The Case for Coal

It’s quite a conundrum. America spent around $475 billion for foreign oil in 2008 (2009 numbers are not complete yet, although the total is certainly projected to be lower). It’s clear that electric powered battery technology for cars would allow us to keep more U.S. dollars at home, improve the trade deficit and provide manufacturing and other jobs, too.

We have enough sunlight, wind, natural gas, and coal to generate the power it would take to transition to domestically supported power generation. The long-term benefits are obvious. Wind and solar installations have an upfront cost, but pay for themselves over time. Natural gas and even coal are domestic resources that can and should be leveraged to allow us to be more energy independent.

But getting to the point of energy independence is a difficult path.

It’s easy to look at that $475 billion figure and say if we invested that into the power generation economy, we’d have efficient battery technology for electric cars and plenty of new manufacturing jobs.

However, that simple conclusion totally ignores the economics of wind and solar generation. First Solar (Nasdaq: FSLR) is one of the most successful American solar companies. Based in Tempe, Arizona the company sold nearly $2 billion of its thin-cell solar panel equipment over the last year. Demand is so strong, that First Solar is expanding its manufacturing capacity to 1,802 megawatts by 2012 (a megawatt can power about 800 homes).

Sounds great. Should provide a lot of jobs, at least in Malaysia, where most of First Solar’s plants are. There should be no doubt that one of the keys to any solar company’s success is cost. Solar equipment has to be produced at a cost that allows it to be competitive with current energy sources.

In China, the minimum wage works out to $141 dollars a month. In Malaysia, there is no minimum wage. Here in the U.S., minimum wage will pay you $1,320 a week. I think we can all agree that even that comparatively high wage isn’t particularly attractive to American workers. And it should also be clear that the success of solar energy depends on cheap manufacturing costs.

I can’t help but wonder when I see a quote like this from Senator Christopher Bon in a Bloomberg article:

"Green jobs like solar power are good-paying, middle class-supporting manufacturing jobs…in China and Malaysia. Solar companies in Missouri are creating low-wage jobs to install them."

Bond is critical of government subsidies to boost renewable energy. President Obama is trying to increase such subsidies from $2.3 billion to $5 billion.

Bond has a point that shipping jobs overseas is not the ideal solution. And while the "cap and trade" strategy for limiting carbon emissions and encouraging transition to renewable energy is another step toward energy independence, it’s also punitive to companies and makes the economics of renewable energy more complicated. It also does nothing to create manufacturing jobs here in the U.S.

The creation of a fossil-fuel based economy made sense because the fuel itself was cheap. Companies that pumped oil, refined it into gasoline, and built gas stations and cars could all profit. And the cost to the consumer was not a burden.

The transition to a renewable energy economy will not work that way. So what’s the solution? I think it’s clear that the government has to take the lead and essentially force the change. That means it has to pick up the tab to make renewable energy economically viable.

Unfortunately, there’s no politically attractive way to subsidize renewable energy. Congress is already up in arms about deficit spending. I can only imagine the response to something like a tax hike to fund renewable energy subsidies, regardless of the long-term benefit. And power companies aren’t real happy about added costs of cap and trade.

I’d love to hear your solutions – [email protected]

One thing is for sure, the use of coal and natural gas figure prominently in America’s transition to energy independence. My work with energy economist Gregor Macdonald has convinced me more than ever that coal use isn’t about to drop, regardless of cap and trade and other global initiatives to limit carbon emissions.

And that’s especially true for emerging economies. In fact, Gregor is predicting that coal use will overtake oil in terms of energy generation in 2012. Our latest issues of Energy World Profits lays out an incredibly compelling case for the growth of coal use both here in the U.S. and abroad.

The basic argument is that high oil prices are driving more people to the electrical grid, in the form of public transportation and eventually battery powered cars. And coal will remain the most economical way of generating the need electricity.

Energy World Profits readers just bought a Chinese coal company that will double its production this year with two key acquisitions. China’s paying top dollar for coal these days because demand is high and domestic supplies aren’t enough. That means this coal company is in great position for earnings growth. And with a trailing P/E of 13, it looks attractive at $5.50 a share. You can learn more HERE