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ENERGY TRANSITION INTRODUCTION: GLOBAL CHANGE AND ECONOMIC RECOVERY Despite an apparently painless turnaround in equities indexes, either driven by or driving a large rebound in commodity prices from their extreme lows of early 2009, the global economy is far from ‘growing healthily’ as of late Summer 2009. Asking why the economy is taking such a long time to rebound, and why its rather likely to be another hesitant, slow and ‘jobless recovery’, with employment taking a long time to regenerate is counteracted by G 20 leaders including Obama, and the IMF’s Dominique Strauss-Kahn. These voices regularly warn we should not count on anything but ‘very gradual’ recovery, despite the truly fantastic amounts of borrowed and printed money that has been ‘injected’ into the economy. The difference between ‘paper economy’ performance, and the ‘real economy’ staying in the doldrums is however stark. As many people remark: If stock markets in OECD countries can rise 33% in six months, and the rate of enterprise failure is declining a little, why can't the larger economy now also rebound, just like paper equities? (See for example). So-called technical factors making ‘real economy’ rebound unlikely are however more than somewhat plentiful (See eg.). As we know, the Keynesian largesse shown by political leaders and central bank governors all round the world has mostly and firstly gone to the financial industry. This was called ‘no alternative’ spending to avert catastrophe, bailing out near-bankrupt financial establishments, insurance companies, high street or retail banks, and selected finance trading entities, transferring private debt to public debt, and spectacularly increasing the debt total. Growth impacts of this spending, other than a regain of activity on financial markets, has been weak, like impacts from a certain amount of Keynesian spending being ‘injected’ into the car making and home building industries of many OECD countries. Overall and to date, the recovery is more than somewhat weak, hesitant, and very shy in the matter of producing jobs. CO2 AND THE ECONOMY Other than evident and massive ‘purely financial’ reasons for slow or no recovery, the ‘fast slump-slow recovery’ performance of the OECD and global economy since at least 25 years and maybe much more than that, is structurally linked to the global economy’s energy footprint. This fact makes it a little hard to be surprised by today’s now traditional ‘jobless recovery’. Certainly since the 1980s, one key reason for supposedly surprising, or at least disappointing economic recovery performance are none other than oil and energy prices, responding ever faster to the slightest signs of economic growth. These constraints are joined by a host of other natural resource, environment, ecological and climatic limits to conventional economic recovery. For around five years, in Europe since the beginning of emissions trading in 2005, tracking down CO2 emissions has become relatively big business. World Bank estimates of total turnover and activity in global emissions trading for the year to March 2009 was around 125 Billion US dollars value. Trading credits to emit CO2 and other more exotic greenhouse gases, but surprisingly not directly or explicitly targeting methane, has also generated a research industry able to quickly give the ‘carbon footprint’ of almost any activity. From Obama’s sorties in Air Force 1 (a not very fuel efficient B747), to F1 car race events (now claimed to be just about ‘carbon neutral’ thanks to offsets), we can find out how many grams of CO2 are emitted per kilometre, per unit GDP, per hour, or per kilogram. Car makers in OECD countries, and worldwide, are being forced and encouraged to produce cars with ever lower outputs of CO2, for example 120 grams/kilometre in EU 27 countries, as a near-term future output weighted average for manufacturers. After an initial flirt with biofuels in 2005-2007, where ‘ikon investors’ like Bill Gates and Vinod Khosla encouraged small savers to lose their money in now-bankrupt biofuel ventures, the car industry’s hopes are today firmly electric. There is now a flurry of activity in Electric Vehicle (EV) development, with probable volume production of EVs by around 2011-2012. Downstream from that, feverish speculation surrounds world lithium mining operations and national reserves of this suddenly ‘critical resource for civilization’, as lithium and lithium-based batteries are described by Warren Buffet’s fund managers (See eg.) These details however change nothing, in fact underline the basic energy economics of growth and contraction of the world economy. Producing lithium, like producing maize for bioethanol fuel, and laying the highways to transport raw materials and finished products needs energy. Any national economy, and the global economy simply represent a large pyramid of energy using activities and operations, if we describe them only in energy terms. This is not a static picture at all, because there is a growing need for energy investment to