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Oil Dependent Economies Shouldn’t Bet Against Innovation

Last January I said:

“I look forward to the time when oil prices collapse under the grip of energy innovation. Hope it happens in my lifetime.”

So, the question is, are we beginning to see that collapse? I don’t think so quite yet.

For some perspective, read this great article by Justin Fox over at Bloomberg discussing the recent drop in oil prices and how much of it is being driven by the Saudis trying to drive out US frackers. Fox points out that the Saudis could potentially keep prices low for longer than many presume in an attempt to essentially bankrupt the frackers who operate at a high cost structure. This would reinforce Saudi dominance over the oil market.

Here’s the thing though – the fracking boom isn’t just a new competitor to the oil market. It’s a new innovation that has made previously unreachable resources reachable. Yes, it’s a rather crude form of innovation, but that’s not the point. The thing is, the next big economic boom is not going to happen as a result of the petroleum based economy. It’s going to happen when we move past the petroleum based economy and effectively release all this demand into other segments of the economy thanks to the efficiencies that new energy technologies release.

The Saudis can try to bankrupt the frackers in the near-term and they might well succeed. But what they can’t stop is the inevitable innovation that is going to render oil dependent economies increasingly less powerful. I’ve previously talked about segments of this energy explosion such as the solar segment (see here), but I’ve also made broader comments about how there is a high probability that the price of oil will one day crash to permanently low levels thanks to technological advancements. As I like to say, bets on raw commodities are actually bets against technologies. I don’t doubt for a second that, at some point in the future, we will move past our dependence on petroleum, but it’s likely to be a slower process than many think. So no, this isn’t the collapse I look forward to, but I do believe it will happen in my lifetime.