Our unpredictable, bright energy future

April 7, 2011 | 00:00

Our unpredictable, bright energy future

No forecast, scenario or "roadmap" is ever going to give a correct prediction of our energy future. If we want to know what is in store for us, argues Karel Beckman, we should keep in mind that our supply of energy does not primarily depend on the availability of "natural resources", but on the knowledge and capital that we have at our disposal. 'We will never run out of natural resources or energy.'

'A time of unprecedented uncertainty for the global energy industry'. That's how Fatih Birol, Chief Economist of the International Energy Agency (IEA), summed up his vision of the energy market in an interview with EER in September last year. And this was before the Arab Spring. Before Fukushima. When oil was at $80 a barrel instead of $120. So how uncertain should we be now?

Uncertainty about the future is, of course, part of the human condition. One way human beings try to cope with this is by trying to predict the future. The modern, scientific way of doing this is through extrapolations, scenarios, roadmaps or models. All these methods suffer from the same fundamental flaw, namely that the future is inherently unpredictable.

Simple extrapolation of current statistical trends, e.g. energy production and consumption figures, has only limited value, since trends have a habit of abruptly turning around or being interrupted. A more sophisticated alternative is to work with "scenarios", as for instance Shell does. This has the advantage that you allow yourself to think about different versions of the future, for example one with and one without nuclear power. Still, no scenario can foresee the many possible actions and decisions human beings may take - the inventions they may stumble upon, the discoveries they might make, the stupidities they may carry out, the wars they might decide to fight. Nor is it possible to foresee the surprises nature may have in store for us. To give an obvious example, how useful are energy scenarios that did not take into account the current developments in unconventional gas?

A recent popular variation of the scenario (particularly in Brussels) is "the roadmap". Indeed, I have never seen so many "roadmaps" come by as in the last year or so. Roadmaps are usually a mixture of extrapolations of current trends and "policy options". By choosing among the policy options, policymakers can presumably determine whether society will end at some particular point on the imaginary energy road of the future. However, introducing "policy options" does little to improve our knowledge of the future. It may even have the effect of putting us on "unsustainable" roads that ignore new realities that arose after the maps were drawn up. (Incidentally, one may wonder what the credibility is of a scenario that looks to a point in the distant future - usually it's 2050 - when none of us will be around anymore in any policy-relevant sense.)

Economic models tend to be less ambitious than scenarios or roadmaps, but no less flawed. For example, I came across a paper the other day by some economists who had calculated the potential

I have never seen so many "roadmaps" come by as in the last year or so
effects of a gas supply disruption from North Africa on Southern Europe, based on current supply and demand models. They concluded that a disruption of North African gas supplies in the winter would lead to serious supply shortages in Italy after less than 90 days. I don't doubt this is true, but such a model obviously does not include all the actions the various affected parties might take in the face of a potential gas shortage. Nor does it include the many other circumstances that might occur that could have an effect on the gas supply situation in Southern Europe. Its results are therefore only of limited use.

Natural capital

To make sense of what our energy future might hold, what we need in addition to forecasts based on statistics is an analytical model of the basic factors that determine the availability, production and consumption of energy. This also means we have to take stock of the basic philosophical premises that underlie our conception of reality.

Such an analytical approach should cover at least three major areas that determine how we produce and use energy: physics (resource availability), economics and politics.

Let's first take a look at physics. There are essentially two ways you can look at the availability of resources. Many people view resources as finite in nature. They believe we have a fixed, limited stock of "fuels" and commodities, and since population is growing rapidly and we are using more and more resources, they fear that we are rapidly "depleting" them. I encountered an example of this way of thinking in a UPI news story of 1 December last year that was entitled "EU over-consumes resources". The story was about a report (the Environment State and Outlook Report 2010) produced by the European Environment Agency (EEA), which concluded that 'Continuing depletion of Europe's stocks of natural capital and flows of ecosystem services will ultimately undermine Europe's economy and erode social cohesion'. It added that 'EEA Executive Director Jacqueline McGlade was quoted by the BBC as saying Europe as well as the rest of the planet is consuming 'more natural resources than is ecologically stable'.

Obviously the assumption here is that there are fixed "stocks of natural capital" and that by using those, we are progressively becoming poorer until one day our resources are gone and we will have no "natural capital" left. The only way to delay the final reckoning in this view is by being more energy efficient and to use "renewable" energies, which do not get depleted.

As reasonable as this sounds, I think this "environmentalist" world view is fundamentally mistaken. In reality, natural resources are, for all practical purposes, infinite. As economist George Reisman points out in a recent article (A Primer on Natural Resources and the Environment),  the earth is 260 billion

The idea that somehow our "natural capital" is running down when we use resources flies in the face of human history
cubic miles of solidly packed chemical elements, of which we have used less than 25 cubic miles. In addition, there are the forces within and surrounding the earth that produce energy, there is the possibility of recycling, and, most important of all, there is human ingenuity, which enables us to invent an infinite number of new applications of existing resources. For example, who could have predicted that human beings could make computer chips and solar panels out of silicon, one of the most common elements that exist in nature?

In fact, the idea that somehow our "natural capital" is running down when we use resources flies in the face of human history. If we think of capital as resources that can be used for productive purposes, then for most of history human beings had virtually no "natural capital" at their disposal - even though they had used virtually no "resources" at all! As Reisman notes, before the Iron Age there existed huge amounts of iron - and oil for that matter - but this iron was not part of our "capital" because we had no use for it. Thus, as our knowledge and production have grown in recent centuries, our stock of natural capital has become ever larger, not smaller. For example, we have recently added unconventional gas to our natural capital, a fact that I suspect the European Environment Agency has not taken on board yet.

