Novice Investing - Cost Effective Energy Resources

Date: Friday 05th 2008f September 2008 05:38:36 PM

Cost Effective Energy Resources - 10/04/2006

By: Hari Wibowo

Energy stock was hot over the past couple of years. That is understandable. Oil price has more than quadrupled from its sub $ 15 a barrel price late last decade. Even after its recent pullback, oil is still a good investment if you hold them for several years. Now, I am not here to tell you to invest in oil or energy stocks but rather to look at the cheaper energy sources of between oil, natural gas and coal.

Now, just what exactly is heating value? Heating value is the heat released by a combustion of a fuel. The higher the heating value per unit weight means that an energy source is emitting more heat than the rest. This is an important concept in any industrial settings. If you typed 'heating value' in Wikipedia, you will find heating value of these three energy sources. To run 100 W lightbulb for a year (equivalent to 876 Kwh of energy consumption), you would need 400 kg of coal, 230 kg of oil ( 1.76 barrels) and220 m³ of natural gas. Now, if this seems unfamiliar to you, it is okay. But in the future market, oil is traded in barrels, coal in kilogram and natural gas in million British Thermal Units (BTU). Recent price of natural gas is $ 5.00 per Million BTU, Oil is $ 60 per barrels and coal is $ 40 per Metric Tons.

Here is the cost of running a 100 W of lightbulb for a year:
Oil: $ 105. 40, Natural Gas: $ 14.95, Coal: $ 16

This finding is somewhat surprising. I always knew that oil would be the most expensive to heat but it is in liquid form and most convenient. It also has the best distribution network from the rest. Natural gas would naturally comes next. While it is in gaseous form, it is often found along with crude oil. Further, natural gas can be transported via pipelines inland. In addition, natural gas is a cleaner fuel than the two but its gaseous form makes it more inconvenient against the oil. Coal would be the cheapest energy source from the three. It is the dirtiest fuel among the three, emitting significant amount of pollutants, namely Sulphur. In solid form, it is harder to transport and most expensive. Inland, you need to transport coal via trucks or locomotives which is the most expensive means of transportation. Pipeline is generally cheaper once you have built it.

Looking at the above, we can draw several conclusions.

1. My Calculation is just plain wrong. I had to recheck this figure to make sure that I don't make any careless mistake. But, I can't find it, thus far. Let me know by contacting me here.

2. Wikipedia got the wrong figure. By that, I mean it takes less than 400 kg of coal to heat 100 W lightbulb for a year. Since, Wikipedia is believed to be a user-generated community, I believe that if this figure is wrong, someone would have corrected it by now.

3. Natural Gas is a screaming buy. While I do not have any quantitative figure, notice that natural gas price has fallen by more than 50% since its $ 15 per Million BTU peak. Oil price has dropped around 25% since its $ 78 per barrel peak and coal is relatively stable at that price. There is no doubt that natural gas is the most volatile commodity of the three. Even just two weeks ago, Natural gas was priced at a mere $ 4.35 per Million Btu. It has since risen to $ 5.50, a gain of 25% in such a short span.

What is a good natural gas play? The bigger, established players generally has other side business such as exploration or oil production. If there is an Exchange Traded Fund (ETF) that moves purely based on natural gas, that would be an excellent investment vehicle to take advantage of the volatile natural gas market. Can you help?

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

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