Trickle Down Enernomics

Cause and effect. Yin and yang. Action and reaction.

However you say it, certain events are bound to induce certain others.

You go for a run: your heart rate elevates.

You step on the gas: your car goes faster.

You leave on all the lights: your house needs more energy.

In those types of situations, the latter event is certain to happen.

And the future of energy is involved in a similar relationship — one that will mean decades of high and sustained returns for investors who spot the trend.

When Population Increases: Energy Demand Goes Up

It’s not a difficult principle to grasp.

And with global population expected to hit 7 billion in a few months, and a population forecast that looks like this…

It’s no wonder we have an energy demand forecast that looks like this:

That’s a 40% jump in global energy demand by 2030.

Electricity demand is growing twice as fast, projected to be 76% more than we use now.

The International Energy Agency says we’ll need $25.6 trillion to get there.

For perspective, that’s 55.5 million years of $1,500 mortgage payments. Gross domestic product (GDP) of the largest economy in the world is only half that.

Trickle Down

Of course, that number is all inclusive. It’s counting investment we’ll need in everything from coal to solar to transmission.

I’m of the opinion that most long-term energy bets are good ones at this point.

Billions will be invested in all technologies, no matter how clean or dirty.

But if you look closely at the second chart above, you’ll notice only two types of fuels show significant growth after the year 2000: solar and nuclear. The share of every other fuel stays the same or contracts.

I’m a proponent of both, but today I want to talk about nuclear. And I want to talk about nuclear for two specific reasons:

1. Japan

2. uranium

Because as hundreds of billions are invested in the sector in the face of the Japanese crisis, uranium prices will get back to their prior trajectory… and you’ll want to be invested before that happens.

The Japan Effect

Nary a month gone by since the earthquake one must still mention it when discussing nuclear energy.

But as Obama:

America gets one-fifth of our electricity from nuclear energy. It has important potential for increasing our electricity without adding carbon dioxide to the atmosphere. But I’m determined to ensure that it’s safe.

And South Korean Prime Minister Kim Hwang-sik:

We have to continue our economic growth, and we do not have alternative sources for energy. We should watch how our efforts in (developing) new renewable energy sources proceed, but now is not the time to scrap our nuclear energy policy.

And French President Nicholas Sarkozy:

The problem is more about establishing safety norms than it is about the choice of nuclear energy, for this there is no alternative right now.

And Xue Xinmin with China’s National Development and Reform Commission:

The main impact (of the Japan crisis) is to tell us once again that we should put safety first, but it won’t affect our overall strategy.

Have all said since the disaster (and I could go on), the nuclear industry is not going to wane.

Uranium

The nuclear industry needs plenty of uranium just to maintain current output levels. It’ll need even more as it grows in places like China and South America.

And the reason I love uranium as an investment is that some of that $25.6 trillion will trickle down to the source: miners.

Take a look at a two-year chart of a few uranium miners:

They’ve returned anywhere from hundreds to thousands of percent recently as investors began to take notice of nuclear’s role in the future energy mix, as I showed you in the energy demand chart above.

But it isn’t hard to see when the nuclear crisis mounted in Japan.

The entire sector has been on a downward skid as the collective world has yet to let out its month-long gasp.

You need to be buying now in order to take advantage of discount prices before uranium prices — and miners — resume their imminent ascent.

Call it like you see it,

Nick Hodge
Editor, Energy and Capital