Arriving at Sardinia’s Cagliari Airport Sunday, I quickly learned why the island’s slogan is “almost a continent.” Sardinia is huge, the second-largest island in the Mediterranean.

I hired a Fiat 500 at the airport for the outstanding price of 20 euros a day and traversed almost the entire length of the island–some 300 kilometers (190 miles)–on the journey from Cagliari to my hotel on the northeast coast of Sardinia. Thankfully, it was a scenic drive marked by rocky cliffs, sandy beaches and hillside vineyards, many devoted to producing the lovely local white wine, Vermentino, in which I drowned my sorrows following England’s loss to Germany in the World Cup.

The trip also reacquainted me with some facts about European road travel. Gasoline (petrol) prices are far higher here than in the US, and cars tend to be much smaller.

While living an England I drove the uninspiring red Fiat 500 for a time; I was pleased to discover that the new models have returned to the charming design of decades ago.

As you can see, the car is tiny. I can reach across and open the passenger-side door from the drivers’ seat, and it’s truly a joy to park, capable of sliding into the smallest of spaces with ease. (For that reason alone, I’d love one at my home in Alexandria, VA). Thankfully, the petrol tank is equally small; I paid about 1.40 euros per liter (USD6.50 per gallon) to fill the tank after my long journey across Sardinia.

The small cars, prevalence of public transport and high price of gasoline lead many to assume that Italy and other nations in Europe must be less reliant on fossil fuels than the US or Canada. That’s only half true.

Europeans do consume less total primary energy per capita than their counterparts in the US. For example, Italy consumes about 8 quadrillion British Thermal Units (BTUs) per annum, a figure that includes energy for transport, electricity and other applications. 

With a population of around 58 million, Italy consumes about 139 million BTUs of energy per person per year, compared to about 335 million in the US and 427 million in Canada. Per-capita energy consumption in larger European countries falls in the same range– roughly 130 million BTUs to as high as 180.

There are many reasons for North America’s appetite for energy, some cultural and some structural. For example, the size and population density of the US and Canada require longer travel distances and present challenges to establishing public-transportation networks.

Nonetheless, it’s also instructive to examine the energy sources used in the EU and the US.

Source: Energy Information Administration

This first graph depicts primary energy consumption in the EU, broken down by source. As you can see, fossil fuels dominate the EU energy supply picture; oil, natural gas and coal account for 82 percent of total primary energy consumption. Oil is far and away the most important single source of energy in Europe, accounting for 40 percent of all energy consumed. Outside the “Big Three” energy sources, the most important energy sources are nuclear and hydroelectric power.

The “other” category is a catch-all that includes geothermal, solar and wind power, as well as biomass such as wood and waste products. Contrary to popular belief, these alternative energy sources aren’t a major source of energy in the EU despite years of generous subsidies.
Let’s look at a similar graph for the US.

Source: Energy Information Administration

Notice how closely the pie graph resembles the previous one. The US gets 84 percent of its power from the Big Three fossil fuels, only about 2 percent more than the EU. And as a percent of total energy use, petroleum is slightly less important in the US.

One might also be surprised to learn that the US consumes more energy from the renewable or other category. This isn’t because of solar, wind or geothermal power but largely stems from greater consumption of biofuels and biomass energy.

Although per-capita consumption of energy in North America is higher than in the EU, the source of that power is almost exactly the same despite dramatically different energy policies and domestic resources. That suggests that all the talk of the EU being ahead of the US in terms of weaning itself from fossil fuels is more politics than reality.

The fact remains that in the EU–as in the rest of the world–renewable energy stocks amount to a play on government largesse and subsidies. Accordingly, the sector likely will be hit hard by the ongoing sovereign debt turmoil in the EU and European governments’ fiscal-austerity measures.

Last week the Spanish government announced a total review of its energy policy and canceled a planned tariff increase that would have raised retail power prices by 4 percent. This move will also delay a planned “tariff deficit” bond sale.

In Spain, utilities sell power at cheap, regulated rates; the government pays them the difference between the cost of generating power and the price they’re allowed to charge for the energy. This appears on utilities’ books as government-backed debt. The Spanish government had planned to securitize these IOUs to the utilities through a bond sale, but that would be a tough sell now that credit ratings have taken a hit.

Another likely victim of the energy policy review: generous subsidies solar and wind power. One might wonder why Spain’s energy policy would be of any interest to international investors–after all, Spain accounts for roughly 2.5 percent of the world’s gross domestic product.

Spain is tiny in terms of total energy consumption, but the country is a giant when it comes to renewable energy, particularly solar power. In 2008 this small country in southern Europe accounted for half of the world’s the solar-power capacity. Spain has already slashed subsidies for solar and, given the state of public finances, those subsidies are unlikely to be reinstated.

And you can bet that Spain isn’t the only EU country that will reexamine generous, taxpayer- funded support for renewable power. Germany’s subsidies for solar power expire on July 1; I expect Germany and other nations to consider drastic reductions as they trim budgets.

From a practical perspective, such an approach makes sense; despite significant subsidies, renewable power isn’t accomplishing its central goal of reducing dependence on fossil fuels.

Although some subsidies and tax breaks for renewable energy will be part of a future US energy bill, such a bill is unlikely to pass this year. And any energy bill in the US will need to include support for natural gas and nuclear power to attract Republican support. From an investment standpoint, I don’t see the US picking up the slack left by falling EU support for alternatives.

Don’t buy the hype surrounding alternative energy; this sector faces severe headwinds that will only intensify as EU nations prune budgets. I’m researching potential short plays for The Energy Strategist, my energy-focused newsletter.

A Face-Lift

While writing my Master’s dissertation at the University of London, I had to create a computer program that analyzed huge amounts of financial data covering hundreds of stocks listed in different countries. I was required to submit this program with the final product; my advisor commented that it was perhaps the longest, least-efficient and ugliest piece of computer code he’d ever seen. Nonetheless, he noted that it appeared to work, though he couldn’t tell me exactly why or how. Suffice it to say, technology has never been my strong suit.

Fortunately, we have an excellent and talented in-house tech team that managed to turn my long list of wants and requested features into a beautiful and functional new website for The Energy Strategist. Thanks for your hard work, Brad.

New features include online portfolios with automatically updated price quotes and statistics, as well as the ability to host live chats with subscribers. During last week’s hour-long chat I answered dozens of questions about individual recommendations, energy commodities and broader market and economic conditions. It’s proved a great way for me to keep my subscribers informed about the latest news on our holdings and my most up-to-date thoughts.

To celebrate the launch of the new site, we’re offering a risk-free trial to the newsletter. To check it out and make sure you’re on board for the next chat session, click here.