A FORECAST FOR ENERGY SECTOR THAT'S A DEAD CERT

The Sunday Times, 25 June 2006

HYPERLINK http://www.timesonline.co.uk/article/0,,2095-2241803,00.html http://www.timesonline.co.uk/article/0,,2095-2241803,00.html

IRWIN STELZER

SEVERAL readers have complained of late that my reviews of the American economy, its current state and its outlook, have been too inconclusive for their tastes. I can only plead, by way of extenuation, that (1) I try to present enough information so that readers can reach their own conclusions; and (2) there are plenty of analysts who know, with a high degree of certainty, just what next quarter's growth rate will be, and where the dollar and share prices are headed, making it unnecessary for me to add to their number. 

But if you want a dose of certainty, consider my unequivocal - well, almost unequivocal - conclusions about the outlook for the world's energy sectors. 

Nuclear power is about to make a comeback. Fear of global warming, some of it whipped up by the likes of Al Gore and his apocalypse-soon PowerPoint and cinema presentations, will be one driving force. Another will be a belated recognition by most countries that they will miss their Kyoto targets by a smaller margin if they build some nukes. But make no mistake: government subsidies will be necessary. Even the we-don't-need-subsidies nuclear lobby concedes that nobody will risk the capital needed by these capital-intensive facilities without, at minimum, specially designed, government- promoted, long-term contracts to insulate the plants from the vagaries of the spot market. There will also be a host of other special incentives. Consumers will pay for them, with the cost concealed in their overall electricity bills. Count on it. 

We also know, with certainty, that none of the new technologies being touted by everyone from corn farmers to the president of the United States will markedly reduce the demand for petrol, and hence for oil. Whether global demand will rise from 86m barrels a day to 118m by 2030, as the US Department of Energy is predicting, is less certain. But increase it will, as the Chinese trade their bicycles for cars, and Americans refuse to junk their existing 235m cars and trucks before the end of their useful lives. There will be some hybrids, and some cars that run on non-oil based fuel, but for the next decade at least they won't have much of an impact on demand. Count on it. 

We know, too, that there will be periodic supply scares. God chose to put most of the world's crude oil in places that are governed by people such as Hugo Chávez, Iranian mullahs, kleptocratic African governments and Middle Eastern regimes that see western investment as a bane rather than a boon. There are exceptions: Canada and its tar sands being the most notable, but they are few and far between. 

We can also be confident that the shift in the balance of world power from oil consumers to oil producers will have important geopolitical effects. Russia's Vladimir Putin and his otherwise inconsequential economy will remain important players because he can threaten western Europe with cold, dark winters. China is extending its political influence by twining its quest for oil supplies with promises of political support and supplies of weapons. Nothing to be uncertain about here. 

Nor is there any reason to doubt that the political duplicity and irrationality that have characterised energy policies will continue. Opec's cartelists will continue to pretend that they are willing and able to expand oil production to prevent prices from soaring. China will continue to pretend that it is not providing zero or low-cost capital to its oil companies as they compete with western oil companies for new supplies. And the environmental lobby will continue to pretend that some combination of conservation and renewable energy makes it unnecessary to build more "dirty" coal plants, or "dangerous" nuclear plants. Count on it. 

Meanwhile, politicians in Britain will pretend that nuclear power needs no subsidies, rather than doing the honourable thing, and arguing that such subsidies might be needed in order to obtain "energy security", whatever that term means. They will also insist that it is necessary to force homeowners to conduct expensive "energy audits" before being allowed to sell their houses to willing buyers. Count on it. 

America's politicians will continue to pretend that the nation can kick what President George Bush calls its "addiction to oil" without major new taxes on oil or petrol. They will also insist that burning carbon-laden coal and natural gas to produce clean biofuels will somehow reduce emissions of greenhouse gases. Count on it. 

Germany's politicians will continue to lead the cheering section for Kyoto while authorising the construction of eight coal-fired power plants in the next five years. Count on it. 

There you have all the certainty that any reader can reasonably want in a few hundred words. But lest you conclude that economics is more of a science than it is, remember that when we talk about energy we are dealing with a sector in which we know something about the effects of price on demand and supply, in which we can reasonably predict the policies and actions of the various players. 

Don't try that with macroeconomic phenomena. Poor Ben Bernanke and his fellow monetary policymakers can only guess at the effect of their actions. Yes, they know that higher interest rates will cool the housing market. But by how much, and when, is another matter: that remains only dimly visible through the glass of their crystal ball, and then, darkly. All the president's men may know, or think they know, that tax cuts will increase the flow of funds into the Treasury's coffers, but whether by enough to offset the deficit-enhancing effects of those cuts they know not, or would rather not think about. 

I do hope that the lusters-after-certainty among my readers will feel they have got their money's worth this week.  

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute. He has served as a consultant to many energy companies and advises a leading developer of wind farms 

Copyright 2006, The Sunday Times