Thursday, March 01, 2007

How much will energy cost?

This topic is very hot right now. It invariably is, when prices have made spectacular up moves, as they have in the past year or two. Most bloggers and the man on the street seem to assume that prices will continue to go spectacularly up. The stock market seems to say otherwise, with energy stocks priced for $40/bbl oil. And, the topic is a bit dangerous, since the short term peaks and valleys associated with oil prices seem to be outside even the experts ability to predict. For discussion about why this happens, see a previous post.

Even so, I believe long term trends have a logic to them which seem to escape the notice of most. Let me be bold and make my projection clear right up front. Barring some short term variability and/or geopolitical events, the long term price of oil will trade in a range of $50-75 per barrel, adjusted for inflation.

One one hand, this seems like a safe bet, since the price has been in this range for the past couple of years, but as I mentioned, this seems to be outside the range of what most would project. Let me explain my logic.

First, the demand side. As energy prices move to the upper end of this range, it begins to provoke actions which restrict demand. Folks begin to carpool a bit more, drive less. They start to think about downsizing their car when they trade, and begin demanding more efficient cars or trucks. They begin to take public transportation a bit more. They turn down (or up in the case of a/c) the thermostat. Energy efficiency becomes an issue with appliances and insulation. Investments in industrial plant efficiency improvements begins to ramp up. Compact flourescent lights take on a new chic. Low grade geothermal heat and a/c become attractive.

Second, the supply side. Solar heat, a/c and wind energy become viable around $50/bbl and are very attractive at $70. Nuclear becomes very attractive in this range. Development of all sorts of energy sources and efficiency improvements begin attracting significant funding. There is a huge supply of coal which becomes attractive at these prices. Drilling smaller and more difficult oil and gas reservoirs suddenly takes off at $50+, and there is an enormous amount of these resources waiting for attractive economics. Ultra deepwater drilling and development becomes attractive, with unknown, but likely large amounts of hydrocarbons to be discovered. And huge reserves of heavy oil and oil sands and oil shale become economic at $50/bbl, wildly so at $75. The known reserves of these resources are huge. Those known in North America dwarf the oil reserves of Saudi Arabia today.

The result is that, outside of short term peaks and valleys, energy prices will remain for the foreseeable future inside the $50-75/bbl range, adjusted for inflation. Perhaps they would be pushed above the rate of inflation a bit by gradually increasing scarcity, but this will be offset by improvements in technology. Notice, no mention of conspiracy by energy companies, auto companies, OPEC, politicos, treaties. these forces may be able to establish some short term control, but in the long term they are powerless against the forces of market supply and demand.

So, what does this mean? It means secure energy sources, on average, at something close to current prices. It probably means increased diversity of supply and a relatively constant percentage of our budget going for energy. It likely means that energy companies are somewhat under priced.

There, I'm on the line with my opinion. Judging by what I hear and read, most will think I'm crazy. So, what's your opinion? Here's your chance to be heard.

No comments: