First off, the stated objective of cutting carbon emissions by 83% by 2050 will go down in history as outrageous – akin to when Who drummer Keith Moon drove his Lincoln Continental into the pool at the Holiday Inn. I think members of Congress must be smoking the same thing Moon was.

To show you how patently ridiculous such a goal is, I turn to Questar’s CEO – a man with the unfortunate name of Keith Rattie. Questar (NYSE:STR) is an oil and gas company. Rattie is an engineer. He has been in the business since the 1970s. He walks us through the basic math in a speech he made at Utah Valley University on April 2 called “Energy Myths and Realities.” Rattie uses Utah as an example:

“Utah’s carbon footprint today is about 66 million tons per year. Our population is 2.6 million. You divide those two numbers and the average Utahan today has a carbon footprint of about 25 tons per year. An 80% reduction in Utah’s carbon footprint by 2050 implies 66 million tons today to about 13 million tons per year by 2050. If Utah’s population continues to grow at 2% per year, by 2050, there will be about 6 million people living in our state. So 13 million tons divided by 6 million people equals 2.2 tons per person per year.

“Question: When was the last time Utah’s carbon footprint was as low as 2.2 tons per person? Answer: Not since Brigham Young and the Mormon pioneers first entered the Wasatch Valley and declared, ‘This is the place.’”

You can extend this math over the whole country – a growing mass of 300 million people. To meet the Waxman-Markey bill’s goals would mean we have to go back to a carbon footprint about as big as the Pilgrims’ at Plymouth Rock circa 1620.

So I think the bill is absurd. I think it is also a great blow to what is left of American industry. But who cares what I think? As the great Jeffers wrote, “Be angry at the sun for setting/ If these things anger you.” This is the way the world works. Politicians do dumb things. We have to play the ball where it is. And that means we have to figure out who wins and who loses.

Here are some thoughts along those lines…

Agriculture. Agriculture, for whatever reasons, is exempt from the new rules. So farmers don’t have to worry about those manure pools out back or the flatulent cows emitting methane all over God’s green meadows. Those big tractors? Burn up that diesel!

Agriculture is a winner by virtue of not losing, like a hockey team that skates to a tie.

Steel. Big loser. U.S Steel, AK Steel (NYSE:AKS) and even foreign steel companies with US operations all get a big kick in the family jewels on this one. Steelmaking emits all kinds of carbon dioxide. The worst-case scenario here is that the US simply won’t be making steel at some point in the future. The plants will all go to Brazil. China is already the biggest steel producer in the world. Now we just handed the country a bunch of new business.

Avoid big steel in the US.

Utilities. Mostly losers. Under the bill, utilities will have to get 12% of their electricity from renewable sources. That means they are going to spend money buying windmills and solar panels. For some of the coal utilities, this is bad news – even though they caught a break when the government made a change to let coal have carbon permits for free to start off with. Gas utilities are better off, as they emit less carbon, but since coal gets some free carbon allowances upfront, their advantage will not be as big as I made out in my letter to you a month ago. (See, the problem with writing about potential legislation is the rules change every week.)

Still, I’d avoid coal producers or coal utilities. They wear big targets on their backs and can’t do much about it, except spend a lot of money. Bad for shareholders. There may be some very good ideas on the picks-and-shovel angle for coal, though. For example, a number of companies will sell equipment to clean up coal. And of course, the solar and wind guys are big winners.

Oil refiners. Losers. This is an industry in which it is hard to make money most of the time as it is. Now, under the new bill, refineries are really screwed. Basically, they are on the hook for about 44% of US carbon emissions. They would be among the biggest buyers of carbon emission allowances. I think with one stroke of the pen, the US government just made the US refining industry that much smaller. Lots of these older refineries will just have to close. US imports for gasoline will rise.

I think the refinery industry already sees the writing on the wall. This is one reason why Valero, the biggest US refinery, has been quick to get into the politically favored ethanol business. It’s also expanding overseas.

Avoid the refineries.

Trading desks. Winners. It figures. As if the government doesn’t help financial firms enough, it is going to hand them a nice tomato in trading carbon credits. The head of Morgan Stanley’s US emission trading desk said: “Carbon, while relatively small, is a critical piece of our commodities offering.” So some financial firms with trading desks in carbon get a nice little payday.

To sum up, this is only the beginning. At the end of the day, this obsession with carbon footprints means that Americans are going to have to pay a lot more for products that use fossil fuels. It means we are going to pay a lot more for energy. Obama and his crew can draw up whatever fantasies they want, but they can’t repeal the laws of economics, which, like forces of nature, win out every time.

Regards,

Chris Mayer

Source: Waxman-Markey Whacks Industry

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• Crude oil rose to a record $119.93 a barrel in New York on the shutdown of a North Sea pipeline and as a strike and militant attacks reduced output from Nigeria. Oil has shot up 80% in the past year as supply failed to keep up with surging demand in China, India and the Middle East.

• Investor Kirk Kerkorian said he bought 100 million Ford Motor Co. (F) shares – a 4.7% stake in the company. He intends to buy more in a vote of support for Chief Executive Officer Alan R. Mulally, according to Bloomberg News.  Ford rose 9.5% to close at $8.21 a share.

• Verizon Communications Inc.’s (VZ) profit climbed 9.8% boosted largely by the telecommunications carrier’s wireless growth. Verizon reported net income of $1.64 billion, or 57 cents a share, for the first quarter, compared with $1.5 billion, or 51 cents a share, a year earlier. Revenue rose 5.5% to $23.83 billion.

• Visa Inc. (V) said profit jumped 28% in the company’s first earnings report since its record $19 billion initial public offering last month. Net income climbed to $314 million, or 39 cents a share, in the quarter ended March 31, from $246 million a year earlier, the company said today in a statement distributed by PR Newswire.

• Bank of America Corp. (BAC) will expand efforts to help Countrywide Financial Corp. (CFC) borrowers avoid foreclosure on troubled mortgages, the Associated Press reported. Liam McGee, president of Bank of America’s global consumer and small business banking operation, said the bank would modify at least $40 billion in loans from at least 265,000 borrowers over the next two years. “Bank of America will continue to offer home loan products to those who can afford them,” McGee said. “We also recognize that some consumers who are experiencing financial challenges but who ultimately have the ability to pay their loans need our help to pay their loans, and we are ready to help them.”

• Corn prices jumped yesterday (Monday) as investors bet that more rain in Midwestern states would force farmers to plant less of the staple crop. Corn for May delivery jumped 22.75 cents to settle at $6 a bushel on the Chicago Board of Trade. Corn prices have shot up 26% this year.

• Natural-gas producer Questar Corp. (STR) announced first-quarter profit rose 23% on higher output and soaring fuel prices yesterday (Monday). Net income for the three months ended March 31 rose to $185.8 million ($1.05 per share) compared with $151.1 million (86 cents per share) a year ago.