Don't count on "alternative fuels" to save the world? (Dark bet on a pessimistic, high tech future)

Here we have an unusually perceptive piece from a specialist in chaos theory who helps us make sense of the "alternative fuels" proposals and claims. It is good to have his hardheaded expert view on the potential of alternative fuels in our future transportation arrangements. But it is important too that we reflect on his dark bet on a pessimistic, high-technology future: in which he sees us as stumbling from crisis to crisis, in response to which we manage each time to come up with last-minute ad hoc "solutions" which leave us as still basically operational, but not all that much more. That I am afraid is the bleak face of the future, unless we are able to find the vision and leadership to do otherwise.

The Methadone Economy

- Tom Konrad, 27 April 2010.

Peak Oil Investments I'm Putting My Money On:
If the measure of success for alternative fuels is the ability to continue to live in suburbs and commute in multi-ton boxes of metal on congested freeways for hours each day, then alternative fuels will fail. No alternative fuel has the existing infrastructure, supply potential, energy density, and low environmental impact that we would need to replace oil without changing our unsustainable lifestyle.

Peak oil may mean the end of bigger and bigger cars driven farther and farther on more and more congested roads. Peak oil may mean the end of suburban life as we know it. Yet life as we don't know it does need not be a vision out of Mad Max. Peak oil will mean changes, some for the better, some for the worse.

The surest change peak oil will bring is less driving, in fewer vehicles that are filled closer to capacity. Those vehicles will use less oil (or alternative fuels) per person-mile. We'll also find ways to satisfy the desires and needs that we currently satisfy with travel without traveling.

Alternative Fuels

The first eight parts of this series looked into alternative fuels. I concluded that no alternative fuel listed could replace oil as we use it today fast enough to replace dwindling oil supplies. Conventional biofuels cannot be produced in enough quantity, and making hydrogen is an inefficient use of electricity or natural gas. Electric vehicles are too expensive or have too little range. There is not enough natural gas and there is too little fueling infrastructure to make natural gas vehicles practical on a large scale. Gas-to-liquids makes sense for stranded natural gas, but there are too many other high value uses for natural gas to make a large dent in declining oil supplies. Coal to liquids does too much environmental harm, and algae needs too much more technological development to achieve its promise in time.

The biggest problem with alternative fueled vehicles, however, is not the alternative fuels, the problem is the vehicles and how we use them.

Oil was a one-time bonanza of a readily available, easily transportable, durable, energy-dense liquid. With oil, humanity won a natural resources lottery ticket. Like a lottery winner who blows cash that could have lasted a lifetime in a few months, we now need to realize that we've spent most of our winnings. It's unreasonable to expect that we're going to win another such jackpot before we have to start watching our fuel budget again. The main question is how soon and how deliberately we will make the necessary adjustment. Will we act like the lottery winner who uses his last hundred thousand to tide him over while he looks for a job? Will we keep partying to the bitter end, until one day we wake up, hung over in the gutter? Will it be something in between?

The Methadone Economy

Switching to a drug analogy, most alternative fuels are the methadone to treat our petroleum / heroin addiction. Methadone is given to heroin addicts in treatment because it mitigates withdrawal symptoms and can block the euphoric effects of heroin, morphine, and similar drugs, reducing the urge to use.

Alternative fuels can be sufficient to allow our society to function, but we're not going to feel the highs we felt when the oil was flowing freely. Alternative fuels cannot take us back to a "normal" pre-peak oil state because our use of petroleum over the last few decades as been far from "normal:" it has been one long, fossil-fueled high. We will eventually kick the petroleum habit with the help of alternative fuels not because alternative fuels are better than petroleum and can bring us something that petroleum cannot, but because our supplier will be getting smaller shipments over time, while the number of fellow junkies knocking on his door will keep going up with big increases in petroleum demand from emerging economies.

There are several competing visions of a future powered by alternative fuels, ranging from wildly optimistic to gloom-and-doom, with variations depending on how effectively the prognosticator thinks we can replace fossil fuels with alternatives.

A high-technology optimistic vision includes smoothly running efficient pods in mass transit systems powered by renewable energy. High speed bullet trains network the land, making overland air travel unnecessary. The low-technology optimistic vision involves a peaceful return to local economies where food is grown locally, and increasing local interdependence fosters strong local community ties, and people grow happier as they become more connected to the land and each other. The low-technology pessimistic vision is a free-for-all scramble for dwindling resources like the vision out of Mad Max referenced above.

