So says UC Davis Professor of Civil and Environmental Engineering Debbie Niemeier in a forecast that published on Nov. 8 in the journal Environmental Science & Technology. Sound nuts?  Wait a moment . . .

Niemeier is working from the theory that long-term investors are good predictors of whether and when new energy technologies will become commonplace. That’s to say stock market expectations are a guide to the future.

The case can be made from applying two key elements of the theory, market capitalizations (based on stock share prices) and dividends of publicly owned oil companies and alternative-energy companies. Other analysts have previously used similar equations to predict events in finance, politics and sports.

Nataliya Malyshkina, a UC Davis Postdoctoral Researcher and co-author said, “Sophisticated investors tend to put considerable effort into collecting, processing and understanding information relevant to the future cash flows paid by securities. As a result, market forecasts of future events, representing consensus predictions of a large number of investors, tend to be relatively accurate.”

Niemeier said the new study’s findings are a warning that current renewable-fuel targets are not ambitious enough to prevent harm to society, economic development and natural ecosystems.

This writer can buy this is a general sense.

Niemeier explains, “Our results suggest it will take a long time before renewable replacement fuels can be self-sustaining, at least from a market perspective.”   Just how the ladies are getting to 90 years isn’t explained.  A “long time” isn’t real precise, but 90 years?

Some license must have been granted for the press release.  The abstract of the ladies paper is more scientific saying, “This research establishes a probabilistic theoretical approach based on market expectations reflected in prices of publicly traded securities to estimate the time horizon until the appearance of new technologies related to replacement of nonrenewable resources, for example, crude oil and oil products. To assess time T when technological innovations are likely to appear, we apply advanced pricing equations, based on a stochastic discount factor to those traded securities whose future cash flows critically depend on appearance of such innovations. In a simple approximation of the proposed approach applied to replacement of crude oil and oil products, we obtain T ≈ (P0oil/C0)·ln (Δ·P0oil/P0alt), where P0oil and P0alt are the current aggregate market capitalizations of oil and alternative-energy companies, C0 is the annual aggregate dividends that oil companies pay to their shareholders at the present, and Δ is the fraction of the oil (oil products) replaced at time T. This formula gives T ≈ 131 years for replacement of gasoline and diesel. The proposed market-expectations approach may allow policymakers to effectively develop policies and plan for long-term changes.”

Everyone with some modeling experience or math or statistics will realize that the inputs for the formula are rapidly moving assumptions.  The curious thing is the formula, updated every day, week or month might be very useful for establishing a trend or more adroitly as measure of the effectiveness of national polices.

Which today suggests – at 90 years – that policy is a dismal failure.

But policy isn’t a dismal failure, rather the foundational work is proceeding both with amazing progress and aggravating frustration – it depends on where you look.

Resources for the stock researchers rely on hard data of performance already done.  The alternative fuels are still building foundations and simply are not threatening entrenched fuel producers in a serious way.  The mindset of the stockholder isn’t ready to move, and justifiably so.

But a certainty exists that’s not in the view just yet – alternative fuels are coming and cheaper and will cross the market price line someday.  At that moment much of the high cost petroleum production will be threatened – if demand is high enough that the marginal last barrels are rare enough to command a good price.  If the marginal barrel is cheap – its all the harder for alternative fuels to get market share.

But if anything has been learned over the passed four years it’s that demand and supply are elastic, more than the analysts thought.  And that doesn’t seem to be in the formulae.

As a practical matter the UC Davis ladies have given us a valuable service.  A tool exists to project the effectiveness of national policy. One hopes they are very busy with Congressional inquiries.

Niemeier said in the news story’s closing, “We need stronger policy impetus to push the development of these alternative replacement technologies along.”

She’s right, whether 90 years, 45 or 5; policy is too weak and too slow.


6 Comments so far

  1. World Spinner on November 17, 2010 7:16 AM

    Warning – Oil Will Run Out Before Replacements Are Ready | New ……

    Here at World Spinner we are debating the same thing……

  2. Al Fin on November 17, 2010 9:45 AM

    The ladies of UC Davis have created a model which lacks predictive power. But its sensational conclusion makes a marvelous headline which has fired the frenzy of peak oilers to the super-critical blowing point.

    The ladies are obviously policy junkies with little concern for real world markets or investors — except as convenient shortcuts to help generate predictions. Their every concern appears to be what public policy can accomplish.

    Very similar to climate catastrophe modelers, who are joined at the hip to policy makers. The models manipulate the real world for the convenience of policy-makers.

    It’s enough to give a problem solver a headache.

  3. Julie K. on November 18, 2010 4:18 AM

    By my opinion to obtain sustainable oil alternatives can be quite hard task. We know several companies that are trying to work out something. I think also that oil producers and some governments are involved into this process. They might not know the exact substance of oil alternative but also they might to show up with the right one in the right time…

  4. willG on November 19, 2010 8:16 AM

    The group are now using a new green fuel every day. I am not in a position to be an investor, but I fear the investors that could are holding back this next wave of Green replacement for oil. Rather they are investing in oil and covering themselves and their shareholders as they should. So oil wins again.

  5. Matt Musson on November 19, 2010 10:50 AM

    We use oil because it’s energy dense, easy to use and available. But, a major innovation in batteries and a new source of low cost electricity generation like Focus Fushion or mass produced small nucear – and we could start weening away from oil.

  6. Joshua Lam on October 25, 2011 9:46 PM

    Oil isn’t just about fueling our vehicles. It’s about making plastics, fertilizers, roads, medicines, equipment, devices–the stuff that IS our economy, and is the food we put on our table. Transportation is a relatively minor concern compared to the rest of the catastrophic systemic problems we will face once we start running out of oil. I really don’t understand why when people think oil, they just think gasoline and diesel for transportation. Finding alternative fuels for transportation isn’t the real pressing concern on my mind.

    Take a look at this:

    The article is from 2000, so he failed to predict the drop in demand from the recession, but eventually global production of oil will peak, and probably sooner rather than later.

Name (required)

Email (required)


Speak your mind