In my previous wire (How we’ve prepared for the next bust, 28 November), I noted that recessions can have salutary effects: they usually damage and sometimes destroy the “conventional wisdom” which inflates the boom and bull market – and later collapses into bust and bear market. I demonstrated that “what everybody knows” at the height of a boom simply isn’t so. Moreover, I identified the striking parallels between the Dot Com Bubble and today’s “climate investment euphoria.”
The bubble rested and the euphoria now sits upon unsound – I’m tempted to say “unsustainable”! – foundations. That’s why Leithner & Company is again doing what it did more than 20 years ago: steering well clear. “You can’t buy what’s popular and do well,” Warren Buffett sagely advised more than 40 years ago. Sometimes, however, you can do well by buying what’s unpopular.
Accordingly, we’re not merely avoiding what’s in vogue: we’re also considering what’s unfashionable – and in “smart” quarters unthinkable. If “what everybody knows” at the boom often becomes “why on earth did we act so stupidly?” at the bust, then what everybody strenuously denied at the top they tend repentantly to accept at the bottom. This article elaborates this crucial idea.
Specifically, in this and my next wire, I demonstrate that the crux of what’s commonly asserted about hydrocarbons (which most investment “experts” unthinkingly parrot) isn’t merely factually wrong: it’s morally reprehensible.
In rich countries, fossil fuels are indispensable to civilisation – and, on the grounds I’ll detail, this crucial fact is unlikely to change for decades to come. In poor countries, hydrocarbons have been, are and will remain essential means to develop the economy and thereby eradicate poverty. Their rapid extinction, as glibly proposed by “experts” and the gullible journalists and venal politicians who parrot them, would, in the highly unlikely event that it occurred, create widespread penury in rich countries – and deepen and perpetuate destitution in poor ones.
Accordingly, and taking into dispassionate consideration advantages and benefits as well as costs and disadvantages, any conventional investment portfolio shouldn’t merely include fossil fuels, their producers and consumers: they should underpin any portfolio that claims to be ethical.
My Ethical and Scientific Starting Points
In a court of law, the accused enjoys the presumption of innocence unless found guilty. Today, a baying mob unmindful of the rules of logic and evidence attacks fossil fuels – which deserve the same presumption. This stance will likely disconcert, bewilder and perhaps even anger the stampeding crowd. Yet it’s entirely consistent with the most recent assessment of the Intergovernmental Panel on Climate Change (IPCC).
The trouble isn’t just that few people, apparently, have read – never mind dispassionately considered – its findings; even more fundamentally, an influential minority grossly exaggerates and wilfully misrepresents them – and many politicians and mainstream media exaggerates this minority’s exaggerations. Holman Jenkins (“The Physicist Who Became a Climate Truth Teller,” The Wall Street Journal, 23 April 2021) described the consequence:
What the media and politicians and activists say about climate science has drifted so far out of touch with the actual reality as to be absurdly, demonstrably false. These falsehoods, moreover, are somehow indisputable. Yet any “science” that can’t be questioned isn’t science; it’s propaganda.
Steven Koonin is extremely well-placed to distinguish fact from fantasy. A theoretical physicist who holds a Ph.D. from MIT, for nearly 30 years he taught at Cal Tech. He quite literally wrote the book on computational physics, and from 2009 to 2011 was Under Secretary for Science, Department of Energy, in the administration of Barack Obama. In his superb book, Unsettled: What Climate Science Tells Us, What It Doesn’t, and Why It Matters (BenBella, 2021), Koonin demonstrates that much of what the public has been led to believe about climate and climate science simply ain’t so. He summarises his position thus:
The earth has warmed during the past century, partly because of natural phenomena and partly in response to growing human influences. These human influences (most importantly the accumulation of CO2 from burning fossil fuels) exert a physically small effect on the complex climate system.
Unfortunately, our limited observations and understanding are insufficient to usefully quantify either how the climate will respond to human influences or how it varies naturally. However, even as human influences have increased almost five-fold since 1950 and the globe has warmed modestly, most severe weather phenomena remain within past variability. Projections of future climate and weather events rely on models demonstrably unfit for (this) purpose.
The uncertainties in modelling of both climate change and the consequences of future greenhouse gas emissions make it impossible today to provide reliable, quantitative statements about relative risks and consequences and benefits of rising greenhouse gases to the Earth system as a whole, let alone to specific regions of the planet.
Overwrought portrayals of a “climate crisis” serve the interests of diverse players, including environmental activists, the media, politicians, scientists and scientific institutions.
