Concerns over runaway rise in oil prices overdone: PPFAS

By: Rajeev Thakkar, CEO, PPFAS

On one hand there is turmoil in the middle-east with countries like Tunisia, Egypt, Libya, Bahrain, Oman and Saudi Arabia being battered, and on the other hand we have problems in a nuclear power plant in Japan. Crude oil trading at above USD 100 and there is worry that the world economy could tip back into recession.

Thus giving rise to the question as to what is the future of the energy sector and where are we headed. It is important to take a broader perspective of the situation rather that get carried away by the headlines of the moment.

• Oil prices will not double or triple shortly on a permanent basis: There is plenty of oil in the world. The difficulty is that a lot of it is difficult to extract or in remote locations or of an inferior quality. This oil is not viable to be used when oil prices are at USD 60 or USD 70. However plenty of oil can come to the market if prices remain consistently at levels above USD 100. It does take some time for markets to adjust and for the oil to be extracted. The current situation should be viewed as a temporary disruption rather than a permanent dislocation.
• Renewables and alternative energy: There is no doubt that the world needs renewable and alternative energy sources and work is going on there. However this energy will only make a difference at the margins in the near term. Sources like wind power and solar energy are either unreliable or very expensive. On a longer term basis as oil prices increase and technology improves we will see increased contribution from some of these sources. However it is too early to pick winners in this space from an investment perspective.
• Coal will remain for a long time: Coal has been getting a bad name as a source of energy on account of global warming considerations. However it is by far the cheapest source of energy (except hydro and wind) and it is abundant in supply. Coal based electricity producers who have good linkages to coal supplies will be consistent performers and will have an edge in cost efficiencies over other energy sources.
  Nuclear cannot be wholly avoided: One cannot completely ignore the risks from nuclear energy especially in light of the Japanese problems. However most sources of energy have some risk or the other. There was the BP oil spill in the Gulf of Mexico and there are numerous accidents in coal mines. There are many coal mine workers who die on account of diseases contracted by working in coal mines. While we need more safeguards for safety and environmental friendliness, nuclear energy cannot be wished away.
• Energy saving technologies will be increasingly viable: For a long time there was no economic incentive to invest in energy efficiency since the cost of the energy was so less and the energy saving technologies were expensive. However with the rising costs of energy, there will be a big thrust on energy efficiencies and in phasing out of older inefficient methods of production.