With oil prices sinking, not soaring … will investors from Wall Street to Silicon Valley lose interest in energy technology? Not hardly. But in the cold dawn of more “rational” oil prices, investors and policy makers will fare better keeping in mind seven energy realities.
Principle #1: Energy demand always rises. There is implicit, if not explicit, in much punditry that, somehow, overall energy demand can be reined in. There has been no period in history, outside of pandemics and total wars, or the equivalent in totalitarian societies, when energy demand has not risen. Technology progress brings economic and social progress. And rising energy consumption is a surrogate measure of rising use of new technologies, of rising affluence, and well-being. In the parlance of investors; there will never be a shortage of demand for the product inartfully called “energy.”
Principal #2: It’s about the technology. It’s never really about the raw resources, whether tons, barrels, or fields of corn, sunlight, and wind. Conventional, or near conventional resources are available in such staggering quantities that the idea of energy resource shortages has no meaning. At a fraction of today’s oil prices, long-term availability of fuels, and fuel-like resources is staggering. Total known hydrocarbons, deep-water oil, heavy oils, shales and coal measures in thousands of billions of barrels in North America alone. Carbohydrate resources, wood, corn, switch grass and sugar cane annually grow hundreds of billions of barrels equivalent. Wind, sun and uranium take the numbers in to the stratosphere. The millennia-long search has always to create clever technologies to extract and deliver energy from abundant resources.
Principle #3: Over time, electrons trump barrels. The technologies that create and use electricity will continue to be the primary underpinning of economic growth, even though oil is the primary transportation fuel. Reduced to its essence, our economy uses just two forms of energy: electricity, or oil and its hydrocarbon cousin natural gas. And in our post-industrial information-dominated economy, electricity dominates. Over 60 percent of the economic activity that comprises the U.S. GDP depends directly on electricity – the other 40 percent on barrels of oil (or equivalent). This ratio has completely reversed since the first oil shock of 1973. Our economy is deeply electrifying.
Even transportation will eventually be assimilated by electrons, and the inexorable decline in power electronics costs. A curiosity just five years ago, plug-in hybrids will soon emerge, accessing the electric grid, when convenient, instead of fuel in the tank – a realistic option for urban distances. A pint of oil can be displaced with one grid kilowatt-hour. Short-distance urban trips account for lots of pints.
Principle #4: Silicon, the digital economy, increases energy demand. The digital economy makes us more efficient, more productive, wealthier – which, overall, indirectly but inexorably increases demand (see Principal #1). It also directly increases energy use from the constellation of electricity-consuming silicon-based technologies that didn’t exist two decades ago; hundreds of millions of digital devices from desktop to palmtop, used in homes and offices, on factory floors and shipping docks, and thousands of million-watt industrial-scale digital technology enterprises from chip fabs to server farms.
The past two-decade 50 percent rise in electric use cannot be attributed to more lights, air conditioners, motors and pool pumps, as it was during the post WW-II industrial boom. In fact, that class of mid-20th century appliances are now astoundingly more efficient; so much so that electric demand should have stayed flat or declined. Somewhere along the way to a GDP twice that of 1979, new ways to consume electricity emerged. Demand for silicon-based digital devices is far from sated in every niche of today’s $12 trillion, and tomorrow’s $20 trillion economy.
Principle #5: Improving efficiency increases energy demand. This seems heretical in the face of a remarkable bipartisan policy consensus that the nation’s energy demand will decrease as overall efficiency rises. Actually, the opposite will happen. The U.S. economy is twice as energy efficient today compared to 50 years ago, and we use three times more energy. Over the next 50 years, likely we’ll triple efficiency, and double energy use.
It is seductive, but uninformative, to note that replacing a specific device with a more efficient one decreases that specific energy use in that application. In the real world, not only do many more new uses emerge for that same or similar device, but many new devices and technologies appear. In high-school economics one learns that lowering price stimulates demand. So it’s worth keeping in mind that improving efficiency reducing costs. All this is good of course because markets love efficiency, for all its benefits (see Principal #1, again).
Principle #6: Not all BTUs are created equal. Markets chase productive technologies –visible in economic, not energy metrics. The unit of choice for counting energy supply and consumption is the (archaic) BTU; British Thermal Unit. One source, or use, of BTUs looks like another when toted up in the government’s energy accounts. This is as useful as comparing tons of gold to tons of wheat. BTUs in photons from sunlight landing on pastures can appear as BTUs from burning wood, or alcohol. BTUs in coal piles at power plants can appear as BTUs of electrons to power microprocessors, or the BTUs in laser photons. All very different in productive impacts, measurable only in what we pay.
We pay $2 for a barrel’s worth of BTUs from a wood campfire; $60 a barrel for heat from wood alcohol; $10,000 for a BTU-barrel equivalent of electrons feeding Pentiums; and $200,000 for a barrel’s worth of laser photons. The market, needless to say, recognizes and willingly pays for, indeed prefers the latter BTUs because they are higher quality, can do more, and more valuable things. The energy technologies that create, manage and deliver the most expensive BTUs are also the most valuable.
Principle # 7: In the end, it’s always about the money. Economies are logical, preferring the most expensive BTUs embodied in highly productive technologies, and hungrily chasing the cheapest low-value raw-resource BTUs. It is thus ironic, if not counterproductive, when alternative energy advocates revel in, even praise, high-priced oil as vital stimulus for favored non-oil sources. Most economists, and certainly all consumers, chafe if not rebel at high commodity prices. Over the long-run, free governments prefer, and technology enables, access to ever cheaper raw commodity energy.
The one advantage these seven principals have over prognostications and wishful thinking is they emerge from history, and from basic physics and economics. There may be, almost certainly is, an oil price bubble. But even as it deflates, it will only slightly mute energy technology opportunities. If energy tech itself is a bubble, it’s a centuries-wide one.