Key Basic Facts
Using data to 2008 compiled mostly by Angus Maddison, a British economist, supplemented by data since then from the World Bank, Figure 1 plots CPI-adjusted, per capita GDP (in $US) in Africa, Australia, China and the world as a whole since 1820. It quantifies a couple things that most Australians likely (albeit vaguely) know – and several they probably don’t. First, in recent decades, “real” per capita GDP in China has risen very rapidly. In 1980, it was just $1,900 – less than one-half the global average ($4,500) and little more than Africa’s ($1,500). By 2020, however, it soared to $12,300 – equivalent to the global average ($12,250) and more than five times Africa’s ($2,400).
Figure 1: Per Capita GDP, Australia and Elsewhere, CPI-Adjusted $US, 1820-2020
As a result, and secondly, China has ceased to be a low-income and has become a middle-income nation: over the past generation, hundreds of millions of its people have risen from abject poverty. Whether it can avoid the “middle-income trap” – and whether a middle-income nation can dominate (like high-income Britain did in the 19th century and the high-income U.S. in the 20th) – is a vital but separate question.
Thirdly, albeit from a low base compared to Australia, the world as a whole is becoming a better place – particularly for some the world’s poorest people. In 1950, global per capita income was $2,900, but in 2020 it exceeded $12,000. That’s a compound annual rate of growth of 2.1% per year over 70 years. Africa, however, has long lagged and today remains extremely poor.
Finally, Australia has long ranked among the world’s wealthiest and most liveable countries. Its GDP per capita in 2020 (more than $56,000) was four times China’s, six times the global average and an astounding 23 times Africa’s average. Significant numbers of Australians might dispute it (and in some instances they might be right), but on the whole Australians and Chinese has never had it so good.
Per capita GDP isn’t conceptually the same as per capita personal income. Empirically, however, they’re correlated: each measures the quantity of resources at the average person’s disposal. When they’re low, the typical individual can access only the barest and cheapest food, shelter, little or no education, medical care, etc., and thus has very few opportunities to escape poverty. Under these conditions, life expectancy is typically short. When the availability of resources is high, the typical individual possesses ample resources to meet basic needs and also to pursue opportunities that improve her means and realise her potential. Under these circumstances, life expectancy is usually long (Australia’s, particularly of its women, is one of the world’s longest).
Capital, Infrastructure, Machines and Energy
Why is Australia so wealthy? Why is Africa so poor, and why has China become much less impoverished so quickly? Australia has accumulated the capital goods – that is, the (1) infrastructure, (2) machines, (3) know-how to build and operate them and (4) energy to power them – that generate prosperity. Relatively clear and stable rights to private property have encouraged people to accumulate capital and the confidence to deploy it in very complex, large and long-term projects.
Africa, on the other hand, has plentiful natural resources and tremendous potential, but (not least because the rule of law there is tenuous) has amassed relatively little capital and infrastructure; China, however, has fewer natural resources (and only because they’re authoritarian are its institutions reliable), but impressive human resources. Perhaps for that later reason, since the 1980s it’s developed astonishingly quickly.
In Australia and other rich countries, the structure of capital is broad and deep – and its appetite is voracious. Energy “feeds” infrastructure and machines. Just as people cannot function without sufficient nutritious food to power their minds and bodies, machines – whether they’re aeroplanes, blast furnaces, iPhones, etc. – cannot function without appropriate and sufficient energy.
Infrastructure, machines and energy amplify and expand our naturally-meagre productive capacity; they thereby enable us to produce the food, clothing, medical care, shelter, education, entertainment, etc., that we require in order to prosper and live full lives.
Without the food, shelter, etc., that countless machines help to produce – and without the affordable energy that fuels these machines – standards of living would plummet.
- Machines permit us to produce far more in much less time than we could without machines. In a single day, for example, a modern combine harvester can reap and thresh enough wheat to make 500,000 loaves of bread. That’s about 1,000 times what a highly skilled human can using hand-held tools (see “The Answers to Your Wheat Harvest Questions,” Allaboardharvest.com, 2 July 2009).
- Machines also enable individuals and small groups to do and produce things that no number of people could do without machines. An MRI machine, for example, allows medical specialists to “see” what nobody without one can; the internet produces the vast and instantaneous access to knowledge that no amount of manual labour could, etc.
In his provocative new book, Fossil Future: Why Global Human Flourishing Requires More Oil, Coal and Natural Gas – Not Less (Penguin, 2022), Alex Epstein uses the phrase “machine labour” to refer to the enormous use of infrastructure and machines in wealthy countries like Australia to amplify and expand our productive capabilities.
