What’s happening to the oil price?

If you’ve seen the news about oil soaring 10% earlier in the week and you’re looking for the answer, here it is: Opec. The cartel of oil producing nations managed to surprise the market by agreeing to cut output by more than a million barrels a day.

Cue oil roaring higher. You can find plenty of analysis of what that deal means in the short term elsewhere. Today I want to share a more valuable, if a little counter-intuitive, idea with you: the higher oil prices go, the more doomed oil is.

Why?

It comes down to two things. Technology and a free market.

Longtime Exponential Investor readers will know that it’s technology that led to this situation in the oil market. New technology made shale oil a force in the market. That led Opec to attempt to destroy the industry by pushing prices lower.

Keep in mind: technology is deflationary in almost every way possible. One key element of new technology is lowering prices – developing new ways of doing things that get us more output for less input. The same is true of the free market. Competition leads to greater efficiency and lower prices.

Let me prove that to you.

What’s happened to shale producers in the last two years? Have lower prices destroyed their business model – which relied on high oil prices? Not at all. When Opec struck the industry down it returned more powered than anyone had ever imagined. OK, perhaps not quite. But it’s Friday. The odd hackneyed Star Wars aside can be forgiven.

Just look at the figures. As Reuters reported yesterday, production costs for US shale oil halved between 2014 and now. Halved! Some shale fields, like the Bakken in North Dakota, now have costs on a par with Iran and Iraq. That’s what high competition and technological innovation do: they lower costs.

So while Opec’s deal to cut output may have sent the price of oil above $50, it comes with a big caveat. The higher the price goes, the more viable shale wells will come on stream. Opec may want a high price… but not too high.

Again, that comes back to the idea of a free market. In a free market high prices are signals: they led to new investment and innovation, which leads to lower prices. They also lead people to seek out alternatives.

While Opec was sitting around deciding how to artificially change the supply, there are people out there seeking to make it radically cheaper… or redundant.

Let’s consider the second part of that sentence. Making oil redundant. It sounds crazy. But the more expensive oil is, the more incentive people have to seek out ways of not using it. That’s true across several industries, most urgently electrical cars. Then you have other ways of generating power, like solar and other renewables (and associated battery technologies). All of them would actually benefit from high oil prices as it’d lead more people to consider alternatives (and those alternatives would be more price competitive).

Then you have even further out technologies that would be radically disruptive. I was reminded of that earlier in the week when reading something my friend Sam Volkering wrote. Sam is a futurist and respected tech investor. We’re going to be working with him to share some valuable new ideas early next year, so remember the name. This week Sam wrote about a “moonshot” technology that could send oil to zero: fusion power.

Here’s what he had to say:

You should consider yourself lucky to be alive today. We live in perhaps the most exciting time in human history. We sit on the cusp of some of the biggest breakthroughs ever.

We’re on the verge of amazing technology like artificial intelligence. Soon the world will see millions of self-driving cars deployed on the roads. Our digital and physical worlds converge closer every day.

These technologies aren’t supposed to scare you. They’re not supposed to put you out of a job. They’re supposed to (and will) improve your life.

But perhaps the most exciting changes that are coming in the world are in the field of new energy. And there’s one energy source that could be the one to end all others.

It’s the silver bullet that could bring clean, abundant energy to the world. And if it does come to fruition, it will kill the oil industry. Then you won’t need to worry about the price of crude. It will be worthless. There will be no demand, plenty of supply, and a dying industry.

The new energy I’m talking about is fusion power.

Oh yes, here we go again,” is a phrase I hear regularly when I bring up fusion power. It’s not exactly a new idea. And it’s always been that elusive “ten years away”.

But there’s only so long something can continue to be ten years away. And 20 years ago the world simply didn’t have the available technology to help bring fusion power to reality.

However, today we do. Today we live in a world on the verge of artificial intelligence. Where quantum computing is just one step away from reality. Where companies are developing “neural networks” and human-brain-interfaces.

Each one of those technologies deserves its own special treatment so we won’t go into them in depth today. But what they’re all doing is working toward a world where humans and machines work together to accelerate our understanding of everything.

Perhaps the most important development of the 21st century will be fusion power. I have no doubt that this century we’ll have abundant fusion power. I actually think it will come within… well, the next ten years. In all reality it’s likely to come very soon. It is the silver bullet that will kill oil.

I say this because researchers at the US Department of Energy (DoE) and Princeton University have developed a new theory.

This theory might just help crack the elusive fusion power. The researchers had been investigating a problem where plasma was creating its own magnetic fields.

Plasma is the key to fusion power. To create nuclear fusion, hydrogen plasma and helium fuse together using magnetic confinement. This magnetic confinement usually occurs inside a device known as a tokomak.

These new magnetic fields sometimes snap and break apart. And then they explosively reconnect. This phenomenon is known as magnetic reconnection. The force and power is incredibly rapid and dramatic. And it’s the process by which solar flares on the sun occur.

This is important because if scientists can understand magnetic reconnection, they can better understand solar flares. You see, the sun is one giant ball of fusion power. And by better understanding solar flares and magnetic reconnection, scientists can better understand the sun and, hopefully, fusion power.

According to futurism.com:

“[This research] also has an effect on how we look at nuclear fusion. One of the most prominent ways of generating nuclear fusion is using tokomak fusion reactors. These trap plasma in magnetic fields in specific areas to force hydrogen to fuse.

“In experiments, magnetic reconnection can break these fields. This weakens the hold on the plasma, meaning it can reach areas in the containment field that won’t allow fusion to sustain itself. This discovery means we can find ways to strengthen these magnetic barriers, making for better fusion experiments.”

And better fusion experiments lead us closer to fusion power. Make no mistake, fusion power is coming. This theory is ground breaking in the development of fusion power.

When fusion power comes, there will be no need for other forms of energy. Oil, coal, hydrogen, solar, it doesn’t matter. Fusion will be the only source of energy we need and use. It will change the world. It will kill off some of the world’s most powerful energy companies.

It’s the silver bullet for all our energy problems. And it’s going to destroy the price of oil.

Sam is one of the experts I interviewed for my book, The Exponentialist. In fact I dedicated a whole chapter to the technologies that could destroy oil.

The changes technology is going to bring about in the energy world will be significant in the coming years. We’ve covered it all year, and we’ll continue to do so next year.

On that note, here’s something to remember next week. I’ll be publishing a special issue of Frontier Tech Investor on Tuesday. If you’re a subscriber, look out for it.

Until next time,

Nick O’Connor
Publisher, Exponential Investor

Category: Commodities

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