Preparing for Energy Battle

Written By Nick Hodge

Posted January 11, 2011

An energy battle is brewing… and the giants of the world’s energy armies are preparing.

I often write about connecting the dots of events going on around you. Here are some events from the past few months you should be keenly aware of.

Those who put the pieces together could be in for serious market profits this year.

Preparing for energy battle

As the effects of Peak Oil become unavoidable, as the world’s population grows exponentially without check, as urbanization increases globally, and so does energy demand — the world’s corporate giants know they can make a fortune.

It’s a game of energy chess, and the kings are getting their ranks in order.

November 7, 2010: Gates and Buffett take private jets to Gillette, Wyoming

Rumor has it these billionaire boys flew into the Cowboy State to check out Black Thunder Mine, which happens to be owned by Arch Coal (NYSE: ACI).

It makes sense…

China produced about 3.2 billion metric tons of coal last year, up 300 million tons (or 10%) from the year before. That’s about 15 billion barrels of oil equivalent — half the world’s annual oil production.

And China’s coal production has been growing like that for years.

Thing is, Beijing is saying that growth will come to an end this year or next. And if they want to keep growing their economy at an 8%-10% clip, the 300-million-ton-gap in cheap coal will have to be filled.

If it didn’t before, the Wyoming visit should make more sense now. Arch Coal is only up 60% in the past six months.

First Week of December, 2010: Three major oil mergers are completed totaling $1.82 billion

Transfield (ASX: TSE) bought Easternwell. Wood Group (LSE: WG) bought PSN. GE (NYSE: GE) bought Wellstream Holdings.

Three deals, one billion dollars; each involving the acquisition of a company possessing expertise in drilling for unconventional oil.

Conventional production has peaked. It’s a fact.

The future of oil is in tar, shale, and deep sea.

December 22, 2010: Oil hits $90 for the first time in two years

And right on schedule, oil climbs to a 27-month high. Gas prices immediately follow, reaching a $3.00 average nationwide.

On Monday, the Kuwait Oil Council said prices will hit $110 per barrel “in the next few weeks.”

The former president of Shell has called for $4.00 gas this year and $5.00 next.

Billionaire oilman T. Boone Pickens has said $90 oil will soon go to $120 with $4.00 gas to follow.

And it should say something that the closure of an Alaskan pipeline can send the price sharply higher, as is the case today. Prices don’t rise for pipeline closures unless the supply/demand balance is extremely precarious.

January 10, 2011: Duke Energy buys Progress Energy for $13.7 billion; DuPont buys Danisco for $6.3 billion

As oil prices rise, so will electricity and food prices. After all, oil is what lubes the gears of the global economy.

The population growth and urbanization I mentioned earlier will also have a big impact on the electricity market — namely increased demand in more centralized locations. Same goes for the agriculture market.

To prepare, Duke Energy (NYSE: DUK) bought Progress Energy (NYSE: PGN) this week for $13.7 billion, creating the largest utility in the United States.

Bloomberg says the acquisition increases Duke’s “ability to build new power plants.”

The same day, DuPont (NYSE: DD) announced it would buy Danisco (COP: DCO) for $6.3 billion. Danisco is only the world’s largest food-ingredients maker and a provider of enzymes for the animal feed and biofuel industries.

DuPont is simply making a bet that it will cost more in the future to feed the world. A similar bet would be wise for your portfolio.

You can do it through a variety of agriculture ETFs or single companies like John Deere (NYSE: DE), Caterpillar (NYSE: CAT), or any number of fertilizer and seed companies listed on the exchanges.

Winning the energy war

It’s easy to see how some the world’s biggest companies are preparing for energy battle.

But no single one of them will win the war…

It will take various weapons — from using less oil to finding new ways to drill for it — for the world to overcome the challenges of Peak Oil and population growth that lie ahead.

Investing in those various solutions now is the only way to ensure economic security when those days arrive.

Call it like you see it,

Nick Hodge

Editor, Energy and Capital

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