, because sunlight's power is only a fraction of what current technology needs it to be to perform the hard work of separating hydrogen from oxygen.

That leaves the hydrogen fuel cell, a somewhat different animal. A fuel cell is more like a battery than an engine. Through a chemical process it produces electricity from hydrogen without burning it. This is where most of the research is going, especially in the arena of hydrogen-powered automobiles.

However, even the most optimistic estimates of the build-out of a full-blown hydrogen-powered economy range between 30 and 50 years. Hydrogen may well prove to be the energy source of the future—the distant future.

After briefly reviewing the promises and challenges inherent in alternative energy sources, we can only come to the conclusion that an alternative to oil as a primary energy source is, at best, decades away. As investors, that is our main concern. The issue is not whether technological progress will eventually create a replacement for fossil fuels as the world's primary source of energy. That's probably inevitable; at least we hope it is.

The question before us as investors is, what happens between now and then? The answer: almost certainly higher oil prices for the foreseeable future. Which will bring us next time to our final, and most important topic—how investors aware of Peak Oil can profit from the higher oil prices that seem to be a near certainty in the years ahead.