The black light at the end of the tunnel

Again and again we end up talking about energy independence and the blindness of our leaders. Now as the price of oil is coming down, mainly because America is driving less and being more conscious about how much energy the country uses, one thing that worries me is that the green revolution may head to an abrupt end.

Now that G.M. and Ford are closing some of the factories that produces big trucks, one thing that comes to my head is that the market will go on the opposite way. Why? They are too dumb to be right.

If the world economy slows and Brazil starts producing those hundreds of thousands of barrels of oil a day from off shore platforms, we may see the price of gasoline drop significantly in the US market, meaning that people will stop thinking about saving and will go to their Hummers again.
This may seems like a fairy tale but it is not. People will go after their personal interest rather than the collectives ones, that is why unless you tax gas – yes Friedman again – no entrepreneurs will be able to invest large amounts of money on alternative energy, Mr. Pickens will lose billions of dollars and Mr. Gates won´t be putting a cent in the company Pacific Ethanol.

If prices fall that fast all the green spirit will turn black, oil addiction will prevail and the Middle East will keep on building ridiculous islands just to show that they don’t know what to do with those extra trillions that they have.

The following picture is blinding the world of economists. We are too worry about inflation fears, Fanny and Freddy, City and Bear, Iraq and Israel, if Bernanke call it recession or a slow down, or if hurricanes will affect the Gulf of Mexico, that we don´t understand that all of them are correlated to two critical problems.

Where are the dollars heading?
To the countries that produce petroleum.

Which country is taking advantage of the current situation?
Those who produce petroleum, plus the ones creating green energy.

If you think you are smart enough – and since I won´t be writing for a while – let me propose this. I will place two scenarios for the future and you will tell how they are going to be, then we can actually believe if all those macroeconomic formulas work in the real word.

If you want to trust your instinct they you are welcome too, just try to put some words on what you think about it.

a- Oil prices will fall below $100 (inflation adjusted) before 2008 ends. The world economy will recover by the first quarter of 2009 and things will seem like 2002. That is low interest rates, more consumption, low energy prices, a housing market picking up, more exports from Asia, a bigger India and a strong Brazil. The main consequence… oil consumption will grow again and big cars will crowd our roads.
b- Oil prices will be at records high, touching $200 (inflation adjusted) the world economy will hung while green technologies and energy savings keep the US and Europe afloat. Both will embrace current wind farms and solar panels while China sinks into a black smoke air that is polluting its cities. The world economy will almost face recession but it will recover by the third quarter of 2009 when these technologies hit the market and be the engine of big companies.

Two tricks on this, first you have to guess if Obama will win over McCain, both candidate´s policies are opposite when it comes to energy. Second you have to embrace or reject the idea that China can grow without the US and Europe buying its “toys”. This is the difference between having a hungry Asian and a starving one.

Maybe you are really smart... who knows.