Monday, July 17, 2006
In the waning moments of World War II, General Patton’s tanks began to run out of fuel as they dashed across France towards Berlin.
President Eisenhower diverted supplies from Patton’s 3rd Army to the British, driving on Belgium and Holland. Patton’s only ready source of fuel was what they could salvage from German vehicles until those key ports were in Allied hands.
During the war, Germans didn’t use fuel produced from crude oil, it was produced from something a little different...
In the 1920’s, German chemists successfully synthesized liquid fuel from coal. The process was named for them: Fischer-Tropsch. That process fueled the German war machine.
Currently, the price of oil is approaching $80 a barrel, and it’s been north of $60 for all of 2006. These high prices lure companies to research alternative fuels... like older techniques that weren’t profitable at $25 or $35 oil. This includes the fuel produced from the Fischer-Tropsch process.
In the U.S., coal was strictly for electrical generation. With the possible exception of Jay Leno, nobody drives Stanley Steamer cars anymore.
However, the stable (and high) oil price encouraged one U.S. company to take the financial risk into coal to liquid processing. The company is Rentech, Inc. (RTK). They are turning coal into diesel fuel to compete in the lucrative trucking fuel industry.
Rentech is only just starting this project, but they’ve bought infrastructure. It’s a start.
It would take years to build the infrastructure necessary to replace diesel from crude with synthetics. However, fuel from coal could fill some critical needs in our society.
First, the domestic supply of coal is huge. Coal is a source of fuel to directly compete with foreign oil.
Second, it will help lower transportation costs. If synthetic fuel options are available, diesel prices will fall. Competition is healthy for a market, but there have never been alternative fuels to consider.
There is a hugely successful company in South Africa, Sasol (SSL) who’s been doing this for years. Shell recently agreed to invest $5 billion into China’s budding coal to liquid industry.
I’m excited about this process. Oil prices are high enough, and technology is advanced enough, that we are going to see some real competition in this area.
I’m not worried about oil prices falling out from under these companies. I’m sure (sorry to say) that the days of sub-$50 oil are history. The good news is that high oil prices are fueling innovation and discovery... and this area will produce some big winners in the stock market.
December 2006 Crude Oil now trading for $80 a barrel.
D.R. Horton, America’s largest homebuilder by sales, reports surging cancellations and cuts earnings. Now down 50% from 2006 highs.
Worst performing ETFs of 2006:Internet HOLDRs (-19%) Biotech HOLDRs (-12%) Semiconductor HOLDRs (-10%) Broadband HOLDRs (-8%) 10-Year Bond Fund (-7%)