Fueling Economic Growth

With the price of oil heading up rapidly, the only logical step would be to consider other sources of power… and in China and Japan they have been developing two new technologies that could change the world. Lord Rees-Mogg explores…

There are two new energy technologies that may change the world, but probably not until the 2020s and after. Both are being developed in Asia, one by the Chinese and one by the Japanese. Asia needs them because it is relatively poor in petroleum supplies and relatively heavily polluted. It has been clear to the governments of the East Asian countries that the future of economic growth depends on the resolution of the problems of energy supply and pollution.

The new technology in which Japan is taking the lead is the use of hydrogen as a fuel for cars. All the major automobile companies have been spending very large sums on research into fuel cell engines. This type of engine has great advantages. Its waste product is water. It does not in itself add to the carbon dioxide influence on global warming. Although fuel cell engines still cost 10 times ordinary gasoline engines, the technology is relatively advanced. But there are difficulties, particularly in the distribution of hydrogen as a fuel. DaimlerChrysler promised to have fuel cell cars commercially available by 2004; it has not happened.

Toyota is also spending very large sums on fuel cell research, but it has made a success of a less revolutionary technology, the "hybrid" car, which combines gasoline engines with batteries. The Financial Times states that this "reduces pollution and increases fuel economy."

The five-seater Toyota Prius, the world’s first hybrid car, was launched in 2000, and production is being expanded to 200,000 a year. So Asia is already at the commercial stage, while the United States and Europe are still in the prototype stage. Nevertheless, the fuel cell car will probably prove to be a commercial proposition at some point after 2010 and will perhaps make a significant contribution to world energy conservation in the 2020s.

The Pebble Bed Reactor: First New Design in Decades

The other new technology, also reported in the Financial Times, is the "pebble bed" reactor, which is being built in China. The new reactor is a high-temperature, gas-cooled reactor; it should be producing power in about five years. It relies on hundreds of thousands of nuclear pellets the size of billiard balls, which provide safety against the possibility of meltdown. It is the first major new design of a nuclear power station for several decades. This is a Chinese "first," just as the Prius is a Japanese first.

One could argue that both automobiles and nuclear power plants are relatively old technologies. Nuclear technologies are approximately 50 years old, and the first automobiles appeared in the 1880s. The United States still has the lead in almost all the technological applications of really advanced science.

There is some truth in this, though that is not much comfort to Europe, whose strongest industries tend to belong to mature technologies. Nor is it really true. Most analysts regard Toyota as the world’s most competitive automobile producer, which gets both its commercial and technological decisions right more often than its major competitors, like General Motors. If there is a revolutionary change in the world automobile industry toward fuel cell technology sometime in the second quarter of this century, Toyota is well placed to lead it.

In the same way, safety from meltdown is a necessary condition if a new generation of nuclear reactors is to be built. The pebble bed technology apparently also makes conversion to weapons grade more difficult. It would not solve all the problems of nuclear energy, but it would solve some of them. This may be a 50-year-old technology, but it remains an advanced technology.

The Pebble Bed Reactor: Economic Growth and Technological Advance

Economic growth normally stimulates technological advance, both by providing the need to develop new technologies and by providing the capital. 18th-century Britain, 19th-century Germany, and the 20th-century United States all had both rapid growth and new technology. Asia is now the area of fastest economic growth and of new technologies.

However, we should not simply concentrate on the rise of Asian scientific capacity. The energy issue is just as important. In physical terms, oil is the real limit to the growth of the world economy. The growth of world demand, particularly the rate of growth of China’s economy, has pushed the oil price up to its current $43 a barrel. Despite a temporary relapse, demand for oil still seems to be greater than potential supply.

If one supposes that $40-60 a barrel is now the normal range of the oil price, all sorts of things become necessary or possible. Hydrogen fuel for cars, a new generation of nuclear power stations, and conversion of shale oil and tar sands all begin to look economic. Indeed, they all are economic at anything over $40 a barrel.

Yet they all take time. Perhaps in 2025 we shall all be riding around in hydrogen-fueled cars, going home to houses lit by pebble bed nuclear power, and relying on oil won from tar sands. But 2025 is a generation away. I have an uneasy feeling that there will be serious energy shortages in the period before these new technologies all come on stream. Oil at $100 a barrel would not be good for world trades.


Lord William Rees-Mogg
for The Daily Reckoning

March 16, 2005

China’s economy has grown an average of more than 8% per year for the last ten years, and in 2005 it is expected to grow by more than 10%…it’s no wonder that their demand for oil and other resources have skyrocketed in the last decade! The rise of China will change the world oil and energy balance forever – but for those investors that are properly positioned, the opportunity to profit is enormous.

Leading political editor, William Rees-Mogg is the former Editor-in-Chief for The Times of London and a member of the House of Lords. Lord Rees-Mogg has been credited with accurately forecasting glasnost and the fall of the Berlin Wall – as well as the 1987 crash. His superbly perceptive, startlingly well-informed, but often controversial insights can be found in the U.K. edition of The Fleet Street Letter and Strategic Investment in the United States.

Yesterday, the dollar rose because foreigners bought U.S. assets at the "fastest pace in two years." Is this because the dollar is a good deal? Is it because the U.S. economy is so dynamic and flexible, everybody wants a piece of it? Does it mean that the U.S. economy is in a stable, long-term up-trend? Or is it merely what happens when Americans spend more money overseas – a perverse and misleading indicator of an economy that is heading for trouble at break-neck speed?

