In essence, the Air Force is offering a pilot site for a coal-to-liquid (CTL) project at a base in Montana. This will be the first of many such CTL facilities around the nation. The idea is that funding will come from the private sector, not the Air Force or any other government source.

The Air Force will sweeten the pot, however, by guaranteeing that it will purchase the fuel that comes out of the CTL plants. Eventually, much of the Air Force fleet will fly on a mixture of CTL fuel and traditional petroleum-based fuel. For the past two years or so, the Air Force has been qualifying its planes to fly on synthetic fuels. Just recently, a B-1B “Lancer” bomber went supersonic over New Mexico on a mix of synthetic fuel. So synthetic fuels work.

The Wagon Train Is Forming Up

Some of the synthetic fuels information has made it into various trade press publications. But the major media have pretty much ignored the synthetic fuels development. Even on Wall Street, this program is under the radar screens. I guess the people on Wall Street are too busy counting up their losses from subprime mortgages. But the wagon train is forming up on the trail to synthetic fuels. Things are going to start happening, and soon.

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The idea is to jump-start a large U.S. military-industrial CTL program that will eventually serve the rest of the economy. The CTL projects will cost over $5 billion each, based on preliminary estimates. In other words, each CTL refinery will cost about as much as an aircraft carrier, and use about as much steel and equipment.

This ambitious CTL project will have major implications for the future of the coal-mining industry, as well as many companies in the engineering, construction and capital equipment sectors.

Future Liquid Fuel Supplies — We’re Running Out of Time

CTL will surely generate controversy. I cannot begin to describe the visceral opposition to CTL projects from the usual suspects. The NIMBYs, the environmental lobbyists the “global warming” activists and many others will all fight against CTL with tooth and nail. You will hear glib arguments about how “If we just do this or that” (windmills, biofuels, conservation, etc.) we can avoid the need to build any CTL plants. As a nation, we should “do this or that” in any event. Really, we need to do everything. But we will also have to build the CTL plants. The opposition to CTL reflects how deeply the “Just say no” approach is hard-wired into our modern culture.

The U.S. could get away with avoiding major capital investments in energy projects when the dollar was strong and oil was cheap. (How else did we wind up importing two-thirds of our daily oil?) If the U.S. needed oil, we just waved dollars and the tankers showed up at the piers. But no more.

It is crystal clear that the U.S. no longer has long-term assured access to liquid fuels. I hope you got the memo. This reality is rapidly transforming into a supreme matter of national security. A U.S. CTL industry cannot come about too fast, in my view. The nation is not “running out of oil,” technically speaking. But not enough oil can cause just as much havoc as running out. And the national “adult supervision” sure knows that the U.S. is running out of time. Let’s look at the present and forecast the future.

Oil Output and Supply

First, let’s discuss the U.S. oil supply going forward. The U.S. presently consumes about 21 million barrels of oil per day. This is a mix of domestic output (much coming in small quantities from several hundred thousand old stripper wells) and imports.

According to the most recent figures from the U.S. DOE, in January 2008, U.S. crude oil output was just over five million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.)

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But domestic volumes of oil output are depleting and declining inexorably. From the North Slope of Alaska to the deep water of the Gulf of Mexico, U.S. output is just plain falling. There is very little good news, and even the good news is oft-times not so good.

New discoveries and new wells just cannot keep up with depletion of older oil fields. By 2025, U.S. daily oil output will be a fraction of its current level (probably down to about 2-3 million barrels per day), even with an aggressive program of drilling offshore and in Alaska — which is not happening, in any case.

Also by 2025, U.S. imports will almost certainly decline. The oil will not be available to buy and import from world markets. Not everyone agrees with this. In one fanciful projection from 2005, the U.S. DOE forecast that “Total U.S. gross petroleum imports are projected to increase in the reference case from 12.3 million barrels per day in 2003 to 20.2 million in 2025.” Maybe in somebody’s dreams, but my view is that this is one projection that will never come true.

I heard some of the “inside baseball” information on one major DOD program that will convert large amounts of U.S. coal into synthetic liquid fuel. This will be a government-industry partnership, with the U.S. Air Force as the lead agency.

