Sunday, March 8, 2015

Will Silver Become the New Oil?

The world has run on oil and gas for the duration of my lifetime. While other sources of energy have always been used, these two fossil fuels have carried the bulk of the load. In the future, we will continue to use oil and gas for energy for a long time. Slowly but surely however, the world is moving towards an increase in alternative energy sources. Nuclear power is well established and there are some wind farms in use today as well. In fact, the state of Texas has a lot of wind turbines operating in the western part of the state

Solar power is poised to step up and become a substantial contributor to world energy supplies in coming years. Despite its higher cost right now, the early adopter infrastructure is being built. Also, costs are coming down and will eventually be quite competitive if current trends hold up. This Bloomberg article notes that new solar installations are ramping up quite nicely. Looking into the future, it makes me wonder if silver might become the new oil over time. If so, how long will it be before some large sovereign entity figures out that the physical supply of silver is small enough to somewhat corner the market? Let's look at the numbers on silver to see what the future might look like for it.


The first thing we need to realize is that silver is a vital material for the panels used to generate power from the sun. This article in lists the many industrial uses for silver. It says this about the use of silver for solar panels:

"As mentioned previously, silver paste is used to make solar panels. Silver paste contacts printed onto photovoltaic cells capture and carry electrical current. This current is produced when energy from the sun impacts the semiconducting layer of the cell. Photovoltaic cells are one of the fastest growing uses of silver." 

So how much silver is used in a typical solar panel? According to this article:

"The average solar panel actually uses about two-thirds of an ounce of silver, which is about 20 grams according to Casey Research."

Next we might ask, What kind of total demand is possible in coming years? The statistics I have seen indicate there are about 120 million households in the US and around 1.4 billion households worldwide. This does not even include offices, educational facilities, and government buildings, etc. Is it reasonable to think that over the next 10 years, 4% of global households might convert to solar energy? If so, that would be 56 million household users alone. But how much silver would be needed to meet that demand?

Per this article a typical house probably averages using 50 solar panels. Each panel has about 2/3's of an ounce. So we will say each house needs about 33 ounces of silver just for the solar panels. Multiply 56 million homes x 33 ounces to get around 1.85 billion ounces of silver. This would be 185 million ounces per year over 10 years. Add in other solar panel demand besides just homes and 200 million ounces per year is not an unreasonable  projection. At the current pace of growth, this could be a conservative guess.

Right now solar demand is estimated at about 100 million ounces per year. So it's reasonable to think that in the future demand for solar panels might add an additional 100 million ounces per year. The Silver Institute publishes total silver supply and demand which you can see here. In most recent years silver demand has exceeded silver supply even with far less demand for solar panels than we have now. The deficit has to come from existing stockpiles of silver around the world which are not estimated to be all that large. Most estimates are are no more than 800 million ounces at any given time. And a lot of that is held by investors in the ETF's. Much of that silver would not be available for sale at current prices. 

On top of the projected increasing demand for silver in coming years, it is possible the silver supply from mines peaked out in 2014 at around 867 million ounces. Several big new mines have come into production in recent years, but no more new big mines are in progress now. Many existing mines are barely cash flowing at current prices and some are not cash flowing. The easier to mine reserves (cheaper to mine) are being depleted. This means that we are coming into a time when the price of silver must go up or we are going to start seeing a steady decline in silver production. Again, this also comes at at time when demand for solar energy is ramping up globally.

The best guess at total world silver reserves in the ground (that could possibly be mined) right now is a little over 18 billion ounces. Since I work in the oil and gas industry I know that much of these potential reserves cannot be mined at existing prices. A large chunk of these reserves are known as inferred reserves. This means no mine exists today to mine them and enormous capital would have to be expended to get at these reserves. So the actual total reserves that can be mined at anywhere near the current price today is a much smaller number. Demand right now is around 1 billion ounces per year and is increasing. 

It should now be easy now to see why I am wondering if silver might become the new oil in years to come. The supply/demand curve even now is fairly tight. It is likely that demand is going to exceed supply by increasing amounts in coming years. The global effort to move to solar energy is going to add stress to the available supply. 

I just have to wonder when Russia or China will decide that the time has come to basically soak up all the available silver on earth to get ready for the future. China wants to use solar power themselves and Russia might want to control the supply as a hedge against Europe moving towards solar power in years to come (a process already underway now). China also needs lots of silver to manufacture electronics. 

Even if they paid an average price of $50 an ounce for it, it would only take about $25 billion to gain control of virtually all the available silver inventory in the world (500 million ounces x $50). This would be nothing to them in exchange for control over the global supply. It might not even take that much to gain control over supplies as a lot of silver in inventory now is held by people who don't intend to sell any time soon, regardless of price.

As solar energy demand ramps up, silver could become a strategic energy resource much as oil is viewed today. This suggests that silver is a pretty low risk asset to hold long term as part of an emergency reserve fund. The price could always go lower of course. But it is hard to see how the price can go much lower for very long because the fundamental supply/demand picture shows silver will be in deficit in the years to come whether investment demand goes up or not. If we get another financial crisis, investment demand for silver will explode higher and more than offset any drop in industrial demand. If we don't get a new crisis, someone may eventually decide that control of the silver supply for future energy needs is worth time and effort. Silver is positioned to do well over the next decade either way.

Think of it this way, there are only about 2.5 ounces of silver on the earth in the ground for each person based on current world population. That population is going to keep increasing even as we use up that silver every year. We currently use about .15 of an ounce of silver every year per person. At just the current pace, we would run completely out of silver in about 16 years. if the pace goes up (due to solar energy needs), we coule run completely out quicker. That's really not a very big long term supply. If just 10% of global households went solar in the next 16 years, that would wipe out 25% of the known mineable silver on earth all out by itself. (140 million households x 33 ounces = 4.6 billion ounces)

I think silver will be a key strategic metal to keep an eye on in the coming years without a doubt.

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