Winds of Change: Energy

Posted by John Slater on May 6, 2013

John Mason – Originally Published at Seeking Alpha – Reprinted with Authors Permission

In my last post I wrote about all the economic re-structuring that is taking place. Even though economic growth remains relatively tepid, changes are taking place in the economy that are going to dominate the future when the economy fully adjusts.

Maybe one of the reasons that the economy is growing so slowly is that the economy is going through a transition phase, like in the 1930s, where resources have to be re-allocated and re-structured in order for the economy to take off once again.

That is, resources are mis-located now relative to what is happening in the economy. For the economy to pick up its full head of steam, resources have to be re-aligned to fit what the economy is evolving into…not what it was. Economic policies that attempt to put resources…especially labor…back into the jobs they historically held…just doesn’t work!

Therefore, as I mentioned in the previous post, this re-structuring is creating tremendous opportunities for investment. But, one has to change ones perspective…and not focus on what was. This is why I found the recent article on the future of energy by Clifford Krauss in the New York Times so refreshing. The title to the article, to me, says it all, “By 2023, A Changed World in Energy.”

“If you could close your eyes for just a moment like Rip Van Winkle, and blink them open in 2023, you might see a very different energy world.

Electric cars may be popular. Solar energy could be cheap enough that millions of households and businesses deploy solar panels to generate their power needs. Fossil fuels will probably still dominate, but most trucks and many trains could run on natural gas rather than more polluting diesel. And the United States could be a major oil exporter.”

And, the miraculous change: “a country on the path to becoming energy independent, a hopelessly quixotic quest only a decade ago. Newly prolific oil fields in North Dakota and Texas are expanding domestic production to levels not seen in a generation. The United States has suddenly become a net exporter of gasoline and diesel fuel. And it is looking for new markets for natural gas as well: new drilling technologies have allowed domestic production to soar over the last five years, causing a glut and price slump.”

Krauss quotes energy expert Daniel Yergin, “When it comes to energy, the rule of the game is to expect the unexpected. So much effort is going into research, development and innovation all across the energy spectrum, 10 years from now we may well see the next game changer.”

All this, to me, spells opportunity. I don’t have space to go through all the possible changes that Krauss writes about in his article. They are mind-boggling. The point is that there are so many things going on in the energy field that it is hard to know exactly what the future is going to look like.

In terms of macroeconomic impacts, however, there are several things that look to be pretty clear. First, the demand for energy in the United States is growing, but rather slowly. The output of energy in the United States is exploding. Think of the implications this has for the US economy. Think about how this will change spending patterns.

In the rest of the world…demand is going to be expanding very rapidly. And, what do analysts see?

The International Energy Agency has recently published its World Energy Outlook, which included the prediction that “the United States will overtake Saudi Arabia and Russia as the world’s top oil producer by 2017, and North America will become a net exporter by around 2030. As imports of oil and other energy sources declines and exports increase, the United States balance of payments becomes a major contributor to economic growth, not a drain.

The world is going through a period of transition. Resources are being re-allocated. The primary resource, human capital, is going to have to go through a major re-structuring in the process. Education and training will have to be adjusted to meet the needs of the future.

One sees more and more studies on how the American work force is bifurcating between the more educated and the less educated. Floyd Norris discuses this bifurcation in his recent article “Wage Disparity Continues to Grow.” Those with educations are doing much better than those with less education. And, the median income continues to remain roughly constant. However, the lower end of the income spectrum continues to fall behind.

How can you have a better situation for the creation of opportunities? It appears as if everything seems to be moving in the right direction in the United States in terms of energy and energy resources. And, the financial resources are finding their way into these areas enhancing research and development. The expansion in this area creates all the right incentives for innovation.

So where do you find the opportunities?

In the natural gas area? In biofuels? Conversion of power plants from coal to combustible gas coming from converted coal? Electric cars? Changing cars and trucks and trains from oil and diesel oil to liquefied natural gas? A growth in renewable sources of energy coming from new and more efficient power generation where solar energy panels and wind conversion innovations make much greater contributions. And so on and so forth.

This is where I show my long-term optimism relative to my short-run pessimism. Unfortunately, I see the world bogged-down with its emphasis on short-run solutions. To me, these short-run solutions slow down the transition and help to postpone the arrival of the new structure. By focusing just on short-run solutions the world actually hurts those less educated because it prevents them from adapting to the new reality.

In all of this, however, there is great opportunity. However, we must focus on what is needed in the future and not what will help us retain the past. This is also were smart investing will help us to achieve that future.

In economic re-structuring there are lots and lots of opportunities. Even in the area of human capital, why do we need to wait on the government? How many private universities have evolved in the last ten years? In many places community colleges are thriving. If there is still a gap…try and find out who is trying to fill the gap. If you can’t find anyone trying to fill the gap you see…why don’t you try and get something going?

The point is, there is something terrific going on in the energy space in the United State. Going even further, there is something terrific going on in quite a few areas in the United States. When major transitional movements that impact an economy periodically are creating momentum all sorts of good things are available. But don’t focus on what the industry was…look to where the sector is going. Look for what is happening…and invest in them!

Editor’s Note:  This is the second of a series addressing the implications of profound changes underway in both the domestic and global economies.  Future business success will require entrepreneurs to foresee the impacts of these changes and steer their firms accordingly.


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