Under new U.S. President Barack Obama, it was all supposed to be different. The new administration had vowed to deliver a national energy plan that would guarantee this country's future energy security. The rich and geographically nearby Canadian oil sands should have been part of that plan.
At the end of the day, the United States dropped the ball on the oil sands, meaning Americans are stuck with yet another pieced-together national energy plan that has more sizzle than steak.
Unfortunately, the cost of this misstep will be higher than ever.
America's energy insecurity
U.S. President Barack Obama has a serious energy dilemma on his hands. This isn't a new story. In fact, it's the same dilemma that most U.S. presidents - Republicans and Democrats, alike - have had to face.
What's different now is the timing.
For the better part of a century, Canadians and Americans have had mostly positive, mutually profitable dealings.
But there were always tensions around the edges.
Former Canadian Prime Minister Pierre Trudeau once famously remarked that Canada's relationship with its much-larger neighbor was akin to "a mouse lying in bed with an elephant." And a longtime Canadian investing adage holds that "when the U.S. economy sneezes, Canada catches a cold."
U.S. presidential administrations - and the current one is no exception - have pretty much taken for granted a potentially limitless access to the abundant resources of America's northerly neighbor. The attitude comes across as something akin to: "I'll just come get whatever I need."
But as they say in the racing world, "you snooze, you lose." America snoozed on the oil sands, and China beat us to the finish line.
This failure to lock up this energy source is just a part of what's going wrong with the current U.S. energy plan.
Understand an important point: This critique isn't motivated by politics ... it's motivated by timing. These miscues are becoming apparent at a most-critical juncture, as this country tries to rebound from the worst financial crisis since the Great Depression. The United States will already be dealing with massive debt costs. Now it appears we'll be adding massive energy costs into that already-worrisome equation.
In his inaugural speech, with a reference to the "clean-energy economy," President Obama made it very clear that he wanted to encourage the use of green technologies to fuel America's energy needs, all the while insisting that energy security remained paramount.
My view is that President Obama had to establish a list of priorities. He had to decide whether the risk of supply disruptions, in the near term, was outweighed by the benefits of responding favorably to environmental concerns and stimulus for the green power sector. After all, at the time, stock markets were in the gutter, jobs were being slashed, and the average constituent who'd voted for him saw a pretty bleak future.
If you look at some of the policies that have been enacted since then, it's clear that the president chose to favor spending on jobs and green energy.
He's not alone.
You see, governments the world over are rushing to pass "green legislation." They are now requiring that higher minimum levels of electricity be generated from renewable energy sources in order to help fight global warming.
And they are throwing money at the challenge like there's no tomorrow. Indeed, a recent United Nations report stated that worldwide investments in green-energy technology totaled $140 billion in 2008, an outlay that trumped the $110 billion earmarked for fossil-fuel projects - the first time that's ever happened.
The cynical side of me sees these financial statistics and concludes that the Obama administration must view this current state of affairs as a great opportunity for it to raise taxes and then redirect that additional revenue into the "sectors" it favors - under the guise that it is saving the planet and creating jobs (more on that below).
But the practical side in me realizes that, as investors, we just need to see the opportunity that's embedded in the new reality, and look for ways to profit.
Here are a few examples of these recent policies in the good ol' U.S. of A. The investments are fairly substantial. But instead of taking a free-market approach in which the best product, or best technology, carries the day, these surgically-focused programs have largely already identified the winning sectors, and winning technologies. For instance:
- The American Recovery and Reinvestment Act will contribute 30% of the cost to build renewable power plants. That's a huge chunk of any project that can be depreciated over five years. Plus, the U.S. Energy Bonds Program will make loans available at a cheap rate of roughly 5% - or about half what they'd otherwise be. The U.S. Department of Energy (DOE) has earmarked a whopping $10 billion to this program to make it happen.
- Prospective cap-and-trade legislation is widely anticipated from the Obama administration. The goal is to cap the pollution any given plant can generate. If polluters produce carbon dioxide emissions above their allowable limits, they will be forced to buy "carbon credits" from the likes of "green power producers" that generate little or nothing in the way of emissions. So cap-and-trade is a potential source of tremendous additional income for the entire green power sector.
