Could Alternative Fuel Tank?
By Scott Reeves Dec 04, 2008 2:15 pm
Cheap oil impairs foresight, stymies innovation.
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.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
(7)
Reply
2008-12-04 15:59:40
Gas Tax?
Want to keep the demand for alternative energy, and help the government pay-off some debt? How about a gas tax.
With some predictions of gasoline prices of $1 in 09, a 75 cent gas tax at the current annual consumption rate would give the government $105 billion, triple what the Big 3 want in order to "survive."
With some predictions of gasoline prices of $1 in 09, a 75 cent gas tax at the current annual consumption rate would give the government $105 billion, triple what the Big 3 want in order to "survive."
2008-12-04 18:00:21
Gas Tax?
I favor a general consumption tax as the ONLY tax.
Oil dependency is only a symptom of the unsustainable nature of our economic systems. Selecting one commodity or another for taxing is just playing with the deck chairs while the unbalanced propeller sets up harmonics in the ship and tears it apart.
The Titanic world petroeconomy has hit an underwater reef called "peak oil".
Oil dependency is only a symptom of the unsustainable nature of our economic systems. Selecting one commodity or another for taxing is just playing with the deck chairs while the unbalanced propeller sets up harmonics in the ship and tears it apart.
The Titanic world petroeconomy has hit an underwater reef called "peak oil".
2008-12-04 18:03:58
Last year was the first wave
As the economy begins to recover, oil will shoot up even higher than the 147. The lack of development during the current lull will mean that the ratio between supply and demand will be even more disparate. Each iteration of these peaks and valleys is going to get worse unless our 'leaders' manage to miraculously set up a moderating feedback; either through alternative energy research, consumption taxes, or both.
Visit theoildrum.com
Visit theoildrum.com
2008-12-05 00:02:38
Last year was the first wave
A gas tax would help curb the increasing demand, therefore curbing peak oil. And hopefully long enough to withstand the doomsday scenario of 2011 your link led me to. In the meantime we could use the tax money to pay for alternative fuel research and create jobs. I'm not disagreeing our economy needs a lot of work.
2008-12-05 10:32:13
oil price overshoot
I would be very surprised to see oil at $25/barrel ever again - I suspect Merrill's number is a case of classic analyst overshoot. Remember Goldman's $200 prediction when oil was ~140 ? It called the top of the wave; Merrill may have just called the bottom, around $40. (useful if true, as both a price and a timing signal).
None of which helps alternative energy. That's left to Congress.
None of which helps alternative energy. That's left to Congress.
2008-12-05 13:10:02
Last year was the first wave
Thanks for the reply. One thing to consider is this: What if someone DID come up with an alternative energy source that was cheap and easy to install?
How would it affect the planet? In some ways, we should thank our lucky stars that we have been limited so far by having to buy our fuel instead of getting it for free (Atlas-shrugged style). Without the moderating burden of gas prices, even inexpensive as it has been historically, the destruction of our planet would have been much worse.
Thank God for the greedy oil barons, eh?
I bring this up because when we consider why we would want a gas tax, we need to realize that it is overconsumption that is the problem, not the gas itself. Taxing ALL consumption and using the tax money to build sustainable communities and localized, diverse economic systems would be even more effective than taxing gas and only building some windmills and solar panels. Conservation should apply to all resources, not just energy, and injecting value should start by putting people into places they can live well, rather than shuffling everyone to distant places for work, education, and entertainment. We have built all of these suburbs and exurbs so horribly that everyone spends their time dreaming of retiring somewhere else. What kind of logic is THAT?
How would it affect the planet? In some ways, we should thank our lucky stars that we have been limited so far by having to buy our fuel instead of getting it for free (Atlas-shrugged style). Without the moderating burden of gas prices, even inexpensive as it has been historically, the destruction of our planet would have been much worse.
Thank God for the greedy oil barons, eh?
I bring this up because when we consider why we would want a gas tax, we need to realize that it is overconsumption that is the problem, not the gas itself. Taxing ALL consumption and using the tax money to build sustainable communities and localized, diverse economic systems would be even more effective than taxing gas and only building some windmills and solar panels. Conservation should apply to all resources, not just energy, and injecting value should start by putting people into places they can live well, rather than shuffling everyone to distant places for work, education, and entertainment. We have built all of these suburbs and exurbs so horribly that everyone spends their time dreaming of retiring somewhere else. What kind of logic is THAT?
2008-12-07 19:23:52
oil price overshoot
Agree with David on ML's number. There are a lot more factors than current supply/demand that go into oil prices - and likely will result in a price reversal and continuation of a trend higher long before the "recession" is over. Moreover, any escalated tension in the Middle East, Russia, N. Korea...etc would undoubtedly rattle the market - and that real threat alone in this post-9/11 world likely warrants a "risk premium" component to stabilized spot prices.
Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options. Click here for a free 14 day trial to OptionSmith by Steve Smith.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved
