The past few weeks have been filled with strife, catastrophe, unrest, panic, and devastation. We witnessed one of the worst earthquakes on record, one of the worst tsunamis ever, both in terms of loss of life and the financial costs, probably the second worst nuclear accident in history, and multiple uprisings in various countries throughout the Middle East.
As is often the case, when there are serious problems, especially in developed countries such as Japan, there are significant dislocations in the financial markets. For every dislocation, however, opportunities develop for other areas of the global economy. Because the Santa Barbara area has a strong focus on alternative energy, these recent events, though tragic on a massive scale, could offer some positive, strategic opportunities for local businesses focused on alternative energy.
On Friday, March 11th, at 2:46 p.m. local time in Japan, a massive 9.0-magnitude earthquake rocked the northern region of Japan, followed within minutes by an enormous tsunami that inundated large areas of the country. The Sendai region seems to have felt the worst of the impact from the tsunami, which left probably more than 20,000 people dead and millions more without electricity, water, roads, food, and in many cases, their homes.
The human toll is incalculable, and extreme, and it is impossible to understand the extent of the psychological damage that has occurred, or the time it will take to heal the Japanese citizenry. The financial toll is also difficult to understand. The Japanese government has already stated that this will be the most expensive natural disaster in history, and many have put the price tag at over $100 billion already. That figure is sure to rise, and does not include all of the indirect costs associated with lost business, both short-term and permanent, that will surely result.
Japan is a huge supplier of technology, especially components that are used in just about everything sold today throughout the world that has any kind of technology included in the product, from cars, to computers, to garage door openers and just about everything in between. Some industry experts have estimated that parts shortages may reduce global automobile production by about 30 percent.
If parts plants affected by the quake don’t return to operation within six weeks, global auto output may drop by as much as 100,000 vehicles a day (the industry produces 280,000 to 300,000 vehicles daily). About 13 percent of global auto industry production is down right now and production of about 320,000 vehicles has been lost, mostly in Japan. The worst case scenario could see lost production of up to 5 million vehicles.
Honda Motor Co., which just extended closings at two car assembly factories until April 3rd, is one of the most exposed carmakers. Honda has 110 suppliers located in the earthquake zone, and about 10 of them cannot say exactly how long it will take for them to recover.
Toyota, the world’s largest automaker, has shut down all vehicle assembly plants in Japan until at least March 26th. The company said it will resume production of three hybrid models in Japan on March 28th. General Motors has idled two compact-car plants in Europe and a pickup factory in Shreveport, Louisiana, because of parts shortages. GM executives sent out a memo on March 18th asking employees to limit travel and expenses to only essential business. (Ford has not experienced any disruptions as of yet.)
General Electric (GE) was also hit initially, along with the entire stock market, since they supplied 3 of the 6 reactors at the trouble Fukushima plant, operated by a private firm—TEPCO (Tokyo Electric Power Company). Shares of GE dropped from a close of $20.36 on Friday, March 11th, to a low of $18.60 intraday by Tuesday the 15th, or by about 8.6%, before rebounding to about $19.50 this week. Uranium stocks and basically anything related to nuclear power got hit very hard immediately following the disclosure of the nuclear crisis. The S&P 500 Index dropped to around 1,250 from 1,320, or by 5.3%, although it too has rebounded almost back to where it was prior to the crisis.
Japan’s Nikkei Index dropped 6% on Monday, March 14th, and then another 10.6% on Tuesday the 15th, as the nuclear crisis intensified. European markets also suffered during this time-period. Any companies that purchase parts from Japan, especially technology companies, also saw their stock prices decline significantly during this time-frame.
At the same time the Japanese fall-out was occurring (pardon the pun), oil prices were (and still are) driving ever higher, based in large part on the continuing unrest in Libya and other Middle Eastern countries. In fact, we saw oil top $106 per barrel this week (West Texas Intermediate), which does not bode well for the summer driving season, which is almost upon us.
I am an optimist, so I always look for the silver lining in every cloud. There has been a widespread, negative global reaction to the nuclear crisis, with many communities that have nuclear plants in close proximity demanding closures, updates, more regulation, greater safety requirements, etc. This broad-based movement has significant political and financial ramifications for the industry.
President Obama has earmarked $36 billion in incentives (government loan guarantees) for the development of new nuclear plants in the U.S. in the latest 2012 Department of Energy budget. Obama also cut the allocation to the Fossil Energy Office in half, underscoring his commitment to have the U.S. generate at least 80% of all electricity needs from “clean” sources by 2035. Of course this was before the nuclear disaster in Japan had occurred. The Fossil Energy Office budget is set to shrink from $928 million to $511 million and several programs will be eliminated. The DOE and the Interior Department recently announced $50 million in projects over five years to develop off-shore wind power on the Atlantic coast. Obama’s proposal would provide new money for energy research, including three new "hubs" for battery and electric grid research, $550 million for Advanced Research Projects Agency-Energy (ARPA-E) and increases in budget authority for promoting renewable-power projects.
The proposed 2012 budget would devote $3.2 billion to energy efficiency and renewable energy, a $1 billion, or 46%, increase over the fiscal year 2010 appropriation. That would include a "ShunShot" initiative to sharply lower the cost of solar cells.
In pursuit of putting more electric cars on the road, Obama proposes $588 million, (an 88% increase), for helping communities that invest in electric vehicle infrastructure. He would also alter the $7,500 tax credit for buyers of electric vehicles, making it a tax rebate available immediately at the point of sale.
All proposals in the President's budget will face tough congressional scrutiny in the coming months, especially in light of the crisis in Japan and the reaction of the public to the crisis here in the U.S. If the proposals make it through the appropriations process, existing and proposed nuclear plant loan guarantees would total $54.5 billion. According to a statement by DOE, that amount could support 6 to 8 new power plants.
Given the nuclear disaster and the relatively weak position of the President (with Republicans controlling the House or Representatives), funding for nuclear projects, at least in the near-term, will likely be non-existent. As a direct result, other alternative energies, such as wind and solar, could get a healthy boost, especially with regard to government funding on the national level. If we couple this potential for additional funding with the very high price of oil we are experiencing, the environment for alternative energy companies, at least in the short-term looks very favorable.
We have a significant concentration in our local community in wind, with Clipper Windpower, Continental Windpower, and others, and in solar, especially coming out of UCSB. This appears to be an advantageous time for local alternative energy businesses to aggressively seek funding to support the expansion of their product development and operations. It would certainly b nice to see some good come out of such a terrible human and financial tragedy; the likes of which we all hope we will never again see in our lifetimes.