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Looking to the Past to Predict an Oil-Free Future

By Eric Bleeker - Apr 23, 2016 at 12:00AM

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How a craze around bat droppings in the mid-1800s could predict the end of oil today

"The Stone Age came to an end not for lack of stones and the oil age will come to an end not for lack of oil"

- Sheikh Yamani, former Saudi Oil Minister

Today, the most powerful resource in the world is oil. Yet, the mid-1800s featured a different resource that was the source of price cartels, bloody wars, and panic whenever its price suddenly spiked. 

Doesn't sound too different from oil today, right?

The resource eventually went into a decades-long decline as it was replaced by newer technology that made digging it out of the Earth uneconomical. With oil having seen its own price more than cut in half over the past two years, could a look into the past be a preview of what will happen to oil in coming decades?

Let's explore. 

A world running out of resources

Back in the 1800s, the world's population was exploding and fears of how everyone could possibly be fed were growing. A popular school of thought named "Malthusianism" predicted a forced return of the population to subsistence levels through the same inevitable crises like famine, plague, and war that had occurred throughout history.  

Yet, those fears never came to pass thanks to an unlikely source: bat droppings. 

Bat droppings?

Yes, bat droppings. What Malthusian thinkers in their day missed is that technology breakthroughs and the discovery of new resources could lead to feeding a larger population than ever imagined. 

In the mid-1800s it was discovered that bat droppings (or, guano) contained tremendous levels of nitrogen that made them exceptional fertilizers that could vastly increase crop yields. The problem? Bats only defecate so much. A small island off Peru that supplied most of the world's guano was quickly exhausted, and a panic ensued.

That panic sparked a hunt for more nitrogen-rich resources across the world. Luckily for people who wanted to live in a world free of that pesky Malthusian crisis, it was discovered that a salt flat on the South American mainland had soil that was uncommonly rich in nitrogen.

The salt flats are a briny expanse unfit for human life. Previously, it wasn't the kind of area nations in the world would give much thought to, let alone fight over.

A picture of the desolate salt flats. Image from Romanceour.

Yet, the discovery of its nitrogen-rich soil changed all that. Bloody wars were waged, and at their conclusion Chile seized control of the salt flats and surrounding area.

And Chile became the Saudi Arabia of its age. 43% of the country's income came from taxes on exporting nitrogen. Its treasury's wealth boomed by 900%.

All this was great news for Chile, but not so much for the countries that had to pay up for its near-monopoly on fertilizer. So the rest of the world began looking for a way to break its addiction.

And in 1905, that breakthrough came. A revolutionary technique for literally pulling nitrogen out of the atmosphere and creating synthetic fertilizer was discovered. The age of Chile's dominance was over.

The end of one resource age 

Of course, resources are slow to change. So, Chile didn't suddenly collapse upon this discovery.

Instead, a decades-long transition away from Chile's salt flats began as factories for producing nitrogen from this synthetic process were built at scale. By the 1930s, production of synthetic nitrogen passed Chile's mines. 

By the 1950, Chile supplied just 15% of the world's supply. 

By 1980, Chile's once-great mines lay in ruins and the country supplied just .14% of the world's supply of nitrogen.

The beginning of another

This story of Chile's salt flats might look familiar.

  • A resource locked away in remote deserts
  • One so lucrative wars are fought over it
  • Its production is tightly controlled
  • And fears persist that it might be running out

As the old saying goes, "history doesn't repeat, but it sure does rhyme."

So much of the story around the salt flats at the end of the last century is reminiscent of oil today. The position of oil feels a bit like that 1905 timeframe for Chile's nitrogen fertilizer industry. 

Oil's still very dominant, but the cracks are starting to show. Technology is making it cheaper to extract. Demand growth isn't as strong as it once was. Then there's the existential threat of technology like electric vehicles. 

Right now they're just a niche in the grand scheme of things. Yet, demand for electric vehicles tripled in China last year. Tesla's (NASDAQ: TSLA) unveiling  of its electric Model 3 received 325,000 reservations in just a week. Again, this is small potatoes next to 82.9 million vehicles sold worldwide last year. 

But it does point to an idea that in the long-term is ominous for oil: that people are buying electric cars not because they're environmental do-gooders. They're buying electric vehicles because they're better cars. 

It comes full circle 

The decline of oil won't come overnight. Yet, the example of Chile's nitrogen fertilizer industry shows that once-great resources do change, albeit over a period of decades. 

It's not hard to see today as the beginning of the same period for oil. The resource will still have many uses, but barring a political crisis, it's not quite clear how prices rise back to previous records over any sustained period of time. 

If the price of oil rises, it only emboldens the technology making it cheaper (fracking) or replacing it altogether (electric cars). That could leave oil stuck in its current lower price range as it's slowly replaced over a period of decades. 

And this story wouldn't be complete without a final note. The key resource for storing energy in most electric cars is lithium. Its price has exploded in spot markets across recent months, up more than 200% since mid-last year. 

Goldman Sachs recently called lithium the "new gasoline" for the 21st century.

One of the reasons the price of lithium is skyrocketing? 70% of the world's supply is locked up in a remote desert region... In the exact same briny salt flats of South America that were the source of the nitrogen fertilizer boom in yesteryears. 

History doesn't repeat, but it sure does rhyme. 

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