In essence, the Air Force is offering a pilot site for a coal-to-liquid (CTL) project at a base in Montana. This will be the first of many such CTL facilities around the nation. The idea is that funding will come from the private sector, not the Air Force or any other government source.

The Air Force will sweeten the pot, however, by guaranteeing that it will purchase the fuel that comes out of the CTL plants. Eventually, much of the Air Force fleet will fly on a mixture of CTL fuel and traditional petroleum-based fuel. For the past two years or so, the Air Force has been qualifying its planes to fly on synthetic fuels. Just recently, a B-1B “Lancer” bomber went supersonic over New Mexico on a mix of synthetic fuel. So synthetic fuels work.

The Wagon Train Is Forming Up

Some of the synthetic fuels information has made it into various trade press publications. But the major media have pretty much ignored the synthetic fuels development. Even on Wall Street, this program is under the radar screens. I guess the people on Wall Street are too busy counting up their losses from subprime mortgages. But the wagon train is forming up on the trail to synthetic fuels. Things are going to start happening, and soon.

The idea is to jump-start a large U.S. military-industrial CTL program that will eventually serve the rest of the economy. The CTL projects will cost over $5 billion each, based on preliminary estimates. In other words, each CTL refinery will cost about as much as an aircraft carrier, and use about as much steel and equipment.

This ambitious CTL project will have major implications for the future of the coal-mining industry, as well as many companies in the engineering, construction and capital equipment sectors. It made me glad to have the likes of CONSOL Energy (CNX: NYSE) and Foundation Coal Holdings (FCL: NYSE) in the portfolio. I already have some other ideas for additional investment opportunities in this sector. So keep your Outstanding Investments subscription current.

Future Liquid Fuel Supplies — We’re Running out of Time

CTL will surely generate controversy. I cannot begin to describe the visceral opposition to CTL projects from the usual suspects. The NIMBYs, the environmental lobbyists the “global warming” activists and many others will all fight against CTL with tooth and nail. You will hear glib arguments about how “If we just do this or that” (windmills, biofuels, conservation, etc.) we can avoid the need to build any CTL plants. As a nation, we should “do this or that” in any event. Really, we need to do everything. But we will also have to build the CTL plants. The opposition to CTL reflects how deeply the “Just say no” approach is hard-wired into our modern culture.

The U.S. could get away with avoiding major capital investments in energy projects when the dollar was strong and oil was cheap. (How else did we wind up importing two-thirds of our daily oil?) If the U.S. needed oil, we just waved dollars and the tankers showed up at the piers. But no more.

It is crystal clear that the U.S. no longer has long-term assured access to liquid fuels. I hope you got the memo. This reality is rapidly transforming into a supreme matter of national security. A U.S. CTL industry cannot come about too fast, in my view. The nation is not “running out of oil,” technically speaking. But not enough oil can cause just as much havoc as running out. And the national “adult supervision” sure knows that the U.S. is running out of time. Let’s look at the present and forecast the future.

Oil Output and Supply

First, let’s discuss the U.S. oil supply going forward. The U.S. presently consumes about 21 million barrels of oil per day. This is a mix of domestic output (much coming in small quantities from several hundred thousand old stripper wells) and imports.

According to the most recent figures from the U.S. DOE, in January 2008, U.S. crude oil output was just over 5 million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.)

But domestic volumes of oil output are depleting and declining inexorably. From the North Slope of Alaska to the deep water of the Gulf of Mexico, U.S. output is just plain falling. There is very little good news, and even the good news is oft-times not so good.

New discoveries and new wells just cannot keep up with depletion of older oil fields. By 2025, U.S. daily oil output will be a fraction of its current level (probably down to about 2-3 million barrels per day), even with an aggressive program of drilling offshore and in Alaska — which is not happening, in any case.

Also by 2025, U.S. imports will almost certainly decline. The oil will not be available to buy and import from world markets. Not everyone agrees with this. In one fanciful projection from 2005, the U.S. DOE forecast that “Total U.S. gross petroleum imports are projected to increase in the reference case from 12.3 million barrels per day in 2003 to 20.2 million in 2025.” Maybe in somebody’s dreams, but my view is that this is one projection that will never come true.

