Oil Spike's Tech Impact

Red Herring
March 31, 2005

Rising gas prices might convince Americans to stop buying SUVs, and give the clean energy sector a boost.

Goldman Sachs speculated Thursday that oil markets may have entered a “super spike” period with prices rising as high as $105 per barrel, a development that would not only change what we drive, but other technologies we use.

Crude oil rose $1.61 to $55.60 per barrel in recent trading on the New York Mercantile Exchange. Goldman Sachs estimates the average oil price will be $135.12 per barrel by 2008, which would put U.S. retail gasoline prices at $4.30 per gallon, about double the national average of $2.15 reported this week by the U.S. Energy Information Administration.

If at-the-pump prices top $4 per gallon, Americans might stop buying “gas guzzling sport utility vehicles (SUVs) and instead seek fuel efficient alternatives,” the Goldman Sachs report said. The example was used as an indicator of when oil prices would begin to destruct demand.

In the meantime, the market is seeing immediate effects as investors assess the impact of oil prices across all sectors, including technology. The Nasdaq slid 6.47 to 1999 on the news. “There does seem to be a fairly profound effect,” said Ehud Ronn, director for the Center of Energy Finance Education and Research at the University of Texas in Austin. “The market perceives oil prices as having a negative effect for the high-tech sector.”

If the prices go anywhere near $105, Mr. Ehud said the economy will descend into a fairly severe recession; the broad stock market, including the Nasdaq, could face declines as large as 50 percent; and the broad tech sector will decline, although the value of certain sectors, such as clean energy and alternative fuels, will improve.

The price of oil actually has limited impact on IT technology, said Martin Reynolds, a Gartner fellow specializing in emerging technologies. “Because profitability and costs are relatively high in the high-tech industry, the price of oil doesn’t make much of a difference,” he said. But oil prices could have a big impact on certain materials, such as concrete, that are produced using oil and that have low margins, he said. “People with high-quality products will pay a premium while low-value uses get cut off first,” he said.

When the low-value producers go out of business, that affects the overall economy, he said. Also, investments could drop as consumers’ disposable incomes are squeezed by high prices for gasoline and the impact of oil prices on other sectors, such as food.

Overall economic dampening is probably the biggest influence of oil prices on the high-tech industry. Neal Elliott, industrial program director at the American Council for an Energy-Efficient Economy, said core inflation could reduce demand for higher-ticket commodities, such as home computers, iPods, and high-definition televisions, as people become more reluctant to replace old products with newer versions.

Higher costs of transportation for components—as well as increased prices for shipping materials, such as plastic wrapping, that are made from oil and gas feed stocks—could also squeeze manufacturers with slim profit markets. And oil price increases are tied to higher natural gas and electricity prices, too, Mr. Elliott said.

But alternative-energy technologies—particularly wind power, which costs $0.04 per kilowatt hour—biofuels, biomass, and energy-efficient technologies from refrigerators to DVD players, are all getting a boost from the prospect of even higher energy prices. Hybrid technologies will become even more popular, at the expense of SUVs, and automakers are going to deploy both high- and –low-tech methods to increase energy efficiency, Mr. Elliott said.

“Lighter-weight materials, more advanced engine-control systems, low-resistance tires—these things are going to trickle down from premium lines to the secondary market, and are going to become standard on fleet vehicles,” Mr. Elliott said. But he noted hydrogen technology might actually be dampened by high natural gas prices, because natural gas is used to make hydrogen.

Eventually, more energy-efficient technologies could have the effect of lowering energy prices and in turn, lowering the appeal of those technologies. If natural gas consumption were reduced 1 to 2 percent per year, for instance, wholesale prices could drop as much as 20 to 30 percent, Mr. Elliott said. “The truth is, we’re in uncharted territory here with respect to energy prices,” he said. “Perhaps nobody really knows what’s going to happen.”