Merry Christmas to all of our clients, referrers and followers
In the last two weeks, the press has been in a lather about the UN Climate Change conference held in Paris. It is worthwhile travelling down memory lane to see how the world has behaved in the past when it comes to the previous most dominant source of energy.
In the beginning, there was John D Rockefeller and his company Standard Oil. Established in 1870, Standard Oil brightened people’s lives (literally) by providing indoor (and later outdoor) lighting via the provision of kerosene to the lamps that many households eventually had. The invention of electricity by Edison and more importantly the incandescent light bulb should have been the end of Standard Oil.
Rockefeller would have been consigned to the historical dustbin as John Pierpont Morgan (the best finance broker in history) found a way of financing the expansion of direct current and later Nikola Tesla’s (more stable) alternating current directly to households.
In 1879 the automobile had been invented by Carl Benz but was considered a luxury item for several decades. Enter Henry Ford. After several failures, in 1908 the affordable Model T was developed and sold to the masses and ran on a Kerosene by-product that had been previously discarded by oil companies. It was called Gasoline.
Standard Oil was thus saved. It had taken three decades for the car to be widely accepted. In Europe, the Nobel brothers (in 1876) had done a deal with Czar Nicholas II of Russia for the oil concessions in Baku. This was commandeered in 1920 (after the Bolshevik uprising) by a young Georgian former oil worker that was once employed by the Rothschilds in their oil refinery in Georgia. The world came to know him as Joseph Stalin.
The importance of oil and energy policy did not become widely apparent until war broke out in Europe. Winston Churchill was largely responsible for converting the Royal Navy from Steam powered ships to Diesel. This gave them instant power and maneuverability – a massive advantage over their German adversaries.
In 1928, the Red-Line Agreement (re-drawing of the map of the middle east) was forged at the insistence of a little Armenian man, Calouste Goulbenkian, who came to be known as Mr. 5% – the founder of the Turkish Petroleum Company (which at the time controlled all of the former Ottoman Empire’s oil reserves – including most of the middle east).
By World War II, the Germans had learned their lessons and created not only powerful ships and submarines but also tanks that allowed them to deploy their Blitzkrieg. Oil had become a strategic fuel in the space of a few decades. Mechanised armies, navies and airforces could be moved faster and travel longer, further and higher.
In 1940, the US embargoed oil exports to Japan (in retaliation for Japan’s invasions of Manchuria in 1937 and Indochina in 1940). As Japan only had two years of oil reserves, it needed the available oil in the Pacific (namely in the Dutch East Indies now Indonesia). To negate any American military opposition to its strategy,
Japan responded in December 1941 by attacking Pearl Harbor and the American bases in the Philippines. The German’s were defeated by the Russians at Stalingrad in February 1943 and failed to reach Moscow but more importantly, Baku. It is sometimes said by historians that had the Germans reached oil rich Baku and replenished their supply lines, the war may have had a different outcome.
Post war, the spoils were controlled by the Americans and the British, particularly in the middle-east where oil had been discovered but no one dreamt that the size of the prize could have been so large.
Until the mid 1940’s Saudi Arabia’s largest export product was dates (it is said that until then, the entire treasury of the ruling dynasty could be carried in King Ibn Saud’s saddlebags). The Red-Line Agreement was replaced by national oil companies that granted concessions to oil giants (and later in 1960 OPEC). The poverty stricken middle-eastern countries became very wealthy.
Oil had effectively replaced coal as the most important source of energy globally in the space of twenty years.
But coal didn’t die, it just became cheaper and less attractive as a source of energy. So what was so attractive about oil? It was easily combustible, produced better efficiency, was cleaner and most importantly – it was more easily transportable. This was particularly the case when intercontinental pipelines were built to transport the substance. Oh, it was also cheap.
It was clear to the super powers and the not-so super powers of the last 70 years that if you controlled the source of the world’s energy, you controlled the world.
Enter renewable energy.
It has all of the advantages of previous forms of energy except one – price. That has and will continue to fall over time (as manufacturing efficiencies and new developments come on line – as per the motor car). When that occurs, the strategic positions of the global superpowers will be altered. Hopefully for the better.
The world’s greatest investor in renewable energy is the country that has learned from history – Germany. It knows better than most why energy self-sufficiency is paramount to a major global economic power. Also, Germany (like many other western European countries) is partly dependent on Russian oil delivered via a the Druzhba pipeline.
As we’ve seen in the recent past (specifically in 2009), Russia has used this as a weapon against its neighbours (Ukraine, Hungary and the Czech Republic) by increasing pipeline tariffs by 30%, then limiting supply in winter (when populations are at their most vulnerable) to aid in “negotiations”.
A couple of weekends ago, developing and developed countries agreed to limit the world’s warming by adopting a zero emissions target by 2050. Most developed countries will achieve this goal by 2030. So why are we (and other countries) so afraid of adopting these changes? Simple really, it will leave a massive hole in our export capability (Australia is the world’s largest exporter of “clean coal”) and our government’s ability to maintain consolidated revenue at current levels. In other words, our government will have to increase taxes or find new ones to replace those taxes currently collected by consumers of fossil fuels.
Even Saudi Arabia, the world’s largest exporter of oil has announced a massive program to develop its solar capabilities. Australian households are predicted to adopt off-the-grid solar power – hooked up to modern batteries capable of storing that power – in record numbers over the coming decade. As well, we are seeing the early adopters of all-electric vehicles that can be charged from these same homes. Over time, as these products become more mainstream and are adopted more broadly (as was the motor car) we can see that the future of energy supply and consumption will change forever.
Don’t get me wrong, I’m not predicting the end of resource companies. Iron ore and other resources will still be required by developing and developed countries. It’s the energy they use to process that ore that will have to change over time if they are to meet a zero emissions target.
What does all of this mean to the average punter with a mortgage?
Well, plenty. If Governments attempt to replace dirty taxes with other taxes, the net effect should (in theory) be zero. The devil will be in the detail. What we’ve seen in the past from central banks is that when Governments are playing around with fiscal policy, they (the central banks) are loathe to intervene with changes in rates until the economic noise resulting from the Government’s changes washes through the economic cycle.
When the inevitable happens the certainties in life – death and taxes – will remain. As for climate change, let’s see where we go from here but the march of technology, cheaper manufacturing and people’s willingness to use it will determine whether or not these renewables are adopted. Governments will either be proactive and encourage them like the Germans or react when the horse has bolted like the Australian Government.
Key Source: Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power, New York, 1991