Three Certainties in Life:
Death, Taxes, and Higher Energy Prices
By Alan Hopkins
Three things are certain in life and you are probably familiar with the first two. The third certainty is higher energy prices. The world wants energy, and unless someone changes the law of supply and demand, it will cost more in dollars in the future than it does right now. Two factors are driving this trend. First, the rest of the world is developing a greater appetite for energy as emerging economies, literally billions of people, move to an industrial economy. The developing parts of our globe, where a majority of the population lives, are just beginning their demand for resources we have been consuming for decades. Second, the United States is devaluing its currency, increasing our cost of energy in dollar terms. You see, in the last few years the United States government has printed, or promised to print, over one trillion dollars. To give you some perspective of this recent increase, as of December 2007 the total currency in circulation—that is, U.S. coins and paper currency in the hands of the public—only totaled about $829 billion dollars. As a result, now to go along with death and taxes we have a new certainty – higher energy prices.
When the United States went through its industrial revolution last century and took 150 million people off the farms and into the cities over 50 years, we used two very different but required assets: technology and natural resources. The developing world is currently in their own version of the industrial revolution, but instead of moving 150 million people from agrarian farms to industrialized cities, they will move about 2 billion. Is there any doubt that as these people progress from the fields to the factories more commodities, and especially oil, will be needed? Why do I single out oil?
Because of all the things the world will demand in the future, oil will probably be at the top of the list.
With less than 5% of the world's population, the United States is responsible for 25% of the world's oil consumption. The United States currently uses about 18 million barrels of crude oil a day, of which we produce about 5.7 million barrels and import the other 65%. Canada and Mexico are our largest suppliers; however OPEC does supply about 38% of what we import. In 1973, oil accounted for 46 percent of the world's total energy consumption. Today its share has declined to 35 percent, but oil remains well ahead of other main energy sources: coal is 25 percent, natural gas is next at 20 percent, and nuclear power meets 6 percent of the planet's energy needs. Notice there is no mention of wind or solar. They account for less than 2% of the world energy consumption.
The current political environment in America favors a lower dollar and mostly inefficient and costly alternative energy sources, but it's not all bad news. In the past several years significant growth in onshore natural gas production has drastically lowered the cost of this resource. With an abundant supply of onshore oil reserves and new drilling techniques, the United States has the capacity to become the world's largest energy producer over the next ten years. This would take a change of direction from Washington, but the possibility remains that even as the overall world demand for oil and other natural resources increase, we could become more energy independent. Yes, we need a change in Washington, but even with dramatic changes to U.S. energy policy, the trends are clear. We can be certain that the price you pay at the pump today will look cheap compared to what your kids will pay.