http://online.barrons.com/articles/jeremy-grantham-u-s-stocks-can-gain-at-least-10-before-crash-1416334236
The epic spurt of growth that began for Europe and the U.S. around 1800 (before which global growth had been negligible for thousands of years), was fueled by coal and then oil. The driver of this growth was the massive gap between what the energy was worth in terms of horsepower and human power equivalents and the much lower cost of digging or drilling the fuels out of the ground. Just imagine, for example, that you had to cut your winter wood supply in a hurry and you had to choose between paying your local labor a respectable minimum wage of, say, $15 an hour or filling your empty chainsaw with a gallon of gas. One of my sons, a forester, tells me he could cut all day, eight to 12 hours, with a single gallon of gasoline and be at least 20 times faster than strong men with axes and saws, or a total of 160 to 240 man hours of labor. For one gallon! So for this task an estimate of value of $2,400 to $3,600 a gallon would be about right. But with gasoline at $3 a gallon we trade way down to trivial tasks with little labor equivalent value because we can, squandering the great potential value that oil has for really important jobs. That’s how we do it. We assume the oil or coal, our finite and amazing inheritance, is free and price it just at its extraction cost plus a profit margin. So at the important end of the spectrum gasoline or oil is worth, say, $3,000 a gallon and at the wasteful, trivial end is worth $3. This example used gasoline, an expensively processed part of a barrel of crude oil, but the same principle of a large gap between value and cost of course also applies to crude. Let’s work with that assumption for a moment. In 1998 the price of oil hit a 20-year low of below $14 a barrel and I assume the average cost was about $10 given there was still quite a bit of very cheap Middle Eastern oil in the mix. But the value might well have been as high as $2502 in which case a “massive surplus” – or beneficial gap between cost and value – of $240 would have existed, or 24 times the cost of extraction.
This surplus goes in part to governments as taxes, in some oil-producing countries virtually carrying the budget on its back. It goes as pay to oil workers and their support infrastructure. It goes as profits to oil companies and from them out to dividends. But above all, its greatest benefit is in those uses that have a far higher value than the cost of the fuel, as is the case with my son’s chainsaw. The great size of this surplus, first for coal and then oil and gas, drove the industrial revolution.
