Agora Financial’s Rude Awakening

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Pittsburgh, Pennsylvania

• Heating your house with $1,000 bills – the soaring price of energy,
• Digging deep in Iceland for a geothermal solution,
• Underground Alaska shakes things up, OPEC points the finger and more…

Byron King, reporting from Pittsburgh, Pennsylvania…

“Everyone talks about the weather,” said Mark Twain, “but no one ever does
anything about it.” In today’s column, we will also talk about the weather,
and then discuss how you can profit from it. Our topic is geothermal energy
and, in particular, a major change in U.S. national energy policy that
appears to be heading our way. In fact, this energy policy change may be the
technological equivalent of the U.S. deciding to go to the moon back in the
1960s. Except instead of looking up to a different world, we will be looking
within our own planet.

If you live in the Eastern parts of the U.S., then you know that this has
been an unusual October. There is a high-pressure system lingering over the
lands east of the Mississippi River, and temperatures have soared. Sure, the
sky is blue and clear and one can enjoy the great outdoors in just shorts and
a T-shirt. But people are also dying of heat stroke, and in many areas, the
thermometer has set records. On Oct. 8, for example, the temperature in
Pittsburgh (where I live) reached 87 degrees, breaking a record that was set
long ago in 1916 — which makes you wonder what was going on back in 1916.
And other temperature records also fell in numerous locales.

Back in August, during the stock market gyrations caused by the subprime
mortgage meltdown, some wags referred to experiencing “October in August.”
The reference was to the stock market corrections that often come in midfall
arriving in late summer. Now, from the perspective of weather, if not of
climate, we are experiencing “August in October.” But then again, the weather
predictions are for cooler temperatures to arrive soon, and even some rain in
the near term. And despite the warm air masses that presently hover over half
of our continent, winter will arrive eventually.

It is the eventual arrival of winter, this one coming and many more winters
after it, that intrigues us here at Outstanding Investments . When winter
arrives, it will, in all likelihood, get cold. People will want to heat their
houses, and they will use natural gas or fuel oil, or most likely some other
form of transmitted energy. (OK, I know. A few members of the energy avant-
garde will use passive solar or burn local firewood, but this does not add up
to a lot of households in the big scheme of things.) But from where will that
transmitted energy originate? Well, dear readers, that is the Outstanding
Investments franchise, in a nutshell. We identify a problem. We offer a
solution.

So it has been warm in the U.S., but it will soon get cold. Here is the basis
of an energy problem. To expand on the problem and its solution, let’s
discuss geothermal energy. (Continued below…)

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Hot and Steamy
By Byron King

When it comes to harnessing geothermal power, the go-to place on the planet
right now is the Republic of Iceland. Yes, Iceland. It is a large island at
high latitude, composed mostly of dense basalt lava flows. Iceland straddles
the Mid-Atlantic Ridge, which provides that country with an almost direct
link to the primordial heat energy within the mantle of our planet. And that
is one all-but-immeasurable store of energy.

Thus, Iceland is the world’s leading nation in terms of exploiting its local
geothermal power resources. In Iceland, the insiders refer to the process of
extracting geothermal energy as “heat-mining,” and they are getting rich from
the effort.

Recently, the president of Iceland, Olafur Grimsson, visited the U.S. to
speak at a number of events and testify before the U.S. Senate Committee on
Energy and Natural Resources.

In a speech delivered at Harvard on Sept. 26, President Grimsson emphasized
the importance of geothermal energy to the economy and society of Iceland. He
stated that Iceland has undergone a “radical transformation” from dependence
on coal and oil in the past 30 years. As recently as the 1970s, Iceland was
among the poorest countries within what was then known as the European Common
Market (now called the European Union). That is, by most measures of gross
domestic product and other economic output, Iceland was an economic laggard.

But then Iceland made a conscious, strategic commitment to develop its
domestic geothermal energy resources. From large industrial projects down to
the level of family housing, Iceland focused its public and private energy
investment on making a geothermal energy vision into an energy reality. Now,
according to what President Grimsson told his Harvard audience, Iceland is
one of the most affluent nations in the world. Fully 100% of Iceland’s
electricity now comes from renewable sources, geothermal and hydroelectric,
and almost all buildings in Iceland are heated with geothermal energy. On the
whole, about 72% of Iceland’s total energy usage is tied to geothermal
sources, which eliminates essentially all carbon emissions and dramatically
reduces reliance on imported fossil fuels of any type.

According to President Grimsson, Iceland has “turned this [geothermal power
production] into an extremely profitable business.” For example, electricity
is so inexpensive in Iceland that there is a booming business on the island
that imports bauxite from the Caribbean area for the purposes of refining
aluminum, a highly energy-intensive process.

In comments after his prepared speech at Harvard, President Grimsson
expressed his “astonishment” at the utter paucity of geothermal power
generation in the U.S., merely 0.3% of all electricity generated across 50
states. And much of that power comes from one location in California, called
the Geysers. President Grimsson noted that the U.S. sits atop “the second
largest geothermal resources in the world, following only Indonesia.”

