Geothermal Energy Offers Alternative To Oil

| June 2, 2008 | 0 Comments

The oil frenzy’s still building.  Last week we peaked at almost $135 a barrel.  According to CNBC and the talking heads, it’s the story of the century.  Every tick higher on oil prices brought a new flood of information, concerns, and stories.

Now oil is off $10 per barrel.

Never fear.  The story of the century is not getting away.  The media has shifted their reporting.  Now instead of asking if this is a new high they ask if this is the start of the fall.

Unfortunately for most of us, it doesn’t matter.  Gasoline prices are now over $4 per gallon in many areas, and the trend is for higher prices still. What we need is for oil to fall by $50 not $10.

The way I see it there are a number of good ways to profit from high oil prices.  The first and easiest is to invest in the oil producers.  They benefit from high oil prices.  The higher we go the more profits they make.  Buy a basket of the biggest companies and hold on for a wild ride. Another way takes a bit more thought.

To profit from oil prices you need to invest in companies that could help eliminate the world’s dependence on oil as the major source of energy.

So, what are the alternatives?

The holy grail of alternative energy is to find a source of energy that’s “on” all the time.  Wind and solar power are at the mercy of Mother Nature.  Pollution is also an issue.  That’s why nuclear energy won’t be completely accepted as an alternative energy source.

Coal, oil, and natural gas are fossil fuels which one day may run out.  And now they’re becoming prohibitively expensive.

So what’s the solution?  I think part of it is geothermal energy.

The future of geothermal energy is bright.  The biggest advantage geothermal plants have is no fuel costs.  No coal, no oil, no natural gas. Power production is never impacted by cloudy days or lack of wind.  It’s an “always on” fuel source that’s just waiting to be harnessed.

Give me a moment and let me explain why I like geothermal.  Then I’ll give you an investment idea.

First, what’s geothermal energy?

Geothermal energy is produced from the heat of the earth.  The slow decay of radioactive materials in the center of the earth generates enormous amounts of heat.  The melted core of the earth is a giant ball of molten hot magma.  The most obvious signs of this heat and power are volcanoes.

Other signs of this heat include hot springs and geysers.  Magma makes its way close to the crust of the earth bringing with it significant amounts of heat.  When rainwater reaches these areas it’s often turned into hot water or steam.

How do geothermal power plants work?

Geothermal power plants are established near these hot areas.  Holes are drilled allowing for water to be injected, and for steam to be extracted. Water is injected down one hole and is heated by the earth.  The hot water and steam naturally look for a way to escape.  The steam rises out of the other holes drilled in the area, and it’s used to power a turbine.

Most other power plants operate in a similar fashion.  They use a fuel source (like oil) to convert water to steam.  The power of the steam drives a turbine, generating electricity.

The supply of steam generated by the earth is very valuable.

Unfortunately, geothermal won’t ever provide all of our power needs. Most areas that are great for geothermal power are far from major cities. However, geothermal can provide an important piece of our energy needs.

So how do we profit.

When you do your research on geothermal companies you’ll realize there are lots of small players.  Lots of companies own land with great geothermal potential.  Some have drilled test wells.  Others are starting to install generation equipment.  Many more are looking for financing.

I’d ignore them all for now.  They’re no different than a wildcat oil driller. It’s a lottery ticket, not an investment.  You have no guarantee that they’ll be able to get a plant up and running.  The promises of great riches are wonderful, but my hunch is that most of them will fail.

However, there’s one company that I do like.  It’s the biggest geothermal company out there right now.  Ormat Technologies (ORA).  They operate under the build-own-operate business model.  Not only are they working towards getting new geothermal plants built, once they are built they handle all of the operations.  This gives them a steady stream of revenue and profits.

The company is huge, they have a $2.0 billion market cap.  Last quarter they had almost $70 million in revenue and generated more than $10 million in profits.  No doubt they are the 800 pound gorilla in the industry. Look at Ormat as a long term energy play.  They’re a great combination of a power plant operator and alternative energy company rolled into one.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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