maintain current activity (or at least try limiting its decline), while also investing energy and materials, as well as cash in a hoped-for new, green and clean, low carbon and resource efficient future economy. Plentiful examples of the problems for ‘switching’ from one model to another exist, for example with landline based telephones versus cellphone and relay tower systems. Doing everything at once is a nice but fond hope – that is operating the current and conventional, fossil-based energy economy while constructing the future non-fossil energy economy, but in ‘revolutionary times’ such hopes are the basis not only of heartwarming slogans, but heavy investor activity and increasingly public borrowing and investment. Unfortunately, for rather simple reasons, both present results, and future performance of this activity risks being a disappointment. In a rather near-term future, simple energy economics focusing net energy yield and similar ‘technical considerations’ will dictate increasing numbers of either-or choices. For the present however, the rather confused and even antinomic hopes for global economic growth, which is fossil energy based, and the ‘green economy’ to replace the old, were neatly summarised by headline slogans concocted for the G 20 London Summit. Other than ‘stabiity’ and ‘jobs’, G20 leaders acclaimed the need for, and supposed growth potentials of a ‘global green recovery’ (See for example). PAST PERFORMANCE On a long-term base, it is easy to trace the CO2 impact of economic growth, and boom-slump cycles in the world economy. The table below from an official briefing by the IEA to the 2009 G8 summit, summarizes long-term past CO2 performance of the global economy, and hoped for ‘revolutionary change’ featuring de-carbonizing the economy without hurting growth, through to 2150.
As we can see, nothing less than an Environmental Revolution awaits us. CO2 emissions will plunge from now on. The obvious and simple question is: How do we expect the economy to shape out in the changeover to this new and ‘revolutionary’ context? Past performance, as any hedge fund investor prospectus is careful (or obliged !)to print in quite large text, cannot or should not be taken as a guarantee that future performance will be the same, or predictable. That may be so for hedge funds, but at the scale of the global economy, as shown in the above chart, there is rock solid predictability. There are few long-term and large-scale inflexions, or downside kinks in the ever-upward profile of fossil energy consumption growth on one side, and of GDP output on the other. We can start by noting the above chart is more than somewhat surreal in suggesting current world GDP is close to, or above 100 trillion USD annual: IMF figures for 2008 are about 63 trillion USD, and 2009 global GDP will certainly be less. Going further with ‘revolutionary thinking’, G8 and IEA-style, we see from the above chart that relatively soon global GDP is supposed to attain 125 or 150 trillion USD a year (the chart uses a log scale). The 2006 Stern report on climate change, we can note, despite its dire warnings of economic menace from CO2 nonetheless forecasts growth of global GDP to at least 175 - 200 trillion USD a year by the period 2050-2075. To be sure, achieving this performance can be easily done in current, rather than inflation corrected US dollar value: all that is needed is for governments and central banks to increase monetary emissions. Certainly since mid 2009, we are warned that hyperinflation, even 1920s German style “Great Inflation” could result from, or accompany a new and dangerous world dollar crisis, like that of 1979-82. In the present context this could be supercharged by ‘disappointing performance’ and high costs of shifting to the green economy, adding to the real danger of the US economy’s plight resulting in a de facto decision to simply drive US dollar printing press activity ever faster. To be sure, the exact opposite thesis – of continuing and then intensifying deflation – can be found as the forecast of current and near-term future threats to the global economy (See eg. and Also). Whatever the outcome for the dollar, past performance of the global economy is very easy to summarize in basic CO2 and energy terms, with no possibility of ‘alternate’ or opposite theorizing. As the chart shows, and any other chart of economic output and energy input will show, fossil fuel burning, and CO2 emissions, and global GDP output increased in lockstep together, for over 250 years from 1750 to 2009. Downside kinks in the process, like the Great Depression and the early 1980s recession were just that – downside kinks. More fossil energy was found, and CO2 emitting growth was restored. FUTURE PERFORMANCE Thanks to “environmental revolution”, the G8 and G20 leaderships now claim, this relationship is about to be made to disappear off the screen – CO2 emissions will fall, rather spectacularly, while global GDP increases just as spectacularly. Past performance, and real world industrial, technical and social infrastructures suggest