Thursday, August 16, 2012

When Free Markets Work

In an age where every financial market is manipulated and distorted by government "good intentions" its good to be reminded why we have (or had) this system called "free markets". While Obama was sending billions of dollars to "green energy" companies like Solyndra and Fisker who immediately made the money disappear like a segregated account at MF Global, something was going on that politicians missed. And because they missed it, they couldn't destroy it. That was natural gas hydraulic fracturing, or fracking.

Fracking made the recovery of natural gas more economical. As a result, drillers began fracking and increasing production of natgas which has driven the price lower, to the benefit of consumers. So low in fact, that its now competitive with coal, that abundant but dirty alternative. The result? Cleaner, cheaper energy.

From Wolf Richter at

But the graph shows something far more important: a narrowing of the gap between coal and gas-fired power generation. It’s not just the low price of natural gas that did it—but a new power generation technology and yes, the usual suspect, Congress.
Gas turbines are an old technology. Most of the energy is wasted as exhaust heat. They’re inefficient, compared to coal-fired steam turbines. But they have an advantage: they can be brought on line quickly to cover peak loads. So coal and gas have been used in parallel: coal to produce low-cost base power and gas to produce more expensive peak power during periods of high demand (daytime, summer).
Gas didn't pose a threat to king coal ... until the arrival in the 1990s of the natural gas combined-cycle (NGCC) turbine: like the classic turbine, it drives a generator, but instead of blowing the “waste” heat out the exhaust, it uses the energy to generate steam that, as in a coal plant, drives a steam turbine that powers another generator. Like their old-fashioned brethren, NGCC plants can be brought on line quickly, but when used for base power, their efficiency can exceed 60%—much higher than that of a coal plant.
A game changer. With natural gas prices as low as they’ve been over the past years, operating costs for power generators have plunged. It doesn’t hurt that NGCC plants have lower capital costs than coal plants—$600 to $700 per kW versus $1,400 to $2,000 kW—relatively short construction times, and environmental benefits. The long-term shift to natural gas looks like this:

Natgas is not just cleaner measured by particulates but also by CO2. As a result of new gas plants, CO2 is now at a 20 year low.

In a surprising turnaround, the amount of carbon dioxide being released into the atmosphere in the U.S. has fallen dramatically to its lowest level in 20 years, and government officials say the biggest reason is that cheap and plentiful natural gas has led many power plant operators to switch from dirtier-burning coal.
Many of the world’s leading climate scientists didn’t see the drop coming, in large part because it happened as a result of market forces rather than direct government action against carbon dioxide, a greenhouse gas that traps heat in the atmosphere.
It was the free market, and not government that found a cleaner way. Contrast that with what we spend on ethanol subsidies and the billions spent in the "stimulus" for bankrupt solar companies and battery companies going bust. It was free markets, not central planning, that made America the wealthiest, most productive country in the world. Returning to free markets will involve some pain as assets are repriced to their true value, but the pain of the adjustment is quick relative to the long term depression Japan has endured by trying to keep zombie banks afloat.

Note on investing in Natgas:
The market price of natgas has fallen below its cost of production. This has meant hard times for gas drillers and anyone invested in them. As I have shown above, the consumers are the true beneficiaries. There are, however, ways of playing this trend in the increased use of natgas for power production. One way is by investing in Master Limited Partnerships of natural gas pipelines. These organizations make their money from "tolls" on the gas that moves through their pipes. These MLP's have a tax advantage similar to Real Estate Investment Trusts, or REIT's  in that they do not have to pay income tax on revenues that are passed through to investors. The result is more money to investors. One Nat Gas MLP is the ETF that tracks the Alerian Natural Gas Index (Ticker MLPG). As of this writing it yields about 6%. In this age of financial fraud, I like investments with lots of proven cash flow. And their is no better way of proving cash flows than when they are paid out to you.

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