The Economist 11/3/05

OIL and natural gas availability has been severely impaired and the effects of this will reverberate through the economy of this country for some time.² Those chilling words were uttered recently by Samuel Bodman, America's energy secretary, as he pleaded for his country's gas guzzlers to start conserving energy. He warned that high prices could be here for years. Greens are ecstatic. They think high oil prices may spur a sustainable clean-energy boom.

OIL and natural gas availability has been severely impaired and the effects of this will reverberate through the economy of this country for some time.²Those chilling words were uttered recently by Samuel Bodman, America's energy secretary, as he pleaded for his country's gas guzzlers to start conserving energy. He warned that high prices could be here for years. Greens are ecstatic. They think high oil prices may spur a sustainable clean-energy boom. GE's wind-turbine business, which was inconsequential a few years ago, made over $2 billion in sales this year. Ethanol, a costly green fuel which in America is usually made from corn, now looks a better buy. And wind and solar power are also back in fashion.

Industry sources reckon that global sales of solar panels this year will reach $11 billion, up from $7 billion last year. America's Energy Conversion Devices, a pioneer in hydrogen storage and solar cells, has seen its shares soar by 50% this year and venture-capitalists are taking an increasing interest in the industry. Sun Edison, an American start-up, has persuaded Goldman Sachs to fund up to $60m of its solar projects, which BP's solar manufacturing division has agreed to provide. Sun Edison offers retailers fixed-price electricity contracts if they allow it to set up solar panels on their rooftops. At a time of ever-rising oil and gas prices, that kind of deal has its attractions‹Whole Foods and Staples have already signed up.

All told, reckons Christopher Flavin of the Worldwatch Institute, a green think-tank, investments in ³new renewables² (not including big dams, which nobody likes anymore) grew from $24 billion globally in 2003 to $29 billion in 2004‹and, he thinks, the pace of growth is even faster this year. Mr lavin says he is ³blown away² by the development of the renewables industry.

Such jubilation is understandable, but it may be slightly premature. For one thing, clean energy is not the only sort of ³alternative² energy that is enjoying a boom: dirty technologies like Canada's mucky tar sands (from which petrol can be made at great environmental expense) are also benefiting from high oil prices. In theory, there is as much energy trapped in Alberta as in all of Saudi Arabia. In practice, it has proved too complex and expensive to be a serious rival to oil‹until now.

Today's oil prices, combined with cost reductions and innovations in tar-sands processing, are leading to a bonanza. Peter Tertzakian of ARC Financial, a Canadian investment firm, estimates that investment in tar sands will leap to C$7 billion ($5.95 billion) this year, up from C$4.2 billion in 2000. More impressive is the tidal wave to come. High oil prices have prompted a flurry of investment in new projects and expansion efforts in tar sands that will, he estimates, add up to a whopping C$70 billion in coming years.

To the chagrin of greens, today's high prices are giving even filthy coal, their bête noire, a new lease on life. Several American utilities are now talking of building new coal plants, partly to hedge against natural gas price risk. More striking is a coal deal recently announced by the state of Pennsylvania and a consortium which includes the oil giant Royal Dutch Shell. Using an innovative process (developed by South Africa's Sasol), the consortium will convert coal waste into a liquid that can be blended into normal diesel fuel.

The rise of coal and shale shows that the surge in oil prices is not an unambiguous win for the greens. And green investors might be unwise to rely on permanently high oil prices. The vast reserves of oil remaining in the Persian Gulf suggests prices will eventually moderate. And as the earlier failed renewables booms of the 1970s and 1980s showed, oil price drops can wipe out alternative energy. Technological breakthroughs and green policies like carbon taxes suggest that this renewable boom may be more sustainable than the last one. But investors counting on sustained high oil prices to justify otherwise uneconomic projects should beware.