| 10/5/2005 - Oil Prices are about no pain, no gain. We’re running out of dead dinosaurs—that’s the big problem. Hedge fund speculation and refinery bottlenecks driving the price up or down are not long term issues. The real game is China and the U.S. We are the two elephants in the room, both gobbling up oil at an unsustainable rate given current supplies and production. We’re going to run out unless we learn to conserve and produce more.
Global oil demand will continue to rise. If China continues to consume as much oil per dollar GDP as they do today, in 20 years their oil demand will be larger than current total world oil production. I spoke with officials in Beijing last week; they are working very hard on oil and energy conservation. They are exploring for new sources. They are building nuclear plants. They will also be trying to shift out of their current reliance on coal consumption to protect the air quality and to save coal miners’ lives. We have to do the same things. People are going to have to park their Hummers and turn them into flower pots or condos. We cannot afford to use oil and gas at our current rate. The faster we can grow our service sector, the easier the oil problem becomes. The only time you use oil in the service sector is on your Caesar salad at lunch. The service sector is much more energy efficient.
We may see $4.00 a gallon oil, but we could also see the price go down. In the short term, price fluctuates based on inventory, market sentiment, hedge fund speculation, and whether the president makes a speech. Longer term, we have to have some real solutions--we've got to have more refineries, drill more holes and--I'm sorry my environmentalist friends--may have to kill a few Caribou or move them to Miami so the U.S. economy can gain access to the 10 billion barrels of oil in Alaska. And we have to develop our vast oil sand and frozen methane resources.
We should work just as hard on alternative energy sources. God only made a limited amount of dinosaurs and they're all dead. We need to develop hydrogen, wind, tidal, and solar power, and other energy sources. Long term, however, human energy will dominate petroleum energy as the principal source of economic growth. Human energy is what makes China and India such formidable rivals because they have 2.5 billion people that we must compete with for resources, capital, and jobs.
For investors, coal is the new oil. China announced they were shutting down the coal mines in their southern region two weeks ago in response to fatal coal mine accidents and to improve air quality. Also, China has a terrible problem with air pollution due to coal, their principal energy reserves. Lower coal production from China puts more pressure on other coal producers and increases the price of coal relative to oil. I own Peabody (BTU) for this reason. I also own the Exchange Traded fund for the Pacific, (EPP), which mirrors the markets in Australia, New Zealand, Singapore, and Hong Kong. Australia and New Zealand are where China gets coal, LNG, and iron. Singapore and Hong Kong is where China gets its capital. This stock is up by half in the past several months.
This is not a doomsday scenario. Limited oil supplies and rising demand just mean that we have to change our behavior before we run into a wall. We will change our behavior; we always do. High prices help convince people to do that. It is very important not to artificially control rising prices because a $3 or $4 per gallon cost of gasoline at the pump will change people’s decisions about things like living closer to work, driving a smaller car, and taking a few less joy rides. We are already seeing that in SUV sales (see WSJ, 10-4-05, "Sales of SUVs Fall Sharply").
I am old enough to remember the first oil embargo in the 1970s. It was painful, but now we use half as much oil per dollar of GDP as we did then. Why? Because it got more expensive. America can adjust—but it takes time. We need to get off of the hurricane and the refinery stories and get onto the real story. Oil and energy supplies are real and long-term problems. We've got to deal them now because without solutions, the energy demand required to fuel economic growth in Asia in the face of limited resources will set the stage for serious conflict between the U.S. and China. The relationship between the U.S. and China in the years ahead will be the most important story of our lifetimes. Facing up to our oil problems today will help us get it right. |
