A Great Bubbling: Economics Of Oil Prices

The world will never be quite the same. High oilhigh-quality diesellike fuel is getting closer.
prices are not only changing the political andRenewables have captured the public's imagination
economic landscapes but they could also changeand are coming into their own. Wind power is the
energy itself, because they are stimulating theone that is closest to becoming conventional. This
most widespread drive for technological innovationis not just the result of market forces. The
this sector has ever seen.development of renewable resources is being
The political shifts are striking, wherever you look.driven by mandates and subsidies of the
Russia was so flat on its back at the end of theEuropean Union and of the federal and state
1990s that Western banks and companiesgovernments in the United States, and by similar
competed to see who could close its Moscowprograms in countries like India and China. But it is
offices faster. Today, even though Vladimir Putinworking.
says he does not like the term, Russia certainlyIn fact, renewables are growing so fast that they
appears to be an energy superpower, using oilare straining capacity in people and materials. Right
and gas to restore its position in the world.now there is a shortage of turbines and blades
Balances of political power are shifting in otherfor windmills. Renewables are a sizable business
ways. In 2006, after his nonstate lunch withthese days; the worldwide investment in wind and
President Bush in Washington, China's President Husolar sales for 2006 is estimated at $40 billion.
Jintao took off directly for state visits to SaudiBut sometimes the enthusiasm for wind and solar
Arabia and Nigeria.discounts the huge scale of the energy system
Meanwhile, that other balance, in supply andand the lead times needed to develop any form
demand, has been extremely tight. Even withoutof energy, as well as the fact that these sources
actual disruptions, possible threats to supply fromhave to eventually establish themselves as
the war in Lebanon and from rising tensions overeconomically competitive without government
Iran's nuclear program were enough last summerhelp. Even with all the advances, they are still a
to push oil prices above $78 a barrel,very small part of the overall energy mix. But
accompanied by forecasts of $100 a barrel.they will continue to grow.
But then a slowing U.S. economy and growingWhat is also rising is the funding and fervor that
inventories, and the prospect of rising non-OPECare going into innovation. A decade ago, I chaired
production, sent prices down. That was enough toa task force on energy research and
alarm OPEC into cutting production in order todevelopment for the U.S. Department of Energy.
stem the downward trend and keep prices aboveIt was a quiet period in energy, supplies were
$50 to $55 a barrel. That's not exactly a lowample and interest was subdued.
price; it's still double the OPEC price band of just aThat would not be the case today. Prices, anxiety
few years ago.about supply and the quest to reduce carbon
The flow of funds illuminates how much hasemissions because of climate-change concerns
changed. OPEC's revenue has tripled over thehave turned energy into a major focus for
past four years, from $199 billion in 2002 to abouttechnology investment. Governments and
$600 billion in 2006. The Mideast's trade surplus isbusinesses continue to be big players. But they
50 percent greater than that of emerging Asia.now have company: venture capitalists.
While oil states are recycling a good deal of thisThe embodiment of the old model was the
resurgent wealth back into the United States andcentralized Synthetic Fuels Corp., a U.S.
Europe as they did in the 1970s this time muchgovernment company that was chartered in 1980
more is going into investments in Asia and localwith $17 billion to promote such options as shale
and regional financial markets and development.oil and the conversion of coal into liquid fuels. It
What used to be said of Shanghai that itwas very much in the spirit of the oft-invoked
employed up to a quarter of all the world's building"three M's" Manhattan Project, Marshall Plan and
cranes is now being said of Dubai.Man in Space. But when prices went south in the
Petrodollars are also fueling political assertiveness1980s it was wound down, and by 1986 it had
in countries such as Iran (where oil revenue rosedisappeared.
from $19 billion in 2002 to $60 billion in 2006) andGovernments and companies are stepping up their
Venezuela (from $21 billion to almost $50 billioninvestment in energy R&D, and will remain critical
over the same period).to the development of new technologies.
But there are two big economic questions. WhatResearch-and-development spending by the U.S.
do high prices mean for the economy? And whatDepartment of Energy is $1.8 billion and is slated
do they mean for the future of world energy?to grow 25 percent in 2007.
