(An abridged version of this essay appeared in the Business Times of 4 October 2008)
Looking beyond the current financial crisis, the future is bright and breezy as solar and wind energy will spell the end of oil's importance.
By JOSEPH CHONG
CEO, New Independent
In the Sunday Times of 6 July 2008 (oil was trading at about US$140 a barrel then), I predicted that the price will fall to US$50 in ten years. Since then we have moved half way there. The price of crude oil rose by 50% in 7 months and fell by 35% in 6 weeks. Until today, many policy makers insist that it is because of supply and demand and speculation played only a minor role. Did demand rise or supply fall by 50% in 7 months? Clearly not.
Published data shows that, physical demand and supply are approximately in balance at around 86 million barrels per day. Indeed, demand worldwide has been decelerating since the beginning of the year. For example, US demand has fallen by about 4% yoy in June to about 20.4 million barrels a day. On the other hand, available spare capacity in the oil producing nations have been thin – perhaps 1.5 million barrels per day. To aggravate matters, demand and supply for crude oil is inelastic in the near term. Most cars can only run on petrol and it takes 5 to 10 years to bring new field discoveries into production. Thus, no matter what the price, consumers and businesses have to pay up until they cannot.
Why then should prices continue to rise when crude oil demand is falling? I believe this is because of the demand from financial investors such as hedge and pension funds and, more mundanely, ETF holders. If spare capacity is plentiful, the impact of financial investors would not be significant. However, if spare capacity is small, financial demand of just the equivalent of 1 million barrels/day could drive prices skyward. This would be equivalent to an investment inflow of about US$50 billion per annum or about 3 months of China’s trade surplus or about 1.5% of the US$3 trillion in Sovereign Wealth Funds i.e. US$50 billion is thus a fairly small sum. It is even smaller if one remembers that oil futures are bought on margin.
I also suspect that both buyers and sellers of oil have been hoarding. As a producer of crude oil, I would delay bringing my product onto the market if prices are rising at the rate of 10% per month if my finances are in good shape.
There was also a huge divergence between the price of oil and the performance of oil stocks such as BP, ExxonMobil etc., which underperformed the price of crude oil by some 55% in the first six months of 2008. Exxon Mobil, based on a present value analysis, was being valued as if crude oil will trade at an average of US$80/barrel over the long term. The reason for this is clear. Buy US$50 billion of the public oil companies and the needle hardly moves. Throw US$50 billion into oil futures creates a quake because it is a relatively small market. The financial speculators know this.
Another anomaly is the huge premium over the marginal cost of production. The most expensive marginal barrel of oil is estimated to be around US$60 -70 a barrel. Being a commodity, that should be the sustainable price. Indeed, coal, which is many times more plentiful than crude oil, could apparently be converted into crude oil at around US$40 a barrel. Being replaced by another fossil fuel, however, is not the crude oil killer. It is renewable energy.
Renewable energy sources, together with the re-tooling of our energy supply infrastructure, will spell the end of oil’s importance. It will come sooner than many think. A view shared by the perpetually pessimistic “Economist “in its June 21st edition. It is not a pipe-dream such as aiming to go the moon in 1960. Most of the technologies are already commercially viable – it is a question of how fast mankind can re-tool.
The most promising alternatives are wind and (thin-film) solar energy – our nuclear fusion reactor in the sky. The earth absorbs 400 times more energy from the sun than all of mankind’s energy needs. Investments in solar energy are growing at 200% per annum. Indeed thin-film solar using nano-tailored ink as the energy absorbing medium is analogous to one of nature’s more potent processes – photosynthesis. Yes, plants get most of their energy needs from sunlight - not crude oil. Apparently, the leaders in this new technology are able to generate electricity as cheaply as coal if the cost of pollution is factored in.
Even as we get excited about solar energy today, the developments in the laboratory are even more exciting. Scientists have now developed material that could absorb infra-red radiation (heat) and convert it to electricity. The potential here is mine boggling e.g. air conditioners as we know them may be obsolete in future.
