According to economist Julian Simon the costs for raw materials, food and energy decline inexorably over time in real terms. He backs it up well in his book The Ultimate Resource. The main point has to do with the human capacity to tackle the challenges to create additional capacity from existing or new sources and at the same time develop more efficient technologies to consumer fewer materials per unit of output.
It’s a powerful, well-researched argument and as a concept represents what we think of as a kind of Moore’s Law for energy. Maybe if true we should call it Simon’s Law to be fair.
The investment implications are pretty clear. Energy and raw materials have certainly been volatile of late and it’s hard to tell if it represents a return to the secular decline Simon would expect or we are still caught up in speculative fever that cooled down just as the weather warmed up for a bit.
Even if energy prices do revert to a long-term secular decline in real terms there continue to be good investment opportunities in alternative energy because the growth will end up being more about innovation than pure returns from higher average prices. For example the products that become possible if they can be efficiently run off solar or other sources can open up new markets independently.
We think this concept of an inexorable decline is an interesting one that will generate more posts here. Water is another area that looks very interesting. If T. Boone Pickens is going there now it could be the next area of major speculation and higher prices.