Sunday, October 19, 2008

The banking crisis will stabilize; energy – fossil fuel and alternative - is the longer-term issue

The U.S. economy is entering a recession, and the credit markets are in disarray. The U.S. economic outlook through the medium term depends almost entirely on the outcome of recent Fed and Treasury moves to contain the fire in the credit markets. However, longer term, the U.S. economy is resilient and potential growth will resume in 2-3 years. And as U.S. and World economic growth re-emerges, energy will assume its place on center stage. Fossil fuel profits will continue with persistently high oil prices, and although alternative energy is not expected to dent world demand for fossil fuels, growth in this industry will certainly bring jobs and income for the U.S. economy.

According to Robert Kaufmann, Pavlos Karadeloglou
and Filippo di Mauro
, oil prices are expected to remain elevated in the $70-$90/barrel range. Non-OECD growth has been strong and is expected continue, putting significant upward pressure on the demand for oil, where its supply is very inflexible even in the long run. Global efforts to bring about climate change with alternative fuels are not expected to reduce oil demand in the longer-term, and although alternative production will bring its own set of economic benefits, a shortage of fossil fuel energies will resume through the medium term.

Fossil fuel-based energy production created a lot of wealth, and elevated oil prices going forward, fossil-fuel wealth is here to stay. From Forbes, America's Energy Billionaires:
“Aubrey McClendon has a solution to the nation's energy problems: natural gas.

"It's ready to rescue our economy, enhance national security and reduce pollution," says the slim gray-haired Oklahoman in a television ad. It's also ready to make McClendon, already a billionaire, even richer.

McClendon is the chief executive of Chesapeake Energy (nyse: CHK - news - people ), one of the country's biggest natural gas producers. In our most recent Forbes 400 list, calculated at the end of August, we valued his net worth at $3.0 billion, much of it coming from his 32 million shares of Chesapeake...

McClendon is one of 38 men and women on this year's Forbes 400 list who owe much of their fortunes to energy. The cumulative fortune of these power players is $161.9 billion.
You can view the slideshow with complete energy billionaire profiles here. The eight wealthiest energy billionaires earned their titles in fossil fuel-based, rather than alternative, energy production:
  1. Charles Koch; Net worth: $19.0 billion
  2. David Koch; Net worth: $19.0 billion
  3. George Kaiser; Net worth: $12.0 billion
  4. Leonard Blavatnik; Net worth: $11.0 billion
  5. Dan Duncan; Net worth: $7.6 billion
  6. Harold Hamm; Net worth: $7.0 billion
  7. Robert Rowling; Net worth: $6.2 billion
  8. Robert Bass; Net worth: $5.5 billion

With oil expected to hover in the $70-$90/barrel range, strong fossil fuel revenues will continue unabated, and although the industry will suffer slightly with the global slowdown, the longer-term profitability in the fossil-fuel industry is strong. But with the higher cost of energy - crude oil averaging $112/barrel in 2008 compared to $31/barrel in 2003 - the demand for alternative fuels has grown and will grow further. And with the strong tax incentives to consumers and firms, there is a strong inflow of venture capital funds into the alternative fuels sector.

Two articles highlight the growing importance of alternative fuels in the makeup of American fuel production. Germany invests in green jobs - in America:

“A solar cell factory has sprouted in Oregon’s Silicon Forest amid the region’s old-growth semiconductor plants. And who is providing these well-paid, high-tech green jobs, investing in America rather than fleeing to Asia to set up shop? The Germans."

Stealth solar startup raises $600 million:

“That pile of cash from investors ranging from Silicon Valley venture capitalists [$600 million] to Richard Branson to the Walton family wasn’t the only big number Solyndra revealed to Green Wombat in anticipation of the solar panel manufacturer’s public debut Tuesday after operating undercover for more than three years. “We have $1.2 billion in orders under contract,” says Kelly Truman, the Fremont, Calif.-based company’s vice president for marketing and business development.”

Even though the technologies are not economically viable throughout at least the EIA’s forecast period, 2030, growth in this industry will produce economic benefits. Strong profit potential is on the horizon, bringing an inflow of foreign direct investment income. The new German solar cell factory will add jobs, incomes, profits, and spending to the U.S. economy. This is especially beneficial for the deteriorating manufacturing industry, which has slashed almost 500,000 jobs in one year. Workers in manufacturing possess similar skill sets as those demanded in the production of alternative fuel, transferring some of the workforce away from unemployment in standard manufacturing to employment in alternative fuel production.

True, tight credit conditions may stunt the near-term development of the alternative energy sector, but this effect will subside as the credit markets stabilize. As Branson and the Waltons know, the riskier investment produces the higher the expected return, and private wealth will flow into alternative fuel technologies in spite of a recession since world production of conventional crude is expected to peak in just 20 years (see the referenced paper, page 28).

In economics, there are always winners and losers. Fossil fuel production will continue as the world’s choice energy source – the technologies can support world consumption. However, in spite of its inadequate energy supply, demand for alternative fuel production has grown substantially; in the medium term, growth in this sector will add jobs, spending, and investment for the U.S. economy.

Rebecca Wilder


  1. Add T. Boone Pickens to that list. He and his ads have sure made the natural gas alternative known. Leave it to the Walmart crowd to find something else they can use as leverage, too.
    It is good to have the Germans involved in solar. Arizona is also in the game. On the housing front, wouldn't you rather have solar heating than electric/gas? I would like a viable alternative ($$$) which I hope will happen wiht these new ventures.

  2. Hi Janie,

    Good to have you back! How was San Diego?

    I would not rather have solar here in the Northeast! It is sunny today, but tomorrow it will be cloudy. Perhaps wind up here.


  3. Seems like they already can make solar work in places like the northeast. Think there is a backup system in place to help. It seemed to work in foggy No. Cal. winters.
    San Diego was wonderful - stayed at North Island again and drank up the sea air. Helicopters and jets were in action but ot too much. Missed you at brunch at the 19th Hole!


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