Inconvenient realities
Some scientists believe one reason for the shrinkage of Arctic Sea ice in recent decades is the prevailing winds blowing black carbon soot over from Asia. This is a separate issue from N20, which is a colorless gas. As the black soot covers the snow and ice fields in Northern Canada, they become more absorbent of the sun’s radiation thus causing more melting. (Source: “Weathering Climate Change” by Hugh Ross)
Due to exploding energy needs in China in 2021, coal prices have experienced an unprecedented surge. Despite this stunning rise, Chinese authorities have instructed its power providers to obtain coal and other baseload energy sources, such as liquified natural gas (LNG), regardless of cost. Notwithstanding how pricey coal has become, its usage in China was up 15% in the first half of 2021 versus first half 2019 which was, obviously, pre-Covid. Figure 4
Despite the polluting impact of heavy coal utilization, China is unlikely to turn away from it due to its high energy density (unlike renewables), its low cost and its abundance within its own borders. As we saw in Figure 2 above, it must heavily rely on oil imports to satisfy its 15 million bpd needs (about 15% of total global demand).
In yet another irony, China has a preference for U.S. oil because of its light and easy-to-refine nature, despite the current Cold War between the two superpowers. China’s refineries tend to be low-grade and unable to efficiently process heavier grades of crude, unlike the U.S. refining complex, which is highly sophisticated and prefers heavy oil such as from Canada and Venezuela — back when the latter actually produced oil.
Thus, China likes EVs because they can be de facto coal powered, lessening its dangerous reliance on imported oil. It also has an affinity for them due to the fact it controls 80% of the lithium-ion battery supply and 60% of the planet’s rare earth minerals both of which are essential to EV manufacturing.
However, even for China, mining and processing enough lithium, cobalt, nickel, copper, aluminum, and the other essential minerals/metals to meet the ambitious goals of largely electrifying new vehicle volumes, is going to be extremely daunting. Then there is its goal of mass wind farm construction and enormously expanded solar panel manufacturing
As energy expert par excellence Daniel Yergin writes: “With the move to electric cars, demand for critical minerals will skyrocket (lithium up 4300%, cobalt and nickel up 2500%), with an electric vehicle using 6 times more minerals than a conventional car and a wind turbine using 9 times more minerals than a gas-fueled power plant. The resources needed for the ‘mineral-intensive energy system’ of the future are also highly concentrated in relatively few countries. Whereas the top 3 oil producers in the world are responsible for about 30 percent of total liquids production, the top 3 lithium producers control more than 80% of supply. China controls 60% of rare earths output needed for wind towers; the Democratic Republic of the Congo, 70% of the cobalt required for EV batteries.”
As many have noted, the environmental impact of needing to immensely ramp up the mining of these materials is undoubtedly going to be severe. Michael Shellenberger, a lifelong environmental activist, has been particularly vociferous in his condemnation of the dominant view that only renewables can solve the planet’s energy needs. He’s especially critical of how his fellow environmentalists resorted to repetitive deceptions, in his view, to undercut nuclear power in past decades. By leaving nuclear energy out of the solution set, he foresees a disastrous impact on the planet due to the massive scale (he’d opine, impossibly massive) of resource mining that needs to occur. (His book, Apocalypse Never, is also one I highly recommend; like Dr. Koonin, he hails from the left end of the political spectrum.)
Putting aside the environmental ravages of developing rare earth minerals, when you have such high and rapidly rising demand colliding with limited supply, prices are likely to go vertical. This will be another inflationary “forcing”, a favorite term of climate scientists, caused by the Great Green Energy Transition. Per Pickering Energy Partners: “The capital intensity of the Energy Transition is unlike anything that we have seen. Relative to 2020 investment rates, spending needs to increase about 10x and hold steady for the next three decades.
Moreover, EVs are very semiconductor intensive. With semis already in serious short supply, as we saw in Chapter 8, this is going to make a gnarly situation even gnarlier. It’s logical to expect there will be recurring shortages of chips over the next decade for this reason alone, not to mention the acute need for semis as the “internet of things” moves into primetime.
In several of the newsletters I’ve written in recent years, I’ve pointed out the present vulnerability of the U.S. electric grid. Yet, it will be essential not just to keep it from breaking down under its current load; it must be drastically enhanced, a herculean task. For one thing, it is excruciatingly hard to install new power lines. As J.P. Morgan’s Michael Cembalest has written: “Grid expansion can be a hornet’s nest of cost, complexity and NIMBYism, particularly in the US.” The grid’s frailty, even under today’s demands (i.e., much less than what lies ahead as tens of millions of new EVs plug into it) is particularly obvious in California. However, severe winter weather in 2021 exposed the grid weakness even in energy-rich Texas, which also has a generally welcoming attitude toward infrastructure upgrading and expansion.
