Most of us have heard the predictions. Crude oil is a finite resource and the world is running out. Oil plays a role in everything we consume, and the price influences the cost of any product. Consider an example of a box of cereal, Corn Flakes.
Let’s start at the farm where the corn is grown: First, the field is tilled and seeded by a tractor powered by gasoline or diesel made from oil. The seed was likely brought in by a diesel truck, which is also powered by oil. How about fertilizer? It must be brought to the farm by oil powered trucks, and spread in the field by oil powered tractors. As the corn grows during the season it must be treated by pesticide. Pesticides are also brought to the farm by big diesel trucks. In fact, the pesticide itself is most likely made from crude oil.
Once the corn is ripe it must be harvested by another oil powered machine, the combine. Then, the corn is shipped to the processing factory by diesel truck or diesel locomotive train. The finished product, Corn Flakes, is shipped by diesel truck to the supermarket, where the customer can purchase the cereal; and take it home in their gasoline powered automobile. The packaging for the cereal is plastic—also made from crude oil.
It is easy to see why even a small increase in the price of oil causes inflation around the world. When oil goes up in price it acts like a tax on everything we buy, from food, to construction materials, to electronics, to vehicles, medicines, etc. These higher prices can cause economic growth to sag—or even cause recessions.
This does not bode well for the short-term investor. We could continue to see years of flat or even negative GDP growth if there are spikes in crude oil prices. However, there may still be hope for long term “buy and hold” investors. There are solutions available to the daunting problem of oil dependency.
Many argue that conservation is the key. However, while conservation may be great for the environment, it is not necessarily good for economics. We must be able to continue to move increasing amounts of people and goods from point A to point B in order to have economic growth. The solution is technology.
This year saw the first sales of mass production electric cars, the Chevy Volt and Nissan Leaf, both of which are possible to drive without using any fossil fuels. There is currently break-through technology in the works to create and mass-produce bio-diesel from algae and other sources. In the future, tractors, trucks, ships and planes will be powered by bio-fuels or natural gas. Many people will commute to work in electric cars. Tires will be made of synthetic rubber. Packaging material will be devised of something other than plastic.
At age 34, I still have 31 years until my retirement age goal of 65. By that time, electric cars will have been in mass-production for over 30 years. Oil powered machines will be a distant memory. Industry will break free of oil dependency, and we could once again see prosperity as a nation. I plan to stay focused and continue putting a small portion of my modest income into 401k savings in hopes of profitable returns on new technologies now and into the future.