Access to large quantities of high-quality machine labour and the energy that drives it explains why approximately 0.5 billion people today live the by far longest, healthiest and most opportunity-filled lives in history. It also explains the lack of such access is the major reason why billions lead much shorter and difficult lives.
Although the world has become a much better place since 1950, approximately 3 billion people (almost 40% of its population of 8 billion) presently consume hardly any machine labour. They use little or no electricity and only miniscule quantities coal, petrol, etc. Epstein calls this group the “unempowered world.” Two rungs higher sit the approximately 1.5 billion people who inhabit the “empowered” world – which means that they consume at least one-third as much electricity as the average American. And between the empowered and unempowered are the ca. 3 billion people in the “barely-empowered” world. That leaves no more than 500 million people – most of them in Australasia, Canada and the EU – whose standard of living and consumption of machine labour (including) energy approximates or exceeds the average American’s.
In these wealthy countries, the enormous use of machine labour is possible only because energy is so cost-effective. The more economical is the production of energy, the more people can use greater amounts of machine labour in more ways. As Michael Shellenberger (Apocalypse Never: Why Environmental Alarmism Hurts Us All, HarperCollins, 2020) notes, “the Industrial Revolution could not have happened with renewables.” Poor societies are low-energy economies, and vice versa. This brutal truth has three prongs:
- Cost-effective energy has long been and will remain indispensable to development and prosperity;
- Today, billions of people suffer and millions die annually from lack of cost-effective energy;
- Hydrocarbons provide uniquely cost-effective energy.
Propositions 1 and 2 are, it seems to me, self-evident. The remainder of this article corroborates Proposition 3. Collectively, these propositions’ implication is as obvious and momentous as it is unappreciated and controversial:
For the world’s ca. 500 million “energy-empowered” people, including Australians, the continued consumption of large quantities of hydrocarbons is a necessary condition not just of prosperity but of civilisation. For the billions of barely-empowered and “unempowered” people in poor countries, who comprise a large majority of the world’s population, a massive increase of the use of hydrocarbons to power the machines that will immeasurably improve their lives is – quite literally – a matter of life and death.
Three Taboo Truths about Hydrocarbons
Taboo Truth #1: “Decarbonisation” is a Delusion
These days, “experts” gloat relentlessly: around the world, “renewable” (which is actually intermittent and thus unreliable) energy, particularly solar and wind power, is – due to its allegedly superior economics – rapidly displacing coal- and gas-fired power. Crucially, however, hard data never accompany this assertion. That’s because such data plainly refute it, and they disprove it because hydrocarbons have long possessed the unique combination of attributes that intermittent sources of energy continue to lack:
Hydrocarbons provide abundant, low-cost and reliable energy in a world where far more energy is required – especially for the billions of people who presently consume almost no energy and thus subsist in dire poverty. That, bluntly, is why hydrocarbons have long been, today remain – and, given the current state of technology, costs, etc. – for decades to come will likely continue to be the world’s principal source of energy.
Figure 2: The World’s Output of Energy, by Source, 1965-2021
By far the most important chart, it seems to me, is the very one that so-called experts don’t want you to see. Figures 2-5 plot data compiled by ourworldindata.org. Figure 2 plots the world’s production of energy (by major source as a percentage of the total) since 1965.
In 2021, hydrocarbons provided 82% of the world’s total energy. That’s more than four times more than all alternatives combined. Moreover, the alternatives are mostly nuclear and hydro-electric (14%): “renewable” solar and wind provided just 4%.
These days, fossil fuels are widely portrayed as merely one (albeit allegedly uniquely damaging) source of energy among many. Hydrocarbons are also disparaged as a source whose importance, given their role as an emitter of CO2, is declining. For these reasons, their detractors insist, fossil fuels are readily and urgently replaceable, especially by intermittent and thus unreliable solar and wind power.
If Figure 2 doesn’t convince you that this portrayal is patently false, then nothing will. Ignore what so-called experts and their mascots (“woke” politicians, CEOs, etc.) assert: on a global basis, “decarbonisation” and the “energy transition” aren’t progressing rapidly; indeed, they’re barely proceeding. And for the sake of prosperity, they shouldn’t proceed at all.
The mainstream media’s designated experts claim that fossil fuels are being rapidly replaced by “renewable” sources of energy. Yet intermittent solar and wind power presently provide only 4% of the world’s total energy – and effectively 0% of certain critical categories (such as industrial process heat and heavy transport).