Really, by 2025, the rest of the oil-producing world will simply lack the product to export. This will be due to reasons of depletion on a global scale, and fast-growing internal demand in oil-producing nations. Gasoline consumption in places as diverse as Russia, Iran, Venezuela and Saudi Arabia is just soaring, so there is less net oil available for export.

And oil output everywhere is flat or declining. (Just last month, Russia announced a plateau in oil output.) And closer to home, Mexico’s Cantarell field is simply crashing at an annual depletion rate of 8% or more.

So what will happen in 2025? Will the U.S. pump its own oil? No, it’s not there. Will the U.S. continue to import large volumes? No, it won’t be available. The bottom line is that conventional oil sources for the U.S. — domestic output and imports — are simply drying up.

Be on the lookout for Part II tomorrow!

Until we meet again,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: The Coal To Liquid Debate Part I

Shares of the world’s No. 2 commercial jetliner-maker soared $3.53 each, or 4.49%, to close at $82.09 because of Boeing’s record backlog and a bullish outlook for next year. Earlier yesterday the shares touched $83.36, the biggest increase since June 2006.

Investors had pushed the stock down 15% in the quarter over worries about delays in the “Dreamliner” jetliner program, and the surprise loss of a $35 billion U.S. Air Force tanker contract to a team that included Airbus and U.S. defense contractor Northrop Grumman Corp. (NOC).

Boeing is one of the companies that Money Morning has written about repeatedly, having identified it as a so-called “Global Titan” – a company that’s positioned to capitalize on worldwide trends and that derives the bulk of its sales and profits from such fast-growing overseas markets as China. Jetliner deliveries rose 8.5% last quarter, with almost two-thirds getting delivered overseas.

Profit from continuing operations rose to $1.21 billion, or $1.61 a share, from $873 million, or $1.12, a year earlier, the Chicago-based Boeing reported. Sales advanced 4.1% to reach $16 billion. The results beat the average estimate of $1.35 per share, according to a survey of 20 analysts conducted by Bloomberg News.

Profit for 2009 will be $6.80 to $7 a share on sales of as much as $73 billion, Boeing said in its first forecast for 2009. That projection also exceeded expectations: Analysts had predicted that profits would increase from about $5.93 a share this year to $6.87 next year – even after about a dozen estimates had been slashed after Boeing announced another delay in its 787 Dreamliner program, the third time the airliner maker has pushed back the scheduled first flight for the high-tech commercial jetliner. But the company announced a record backlog.

“We are encouraged that they added to the backlog in the first quarter,” Eric Marshall, research director at the Dallas-based Hodges Capital Management, said in a Bloomberg Television interview. Delays to the 787 Dreamliner program, which dragged down Boeing’s stock price this year, have “created an attractive opportunity for long-term investors. We think the stock could go back above $100 over the next year,” which is why Hodges is adding to its Boeing position of 330,000 shares.

From yesterday’s close, a move to $100 would represent a return of 22%. And that doesn’t include income from Boeing’s current dividend yield of 1.95%.

Weak Greenback Stings Airbus

With a decline in the greenback of nearly 9% so far this year, Boeing has gained an advantage over its bureaucratic European rival, Airbus. Most of Airbus’ costs are euro-denominated, while Boeing’s sales are conducted chiefly in dollars.

Airbus, currently the world’s biggest maker of commercial aircraft, said it’s raising the price of its planes in response to the dollar’s decline against the euro, and to offset an escalation in metal prices fueled by the ongoing global commodities boom.

The list price of the single-aisle Airbus A320-series jet will rise by an average of $2 million as of May 1, while twin-aisle airliners will typically cost $4 million more, the Toulouse, France-based Airbus said Tuesday.

“The price increase is mainly triggered by the weak U.S. currency and the overall increase of the world’s raw-material prices, especially with regards to metal,” Airbus said.

The falling dollar hurts earnings at both Airbus and its parent company, European Aeronautic, Defence & Space Co., when revenue from dollar-denominated aircraft sales is “translated” into, or converted into, European euros.

Metal costs also have crimped profits, as the price of aluminum alone has soared 28% just this year, due to supplies constrained by rising purchases in China, and shortages of energy needed to make the lightweight metal.