Although renewables are relatively small suppliers of energy currently, their rapid growth and huge potential will erode demand for oil at the margin as their share of total supply grows. For example the US could generate the equivalent of 6 million barrels per day of oil in its “wind belt” running north-south from Texas to the Canadian border. If the oil market were oversupplied by 6 million barrels today, the price of crude oil would plunge fairly quickly to US$50.
This rapid growth in alternative energy is happening not only in the developed world. China is now the world’s second largest wind turbine market after the US and the central government has set clear goals for the exploitation of wind and solar energy. Renewable energy makes even more sense for China given that China requires about 80% more energy than the US for every GDP dollar generated.
Unlike a coal plant that takes 5 years to build or a nuclear one which takes 10 years, and would be useless if only half completed, a solar or wind generator takes less than a year to build and could generate electricity even if half finished.
However, can land scarce Singapore be energy independent? Just like our water supply, there is good possibility that careful planning and technology will make this a possibility to a certain extent. Every HDB block is a potential solar generator not only for the residents but could sell surplus electricity to the grid. Another possibility for Singapore is to float the solar generators over our numerous reservoirs or along our sheltered coastlines. This is what small Denmark, which gets 20% of its electricity from wind energy, has done. It has installed some of its wind turbines offshore. Indeed, the world’s largest wind turbine maker is a Danish company, Vestas Wind Systems.
On a more global scale, the commercialization of alternative renewable energy has tremendous implications for mankind. Especially, the rural third world where the main hurdle to development has always been affordable electricity. Cheap solar has the potential to make irrigation, mechanization, sanitation and communication assessable for these people. It has the potential to reverse the trend towards urban overpopulation and squalor.
Indeed, we see this happening to rural communities in the US. Sweetwater in Texas has seen a major rejuvenation in jobs and population after the installation of a major wind farm. Ironically, farmers in Texas earn more leasing their land for wind turbine use than from farming. Texan farmers get $3000 per acre from wind compared to $150 per acre from corn. Wind farming is the most profitable cash crop.
In many ways, this renewable energy revolution will dwarf the internet in its potential to improve the lot of mankind. Looking beyond the current financial crisis, the future is indeed bright and breezy.
Looking beyond the current financial crisis, the future is bright and breezy as solar and wind energy will spell the end of oil's importance.
By JOSEPH CHONG
CEO, New Independent
In the Sunday Times of 6 July 2008 (oil was trading at about US$140 a barrel then), I predicted that the price will fall to US$50 in ten years. Since then we have moved half way there. The price of crude oil rose by 50% in 7 months and fell by 35% in 6 weeks. Until today, many policy makers insist that it is because of supply and demand and speculation played only a minor role. Did demand rise or supply fall by 50% in 7 months? Clearly not.
Published data shows that, physical demand and supply are approximately in balance at around 86 million barrels per day. Indeed, demand worldwide has been decelerating since the beginning of the year. For example, US demand has fallen by about 4% yoy in June to about 20.4 million barrels a day. On the other hand, available spare capacity in the oil producing nations have been thin – perhaps 1.5 million barrels per day. To aggravate matters, demand and supply for crude oil is inelastic in the near term. Most cars can only run on petrol and it takes 5 to 10 years to bring new field discoveries into production. Thus, no matter what the price, consumers and businesses have to pay up until they cannot.
Why then should prices continue to rise when crude oil demand is falling? I believe this is because of the demand from financial investors such as hedge and pension funds and, more mundanely, ETF holders. If spare capacity is plentiful, the impact of financial investors would not be significant. However, if spare capacity is small, financial demand of just the equivalent of 1 million barrels/day could drive prices skyward. This would be equivalent to an investment inflow of about US$50 billion per annum or about 3 months of China’s trade surplus or about 1.5% of the US$3 trillion in Sovereign Wealth Funds i.e. US$50 billion is thus a fairly small sum. It is even smaller if one remembers that oil futures are bought on margin.
I also suspect that both buyers and sellers of oil have been hoarding. As a producer of crude oil, I would delay bringing my product onto the market if prices are rising at the rate of 10% per month if my finances are in good shape.
