Why $200 Oil is a Good Thing

As I was watching the pump go up over $75 to fill my tank, I wondered about that Goldman Sachs analyst projection of $200 per barrel oil. That would take the price per gallon to $7. That will certainly create a worldwide recession and undeniable changes to our behavior.

Then, I put my optimist hat on about super expensive oil. As you know, I'm an entrepreneur and preternaturally positive. The US is a dynamic economy. It's flexibility has accommodated incredible shocks and changes over time whether it be oil shocks in the 70's, the S&L crisis of the 80's, the emerging economy debt shocks of the 90's or the tech crunch of 2000-2002. So here are some thoughts:

- Silicon Valley gets rich: For years VCs have been studying energy markets looking to fund wide varieties of alternative energy projects from solar to biofuels to efficiency software to CO2 eating algae. For example, ompanies like Nanosolar are into commercial production of thin film solar cells with far greater utility and half the cost of alternatives. For all the promise, those businesses need oil to be well over $60/barrel over the long term. Even more than technology, shifts in energy produce wealth over a long period. Remember the Ewings on Dallas - even the kids win.

- Oil nations lose: By allowing oil prices to explode, they create cultures of dependency with their people. Why take any initiative when money is flowing out of pure luck of location? While beautiful cities will be built, super wealthy inheritors have no need to work hard or think out of the box. Governments feed this dependency because they can provide all kinds of benefits in return for a docile population. This breeds corruption and eventually hard times when alternative energy ends the gravy train. Look at Venezuela, Iran and Russia. Right now, things are wonderful, but every time oil prices go up, spending increases. Once you get used to all kinds of subsidies and free stuff, it's hard to let go.

- Manufacturing comes back to the US: Disparate supply chains only work when transportation costs are dirt cheap. With high shipping costs, it does not make sense to make heavy goods far from the end consumer.

- Farmers come back strong: It's just not corn, it's every crop because the return has to be as good as corn to ethanol. Moreover, there are new varieties of biofuels, coming from jatropha, switchgrass and trees. There are bioplastics from genetically engineers crops. With prices for food rising, farmers can go from subsistance to export.

- US automakers get a chance to come back: Most of the time American automakers have shrunk from truly attacking the market with innovation. Instead they used protectionism or hid behind poorly negotiated labor agreements. This is a time of great change - GM is seriously talking about releasing the innovative Chevy Volt, a mass produced plug-in hybrid. Both Ford and GM are releasing a hybrids across their product lines and have access to diesels from their European lines. They could use this time of crisis to fundamentally reset their businesses towards highly fuel efficient product lines and more flexible labor agreements.

- Electric cars every where. Tesla estimates that driving its all electric car cost 2 cents/mile. Large utility plants are far more efficient than millions of gasoline engines. With the possibility of greater renewables powering these plants American can more to energy self-sufficiency. That means fewer troops around the world having to establish energy supply lines for world.

- End of suburban sprawl: It's already occurred in the SF Bay Area in Stockton and Tracy. It just costs too much to drive in from far away. People will be compelled to move closer to where they work. It is likely that cities will be where companies locate as mass transit makes more sense for commuters. It is far more efficient than America's current level of dispersion. Check out this NY Time article on the subject.

- Obesity will drop: I know this sounds like a stretch, but the McD Dollar menu has done more damage to America and the industrialized than any catastrophe in the last 20 years. Look around and you will see people are heavier than ever. Because food prices are half what they were as a proportion of income over the last 30 years, portion sizes are greater and processed food costs less than it ever did. So what do people do? Eat more. Obesity amongst children is at epic proportions. Maybe rather than super-large everything, restaurants will cut back. We can eat less and maybe prevent all those future health problems caused by excessive weight.

OK, so I'd still like to go back to $1.50/gallon gas, but the scarcity of oil can be a great call to action for the world's most entrepreneurial and dynamic economy. If we were self-sufficent with energy, there would be no trade deficit and potentially no fiscal deficit. America would still be a free trading nation, but with greater power than before because $200/barrel means tech-driven energy rather than just drilling under the sand. This can only be good for us in the long term.