Filed under: Sustainable Finance
Posted by: Tracy Parsons
@ 8:44 am
By Jackson W. Robinson, President, Winslow Management Company, also portfolio manager for the Winslow Green Growth Fund
In 1979, with the country still reeling from the effects of the oil price spikes in the mid 1970’s, President Carter installed a solar hot water system on the White House roof, and the nation was excited about alternative energy. By 1986, the price of oil had fallen dramatically, and no one noticed when the presidential solar panels were removed.
In 2000, investors staggering from the dotcom crash turned to alternative energy as the next big thing, sending the price of many solar and fuel cell company stocks soaring. By 2003, oil prices had again fallen dramatically, investors moved on, and the highflying stocks crashed – and some burned.
Then in 2006, with oil prices sky-high again, politicians, investors, and even farmers began touting the benefits of alternative energy again. So as we enter 2007, with worldwide oil prices having moderated slightly and hovering around $60, even strong advocates of green energy have to ask: is it any different this time?
While there’s plenty of political uncertainty ahead of us, at Winslow we believe the outlook for alternative energy is indeed different this time, and it is here to stay. We see a wide-ranging and compelling list of reasons new to this cycle, both for continued elevated oil prices, and for long-term confidence in alternative energy, regardless of the price of oil:
- Oil consumption is rising rapidly and globally, and the primary demand for oil is no longer limited to the industrialized regions of the world. Exxon Mobil estimated in 2004 that the worldwide demand for oil is poised to grow by 60% to an aggregate of 335 million oil-equivalent barrels per day by 2030. According to Exxon, the projected growth in the rapidly developing countries of the world such as India and China is massive, estimated at an average of 125%, compared to 22% for the U.S. and Europe.
- Recent data from the Energy Information Administration of the Department of Energy places proven worldwide crude oil reserves at 1,300 billion barrels. To place that large number in context, that is enough oil to feed 17 years of global oil use at Exxon’s 2004 usage estimates, or 11 years at their 2030 projections. While we’re not suggesting that the world will run out of oil in the next 20 years, oil is a finite resource. Even Cambridge Energy Research Associates, in a recent paper claiming that the world is not running out of oil, depicted a decline in world oil production after 2040. This does not mean the world will be out of oil then either, just that production will begin a gradual decline after that time. The combination of the inevitable reduction in supply and continued increase in demand is particularly frightening, even if it remains a few decades off.
- The cost of finding and delivering a new barrel of oil is rising, and will continue to rise as new reserves are found in inaccessible locations such as deep ocean floors. According to Arnold Kling, a noted economist and professor at George Mason University, the marginal cost of finding a new barrel of oil today can be estimated at approximately $50. If Dr. Kling is right, how can anyone reasonably expect the price of oil to drop much below $50 a barrel on a sustainable basis?
- According to the Energy Information Administration, in the spring of 1998, the U.S. began importing more foreign oil than it produced domestically. Today, less than 10 years later, the U.S. imports more than 60% of the oil we consume.
- The combination of very high U.S. trade deficits—the annual U.S. current account deficit is approaching $1 trillion dollars – and a rapidly growing national debt (now over $7 trillion, having doubled since 1998) has been a driving force behind the weakening U.S. dollar compared to the euro, yen and other global currencies. A weakening U.S. dollar translates into increasing in oil prices for Americans as their purchasing power of foreign commodities erodes.
- Regardless of personal views of American foreign policy, it is a fact that oil is largely located in, and sold by, countries with generally unfavorable views towards America. Some of the governments of those countries are often linked financially with anti-American terrorist organizations.
As New York Times columnist Thomas Friedman often points out, developing viable alternative energy sources that reduce reliance on oil will reduce payments to governments hostile towards America, while encouraging reform within those governments by reducing their oil revenue. In addition, a May 2006 Times article pointed out that national oil companies, which do not grant access to international oil companies, own 77% of the proven oil reserves – oil that we cannot depend on being able to access.
- Several high profile energy-related events have raised questions about both the safety and security of a system based on centralized production of energy. The nuclear incident at Three Mile Island in 1979 and the disaster at Chernobyl in 1986 continue to influence energy priorities – no new nuclear energy facility has been constructed since Three Mile Island, although several that had been under construction have since been turned on. The northeast blackout in August 2003, not to mention September 11, 2001, only strengthened the case for a decentralized energy system that would be less vulnerable to both failure and attack.
- The contribution of modern society’s energy addiction to climate change is both undeniable and evident. While the Kyoto Protocol attempts to rein in carbon emissions, it addresses only the tip of the metaphorical iceberg. Game-changing attitudes, awareness, polices, standards, life-styles, and technologies are needed at every level and in every region of the world to halt the growth in carbon emissions. Early signs of the “carrot and stick” approach are emerging; a recent Goldman Sachs study found that 49 countries now have laws promoting renewable energy.
While some American businesses, communities, and individuals have voluntarily cut their emissions, it has not been enough. Both grassroots and political momentum is building towards a regulatory approach of reducing emissions. Seven states are current participants (as of December 2006 – hopefully this number grows over time) in a regional plan to reduce emissions, 28 states have established renewable energy standards, and the first carbon tax was passed in the U.S. in November, when the voters of Boulder, CO approved a carbon tax for all consumers of electricity generated by fossil fuels.
- At the same time, technologies to help us move away from these vulnerabilities are becoming increasingly attractive, both in terms of capabilities and economics. Light emitting diodes (LEDs) use 90% less energy than comparable incandescent lights and are becoming more cost competitive. Residential geothermal heat pump systems can potentially pay for themselves in as quickly as two years, through savings on heating and air conditioning. Hybrid vehicles are available now, and many vehicle fleets are lining up to take advantage of cost savings from reducing their use of diesel fuel. And new wind turbines can produce electricity for as low as 3.5 cents per kilowatt-hour.
A New Direction
A recent issue of The Economist echoed the fears of many, comparing current interest in alternative energy to the dotcom boom, pointing out that venture capital investments have more than doubled from $30 billion in 2004 to an estimated $63 billion in 2006. At the same time, the current energy system leaves us vulnerable on many fronts – to shortages, to increased and increasing prices, to hostile governments, and to perhaps the biggest threat, a changing climate. We feel that these supply, demand, price, trade political, safety, and climate factors point to an undeniable need for a new direction.
As we examine our global energy situation today and the alternatives, both bad and good, is it any wonder that the demand for green energy is attracting so much interest and capital? We don’t think there has ever been a stronger investment story for alternative energy – increasingly cheaper, undeniably better, and more important than ever before.
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