November 11, 2008

Five Difficult Pieces

The five most difficult pieces of the energy puzzle are climate change, peak oil, nuclear proliferation, financial dysfunction, and grand strategy. We want to acquire an understanding of each of these in its own right, but also to be looking toward the ways they fit together.

My approach emphasizes the trade-offs and extremely difficult choices that await us in grappling with the energy problem, while seeking to find a provisional road map for sensible public policy.

Perhaps the most frightening problem is the climate change induced by global warming. That humankind faces a great threat and a great challenge in this regard is the conviction of the large majority of scientists who have studied the matter; those of us who are not experts need to take their warnings seriously and attempt to understand the contours of this problem. Any solution to the energy predicament that blithely ignores the potential impact on climate change is just hidebound. Realism on this score, as best as we can muster it, is a solemn duty.

The second piece of the puzzle is the possibility that oil production will peak in the not too distant future, beginning a decline that will forever alter our hydrocarbon-based societies. Some experts believe that "peak oil" is here now; we will try to assemble the most important pieces of evidence on either side of the debate. If the peak oil theorists are right, then revolutionary changes are in store over the next decades. An initial conclusion might be that diminishing supplies of oil (we'll never "run out" entirely) would definitely diminish the dangers from global warming, but it is also quite possible that “subprime” carbon fuels like coal or tar sands would supply the oil deficit, in which case the warming problem would be exacerbated.

The third conundrum concerns nuclear power. To those chilled by the prospect of global warming, nuclear power is a godsend. Any energy source that emits no greenhouse gases is like some sort of manna from heaven. On the other hand, more civilian nuclear power, here and abroad, might lead to the widespread proliferation of nuclear-armed states. And there are other serious drawbacks: both the construction and cleanup of nuclear plants are carbon-intensive; the operation of reactors requires huge volumes of water. A key nexus for considering the nuclear conundrum lies with the Nuclear Non-Proliferation Treaty of 1968 and its application to Iran's nuclear program--the subject of reiterated threats of force by the United States and Israel. No other nuclear thicket--not North Korea's, or India's, or even Pakistan's--raises a more immediate danger of war than the Iranian program and the bellicose response it has evoked in the United States.

The fourth problem is the relationship between energy and the financial markets, in late 2008 in a state of serious disorder. The capital markets are in the business of allocating capital, but they do not necessarily do so in a fashion that contributes to vital public goods. Complicating this question is the long time frame needed to bring energy projects to fruition; another is the role that commodity speculation has played in the energy markets, of which the experience of 2008—in which oil rose rapidly to $145 in the summer, then crashed—was a dramatic reminder. So we want to know whether the capital markets are functioning, as it were, in optimal fashion. Are they regulated wisely? Is there a way of approaching them such that businesses can make a profit and the public can secure vital goods of its own?

The fifth nexus revolves around the significance for US foreign and defense policy of dependence on foreign oil, especially the oil of the Persian Gulf, where most of the world’s reserves are concentrated. Adverse consequences for the balance of payments, excessive dependence when oil prices are low, a huge transfer of wealth when prices are high, the role of US military forces in “ensuring access,” the prospect of "resource wars"—these are all very familiar aspects of the energy predicament as it has affected, and been affected by, US policy. A fundamental aspect of the rise in oil prices over the last three years was the shift in financial power that went along with it. Russia, Saudi Arabia, Venezuela and other “petro-powers” saw their coffers swell, whereas oil consumers saw their trade deficits expand. Oil politics, then, are part of "grand strategy." While we'll attempt to understand in general terms the influence of the energy complex on geopolitics and the shifting distribution of power among the nations, a key concern is to understand the lineaments of a prudent US policy toward these hazards. I take it as a given that military solutions to either energy dependency or nuclear proliferation are seriously misguided.

These five difficult pieces constitute the core of the energy predicament as I see it. I give an exploratory overview of these inter-relationships in the second chapter ("Defining the Problem"), followed by two chapters ("Capital Markets" and "Patterns of Dependence") laying out basic facts of the energy predicament.

In Capital Markets, I want to build up a picture of how energy figures in the equity markets. We'll look at the oil, coal, natural gas, wind, solar, and nuclear industries, show a few proxies for each one them, and then examine a range of ratio charts in which we look at their price movements in relationship to one another. Ultimately, the markets are asking a very simple question: who's going to make a profit, who's going to take a loss? At any given time, it very difficult to know for sure exactly what information the market is registering--on occasion it acts very erratically, as most people these days don't need to be reminded. At the same time, these price movements are of vital significance in determining what gets built and what gets put on the shelf. They determine, as it were, our future energy infrastructure. So anybody interested in the outcome--aren't we all?--should pay attention to them.

In the next chapter, Patterns of Dependence, I compile some visual evidence laying out various "dependencies" associated with the energy complex--how much oil the US imports, natural gas pipeline networks, sea lanes of communication--things of that sort. We'll also introduce here a key metric of energy production, the energy return on energy invested.

