Wednesday, April 6, 2011

Surviving World Upheaval

By Bert Whitehead, M.B.A., J.D. ©2011

We are witnessing two astonishing world events that erupted in the past three months, both of which were unpredictable. Since the revolutions in the Mideast and the nuclear crisis in Japan both involve significant energy resources worldwide, the impact may be staggering. It is interesting how quickly we normalize the impact of such calamities, perhaps because we don’t think we are directly affected. After all, these things aren’t happening here: they are half a world away.

Of course it is entirely possible, maybe even probable, that everything will work out fine. The Middle Eastern tribal structure will give way to real democracy, without needing dictators to keep folks in line. Japan will mop up their nuclear reactors, and we all will find a way to counteract the spread of radiation before any real harm is done.

But this is not the only possibility. For all we know, the amount of damage could be astounding and may permanently affect the way we live our lives. These events will likely cause major shifts in the way we produce energy as well as the way we use electrical and mechanically driven power.

The situation in the Arab world is evoking keen uncertainty. It certainly will not result in more oil becoming available from that part of the world. Current prices, near $110 per barrel, reflect the market’s concern that the supply of oil will be interrupted. The political outcome is unknowable, and our range of options as the primary consumers of oil is probably nil, or extremely limited at best.

Providing cover for Libyan revolutionaries was intended as a humanitarian gesture. But if the effect of NATO’s intervention actually prolongs and intensifies the conflict, we are caught in the dilemma of watching the human slaughter continue in slow motion, or committing more military support. Then there’s a significant problem in that we don’t really know who we want to win control of the country. We are likely to be disappointed based on the options available to the people of Libya.

Regardless of how the Libyan adventure plays out, we are starting to realize that this is a very long string of dominos just starting to fall. The revolutionaries in all seven-plus other Arab countries will certainly expect support for their fledgling democratic efforts, yet it is not likely that the people in the NATO countries have much of an appetite for more wars.

The bottom line in the Mideast is that the world’s largest suppliers of oil are all on the brink of collapse. They could be replaced, but even if there is the political will to ‘drill, baby, drill’ it will be a couple of years after our strategic reserves are exhausted to even start replacing this supply vacuum.

Then we get to Japan. No matter where it goes from here, it will be a long time before anybody builds more nuclear reactors. Japan must plan to import all the oil it can to just replace the power plants they have lost. So the restrictions on the availability of energy will compound exponentially while the demand increases.

But of course that can’t happen, because we will have to act before it all caves in. I’m not hyping this scenario, but it is possible and the effects are likely to affect our lives endogenously. It will affect the way we live.

What’s the smart thing to do? Well, first, don’t do anything stupid! You’re not going to save your skin by buying oil futures, or oil stocks, or gold. The markets will sort out these problems; government intervention may be more of a hindrance than helpful. The advice you get from the media is likely to be self-serving for the provider. Don’t count on ‘alternative energy’ during our lifetimes – too many problems/costs with infrastructure and storage issues. We will have to turn to more coal and natural gas.

So start looking at sensible things you can do in your life to reduce the amount of energy you need. This goes beyond turning out the lights when you leave a room; change the light bulbs! The energy credits mostly expired last year, but this is the time to look at the energy we use in our households from a purely financial perspective. If you’re buying a car, maybe it makes sense to get one that is energy efficient. The ‘pay-back’ period for energy savings is likely to shrink from today’s period of 10-15 years to only 5-7 years, and that shrinkage may happen sooner than later.

The reality of our brave new world is that we will be paying much more for energy of all kinds. It’s not a question of “If…”, but a question of “When…” And this short survey of today’s World Upheaval suggests that, during the past three months, we may have moved much closer to having to do something about it ourselves!

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.

No comments: