My perspective on Obama's Green Economy

Well, here we are in 2009! Will this be the year the "Green economy" gets a jump start?

The US is in bad financial shape. Globalized as we are nowadays, everybody is affected. Let’s follow the money to see what the options in this economy are. Keep in mind I am NOT an economist, this is just my personal view of things.

Who has cash?

Cash is the king of economic downturns, whoever holds cash is able to buy assets at a discounted price and will benefit from the eventual up-turn of the economy (if we ever get there!).

China is loaded with cash; it has accumulated cash by becoming the manufacturing center of the world and maintaining their consumption per capita at low levels.

The Oil producing countries have cash. They have been benefited by the absurd surge in oil prices.

Lets assume for one moment that Obama takes on the task of building the "Green Economy" he has promised head-on (I believe he will, because this is his answer to the economic downturn). Obama (or the US) will need MONEY (Obama: "Strategically invest $150 billion over 10 years in green initiatives") to get this "Green Economy" up and running. So, who will fund this endeavor?

There are two options:

A- Get funds directly from the Chinese or the Saudis into "Green Economy" initiatives (very unlikely). The US will not allow these countries to become the direct engine of the new economy. Therefore we are left with only one option:

B- Print more US dollars and sell the T-bills to the Chinese and the Saudis.

Clarification 1: If a country prints more money it either has to create more wealth or find buyers to support the "fresh" money, otherwise it would trigger an hyper-inflation

Clarification 2: I use T-bills as a general term, there may be other financial instruments used by the government to raise money, I am not sure

Now that we have some idea of where the money will come from, let's take some time and run a simulation of how will the "Green Economy" will be developed.

As an example we will use Obama's initiative of pushing for 10% renewable energy by 1012. Let's say that wind farms will help US energy get to that 10% (most probably they will).

Company XYZWind is going to build a 200 Mega Watt wind farm. They are going to purchase land (good for the US). Then, they will have to buy wind turbines. If they buy from a US supplier is beneficial to the US, if they buy foreign technology is not so good. Either way, the components will be most likely manufactured (where else?) in China!

Company XYZWind will require $350 Million to develop this project. Where will the money come from (again, same question)? Here are some options:

1- From government funds: either by way of subsidy or by way of loan. As we mentioned before, the "fresh" money from the US government will have to come from whoever holds cash to buy T-Bills (China and the Saudis)

2- From private funds: most US investors as well as big corporations got hurt in the recent economic downturn, it will be interesting to see if they have the guts to undertake this type of ventures.

Finally, the wind is blowing and the turbines start rotating. Electricity is sent to the grid. But as we all know, the cost of generating a Kilo Watt with wind turbines is more expensive than the price we currently pay per Kilo Watt from the utility (or in the best case is too close to generate enough profit). The government has to provide an incentive. Where is the money from the incentive coming from? You guessed right! China and the Saudis through Treasury Notes!

CONCLUSION: We can have a new Green Economy that will help improve the current financial crisis. If the US (and the rest of the countries that wish to jump into this strategy) follow the Green Economy development plan there will be a big debt to pay. But if these countries play the cards correctly, eventually the debt will be paid and the benefits will remain at home. Otherwise, we will be in the hands of the Chinese and the Saudis.

What do you think?

I would like to send a special SHALOM to my friend in Israel who are going through rough times. In war there are no winners, I hope this conflict gets resolved as soon as possible with the least amounts of deaths (from either side!).

Who can figure Oil out?

First of all I would like to apologize to my readers for missing last week's post. I was out of the country in a business trip. I would also like to inform you this will be the last post of the year, since I will be, again, out of the country for the next week. So, to all of my (millions and millions of!) readers I would like to wish a happy new year, happy Hanukah, merry Christmas, happy Kwanzaa, and all the good stuff!

Now, let’s get down to business: Oil is Greentech’s biggest allied and its biggest enemy too!

On one hand its price becomes an incentive or disincentive to new alternative energy technology development. If the price goes up it’s an incentive for greentech.

