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In part IV our our Synthetic Financial Disaster Series, I’m writing about the one global crisis that may send the global economy into meltdown. I’ll start by stating a few obvious statements that may be contrary to the popular gloom and doom scenarios I’ve been reading about lately.

First, the Earth will NEVER run out of oil! There will ALWAYS be petroleum somewhere on planet Earth but it will become too costly to recover in the future. There is no point in spending x amount of energy extracting oil if you’re only getting x-1 in usuable energy.

Second, the Earth won’t run out of energy! There will always be methods of utilizing, harnessing, and converting existing energy sources on the planet and surrounding environment (Sun, hydrogen, etc) so we won’t run out.

What about this Energy Armageddon then?

Well while there will always be energy on the planet it may not necessarily be affordable for the vast majority of the population to use energy FOR THE THINGS we would like to use it on. It is difficult for many people to understand, particularly for Americans that have rarely venture into third/fourth world parts of the planet, but most of the planet gets by with very limited energy. If the promise of democratization of the world truly takes hold then the US may come to regret having embarked on the journey. Imagine the world with not just one China but with 20 mini-China’s each requiring huge amount of energy to provide the “lifestyle” that we as Americans have lived for the past 100 years and now are trying to export to the rest of the world.

How does this impact me?

In Parts I, II, III of the Synthetic Disaster Series, I’ve discussed my belief that the global aging population presents some unique set of circumstances occuring at the same time:

  • The quickening pace of an aging population and how this will lead to lower productivity and lower tax revenue for world governments.
  • The special needs of an aging population and how this will tax already cash strapped governments
  • The migration patterns of an aging population and how this will impose unique costs to degentrified areas and support for others
  • The burden that cash strapped citizens will impose on FDIC/SIPC institutions by withdrawing funds from banks & brokerages

So what does this have to do with energy?

The basis for our current structure of trade relies on the transfer/trade of something of some denominated value (e.g. US Dollar, British Pound, Euro, Yen, etc) in exchange for an energy source (nuclear/uranium, oil/gasoline, coal, etc.). As the population ages, there is a greater demand for energy. Why? An aging population will have considerable more “idle” time and in theory, spend their time participating in leisure activities. There is nothing on the planet that consumes more energy and produces the least amount of value than leisure activities. Leisure activities simply produce “happiness” or “satisfaction” but rarely any productive economic benefit to societies. Yes, a tourist will spend money on trinkets and have a marginal improvement to a local tourist economy but there is no substantial benefit to society or the local area where money has been spent.

Additionally, if the planet will continue to “warm” over the next few decades, then there will likely be an increase in cooling costs for businesses and homes over the next few decades. Result: an increase in energy demand. The situation is further complicated by additional emerging countries with huge energy appetites. China, Brazil, Korea, India are just a few examples of countires with burgeoning populations and increased energy demands.

A recent article on the Wall Street Journal commented: “A broad coalition of utilities, government regulators and consumer advocates have come together to produce a National Action Plan for Energy Efficiency, which seeks to put regulations in place to reward utilities for promoting conservation. Currently, utilities in most states lose revenue for conservation. The announcement came on the heals of the week ended July 22 was, a record week for electricity use in the U.S. do to a national heatwave, during which utilities furnished consumers with 96,314 gigawatt hours of electricity, or nearly double the consumption logged in 1982, the baseline year for a utility consumption index by the Edison Electric Institute, a leading industry trade organization.”

Sounds pretty scary doesn’t it? In a 24 year time span, the amount of energy needed in the US DOUBLED. At the very least, we can expect that number to DOUBLE again within the next 10 years due to increases in the population, greater industrialization and economic expansion in places like Asia, South America and Africa.

Rest assured, there WILL be energy, the real question is how much will it cost? If energy consumption doubles over the next ten years, the higher cost will inevitably lead to either economic slowdowns, recessions and perhaps depression or a reduction in “lifestyle” and standard of living.

What should I do?

It would be prudent to invest in a DIVERSIFIED basket of energy companies (oil, coal, solar, nuclear, fuel cell, etc) and hold for the long term. Energy is a guaranteed growth industry.