The news that Lockheed Martin's Skunk Works project is developing a compact cold fusion reactor rocked the world in mid-October. The compact fusion reactor (CFR) is expected to use a fusion process as opposed to the fission process used by nuclear power plants now. CFR should be safer, cleaner, and more effective than existing nuclear reactors. For many years, it has been expected to eventually turn the energy sector and the whole global economy upside down by providing a source of plentiful cheaper energy.
That's why many Ukrainians around the world rejoiced at the news in hopes that cold fusion would provide independence from Russia's oil and gas supplies and undermine Russia's economy as that country heavily depends on fossil fuel exports.
To clarify the prospects of cold fusion and its potential to reshape the energy sector's landscape, the New Pathway interviewed a commodity markets expert Mark Lackey who is also Executive Vice President of Toronto's CHF Investor Relations. The conclusion from the interview is that although cold fusion does not really threaten the oil market in a shorter term, it has a high potential to threaten the natural gas market (oil and natural gas play roughly equal roles in Russia's GDP). And if electric cars do take off in big numbers, cold fusion will also threaten the oil market. But it all will happen in at least 5-10 years.
We also talked to Mr. Lackey about the current state of the oil market and found that oil prices may stay low for some time as technological advances have reduced oil producers' costs. However, his outlook on oil is more bullish for the next year.
NP: What are the prospects of the cold fusion technology?
ML: In the last year or so there has been more interest in getting cold fusion. This technology was dead for 20 years, but then some companies started to refocus on it. If they start mass-producing cold fusion plants, it would hurt solar, wind and coal energy markets, while natural gas and nuclear would be hurt less and the oil market – the least. They would stop building new nuclear power plants at that point in the future, but there are 74 fission nuclear reactors under construction worldwide currently, so, the future for the current nuclear industry looks more or less bright for some time.
The question is, how far away is the cold fusion techology? In my discussions with hydro utility companies, they say “We'll believe it when we see it”. So, in the short run, I don't see it having a whole lot of impact, but over time, yes, it could be quite significant. Cold fusion does not have radioactive issues. I will be watching this with interest over the next years to see if anyone actually starts developing and selling cold fusion units.
“… it would hurt solar, wind and coal energy markets, while natural gas and nuclear would be hurt less and the oil market – the least.”
So far, this news has had absolutely no effect upon Lockheed-Martin stocks. In 1989, some of the stocks took off because of cold fusion, and, of course, nothing happened – they were way ahead of their time. Now investors are more cautious but that will change when it comes to the actual development of reactors.
This is the same as with the technology of horizontal drilling for oil and gas which started developing in 1980s or the SAGD (Steam Assisted Gravity Drainage) technology for oil sands. These techologies have changed the market place dramatically but the stocks did not take off right away, maybe in 2-5 years after the technologies were first developed. People in many companies are cautious to be first to take on new techologies.
Countries, which are looking at high electricity use growth, 10% a year, like China, India, Indonesia, might be more willing to look at cold fusion than North America where we don't need any new generating plants, at least not in the short run. Look at all the natural gas China is trying to put into play. They are cleaning their coal, building nuclear plants – they are looking at any and all options and I would suggest they would be interested in cold fusion. Or look at the Saudis – they don't want to continue to burn oil and natural gas to desalinate the water, it's expensive.
Support for cold fusion may also come from organizations like the World Bank which no longer supports projects which burn coal for example. Bill Gates is putting money into another nuclear option, the pebble-based uranium plants which are smaller and don't use water, thus produce a lot less nuclear waste, so he might be interested in cold fusion if he is convinced that there is an opportunity there.
NP: What effect cold fusion could have on fossil fuels?
ML: It would have a bigger and shorter term effect on coal, natural gas, wind, solar energy and minimal effect on oil. The use of the oil barrel worldwide is currently by 70% in transportation – cars, trucks, boats. The rest is petrochemicals which can't be produced in any other way. The oil heating market has disappeared throughout the world to a large degree.
