There were still people out in the streets drinking as we made our way to the Old Hat Factory this morning. We even heard music thumping from one of the clubs we pass on St. Kilda Road. The new year is here. What will it bring?
Black lung, probably, if you live in the Chinese city of Datong. Datong, abeout 260km west of Beijing, is the coal capital of China. And coal is most definitely king in the Middle Kingdom. “The Chinese plan to build no fewer than 500 new coal-fired power stations, adding to some 2,000, most of them unmodernised, that spew smoke, carbon dioxide, and sulphur dioxide into the atmosphere,” writes Michael Sheridan in today’s Australian.
And you thought Melbourne was smoky.
China estimates that pollution from coal-fired power plants results in 400,000 premature deaths…each year. Yet there are 21,000 coal mines in the country and coal output has doubled in the last five years. China’s Shanxi province produces more coal than Britain, Russia, and Germany combined.
Coal production is so high because coal is not oil. We know, it sounds simple. But the simplest explanation is often the best. Oil is expensive. It is cheaper for China to power its economic wunder-economy with coal it can dig from it’s own dirt, rather than oil it must import from the sands of Arabia.
Cheaper maybe, but certainly not cleaner, healthier, nor if Al Gore is right, better for the future of the planet. Yesterday we squirmed in a wiry, narrow seat at the Astor Theatre (our favourite local cinema) to watch Gore’s documentary “An Inconvenient Truth.” There’s nothing like being lectured to pompously for an hour and a half to remind you of what it must be like to be a reader of the Australian Markets and Money sometimes. We will try not to be so Gore-like and pedantic in the future.
Gore’s movie is really a long commercial for his presidential candidacy in 2008. And to that extent, it’s pretty nauseating. It’s also condescending, using cartoon animations to explain climate change, and a computer-generated polar bear drowning in a sea without ice to show us children of the Nanny State just what we’re dealing with. But that doesn’t mean there isn’t an underlying argument to the lecture worth considering. That argument is simple: the world’s economy can’t afford to keep growing using old fossil fuels and old ways of burning them for energy.
We know a little about history and biology. But we don’t know much about science books, the French we never took, or how many parts per million of carbon dioxide are really in the air and how much they are contributing to rising temperatures on the planet. But we do know that burning pulverized coal to produce electricity produces particulate emissions in the air that turn the delicate lining of your lungs into sludgy, black, phlegm.
It was true in London in the early 19th century, Pittsburgh in the late 19th century, and it’s true in China in the early 20th century. And if we read the geopolitical tea leaves correctly, something is going to happen in the energy markets that hasn’t happened before, the real cost of emitting carbon dioxide, sulphur dioxide, and nitrous oxides into the atmosphere as a by-product of power generation is finally going to be included in the price tag.
The producer may pay in the form of a carbon tax. Or the consumer may pay in the form of higher fees per kilowatt hour as cleaner coal-burning plants are built. But someone is going to pay to keep burning coal. And the price of coal-fired electric capacity rising to combat the real or perceived threat of global warming, nuclear energy is going be front and center in 2007.
Perhaps not right away. In the logical chain of events, the energy crisis of 2007 comes down to an acronym we made up this morning: MESI. It describes what people are going to do as the energy crisis blooms like a grotesque flower this year.
“M” is for more, as in more oil and gas. This includes the exploration for more oil and gas reserves to replace those already produced. But it most likely means a bidding war for known oil and gas reserves. For example, we read this morning in the Asia Wall Street Journal that, “China, which is aggressively seeking overseas energy assets to fuel its booming economy, said Sunday that one of its biggest conglomerates has bought the Kazakhstan oil assets of a Canadian company for US$1.91 billion…China’s CITIC Group bought the oil assets of Canada’s Nations Energy Company Ltd.” It’s China’s third-largest acquisition of overseas oil assets in history and, “The Karazhanbas field in Western Kazakhstan has proven reserves of over 340 million barrels of oil.” More, sir.