On the other, it shapes the world economic outlook in a way that it frees or strangles resources flowing into greentech. If the price goes down more resources are available for greentech development (notwithstanding the global crisis).

Are you confused yet? Wait there is more:

What drives the price of Oil? Well this is also a complex answer.

Any traditional product follows the supply-demand curve. As the amounts of supplied product increase and demand diminishes, the price drops. On the opposite end, if supply is low and demand is high the price escalates.

Oil has a couple of added ingredients that make the supply-demand curve bend in different directions.

HIGHER PRICE, HIGHER SUPPLY: Oil has a very particular characteristic. Its supply sources become more abundant as the price goes up. Many heavy oil production fields, as well as other, less profitable sources, become feasible only after oil hits certain price targets. That is the case of the Athabasca Oil Sands a large deposit of heavy crude in northeastern Canada, where “despite the large reserves, the cost of extracting the oil from bituminous sands has historically made production of the oil sands unprofitable” (additional info can be found here)

LIMITED SUPPLY: Oil, as we al very well know, is a non-renewable natural resource. Therefore, its Supply quantity is a finite number. Many different estimates exist as to “how finite” oil is (i.e. when will it run out?), but there is a general consensus that IT WILL in fact run out some day.

As we get closer to the day Oil runs out, the price will skyrocket to levels never seen before. As any other scarce resource it will become a luxury.

SPECULATION AND CRISIS: This is a factor that has altered oil prices recently, it relates to the “market perception” of the above mentioned factors.

When the economy was booming and oil prices escalated, investors started getting into oil to make big profits, pushing the price further up.

Now, the economy has slowed down and demand has decreased and oil is at 30% the price that it was 6 months ago, investors have shun away from oil.

I will not attempt to include this factor into the supply-demand graph, as it is a very volatile and subjective variable.

The reality is that we are facing uncertain times, and as such people are going back and reconsidering their strategies. Will this affect Greentech?

In one sense it will, because the people that were unconvinced will tend to tilt more towards non-green as the price of oil gets lower and resources for greentech gets scarcer.

On the other hand this will be the big trial for greentech because it will test weather the critical mass of believers in a greentech future exists. And, if this critical mass will be able to propel Greentech to the next level (the mass market or mass implementation of green technologies).

I personally believe that people are aware that whereas oil goes up or down we need to do something to get off the “Oil rollercoaster”. Furthermore, people have also realized that oil dependency has very serious political consequences and they are more willing to do something about it. And, last but not least, oil has an environmental impact that many people are aware should be changed before we destroy our planet, and with it: ourselves.

Again, HAPPY HOLLIDAYS and SHALOM! See you in 2009!

Are we there yet?

Depends who you ask.

According to the Saudis, Oil will be the primary source of energy for many years to come (see the interview with Ali Al-Naimi, the Saudi oil minister, in CBS "60 minutes"). In the segment, the reporter shows the new petroleum facilities being developed in Saudi Arabia. They claim they will find DOUBLE the amount of oil they already have in the near future. It makes you wonder weather we are overreacting to the "end of times" for the oil sources.

In addition to the oil conundrum we are facing a challenge in the renewable energy front, and according to the NY Times here in the US we are not doing too good (read "Energy Goals a Moving Target for States").

A mere 10 to 15% goal of renewable sources of energy is an uphill battle for many states to achieve. According to the article: "Nationwide, the hard numbers provide a sobering counterpoint to the green-energy enthusiasm sweeping Washington".

On the other hand

The US will soon have a new president. The general expectation (based on his own words) is that the "Green Economy" will be a priority. This effort towards renewable energy and clean technologies is one of the tools Mr. Obama proposed as a strategy to overcome the current financial crisis (see Obama’s entire plan at Elections and Greentech, are they related?)

Additionally, the same NY Times, did a whole section on the "Business of Green" in September (featured in one of our entries "NY Times Week-in-review"). I believe they were responding to a trend, therefore being optimistic about the growth of the Green Business.

So which one is it? Are we reading too far into the energy and pollution crisis, or are we in the verge of major changes towards the "Green Wave".

Until next week, SHALOM!