economics opinion

Synthetic Fuels and the Green Back.

Just a question, no answer for now.

So the fossil fuel market’s trajectory is towards contraction – inevitably – based on where environmental policy and innovation is taking us. Furthermore, ultra cheap electricity produced in excess to peak requirements makes synthetic fuels potentially cheaper than any conventional well derived fossil fuel (as well as fully carbon neutral). Lastly there will be a legacy market catering to fossil fuel based engines in aviation, marine and road haulage for probably at least another decade or two.

So it stands to reason that synthetic fuels could displace fossil ones in what is left of that market as synthetic fuels follow manufacturing economics, whereby scale reduces cost, whereas fossil fuels follow resource economics.

Price fluctuations in synthetic fuels might be more akin to what we see for example in the market for DRAM memory chips, supply and demand driven but more cyclical rather than cartel driven. Furthermore, synthetic fuels are not geo-locked the same way oil wells are. In fact synthetic fuels don’t really need a commodities exchange, in the same way most other industrial chemicals don’t need one either.

So this poses an interesting question. In what currency will synthetic fuels be traded, will they even be viewed as a commodity still, since they can be totally customized for any respective application? So if the synthetic fuel business happens largely between counter parties, away from exchanges, along normal procurement relationships, then how does this impact the US dollar as a reserve currency? If you no longer need dollars to satisfy the energy needs of your country, does that mean you may be less willing or keen to buy dollar denominated government debt? Would said government debt then need to be issued at a higher interest rate to remain attractive?

Opinions on the subject have been diverse in the past, ranging from concerned to a shrug. Taking the middle ground here, it seems that the dominance of the USD in the crude trade is already slowly diminishing. Thus synthetic fuels might generally continue to reduce or attenuate America influence on the global financial system. However, this process is already playing out regardless, as the EU for example has started work on establishing alternatives to the SWIFT inter-bank clearing system for example.

A multi polar system may in the long run require consensus building for international financial sanction for example, which on the one hand may make them harder to enforce, but also could render them more potent when they are agreed upon by the dominant players/currency blocks.

So it seems, that those who are skeptical about synthetic fuels, because they believe either governments or oil majors will not allow them to happen, due to their reserve currency impact, may be over estimating the importance of that aspect. I for one believe, that even oil majors as profit seeking entities, will eventually jump on the synthetic fuel bandwagon as it will be a means for them to continue operating in the energy sector in a core competency adjacent domain. Likely a more attractive proposition for those resistant to change, than outright embracing becoming alternative energy companies or going out of business.

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