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”Don’t Let Perfect Be the Enemy of Good”

Sigma Investment Counselors

April 15, 2013

While it is unlikely that Voltaire had fossil fuels in mind when he wrote those words, several hundred years ago, the fit, for the US, is quite compelling. We use and need a lot of energy. We account for approximately 5% of the world’s population but contribute more than 20% of the world’s goods and services. That requires a lot of energy.

Currently, fossil fuels provide most of the world’s energy requirements and their shortcomings are well known. Unfortunately, there do not appear to be any near-term, practical alternatives to fossil fuels. If we are going to have to live with fossil fuels, the development of economic recovery technologies for shale gas is potentially very significant for continuing growth.

Consider the most likely alternatives. Nuclear, after Japan’s recent experience, is probably not a viable option. Renewable energy sources, such as solar and wind, are environmentally attractive but have serious economic and scale problems. I do not expect either to be major contributors to total energy requirements for at least a number of years. This suggests that we are likely to continue to be quite dependent on fossil fuels, of which, coal is generally considered to be the least desirable, with oil next and natural gas the least damaging. Fortunately, the US appears to have an abundance of accessible, low-cost, shale gas.

Shale natural gas is not a perfect energy solution, but it is relatively good. We have a lot of it and it is cheap. Developing, producing and transporting natural gas will require a significant infrastructure and is already generating a number of relatively high-paying jobs. The substantial volumes available and the ability to substitute gas for oil in many applications, should lead to domestic net energy self-sufficiency in a few years. If we construct LNG loading facilities, natural gas could become a significant export, with an attendant beneficial impact on the balance of payments. And the wide availability of relatively cheap gas is already encouraging international companies to relocate and establish facilities in the US that require large volumes of natural gas, with the attendant new jobs.

Over time, economic and environmentally attractive energy sources may come to fruition, but in the interim, “Don’t let perfect be the enemy of good”.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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