Energy and Money: Beyond the Petrodollar

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This perspective posting discusses the central importance of energy and money in domestic and global affairs, and presents ideas for consideration in a search for ways to help offset systemic risks associated with conventional systems of energy and money.

Energy and money systems are central to the proper functioning of nearly all other systems globally. Over the second half of the last century, these two systems have been based largely on hydrocarbons from crude oil and other fossil fuels as energy, and on the US dollar as money. An historical testament to the importance of the pillars of energy and money and the link between them was the creation of the petrodollar in the 1970′s. The petrodollar emerged at around the same time that the creation of paper money backed by gold was abandoned, in favor of money creation (globally represented by the US dollar) effectively backed with crude oil and other hydrocarbon energy resources.

In hindsight, it would have been expected that an imbalance would, in time, necessarily prevail between global demand for hydrocarbon energy and a finite non-renewable supply of fossil fuels. In spite of expected volatility in the demand for crude oil from general ups and downs in the cycle of business globally, the long term trend in marginal demand has been on a consistent upward trend. The state of imbalance in foreseeable crude oil supply versus demand has commonly been referred to as ‘peak oil’. The prospect of peak oil looms at the same time that the value of fiat money appears to be getting diluted rapidly through concerted global central banks’ efforts to hyper-inflate money supplies in paper and digital forms. The existing pillars of energy and money continue to erode, increasing the risk of systemic breakdown of these systems and posing a threat to the functioning of nearly every other system globally.

Perspective on Energy

Traditional energy sources have been crude oil and fossil-based hydrocarbons in general, nuclear, and hydroelectric. Alternative and emerging sources of energy include biofuels, wind, solar, and hydrogen. Crude oil has been particularly important perhaps, because of its primary role in the transportation industry. Without a cost-efficient fuel to power combustion engines, the world could not have possibly reached the level of development that it is at today. Consider the outcome of the last century without having had a cost-effective way to power cars, buses, trucks, ships, and airplanes. Crude oil has provided a practical source of fuel for mobility, unlike nuclear, hydroelectric, wind, and solar. Despite advances in engine technology powered by electricity, hydrocarbons and the combustion engine remain the most practical way to sustain activity on a global scale.

There are other risks associated with electricity-generating resources beyond limits for use in transporting people and goods. Nuclear energy appears to have been a suboptimal alternative, given the fallout from multiple incidents that have occurred throughout history, with the most recent being the catastrophe at Fukushima, Japan. Hydroelectric energy is potentially limited by a finite number of waterways to dam and associated environmental harm. Beyond powering homes, business and other fixed assets, electricity from nuclear, hydroelectric, solar or wind has yet to emerge as a viable energy option for mobile assets such as transportation industries. Electricity-generating resources appear far from being able to offer practical alternatives to octane, diesel, jet fuel and other hydrocarbons used to power engines for moving people and materials in a practical and efficient way.

In order to consider practical alternatives to fossil fuels, it is somewhat important to understand at a rudimentary level the process of getting energy from these resources. Crude oil, for example, is made of hydrocarbons which are simply long molecular chains of carbon (C) and hydrogen (H). When combined with oxygen gas (O2) and ignited, the outcome is a release of energy, carbon dioxide (CO2) and water (H2O). The energy released from the burning of hydrocarbons powered the industrial revolution and continues to power the engines of today’s global economy.

In principle, any compound that mixes with oxygen to release energy can be thought of as a fuel. One example is hydrogen fuel (H2). NASA had regularly used hydrogen fuel instead of hydrocarbons to launch its shuttles into space. There is an important distinction between burning hydrogen fuel and hydrocarbons. Burning hydrogen fuel (H2) produces water (H2O) and releases far more energy than burning hydrocarbons which produce carbon dioxide (CO2). The release of carbon dioxide from burning hydrocarbons is furthermore understood to be the biggest contributor to greenhouse gases.

