SOLAR ENERGY GAINS POWER
Even if petroleum price rises this year, the pressure is inescapably downward. It seems that the promises of solar power may finally come true, because of a drop in the price of battery storage and an increase of efficiency in the panels. While the role of solar is still far from dramatic, we are seeing small cumulative gains in the same direction chipping-in on oil demand. The sun is free (so far), and it is only a matter of time for utility companies to jump on the idea by supplementing their production with solar panels to preempt homeowners from getting off the grid and have their own home micro-power plant. For the cost of solar is starting to experience the virtuous cycle of increased demand, bringing efficiencies and cost reductions, and the breakeven costs compared to other sources of energy is getting close. And governments, now clearly committed to climate action, might help accelerate the subsidies.
It looks like oil producers, detecting the problem, might continue their competition to get some cash before the game is over. Let us not forget that, pending on who counts, Saudi Arabia has depleted in a single year between 8% and 15% of its financial reserves. Oil prices were considerably higher on average over 2015 (about 30%) than they are today, meaning that unless there is a big rise, Saudi Arabia’s balance sheet will experience even more red ink.The country is more fragile economically -and politically -than it was at the time of the last oil price dips in the early eighties and early nineties.So most certainly, some political instability might come out of the depleted coffers: the Saudi government had been buying its way into stability. Or we may watch a more benign outcome such as the mollification of the Saudi position in local conflicts.
AGRI PRICES UNDER PRESSURE
Agricultural prices are also threatened by solar as some governments might eventually come to their senses and phase out the ethanol programme as a mandatory use of land for supposedly “clean“ energy. This would free up considerable acreage and push prices lower. So far, these are excellent news for the great majority of the population of earth who don’t own an oil field, or don’t draw a state pension linked to oil. But there is a source of caution.
The United States monetary policy has not performed its wisest move ever in response of the crisis of 2008-09: it overshot in its rate cutting. Yet there is absolutely no evidence -and no serious argument -that interest rates at zero are better than, say, 2% or 3%, and the Federal Reserve seems to be realising it. Monetary policy is supposed to be a transitory move to allow the system to repair itself, not a permanent fix, and at interest rates close to zero we have lost a weapon in case of a renewed contingency. So it makes sense to bring interest rates to a reasonable level; and the train has left the station.
So far so good. But we need to be careful with every asset that has been inflated in response to easy money. Low interest rates have invited speculation in such sectors as US junk bonds, real estate, and emerging market fixed income securities. These sectors -which are currently wavering -will be harder hit than the stock markets. Few investors are experienced enough to remember the aggressive rate cuts of the early 1990s and the subsequent abrupt hike of 1994. The impact of the US tightening was felt in Italian and Spanish bonds, and later with Mexican and Thai securities more than in the domestic US. Since 2009 we have been converting private borrowing into government debt, with many sovereigns borrowing for -literally -free.The Federal Reserve being more interested in the US stock market than Hungarian bonds, will continue its careful increase in rates. They may delay here and there in response to, say, a Chinese slowdown or US stock market volatility, but a series of timid rate increases is a necessity.
But let us not cloud the otherwise rosy picture; remember that the Fed is only responding to good news.
Nassim Nicholas Taleb is an author of influential books on risk analysis.