Hydrocarbons’ key characteristics, including their cost-effectiveness (details appear below), make them indispensable – and therefore hard to displace. In sharp contrast, the comparatively high cost and limited usefulness of solar and wind power renders them (except in limited instances) economically uncompetitive (for authoritative figures, including the IEA’s and IPCC’s, see Table 2 in Investors beware: “Cheap” renewables are very expensive); as a result, “renewable” must depend upon governments’ mandates and massive subsidies, as well as the backup of reliable fossil fuels. Moreover, everywhere it’s been deployed in nontrivial quantities (namely in Australia, Britain, the EU and parts of the U.S.), intermittent and unreliable energy has inflated costs and prices, and produced major grid reliability problems.
For these and other reasons, the consumption of hydrocarbons globally isn’t decreasing – and in countries like China it’s soaring (Figure 3). As and when the development of countries such as India accelerates, their demand for hydrocarbons will rise accordingly.
Take a good, hard look at Figure 3 – and recall Figure 1. Together, they quantify the most astonishing decline of extreme poverty – involving hundreds of millions of people – in human history. Since the 1980s, China has risen from an impoverished to a middle-income country. How did it happen? We already know the answer: through the accumulation of infrastructure and machines powered mostly by fossil fuels.
Figure 3: Consumption per Capita of Hydrocarbons, China and the World, 1965-2021
More than this: it couldn’t have happened without a colossal (1,136% over 55 years, or a compound annual growth rate of 4.7% per year) increase of per capita consumption of hydrocarbons. And it gets even better: an astounding decrease of mass poverty through fossil-fuelled infrastructure and machinery is now occurring in India and elsewhere; and before long, I hope it begins to happen in the world’s poorest nations, which are located largely in Africa.
Unfortunately, few people in wealthy countries recognise what most of today’s “experts” strenuously and callously deny: cost-effective hydrocarbons are a necessary condition of the mass alleviation of extreme poverty.
Taboo Truth #2: Hydrocarbons Are a Necessary Condition of Prosperity
Energy feeds the machines that ultimately serve four human purposes: commercial (lighting, heating and cooling offices, shops, etc.), agricultural and industrial (powering the farms and factories that produce the food and countless other goods that modern life requires), residential (lighting, heating and cooling homes) and transport and communications (moving cargo, people and ideas). Each of these activities is indispensable to our wellbeing. In the U.S., where data are longest and most reliable, commerce consumed 18% of total energy in 2021 (and an average of 15% from 1950 to 2021), industry 33% and 39% respectively, residential 21% and 20% and transport 28% and 26%.
Since the Industrial Revolution, these four activities have advanced tremendously. Consequently, the world hasn’t merely become an ever better place to live, first for Britain’s poorest people, then for North Americans and Europeans: mass prosperity has progressed at an ever faster pace, and now straddles the globe – including hundreds of millions of people across Asia who just fifty years ago were destitute. This tide of prosperity is more than astonishing: it’s unparalleled in history. What has underpinned it? Agriculture, housing, manufacturing, medicine and transport and communications powered by abundant, low-cost and reliable fossil fuels.
Among their other benefits, hydrocarbons have powered the economic development that has crushed the rate of extreme poverty – the percentage of the world’s people subsisting on $2 or less per day – from 42% in 1980 to less than 10% today.
In 1965, consumption per capita of hydrocarbons in China was 2,031 units – just 17% of the global average (Figure 3). By 2021, in contrast, it skyrocketed to 25,081 units – which was 145% of the global average. Similarly, and as Figure 4 shows, GDP per capital in China was $1,156 in 1965, which was just one-quarter of the global average. By 2021, however, China’s per capita GDP increased to $12,422, which is effectively identical of the global average.
Figure 4: GDP per Capita, $US, CPI-Adjusted, China and the World, 1965-2021
Like people in Britain and North America in the 18th and 19th centuries, in the 20th and 21st centuries people in China – and many other countries – live incomparably better lives because they’ve built the housing, machines and transport that require energy from hydrocarbons. And the more they’ve prospered, the more energy they’ve demanded. As the 21st century unfolds, so too will people in India and elsewhere.
The strong correlations between the consumption of energy and both life expectancy (which I’ve not plotted, but in the most prosperous parts China it’s reached Western levels) and income are not coincidental: the dramatic increase in the use of machine labour has made possible a dramatic increase in the productive ability of individuals, which has made possible a dramatic increase of their standard of living.
