World finance is a zero sum game played on an expanding balloon of debt.
Now that the balloon is getting too big, the rich take fright, start talking about the need to reduce debts, which spells trouble for the “real economy” (see previous post).
At the same time, another drama shakes the heart of the world economy: energy.
While cheap energy has enabled physical activities to multiply, the days of cheap energy are over. It is essential to understand why and envisage the consequences.
Fossil fuels – oil, gas and coal- account for some 82% of world energy supplies, the remaining 18 % coming from a mix of biomass, hydro electric, nuclear, wind and solar.
The big question is this: can the various sources now accounting for some 18% be expanded sufficiently to replace a significant amount of fossil fuels?
Why the need to replace fossil fuels?
Most ecologists would say: because their combustion creates CO2 emissions which are a main contributor to climate change. To prevent climate change from reaching catastrophic proportions, new CO2 emissions must be drastically reduced.
Hard nosed economists and business folks care much less about this, if at all.
Their real concern is that oil and gas fields that used to be easy and cheap to exploit are depleting fast and an increasing share of new production has to come from “non conventional” sources: deep offshore, tar sands, shale gas…
Non conventional sources of oil and gas are much more difficult and expensive to exploit, and operations entail long lead times, big risks and tremendous impacts on the environment.
Of the 82% of fossil fuels, oil represents around 32%, gas 25% and coal 25%.
Coal is used mainly for electricity generation, gas for electricity generation, steam production and heating, and oil for transportation, petrochemicals, heating, steam production and small scale electricity generation.
Oil has the widest uses, is the most flexible energy source, but is also the one whose reserves are being depleted fastest.
The price of crude oil is now stubbornly around or above $100 per barrel despite a weak economy. One wonders when it will reach $200 and how harsh the impact will then be.
Though less flexible, gas has the advantage of being the least carbon intensive and least polluting of the three fossil fuels and is therefore often presented as energy of the future.
New technology enables the exploitation of large hitherto unusable reserves of shale gas.
The technology known as fracturing involves the injection into the ground of vast quantities of chemicals mixed with high pressured water in order to break geological structures in which the gas is trapped.
While by far the most carbon intensive fuel, coal is an efficient and until recently relatively cheap source of energy for the large scale production of electricity. Its reserves, though much larger than those of petroleum are not unlimited.
In short, all fossil fuels are problematic for various reasons and getting more expensive, and there is a wide consensus that it would be good to rely more on other sources.
The latter account for some 18% of all supplies; biomass represents around 9%, hydro electric 4%, nuclear 4%, and wind and solar together 1%.
A significant share of energy form biomass is “non commercial”, i.e. from just burning wood (often as a result of deforestation) and animal dung. This cannot increase much in the future.
The intensive and ecologically unfriendly cultivation of sugar cane, corn, and other plants for bio-fuels requires excessively large land surfaces and compete with food production.
Most sites suitable for hydro electricity have already been developed, often with heavy environmental impacts. There is little room for expansion in this area.
For the nuclear segment to take a share of say 6-8% of all energy supplies, several hundred new nuclear plants would have to be built. Post Fukushima this is most unlikely.
As for wind and solar, often paraded as the energies of a future carbon free world, the cold fact is that, though expanding quickly, they start off from a negligible position. Moreover, they too have significant ecological draw backs.
The bottom line is that fossil fuels are going to retain the lion’s share of energy supplies for many years to come, during which time their cost will rise sharply.
Superimposing this energy equation onto the finance game highlighted in the previous post, it is clear that economists and politicians face a problem with no conceivable solution in the present narrow mode of thinking.
And there are yet other problems to highlight about the prospects for the world economy. They will be envisaged in a future post.
The aim of our systematic review is not to kindle pessimism and despair, but to show clearly and definitely that the time is ripe for a radically different mode of thinking
Fear not, think straight and trust your intuition.
Love,
Leo
Copyright © Leo Foresta 2012
Leo Foresta 