I'm long on optimism about technology, but short on optimism about our will to make the necessary sacrifices to implement that technology quickly or efficiently. I'm betting on a pessimistic, high-technology future. In this future, we manage to cobble together a hodge-podge of last-minute, jerry-rigged solutions to keep the economy functioning at a basic level, but not at all smoothly or evenly. In it, we lurch from a crisis caused by financial melt-down, to a crisis caused by peak-oil to one caused by climate change. We'll tackle each crisis with incredible ingenuity, staving off total chaos, but at the cost of mis-allocated resources and a deteriorating standard of living. We hold out in the belief that after just this one more fix, the world will be back to normal and we can stop worrying. But that day will never come.

Forward thinking planners in some municipalities and communities will work on implementing true, long-term solutions. But they will not have enough money or resources to do more than ameliorate the next crisis. The large-scale, system wide solutions of better mass transit, algae biofuels, and continent-wide electricity transmission of the high-technology optimistic vision will be implemented too slowly, on too small a scale to achieve the economic stability the techno-optimists hope for. But these half-built systems will still bring considerable benefit, and keep the succession of crises from being the complete disaster that would come with a complete lack of planning.

This is the Methadone Economy. Alternative-fuel oil replacement therapy is necessary because oil supply will not keep pace with demand; we must replace oil or do without. But alternative fuels are not oil, and will require more effort devoted to energy production to produce the same effect. The Methadone economy will function, but it won't give us the highs we got from the cheap, concentrated, easily accessible energy of oil.

A future characterized by thoughtful, long-range planning seems unlikely to arise from the same political class and voting public that has not meaningfully prepared for anything but good times in decades. The first IPCC report was released in 1990, and it made clear that human activities were substantially increasing levels of greenhouse gasses which would warm the planet. Two decades later, greenhouse gas emissions are still rising. We had the first warnings about peak oil in the 1970s oil crises, but only now are we starting to put serious political and economic capital into searching for solutions. When the pre-2008 global debt bubble was on, NINJA (No Income No Job no Assets) loans were welcomed by politicians praising financial innovation and its ability to bring home ownership to people who could not previously afford it.

The Methadone Economy may sound gloomy, but I see it as the most optimistic vision possible given the political reality we see around us. More pessimistic visions abound, but if you expect them, you're probably better off investing in guns and physical gold than you are investing in the stock market.

Conclusion

I see three major investment themes in the Methadone Economy.

First, there is the knowledge that long-term solutions will be implemented, although not completely and at insufficient scale. Investors in contractors who specialize in mass transit and high-speed rail should do well, as should the longer-term alternative fuel solutions discussed in earlier articles of this series. Vehicle efficiency improvements will find rapidly growing markets as fuel becomes more expensive.

Second, band-aid solutions will thrive. Bike lanes, electric scooters, buses, and any other transportation solution which can be implemented with only small changes to existing infrastructure. Road pricing schemes and the software technology to help people coordinate ride sharing. The clever use of a few resources will always win over grand schemes when there are few resources to spare.

Finally, the Methadone Economy is an economy where we cannot expect long term growth. More likely, we will see periods of anemic (and occasionally robust) growth punctuated by periodic crisis-driven declines. This will be mirrored in the stock market, and so investors in the above two solutions should do well to hedge their overall exposure to the market.

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About the author:
Tom Konrad, PhD., CFA is a regulatory consultant and financial analyst specializing in renewable energy and energy efficiency. In his consulting role, he testifies on behalf of clients before public utilities commissions and state legislatures to promote clean energy. In addition to AltEnergyStocks.com, he writes about clean energy and economics as a freelancer. He has a Ph.D. in mathematics from Purdue University, where he wrote his thesis on Complex Dynamics, a branch of chaos theory. His study of chaos theory led to his conviction that knowing the limits of our ability to predict is much more important than predictions themselves.

This article originally appeared http://seekingalpha.com/ on 27 April 2010 and can be seen here. Kind thanks for the author for permission to reprint in these pages.

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Saudis terrified we might actually reduce oil dependence (World Streets launches campaign for compassionate aid)

Thanks to environmental writer and columnist Jay Bookman for this heads-up, and right behind him the New York Times, World Streets now has a new thing that keeps us up at night. Any reduction on our part of oil consumption, say through some of the projects and measures being pushed by World Streets and others, is (do we have this right?) a form of theft. Fair is fair we would say, so let's get together and work this one out. Get out your checkbooks. Compassionate capitalism.


From the New York Times of 14 October:

Saudis Seek Payments for Any Drop in Oil Revenues

- by Jad Mouawad and Andrew C. Revkin

Saudi Arabia is trying to enlist other oil-producing countries to support a provocative idea: if wealthy countries reduce their oil consumption to combat global warming, they should pay compensation to oil producers.