Hydrogen (H) as an element is unique in a number of ways. One of its properties is that it has 1 proton and 1 electron, unlike all other elements which also have, on average, an equivalent number of neutrons. Carbon (C), for example, has 6 neutrons, in addition to 6 protons, and 6 electrons. There is no clear scientific consensus on the reasons hydrogen normally exists without neutrons. A further remarkable property of hydrogen is its prevalence in the universe. Every star in the universe including our own, the Sun, exists mostly as hydrogen. Our planet is 2/3rd covered in water which is 2/3rd hydrogen. The composition of living cells is the same by atomic percentage. With hydrogen prevalent on so many levels, a side question to consider is whether life on planet earth should be referred to as hydrogen-based instead of carbon-based.

In a very disproportionate way, the natural world seems to point to hydrogen (H), or in practical terms, hydrogen fuel (H2), as a prime candidate for alternatives to hydrocarbons. Since hydrogen fuel releases water when it is burned, its exhaust is available for recycling into hydrogen fuel, which makes it inherently renewable as an energy resource. The primary question is then how to extract hydrogen fuel from water. Secondary technical challenges may include storage and transportation, notwithstanding emerging technology which may enable the production and consumption of hydrogen fuel in a coupled way.

Despite technological advances in hydrogen fuel-based combustion engines and hydrogen fuel cells for electrical engines, hydrogen fuel has been largely inaccessible. The prevailing consensus is that the process of separating water into hydrogen and oxygen requires far too much energy, to make the production of hydrogen fuel a viable economic option. Electrolysis uses electricity to separate water into hydrogen and oxygen but is not a viable option on its own for extracting hydrogen fuel. This appears consistent with the laws of thermodynamics which roughly state that it is impossible to get more energy out of a system without the same energy having gone in to create it in the first place. It is important to note that the energy referred to can manifest itself in multiple ways such as heat, electricity, motion, and other states. Since the mixing of hydrogen and oxygen releases water and heat energy, the same amount of energy ought to be required to separate water back to hydrogen and oxygen gases. It would therefore appear unlikely that hydrogen fuel extraction can present a viable option. Hydrocarbons, on the other hand, have had a great deal of energy put in over time in the form of biomass and pressure to create crude oil and gas deposits.

In a search for ways to extract hydrogen fuel from water in an economically viable manner, it is worthwhile examining the role of catalysts in the natural world. In a very large variety of chemical reactions, catalysts are generally present and act to alter the reactive energy states of molecules involved in the reaction, whether to combine or separate molecules. The role of catalysts may be described as ‘bending’ molecules in order to pry them apart or recombine them with less effort. Enzymes provide some of the best examples of this bending process in nature. This principle is similar to separating the interlocking chains of a metal puzzle, which requires that the two chains be positioned in a very specific way relative to one another, in order to slip them past each other with little effort. In an example reaction where a given molecule is to be separated into its components, as a general rule in nature, relatively more energy would be required for the reaction to occur without an appropriate catalyst. The reverse reaction is similarly possible with another appropriate catalyst. Conceptually, we can imagine using catalysts to alter the energy state of water in order to more easily separate it into hydrogen and oxygen gas. The hydrogen gas collected may be recombined with oxygen with using a different catalyst (e.g. a spark) to release energy as heat. In principle at least, it is conceivable that catalysts can equally be applied to generate hydrocarbons from carbon dioxide (CO2). These apparent contradictions of the laws of thermodynamics may be explained away by the role of different catalysts in altering the energy states of molecules under different reactions.

Anecdotal evidence presented over the internet suggests a large variety of catalysts as potential candidates to help extract hydrogen gas from water in a cost effective way. Some experiments have even suggested using radio waves to separate water into hydrogen and oxygen gases. Although it is unclear the extent to which these reactions have been achieved in an economically viable manner, it is nevertheless incumbent on governments, scientific communities, businesses and ordinary individuals to examine the mounting body of evidence showing different ways to extract hydrogen fuel from water. The world’s fossil fuel industries are expected to have the greatest incentive in leading this initiative, in an effort to adapt and survive the inevitable depletion of hydrocarbon deposits around the world.

