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Over the next decade or two, energy prices are going to reach
shocking levels, and the price of uranium, inextricably tied to energy, is
headed up as well. I first recommended uranium companies in October 1998,
when the metal was trading hands at a paltry $9.50 per pound. Since then,
U3O8 has risen to $18, and I believe, due to growing global energy demand
coupled with the relative costs of alternative fuel sources, it's going much,
much higher.
Global electricity use is projected to increase by 66% from 13
trillion kilowatt hours in 1999 to 22 trillion kilowatt hours in 2020. In North America, the growing demand for power has reached
the point where the grid is increasingly vulnerable to massive failures, like
that of last summer when the lights went out on 50 million people.
To meet this demand, energy has to come from somewhere, and nuclear
power is the only sensible choice. This conclusion is not mine alone…
as I write there are 30 new reactors in various stages of construction around
the world. China
alone is planning at least one new reactor per year for the foreseeable
future. Even in the U.S., despite all the hand wringing about nuclear power,
the share of electricity generated by the same has risen from just 4.5% in
1973 to over 20% today… making it the second most frequently used fuel
source for producing electricity (after coal).
Oil currently accounts for 40% of the world's energy consumption, and
world oil consumption is projected to increase 2.3% per year for the next 16
years - driving the demand to 120 million barrels per day in 2020. Against
that consumption, the world is currently producing on the order of 77.5
million barrels a day, but the threats to supplies coming out of the Middle
East, Nigeria, Venezuela and elsewhere (for instance, the Strait of Malacca) are growing… and due to
reserve depletion, are only going to get more difficult and costly to
recover.
As I write, oil is nearing $50/barrel. While that price will
certainly ebb - maybe all the way back into the $30/barrel range - the days
of $18 a barrel are almost certainly gone for good. While higher oil prices
carry many negative consequences - on discretionary household spending,
inflation and corporate profits, to name a few - for the sake of this
discussion, what's important is that pricey oil makes alternative forms of
energy more appealing.
Natural gas? There is a general preference for natural gas over oil
and coal for power generation because it is clean, and gas burning plants can
be built relatively cheaply and quickly. In fact, it is the fastest-growing
component of energy consumption, surpassing coal for the first time in 1999.
Energy mavens say that by 2020, it will exceed coal use by 44%, but I doubt
it. Gas will price itself out of the market before that happens.
Coal and nuclear are the only feasible sources of mass energy with
anything like current technology. There are many hundreds of years of cheap
coal available, but the stuff is an environmental nightmare compared to
nuclear (which, despite what the scaremongers would have you believe, is
actually the safest, cheapest, cleanest, and most practical source of mass
power). Other commonly discussed energy alternatives face distinct
disadvantages, or are years from mass commercial viability, or aren't mass
power solutions at all.
The looming energy shortage has even become clear, however belated,
to the U.S. Department of Energy, which recently announced incentives to
encourage U.S. power companies to apply for licenses to build new nuclear
plants (the first in 25 years). In addition, the DOE is even considering
building a plant of its own. This is a big change from just a few years ago,
when the talk was of literally closing down the industry, not only here, but
worldwide.
DEMAND & SUPPLY
How great is the demand for uranium likely to get? Saskatoon-based Cameco (CCO-T), the world's largest uranium miner,
estimates that even without the potential for added demand due to rising oil
and natural gas prices, global uranium demand should average 194 million
pounds per year from 2003 to 2012, with the U.S. using 40 million pounds of
that amount from 2006 onwards.
What about supply? Uranium is more abundant than tin, and ten times
more abundant than silver. Yet, a chronic supply/demand imbalance has
developed in yellowcake, as U3O8 is known. The best evidence of this is that
the industry has been living on inventory since 1985.
Supply is running at about 135 million pounds per year, with mines
contributing only 79.2 million pounds per year. In Canada
and Australia,
the big dogs in uranium, largely as a result of recent poor prices, few new
mines have come on stream.
Of course, if prices continue to rise, prospectors will redouble their
efforts to find new deposits. But it typically takes up to 10 years from
discovery to production for a well-sized mine.
