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De-coupling of OIL from world economy July 9, 2009

Posted by Bipin Agarwal in Future of transporation, Global Economy, IT Offshoring - Future Direction, IT offshoring and Real Estate development, Politics and economy, Quality of Living, Real Estate Development in Global Economy, Real Estate Development in India, Real Estate development in USA, Recession.
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OIL Power – OIL, the dominant source of energy has impacted the world economy and power struggle among countries for a long time.  The effect has been more visible for last twenty five years. Middle East, Russia, other Oil producing countries have enjoyed unprecedented boost to their economy and foreign reserve  because of high oil prices. We all know that it is not a pure supply and demand dynamics. This game has worked well because there was no other significant sources of energy that was easily and readily available.

Past Effort to Change – There have been lot of attempts to create new sources of energy including nuclear power, wind energy, bio-fuel, and clean coal. All of these efforts have been successful to some extent, but none of them significant enough to change the dynamic of world economy and power status. Lot of that has to be with the economics of the particular method (bio-fuel, clean coal), time it takes to set up the plan and disposal of waste (nuclear), predictability of the energy generation (wind). As a result, none of the method so far have emerged as a challenge to OIL energy.

Off-course like everything else, corporate interest and desire to maintain power status by countries has further compounded this challenge. Both OIL and defense industry (selling arms to protect the supply of OIL sources) has played a significant role in creating hurdles. Politics has played a big role as well. Keeping the OIL price high forces the poor country to spend their significant resources for buying oil, hence limits investment in other areas for productive growth. Further, the market for automobile has been too large for these corporate to let it go easily.

What Has Changed – It is fair question to ask. There is lot of new dynamic from developing countries to developed countries. Growth in the developing countries India and China have changed the market dynamics for Oil consumption. These countries cannot afford to import OIL they need to support the economic development.  Economic development is putting a lot of pressure on the politicians to find alternate source of energy. Developed countries, US and part of Europe have so much debt that they have to figure out a way to reduce OIL consumption. US is suffering the most from OIL dependence. There is lot of domestic pressure in US to end Oil dependence.

Solar, the GAME Changer – We all know that SUN is, as predictable a source of energy as far as humans are capable of visualizing. The capability to harvest this energy on a large scale in a economic way has been a major barrier to solar becoming a challenge to OIL.

Good news is that now we do have a scalable and reasonable economic solution to harvesting solar power.  Significant reason for this change is because we can cost effectively manufacture the devices capable of harvesting this energy as opposed to conventional means of either drilling (oil and gas), digging (coal), or changing the course of rivers (Hydro). Recent decision by US government to review sixty seven thousand acres of land for solar power generation is a further validation of the direction of solar based energy. Large corporation currently own large tract of land to participate in the opportunity, I call it SOLAR GOLD. Gold is not black any more.

Impact on World economy and Power – Every country will feel the impact of this change (SOLAR GOLD) differently. It is not possible to discuss every country in detail in this article, So I will talk about some regions, countries. If you would like to discuss a county of your choice, please send me a note @bagarwal.india@gmail.com

Middle East and Russia, there have been a lot of conversation that OIL at dollar eighty a barrel is what they need. It cost about couple of dollar to produce a barrel of oil. Why do you think world will come to the rescue of Middle east and Russia if Solar is available.  While Russia is better positioned then Middle east because of their defense capability, but that is not good enough.  President OBAMA is playing the card right by going to Russia, putting the arms control pact and engaging Russia for nuclear issues so that defense capability (industry) becomes a  non-issue. These are not well positioned for long term.

China & India – Both countries are heavily dependent on importing Oil and Gas currently. China has been pro-active in securing the oil supply like USA has done for decades. This does change the long term picture. Both countries will resort to using Solar in big way and this position them very well in the long term.  These two countries are currently not dependent on Oil Export for their economic prosperity and it will be huge advantage in the long term.

Other developing and emerging countries – This is a mixed bag. Some of the developing countries have OIL export in combination with other industries (Mexico – OIL and manufacturing). Other countries in this block have lot of domestic economy. It is unlikely that any of these countries will ever become a super power. There will be wide range from being no effect to significant impact for each of the country.

Europe – There is part of Europe that is well developed, West Germany, UK, France, Denmark, etc. then there is part of Europe that is still developing such as Eastern Europe. It is unlikely that any country in Europe will be a Super power in the long term, However Europe as a block (European block) has the potential to be a significant player, that is only if they can stay together which is very unlikely. It is human nature. US, China and for that matter some of the countries within Europe will do everything possible to make sure that Europe is divided and chances are that they will be successful.

USA -It is interesting. USA is a huge importer of OIL but also is superpower. How did that happen? Dollar as a world currency has helped USA more than anybody is willing to admit. Defense capability, other industries such as financial services, technology  helped USA to be the dominant world power. Immigration policy of USA to attract the brightest from all over world has played a key role. USA is also taking big steps to reduce dependence on the OIL. USA is pushing for electric car as a transport mechanism and pushing Solar to produce bulk of its electricity. Since all this is being done in the private sector with government incentives, USA is moving at a fast pace to maintain the Superpower status.

Summary

Every country will have to adjust to this reality of SOLAR GOLD over time. If you are a  country that is largely dependent on Oil export only, there is lot of work cut out for you.  Country currently importing huge amount  of Oil (USA, lot of European, developing countries), there is a significant opportunity for you to position yourself for success. It will require a focused effort, a combination of policy, investment, and incentives both in the area of energy production, education, and infrastructure.  A country with a population base (critical mass) will have an inherent advantage (USA, China, India) to play in the super power league.

You have a question, about Global economy, Real Estate, and Politics correlation, feel free to ask.

http://www.redhawkinvestments.com

Bipin Agarwal

bipin.agarwal@redhawkinvestments.com

https://twentyminutelifestyle.wordpress.com/abou

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Comments»

1. Leon Belenky - July 10, 2009

“Wonderfully written!”

Thanks,

Leon Belenky

2. Bipin Agarwal - July 13, 2009

July 13th there was a great article about Solar Gold Rush, businessman from Russia focusing on solar. Link is below.

http://www.businessweek.com/globalbiz/content/jul2009/gb20090713_992163.htm

3. Leon Belenky - July 13, 2009

Hi Bipin,
Good data points. Like to add following:
1. the Solar technology today – I seriously doubt how green it is – considering the silicon waste and the energy used to manufacture the panels. and the batteries needed to store that energy – like the hybrid car batteries are indeed a longr term drain on our environment with all teh pollutants in them. yes, hopefully one day it will become green.

2. I too wonder how US will continue to stay as a leader for ever ? In past yes, innovations and consumption soared this country. Going forward – Is it eventually teh military might that will prevail in maintaining value of Dollar ? Keep in mind – foreign investments liek land/housing and T bills are heavily tied to military might.

3. besides focusing on energy sources, the world can benefit a lot from focusing on reducing consumption and living within means. Reduce the amount of food on american plates (compareit w othe countries). Reduce or eliminate large scale meat farming – they over consume grain to produce a fraction of meat and use excessive water and pollute teh air with methane.

vasant

Bipin Agarwal - July 13, 2009

These are great points.

All the issues raised are real. Solution will come.

SOLAR Gold Rush is real. It is a ten year time frame.

Bipin


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