Peak oil

This is not to deny that we can run into temporary problems with regard to specific resources. Although we will never run out of resources or energy, we may be faced with shortages of certain minerals or metals that we make use of. We may even "run out of oil" some day (more likely: specific types of oil, because we have probably barely scratched the surface of "unconventional oil"). Here is where we enter into the realm of economics.

If people are free to make economic choices, then the way in which they will use natural resources and energy will primarily depend on the human resources (knowledge and labour) and capital available to them. They will, for example, produce oil if they have a profitable use for it, if they know where to find it, and if they have enough capital available to allow them to invest in oil exploration and production. If they run out of oil at a particular time in a particular place, they will - again, depending on their knowledge and capital - adapt themselves and look for oil elsewhere or in a different way, or they will try to find some other source of energy that is cheaper or more easily available.

How useful are energy scenarios that did not take into account the current developments in unconventional gas? (photo: Epsilon Energy Ltd.)
Thus, the issue of "peak oil" is a purely economic issue. It is not a question of "the world running out of oil", but of people making economic choices based on the mix of knowledge, capital and natural resources available to them, about what kind of energy to produce. Take this rather interesting piece of news reported by news agency UPI recently. Saudi Arabia, UPI reported, 'is increasingly focusing on nuclear and solar energy', because 'within two decades' it would have to use most of its oil production for domestic purposes if consumption keeps rising the way it is now. The story quoted Hashim Yamani, president of the King Abdallah City for Atomic and Renewable Energy (!), as saying that Saudi Arabia, if it took no action, would need 8 million barrels of oil per day by 2028 just to meet domestic needs. This of course is almost equal to its current production level.

The point of this story is not only that it shows that the Saudis make certain economic choices in the face of the resources, knowledge and capital they have at their disposal, but also that these choices are fundamentally unpredictable. They cannot be foreseen in any scenario. The only thing that can be foreseen is that people will make such choices when they need to decide how to produce and use the resources that are available to them.

A brief note about capital. The availability of capital is probably the most important factor determining people's standard of living. The more capital people are able to use, the higher their productivity. But capital is not the same as money - especially not in our modern world where money is artificially created out of thin air by central banks. As the "Austrian" school of economics teaches us (the only school that predicted the credit crisis on the basis of its analytical insights into the nature of economic cycles), capital can be created only by deferring consumption, in other words, by saving. Only if people defer consumption, do they free up resources that they can invest in new productive activities. Printing money does not create resources - if it did, we would never have any economic problems anymore. We could overcome scarcity simply by printing money.

What printing artificial money does is create inflation. The greatest money printing machine in the world today is the US Federal Reserve Bank. Ironically, the Fed's policy of what is euphemistically called "quantitative easing" (which makes life easier on banks, the US government and other big borrowers

Saudi Arabia, if it took no action, would need 8 million barrels of oil per day by 2028 just to meet domestic needs
and harder on the rest of the world's population), is having major and largely unforeseen effects on the world's energy situation. Because the dollars created by the Fed find their way to countries all over the world, they are a major factor in driving up global energy and food prices. This in turn is a major factor in the unrest and political instability raging through the Arab world and elsewhere, which may have far-reaching effects on our energy supplies.

Self-fulfilling prophecies

With the monetary policies of the Fed, we have entered the realm of politics. Political decisions are fundamentally different from economic decisions. Unlike economic decisions, political decisions are by definition backed by physical force. They are made by some people (governments) to force others (their subjects) to act in certain ways. Taxes, subsidies, market regulations, safety rules, and environmental legislation are all examples of political decisions. Wars are another example, including "resource wars". Obviously such decisions can have a large impact on our future energy world.

Like economic decisions, political decisions are fundamentally unpredictable, as they are a function of human volition. Rulers may decide to tax fossil fuels or prohibit nuclear power or take a host of other measures that affect the way we produce and consume energy. In a sense this is where many "roadmaps" are on somewhat safe ground. After all, if they can convince politicians to take certain actions, they become to that extent self-fulfilling prophecies. On the other hand, political decisions that interfere in the voluntary, economic relations of people often have unintended consequences. Price ceilings tend to lead to shortages. Subsidies tend to lead to oversupply. Taxes reduce the availability of capital. Central planning creates all sorts of inefficiencies.

The biggest uncertainty at this moment in the sphere of politics is undoubtedly the area of climate change policy. Political actions taken to "limit climate change" will have profound effects on our energy future.

The future of nuclear power is also highly dependent on political decisions, in particular with regard to requirements for operational safety and the storage of radioactive waste. The issue of nuclear proliferation should not be underestimated either. Many countries are currently preparing to venture into

What will happen to countries' nuclear installations when their governments are overthrown?
nuclear power production for the first time, including for example Saudi Arabia, the United Arab Emirates and Turkey (in addition to the well-known example of Iran). We are discovering, however, that many countries are less politically stable than we once had imagined. So the question is (and I think this question will be getting a lot more attention in the near future) what will happen to countries' nuclear installations when their governments are overthrown? This risk does not just apply to the Islamic world of course. Even the United States may be less politically stable than we think. What does that imply for our energy scenarios?

Resource wars

My conclusion is that if we want to get some sense of what our energy future will look like, we have to remember that a) natural resources are for all practical purposes infinite, b) people when they are left free will make economic decisions that are unpredictable but tend to increase wealth, and c) political decisions interfere with those voluntary economic activities, for better or worse.

This means, for example, that there is no reason to expect "resource wars" - unless governments follow policies that hamper the production and exchange of energy, in which case resource wars become likely.

It also means that uncertainty is not a problem as such, as long as people are left free to act to cope with this uncertainty. Then any kind of energy problem can and will be solved. I hope this thought is helpful to you somehow.


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