Monday, June 09, 2014

Revolutionary Resources Must Cover Costs And Carbon

The Commonwealth Club addressed natural resource shortages and mitigation strategies today.  I have yet to read Resource Revolution so I'll withhold judgment on the author's arguments.  I keep hearing about resource constraints in the context of these billions of middle class consumers the developing world is supposedly creating.  I don't think they're coming, but the developed world has plenty of room to grow.

US energy use has tracked population growth and GDP growth fairly closely for much of this nation's history.  The EIA's Annual Energy Outlook has all the details.  The post-WWII explosion in US GDP had a lot to do with rising domestic oil production.  Petroleum has the highest energy content of any energy source you can name.  The current US fracking boom and the widespread adoption of efficient technologies has prolonged the US's ability to generate high GDP growth.  Transitioning to a post-hydrocarbon energy future makes maximum possible use of this window of opportunity

More analysts need to consider the impact of the sharing economy on resource use.  Millennials using ZipCar and Airbnb won't generate demand for the steel and wood used in new cars and hotels.  Analysts should also consider whether the developing world's aspiring middle classes will bump right up against the food-water-energy security nexus limits on population size and composition for a given watershed.

There is plenty of analytical controversy over why oil prices remain high despite declining driving in the US and cheap alternatives like natural gas (at least in North America).  I'm pretty sure it's because the production cost curve for oil is rising around the world and cheap oil is getting harder to produce.  Keeping those costs manageable may require energy companies to adopt sustainable ESG criteria that will keep them in the hunt for investment dollars worldwide.

Resource sector analysts have discovered the "carbon bubble,"  a new methodology for valuing investments in hydrocarbon production.  Claiming that hydrocarbon investments are "stranded assets" because their eventual carbon emissions will negate any economic value they produce is IMHO a baloney calculation.  Physical plant has a natural depreciation schedule and expected salvage value.  The carbon itself now has economic value because it is a useful input into other green processes.  Here's my ultimate carbon capture cycle . . . coal production to energy plant to CO2 emission capture.  The fly ash from coal burning makes concrete.  The captured CO2 is a feedstock for algae production, which processes into biofuel.  See folks?  There are no stranded assets anywhere in that carbon chain.

Carbon credit markets will make the price of carbon even more transparent as different parts of the energy supply chain bid on it.  It's a legitimate resource and it needs a global price, just like oil.  All it takes is enough demand and some adaptive accounting rules to make it official.  That's the real resource revolution I'd like to see.