Saturday, February 18, 2006


Let’s Kick The Oil Habit !

The future of energy: as prices rise, the race for new energy sources heats up.


If anyone harbored even for a second any doubts that hybrid cars are hot, the Tokyo Motor Show held in October, 2005 put them to rest for good. Carmakers practically ran over one another promoting their models in a joint attempt to catch up with Honda and Toyota, the pioneers of hybrid technology. Companies such as BMW, Mercedes-Benz, GM, Porsche, Volkswagen, Mazda and Mitsubishi showed new models or talked about plans to sell them by the end of the decade at the latest.

Motorcars have been my lifelong passion, especially these past few years when I have seen the cost of a fill up of super unleaded gasoline for my BMW 325i skyrocket from $18 to over $27. And this is for a car that is perfectly tuned and pampered like no other, in the shop every 4,000 miles if only for an oil change. This is the reason why I followed the Tokyo Motor Show with a keen eye, paying particular attention to the new hybrid technology. On display were not only regular hybrids – the kind powered by gasoline engines mated to electric motors – but also variations adding hydrogen to the mix. The stakes are high, since the Big Three – GM, Ford and DaimlerChrysler – all reported softening sales with losses for the last quarter of 2005 totaling a staggering $2 billion, due pre-eminently to the plunge in sales of gas-guzzling SUV’s.

It certainly doesn’t take a Ph.D. in Economics to figure out why this is happening: prices of gasoline are higher anywhere from twenty to twenty-five percent than they were in 2004 and there is looming on the horizon the expectation that price of crude will top the $80 per barrel in the relatively near future. Those dramatic increases, former Feds Chairman Alan Greenspan declared almost a year ago, will create a significant drag on economic growth. The silver lining, added Greenspan, is that as oil gets more and more expensive other technologies that use less oil will become more competitive. And that seems to be exactly the case. The question is: are we moving fast enough?

In the United States wind farms already cover breezy hills throughout the West and Midwest, while Canada is extracting oil from the tar sands of Northern Alberta for an amazingly efficient price of $20 per bbl.. And, moreover, the technology exists to convert North America’s huge supply of coal into petroleum. This process, called coal liquefaction, creates a fuel that could power cars and, at current price levels, it is starting to look more and more economically feasible. Conservation too is playing an important role as auto companies are starting to get serious about boosting mileage by replacing steel components with materials like strong, lightweight carbon fiber. At the same time oil companies, fearful to be left behind, are improving their biofuels – new processes for turning woody, weedy plants into ethanol.

If this explosion of innovations has a drawback, however, is that all these developments are coming too late to allow a smooth transition to the post-petroleum era. Hydrogen fuel cells, ethanol from vegetable matters, solar cells, wind power, synthetic gasoline from coal – all could make a dent once they are available in sufficient quantities. But that won’t be for years, maybe decades. Economists and researchers in fact predict that twenty years into the future oil will still be the dominant fuel. Which then basically means that we will just end up paying more for it. As consumers we need time to make adjustments – often very expensive ones – to the new technologies. Not everyone can afford to junk a two-year old SUV to buy a new hybrid. Likewise, most people can’t afford to abandon houses built in developments 100 miles out in the countryside at a time when oil was cheap. And although governments, energy and power companies are investing in new technologies, they can’t create a massive new infrastructure overnight.

The problem with the free market, as it has been always the case, is that while it may sort out things over the long run, people have to cope in the short run. As a direct and proximate consequence, therefore, the likelihood is high that we may have to endure a tremendous amount of economic and social hardship that could have been averted had we acted sooner. Some economic circles even fear that we could see the equivalent of the Great Depression fueled by extreme oil and natural gas prices. The difference between today’s shortage of oil and the previous ones is that in today’s world demand actually exceeds supply. By comparison, instead, the two shortages in the ‘70s were artificially induced. Back then OPEC was powerful and disciplined enough for Middle East oil producers to turn down production in retaliation for the U.S. support of Israel and the Shah of Iran. But now a confluence of factors has made oil shortage inevitable, not optional Topping the list is the unexpected and sudden emergence of India and China as new economic powerhouses.

With the inevitable price jolts to come, therefore, it seems more and more apparent that we are heading straight for a new energy crunch, the type that we will remember for a very, very long time.

Luigi Frascati

Real Estate Chronicle

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