Jan

5

saudi arabiaI wonder about energy stocks going forward. No one can know the "right" price for oil. The Saudis though used to believe that current prices were way too high.

Official Saudi policy used to focus on keeping world oil prices below $25 a barrel. Dollars have lost value since then, but the logic behind earlier Saudi policy is worth remembering. The Saudi economy suffered greatly from the unintended consequences of the huge price increases of the late 1970s (the early price increases were just adjusting for the falling value of the dollar).

The oil price collapse of the 1990s followed the huge investments high oil prices attracted to oil production, and the new innovations and subsurface analysis that increased the reach and accuracy of oil-drilling equipment. North Sea oil came onstream. Prudhoe Bay drilling and development received a political okay over environmentalist objections only because of high oil prices from the Middle East. OPEC's share of total oil production fell significantly as world exploration was spurred by much higher prices.

High prices slowed demand and pushed supply dramatically up, which should not have been a surprise. But high oil prices were such a gift to the legions of true-believers invested in green visions. They wished for smaller more fuel-efficent cars, for recycling, for green energy. Environmentalists and governments got on board with investments, grants, and tax-credits for solar panels and wind turbines (ones that were way, way less efficient than today's still not good enough solar and wind technologies).

The elites wanted to believe. Oil producers wanted to believe that finally oil prices would go up and stay up. Wealthy environmentalists wanted to believe oil and other natural resource were running out, as they had been taught in college by textbooks like Herman Daly's "Steady-State Economics" (which was one of my textbooks in my "Social[ist] Economics" course). We had been taught that economic growth and overpopulation were the great dangers of the modern world.

Ph.D. economists were hired by the hundreds to staff energy economics research agencies and private consulting firms. Some 400 energy reporters eagerly covered the energy beat and rushed to cover each OPEC meetings and Energy Dept. briefings where they thought future policy and prices would be decided. (OPEC meetings were the IPPC meetings for that past alarmist generation.) Everyone was engaged and happy. Everyone except everyday Americans who now paid far more for gas and home heating.

Energy reality struck, dropping oil prices well under $20 a barrel, which wreaked the oil-producing economies in the Middle East as well as the fragile Russian economy. Early alternative energy companies and investments were wiped out, and half the major oil companies were swept into the mergers that gave us so many hyphenated oil companies.

Fast forward a bit to new turmoil in the Middle East and the oil price spike of 2007-08. High prices helped crash the U.S. economy and stall other major economies, and attracted billions and billions of new investments in alternative energy firms. Huge revenues from high prices raised investments by the majors as well.

More important, tens of thousands of top engineers and scientists turned their eyes and minds to oil and alternative-energy technologies.

The wishful thinkers again wished it would be different this time: that high oil prices were here to stay. The dot-com guys thought the tech party would continue on, the housing enthusiasts though the same, and now many oil investors think $75 a barrel oil is "only the beginning." Many say energy supplies are constrained in new ways.

The last ten years saw stunning economic growth around the world, especially in China, India, Indonesia, Brazil (Tyler Cowen discusses this in his recent NYT article. This economic expansion increased energy consumption beyond what was projected by pessimists. So energy prices spiked and oil companies that had downsized in the 1990s tried to restart and rebuild various departments and production ventures.

Maybe this vision of billions of new oil consumers led the Saudis to believe that this time entrepreneurs would not be able to summon enough innovation to respond to the higher demand and prices. But among the billions of new energy consumers are tens or hundreds of thousands of new scientists, engineers, and entrepreneurs who are searching, finding, developing, processing, inventing, and imagining new energy technologies and sources. The stunning natural gas discoveries across the U.S. suggest similar reserves can be found in Europe.

Exxon is less likely than wealthy environmentalists to waste investments in alternative energy. When Craig Venter gets his hands and mind on Exxon's $600 million for an algae fuel project, that is a very different thing than Department of Energy minions or Al Gore throwing money at plausible green-energy projects.

The drilling technology, biotechnology, and computing power available today to search both for new energy reserves and for biological energy processes is far, far beyond what was available or even imagined 30 years ago.

Just a couple years ago natural gas supplies seemed hopelessly constrained and processing and shipping LNG to the U.S. was thought the only option. Small firms kept drilling and experimenting across Ft. Worth, mostly ignored by the majors. But natural gas price spikes in 2005 and 2008 spurred them on, giving them access to new investment dollars.

Now natural gas is in vast supply. Somehow people can't imagine that similar technology advances could quickly find new oil supplies and other technology advances could discover scalable biofuel sources. How many energy price spikes and crashes should we expect over the next ten years?


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