The balance of the uranium needed to keep the world's lights on today
comes from above-ground supplies like HEU/weapons conversion, MOX/breeders,
and utility stockpiles. However, these supplies are not growing, while demand
is - rapidly. Here is a quick look at each.
HEU. One source of reactor fuel is surplus weapons-grade uranium
referred to as Highly Enriched Uranium (HEU). From the 1940s through the
'60s, the military was the major consumer of uranium, for use in nuclear
warheads. But since the early '90s, it has not only stopped building new
ones, but has deactivated many of those in existence. New weapons are built
using the HEU and plutonium from old ones, with any surplus available for use
as fuel. Due to the numbers of weapons potentially involved, their
deactivation could create a significant new supply.
However, my guess is that military inventories of uranium, as well as
Russian civilian inventories, are going to pretty much stay where they are.
As the world moves towards a larger and hotter stage of the Forever War,
there's likely to be resurgence in the nuclear arms race, which would reduce
the availability of HEU as reactor fuel.
MOX. "Mixed-Oxide" fuel, or MOX, as it is usually called, is a
combination of uranium and plutonium and a product of the reprocessing of
spent nuclear fuel rods. Reprocessing is expensive, but so is enrichment. On
the other hand, reprocessing cuts waste storage, and that's expensive, too.
It's hard to determine what real costs are relating to nuclear power,
since it's all so highly politicized. The only certainty is that if we lived
in a free market society, the costs of building and running a nuclear plant
would be a small fraction of what they are now. A mixture of MOX and
conventional fuel is already used in some reactors in Europe,
and it could ultimately reduce uranium requirements by several percent.
BREEDERS. A breeder reactor is one that actually creates
more fissionable fuel than it uses. Their more widespread use could,
therefore, substantially reduce the need for newly mined supplies. Both
breeder and MOX are excellent technologies, and both are negative influences
on uranium prices. However, both vastly increase access to weapons-grade
material. As a consequence, because of political realities - namely fear of
weapons proliferation - I doubt either will be much of a factor, at least not
in the political climate for some time to come.
A general estimate is that, by 2010, annual supply from breeder
reactors will be on the order of 6 million pounds in MOX fuel plus 4 million
pounds in reprocessed uranium - meeting, perhaps, 5% of consumption.
UTILITY STOCKPILES. When uranium prices were rising in the late '70s,
many utilities hoarded material. In the early 1980s, it was reported that
some utilities held over five years of fuel in inventory. Those same
utilities sold inventory as prices dropped, accelerating the decline. With
supplies again tightening and prices on the rise, expect utilities to begin
hoarding again, exacerbating the price escalation. This is standard behavior
in industries where demand is inelastic relative to price, and prices are
rising. Today's low stockpile levels - about one year's worth - are
potentially a big positive for uranium.
SUMMING UP
Using the 194 million pounds per year demand forecast, and
subtracting roughly 50 million pounds of supply from above-ground sources,
results in a 144 million pound per year difference that mine production needs
to meet (nearly double current output). That's not going to happen, except at
much higher uranium prices. While longer-term price forecasts are worth
little - there are just too many variables - I'll make a guess. Uranium will
trade over $25 within the next 12 months and is quite capable of going to
$30, $40 soon, and over $100 by the end of the decade.
Success in speculation requires a willingness to look beyond the hype
and hysteria about things like nuclear power. With the exception of a small
group of pathetic Luddites, no one is ready to
freeze in the dark. To sustain the increases in energy demand dictated by a
growing world economy, there is no question that uranium will need to play a
key role. Uranium, after decades of being the unwanted stepchild of energy
sources, is now likely to offer better percentage returns to speculators than
oil, gas or any other energy alternative.
Doug Casey
www.caseyresearch.com
DOUG CASEY is the author of Crisis Investing which
spent 26 weeks as #1 on the New York Times Best-Seller list. He is also
editor and publisher of the International Speculator, one of the nation's
most established and highly respected publications on gold, silver and other
natural resource investments.
Editor’s Note: While buying
physical gold and silver is definitely a good idea, following Doug’s
recommendations for gold and silver stocks is an even better one. With a
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