Forecasting Energy

There is evidence to predict the future –

  • Over an eight year period (2000-2007) the world’s usage of oil increased by almost 9 million barrels a day.
  • Over the same time period, non-OPEC countries have increased production of oil by 4 million barrels day – OPEC didn’t increase output.
  • Oil prices are at an all time high of $140.00
  • The value of the Dollar versus the Euro has dropped by 16% over the past year (that is pretty good return if you are a currency trader).
  • General Motors (GM) is now valued by their stock price at $6.47 billion – a 34 year low.
  • Toyota is valued at $162.6 billion.
  • Goldman Sachs analysts are reporting that another $65 billion in mortgage losses are still to come.
  • Since 2000 consumer debt has increased from $8 trillion to $14 trillion.

This tells me that the US consumer is unable to withstand price increases for items like oil. The old cliche rules – Necessity is the mother of invention.

  • Over the last year the number of wind turbines has doubled
  • SunPower investors has made a spin off company more valuable than the parent company – Cypress Semiconductor.
  • Twice as much ethanol is coming on board when the construction of new plants is completed.
  • Increased investments has led to recent improvements to efficiencies for solar panels, wind turbines, and storage batteries.

Why is this happening? Here are several excerpts I pulled from these three articles:

Oily Speculations by James Surowieki
What the Green Bubble Will Leave Behind by Daniel Gross
Anxious in America by Thomas Friedman

Given this history, and the fact that recent years have seen a huge flood of speculative money entering the commodity markets—assets in commodity indexes, by some calculations, increased twentyfold between 2003 and the spring of this year—it’s not unreasonable to wonder if there might be something nefarious behind the sharp run-up in oil prices. But there’s little convincing evidence that the oil market is being significantly manipulated. Whatever chicanery is occurring—and we can assume there is some—has only a marginal effect on prices at the pump.

But there’s also something else at work, which the oil guru Daniel Yergin calls a “shortage psychology.”

The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand. It’s also based on people’s expectations about future supply and demand, because those expectations determine whether it makes sense for oil producers to sell their oil now or leave it in the ground and sell it later. Currently, the market is assuming that oil will become scarcer, and that global demand will keep rising, especially in rapidly developing countries like China and India. As a result, producers are asking very high prices to pump their oil.

Now, it could be that these assumptions are all wrong—that the supply of oil will not be constricted going forward, that concerns about the Middle East are exaggerated, and that higher prices will lead people to cut back on energy consumption, shrinking demand. In that case, oil would turn out to have been hugely overpriced. But that won’t be because of sinister speculators; it will be because oil producers and oil users collectively misread the future.

If this is the case, then the opportunity for new solutions in alternative energies would yield large margins. This opportunity would lead to another bubble.

During a bubble, investment is spurred by technological progress and new economic assumptions — in this case about the price of oil, climate change and the desire to curb carbon emissions.

Other posts on the subject:
Bubbles are Bursting
Energy Cost and Investment Prediction
Olympic Prediction


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