The risks from high oil prices are clear andNow the people who brought you Silicon Valley
manifold: loss of purchasing power on the part ofare also stepping into energy. Venture-capital
consumers who drive the world economy; a blowinvestment in energy reached $1.7 billion in the
both to business and to stock-market confidencefirst three quarters of 2006, almost five times
and thus to investment; and a painful shock towhat it was in the same period in 2004, according
the balance of payments of non-oil-developingto the Cleantech Venture Network. "When we
countries.started investing in this area, it was like investing
Most fundamental of all is the possibility that highin the Internet in the early 1990s before anyone
oil prices will start to drive up inflation, forcinghad ever heard of the Internet," says Ira
central bankers to jam on the interest-rateEhrenpreis of Technology Partners, an early
brakes. But at what level of price?clean-tech investor. "Now there has been an
A few months ago one of the key OPEC decisionawakening in the VC community that clean tech
makers, harking back to that not-so-long-ago $22offers as large an opportunity as information
to $28 band, observed, "We thought that thetechnology and life sciences, both of which were
world economy would collapse at $40 a barrel."revolutionized by venture capital."
But economic growth sailed right on through $40,This means growing amounts of money going into
then $50, then $60 a barrel.energy businesses, operating under the discipline
Part of the reason is that the major economiesof venture capital. Some of the results are
are much less oil-intensive than they were in thealready there. One of the biggest recent tech
1970s. What this means is that less oil is requiredIPOs, Suntech, made its founder, Zhengrong Shi,
for every unit of GDP. For instance, the U.S.the richest man in China.
economy has grown by more than 150 percentOf course, many of the new initiatives will not
since the 1970s, but oil consumption by only aboutsucceed. With this rapid growth comes a degree
25 percent.of hype that has some echoes of the Internet
The other major explanation is that this time,frenzy.
prices have been rising in response to a "demandBut that cycle of boom and bust left a set of
shock" (epitomized by 10 percent economictechnologies that are transforming business and
growth in China) and not a "supply shock" (asociety. And one clear difference is that in the
disruption such as the 1973 embargo or the 1979Internet boom the business plans focused on
revolution in Iran). This is largely true, although noteyeballs and didn't worry so much about how to
completely. For there has been an "aggregatemake money. Here the market opportunity is
disruption" a supply cut when you add up the lossclearer.
of supply from Nigeria because of an insurgencyThis diverse but intense focus on energy
in its delta region, the reduced levels of productiontechnology will likely have wide effects. There will
in Iraq and Venezuela and the (now mostlybe new ways to find or develop conventional
healed) loss of supply from the 2005 hurricanes inenergy. The competitive position of alternatives
the Gulf of Mexico.will be enhanced. The boom in conventional,
Yet there was some point at which prices wouldcorn-based ethanol, with its overwhelming political
begin to bite. That appears to have been in thesupport, will nevertheless run into limits of land and
$60 to $70 range. And those effects can befood-versus-fuel competition. The current holy
seen, along with the housing decline, in the slowinggrail in liquid fuels is the search for economically
U.S. economy, with implications for all countriescompetitive cellulosic ethanol, made from crop
that export to it.waste or specially designed energy crops.
But the most lasting impact of the shift in theOverall, some of the most intriguing possibilities will
energy market may well be measured in energycome from applying biology and genetic
itself. There is a bubbling and brewing ofengineering to energy problems.
technological innovation along the entire energyMuch else is now on the energy-technology
spectrum from conventional supplies andagenda from fuel cells and solar energy to
renewables and alternatives, to efficiency andadvances, on the demand side, in how we use
demand management.energy and the ways in which our cars are
Oil and gas companies continue to innovate. Lastpowered. Technological advances, along with
September, Chevron announced a find in the Gulfregulations, enabled the United States and Japan
of Mexico oilfield at 6,890 feet, and an additionalto double their energy efficiency in the 1970s.
19,685 feet under the seabed an extraordinaryThat could happen again. When it is all added up,
technological achievement.there has never been so much activity in new
Around the world, the "digital oilfield of the future"energy technologies. If it stays at this pace,
is becoming the digital oilfield of the present. Theexpect dramatic results.
large-scale conversion of natural gas into