upcoming energy wave

An interesting newsletter from Economist Tobin Smith:

Let me take this opportunity to make one basic, simple point about this soon-to-be $100 billion industry: Its growth is as inevitable as the sun coming up tomorrow. Or a UCLA victory tonight (sorry, can't help it)!

The unstoppable upward growth curve of clean energy technology is driven by a few key economic transformations, and one rather large psychological driver.

First, $30-a-barrel oil is a distant memory. Not because OPEC has now come clean with their $55-$65 target. And not because our economy has proved that $60-$70 oil does not tank our ability to grow our economy 3% or more.

It's because the price to find and produce new light, sweet crude (low sulfur oil needed by 90% of the world's refineries) OUTSIDE of Saudi Arabia and Russia is so high.

Finding and production costs for new crude oil (mostly from deep water wells) are pushing costs $25-$30 higher this year.

And we are depleting existing sweet crude reservoirs faster than we are replacing them -- about 140% faster, according to the latest industry numbers.

So understand this: If 90% of the world's oil refiners need low sulfur oil, and most of the spare capacity and new oil coming from OPEC is sour crude, we have a supply and demand problem in sweet crude.

AN UNLIKELY SCENARIO

If, due to some economic tragedy, sweet oil demand was cut so significantly that there were 5 million to 8 million barrels a day of EXCESS sweet crude supply, sweet crude prices would plummet -- but not much below $40 a barrel in the worst case.

This is because no one would continue to produce new sweet oil wells with under $40 prices -- they would be shut down.

Which would, of course, rapidly reverse the excess supply of daily sweet crude, and that excess supply would only come back when prices reverted to profitable ranges.

This case is the extreme situation -- not a probability that anyone could model. This is the bubonic plague case where 10%-15% of the world's oil-consuming population literally died, causing demand destruction like we've never seen in the modern world.

My point is, if the only case for lower than $40 oil is an extremely unlikely case, every other case for future oil prices is higher than $40 -- and that takes us back to clean energy.

There is another cost of energy that we must now recognize -- military defense.

Whether you agree or disagree with the invasion and temporary occupation of Iraq, no one can argue that the protection of Middle Eastern oil and the removal of Saddam Hussein from the cash flow of 5 million barrels a day at $50 a barrel was not at the root of the action.

Tack on $100 billion a year in military costs to the production and distribution costs of oil, and you get an even bigger driver of non-oil-based energy sources.

So it's the direct and indirect costs associated with the finding, producing and distributing a barrel of oil that locks $50+ oil into the future calculus of the world's economies.

And it is this locked-in future of $50+ oil that makes investments in clean energy technology so inevitably profitable.

This time, the clean energy wave is real and unstoppable.

 

<div class='quotetop'>QUOTE(imntacrook @ Apr 3 2006, 10:50 PM) [snapback]234586[/snapback]</div>

Yea, that would cook opecs bacon.....