The Economist loves to slay sacred cows, so one might expect it to put a bullet in the latest craze–alternative energy (e.g.: yank the subsidies and whole industry is toast). Instead, the Economist says, the alt energy boom is real.
- Dwindling supply and pricing fundamentals: “In the space of a couple of years, [everything] has changed. Oil is no longer cheap; indeed, it has never been more expensive. Moreover, there is growing concern that the supply of oil may soon peak as consumption continues to grow, known supplies run out and new reserves become harder to find.” [Duh…]
- Energy security… After 9/11, the West is more eager than ever to diversify it’s energy supplies, irrespective of the cost: “Much of the world’s oil is in the hands of governments who have little sympathy with the rich West. When a former head of America’s Central Intelligence Agency allies himself with tree-hugging greens that his outfit would once have suspected of subversion, you know something is up.
- Climate Change… With carbon taxes and cap and trade systems gaining in popularity, the economics of alternative energy become even more feasible: “In theory, there is a long queue of coal-fired power stations waiting to be built in America. But few have been completed in the past 15 years… for two reasons. First, Americans have become intolerant of large, polluting industrial plants on their doorsteps. Second, American power companies are fearful that they will soon have to pay for one particular pollutant, carbon dioxide, as is starting to happen in other parts of the rich world.”
So should you dump the oil companies and rush out and buy alt energy stocks? Maybe, but before you do, know that the coming alternative energy boom is likely to be more gradual than previous booms. The Economist argues energy technology isn’t disruptive, it’s additive, so one technology is slower to replace another: (“information technologies tend to be disruptive, forcing the replacement of existing equipment, whereas, say, building wind farms does not force the closure of coal-fired power stations.”)
Also, the energy industry is highly capital-intensive, with higher barriers to entry. For these reasons, the boom will be slower to develop, and investors will have to be patient.
Business Insider Emails & Alerts
Site highlights each day to your inbox.