Jim welcomes Eoin Treacy, Global Strategist at Fullermoney.com in London this week for a global-macro discussion. Eoin sees a renaissance in US energy production with the recent massive natural gas discoveries. He also sees the bull market in stocks lasting for at least another year, and believes that China will be able to engineer a soft landing for its economy and avoid a crash.link
At today's level of $105, crude oil prices are beginning to get to a stage where demand destruction could set in. Some consumers will simply no longer be able to use as much energy. At some point (last seen in 2008) energy prices get to a point where they inhibit economic growth and cause recession. This is a temporary solution to energy supply and demand because once energy prices fall, the demand component kicks back in and the cycle begins once more.
Investments in energy efficiency either through high cost alternatives to fossil fuel such as wind and solar are primarily aimed at cutting consumption and bringing down prices. However, they have so far been unsuccessful in mitigating the rise in the marginal cost of energy despite massive investment.
Battery technology holds out great hope to lower energy consumption by evening out variability in supply however, the necessary technological advances have not yet been made. (Also see Comment of the Day on January 27th).
Natural gas prices are low today because technology developed in the energy bear market can profitably be applied to previously inaccessible reserves. A surfeit of supply is helping to depress prices. The higher oil and other energy prices rise, the more competitive natural gas becomes. If the Jevons paradox tells us anything, it is that demand will invariably rise for an energy source which is cheap and abundant relative to other sources.
The building of LNG terminals is helping to create a global market for natural gas and consumption is expected to rise more than 50% in the next 20 years. This comparatively clean fuel should also help it to gain credence among the green lobby and it is reasonable to expect that the number of uses for the fuel will increase over time.
Cost to the end consumer should be the central aim of all energy policy. Greater efficiency as well as new cheap sources of supply will be required to help improve global economic growth and raise standards of living. there is more