Wednesday, August 25, 2010
In 2006, I told my readers all the easy barrels of oil were gone. When I say "easy barrels," I'm talking about Beverly Hillbillies oil: Stick a straw in the ground, and out it flows. That kind of oil is cheap to drill. And it's disappearing.
These days, we're refining sludge from the oil sands or drilling three miles below the ocean floor. Either way, we're spending more to get oil.
With exploration and production costs increasing, oil's long-term average price is going to hold above at least $60, more than double its price in the early 2000s.
Today, we're seeing a similar setup in another energy resource...
As I showed you last month, rising uranium consumption will lead to higher uranium prices over the long term. Here's another reason prices are headed higher: There's no easy uranium left.
The Red Book is the world's authority on uranium production and consumption. It's a 456-page tome put together by the OECD Nuclear Energy Agency and International Atomic Energy Agency.
One section of the Red Book covers how much uranium we have available at different mining costs: $15 per pound is considered cheap and $50 is considered expensive.
I pulled some numbers from the latest edition. As you can see, we're running out of cheap uranium...
At that rate of decline, we might already be out of uranium that costs only $15 per pound to mine. But we do have plenty of uranium... if we're willing to spend $100 per pound to get it.
Between 2003 and 2006, uranium sold for between $12 and $35 a pound. So the 2007 Red Book didn't even bother counting uranium resources that cost $100 a pound to extract. That's changing...
Right now, uranium sells for $46 per pound. It seems a long way from $100-plus. But there's not much to stop the price from heading that high.
You see, one ton of coal is enough fuel to generate 2.4 megawatts of electricity for one hour. One thousand cubic feet (one mcf) of natural gas is enough fuel to generate 0.6 megawatts for one hour. One pound of uranium will generate 14.4 megawatts for one hour.
So uranium is six times more efficient than coal and 24 times more efficient than natural gas.
Theoretically, that means power companies could pay six times as much for a pound of uranium as they pay for a ton of coal, about $60-$80 these days... or 24 times as much as they'd pay for an mcf of natural gas, about $4.35.
Keep in mind, they can't easily switch from one fuel to the other. I'm just pointing out uranium is an efficient fuel source. More importantly, its cost is a tiny fraction of the operating costs of a nuclear power plant. It could double in price and have little effect on a power plant's bottom line.
We have limited downside: uranium costs more and more to mine. And on the upside, we've got plenty of room to run to $100 per pound and higher.
That's tremendous news for companies like Cameco, the world's largest uranium miner. Cameco has long-lived uranium mines already in production and spends about $28 a pound to get it out of the ground. Companies that hold those kinds of resources will do very well as the uranium price rises.
Construction stock BLOWOUT. World's largest cement maker Cemex plunges 6% to new 52-week low. Huge sand and gravel producers Martin Marietta and Vulcan Materials do the same.
Natural gas stock BLOWOUT. Huge producer EnCana hits new 52-week low... new lows for Chesapeake Energy, Range Resources, and Ultra Petroleum.
Yahoo shares down yesterday to reach new 52-week low.