“E” is for efficiency. Emissions can be reduced or existing resources depleted less quickly if we are more efficient in producing them and using them. This means more efficient extraction, enhancing recovery rates from existing and new gas and oil deposits. But it mostly means improved fuel-efficiency standards in cars and more efficient household appliances. 2007 could be the year U.S. auto-makers, facing rapid declines in market share, finally begin producing cars for a world which demands better gas mileage. At the generation level, look for improvements in the industrial capital used to produce electricity, too. And buy one of those new globes for your light fixtures, at the very least.
“S” is for substitution. When bananas went to $14 per kilogram, your editor switched to apples. Consumers, the price-sensitive ones, are not stupid. As prices rise, they begin to look for lower-priced substitute products which deliver roughly the same good or service at a lower price. In the energy markets, this means renewables and alternative energy…things like ethanol, biofuels, and wind, solar, thermal, and hydro. None of these things, mind you, even taken all together, can produce the same kind of energy we get from oil and gas with reliability and regularity. But that just means the economic model that relies on industrial-era, large-scale energy generation and transmission is being modified. And that means opportunities. We like fuel cells thee most. Which brings us to…
“I” is for innovation. Problems of scarcity and depleting resources are often accompanied by dire predictions of the end of the world as we know it. Which is true. In fact, we read today that Barclay’s Wealth in the UK has recently told high net-worth clients that, “Given the likelihood of natural resource depletion and climate change it is feasible the next decade could represent the high watermark for wealth generation.”
Wow. So the rising cost of energy inputs into the economy has reached such a level that the world is simply going to cease generating wealth at this level. Hmmn. It’s possible. There are the laws of physics to consider, which determine how much energy you can get from carbon, and how efficiently you can turn that energy into work. But thus far, human beings, when confronted with an apparently natural limit on growth do what the species does best: adapt and innovate.
Just because we’ve done it before doesn’t mean we’ll do it again this time with success. That is, just because technological innovation has improved crop yields, produced life-saving medicines, and lowered the cost of energy over the last 100 years doesn’t mean it will solve all future problems. But not all innovation is whiz-bang gadgetry.
Generally speaking, people prefer living to dying. So they adapt when they have to, whether it means inventing something newer or better, or living more conservatively and efficiently. There is a lot of fat to cut in the energy diet of the average Westerner. Some of it’s going to be trimmed in 2007.
Beyond that, we have no idea. Nuclear makes sense because once the “social cost” of carbon emissions is paid by some body, coal is not as cheap as it first appears. Neither is oil, once its geopolitical cost is counted. Nuclear is not exactly cost-free. The spent fuel must be stored. And there is always the issue of plant safety. But Australian consumers are going to pay for more energy either way: from clear-burning but more expensive coal plants, or from carbon-free nuclear plants with their radioactive by-products. Pull the lever Australia, it’s time to decide.
The markets are quiet, for now. A wire service article today says that a recent report from credit-ratings agency Standard and Poors reports that “markets had reached a permanently high plateau due to a mixture of recent technology, globalization, and prudent central banking.”
We couldn’t find proof that S&P actually used the phrase “permanently high plateau,” a phrase made infamous by Yale economist Irving Fisher, who wrote that stocks had reached a permanently high plateau…just before the stock market crashed in 1929. IN fact, S&P consultant Simon Ibbetson warns earnings and share prices could decline quite suddenly and quite a lot.
“A sudden and very largely unanticipated reversal could also occur given the natural propensity for earnings to follow cycles and the fact that declines in both earnings growth and share prices tend to be sharper than the preceding rise…Therefore, the investor that is looking forward to another year of 10 per cent plus returns should also be prepared to lock back on 2007 in 12 months’ time having lost a similar or greater amount with equanimity.”
We don’t doubt the forecast of large declines in share prices. But we doubt it will greeted with equanimity. Certainly not the kind of good cheer that the new year was welcomed with last night. But we’ll see…