The Energy Revolution on Our Doorstep

A major plank in my golden age scenario for the 2020’s is the collapse of the cost of energy. This won’t occur because of a single big discovery, but from a 1,000 small ones that aggregate together to create a leveraged effect. The upshot is that we may be free of OPEC in 3-5 years, and completely energy independent not long after that. The impact on financial markets and global standards of living will be huge.

To flesh out my arguments, I called Dr. Amory B. Lovins, chief scientist of the Rocky Mountain Institute, who spends a lot of time thinking about these things. He says that our current energy addiction makes us dig up about four cubic miles of primordial swamp goo to burn each year. That costs the US about $2 billion a day, and another $4 billion a day when the cost of defending unstable supplies in the Middle East is thrown in.

Some 75% of the electricity generated powers buildings, three fourths of the oil fuels transportation, and the rest goes to industry. Demand for Texas tea is already falling dramatically. Since 1975, the amount of oil needed to produce a dollar of GDP has plunged a stunning 60%. Coal production peaked in 2005 and has since lost 25% of the market for power utilities, mostly to natural gas. “Peak oil” is becoming a reality, not in supply terms, but in demand.

This is only the beginning of a major long term trend that still has decades to run. Obama’s move to raise mileage on US made cars from 25 to 55 miles per gallon by 2025 will have a crucial impact. While in the past Detroit lawyered up and fought such policies tooth and nail, now it is reengineering to achieve this ambitious goal. GM says it will offer a hydrogen fuel cell powered subcompact in five years for $35,000. Some two thirds of fuel consumption is caused by weight, so the adoption of cheap ultra-strong carbon fiber composite technology from the aircraft industry, which offers five times the strength of steel at a tenth of the weight, will give them a major advantage. BMW, Volkswagen, and Audi all plan to bring such vehicles to the market in 2013.

Alternatives will also make a growing contribution. While they account for only 3% of the total US energy supply, 50% of the new capacity added since 2010 were powered by alternatives. Solar clearly is cost competitive in the Southwest, as is wind in Texas. All that is lacking are the transmission lines to bring power to the energy hungry, populous coasts.

The cost of solar has recently dropped as much as 80%, as highlighted by the Solyndra bankruptcy. Prices have fallen so fast that it may wipe out all the current equity investors before a new industry rises up to replace them. Radical change can’t happen without casualties along the way.

Don’t expect any action from a gridlocked congress to make this easy. But the marketplace is moving ahead without them. Companies are turning into world class conservationists, desperate to find new ways to reduce costs, now that labor has been cut to the bone. The big surprise here will be in building design, which can bring immediate and large savings in heating and air conditioning costs that fall straight to the bottom line.

No great sacrifices will be required to achieve this energy revolution. If existing energy savings technology were applied to lights, air conditioners, refrigerators, and TV’s, the combined energy savings would be about $1 trillion a year, enough to take 300 coal fired power plants offline.

The implications of this shift away from oil will be global. Much of the world’s developing country debt is driven by high energy bills. So the boost to global economic growth enabled by cheap oil will be enormous. Consuming countries like China, Japan, and Europe will benefit greatly at the expense of producing countries in the Middle East. With oil under $50, that volatile region of the world will shrink to irrelevance, certainly not worth defending.

This is all highly beneficial for risk assets everywhere and is the basis for my own forecast of a Dow average of 50,000 by 2030. It is also massively dollar possible as the disappearance of oil import will shrink our trade deficit dramatically and push our current account deficit into a surplus. Perhaps this is what the recent extraordinary strength of the dollar is trying to tell us. The very long term charts are suggesting that this could become a multiyear affair.



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