We’re reviving a post we did back in April of 2007 about what we view as “Moore’s Law for Energy” which is rooted in the work of Julian Simon who published an influential book called “The Ultimate Resource” and made some famous bets with other economists about declining long-term costs of raw materials.
Back in 2007 oil prices were surging to ultimate hit $140/barrel (albeit briefly). I shorted oil on July 3rd of that year for the first and probably last time in my life since that’s not my strong suit. But the annual July 4th BBQ the consensus was that oil was going to $200/barrel and maybe higher. You could feel the bubble.
Today hands are wringing over the recent declines in oil but even in the piece we originally published the research suggested that oil could return to the $30/barrel level. (We’re not here to make oil predictions though.)
What is more certain is that the types of advances Simon talks about are all around us:
- Fuel economy has taken huge strides forward. When I wrote the piece in 2007 I was driving a large steel vehicle with a V8 engine getting about 10 MPG. In 2008 I upgraded to a similar vehicle with a V6 packing the same horsepower which jumped up to 20 MPG. Just a few years later Volvo has demonstrated a 4 cylinder engine that generates the same power with 50% greater efficiency. Add in some start/stop technology and lighter materials like aluminum and it’s easy to see 40+ MPG for a vehicle of the same size and performance. All in about a 10 year span.
- Incremental energy production has ramped up, particularly in the US natural gas industry. The “US energy boom” has been powered by a wave of public and private financing. We can see it clearly in the sheer volume of new energy IPO deals counted and covered by IPO Candy. Add do that continued smaller contributions from wind and solar and it adds up. The momentum may dampen somewhat if oil goes lower and stays there but will probably stay active.
- No more just guessing about and wasting energy. When it’s cheap nobody cares if it takes a few days to figure out a pipeline is leaking or that air is seeping into a natural gas feed, greatly lowering the energy content. Well those days are coming to an end. We own shares in one basic energy technology company, CUI Global (NASDAQ: CUI). CUI is a very small ($150M cap) company that provides devices that enable real-time accurate measurement within our energy transport systems. The ROI is high and simple to understand. We love to think about CUI as an “Akamai (NASDAQ: AKAM) for energy pipelines” but know that’s going too far.
Of course the list can go on and on from light bulbs to electric cars. We own Tesla (NASDAQ: TSLA) but that’s not a play on energy but rather a new approach to vehicles.
Unfortunately Julian Simon died in 1998 but his work and profound thinking live on and serve us well when thinking about “fixed” commodities and their long-term prices.