Bubble-itis

The media have been saturated with the customary cusp-of-the-year analysis and projections, and so far little of it seems particularly surprising or insightful. I ran across one small item in the New York Times that I thought merited further consideration, though. In Sunday's Week in Review Section, one segment of their "What in the World We'll Do in 2006" report featured this discussion of whether alternative energy was turning into the new stock market bubble. The author never quite comes out and says that it is, but he sets up his criteria for a bubble and asserts that alternative energy meets them all.

In much the way that the Depression focused economists on the dangers of deflation, the Tech Wreck gave rise to a whole industry of bubble-mavens, and there are certainly areas of concern, such as housing markets across the developed world. But either in terms of their share of market capitalization to the total stock market, or of their contribution to the global $3 or $4 trillion energy market, alternative energy stocks aren't even on the scale of the bubbles in glass of soda, let alone something policy makers, economists or investors should worry about.

The increased attractiveness of alternative energy stocks is clearly attributable to the dramatic increases in the prices of oil and natural gas, and the growing environmental challenges facing coal. To the degree these energy sources face long-term problems, alternative energy seems on secure footing. The sector includes some very promising technologies, in addition to the obvious wind and solar power segments. Gasification and sequestration, next-generation biofuels, advanced batteries, and stationary fuel cells will likely all be applied at material scales within the next decade. That means selling real products to real buyers, and generating real BTUs and kilowatts. In this light, analogies to the Tech Bubble begin to look silly.

Investors still need to be savvy about where to invest in this sector. Many of the new technologies under development today will turn out to be impractical or uneconomical. Many of the companies involved will not be viable. This is exactly what you'd expect in a market segment that, though it has been around for quite a while, has only recently entered the limelight. Talk of bubbles at this stage is particularly unhelpful, because it undersells the promise of the sector while distracting investors from the crucial details of specific technologies and company structures and capabilities on which they should be focused.

And while a substantial drop in energy prices might create a short-term flight from alternative energy, reinforcing the idea that it was all hype, the long-term trends ensure that this sector has plenty of room to grow, for a long time to come.