– For Exernomics. Robert Ayres, Paris. 24 October, 2014
The future of energy will be driven by a combination of price and availability, as it always has. But in an uncertain world one thing is very sure, and that is that this combination is already in rapid transformation, so we are looking at a very different future indeed.
In my recent book (“The Bubble Economy”) , I have argued that the rising price of oil, in particular (because of its unique role as a fuel for mobile applications) together with the declining price of “renewables” creates an opportunity for long-term investors. It is estimated that $2 trillion/year must be invested in renewable energy to meet future energy demand without increasing carbon dioxide emissions. Surprisingly, perhaps, current trends suggest that – contrary to widespread assumptions – such investments can be very profitable.
New York City skyline during power outage
From a financial point of view, the benefits are clear: that government subsidies will not be needed after the first few years, if at all. In later years, investors such as pension funds and university endowments, facing the demographic challenge posed by shifting dependency ratios, can expect high and increasing returns from exposure to proven technologies in developed markets and energy demand growth in emerging markets. Moreover, these investments can create near-term economic benefits, accelerate economic growth, and ameliorate the problem of climate change.
The two articles that follow in this series — explain in more detail why oil prices can be expected to rise during the coming decades, while the costs of renewables can be expected to fall. In the language of the stock market, profits will be made by creating derivatives based on the changing price differentials between petroleum on the one hand, and some yet-to-be-created index of renewables prices on the other. This is just the sort of thing that some hedge funds were created to do. Somebody will do it.
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Forthcoming editorials by Robert Ayres to appear in this Exernomics series:
To appear here next week:
The Future Price of Oil
The Future Price of Renewables
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About the author:
Robert Ayres’s long career has focused on the application of physical ideas, especially the laws of thermodynamics, to economics; a long-standing pioneering interest in material flows and transformations (Industrial Ecology or Industrial Metabolism); and most recently to challenging held ideas on the economic theory of growth. [More at http://ruayres.wordpress.com/on-ayres/206-2/]