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Could Alternative Fuel Tank?


Cheap oil impairs foresight, stymies innovation.

Good news at the pump probably means bad news for venture capitalists and future development of alternative energy sources.

Merrill Lynch says the price of crude oil could dip below $25 a barrel next year as the worldwide recession continues to slash demand. At $25, the price would be about 80% below the peak of $147.27 a barrel reached last July.

If oil is cheap, there's no market for alternatives - especially those that will cost more in the short-term. Venture capitalists won't see a return on investment and will put their money elsewhere, slowing development of alternative energy sources.

Car buyers won't pay a premium for an electric car, especially a vehicle with limited range, as long as gasoline is cheap. The London Times reports that the sale of electric cars in the United Kingdom declined 50% this year.

If alternative energy-cars don't sell, automakers such as Ford (F) and Toyota (TM) won't invest heavily in their development - especially when they're crunched by sagging sales.

However, cheap oil could do more than just snuff the short-term development of alternative energy - it could burst the "green energy" bubble like the collapse of Internet stocks earlier this decade. Energy sectors going pop could include wind, solar, geothermal and hydrogen if oil remains cheap. Americans make decisions with their wallets, not their heads.

Look for politics to intervene and attempt to override the market. The pitch will be "energy security" and the promise of jobs, jobs, jobs - somewhere, sometime in the future.

The Energy Policy Act of 2005 may have been the opening salvo in the effort to prop up alternative energy. The measure includes such provisions as $50 million a year for biomass grants.

If Merrill Lynch has pegged downward trajectory of crude oil correctly, it will be the first time a barrel has fetched less than $25 on the New York Mercantile exchange since November 2002. But don't look for General Motors (GM) to revive the gas-guzzling Hummer.

The US Labor Department says Americans collecting unemployment benefits hit about 4 million during the week of November 22, the highest in 26 years. Consumers are hunkering down as evidenced by weak retail sales during the holiday season and the few who buy cars are likely to stick with economy models that deliver good gas mileage.

But keep in mind that cheap oil also undercuts the ability of oil companies to find and develop new fields, even if they existed. That means higher prices when the economy recovers, because there won't be adequate supply to meet increased demand.

Few would have guessed that cheap oil could cause so many problems.
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