Electric Heating Systems

Oil prices, we are led to believe at present, have "plateaued" around $71 per barrel after the whiplash at the end of last year which saw a high of about $145 a barrel and a tumble to $45 per barrel by the start of this year. Current prices are nearer their 5 year mean. I have added a widget to this blog, now so you can track the current and historical prices (no forecast unfortunately!).

The point about the oil price index is its "dulling" effect on the energy-efficient appliances market this winter. I've said in a previous post that I'm sceptical regarding people's atruism towards the environment (apart from it being "good in principle") except when it begins to hurt their pocket. And the trouble is at present, that the "normal feel" of oil prices takes away the incentive to switch. Plus there is a general absence of credit at the moment which doesn't help peoples investment decisions. An exciting new industry therefore finds itself in a hard market - not of its making.

But the message to potential customers must be that we are in the eye of an oil price storm and peoples' present price-complacency should not be a signal to do nothing. When oil prices start to rise: demand for energy-efficient appliances will start to rise. And whilst that will be good for the industry - it will be bad for the consumer. If you think the current hype is bad, just wait...

What are the arguments?
Well, the present oil price is actually artificially high at the moment. Last year's price hike was about feared supply constraints in the face of soaring oil demand. But current demand for oil has dropped due to the recession. This is deflationary. In response to which OPEC has cut production back. This is inflationary. In an entirely free market, the oil price should in fact be lower than it currently is.

But the industry is, understandably, taking the opportunity to restructure production because demand really can only pick up and price shocks like those seen last year must be avoided at all costs for the industry itself. (Nothing more likely to force the market away from oil as quickly as possible).

According to Reuters, the present price of around $71 per barrel, whilst artificial, is an incentive to investment: so present supply can both be made more operationally efficient (i.e. cheaper), presently unprofitable reserves can be exploited (to effectively "buy time"), and to allow research into alternative fuels.

But let us not kid ourselves which way oil prices will go. Last year's price shock says there is a level of demand that cannot be met by existing supply capacity (either in terms of reserves of oil, or the profitability of production using current techniques).

My own money is on the likelihood that we'll see a few more years of price stability followed by inflationary pressure on oil prices. This will be because:

a) The industry has bought itself some time with the artificially high prices and present supply cut-backs. When demand rises again, the industry can tolerate increasing supply before it has to increase prices, but only up to a point;

b) after that point, the oil price stability (and profitability of its producers) depends on improving efficiency of production and / or finding new reserves: both of which are subject to diminishing returns.
- You can only improve efficiency to a certain extent in the absense of a revolutionising technology;
- everyone can do it (so for an investor it holds decreasing attraction);
- the availability of new seams by definition has to become more and more marginal and less economic to exploit.

So without improved efficiency or viable new reserves, the price has to rise;

c) If the fact of energy demand rising can be taken as a given, it is far more attractive surely to LET oil prices rise against the existing capital base. I.e. dont pump more money in, but rather, reap the rewards of what you already have pumped in - a bit like a "pension" if you will, for the oil industry!. Meanwhile place your new investment dollar into alternative energies and energy-saving technologies and reap the rewards of the rise in that industry too!. It's a win-win.

Current oil prices are a sleeping tiger and the energy-efficiency idustry should be doing all it can to sell to people now, even when there is not so much incentive for them to buy. When oil prices rise the competition to fill the market capacity for alternative energy appliances will be intense, but inflationary, while there is money to be made from the huge demand and relatively tight supply.

Check back regularly on the oil price widget - it may serve as an index for the infrared heating market's own fortunes!