GLOBAL RESOURCES ANALYSIS
EFFECTS | HIGHER ENERGY PRICES
Resources (energy and elements) are the basic ingredients for each product and service we use and therefore represent a certain price component. By low energy and element market prices this fact isn't something of huge importance, labor was the main price facet that matters, this was the main reason behind industrialization in the early days and the main reason these days why industrial production is moved from western countries to emerging countries. But the labor facet of each product has by industrialization become severely low. The energy cost of production and transport is the main cost price facet, even by low energy prices, but by the historical low level of it (and the facet that's needed) we don't saw it till now. But when energy and element prices rises severely energy price component and element price component will become a matter of huge importance. Because every product and service that was based on loads of cheap energy and cheap elements (and, is not any product and service that?) will become suddenly increasing expensive. Higher products prices and higher services prices will lead to less prosperity. Energy takes a special place within the resources, because it's the only resource that is used for literally every product and service. Each product and service also needs water, water that also is becoming more scarce and therefore more expensive. The energy component of each product and service is not know yet, but rising oil/coal prices will certainly make that clear to every company and customer. Rising energy prices takes some time before they are reach the market in prices of products, this because a lot of energy is purchased in long term contracts. But double energy prices (the situation we'll reach in the combination of the years 2007 and 2008) will give an 50% product price rise when the energy price rise reach the market in products. A 4 times higher energy prices gives double expensive products and a 6 times higher energy price will give a triple high price level of products. This is not science fiction, but just the effect of the global market mechanism of supply of and demand for energy. The labor component of each product is very low and the energy component of each product is very high. And not only manufacturing costs rise by energy, also transportation costs and sales costs will rise in the same factor by rising energy costs. And not only energy prices rises, also material (elements or biological originated products) are rising. The simple question behind this all is: will the global oil production rise, stabilization or decline, and if it would rise (not many believers in this left), will that be enough to meat the rapidly increasing global demand, even when the USA (5% of the world population, and yet accountable for 25% of the global demand) maybe will use severely less by going into a recession. Replacing coal to power by oil to power is not longer an option that release market pressure on oil, since end 2007 the coal prices rise even more than oil prices. For now: the world production doesn't move from it 85/86 mbd (million barrels a day) and yet global demand increases daily, while supply is currently plateauing and soon will declining (or we must find a new Saudi Ghawar like field each year). This will have a huge market price impact. It has lead (and will lead further) to a market dominance polarity change. The producing countries are running now the show and they are well informed that the time nature has given them natural resources to explore is limited. They all have huge budget surpluses and have not any motivation of increasing production by expensive investments. They know that next year the prices will be much more better than this year. This market polarity change is the reason that oil prices never will go down: supply has taken over control of the market and they have no hurry at all to end their beautiful party for the benefit of wealthy nations far away, non of the suppliers wants to spoil rising prices by (in from their point of view stupid) production rises and the big question is: are they able to do so, many analysts say that everybody is producing on maximal levels. Beside the market price facet, the exploration price facet of fossils become more and more important, just because almost all easy exploitable reserves are declining (making them more expensive to explore in their last years) and leaving only the hard to get (as: expensive exploration) reserves to explore. An other price rise for energy. Cheap oil is over. We're enter an economic new era of high energy prices. High energy prices are the free choice driven taxation of the energy rich emerging nations to the current wealthy western nations. Wealth is equal to high energy consumption based due the low energy prices of the past. The price rises can be seen on the next IMF Actual Market Prices for Non-Fuel and Fuel Commodities datasheet: http://www.imf.org/external/np/res/commod/table3.pdf. This IMF sheet give a very good and solid sight on the material price rises of the last 3 years.
Author: Gijs Graafland
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