Taboo Truth #3: Hydrocarbons Underpin a Clean Environment
Fossil fuels, assert “experts,” are “dirty.” Hence they advocate the rapid elimination of hydrocarbons for the sake of a “clean” environment. The truth is very much otherwise: as Epstein and Shellenberger detail and document, today’s fossil-fuelled world is unnaturally clean. Indeed, in rich countries, whose per capita consumption of hydrocarbons is greatest, air and water have become much cleaner since the mid-20th century – and are now cleaner than at any time since before the Industrial Revolution.
Using data compiled by the U.S. Environmental Protection Agency, Figure 5 plots America’s (1) consumption of fossil fuels and (2) emissions of carbon monoxide since 1970. For the years 1970-1990, EPA published these figures every five years; since 1990, it’s published annual figures. In order to maximise their comparability, I’ve standardised each series’ starting point (1970=100).
Figure 5: Consumption of Fossil Fuels and Emissions of Carbon Monoxide, U.S., 1970-2021 (1970=100)
These days, everybody obsesses about carbon dioxide, but nobody seems to utter a word about carbon monoxide – and I think I know why: air pollution in the U.S. (that is, the output of its major contributor, carbon monoxide), has plummeted three-quarters at the same time that the consumption of fossil fuels (and thus CO2) has increased one-quarter. (As an aside, in 1970 the population of the U.S. was little more than 200 million; currently it’s more than 330 million – an increase of 65% over the past half-century. The implication is obvious: like other rich countries, and thanks to a mixture of technology and regulation, the U.S. consumes hydrocarbons much more efficiently.) Environmentally, that’s a fantastic news story – therefore the mainstream media ignore it. News about the environment is only newsworthy if it’s a natural disaster or “climate crisis.”
A major side-effect from the combustion of fossil fuels – particulate pollution – has greatly diminished as the quantity of fossil fuels consumed (and the benefit of that consumption) has increased. The more empowered and capable – bluntly, the more machine labour has advanced and thus the richer America has become – the more it’s reduced fossil-fuels’ side-effect (pollution) without affecting its major benefit (economic prosperity).
Hydrocarbons help to clean the environment in another crucial way. Egged by “experts,” virtually everybody in rich countries believes – fervently – that “natural” life is clean. The truth is diametrically opposite: all life produces waste – from our own bodies, the food we eat, etc. Hence sanitation is a pillar of modern civilisation.
Today in Australia, advertising glorifies “natural” water. The reality is that, for most people throughout most of human history, untreated water has been dirty and potable water physically distant.
In the world’s poorest countries, many people die from diseases that thrive in unhygienic conditions. According to the World Health Organisation, two billion people (one-quarter of the world’s total population) lack basic sanitation such as clean water and indoor toilets. Approximately 10% of the world’s population consumes food irrigated by effluent, and a considerably higher percentage consumes unrefrigerated (and thus partly-spoiled) food. Consequently, diarrhoea kills roughly 425,000 people annually – almost all of them in poor countries that lack basic sanitation (see “Sanitation,” WHO, 14 June 2019).
Why is sanitation in poor countries so bad? People must devote so much time, effort and income to survival – food and shelter – that few or no resources remain to devote to public hygiene. In wealthy countries, an enormous array of infrastructure disposes waste efficiently and (on a per person basis) cheaply.
“Experts” call hydrocarbons “dirty,” but a fossil-fuelled civilisation has created the wealth that has amassed the sanitation infrastructure that has produced levels of public hygiene that our forebears would have considered unimaginable – and which people in these countries today mostly take for granted. People in impoverished nations harbour no such delusions.
In countries like Australia, sanitation is major industry that runs mostly on fossil fuels – from the excavating machines that dig the sewers to the trucks that remove waste to the processing machines that sort different types of rubbish to the incinerators that destroy medical waste and hazardous materials). Without this fossil-fuelled industry, public hygiene in wealthy countries would degenerate rapidly.
Hydrocarbons Predominate Because They’re Cost-Effective
Hydrocarbons have long been and today remain by far the world’s predominant source of energy. Moreover, they’ll likely remain so for decades to come – and intermittent and unreliable (“renewable”) energy play no more than a subsidiary role. This is not just because hydrocarbons are and their alleged “alternatives” aren’t cost-effective. Additionally, and even more importantly, these “alternatives” aren’t; in crucial respects hydrocarbons are irreplaceable.
The Production of Energy is a Long and Complex Process
In order to comprehend this point, you must appreciate that the “production of energy” is actually a multi-step process of transformation:
- Deposits of raw materials must be discovered.
- Infrastructure (e.g., coal mines, oil rigs) must be constructed.
- Raw materials must be extracted.
- Raw materials must be processed into intermediate products (e.g., crude oil into petroleum, etc.).
