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A Political Push For Coal

Written by HardAssetsInvestor.com
May 29, 2007

The lawmakers are at it again, this time it's subsidies for coal-to-liquid alternative fuels. The bill in question (S.155 or Coal-to-Liquid Fuel Promotion Act of 2007) has been authored by Senator Jim Bunning (R) of Kentucky, and offers a helping hand to the coal industry's push to green-ify.

As with most alternative fuels, there's too much fluctuation in oil prices for private investment to risk getting into bed with the coal industry's effort to open up new coal-to-fuel production plants, even though they claim that they can make a profitable product and compete with oil if oil remains above $50 a barrel. Private investors have seem oil tumble too many times to be snookered into that investment.

So, here's what Senator Bunning is asking for: subsidized production, subsidized research, and price support depending on what oil does. In other words, he wants to remove as much risk as possible for business.

Sound familiar? It should: the coal industry is hardly the only alterno-fuel with it's hand out for federal money; ethanol has been reaching into Uncle Sam's pockets and pulling out big subsidies for years.

Let's put it in perspective. What is coal-to-liquid fuel all about? It's the processing of coal into diesel for cars, trucks and even airplane fuel. This is not a new fad. Germany used it in World War II, and South Africa used it during the apartheid oil embargo. But it's got issues. First, the processing plants are expensive, billions of dollars expensive. Second, they pump out a lot of the greenhouse gasses most alternative energy sources are designed to prevent. Ethanol has a lot of the same issues - the expensive plants, the environmental arguments (Is it really a green fuel? Does it take more energy to produce than it contains? Etc.)

There never has been a free lunch.

But get used to it. It may be early, but we're in an extended election year. Every would be denizen of 1600 Pennsylvania Avenue is looking for no-lose issues, and this alternative fuels appear to be one of them. Clean coal makes red states happy because most of the Coal is coming from and is used in red states.

Corn-based ethanol is a winner for the same reason, red states dominate both production and processing. So Republicans get to help their supporter's economies, while still getting environmental street cred with blue states. And Democrats can look like they are sticking to blue state environmental values, while throwing an energy independence bone to the red.

The only folks who will really complain are small-government fiscal conservatives and hard-core environmentalists. And those represent both sides of the bell-curve tails.

Massively oversimplified stereotypes? Of course. But that's never slowed down a position paper yet, so expect to see this kind of legislative support and more for the foreseable future. And all that trickles down into a real impact on your portfolio.

Here are just a few of the investment implications:

1: Support for Corn and Soybeans as fuel sources isn't going to go away soon, and will do nothing but increase as the price of oil stays high. This additional non-cyclical demand puts upward pressure and acts as a kind of floor on prices.

2: Coal, as a commodity, will become more versatile and thus more liquid (pardon the pun); futures markets and more interest in coal investments could be forthcoming.

3: All this political hubub really comes down to oil prices. The hard reality of being a US politician is that there's only so much you can do. Politicians can't invent new oil sources or cheapen refinery capacity. But they can turn tax dollars into energy dollars. So you might not see it at the pump, but you will be paying for that clean-coal diesel and corn-belt ethanol one way or another.

The more expensive it is to fill up the tank, the more grass roots polling will convince politicians that they need to be seen as doing something. This acts as a bit of a ceiling on oil prices, although the height of that ceiling is anyone’s guess. At $150 a barrel of oil, you'd see dramatic action - political, legislative and economic shifts on a Hollywood-Movie scale. The same can be said for $25 a barrel oil. OPEC lives in the vast gulf in between those ridiculous hypotheticals. You can bet they're watching the emerging election landscape, and will be playing their cards one at a time and with great precision to keep oil prices at that tipping point level that maximizes their profits.