I’ve always been skeptical of investments that make too much sense. Alternative energy falls into this category. The world has a finite supply of oil pitted against increasing demand. Eventually, these conditions will lead to serious problems. Hence, finding an alternative seems to make a lot of sense.
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But there’s one major flaw with the argument – it’s always been true. Step back ten years to 2000: demand was growing and supply was finite. What about 1990? You guessed it: growing demand and limited supply. 1980? Same story. We could go on and on.
However, investors in these technologies are really asking the wrong question. If the world will run out of oil isn’t as important as when. For investment purposes, it’s a question of timing. When something has been true for decades, one has to ask oneself where society stands on the supply timeline. Is it at the beginning, the middle, or the end?
For alternatives to become profitable on their own, we’ll probably need to be in the end stage of oil. In my opinion, we’re somewhere in the middle. At the moment, there’s plenty of oil out there. What’s my case? For one, oil prices. What many people don’t understand is that today’s oil prices reflect future supply and demand expectations.
If this weren’t true, it would be incredibly easy to make money on oil. Any idiot could buy today’s undervalued oil, hold it, and sell it in the future with no risk. In reality, current oil prices must reflect future expectations – otherwise this basic arbitrage opportunity would exist.
Furthermore, oil prices send signals to individuals. If prices are high, people will try to conserve oil. And if prices are higher still, entrepreneurs will be encouraged to find other alternatives. Investors will see these opportunities as credible goals and as a result subsidies won’t be necessary.
The subsidies themselves are a circular argument. They provide funding to find alternatives because oil prices will go higher. But the reason the projects need subsidies is because oil prices aren’t high enough yet. And oil prices aren’t high enough due to future expectations of supply and demand.
Oil hasn’t even begun to really squeeze the economy. Many Americans still drive SUVs and large trucks. Yes, oil prices are much higher than before. But they’re only a minor inconvenience at this point. Unless you’re living hand to mouth, oil prices don’t affect many of your decisions. Perhaps, they mean one fewer night out at a restaurant this week. But most of us don’t have to make radical lifestyle changes based on oil prices.
The environmentalists are mostly right on this one. The world will run out of oil, as they claim, but their timing is off. When price signals change the behavior of large parts of the population, then I’ll be more interested in these technologies. First, the SUVs and large trucks have to go. Second, oil prices have to become a major disruption to daily life – not something that inconveniences you with $15 less in your weekly budget. At that point, not only will alternative energies become more investment-worthy, but we’ll also see a surge in innovation unlike anything that subsidies could produce. |
