Oil bulls are on the loose - or on the losing side?

Monday, April 04, 2005

All economic worries about rising deficits, slowing profit growth and fears of inflation have suddenly been washed away by a single concern: the price of oil which rose to a record high of more than 58 $ today.
The reason for fear is clear. Economic theory says that all the productivity of human mankind is based on its exploration of the earth's energy resources. Whatever we do commercially is based on this free lunch from our globe (OK, the utility companies stand in between people and their free lunch). But one still has to consider that whether one travels for business or personal reasons, cooks a meal, works on a computer or enhances one's knowledge by reading a book after sunset, it all involves using some form of energy. Even your doctor does basically the same thing. He charges you for the mental energy that gets invested into your well being (OK, he's got to pay his utility bills and the gas for his home visits and his assistant too). In short, without energy there would be no economy (and no warm meals).
But now the greed that led to record sales of gas guzzlers in any shape makes a sharp u-turn into panic. The disgusting four letter word of the times comes ahead of oil production: peak.

Oil experts have started to voice their warnings about the coming depletion of oil reserves roughly ten years ago, though in vain. Only 4 years ago oil was traded at 12 $ a barrel; that was really close to a free lunch. And our lunch grew dramatically: Daily global consumption is estimated by OPEC to be around 82.4 million barrels in 2005. That amounts to a total of more than 30 billion barrels annually, with a rise of 1.4 percent forecasted for 2006. A nice number for the oil companies, especially at these prices.
While the discussion is still limited to gasoline, heating oil and kerosene, we must not forget petrochemicals. From car tyres to medicine, from our cell phone covers to plastic sheeting, oil engulfs the better part of our comfortable modern day life. No other commodity has such a versatility of uses.
Expectations of another doubling of oil prices above 100 $ a barrel put all this in danger. We could be double-trapped. If we reduce our oil consumption, economic growth will most certainly slow. If we don't reduce it, inflation will show its claws and teeth and this will lead to a slowdown as well. That is because higher oil prices will affect the price of nearly everything else.
But this pessimism that dominates the current discussion is not justified. Mankind has shown it can adapt to even the worst scenarios. Sure, a setback in oil supply will be painful in the short term. But in the long term it can save our lives. Because high oil prices offer a higher incentive to develop more sustainable and environmentally friendly forms of energy. Otherwise we would anyway choke to death once the developing countries would begin to use the same amount of fossile fuels as the roughly 700 million people in America and Europe do nowadays.
Mankind pollutes the air with close to 25 billion tons of carbon monoxide per year. Global warming, ozone holes and the cost to our health and the nature from pollution add up to a nasty bill we pay for the joy of cheap personal mobility.
We must not forget though that where there is so much shadow, there must be a very sunny side to!
Just step outside, look upwards and you can see the most reliable form of energy for the next couple of millions of years (baring darkness or clouds). As my wife told me, and I never argue with her, the sun delivers about 11,000 times the energy we are currently in need of!
This means, if we can utilize only 1/11000th of the solar energy we could give up creating lunar landscapes on our small earth.
So what the steam engine and railroads were for the 19th century and the combustion engine for the 20th century, solar power will be for the 21st. An energy form that will lead to a dramatic scale of innovation and improvement of our quality of life.
When the first crude oil was discovered in Siberia 200 years ago, the czar's geologists wrote a report, that this was a liquid completely useless. Reminds me of today's doubters of solar energy who claim it will take ages to make use of this unlimited commodity.
BTW, from an economic viewpoint it is now the time to invest into anything connected with solar energy. I already loaded up in German Conergy AG shares as Europe is much more sensitive to environmental problems than the USA.
See you in the sun...


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