- Raw or intermediate energy and associated materials must be transported – whether on LNG tankers or electricity transmission lines, etc.
- Raw or intermediate energy must be converted into a useful final form (e.g., a furnace converts natural gas into heat which warms a house, an electric motor converts electricity into motion which washes clothes, etc.).
Notice that all of these steps require energy; also note that this energy almost always derives from hydrocarbons and practically never from solar and wind. Most importantly, therefore, understand that the production of energy isn’t merely a matter of accessing unrefined energy, such as “free” sunlight and wind: it’s a complex and lengthy process of transforming raw and intermediate energy into its end use. The full cost of a given form of energy is determined by the total cost of the full process.
When we consider the full process of converting intermittent sun and wind into useful, reliable energy – including the additional processes and infrastructure necessary to produce energy when the sun doesn’t shine or the wind doesn’t blow – we can see why the provision of reliable, on-demand power from solar and wind is always difficult (and usually prohibitively expensive).
The Cost of Storage
Their process of transformation isn’t the only reason why hydrocarbons are usually much more cost-effective than intermittent (solar and wind) sources of energy. Other things equal, sources of energy that occur in an easily-storable form (such as coal, gas and oil) are more cost-effective than sources that don’t (such as sunlight and wind).
That’s because easily-stored energy is reliable: we can access it when we need it in the amount we require. Intermittent flows of sun and wind, on the other hand, cannot provide reliable energy – and thus necessitate massive and cost-prohibitive storage (battery) systems.
Indeed, not a single self-sufficient solar- and/or wind-based electricity grid currently exists anywhere in the world. Moreover, most grids fed by solar and wind rely not upon expensive batteries but upon cheaper fossil-fuelled backup.
“Energy Density” and the Cost of Transport
A third factor helps to explain hydrocarbons’ cost-effectiveness. The more concentrated is a source of energy, the more cost-effective it tends to be. Concentration lifts cost-effectiveness because it reduces the cost of transporting energy. This is particularly crucial for motive power (such as petrol for a lorry) which must carry its own fuel.
Energy density – the amount of energy stored per unit of volume and/or mass – is the standard measure of energy concentration. The energy density of sunlight and wind is very low: solar and wind farms require enormous amounts of land and materials in order to harness the same amount of energy as hydrocarbons or nuclear provide using minute amounts of land. As a gas, natural gas doesn’t have high density in terms of volume. But its density in terms of mass is very high – and can be compressed into a dense (by volume) fuel.
In Key Respects Hydrocarbons Remain Irreplaceable
Given its low cost of storage and high density, versus intermittent energy’s high cost of storage and low density, energy generated from hydrocarbons is, depending upon the application, usually more cost-effective than other alternatives.
It’s true that in some instances it’s technically easy (but seldom cost-effective) to replace some of the electricity generated from hydrocarbons with solar and wind power. Equally, however, it’s technically far harder – and economically it clearly isn’t cost-effective – to generate “industrial process heat” and many sources of motive power from sources other than hydrocarbons.
According to the International Energy Agency, “industrial heat makes up two-thirds of industrial energy demand and almost one-fifth of global energy consumption. It also constitutes most of the direct industrial CO2 emitted each year, as the vast majority of industrial heat originates from fossil-fuel combustion …Therefore decarbonisation would require a dramatic shift in how industrial heat is generated.”
In this respect it’s important to dispel a widespread confusion: “electricity” and “energy” are not synonyms. These days, supporters of “renewable energy” relentless assert: “taxpayers’ money and subsidies will lift the share of so-called ‘low-cost renewables’ in the electricity market to (say) 80% by (say) 2030.”
The sensible answer is: “so what? Electricity currently comprises only about 20% of total energy consumption in most Western countries. Even if you hit your target, which is highly doubtful, the consumption of power from solar, wind and the like will comprise just 20% × 80% = 16% of the total consumption of energy. What about the other 84%?”
Why does a large majority of the world’s total energy take forms other than electricity? The most cost-effective way to fuel many kinds of machines isn’t indirect (via electricity generated from fossil fuels, solar or wind, etc.) but directly by burning hydrocarbons to generate heat or mobility. In three main areas – industrial heat, motive power and residential heat – direct combustion is in most cases the most cost-effective.
“Industrial process heat” is a major but widely overlooked category of energy use. It requires extremely high temperatures (above 500C). Electricity can sometimes (as in the smelting of aluminium) generate industrial heat; but most often, as in the manufacture of cement, fertiliser, plastics and steel, the direct burning of fossil fuels is the most cost-effective means. That’s primarily because by burning a combustible fuel and using the heat directly (rather than by converting another source of energy into electricity) the manufacturing process captures a much higher percentage of the fuel’s heating potential. In short, much less fuel generates much higher heat.
