Disclaimer: This article was written originally in November 2005
One of my favorite economists, whom I have been tracking for the last 10 years, has a habit of making “big calls” at the end of any steep downturn. He sees a ‘peak bull’ market as a natural culmination of factors that come into play during the ‘deep bear’ phase. So (like the good Austrian economist that he is) he refuses to make any predictions during the bull phase, where the only obvious prediction is that “this too shall pass”.
What goes up, must come down, don’t we all know that? But what we also know, is that what goes down, does NOT always come up………in fact, one of the rules of stock market investing is that what goes down, ALMOST NEVER comes up. The leaders of the ‘last big thing’ will never rebound to lead the next significant movement.
Behaviourally speaking, there is a technical reason for that. The holders of the big stocks of the ‘last big thing’ are always the fools, who have no idea of the underlying value of what they have just bought. There is usually prey to all the irrationalities commonly found in the majority of men. “Pegging” (also called ‘notional thinking’) is one of the commonest irrationalities, where a person will want to sell his holdings the moment he gets back the notional price of purchase, even if it is after a long time. So Infotech could never lead the current “India Boom 2005”, simply because there are a lot of tired fools sitting, for example, in Infosys at Rs.16,000 (its peak price in 2000, unadjusted for splits).
Let us look at another economic boom-bust cycle, not strictly related to equities, but subject to the same rules. I think most mainstream thinking is now agreed that “cheap oil is dead, long live gas”. This is about as linear and as predictable as it gets.
Let me now try and build my argument against this view. For long the world has worried about whether there is enough oil/ coal, etc to burn. Way back in the 1600s, the people of London used to worry whether there would be enough wood to burn. I hear all this worry as being focused on whether there is enough fossil (or trapped carbon) below or above the ground.
This time, the threat is not coming just from the inadequacy of carbon. Anyway, there seems to be enough of it below the earth, if we include coal, natural gas, tar sands, etc. The real threat is on the oxygen side of the chemical equation. How much of this released carbon can the atmosphere of this planet absorb, before it crosses the tipping point and creates irreversible changes in weather patterns, also called Climate Change? Some would argue that we have already crossed the tipping point, or the inertia of man’s habits will ensure that we will do so in the near future. They point to this recent harvest of hurricanes, deriving salacious pleasure from the fact that almost all of them have devastated the biggest culprit of all, The American Way Of Life…….. Divine retribution, it would seem, with a sharp focus.
So will we cross over into oblivion, or will mankind somehow come back from the brink? History is not on our side, I would say. There is no historical precedent for a reversal so dramatic, from a position of such vast momentum. There seems to be just nobody left in this world who does not have a vested interest in the survival, even growth of the carbon (consumption) economy. And there seems to be nobody who will speak up for oxygen, simply because everybody’s problem is nobody’s problem.
No precedent, I said, but for the Montreal Protocol. Sufficiently affected, by real cases of skin cancer in the developed countries (which included, significantly, Australia, today a non-signatory to the Kyoto Protocol), a Protocol was put together to stop, even reverse, the Ozone problem.
Which brings me to the big question? Will the Kyoto Protocol set the world’s energy agenda over this century, or will Big Oil? Will the problem remain, as I see it now, of finding enough subterranean carbon, or will it be of managing the earth’s capacity of handling the burden of released carbon?
I have two choices in answering the above question: one, as I pointed out above, I can choose to be a pessimist. The problem there is that if I am right, there will be nobody left in this world to fete me when I am proven to be prescient.
Or two, I can choose to be an optimist. In which case, if I am right, this magazine and I can tell you in some future column that “you saw it here first”. So I will take the latter course.
The Kyoto Protocol seeks to load the environmental costs of carbon release (into the atmosphere) to the actual ‘criminals’. This, it seeks to do, through a trading mechanism that simultaneously creates a profit opportunity for entrepreneurs who seek to ally this “pain point” of the world economy. There is talk of expanding its scope to individuals through a “carbon tax”, which would make the ‘problem-solvers’ even richer.
I just saw an ad by Philips, claiming that new lighting technology (from, of course, theirs truly) will cut down the lighting costs of the Eiffel Tower by 29%. I also read somewhere that new LED technology, awaiting commercialization, will cut street lighting costs to almost zero. It could also replace CFL technology, even before it is fully deployed across the world. It would spell the end of Edison’s filament lamp, for sure.
So what’s the point?
Halogen lamps took nearly 30 years to take over the world from tube lights. CFLs took just 10 years to replace tube lights. LED might take just 5 years, and lighting, which accounts for about 10% of energy usage in most countries, may drop out of sight as a major energy user.
Traditionally, commercialization of such innovations would have taken much longer, be subject to much more skepticism for funding, and come up against entrenched vested interests of legacy applications. I remember, back in the eighties, Kolkata was debating the use of Sodium Vapour lamps on the ground that the lighting they gave was not white.
I don’t see a ‘linear’ switch from one source of carbon to another, ie, natural gas or something. I see hundreds of energy sources, local in nature and without the “Big” lobbies that come with them. Bio-diesel will take over in large parts of India, where jatropha can be grown on wasteland. Hundreds of sugar companies will produce enough ethanol to take over a chunk of petrol/diesel consumption. These fuels are non-fossil in nature, absorbing at least as much carbon from the atmosphere as they release.
Cars will get lighter. Trains will move people at a tenth of the “carbon cost” of automobiles. Geared cycles (not mobiles) will be good for diabetics, burning (living) human sugar instead of fossilized carbon. There has been a 30% CARG in investments in alternative power generation (wind, tides, etc) with the figure recently topping $30 bn.
A Japanese multinational is working at putting a nuclear genset outside your house, to generate all your needs. If the Japs can put a nuclear contraption outside their house, that should be good enough for you and me. Between Reliance Yamuna Power and my own nuclear reactor, I would choose the latter any day.
The only real casualty will be the American Way Of Life. Europe anyway likes bikes and trains, while Asians have long been used to a non-oil economy.
The Next Big Thing, therefore (I am running out of space) will be the demise of Big Oil and its replacement by innumerable applications. It will be fun (and profitable) to watch out for the flowering of these new applications, but one thing is for sure. At the end of it all, the energy industry will no longer be the concentrated monolithic organism that we see now. It will be clean, responsible, and perfectly competitive……ceding power to the consumer.
Sanjeev Pandiya is an auto sector executive, who also teaches Corporate Finance at XIM-Bhubaneswar. He likes to stick his neck out.