this is not likely to be the case. Our interest in this article is the probable near-term future performance of the global economy. Energy supply and types of energy utilised, the new and “clean” technologies, CO2 emissions trading, the Clean Development Mechanism, as well as economic aids and fiscal stimulus (that is money printing press activity) all enter into the equation. What we can be sure of is the strong possibility of another dose of what I call ‘Petro Keynesian Growth’. In other words a rise of energy and non-energy commodity prices, as in the 1920s, 1970s and in 2004-2008, leading to a rise in world liquidity and purchasing power, extending away and draining dollars, euros, yen and other moneys (such as Yuan, Rials and Rubles) from the buddy-buddy ‘closed loop’ of financial trading, now crowned by a no-fail guarantee through public bailouts of losses on ‘wrong way’ bets. The net impact of commodity producers gaining more revenues is accelerating real economy growth, for reasons including the marginal propensity to consume of these economic actors. Having no feedback, this Petro Keynesian growth continues until it ‘peaks out’ in a predictable sequence of slowed growth in the most energy and resource-intensive economies, basically the OECD group, rising inflation, increasing debt, and debt default, and so on. The so on includes state rescue plans and ‘fiscal stimulus’, or old-style non-Petro Keynesianism when things get sufficiently bad. In 2008-2009 this older model Keynesianism has reached astronomic heights. An idea of these giddy heights can be guessed by taking an estimate from US TARP (troubles assets repurchasing) administrators for possible final costs of their very classic Keynesian cover-up of economic and financial ‘wishful thinking and hubris’. Their estimates are that TARP costs may rise to as much as 23 700 Billion US dollars (that is 23.7 trillion USD), close to 40% of world total GDP for 2008. [See] . This type of fiscal excess, in response to fiscal distress, can rather likely itself help generate another upward spiral in oil and other ‘real resource’ prices. This will be through an easily-described process weakening the US dollar, with or without any increase in global economic output. This weakening of the US dollar, rather than possibly increasing activity and increasing emissions of CO2, will certainly lead to rising gold, silver, platinum, oil and non-oil commodity prices. For those who want a ‘worst case scenario’ one is available – as the most easily described near-term outlook for the global economy. ENERGY CHOICES The call for ‘global green energy’ is usually made in parallel with intense warnings of climate change, reaching ‘catastrophic’ heights by perhaps 2030 or 2040 or a little later. Rather less of the warnings focus near-term likelihood of world oil export supply, if not natural gas supply starting to fall at the impressive rate of perhaps 2.5 Mbd (million barrels a day) lost each year from 2010-2011. This forecast is not openly made by agencies such as the IEA, but is nevertheless ‘embarked’ in various publications (See eg. page 4) ), In the case of the IEA and other major energy and economic agencies, this background loss-of-capacity forecast is used to build scenarios for world oil and gas annual investment needs ‘reaching 1 000 Billion US dollars a year by 2016’, while other experts claim even vaster sums will be needed to stem the tide of oil depletion (see eg. Matt Simmons) Likelihood of this type of spending being translated from paper, to the real world are probably as low as US TARP spending resulting in the US finance, bank and insurance sector becoming ‘clean’ let alone ‘green’ in a foreseeable future. What counts is that any serious attempt at Energy Transition, away from fossil energy to renewable sources, is confronted by the need for similar and epic amounts of spending, even to attain what could be called ‘relatively modest’ targets for replacing or substituting present fossil supplies. This underlines one basic easy-forgotten aspect of the global energy economy: accumulated and massive growth of mostly fossil-based energy supply and infrastructures. My findings for Australia’s FINSIA on the subject of simply replacing 25 Mbd of current global oil and gas supply capacity by renewable source energy and also by cutting energy demand (published in their JASSA journal, Issue 2, June 2009) suggest it would need at least 1 000 Bn USD a year of investment spending through 2009-2025. Current spending on “Cleantech”, much of which concerns M&A activity, IPOs, debt refinancing, private equity start up operations, and so on, totals no more than about 125 Bn USD in 2008-2009, of which about 50% is energy sector, using estimates from Clean Edge and other sources (See eg.). The either-or choice is therefore looming. The third and time-hallowed option, of doing nothing, is effectively the current real world response to coming, sure and certain terminal energy crisis for ‘classic energy solutions’. It is therefore easy to forecast an energy garrot on global economic