The oil-rich kingdom has pushed this position for years in earlier climate-treaty negotiations. While it has not succeeded, its efforts have sometimes delayed or disrupted discussions. The kingdom is once again gearing up to take a hard line on the issue at international negotiations scheduled for Copenhagen in December.

The chief Saudi negotiator, Mohammad al-Sabban, described the position as a “make or break” provision for the Saudis, as nations stake out their stance before the global climate summit scheduled for the end of the year.

“Assisting us as oil-exporting countries in achieving economic diversification is very crucial for us through foreign direct investments, technology transfer, insurance and funding,” Mr. Sabban said in an e-mail message.

This Saudi position has emerged periodically as a source of dispute since the earliest global climate talks, in Rio de Janeiro in 1992. It is surfacing again as Saudi Arabia tries to build a coalition of producers to extract concessions in Copenhagen.

Petroleum exporters have long used delaying tactics during climate talks. They view any attempt to reduce carbon dioxide emissions by developed countries as a menace to their economies.

The original treaty meant to combat global warming, the 1992 United Nations Framework Convention on Climate Change, contains provisions that in Saudi Arabia’s view require such compensation.

Mr. Sabban outlined his stance at climate talks in Bangkok this month.
Environmental advocates denounced the idea, saying the Saudi stance hampered progress to assist poor nations that are already suffering from the effect of climate change, and that genuinely need financial assistance.

“It is like the tobacco industry asking for compensation for lost revenues as a part of a settlement to address the health risks of smoking,” said Jake Schmidt, the international climate policy director at the Natural Resources Defense Council. “The worst of this racket is that they have held up progress on supporting adaptation funding for the most vulnerable for years because of this demand.”

Saudi Arabia is highly dependent on oil exports, which account for most of the government’s budget. Last year, when prices peaked, the kingdom’s oil revenue swelled by 37 percent, to $281 billion, according to Jadwa Investment, a Saudi bank. That was more than four times the 2002 level. At one point in 2008, the average gasoline price in the United States surpassed $4 a gallon.

Saudi exports are expected to drop to $115 billion this year, after oil prices fell. American gasoline prices are hovering around $2.50 a gallon.

The one-year swing in the kingdom’s revenues shows that oil prices are likely to be a bigger factor in Saudi Arabia’s future that any restrictions on greenhouse gases, said David G. Victor, an energy expert at the University of California, San Diego.

Mr. Victor dismissed the Saudi stance as a stunt, saying that the real threat for petroleum exporters came from improvements in fuel economy and rising mandates for alternative fuels in the transportation sector, both of which would reduce the need for petroleum products. “Oil exporters have always, in my view, far overblown the near-term effects of carbon limits on demand for their products,” Mr. Victor said. “For the Saudis this may be a deal-breaker, but the Saudis are not essential players. In some sense, one sign that a climate agreement is effective is that big hydrocarbon exporters hate it.”

A recent study by the International Energy Agency, which advises industrialized nations, found that the cumulative revenue of the Organization of the Petroleum Exporting Countries would drop by 16 percent from 2008 to 2030 if the world agreed to slash emissions, as opposed to the projection if there were no treaty.

But with oil projected to average $100 a barrel, the energy agency estimated that OPEC members would still earn $23 trillion over that period.

Mr. Sabban, however, cited an older study by Charles River, a consulting firm, which found that the losses in revenue for Saudi Arabia alone would be $19 billion a year starting in 2012.

The Copenhagen talks were a major point on the agenda of the last OPEC conference.

But not every oil-exporting country is falling in line with the Saudi position. Some have been trying a different approach that has earned the backing of environmental groups. For example, Ecuador, OPEC’s newest member, said last year that it was willing to freeze oil exploration in the Amazon forest if it got some financial rewards for doing so.

The Saudi negotiator said that the compensation mechanism was an integral part of the global climate regime that has been in place since the 1990s and that was not up for renegotiation.

“It is a very serious trend that we need to follow and influence if we want to minimize its adverse impacts on our economies and our people,” Mr. Sabban said in an e-mail message to other OPEC officials. “That does not mean we would like to obstruct any progress or that we do not want to join any international agreement. We will do that if the deal is fair and equitable and does not transfer the burden to us.”

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Thanks to Jay Bookman for his good heads-up on this important news. He maintains a very interesting blog specializing in foreign relations and environmental and technology-related issues. which you can check out at http://blogs.ajc.com/jay-bookman-blog\

And here you have our editor, overcome with emotion as he tries to figure out how World Streets is ever going to find the wherewithall to compensate for our actions leading to all those big number reductions in oil imports. (He really should have thought of that first.)

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