Energy Outlook for the Next Decade: Part 2

Oil, Gas, Coal, Uranium, Renewables, Efficiency, Water, and Agriculture

Last week, I explored some of the big themes for the coming decade. For my final column of the year, I offer my specific outlooks for oil, natural gas, coal, renewables, uranium, efficiency, water, and agriculture. Oil

Oil will probably spend 2010 rangebound between $60 and $75, but could fall lower if the deflationary recession persists.

As I discussed in Part 1, it will probably take until 2012-2013 for demand growth to push the current 4-5 mbpd of spare capacity back down to the 1% breaking point, but then we should see another price spike.

For reasons I have discussed previously, I'm no longer convinced that the next few cycles of oil prices will breach the $147 peak or the $33 low set in 2008. But if Cohen's diagram (see Part 1) is correct, then we should continue to expect higher highs and higher lows, with oil peaking somewhere around $160s and bottoming around the $50s in the next cycle (with an error bar of perhaps $20!).

The best way to play it will be to scale in on the descent and scale out on the ascent, rather than trying to time the tops and bottoms.
By mid-decade, I think the world will be convinced that the peak of oil is in the past, putting an end to that debate. The realization should kick off an intense round of competition to secure the remaining resources, drawing more Chinese money to Canada, Brazil, and Africa, and committing the U.S. to retaining its military foothold in the Middle East.
Coal
As much as I hate to say it, coal is poised for a long-term bull market. As oil, and then natural gas decline, the world will fall back on it as the cheapest hydrocarbon of last resort in the next decade. It will be the fallback feedstock for liquid fuels for cars, trucks, and airplanes, plastics, and industrial chemicals.

The world will groan under the CO2 output of the devil we don't know, but will choose it over the devil we do know: economic decline. Therefore I expect the better part of the coal boom to fall in the latter half of the decade, as emissions concerns are overridden by economic pressure. Coal-to-liquids, in particular, will be the recipient of heavy sponsorship from the military and aviation sectors.

Natural Gas
The next decade outlook for natural gas is the most uncertain of all. The current glut in North America owing to the shale gas boom could be resolved in one of two ways: It will either continue through the decade, if long-term production rates are sustained at high levels, or it will crash around 2013-2014 if production falls rapidly after the initial burst of output, as some analysts believe.

There simply isn't enough data to make that call at this point, but my gut feeling is that there will be a short-term boom for the next few years, and a significant load will be shifted from diesel to CNG for transport trucks. Then supply will peter out before the end of the decade, with some ensuing panic.

Boom-and-bust cycles will characterize the North American gas market until prices stabilize above $7 per thousand cubic feet. LNG export capacity will continue to grow in the Middle East and Russia, but most of it will go to non-U.S. customers, and the North American market will remain largely domestic.
Uranium

As a spate of recent news reports have recognized, the global uranium supply is running low. We've nearly worked through the stockpile of uranium from retired nuclear weapons, and the quality and availability of fresh ores to mine is falling. As I do not see any significant momentum toward next generation reactor designs, I believe light water reactors will continue to dominate the nuclear sector, which means another decade of high demand for uranium.

While uranium supply peaks or declines, demand will continue to increase as new reactors are built, particularly in China and India. Nuclear power will not add a significant amount of primary energy to the global mix, but uranium will be a hot commodity. It will see at least one, and maybe two boom-and-bust cycles in the next decade.

One no-brainer investment in this sector would be Cameco Corporation (NYSE: CCJ). They've been making good progress lately and I think they will succeed in pumping the water out of their Cigar Lake mine and putting it back into action.
The whole uranium producer group should be a long-term hold for the decade.

Agriculture
At this point, I can't really think of any reason to be bearish about agriculture. Fertilizer and grains will be hot throughout the decade as we try to feed the world's growing population and combat the decline of oil with biofuels.

The added pressure will only exacerbate the problems inherent in commercial agriculture, accelerating the boom in organic and local food production.
The encroaching desertification of California - along with price spikes in oil - will make it increasingly difficult to export its produce to the Midwest and East Coast (unless by some miracle we get very serious, very quickly about rail in this country). This will have wide-ranging and very long-term implications for U.S. food supply.

GMOs designed for drought tolerance and water efficiency plays in the ag sector will figure prominently. Both technologies will probably see a frantic investment bubble this decade. How long they can hold back the tide of climate change and desertification will remain an open question in the '10s.

The long-term trend for agriculture is much easier to identify. By the end of the century, nearly all of our food supply will have to be relocalized. Those who are paying attention, however, will realize it by the end of this decade.
Accordingly, farmland will continue to be a hot market throughout the decade, particularly in Africa, Asia, Central and South America, and possibly Canada.

Water
Water will be one of the biggest investment areas - and socially speaking, one of the biggest pressure points - of the next decade, due to climate change and simple population overshoot.
This month brought three fresh examples of the issues we're facing:
* In a classic case of the energy-water nexus, the long-running drought in South America has reduced Venezuela's hydropower supply enough to force them to cut back on oil refining activity, with the end result that they'll have less heating oil to send to places like China this winter. China will make up the loss by burning more coal. * Much of East Africa received only 5% of its normal rainfall in November, putting millions of people at risk of starvation. * A new report found that the aquifers supporting the Central Valley of California, a region that produces 8% of the U.S. food supply, have lost more than 30 cubic kilometers of water (about 8 trillion gallons) since 2003 due to drought, reduced water exports from the Sacramento Delta, and too much groundwater pumping.
Water desalination and purification have long been a major investment focus in the Middle East, but the American Southwest, Australia, Africa, and South America will join them this decade as new markets in desperate need of solutions. Technologies running the gamut from personal water treatment to city-scale water desalination will benefit from this potentially enormous market.

Efficiency
Efficiency is by far the low-hanging fruit in our declining energy future, and this will be the Decade of Efficiency. Consider this simple metric: It takes $4-$5 in solar PV to generate the same amount of energy that $1 in insulation measures will save.
Cash for Clunkers and Cash for Caulkers were only the beginning of a long decade of incentives for higher efficiency. Not just cars and buildings... but appliances, combined heat and power applications, district heating from co-located waste heat generators, and dozens of other approaches will be vigorously pursued. By the end of the decade, I expect the efficiency of U.S. appliances and vehicles to approach what Europe enjoys today.
The largest niche in efficiency will be retrofitting homes with insulation, caulking, windows, and solar generation. Small businesses doing energy auditing and building efficiency upgrades - like San Francisco's Recurve, who have figured out how to scale their businesses - will be home runs. By the end of the decade, I also expect building efficiency, good passive solar design, and low water use to be mandatory elements of architectural college curricula.
Building the smart grid will be a top priority for this decade, along with at least the first part of a long-distance national HVDC grid. Not only will it enable the growth of renewable power, but it will be a saving grace in helping us cut the waste and make the most of our existing grid power supply.

Article by Chris -