Mark Mills
Wall Street Journal
With oil prices nearing $30 a barrel, is the "new economy" in trouble thanks to old-economy troubles? Will oil prices fuel inflation, undermine consumer and business confidence and put a drain on capital? Will oil markets drag down the fortunes of high-tech companies?
Don't count on it. The epicenter of power in energy markets has shifted from Abu Dhabi, where oil lies beneath the sand, to Silicon Valley, where electrons flow through computer chips made of sand. Three trends in the digital economy are diminishing the importance of oil prices and the Organization of Petroleum Exporting Countries.
First, it has accelerated wealth creation. The U.S. Commerce Department estimates that at least one-third of the nation's economic growth is driven by information technology. That means silicon has injected $800 billion into the U.S. economy in the past decade. As a result, oil prices matter less. The share of gross domestic product absorbed by oil purchases is 30% lower now than in 1990, despite the current high oil prices.
And prices will drop. During the past century, oil prices oscillated between $14 and $27 a barrel (in today's dollars), with only two very brief exceptions. There will be more oil price spikes; such is the nature of any commodity. But they will matter even less as the economy keeps expanding.
Second, the silicon revolution has made electricity the most important form of energy. The price of a kilowatt-hour now matters more than the price of a barrel of crude. Transportation uses two-thirds of all oil consumed, but constitutes only 10% of the economy. The other 90% of the economy gets 55% of its energy from electricity. More than 80% of the growth in U.S. energy demand since 1990 has been met by electricity.
The tools of the new economy are leading the way. More than 60% of all capital spending, or some $450 billion a year, is on information-technology equipment. Every piece of IT equipment, from the PC to the wireless base station, uses only one kind of energy: electricity.
Even as oil prices yo-yo, the average retail price of a kilowatt-hour has dropped 10% since 1990, and wholesale prices are in free-fall. With market pressures from expanding utility deregulation and new technologies, the electric price trend is locked in a downward cycle. Only 4% of the nation's electricity is generated by oil, compared with 52% by coal, 15% by gas, 19% by nuclear reactors and 10% by hydroelectric plants.
Third, computers themselves help hold down energy costs. Remote imaging and supercomputers have made exploration so efficient that finding costs for a barrel of oil are down by more than 75%. Computer-based design has radically improved equipment used to drill, extract and process oil. Smart drill bits, with fiber-optic real-time links, direct serpentine drilling paths to chase down black gold. The Oil & Gas Journal forecasts at least $11 billion annual savings just from Web-driven operational efficiencies yet-to-be implemented by oil companies.
Everything from power plants to paper mills can or will arbitrage, in real time, so as to take advantage of episodic oscillations of commodity prices. Aircraft and truck fleets have gained fuel savings from intelligent routing and dispatch. We are only at the beginning of a world of smart imbedded and networked chips in practically everything from refrigerators to machine tools. The collective effect of such efficiency is to build in more resilience to energy commodity price swings.
The 20th century belonged to oil. The 21st century will belong to the electron, and this is OPEC's worst nightmare. True, oil will remain the dominant transportation fuel for a very long time. Economic growth will boost oil demand. But the economy is far less dependent on oil than it once was. The stubborn refusal of inflation to kick in at $30-a-barrel oil proves it that the era of oil-price-driven inflation is over.
© 2000 The Wall Street Journal
