Photo Credit: Toyota
As the oil market cools from its high of $147 back into the $115 area, investors are seeking alternatives. Though the oil market might be making a slight comeback on geopolitical occurrences and traders finding a bottom in the market, it's time to start thinking about the next energy bubble: the electricity bubble.
Hybrid cars the result of higher oil
As oil prices starting climbing, so did the amount of sales of hybrid and plug in hybrid cars. Plug in hybrids are becoming the new favorite amongst people looking for savings at the pump, as well as eco-friendly drivers hoping to limit their effects on the local ecosystems. Even presidential candidates are hopping on the Plug in hybrid; Barack Obama has stated that he hopes for 1 million plug in hybrids on the roads by 2015. While this rhetoric is familiar verbiage from the mouths of politicians, it's finally something that will be achievable through the many plug in alternatives hitting the market by 2010.
Plug-in Hybrids becoming very popular
Virtually every automaker has produced, or will produce, a plug in hybrid car by 2012, if not by 2010. Ford is coming out with many green SUV products to distance itself from its already beefed up lineup of gas guzzling trucks and SUVs. Volkswagen is producing a plug in version of its popular Gulf automobile, which will be launched by 2010. The Chevy Volt, a car that is said to achieve 40 miles on a full charge, or 640 miles with the addition of 12 gallons of gas, will come out in 2010 as well and feature dual plug ins for at home charging. There is certainly a lot brewing on the end of plug in hybrid innovation.
Electricity demand will skyrocket
What people don’t see is how this this trend will impact electricity demand in the future. In heavily populated areas across the US, prices for electricity are already 2-3 times higher than Midwest America. And as these car owners switch from gas powered modes of transportation to electric powered cars, we will see a huge demand for at home electricity that we’ve never witnessed previously. This demand will push up the price of all energy sources, mostly coal, and likely drop the price of oil because of less consumer demand at the pump.
Currently, coal is used to produce 49% of the electricity in the United States; however, further demand for energy will push coal prices higher as alternatives are still years away from ever hitting the market in mass scale. What this means for intelligent investors is the perfect opportunity to profit on a transportation shift. While alternatives should get a boost from higher energy demand, they’re still largely untested and exponentially more expensive to use than coal or oil based electricity production.
The fundamentals for higher prices line up
The fundamentals behind a price hike in coal are all set. Higher demand for coal coming from regional power producers will push the price of coal even higher. In more “greener” areas where the next generation plugin hybrid cars are expected to make a splash, electricity is already short. California has experienced plenty of brown outs as a result of limited energy supply, and further demand for electricity will only raise prices not only for electricity, but for the sources of energy, such as coal or oil.
An ETF for utilities
The exchange traded fund XLU is a great way to add exposure to all forms of utilities. The fund tracks the return of energy producers, namely electricity and gas production, but also the refineries and middle men in the energy business. For a broad spectrum of energy producers, this ETF is perfect. XLU is trading about 20% off its highs set earlier this year, but higher prices for electricity brought on by higher demand should give this ETF a boost.
KOL for Coal
For coal companies, there is no better alternative than KOL. The fund tracks the Stowe Coal index of 41 companies all involved in coal production, mining and refining it for usage. The best money will be made in coal companies rather than an investment in coal because profit margins grow exponentially with the price of the commodity. A change of 20% in coal prices could easily mean doubled profit margins for most producers and likely doubled stock prices.
Bracing yourself for the future means being in the market before the rest of the market catches on. The next big bubble will be in coal producers brought on by higher energy costs and demand for energy around the world. While current automobiles use zero coal for power, half of the electricity used to power plug in hybrids will come entirely from coal. With 135,000,000 cars in the United States being replaced at an average rate of 12 years, the energy landscape will look entirely different by 2022. Hold on tight, energy prices are only going to scream higher.