Another key difference between Chindia and the United States is that we can afford recessions. Chindia can’t. There would be a revolution in China if economic growth were to slow dramatically. Growth is seen there as absolutely essential to social stability, and with that continuing growth will come greater consumption of energy.

There’s another part of the world that I’d like to draw your attention to, and that’s the Middle East. The International Energy Agency now estimates that oil demand in the Middle East is going to grow at least 6 percent a year. This year, demand from the Middle East is expected to grow around 300,000 barrels a day. The Middle East’s incremental supply is expected to increase at a slower rate, so the world is not likely to get much additional oil from that region.

Russia would be exporting much less oil if its GDP had not dropped 30 percent in the late 1990s and domestic energy consumption had not fallen off a cliff. If Russia ever gets its act together and starts growing at a reasonable rate, and that’s started already, guess what? It will need a lot of that incremental energy for its own use.

There is a mismatch between the world’s incremental growth in demand for oil and incremental growth in supply. I think there’s going to be more demand growth than supply growth unless a severe recession stops it.

Between 1979 and 1984, when the U.S. experienced two quick recessions, energy consumption in the world went down about 10 percent. During that time, however, the developing world continued to increase consumption. Back then the developing world’s needs were just a drop in the bucket, but that’s no longer the case.

My greatest source of frustration is that this country has the technologies right now to develop alternative energy sources on a massive scale. There could be a suite of alternatives that would really go a long way toward solving our energy problem.

I would urge everyone to protect his portfolio and to overweight energy by having a reasonable position in metals. Oil could go back to $55 a barrel, but until you see the stocks of the major oil companies trading at 20 or 25 times earnings, or until you see Wall Street saying oil prices are in a long-term uptrend and it makes sense to build infrastructure for alternative energy sources, you’ve got to worry about much higher oil prices ahead.

I was once with a group of investment bankers and I asked them, “Suppose an oracle came down from Mars or from the galaxies and you knew this oracle had absolutely perfect foresight. He or she had seen the future and had decided to impart one prediction to humanity. The prediction was that oil prices are going to $100, $150, $200 a barrel of oil in the next five to ten years and they are going to stay there, they are not going to come back down.”

I asked these investment bankers what would happen if this were coming in the future. They said there would be massive spending on infrastructure and that we would probably get the job done.

The problem in America today, I believe, is that we don’t appreciate that we have a problem. If there were some belief that oil prices were not going to go back down, that this was not an ephemeral phenomenon, we’d be well on our way toward fi nding a solution.

But as it stands right now, I think we have a very, very tough period ahead of us. I guess the good news is that with any turbulent period comes enormous opportunities. That was the case in the ‘70s, and I suspect it will be the case this time around.

 

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