Investing in Energy

Trend: Volatile cycles may be normal for investors in and consumers of energy for many years.

Writer and thinker John Michael Greer predicts the ebb and flow energy prices as fossil fuels and alternative energy vie for control of the marketplace. Those of us who dream of buying-and-holding stock in great alternative energy companies might find some warnings here. Excerpts below.

Link: The Archdruid Report: Cycles of Sustainability

It’s a useful experience to read through publications on energy issues from the 1970s and compare their confident predictions that permanent limits to growth had arrived with the very different realities of the decades that followed.

Fast forward from these perspectives to today’s peak oil debates and you might be forgiven a strong sense of déjà vu. Part of the received wisdom in the peak oil community these days is that once worldwide petroleum production peaks and begins its permanent decline, the mismatch between production and demand will cause exactly the same sort of Age of Scarcity that Hearne and so many other thinkers imagined in the Seventies. Now as then, the major issue under debate is whether the changeover to sustainability can be done quickly and completely enough to prevent a crash.

The most likely immediate aftermath of a significant decline in world oil production, of course, is skyrocketing prices for oil and everything made or transported with it, and the possibility that oil could hit E200 a barrel or higher, even corrected for inflation, is a real one. Price surges on that scale can hardly mean anything less than a body blow to the economies of most nations in the developed world. It also means that any method of conserving energy or using alternative energy resources in place of oil will be worth much more than its weight in light sweet crude.

So far, this fits the conventional wisdom in the peak oil community, but it’s worth looking a step further into the future. If economies across the industrial world contract, the demand for petroleum will soften as people are forced to abandon the lifestyle choices that account for much of today’s extravagant energy usage. Especially in the US, where 5% of the world’s people use 25% of its petroleum production and arguably waste most of it, a severe economic contraction could readily cause what economists call “demand destruction,” which can be simply defined as the process by which people who can’t afford a product stop using it. Meanwhile, in a global market awash with effectively limitless amounts of paper capital, the chance for huge profits in the conservation and alternative energy sectors guarantees that entrepreneurs in these fields will have more money to hand than they know what to do with. The most likely result, as these trends start to bite, is that the price of oil will level off and then begin to decline.

Does this mean that peak oil can be ignored, because it poses no threat to industrial society? Hardly. As oil production worldwide continues to contract, and conservation and alternative energy reach the point of diminishing returns, oil prices will spike upward in turn, rising even higher than before and unleashing another wave of economic and social disruption.

In such a future, the periods of apparent recovery that will likely follow each round of energy shortages and demand destruction will provide little room to rebuild what has been lost. Those periods will, however, make it exceptionally difficult for any response to fossil fuel depletion to stay on course, so long as that response depends on market forces or politics. Each time oil prices slump, the market forces that support investment in a sustainable future will slump as well, while governments facing many calls for limited resources will face real challenges in maintaining a commitment to sustainability which, for the moment, no longer seems necessary. Thus the collapse of public and private funding for the alternative energy sector in the aftermath of the 1970s will likely be repeated over and over again as we stumble down the long downhill side of Hubbert’s peak.

Those planning for a future of peak oil, in other words, need to beware of the perils of linear thinking. Much more often than not, the world moves in circles rather than straight lines, and planning for a future that is like the present, only more so, is a good way to come to grief in the real world.