So, unless you think that electric car is going to take off and there are going to be millions of electric cars out there, which I don't think is going to happen, oil is going to be affected the least by cold fusion. Tesla has a car that is interesting for upper areas. They are saying that in five years they can get to half a million vehicles, but we are producing over 50 million a year today, so that's 1% of the total. So, the electric car could be a factor in 20-30 years perhaps.
I'll give you an example: in 1993, a lot of people kept saying that fuel cell cars would do well. At the time, someone said that there would be 10 million fuel cell cars on the road by 2013. There are zero. Electric cars are futher advanced than the fuel cell car, but there are limitations. Tesla say themselves that their cars don't operate as well in cold weather. And there has to be an infrastructure.
Uranium too – there are a lot of contracts for uranium power generation plants which are not going to be broken.
Lignite, low quality coal, which most people don't like, will be affected by cold fusion. Solar and wind have big subsidies, will come under scrutiny, and will be affected by cold fusion.
Natural gas used for energy generation will be affected too. At the same time, there are a lot of uses for natural gas other than energy generation.
“…unless you think that … there are going to be millions of electric cars out there, oil is going to be affected the least by cold fusion”
Current low interest rate environment globally may be a good thing for cold fusion – it would help finance the development projects.
NP: Do you think that cold fusion will be used for base load electricity generation capacity or as a more flexible capacity?
ML: Given the upfront cost of building a plant like that and given that the input cost would not be that high, it would be a better candidate for base load. But primary base load capacity is not substituted very easily, that's the one advantage that nuclear power has throughout the world – people don't tend to go off nuclear if the price of coal or natural gas went down.
NP: What do you think about the future of the oil market? The Russian government is saying that the oil price will go up soon because the U.S. shale oil industry will experience losses at the current prices of around $80 per barrel. But there are estimates that the technological advancements have driven the U.S. shale oil costs to $60 per barrel.
ML: Depending on where the production is. The Russians are right that some shale oil operations in North America have costs of $80 per barrel. But there are other shale oil opportunities, in particular the newest ones in Texas, which require prices of around $60-$65 per barrel.
The consensus is that below $75 per barrel many producers will become nervious. Consider some North Sea oil with costs over $90, while some oil sands oil needs $80. That's why I don't think that even $80 per barrel is a sustainable price over a long run, let alone lower levels.
My longer-term forecast is still in the range of $80-$100 per barrel. Right now, this price drop is seasonal to a significant degree, there are always weaker oil prices in October. The decline has stopped, the price of the WTI oil once went under $80 per barrel and now it's around $81. Unless I see a rapid slow-down in car and aircraft sales, I am not going to be that negative on oil prices.
Many people gauge oil price forecasts from GDP forecasts – if GDP is weak, they lower oil price forecasts. But you need to break down the numbers and look at different sectors, and the transportation sector in particular. I see a lot of strength in the transportation sector currently in China and India, and North America is holding up quite well.
We are moving into a seasonally strong period and the oil price may move back up. It was funny, when oil was at $105 earlier this year, my forecast price range was $85-$105 and many people said, how can I say it would go down to $85? And now it is at $81 and they are saying how can you think it will get back to over $100?
Everybody is too influenced by daily events, but you need to think past the noise. I seem to be one of the few bulls that's left. But it needs to be analysed what is sustainable at what prices.
There is on-shore oil in Saudi Arabia and Russia that can be pulled out at between $15 and $25 per barrel. But there is other oil produced that's far more expensive. You need to look at the prices that marginal producers need. If those producers disappear from the market, it's going to make a difference to the price.
NP: For instance, Russia's current low-cost projects are being exhausted and their new projects are much more costly.
ML: Yes, more and more future production will be higher-cost. Even some current Saudi production is not that cheap. They use some water injection and enhanced recovery which increases the cost of barrel to about $40.
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