Perspective on Money

The ties that bind energy and money together extend beyond practical considerations such as the emergence of the petrodollar, as a model for money backed by hydrocarbon energy. In many respects, money can be seen as an expression of energy or, more precisely perhaps, as accounting records of energy transfers between individuals and entities. For example, individuals as employees provide manpower energy to employer organizations in exchange for money. Entrepreneurs and corporations expend energy to produce goods and services which are exchanged with other entities and individuals for money. Agricultural commodities are direct stores of energy (food that drives muscle energy), as are energy commodities such as hydrocarbons (fossil fuel for mechanical energy). At various intervals in history, agricultural commodities such as cacao beans had functioned as money, which in this case, would have been close to a direct exchange of energy (cacao beans) for energy (that has gone into the production of goods and services provided).

The original creation of paper money backed by gold was a matter of convenience, with the paper paid and received representing a transfer of ownership in the underlying gold. In the modern era, paper money was decoupled from gold and implicitly re-coupled to fossil fuels. However, the paper did not provide an explicit legal claim on the underlying oil commodity, nor would it have been practical to do so. The ability of money to function as a trustworthy record keeper of energy transfers largely depends on faith in the utility of the underlying paper or electronic equivalents. Such faith appears to be eroding in an accelerated way by the pace of fiat money creation globally and the inevitable prospect of fossil fuel depletion as a commodity supporting such money.

The current dominant expressions of money, largely based on paper forms of USD, GBP, EUR, JPY and other major currencies, appear to be in the process of being dismantled, as evidenced by global efforts to devalue fiat money. Current and projected policies concerning global debt expansion and exponential growth in money supply will, in time, likely cause fiat forms of money to lose their ability to function as trustworthy records of energy transfers. It matters little whether it is by default or design, that fiat money systems are being dismantled. Diversifying available systems of money would intuitively be more optimal as a general strategy under most circumstances, and especially under the precarious condition of the sole existing system of money (paper and digitally based).

There are encouraging signs in the development of new money systems. In the emerging world of crypto currencies, Bitcoin currently stands out as a familiar example. Under an ideal diversified scenario, there would be multiple systems of money in competition with each other and which are convertible into each other. The primary purpose of these systems would be to act as media of exchange of energy between entities and individuals. There is no need per se in having money backed by anything, whether gold or any other commodity such as fossil fuels. Money simply has to fit the general criteria of acting as a medium of exchange. One of the central criteria is the inability to inflate the supply of money, in whatever form, in an unsustainable manner through counterfeiting or excessive paper money-printing and digital entry-making. Having diversified systems of money would likely protect against the major risk of operating under a single system (i.e. global central banking monopoly over money creation), and having this system fail with no available alternatives in the marketplace. The world’s financial industries are expected to have the greatest incentive in leading the development of alternative systems of money, in an effort to adapt to the expected fallout from central banking practices.

Energy and money are perhaps the two most important systems in the world today. Nearly all other systems in society depend on these systems for enabling normal activity. Fossil fuel energy drives the world, literally and figuratively. There appears to be no practical way around the inevitable prospect of depletion of fossil-based energy reserves. This bodes ill for hydrocarbon energy and for exponential money growth backed by the same hydrocarbons. Alternatives to hydrocarbons will ultimately have to be found. A catalytic breakthrough in the extraction of hydrogen fuel from water would likely transform the world’s energy outlook from projected scarcity to perpetual abundance. From an unconventional perspective, planet earth can be seen as awash with hydrogen fuel (H2) stored in its oceans’ water (H2O). If money is to be backed with energy resources, hydrogen fuel may be the natural choice.

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About Gregory Hajjar CFA

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