Monday, July 23, 2007

Energy Prices-Where to from here?

I'm on record (March, 2007)that I expect oil prices to remain in the $50-75 range, inflation adjusted, for the foreseeable future. Prices are now at the extreme upper end of this range, and a recent Yahoo Finance poll indicates that most people think oil will hit $80 before it retreats to $70. That, it seems, is reason enough to take another look.

I'll have to admit that $75 oil has not dampened demand as much as I expected. Just yesterday I made a 50 mile round trip to a historic battlefield with some friends. Despite the fact that we live relatively close to each other, we took two separate vehicles. Granted, there were 5 of us, plus two dogs, so it would have been a bit cramped in a single vehicle, but one was a large, crew cab pickup, so it would have been possible to carpool. This is the kind of conservation I would have expected to blossom with oil at $75. And, national gasoline demand trends indicate that this is typical-demand continues to trend upward at about the same rate. And, I have seen few jumps in conservation investment in other areas such as insulation and computer control.

On the supply side, things are progressing more as I would have expected. Solar energy companies are reporting a tripling of sales, and wind farm announcements and new wind energy companies are proliferating. Railroads and mineral companies are surging, based largely on demand for coal usage. Investment in heavy oil is increasing. Meanwhile, demand for drilling rigs continues to surge. Engineering studies for future nuclear plants have been initiated recently. Even OPEC recently stated that they believe oil prices in the $60-65 range are optimum for "both consumers and producers." Of course, OPEC may change their minds if demand is not dampened by current higher prices. It wasn't so long ago that they were committed to keeping prices in the $20-25 range to "avoid damage to the economies of the consuming countries." Ultimately, their motivation is to keep prices at a level that does not significantly destroy demand.

So, in a nutshell, economics seem to be working on the supply side to keep supply-demand balanced. On the demand side, at least at the consumer end of the spectrum, it would appear prices may not be high enough to damp demand. I'm no longer well enough connected in industry to see whether the same holds true there, but demand trends seem to indicate little effect of higher prices yet.

Perhaps the operative word is "yet". It takes a while for a conservation mentality that matches current prices to take effect in the general public. Many seem unaware of the conservation investment opportunities that are currently knocking. And, as I explained in a previous post, energy supply-demand is remarkably inelastic in the short term, but very elastic in the longer term due to the long time horizons typically required for energy investments.

So, is the $50-75 range still applicable? For now, I believe it is. I voted for $70 oil in the Yahoo Finance poll. Many "experts" have recently stated that $80 oil is now all but inevitable, so I'm in the minority. And, if peak oil is close at hand, and conservation does not pick up soon, I could be wrong.

The next few weeks should be very interesting.


ASG said...

Max, I was just introduced to your blog after reading your Smart Money Letter in response to their Solar-Power Brownout article.

I appreciate your insight into the growing attempt to increase renewable energy supply to meet our seeemingly insatiable global energy demand.

I'm curious if you've pursued - or have information on - attempting to combine real estate specualation/investing along w/generation of renewable energy, either solar or wind.

I'm attempting to find methods/requirements to sell energy to the grid (rather than just building credits w/a local power company) in an attempt to purchase land for my future retirement dream house, build solar/wind power generation to hopefully cover the loan/mortage monthly payment by selling the green power to the grid.

Any thoughts on this topic?

Hopefull Green Power Producer

max said...


I don't have a lot of insight into the renewable energy/real estate link.

I do own land, and I admit to thinking about one day developing some renewable energy sources there. But, this renewable energy link is just a small part of my reasons for owning the property.

I have read that in some areas landowners are being paid for rights to installation of renewable energy equipment, primarily wind. These payments are often much larger than revenues from agriculture, and the land is still reasonably usable for agriculture and other uses. Of course, the same applies to oil and gas revenues in many places. I also know of an individual who travels around looking for weak cell phone signals. Then, he buys property in the area and approaches cell phone operators about building a tower. He has make a good living doing this.

As is typical with real estate, location is the key. So, I would start with widely available maps which show solar and wind power potential.

These maps often show the highest potential in remote areas, which is both a blessing and a curse. Remote land would be cheaper and less likely to run into objections of neighbors, but leads to high, and potentially unsupportable transportation costs.

There also are wide variations in the ability to market the power. Some areas require that utilities buy any power you generate. In other areas you would have to negotiate for the right to sell into the grid or sell to someone who will.

I'd start by gathering maps of all these variables and overlaying them to identify opportunity pockets.

I do think more renewable energy opportunities are coming and they may well create a boom in the type of investments you are considering. However, I would be prepared for long lead times and disappointments along the way. And, I would try to tie in to as many other types of investment opportunities for the property as possible to spread my bets. Other opportunities might include cell service, oil & gas, agriculture, recreation and development.