The direct burning of hydrocarbons for mobility isn’t only lower-cost than alternatives: its effectiveness is unmatched. Indeed, in numerous areas within the realm of motive power, no replacements for fossil fuels exist at any price today. Modern mobility, in short, presupposes the high energy density of oil.
The density of some other forms of liquid fuel is comparable to that of oil-based fuels. These range from liquid hydrogen (which is nearly one-third as light as oil fuels but whose volume is approximately four times greater) to plant-based alcohol fuels (which occupy twice as much space as oil-based fuels). But unlike oil, which in most cases starts as a liquid that’s relatively cheaply convertible into usable fuels, hydrogen and plant-based fuels start as materials that are nowhere close to liquid fuels. And the process of transforming them into liquid fuels has thus far proved cost-prohibitive at scale.
When it comes to cost-effective mobile machines, oil currently has no rival. This is particular true with larger mobile machines such as aeroplanes, cargo ships and heavy-duty trucks. That’s why, of the one-third of the world’s energy that’s mobile energy, 90% comes from oil.
It’s true that oil has more competition in “light-duty” applications, such as cars, where batteries’ far lower energy density matters less. Battery-powered cars currently struggle with cost and convenience (charging times, vehicle range, etc.). To the extent that batteries’ cost-effectiveness improves, some of these disadvantages could diminish and EVs thereby become less uncompetitive (that is, net of the massive subsidies that currently drive most battery vehicle purchases).
Yet it’s vital to bear in mind: even if EVs become less uncompetitive in light-duty applications, there’s currently no such prospect for the largest vehicles such as aeroplanes and cargo ships.
“Factfulness,” said Hans Rosling (Factfulness: Ten Reasons We’re Wrong about the World – and Why Things Are Better Than You Think (Sceptre, 2018), “is the stress-reducing habit of only carrying opinions for which you have strong supporting facts.” That principle has led me to four unambiguous conclusions. First, plentiful, reliable and affordable supplies of food, clean water, comfortable housing, rapid transport, advanced medical care, modern sanitation, etc., presuppose plentiful, reliable, low-cost, high-quality and global-scale energy. For an overwhelming majority (more than 80%) of the world’s purposes, these essential goods and services necessitate fossil fuels.
Second, regardless of the causes and impacts of rising CO2 levels, if you’re knowledgeable about the state of the world today then you must acknowledge that more human beings are now flourishing than at any point in history. And if you’re at all knowledgeable about the critical importance of fossil fuels, you’ll also recognise that they’re a major contributor to Australia’s unprecedented standard of living.
Thirdly, however, the vast majority of the world’s people isn’t flourishing like Australians are – and fossil fuels power the machines that will propel their emergence from poverty. The world’s poor will benefit immeasurably from economic development – which necessitates the continued expansion of cost-effective energy, i.e., fossil fuels.
Finally, hydrocarbons’ benefits aren’t merely essential: for many purposes they’re inimitable and irreplaceable. Solar and wind polar aren’t cost-effective alternatives to coal- and gas-fired electricity; indeed, for multiple crucial uses fossil fuels have no alternatives at any price. That’s one reason why, whether in Australia, Britain, the EU or the parts of the U.S. (such as California and Texas) where they’ve penetrated the most, these “alternatives” require massive subsidies, lift costs and prices and impose negative externalities such as the destabilisation of the grid.
On 9 December, Australia’s federal and state governments announced a deal to cap the price of coal and natural gas and to boost “investment” in unreliable an intermittent energy. Through yet another subsidy, the scheme might temporarily (it lasts just one year) decelerate some consumers’ rising power bills. According to The Weekend Australian (10-11 December), “instead of household electricity prices jumping by 36% next financial year, bills will instead increase by 26% …” But the costs of “renewable” will continue to rise, and when the subsidy terminates, power prices will soar. Yet against all past experience here and elsewhere, the deal’s proponents claim that it – and the system’s greater output of “renewable” power – will reduce the price of electricity.
Implications for the Future – and for Investors
For intermittent and unreliable power’s true believers, the assertion “renewables are cheaper” is an article of faith. On 30 August 2021, for example, the Global 100% Renewable Strategy Group asserted without evidence: “numerous studies have investigated 100% renewable energy … and have found that it works, not only for providing electricity, but also for providing all energy. A transformation to 100% RE can occur faster than current expectations: the power sector can transform by 2030 and the other sectors soon thereafter … The total energy cost of a 100% RE system will be lower than the cost of conventional energy … A 100% RE system can supply regions, countries and the world reliably (24-7) with energy at low cost.”