The subsequent five chapters treat the five difficult pieces noted above: Climate Change, Peak Oil, Nuclear Quandary, Financial Dysfunction, and Grand Strategy.

That's the general prospectus. The idea behind this first iteration is not to present a completed work but to construct a good frame for further investigation, both for myself and others.

* * * * 

I've retained the above statement, written in 2008, to indicate to the reader "where I'm coming from," but since that time have made a few changes in overall plan and perspective.

First, I've added a section on food and water. When I started, I was seriously worried about "peak oil." Now, I've grown anxious about "peak water." It dawned on me that the food and water problem is intimately connected with the energy problem, and all of them reflect basic resource constraints. So now, officially, there are Six Difficult Pieces. Do I hear Seven?

I've also consolidated the "capital markets" and "financial dysfunction" sections, though I've only partially done the comparative review of the various energy sectors promised in the prospectus. I will do that one of these days. In "Peak Oil," I have brought together material on resource constraints more generally, while adding a separate section dealing with the oil market as such. I've also added chapters dealing with natural gas, coal, and wind and solar, plus a few other odds and ends.

I haven't done as much on nuclear proliferation and grand strategy as originally planned, but have not changed my views on the basic questions of U.S. policy, whether toward Afghanistan, Iran, or Iraq: I favor deescalation rather than escalation, steps toward withdrawal rather than ratcheting up our commitment, deterrence rather than preventive war. In 2008, I was seriously worried about the prospect of a preventive war waged by Israeli or the United States or both against Iran, a step for which there seemed a lot of momentum. Both Israel and Cheney wanted it; only Bush's veto of the idea prevented it from happening (an attitude from W. that I did not expect and for which I am genuinely grateful).

I remain keen on taxes on energy consumption, a vital step to limit dependence, check harm to the environment, and raise needed revenue (while allowing the U.S. government rather than foreign oil producers to capture more of the the "rent" from this resource). I've been convinced of the need for such taxes for over 30 years, soon to be 40, and at this point am immune to all counter-arguments. We ought to have had large taxes on gasoline consumption since the oil crisis first reared its head in the 1970s, as Europe and Japan have done. That this question remains unthinkable in American politics is a sad commentary on our "democratic distemper" and our "incoherent empire."As it is, America's transportation infrastructure, built on the basis of cheap oil, makes the country extremely vulnerable in the event of an era of expensive oil. 

On some other rather big questions, however, my convictions are unstable. I keep changing my mind, or rather can't make up my mind. The "climate skeptics," I believe, are not without some decent arguments. "Peak oil" might not seriously kick in for some time. While still being basically persuaded of the "climate change" and "peak oil" cases, I admit to various doubts, and know enough to know that I can't really resolve them to my satisfaction but must instead simply weigh the probabilities.

Paul Roberts' book on The End of Oil had a big effect on me when I first read it in 2005 or so; he looked on gas as the great and necessary "bridge fuel" to the future. Since that time, natural gas has boomed and busted. If you believe the gas companies, who say their reserves have doubled and are good for another 100 years, the attractiveness of natural gas has been greatly enhanced in the last few years. There are, however, unanswered questions regarding the long term status of reserves, the safety of "fracking" to water supplies, and the contribution of the entire natural gas production cycle to "greenhouse gas" emissions.

Wind power, which seemed to me an unambiguously good thing in 2008, looks much more dubious to me now. My expectations for solar power, primarily due to the hits it has taken in the capital markets, are also considerably diminished. I go back and forth on the possibilities, opportunities, and dangers of nuclear power.

In 2008, I took the danger of global warming as the overriding “environmental” problem raised by energy usage, but I am much more impressed today by the sheer diversity of environmental threats—the effect of removing mountaintops for coal on water supplies, for instance; or the susceptibility of the energy infrastructure to “accidents,” of which we’ve had an abundance the past few years.

I see more clearly now the adverse environmental consequences associated with all forms of energy production; I am also much more aware of the profound tension in environmentalism between climate change and more immediate threats to the physical environment. Which is the more important God to serve? That question did not really present itself to me in 2008.

The tensions within environmentalism are especially notable in the current debate over wind and solar power. Though there is something to be said for both forms of energy, they are not environmentally benign. Wind may have fiendish effects on our feathered friends and itself depends critically on rare earth minerals; solar may imperil wilderness and landscape. China, in any case, has developed something of a lock on both industries.

I was hostile to corn ethanol when I began in 2008, but don’t think I quite saw the sheer lunacy of depleting precious aquifers to grow corn for ethanol, as was official U.S. policy then and remains so now.

I like to think that an inability to make up one’s mind, or a willingness to change it, is a product of honest skepticism rather than intellectual flaccidity. But perhaps not! Despite these shifts in perspective, my basic and consistent purpose has not been to propagate a dogma but to gather evidence and to pose a set of questions.


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