recovery and expansion, after a short interlude of ‘Petro Keynesian Growth’, as in 2004-2007. Due to the oil depletion clock and a fall in oil and gas investment in 2008-2009, the ‘growth interlude’ threatens to be much shorter this time around. Due to financial excess, and printing press extremes of money emission, it also threatens to be much more inflationary. Oil prices, when markets become physically undersupplied or exposed to ‘structural shortage of offer’ will of course be bid up in the same exuberant way as in 2007-2008. For natural gas this much less sure, due to a bulge in both pipeline and LNG supply, but higher fossil energy prices will be sure and certain, anytime growth returns. THE FOURTH SCENARIO The existing energy-economic options or ‘strategies’ for the near-term future are essentially to massively invest in oil and gas supply, to stem the effects of depletion, or to invest in renewable energy and energy saving, supposedly to limit climate change, or to do nothing. There is however a potential ‘fourth way’, related to all 3 of the de facto and declared solutions on offer. Probable rates of world oil and gas investment spending, a lot of it simply to stem depletion effects, are around 350 Bn USD a year for 2009. Using highly variable definitions of what “Cleantech” comprises (See eg.) some estimates and forecasts of “low carbon” spending and activity are already very large. Forecast spending needs only for renewable energy, from sources including the UNIPCC, the Davos Forum of 2009, recent G8 summits, and elsewhere give figures, or rather wish lists for investment and spending reaching 500 to 750 Bn USD a year by around 2015-2020. There is a constant trend to forecast ever-bigger amounts being needed for renewable energy investment, and exactly the same for oil and gas sector spending. The problem is that both will tend to be ‘low performance’, for simple reasons. World oil and gas faces huge spending needs to limit capacity loss from depletion (and from what Matt Simmons calls ‘rust’, or ageing and maintenance costs). Renewable energy is faced by exactly the opposite paradigm. This is a young and growing energy industry already subject to grave investment errors like the biofuels boom and slump of 2005-2007. It has, or tends to have high or very high capacity costs, expressed on the same basis as energy from oil, gas, coal or uranium, like barrel day equivalent or year-round kW of capacity. Oil and gas is doomed to become a low performer in net energy or incremental capacity costs, but renewable energy starts as a low performer. The fourth scenario is therefore simple to summarize: there is an increase in the real cost of energy. This is a complete change with the past, when energy price rises were temporary. Higher energy prices can only result in a forced, but automatic adjustment of the global economy as a direct result. THE LONG REVOLUTION We can be certain no political leader seeking re-election, or unelected leader wanting to stay in power will admit to this outlook, because who will say economic growth is likely an endangered species? In the short term, as noted above, higher energy costs could trigger another ‘Petro Keynesian Growth’ interlude, but this will in no way be sustainable, exactly like its most recent manifestation. If there is a ‘petro growth’ interval, it could this time trigger really impressive inflation, perhaps quite rapidly followed by intense deflation. The net result is however always the same: growth contracts. This is in fact a 250-year process or cycle, and we could take a long cyclic approach to the question, suggesting that we are in the presence of a massive and historic change in economic structures, mediated or driven by changing man-environment relationships. This harks back to then-original ideas of energy, economics and entropy advanced by economists or writers such as Georgescu Roegen in the 1970s following the first Oil Shock (See eg.). The bottom line was simple: whoever controls oil supplies controls the economy, a less than revolutionary conclusion. At the time, in the 1970s, it was easier to ignore the time dimension of the entropy paradigm. Very fundamentally, time enters into the equation. For economics, there is no ‘unique referential frame’, bringing us into an area of considerable dispute in science circles (for CMB or ‘conventional Big Bang theory’ See eg.). For the global economy a simple way to summarize entropy limits on what is possible is that maintaining growth gets more difficult each time the economy’s energy intensity rises, and total energy demand increases. Reaching fundamental limits including geological limits of mineral resource supply, and ecosystem and biodiversity limits on bioresource supply, means that ‘revolutionary change’ is not so much possible as inevitable. For the global economy the coming change of energy structures and systems will surely be revolutionary – but as in previous system change periods it could appear long, and start by disappointing.
contact information Andrew McKillop | Author & Consultant | Email |