You’ll recall, dear reader, that January was another record month for the U.S. trade deficit. Americans spent $57 billion more than they earned. That left $57 billion more in foreign hands than they had the month before. What were they to do with it? For the moment, they are still buying U.S. Treasury bonds. But how much credit are Asian banks willing to give? How many U.S. dollar assets will they be willing to hold? When will poor, sleep-deprived Mr. Asakawa finally crack?

Stocks went down a bit, yesterday. Gold held in the $440 range. The dollar rose.

We have made the point many times before: Just because nothing happens today doesn’t mean nothing will happen tomorrow. But even we are beginning to wonder.

Something must happen sometime, we say to ourselves. That is, the trends that are currently underway must come to an end. Everything in life has a beginning, middle and an end. Each day that passes in which they do not come to an end brings us a day closer to the day when they will. Not only that, each day that passes when nothing happens increases both the proximity and severity of the something that will happen.

"Stability leads to instability," said economist Hyman Minsky. The longer things remain stable, the more people become convinced that they will never change. As long as the camel’s back doesn’t break, why not heap more straw upon it? And if you need not worry about something happening, the smart thing to do is to go after as much yield as you can get now. Why not? Nothing bad will happen.

That is what today’s house flippers are doing. They are taking riskier and riskier positions – because they are sure that present trends will not come to an end anytime soon. Instead of buying a house with 20% down, they buy one with 10%…or nothing…down. Instead of buying one, they buy two. Instead of buying a modest house, they buy an extravagant one. Look, if you expect house prices to rise by another 10% this year – maybe you should rush to do the same. Buy a $1 million house with $100,000 down. If it goes up by 10%, you’ve doubled your money. Better yet, buy two of them. Live in one. The other would be a pure speculation.

But as more and more people make such risky bets, it actually hastens the arrival of what all of them forgot to fear: something will happen.

At some point, houses are cut loose completely from their real value as places to live; they become too expensive to live in. How many people can afford to live in a $1,000,000 house? Even at today’s low interest rates, mortgage payments still would be in the range of $6,000 per month. How many people earn enough income to support that kind of a drain? Not many. And when they are all fully housed, where will the new buyers come from? At some point, the speculator can only sell his $1 million house to another speculator.

Now, imagine that you have two million-dollar houses. You might be paying $12,000 per month – not including taxes and maintenance. If the market really does rise 10%, you are a genius. But if it does not, you are in real trouble. Houses are unlike stocks in two critical respects: First, they have real value (as shelter); and second, it costs you money each month just to own them.

When the end comes, expect weeds.

More news, from our team at The Rude Awakening:


Tom Dyson, reporting from Baltimore…

"Oil, copper and now gasoline prices are all making multi-year highs. The CRB hasn’t been this high in 24 years. But is now a good time to sell the peak or buy the trend?"


Bill Bonner, with more random opinions and marginal thinking…

*** The Seattle Times guesses that oil will rise as high as $80 before backing off. We have no reason to doubt it. Oil may be the best investment you can make. But what bothers us is that everyone seems to think so. Newspapers and magazines tell us that oil will rise and the dollar will fall. And yet, Shell sells for only 11 times earnings. And you can still buy an ounce of gold for less than $450.

What we make of that is that investors don’t really buy what they think will happen. They buy what they FEEL will happen. The dollar is almost sure to go down against gold. Gold is real money; the dollar is getting phonier every day. But investors don’t yet feel gold’s pull. Many young investors don’t know what gold is. They have never seen it, except in jewelry. They don’t understand how it works as an anti-dollar. They have no feeling for it.

Nor do they yet have much of a feeling for oil. Yes, they may say to themselves, oil will probably go up. But oil there is no excitement in oil. It has been around too long. It is yesterday’s investment story. Today’s big money – they believe – is made in Google or Ebay.

Neither gold nor oil are a la mode yet. But hemlines rise and fall. So do oil stocks. We suspect they are rising

*** Each generation of world-improvers adds their own regulations. After a while, there’s so much red tape around that even the world-improvers themselves realize that they are being smothered by it.

"Civil servants find it easier to introduce new regulations to tackle problems than to do anything else," says today’s London Times, citing an official report. What to do about it? Mr. David Arculus, a private businessmen in charge of a task force on the subject, says: "My solution is to say ‘don’t just do something, stand there.’" He proposes that Britain adopt a "one in, one out" approach. If regulators want to improve the world, they would have to get rid of some previous improvement.

Dream on, Mr. Arculus, dream on.

*** Family life is settling down. Jules has completed college applications. He awaits an answer. Edward’s teeth seem to be re-attaching themselves, after he knocked them out. Henry is studying French, German, English, Spanish and Latin all at the same time; we don’t know how he keeps up with them all. Maria has gone quiet on the subject of her new boyfriend, except to say that she may be going to Greece in the summer. And Elizabeth came back from her riding competition with a black eye.

"Wow…you must have really gotten on someone’s nerves," we said, gallantly.

"Oh, don’t be silly, I hit myself with my riding helmet. I don’t know exactly how…"

"Well, it’s a good thing we’re in France. If we were to go out into public in the U.S. I’d be hauled in by the police for wife-beating."

A few minutes later…

"Your eye looks much better, what did you do?"

"I put on some great make-up. It hides everything. Must be very popular with women whose husbands beat them."

The Daily Reckoning