iReconnoiter

With energy demand in the emerging nations escalating and the world supplies static, the influx of money has helped chase prices of oil higher. Generally in most markets, skyrocketing prices would result in increased supply and decreased demand – that would cause prices to ease and balance up to the equilibrium eventually. Unfortunately, the oil market is not working that way.

Supply is essentially fixed in the short term because it takes painstaking years to find new oil fields and bring them up and running. Demand, on the other hand, is also essentially fixed, since there is no ready substitute for petroluem, diesel, jet fuel. Flush with cash from investors of all kinds, traders observing these factors have bid prices higher and higher …

The digital economy is a culture of abundance. It’s virtually costless to duplicate something online, whether be it music, movies, games, softwares. Google, Microsoft, Yahoo, Facebook, and MySpace all compete eagerly to attract customers to their plentiful free offerings. On the other hand, the oil economy represents the culture of scarcity, wherein traders try to guesstimate just how much petroleum is left in the world and just how high the price of oil can go.

The high cost of oil actually accelerates and perhaps push the shift into the virtual world, as people and businesses substitute digital connections for physical interactions. Managers will rely on video-conferencing instead of flying across the country or the world to meet in person. Newspapers/Magazines, faced with rising energy costs for production and delivery, will make the big decision to drop their print versions and go completely online. Socialising will shift increasingly to the Web from pricey evening dates or gatherings. And teenagers will do more of their driving in online MMORPG rather than spend $100 to fill the tank of their family car.

However, the culture of abundance could lose its ground under the weight of energy costs. The data centers supporting the digital economy are extreme power users of electricity. If oil prices stay high, electricity prices should soon follow – and how long will it be before the data centers become expensive drains on corporate profits? Anticipating this problem, Google and other major tech companies have built some of their data centers in areas where cheap hydropower is available. Nevertheless, most of their digital infrastructure around the world has no such immunity from rising energy costs.

Similarly, we have grown used to spending relatively small sums to purchase sophisticated routers, laptops, and smartphones. But these abundant supply of cheap electronics is based in part on making the gears many distance away in Asia and shipping it to our country. If the price of transportation continues to rise, will the price of tech toys have to rise as well?

These questions cannot be answered until we know whether oil prices are going to fall or soar to even higher levels.