Wednesday, August 11, 2010

Idea # 2 for Solving the Economic Crisis: Invest in the New Green Revolution

There is no longer any question that we are at the end of the era of cheap oil. Once dismissed as a doomsday crackpot fantasy, the theory of "peak oil" is now the accepted view of the scientific community and national governments alike. For the uninitiated, global peak oil is the point at which the maximum rate of global oil extraction is reached, after which production begins to decline, possibly precipitously. The theory was first outlined by oil geologist M. King Hubbard in 1956 and became known as "Hubbard's curve." Hubbard based his model on the observed production of oil wells and fields, showing that local production, national production and even global production of oil (or any finite resource) traced a logistical curve of exponential growth, followed by a brief plateau, ushering in irreversible decline.

The is the sketch used by Hubbard to accurately predict peak oil production in the United States at between 1965 and 1970. Up until that point, U.S. was effectively the Saudi Arabia of the world, producing enough oil to meet all of our energy needs while exporting to other nations. People scoffed at Hubbard's prediction at the time, as U.S. production was growing exponentially by the year. But U.S. oil production did indeed peak in 1971 and has declined ever since, despite ever more sophisticated methods of extraction. Indeed, Azerbaijan, U.S., Venezuela, and Saudi Arabia (all at one time top oil-producing countries) have peaked or are peaking now.

This chart from shows oil production projected over time; estimates vary, but most analysts agree that we have either just reached peak oil or, in the most optimistic scenario, will do so in 2020.

To be clear, peak oil is not the point at which the world's oil supply is depleted; there are significant quantities of tar sands, heavy crude and shale oil that can replace the light sweet crude. The problem is that extracting fuel from these alternative sources is difficult and energy-intensive; we come ever closer to expending the same amount of energy on production as we get in return--at which point oil production is no longer worth the trouble.

The reality of peak oil is hitting at the same time that major new economies (India, China) are growing at a remarkable clip, putting ever greater pressure on the oil fields that remain. In the mid-twentieth century, only North America, Western Europe, Japan and a few other wealthy countries had oil-based economies. Today, almost every country in the world relies on a ready supply of cheap oil. If we do not make dramatic policy changes soon, we can look forward to a generation or more of resource wars, as the EU, U.S., China and India engage in a Second Great Scramble over remaining oil and gas resources in the Caspian Sea, Africa, the Middle East, and the Arctic Circle. Not only will this increase the absolute level of war and suffering in the world, but it does little more than postpone the inevitable transition to alternative fuels, while polluting the environment and contributing to greenhouse gases.

So how does this looming crisis constitute a growth opportunity for the U.S. economy? The argument here is that massive investment in alternative sources of energy promises an economic boom that could rival or eclipse the tech boom of the 1990s.

There is every reason to believe that the government can spearhead path-breaking innovation in the field. Many twentieth-century inventions were made possible through publicly-funded research. Some came through direct government funding, such as the internet (based on APRANET, a U.S. military communications project), the computer (funded by the Defense Department), chemotherapy, and nuclear fission/fusion. Others were financed indirectly through universities and research institutes, such as the World Wide Web, antibiotics, antiseptics, the Human Genome Project, and many cancer drugs.

Nor is there any doubt that the government can spur economic development, partly by investing in human capital. In the mid-twentieth century, the government built the U.S. highway system, the university system, free K-12 education, public libraries, national parks, hydroelectric dams, bridges, nuclear energy, and mass irrigation of the American Southwest. U.S. military spending during World War II pulled us definitively out of the Great Depression, and U.S. aid under the Marshall Plan helped West European countries recover from the war. The government-sponsored GI bill helped many returning WWII veterans enter the middle class by financing university education and providing loans for new homes.

Is there any question that America is thirsting for another Keynesian revolution? (Those of you who doubt we have enough money for such an enterprise can find it in the trillion-dollar defense/war budget and tax cuts for the wealthy.) Massive public investment in America's infrastructure and industrial base may be our best shot at resolving the current economic crisis and chronically high unemployment while mitigating the future energy crunch.

Venture capitalist Eric Janszen, who famously forecast the tech bubble and got out at the top of the market, predicted in February 2008 that a new bubble in alternative energy would emerge in response to the collapse of the housing bubble. In The Next Bubble: Priming the Markets for the next Big Crash, he observes that growth in our finance, insurance and real estate (FIRE)-based economy is to a great extent based on speculative bubbles. He predicts that the next great bubble will be in renewable energy because it is "politically expedient" and "scalable," requiring huge investments in communications and transportation infrastructure.

This would not be such a bad thing. An alternative energy bubble would have excellent knock-on effects, such as helping us transition away from our dependence on oil and curbing greenhouse gases, changes that are sorely needed going forward.

But why not have a new green revolution without the downsides of a destabilizing bubble? According to Janszen, this is entirely possible. He proposes levying a floating tarriff on oil, raising the price of oil to 200 to 300 dollars a barrel. If the price is raised very gradually, economic dislocation will be minimized as alternative renewable energies become increasingly cost-effective. As he points out in an interview with Wired magazine, the economy did not suffer unduly when the price of oil shot up from 20 USD to 100 USD a barrel in 2008. To facilitate the transition to renewable energy, he suggests rebuilding the nation's power grid to make it more efficient, installing high-speed rail, and piping fiber-optic cable into every household to reduce the need for commuting. Meanwhile, public-private corporations can be established that could draw on government funding but at the same time be responsive to shareholders.

One way or another, the new green revolution is coming. Renewable energy sources now make up 19 percent of the world's energy use; over half of newly installed energy capacity in the U.S. and Europe in 2009 was in renewables. From wikipedia:

According to a 2010 global status report on renewable energy, the growth in the capacity of alternative energy is between 10 to 60 percent annually, depending on the source. Alternative energy is also the darling of Wall Street. For two years running, private investment in renewables outstripped private investment in fossil fuels, growing from 40 billion in 2004 to 150 in 2009. Asian countries, particularly China, have emerged as leaders in development and manufacturing in this sector, with China producing 30 percent of the world's wind turbines (an increase from 10 percent in 2007) and 30 percent of the world's solar PV energy. The U.S. and even Europe are starting to fall behind the curve on the new green revolution.

There is really no down side to a new green revolution in terms of creating jobs and manufacturing potential, spurring the economy, averting or mitigating an energy crunch, and reducing the effects of anthropogenic climate change. For its own good, the U.S. must establish a leadership position in the new energy future.


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