Eon chief warns US energy advantage makes Europe uncompetitive
Comment of the Day

September 30 2013

Commentary by David Fuller

Eon chief warns US energy advantage makes Europe uncompetitive

Here is the opening from this informative FT article

David Fuller's view The head of Germany's largest utility has warned it will be years before Europe can hope to counter the US's growing advantage in energy costs and predicts that the disparity will meanwhile lead heavy industry to abandon the continent.

Johannes Teyssen, chief executive of Eon, said there were no obvious options for Europe to narrow the US advantage - whether by drilling for shale gas, importing more liquefied natural gas or importing inexpensive US supplies.

"There is a competitive advantage for America that we cannot prevent, at least for some time," Mr Teyssen told the Financial Times. He said it was "a dream" for politicians to suggest otherwise. "It will take years and long years of innovation before we can start to shrink it," he added.

Mr Teyssen's comments will add to growing concerns in Europe that high energy prices are encouraging manufacturers such as chemicals companies to shift investments across the Atlantic, where the shale bonanza has reduced natural gas costs to between a quarter and a third of those in the EU.

The issue was discussed at a summit of EU heads of government in Brussels in May and is expected to be a priority for a new German government.

"The price difference is unnerving some companies and deciding their investments," Mr Teyssen said, adding that the US advantage was "getting so big we cannot allow it to continue".

Even if Europe put aside its environmental concerns and decided to pursue natural gas fracking, it would take at least five years to develop such an industry, he predicted. Instead, he said, the continent was more likely to benefit if China and Australia pushed ahead with the technology because it would free up gas from Qatar and other world suppliers.

"The indirect fracking effect is probably the one that helps Europe the fastest - not direct fracking," Mr Teyssen said.

With few other options at hand, Mr Teyssen argued that European politicians concerned about industrial competitiveness should focus on repairing an EU energy policy that was becoming increasingly dysfunctional. "There have been a lot of good intentions...but things are now just getting out of control," he said. "European power is getting dirtier. The CO2 content is increasing in spite of the renewables. It is unaffordable, and it's losing its security. So the alarm signs are tremendous."

A priority for utilities is to rein in generous subsidies for renewable energy that have underwritten a boom in solar and wind power across the continent. Mr Teyssen blamed such support schemes - along with laws in Germany and other member states that prioritise renewables - for distorting the market. One consequence is that Eon has been forced to mothball gas-fired plants that are efficient but no longer profitable.

My view - Continental Europe is an extraordinarily interesting, diverse and wonderful region to visit. Unfortunately, its governments have a lot to answer for, and not least in recent years. Germany is now burdened with expensive and inefficient windmills. It is also closing down rather than modernising its nuclear reactors. To date, it has turned its back on fracking for natural gas, as have many other European countries.

France has the cleanest and most competitive energy policies of any large European country, thanks to the vision of Prime Minister Pierre Messmer following the 1973 global oil crisis. Unfortunately, following Fukushima, President Francois Hollande has promised to cut France's energy mix from 75% nuclear power to 50% by 2025. New nuclear would be safer than the aging plants and also increase France's energy advantage, whereas acres of solar farms will be a NIMBY issue and considerably increase energy costs.

Tim Price: Return of the cockroach - My thanks to the author for his refreshingly independent report published by PFP Wealth Management. Here is a brief sample:

This multi-asset fund has, over the last decade, handily outperformed the broad US stock market, despite carrying less risk. This is probably what most investors realistically want. In passing, we also note that the fund's shorter term performance has been negative, with year-to-date returns of -7.6%. Is the model broken ? Does it no longer make sense to diversify across multiple asset classes ? Or is it simply that over the shorter term, markets are inherently volatile, and those in instruments like gold doubly so ? We think the latter.

Last week we also had the opportunity to attend Didasko's Practical History of Financial Markets course in London, taught by Andrew Smithers, Stephen Wright, Gordon Pepper, Michael Oliver, Peter Warburton, Herman Brodie and Russell Napier. We can only echo the testimonial of Sebastian Lyon of Troy Asset Management, who described the course as:

"The best and most valuable two days I have spent outside the office in twenty years (holidays excepted). In a field which remains mired in short-termism and brevity of memory, all aspiring and experienced fund managers should attend this course. They will gain the invaluable advantage of historical perspective."

My view - Veteran subscribers may recall that Tim Price has often mentioned diversified, multi-asset funds. These have generated considerable interest, not least because of their respectable performance which has often outperformed Wall Street or any number of stock markets over the last 10 to 15 years, and without the volatility of equities.

The secret of a good stew is in the quality and weighting of its ingredients. Chefs will have their favourites, as will investment managers when determining the menu for their multi-asset funds. However, ensuring a long-term supply of successfully balance ingredients for a fund is more difficult for the investment manager than the chef's task of recreating a satisfying stew every year.

Here is the current weighting for the Permanent Portfolio (PRPFX US), supplied by Tim Price:

For those seeking more than just conceptual comfort from the diversified approach, a US mutual fund, the Permanent Portfolio, ticker PRPFX, is managed along very similar lines to those advocated by Harry Browne. This is a $12 billion fund invested in bullion (25%), US Treasury securities and similar assets (35%), Swiss franc assets (10%), real estate and natural resource stocks (15%) and growth stocks (15%). Its 10 year historic returns are shown below:

My guess is that unless that 35% weighting in US Treasury securities and similar assets is lowered and / or shifted to short-dated maturities, it will be a headwind for the next couple of generations. Meanwhile, the PRPFX chart remains rangebound and requires a sustained break above 50 to reaffirm the prior uptrend. Conversely, this pattern will look like a top area on a decisive break beneath 45.

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