John Petersen
On August 27th, we’ll celebrate the
150th anniversary of Colonel
Edwin Drake’s completion of the world’s first successful oil well
near Titusville, Pennsylvania. That discovery and the many that
followed planted the seeds of an industrial, economic and cultural
revolution that transformed America from an agrarian backwater into a
global superpower. For the next 114 years, oil was cheap, plentiful and
the solid bedrock of the American Dream. Since the early ’70s, however,
the dream has gradually become a nightmare as domestic and global oil
production began an irreversible decline.
My first graph comes from the Energy
Information Administration and shows the annual U.S. production of
crude oil over the last 150 years.
My second graph comes from Wikipedia
and shows both nominal and constant dollar oil prices over the last 150
years (click on the graph for an expanded view).
The most interesting feature of the
two long-term graphs is the general shape of the constant dollar oil
price curve. If you smooth out the price shocks of the ’70s and ’80s,
the graph shows a pronounced albeit elongated U-shape. While there are
many theories about where oil prices will stabilize when the global
economy begins to recover, it seems safe to assume that the price won’t
be $20 or even $40 per barrel.
My third graph takes historical oil price data I downloaded from the Energy
Information Administration, adds a price channel overlay on the
ten-year trend and shows why I believe oil prices will stabilize around
$80 per barrel.
Barring unexpected major new discoveries, there’s only one way for oil
prices to go over the long term.
It doesn’t take much reflection to see that oil production, consumption
and pricing have become major problems that can only get worse as six
billion people in emerging economies strive to attain the lifestyle
that 600 million Americans and Europeans have enjoyed for decades. The
harsh but undeniable reality is that oil cannot sustain global economic
growth for the next 20 years, much less the next 150. This reality is
the driving force behind a concerted global effort to identify and
harness alternative energy resources that can offer relevant scale
solutions to a looming global shortage. Unfortunately, many alternative
technologies are even less sustainable than oil because they depend on
a smaller natural resource base.
There are only four unlimited energy sources known to man. The first is
the internal heat of the earth itself. The second is the movement of
the hydrosphere. The third is the movement of the atmosphere. The
fourth is the sun. Where the Ancient Greeks taught that earth, water,
air and fire were the classical
elements, the new science of alternative energy teaches that earth,
water, wind and sun are the true classics. When it comes to harnessing
that energy, however, the only thing that matters in the long run is
the mineral wealth of the earth’s crust and oceans.
Many alternative energy technologies including windmills, PV solar
cells, fuel cells, advanced batteries, and
advanced electric motors depend on exotic metals that were pretty
scarce to begin with. Like oil, each of these exotic metals will have a
U-shaped price curve and while they’re relatively cheap and relatively
available for the time being, each will eventually hit an inflection
point where they’ll no longer be cheap or available. According to
experts like Jack
Lifton, many critical natural resources will reach their price
inflection points within a few years, rather than decades or centuries.
So far, the only alternative energy technologies I’ve identified that do not face daunting mineral scarcity risks are concentrated
solar power, or CSP, and geothermal power.
Historically, investors have not had to worry about how natural
resource constraints might impair their portfolio companies because the
required raw materials have always been available for a price. As we
enter the Age
of Cleantech, the sixth industrial revolution, those rules will be
re-written in ways that many will find shocking. I’ve previously
described how
raw materials shortages will impact the battery and hybrid electric vehicle markets. Over the next few weeks I hope to expand my focus to
consider the principal raw materials that are critical to the
development of a truly sustainable alternative energy infrastructure.
Unlike this article, future installments will identify companies that
enjoy specific natural resource advantages or suffer from specific natural resource
risks, and hopefully help investors identify the likely winners and
losers.
Given the long-standing animus between environmentalists who see
themselves as protectors of the planet and miners who see themselves as
simple providers of essential raw materials, I’m not optimistic that
humanity will be able to solve its energy problems without
catastrophic conflict and horrific environmental consequences. If we
are to have any chance at all, the environmentalists must come to grips
with the fact that a clean energy future depends on the robust and
responsible development and use of all the earth’s resources.
Readers that want to develop a deeper understanding of the issues and
opportunities in the energy storage sector may want to join me in San
Diego for Infocast’s
Storage Week on July 13th through 16th. The speaker’s list
includes more than 80 thought leaders from the battery industry, the
government, the utility and automotive industries, and the research and
development sector. I’ll be participating in three panel discussions
and hope to return home with new investable insights that I can share
with readers in future articles. If something important happens while
I’m on the road I’ll try to cobble a quick blog entry together.
Otherwise, you can look for my next article in a couple weeks.