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Treating an Addiction

When President Bush recently expressed his view that Americans were addicted to oil, many must have wondered what took him so long to wake up to this reality. But let’s not be the pot calling the kettle black, for Canadians are just as addicted to oil as our neighbours to the south. Our predicaments differ however in that Canada also happens to be one of the world’s primary oil exporters, so we are not just addicts, but major dealers too.

Dealing to addicts can clearly be a lucrative business, and you need look no further than the performance of the Toronto stock exchange over the last few years for supporting evidence. Simply put, when the price of oil rises on world markets, the price of stock in many large Canadian corporations also rises. No wonder with so much of our economic activity tied into financing, exploring, drilling, servicing, transporting and refining petroleum products.

As it stands, the financial health of Canadian investors is, for richer or poorer, married to the profitability of the oil industry. A quick survey of the ten largest mutual funds in this country reveals that the average fund has approximately 30% of their total assets (your money) allocated to the energy industry, and that looks to me like a lot of eggs in one fragile basket. So if you’ve noticed that the value of your RRSP jumps with every new attack on a Saudi oil facility, or that your Comox Valley business is profiting from an influx of Alberta petro-dollars, you may want to pause to consider how long the party may last.

President Bush also let slip last month that the Americans were on the verge of an energy breakthrough that would help wean them from their (our) dependence on oil. Now that may be just so much hot air, but it’s got to get you thinking, what happens to the dealer’s business if all the addicts one day kick their habit en masse? Well I guess they will need to find another business, an approach that many of the major oil companies have already embarked upon.

There is of course no shortage of effort being devoted to developing a long-term substitute for our oil dependency, yet no single technology has established a clear lead in the race to treat this addiction. This presents a conundrum to investors who wish to hedge their energy bets, as there is virtually nothing currently available in domestic markets that would allow us, with a single investment, to take a stake in a broad cross-section of businesses devoted to solving these challenges.

Fortunately, this is soon to change, as increasing demand for such a product inevitably leads to its supply. One still needs to look south of our border for such opportunities, but the US market is readily accessible to Canadian investors, and anyways, if you are looking solely to Canadian companies to develop an oil alternative, you will likely be disappointed. Yes we have a few enterprises in this country that are on the cutting edge of such research and development, but investors in companies such as Ballard Power have been waiting a long time to see some profit from their efforts.

One of the most interesting opportunities that will become available later this year, is an exchange-traded fund (ETF) based upon the newly launched WilderHill New Energy Global Innovation Index (Ticker NEX-AMEX). The ETF will be comprised of companies worldwide whose technologies and services focus on the generation and use of cleaner energy, conservation and efficiency, and advancement of renewable energy. Included are companies whose lower-carbon approaches are relevant to climate change, and whose technologies help reduce emissions relative to traditional fossil fuel use. This will include companies in wind, solar, biomass & biofuels, small-scale hydro, geothermal, marine and other renewable energy businesses; it also importantly includes companies targeting continued improvements in generation, distribution and storage of energy, as well as conservation, efficiency, materials, and in the emerging hydrogen and fuel cell sectors.

A perusal of the New Energy Index reveals 86 constituent companies that provide a comprehensive cross-section of global leaders in the alternative energy industry. As you might expect, Ballard Power is part of the mix, as are Vestas Systems, one of the world’s foremost manufacturers of wind turbines, ATS Automation Tooling Systems Inc., a Toronto-based company with a rapidly growing solar energy division, and Cree Inc., an American company at the forefront of light-emitting diode (LED) technology. The full list of companies in the index is available at http://www.newenergyfinance.com/NEF/HTML/Press/NEX.pdf, and makes for an excellent starting point for those wishing to do some research into this rapidly emerging asset class.

Despite the recent comments from President Bush, we are not likely to see the kind of breakthrough that would lead to the demise of the oil industry anytime soon, but investors with a long-term outlook may be wise to position themselves for the inevitable transition to a new energy economy.

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