There was also a huge divergence between the price of oil and the performance of oil stocks such as BP, ExxonMobil etc., which underperformed the price of crude oil by some 55% in the first six months of 2008. Exxon Mobil, based on a present value analysis, was being valued as if crude oil will trade at an average of US$80/barrel over the long term. The reason for this is clear. Buy US$50 billion of the public oil companies and the needle hardly moves. Throw US$50 billion into oil futures creates a quake because it is a relatively small market. The financial speculators know this.
Another anomaly is the huge premium over the marginal cost of production. The most expensive marginal barrel of oil is estimated to be around US$60 -70 a barrel. Being a commodity, that should be the sustainable price. Indeed, coal, which is many times more plentiful than crude oil, could apparently be converted into crude oil at around US$40 a barrel. Being replaced by another fossil fuel, however, is not the crude oil killer. It is renewable energy.
Renewable energy sources, together with the re-tooling of our energy supply infrastructure, will spell the end of oil’s importance. It will come sooner than many think. A view shared by the perpetually pessimistic “Economist “in its June 21st edition. It is not a pipe-dream such as aiming to go the moon in 1960. Most of the technologies are already commercially viable – it is a question of how fast mankind can re-tool.
The most promising alternatives are wind and (thin-film) solar energy – our nuclear fusion reactor in the sky. The earth absorbs 400 times more energy from the sun than all of mankind’s energy needs. Investments in solar energy are growing at 200% per annum. Indeed thin-film solar using nano-tailored ink as the energy absorbing medium is analogous to one of nature’s more potent processes – photosynthesis. Yes, plants get most of their energy needs from sunlight - not crude oil. Apparently, the leaders in this new technology are able to generate electricity as cheaply as coal if the cost of pollution is factored in.
Even as we get excited about solar energy today, the developments in the laboratory are even more exciting. Scientists have now developed material that could absorb infra-red radiation (heat) and convert it to electricity. The potential here is mine boggling e.g. air conditioners as we know them may be obsolete in future.
Although renewables are relatively small suppliers of energy currently, their rapid growth and huge potential will erode demand for oil at the margin as their share of total supply grows. For example the US could generate the equivalent of 6 million barrels per day of oil in its “wind belt” running north-south from Texas to the Canadian border. If the oil market were oversupplied by 6 million barrels today, the price of crude oil would plunge fairly quickly to US$50.
This rapid growth in alternative energy is happening not only in the developed world. China is now the world’s second largest wind turbine market after the US and the central government has set clear goals for the exploitation of wind and solar energy. Renewable energy makes even more sense for China given that China requires about 80% more energy than the US for every GDP dollar generated.
Unlike a coal plant that takes 5 years to build or a nuclear one which takes 10 years, and would be useless if only half completed, a solar or wind generator takes less than a year to build and could generate electricity even if half finished.
However, can land scarce Singapore be energy independent? Just like our water supply, there is good possibility that careful planning and technology will make this a possibility to a certain extent. Every HDB block is a potential solar generator not only for the residents but could sell surplus electricity to the grid. Another possibility for Singapore is to float the solar generators over our numerous reservoirs or along our sheltered coastlines. This is what small Denmark, which gets 20% of its electricity from wind energy, has done. It has installed some of its wind turbines offshore. Indeed, the world’s largest wind turbine maker is a Danish company, Vestas Wind Systems.
On a more global scale, the commercialization of alternative renewable energy has tremendous implications for mankind. Especially, the rural third world where the main hurdle to development has always been affordable electricity. Cheap solar has the potential to make irrigation, mechanization, sanitation and communication assessable for these people. It has the potential to reverse the trend towards urban overpopulation and squalor.
Indeed, we see this happening to rural communities in the US. Sweetwater in Texas has seen a major rejuvenation in jobs and population after the installation of a major wind farm. Ironically, farmers in Texas earn more leasing their land for wind turbine use than from farming. Texan farmers get $3000 per acre from wind compared to $150 per acre from corn. Wind farming is the most profitable cash crop.
In many ways, this renewable energy revolution will dwarf the internet in its potential to improve the lot of mankind. Looking beyond the current financial crisis, the future is indeed bright and breezy.
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