President Grimsson concluded that by harnessing the “fireball on which we
sit,” mankind could revolutionize energy production across the globe.

President Grimsson then took his geothermal views from Cambridge, Mass., to
Washington, D.C., where he spoke to members of the U.S. Senate. The Senate is
considering the National Geothermal Initiative Act of 2007, which is
legislation aimed at promoting the development of geothermal energy resources
within the U.S. The Senate bill sets a national goal to achieve 20% of total
national electrical output from geothermal resources by 2030, about a 64-fold
increase from the current base line.

In his remarks to the Senate, President Grimsson restated many of the
comments and observations he delivered earlier in the day at Harvard, adding
more perspective. “Our task,” he said “is to find the technology to harness
the fire inside the planet.” Also, “The companies doing business in Iceland
have found that geothermal energy is over 30% more profitable than any other
form of clean energy today.” President Grimsson noted that 25 years ago,
Iceland “had to beg for corporate investment.” But now companies are lining
up to gain access to Iceland’s low-cost, clean energy opportunities.

In response to a question from Alaska’s Sen. Lisa Murkowski, President
Grimsson stated that the geothermal energy resources of Alaska could serve as
an “investment magnet” for that one state alone, if developed properly.

Alaska is one of the most seismically active regions in the world, with many
geologically controlled areas of significant geothermal potential. President
Grimsson said that geothermal energy development could be extraordinarily
important for Alaska and provide “alternatives to oil and gas” that help
smaller communities build their economies and improve the lives of their
residents.

President Grimsson’s comments dovetail entirely with comments made last year
to the same U.S. Senate committee by Walter Snyder, director of the
Intermountain West Geothermal Consortium. In 2006, Mr. Snyder focused on the
geothermal potential for the Western parts of the U.S. The energy potential
is so vast, he claimed, that no one really knows its full extent. Some
geologists who work in the field believe that just the state of Nevada alone,
already a national leader in geothermal energy production, could become the
world leader. This is particularly true due to Nevada’s proximity to power-
hungry California, where environmental regulations prevent much in the way of
traditional energy development. Mr. Snyder said that known but untapped sites
in Western states could be developed within a reasonable time to produce
13,000 megawatts of geothermal energy, or the equivalent of about 15 nuclear
power plants or 30 coal-fired plants. Mr. Snyder noted that the potential of
the Western U.S. “may actually be two or three times greater” than that
figure.

The outcome of these Senate hearings may well be a major change in U.S.
national energy policy distinctly favoring geothermal energy production. By
itself, just the idea of mandating an increase of total national electricity
production from the current 0.3% geothermal to 20% by 2030 would be the
energy equivalent of President Kennedy declaring in 1962 that “We choose to
go to the moon.” But then again, hey, we took the policy goal and actually
went to the moon. All we have to do with geothermal is go to Nevada or
Alaska, or to a hot spot near you.

So what is currently a very small sector of the U.S. energy business is on
the verge of seeing immense growth, if not just plain spectacular expansion,
over the next two decades. That kind of arena is exactly where we want to be
with our investments. With policy changes like what we are seeing for
geothermal, this is another moonshot primed to happen.

P.S. In my new investment service, Energy & Scarcity Investor\, which will
debut early next month, I will focus one early report on some relatively
small, thinly traded companies that are active in the geothermal energy
arena. Watch your e-mail…

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Rude Endnote: Yesterday oil broke through the $93 in early trading. With so
many global events contributing to the thick goo’s meteoric rise of late,
it’s difficult to determine exactly which factor is most responsible for
oil’s mega-sprint toward the $100 mark.

As we round out this morning’s Rude, full-scale violence threatens to erupt
between the Turks and the Kurds along the border in Northern Iraq. The Turks
have amassed some 100,000 troops their, all poised to storm in on word from
their commanders.

Over in the gulf of Mexico, poor weather has halted production for about a
fifth of Mexico’s operations.

And lest we forget, the U.S. dollar (which oil is almost universally priced
in) reached record lows against the Euro yesterday as traders speculated over
the probability of another rate cut by the Federal Reserve of printing
presses.

As for the OPEC, they’re happy to let the host of geopolitical squabbles and
disagreeable weather take the heat for the skyrocketing price action, saying
supply is not the problem.

Qatar’s oil minister, Abdullah bin Hamad Al-Attiyah, told reporters yesterday
that the energy dilemma was beyond OPEC’s control.

“I haven’t any signal that there is any shortage of crude…I believe a big
portion of the oil price today is related to geopolitics and fear factors,
and we cannot solve it,” he said.

“Sometimes there is a shortage of oil products but not of crude. This is
because of limitations of refinery [capacity]. We don’t have a magic stick to
solve this.”

As long as there is trouble in the Middle East, cyclones in the Gulf of
Mexico and rogue dictators willing to hold their energy reserves hostage to
the rest of the world, we expect oil to continue on its merry way upwards.

We’ll be back with more on the subject tomorrow but, until then, be sure to
keep up to date with all the news from our Baltimore desk with your daily 5-
Minute Forecast.

Cheers,

Joel Bowman
Rude Awakening