Novice Investing - Cost Effective Energy Resources II

Date: Friday 29th 2008f August 2008 09:07:51 PM

Cost Effective Energy Resources II - 10/31/2007

By: Hari Wibowo

With the continuing skyrocketing energy prices, let's visit what is the most cost effective energy resource. Late last year, I was writing about energy resources and seems to be making tremendous errors. It all starts with this heating value from Wikipedia. The energy required to run a 100 W lightbulb for a year is as follows: 400 kg of coal, 230 kg of oil ( 1.76 barrels) and220 m³ of natural gas. The cost turned out to be:
Oil: $ 105.40, Natural Gas: $ 14.95, Coal: $ 16

At the time, natural gas price was $ 5.00 per Million BTU, Oil was $ 60 per barrels and coal was $ 40 per Metric Tons. With these prices in mind, the cost should be: Oil: $ 105. 40, Natural Gas: $ 38.85, Coal: $ 16. This is about the norm (Cost: Coal< Natural Gas < Oil) and I apologized for not discovering the error sooner. How about now? With crude oil near @ $ 90 per barrel, natural gas at $ 8 per Million BTU and coal was $ 50 per Metric Tons, the cost of running a light bulb is now:
Oil: $ 158.40, Natural Gas: $ 62.15, Coal: $ 20

The ratio is almost similar with last year's and while cost has increased in terms of the dollars (USD that is), the value of US dollars has plummeted from 1 EUR = $ 1.27 to: 1 EUR = $ 1.4451 recently. That is about 18% depreciation of the US Dollars for the past year. Thus, in term of euro, oil price has appreciated around 12%.

What should we expect from energy prices, particularly oil? With the US government currently in another interest rate cut mode, you would expect oil to appreciate in value, considering that demand remains strong in the US and developing world. With its low interest rate 1 % campaign from 2001 until up to 2004, the fed has inflated all other assets from oil, gold, to housing prices. Now that housing meltdown has deterred investors, they would chase other assets for this interest rate cycle. Oil price ended up sharply the day the US federal reserve announced an unexpected 50 basis point of interest rate cut. As more cuts are expected, you should expect oil price to remain strong for the foreseeable future. How about $ 100 per barrel? It doesn't look very unrealistic these days.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

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