Conversely, a weakening dollar makes foreign purchases of Boeing aircraft cheaper – almost as if the buyers are getting a price cut. But since Boeing doesn’t have to convert those dollars into a different currency, the “price break” buyers are getting has no effect on its revenue or profit.

Boeing also is getting a boost as carriers such as Continental Airlines Inc. (CAL) buy more of the U.S. airplane-maker’s Boeing 737-class jet to replace older, less fuel-efficient aircraft to reduce the effect of record oil prices. Unfilled commercial orders rose to an unprecedented $271 billion.

Boeing Chief Executive Officer W. James McNerney Jr. had held back his annual forecast until yesterday to learn more about delays in the Dreamliner, which is at least 14 months behind schedule and won’t enter service until late 2009.

Boeing said that its commercial sales rose 8% to reach $8.16 billion, generating a 39% jump in operating earnings, while Boeing’s military business saw sales fall 1.8% to reach $7.58 billion, even as profit increased 10 percent. Boeing is also the second-largest U.S. defense contractor, trailing Lockheed Martin Corp. (LMT).

Boeing said today it expects to deliver 500 to 505 airliners in 2009 – up from as many as 480 this year. Asia is expected to be a major market going forward, as will be China. Consider that:

• The global demand going forward is almost beyond belief. China alone will require 3,400 new airplanes worth about $340 billion over the next 20 years – an average of $17 billion annually. And that doesn’t include other Asian markets, such as Vietnam, which will need to modernize their air fleets as they commercialize their commodities.
• The Vietnam deal announced in November is worth $1.9 billion.
• In fact, over the next two decades, Boeing has forecast that air carriers worldwide will need to acquire 28,600 commercial aircraft – with a value of $2.8 trillion.

Boeing spent $1.2 billion last quarter to buy back 15.6 million shares, part of a $7 billion repurchase authorization. Thirteen of 24 analysts in a Bloomberg survey recommend the company’s stock; nine say to hold it, and two recommend selling.

Founded in Seattle by timber millionaire William E. Boeing back in 1916, the company got its start building seaplanes and operating a series of air transport services. In 1933, Boeing built the world’s first true commercial airliner, the Boeing 247, which was all metal, instead of the conventional wood, fabric and metal construction of that time.

But the company really came to prominence in the late 1930s, in the depths of the Great Depression, when it made a bet-the-company decision to develop a long-range Army Air Corps bomber on spec. The four-engined aircraft was so impressive that an awestruck newspaperman dubbed it the “Flying Fortress.” The name stuck. That airplane was the Boeing B-17, a heavy bomber without which most experts say the Allies might never had defeated Germany in World War II.

With the arrival of the jet age in the 1950s, the company risked its own capital to develop what eventually became the Boeing 707, a jetliner that leapfrogged offerings from Great Britain’s De Havilland, France’s Sud Aviation and Russia’s Tupolev – and revolutionized jet airliner travel in the process. A subsequent model, the 737, is the best-selling commercial jet ever. Boeing’s double-decked, humpbacked 747 “Jumbo Jet” debuted in the late 1960s, and opened the door to true intercontinental travel.

Since World War II, Boeing has also been a heavyweight in the defense-aerospace sector, building long-range bombers, aerial tankers, missiles, and helicopters, among other weapons systems. The military-contracting business has helped Boeing through periods in which there might have been a lull in the commercial side of the company’s business.

An industry with strong unions, a high degree of government regulation (some of it certainly justified, like safety), and competition willing to take large losses to maintain market share just doesn’t get me interested.

And yet, now that the airlines are on the verge of collapse once again, I’ve realized there is opportunity in this beaten-down sector. Airline stocks are falling across the board, and the contrarian inside me is starting to get interested.

When stocks go on sale and fear is running rampant, that’s when I think about becoming a buyer. Right now there is no perhaps no bigger firesale than the one going on in the airline sector. This perpetually cash-strapped industry is on the verge of yet another round of bankruptcies… and this time the problem is far bigger than declining ticket revenues.

