Long Term Energy Perspective from Morgan Stanley

Robert Feldman of Morgan Stanley Global Economic Forum has painted a scenario for energy future. Excerpts:

...(In spite of improved energy efficiency, and currently low real price of oil) there are good reasons to think that the energy problem is real. Typical demand projections show total oil demand rising by about 2% per year through 2030, with little sensitivity to either GDP growth or oil prices. The absolute level of oil use rises from 82.4 mbpd in 2004 to 92.0 mbpd in 2010 and 138.5 mbpd in 2030.

The supply side suggests difficulty in meeting such levels of demand for an extended period: Currently, there are about 1.2 trl bbl of proven reserves. With 2%/yr demand growth, cumulated oil use will exhaust the reserves by about 2034. Thus, even with rapid improvements in efficiency, oil is becoming a scarce resource. On alternative energy sources, the good news is that there is a lot of energy out there. The bad news is that it will be hard to get. For example, coal reserves are the equivalent of about 3.3 trl bbl of oil. However, coal combustion releases significant amounts of pollution, both greenhouse gases and radioactive materials.

I will have to check on the radioactive materials part.

The history of scientific research on energy and on conservation has shown CRIC cycles, the cycle of Crisis, Response, Improvement, and Complacency that characterizes the interaction of policy and the economy. Moreover, oil prices are not quite high enough to create a true crisis, so the world stands on the borderline of complacency and crisis.

This is very true. In the NYT article I referred to the other day, James Schlesinger is quoted as:

We have only two modes - complacency and panic.

The fact that we are on the nrink of yet another crisis can not be denied, except this time rising demand may just be as responsible as the stanganent supply for the crisis to precipitate.

Japanese companies worked continuously through the last 15 years to develop hybrid autos, regardless of oil price fluctuations. There are many other infant technologies that Japanese firms are currently developing. Examples include high-efficiency motors (using neodymium magnets), diesel particulate filters (DPFs), advanced solar cells, fuel cells, direct reduced iron, and integrated coal gasification combined cycle (IGCC) plants.

There is no dispute that Japan has indeed taken a lead in developing solar power, IGCC, and hybrid vehicles. Japanese companies probably are trailing the European companies regarding diesel technology, and it is unclear whether the Japanese companies have any advantage over American companies in fuel cell development.

Where are the investment opportunities?...Direct Ventures in Energy. The first direct opportunity is the exploration for new energy resources, in particular for natural gas. The second area is resource development, i.e. the investment in infrastructure for extraction and delivery of energy. The third area is R&D, especially the D. The major advances in IT technology make energy savings in standard appliances more feasible.

Derivative Opportunities could be just as interesting. For example, as transportation costs rise, cities will naturally concentrate, in order to minimize transportation. Since information can often be a substitute for transportation, both hardware and software industries stand to gain from the response to higher energy prices. In addition, there is likely to be yet another round of replacement of machinery, since reduced operating costs are a clear advantage.

Lots to think about!