This long piece Edward Chancellor reframes the clean energy debate in a new, and unfortunately more worrying, way. Chancellor begins with what is now familiar territory for the most of us: “Over the past 250 years, the abundant use of coal, and later oil and natural gas, has spurred industrialisation, lifted living standards, and increased the size of the global population….Even if climate change wasn’t a pressing concern, the world would still need to adjust to running out of cheap oil and gas. The transition to alternative energy may be inevitable, but it’s bound to be disruptive. One thing is certain: transition risk is not being properly priced in the markets.
The use of fossil fuels to generate power is constrained by certain laws of physics. As the late Kenneth Boulding pointed out in his 1973 essay “The Economics of Energy”, the second law of thermodynamics states that energy becomes increasingly less available as it is used. The law of conservation of energy states that it can neither be created nor destroyed. Thus, in a closed system such as Earth, the supply of energy from fossil fuels must be gradually exhausted. There’s only a limited amount of what Boulding called “bottled sunshine” to draw upon.”
Then Chancellor amps up the concern levels by giving us some worrisome maths: “A recent study by French government scientists warns that global oil production could collapse in just 13 years. Louis Delannoy and colleagues point out that as oil becomes less readily available, more energy must be used to extract it. Prior to the 1970s oil crisis, it took the energy equivalent of two barrels of oil to extract 100 barrels. That figure has now risen to more than 15 barrels and will climb to 25 by 2024, according to Delannoy. In other words, a quarter of the world’s oil supply will be spent on production. This process of “energy cannibalism” means less energy is left over for other purposes. Given the world’s continued dependence on oil, the global economy faces a potential “carbon crunch”.”
Now you might be thinking that we’ll beat the carbon crunch by switching to green energy. Chancellor explains why that is not going to easy: “Even if it were possible to generate enough alternative energy, a stupendous supply of raw materials would be required to transition to a low-carbon economy. The Manhattan Institute calculates that a single electric vehicle battery requires around half a million pounds of raw materials – including lithium, cobalt, nickel, graphite and copper ores read more . There are currently more than 1 billion cars on the road, of which only a tiny fraction run on electricity. To power the world’s car fleet with electric batteries would consume nearly half the world’s proven nickel and lithium reserves, according to recent calculations from the Geological Survey of Finland. What’s more, those batteries would have to be replaced every few years.
The Finnish geologists conclude that expectations for replacing existing hydrocarbon-fuelled industrial and transport systems are unrealistic. “The current system was built with the support of the highest calorifically dense source of energy the world has ever known (oil), in cheap abundant quantities, with easily available credit, and seemingly unlimited mineral resources. The replacement needs to be done at a time when there is comparatively very expensive energy, a fragile finance system saturated in debt, not enough minerals, and an unprecedented world population, embedded in a deteriorating natural environment. Most challenging of all, this has to be done within a few decades.””
So what does all of this mean for investors? “Joseph Schumpeter believed that depressions are caused by the advent of new technologies that disturb existing lines of profitability. The transition to green technology is more ambitious and more disruptive than anything attempted in the history of capitalism. As the economy transitions away from fossil fuels, the financial markets are bound to become extraordinarily volatile….
To kick the addiction to fossil fuels, as mankind must, and at the same time maintain high standards of living, new technologies are desperately needed – less resource-intensive batteries with greater storage capacity and more efficient low-emission energy sources. But the next generation of small-scale nuclear plants won’t be up and running for years. And despite recent advances, nuclear fusion won’t be ready for at least a decade. In the meantime, investors should prepare for a rough ride.”
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