The problems run deep. Simply charging an extra $5 for a meal or hawking some designer sunglasses for $200 apiece isn’t going to save the airlines. A renegotiated contract with the pilots’ union isn’t going to help much, either. These cost-reducing activities just delay the inevitable.

The United States airline industry is truly on the brink. As it stands, things could get bad enough for the government to step in and just run the whole deal. If you think delays and cancellations are bad now, you haven’t seen anything yet.

The Airlines’ Dirty Little Secret

The airlines have many problems, but one in particular stands to bring the entire industry to its knees. It’s true that record-high fuel prices are killing profits and outdated air traffic control systems are creating costly delays and cancellations. But the truly big problem is age.

The majority of aircraft in U.S. airline fleets are between 20 and 30 years old. Now, that’s not much of a concern for the time being. After all, the U.S. Air Force is still flying around B-52s that saw action in Korea.

Airframes last a long time, but maintaining them costs a lot, too. In the case of the B-52s, it takes about $4 million a year in maintenance expenses just to keep a single plane up in the air. Airlines simply don’t have the cash to pay for maintenance on their fleets.

That’s it, plain and simple. Old jets are bogging down the entire domestic airline industry. We’re just starting to see the impact of the problem.

In March, for example, Southwest Airlines (LUV:NYSE) had to ground 38 jets. The problem was fuselage cracks. In Southwest’s defense, this is a problem affecting many older aircraft. If inspected and deemed safe, it’s not much to worry about. When Southwest failed to inspect the planes and regulators got wind of it, however, there was no other solution than to ground a big part of the fleet.

Last week, American Airlines ran into similar troubles. The legacy airline, owned and operated by AMR (AMR:NYSE), was forced to cancel more than 2,500 flights as the FAA discovered wiring issues in almost half of American’s domestic fleet.

Wiring problems…fuselage cracks…these aren’t widespread issues for new planes.

United We Stand…

This problem affects nearly the entire industry on a domestic level. At the same time, bad news for U.S. legacy carriers spells profit opportunity for strong overseas competitors.

Take a look at EasyJet, for instance — a European discount airline franchise. EasyJet’s airplane fleet has an average age of just 2.3 years. In most cases, EasyJet is flying aircraft two decades newer than U.S. based airlines.

This problem is nothing new for domestic air carriers. In my premium investment advisory service, BreakAway Investor, we took a look at who has the solution. After taking a top-down view of the industry, we selected AAR (AIR:NYSE).

AAR provides maintenance services to the airline industry. In picking AAR, I thought we isolated the company that had the solution. However, after holding the stock for about a year, we noticed that sales weren’t increasing as fast as they should, considering the state of airline fleets.

Now, I’m not going to sit here and say I knew about the cracks and wiring problems. But we did uncover a big problem — and the company with the solution to that problem. That usually results in some pretty nice returns. In this case, however, the airline industry just wasn’t spending as much on maintenance as we expected.

When the markets started to dive and recession fears took hold, we knew the airlines simply wouldn’t be laying out the necessary cash to keep up their fleets. They simply couldn’t afford it. So we took a 25% gain on AAR and ran… fast.

Is there a solution to the aging aircraft issue? Not a near-term one. Bob McAdoo, an analyst at the Prudential Equity Group, states, “Very few new planes are scheduled for delivery to domestic airlines this year or next.”

That’s a problem for travelers in the United States, but an opportunity for investors. Let me explain.

Everything’s New

Over the winter, I took a six-country tour of Southeast Asia just to try and get an idea of how the region is progressing. Although they are certainly in different stages of development, these countries all have one thing in common: Everything is new.

Airports, office building, apartment buildings, bridges… everything. It’s all new. This was even more apparent in the airline industry. They’re all buying brand-new planes. All 10 of my flights in the region were on a fairly new aircraft.

The international airlines have a distinct advantage here, and aging aircraft will be an ongoing problem for domestic airliners. The plunges in share values over the past week are just the start. Once again, the airline industry is the easiest place to lose money.

That is, except among foreign carriers that have the financial wherewithal and orders in place for new aircraft. They’ll be the ones raking in profits from a global travel boom. Newfound emerging market wealth is creating a lot of opportunity, and this is just one example.