Based upon my four conclusions, I think they’re utterly delusional (I’m tempted to say “tilting at windmills”!), and I’d be flabbergasted if anybody with half a brain took them remotely seriously. They’re not merely asserting, in effect, that within a decade unreliable and intermittent solar and wind will generate ALL of the world’s electricity: “soon thereafter” they will cost-effectively produce ALL of the world’s industrial process heat and motive power – including aeroplanes and cargo ships. In just 15 or so years!
At what cost? The Group doesn’t deign to tell us. In How we’ve prepared for the next bust I summarised current and reputable cost estimates on a global basis of “net zero to 2050” (which is formidably ambitious but not remotely as ambitious as 100% intermittent and unreliable, and 0% fossil fuels by 2030). The estimates commence at $US130 trillion ($US4.5 trillion per year for almost 30 years) and are rising rapidly. If the U.S. built a system that derived electricity (which, remember, comprises less than one-quarter of all energy) entirely from solar and wind farms, and if it relied entirely upon batteries to ensure its reliability, how much would it cost? According to studies conducted in 2018 and reviewed by Michael Shellenberger, more than $23 trillion – which is $1 trillion higher than America’s GDP in 2019!
And, he adds, “These calculations only consider electricity. If we move beyond electricity to include all energy, space requirements quickly get out of hand. For example, if the U.S. were to try to generate all of the energy it uses with renewables, 25-50% of all the land in the U.S. would be required. By contrast, today’s (mostly fossil-fuelled) energy system requires just 0.5% of land in the U.S.” “In the end,” Shellenberger concludes,
“There is no amount of technological innovation that can solve the fundamental problem with renewables. Solar and wind make electricity more expensive for two reasons: they are unreliable, thus requiring 100% backup, and energy-dilute, thus requiring extensive land, transmission lines and mining. In other words, the trouble with renewables isn’t fundamentally technical – it’s natural.” It’s ironic, and if the consequences weren’t so serious it’d be hilarious: ”renewable” energy is inherently unreliable and expensive – and thus unsustainable!
These “scientists” – and many others – seem to reject the very existence of laws of physics. They certainly deny the existence of laws of economics – or, risibly, believe that governments’ legislation or regulations can simply and permanently repeal them. Even if the technology, materials and labour existed (they don’t), the astronomical cost of “100% renewable by 2030” renders it impossible. Epstein’s estimate, using data from BP’s Statistical Review of World Energy 2021 and the Energy Information Administration, an agency of the U.S. Department of Energy, is $US400 trillion – more than four times the world’s current GDP! Epstein concludes: “solar and wind replacing fossil fuels isn’t a fantastic breakthrough; it’s a thoroughly dishonest fantasy.”
On that basis, he outlines four scenarios for the indefinite future:
- Alternatives, which presently provide ca. 20% of the world’s energy (most of it as hydro-electric and nuclear power; solar and wind are incidental), will continue to provide secondary supplements to fossil fuels in some applications.
- Alternatives will become more significant supplements – providing, say, 30% of energy in a world that will demand much more energy. Under this scenario, the use of fossil fuels continues to rise – but not as quickly as alternatives. But which alternative? Base-load nuclear – or unreliable and intermittent solar and wind?
- In a radical departure from current reality and trends, alternatives become partial replacements of fossil fuels. Specifically, alternatives provide so much cost-effective energy in so many applications that, despite strongly rising output of energy, the supply of hydrocarbons declines.
- In an even more radical departure from the way any economy has ever functioned, the Global 100% Renewable Strategy Group’s vision (hallucination?) prevails: alternatives totally replace fossil fuels by 2030. These alternatives will soon do everything that fossil fuels do today; moreover, they’ll also meet the developing world’s rising demand for energy – all at lower costs than today’s hydrocarbons.
Epstein sagely concludes:
“Given what we know about (alternatives’ poor ability to) compete with fossil fuels … our extremely strong baseline expectation over the next 30 years should be scenarios 1 or 2, with 3 being incredibly improbable (and) 4 being virtually impossible …”
As I’ll detail in my next wire, to be posted on or about 19 December, any investment portfolio that purports to be “ethical” MUST include a hefty weighting towards the producers and consumers of fossil fuels – and shun producers of intermittent and unreliable energy. If the empirical case for hydrocarbons and against “renewables” is compelling, the moral one is overwhelming.