- The U.S. government has an obsession with geothermal energy. The government will be contributing $400 million to the DOE's Geothermal Technologies Program. The goal is to enhance research for this sector. All of this is in addition to the $2 billion that's already contributed to the DOE to further research and development.
Asia to Canada: Let's make a deal
Critics have blasted U.S. leaders and U.S. oil companies for not locking up as much of Canada's vast supply of reliable oil as possible. By failing to do so, the United States essentially opened the door for China and other Asian nations, which have been ardently courting Canada.
Just last September, we saw PetroChina Co. Ltd. (NYSE: PTR) pay Athabasca Oil Sands Corp. (TSX: T.ATH) $1.9 billion in cash for a 60% stake in two undeveloped Canadian oil sands projects. It was PetroChina's biggest acquisition in North America.
In October, state-owned Korea National Oil Co. (KNOC) snatched Canada's Harvest Energy Trust for $1.8 billion in cash, and the assumption of more than $2 billion in debt - meaning the deal was done at a hefty premium to its market value. KNOC hopes to ship Alberta oil sands to refineries in South Korea. That move not only helped concretize that Asian nation's plan to quadruple production from current levels to 300,000 barrels daily by 2012, it also enabled it to move assets out of depreciating greenbacks and into appreciating oil.
Just two weeks ago, the China Petroleum & Chemical Corp. (NYSE: SNP), also known as Sinopec, offered $4.6 billion for a minority stake in the Syncrude Canada Ltd. oil sands plant. This attempted deal is causing waves, at least in Canada.
Sinopec is Asia's biggest refiner, with an expanding capacity to process heavy oil, the kind Syncrude produces before upgrading to synthetic crude. Syncrude is the world's largest producer of light sweet crude oil from oil sands.
The deal would give Sinopec a veto over any decision for Syncrude to invest in upgrading more oil in Alberta. That province would clearly prefer to see upgrading done at home, since bitumen processing creates jobs and tax revenue. This is the first time a Chinese state-owned enterprise is taking on a share in a major oil producer, so the Canadian government could soon be placing its foreign-investment-review policies under a powerful microscope.
Remember, too, that because of its centralized decision-making, China's government can act much more quickly, and without having to fear any public-opinion backlash. In the past, China also hasn't had to worry much about environmental groups or non-governmental organizations (NGOs) - just ask Tibetan protestors.
Another advantage Asian culture has in the realm of planning is its tendency to take a much longer view of major issues. For example, Chinese planners don't just consider the next quarter or the next year, they will look decades - or even generations - into the future, and will plan accordingly. It's a lesson Western corporate leaders would do well to observe, and perhaps even copy.
Considering the massive modernization most of Asia is undergoing, you can continue to expect an aggressive acquisition stance to be the norm for some time.
After years of developing nations accumulating Western fiat currencies through exports, we're now witnessing a massive generational transfer of wealth from West to East.
Obama's flip flop
This is sure to remain a hot issue. But I believe that President Obama's approach may well be an excuse to favor homegrown U.S. businesses with a less obvious "Buy American" policy. Here's what I mean.
I find it particularly interesting that President Obama recently did a complete 180-degree turnabout on his energy policy by opening parts of the Atlantic Ocean and Gulf of Mexico to oil drilling.
Money Morning Chief Investment Strategist Keith Fitz-Gerald attributes the change to an administration realization that a weakening greenback makes it difficult for America to accumulate oil assets outside U.S. borders. I think Fitz-Gerald is right.
So in one fell swoop, the new president can address multiple issues with this single move. U.S. oil producers must be ecstatic to now be able to explore, at home, over vast areas, and using current technologies. The lure of some attractive discoveries is strong. At the same time, the president can now say that he's dealing with the issue of energy security, since anything newly discovered will be located inside U.S. borders.
More importantly, though, President Obama's cap-and-trade scheme may be nothing more than an insidious trap for foreign-energy producers, and an effortless windfall for American producers and distributors. Under such a system, one can imagine a scenario where oil exporters would be required to have a quota allowance to sell into the U.S. market to "comply with environmental laws," where quota could only be bought from an American concern. And voilà, a large chunk of the profits end up at home here in the United States, while the exporter's margins run thin.
It's true that developing new technologies to produce oil from oil sands more cleanly would counter some of this problem, but that takes years of research and serious funding. Meanwhile it's a pretty safe bet even more of those assets will continue to migrate into Asian hands.