Yet it’s the Golden State, home to 40 million Americans, and the fifth largest economy in the world if it was its own country – which it occasionally acts like it wants to be – that is leading the charge to EVs and seeking to eliminate internal combustion engines (ICEs) as quickly as possible. Even now, blackouts and brownouts are becoming increasingly common. Seemingly convinced it must be a role model for the planet, it’s trying desperately to reduce its emissions, which are less than 1% of the global total, at the expense of rendering its energy system more similar to a developing country. In addition to very high electricity costs per kilowatt hour (its mild climate helps offset those), it also has gasoline prices that are 77% above the national average.
Voters in the reliably blue state of California may become extremely restive, particularly as they look to Asia and see new coal plants being built at a fever pitch. The data will become clear that as America keeps decarbonizing – as it has done for 30 years mostly due to the displacement of coal by gas in the US electrical system — Asia will continue to go the other way. (By the way, electricity represents the largest share of CO2 emission at roughly 25%.)
California has always seemed to lead social trends in this country, as it is doing again with the GGET. The objective is noble, though extremely ambitious, especially the timeline. As it brings its power paradigm to the rest of America, especially its vulnerable grid, it will be interesting to see how voters react in other states as the cost of power leaps higher and its dependability heads lower. It’s reasonable to speculate we may be on the verge of witnessing the Californication of the U.S. energy system.
In case you think I’m being hyperbolic, the IEA has estimated it will cost the planet $5 trillion per year to achieve net zero emissions. This is compared to global GDP of roughly $85 trillion. Frankly, based on the history of gigantic cost overruns on most government-sponsored major infrastructure projects, I’m inclined to take the over — way over — on the $5 trillion estimate.
Moreover, energy consulting firm T2 and Associates, has guesstimated electrifying the U.S. to the extent necessary to eliminate the direct consumption of fuel (i.e., gasoline, natural gas, coal, etc.) would cost between $18 trillion and $29 trillion. Again, taking into account how these ambitious efforts have played out in the past, I suspect $29 trillion is light. Regardless, even $18 trillion is a stunner, despite the reality we have all gotten numb to numbers with trillions attached to them. For perspective, the total towering level of U.S. federal debt is around $30 trillion (unfunded entitlements may sum to as much as $150 trillion per pundits such as Jeff Gundlach).[iii]
Regardless, as noted at the start of this chapter, the probabilities of the Great Green Energy Transition happening are extremely high. Similarly, I believe the likelihood of the Great Greenflation is right up there with them. While it would be unfair to blame the Fed for this particular inflation forcing, per earlier comments it is now being instructed to become involved in fighting climate change. This includes mounting pressure on it to penalize banks that invest in fossil fuel projects. If anyone at the Fed believes this poses extreme economic risks, their silence is deafening.
As Gavekal’s Didier Darcet wrote in mid-August of 2021: “Nowadays, and this is a great first in history, governments will commit considerable financial resources they do not have in the extraction of very weakly concentrated energy.” (my note: i.e., less efficient) “The bet is very risky, and if it fails, what next? The modern economy would not withstand expensive energy, or worse, lack of energy.”
While I agree this an historical first, it’s definitely not great (with apologies for all the “greats”). This is particularly not great for keeping inflation subdued, as well as for attempting to break out of the growth quagmire the Western world has been in for the last two decades.
In my view, as I’ve written in my newsletters, we are entering the third energy crisis of the last 50 years. If I’m right, it will be characterized by recurring bouts of triple-digit oil prices in the years to come. Along with Richard Nixon taking the U.S. off the gold standard in 1971, as discussed in Chapter 5, the high inflation of the 1970s was caused by the first two energy crises (the 1973 Arab Oil Embargo and the 1979 Iranian Revolution). If I’m correct about this being the third, it’s coming at a most inopportune time with the U.S. in hyper-MMT mode (per Chapter 7).
The sharp and politically uncomfortable rise in U.S. gas pump prices in the summer of 2021 caused the Biden administration to plead with OPEC to lift its volume quotas. The ironic implication of that exhortation was glaringly obvious, as was the inefficiency and pollution consequences of shipping oil thousands of miles across the Atlantic. (Oil tankers are a significant source of emissions.) This was as opposed to utilizing domestic oil output, as well as crude from Canada (which is actually generally better suited to the U.S. refining complex). Beyond the pollution aspect, imported oil obviously worsens America’s massive trade deficit – which would be far more massive without the 11.5 million barrels per day of domestic oil volumes – and would cost our nation high-paying jobs.
Surely, there are better ways of coping with the harmful aspects of fossil fuel-based energy than the scorched earth policies of some activists. (Literally, in the case of one Swedish professor who has written a book on blowing up oil and gas pipelines; he was inexcusably given a platform by the venerable The New Yorker.) Less violent, but seriously harmful, anti-energy policies include blocking new pipeline builds, shutting existing ones, and efforts to seriously restrict U.S. energy production. In America’s case the result will be forcing us to unnecessarily and increasingly rely on overseas imports. (For example, per The Wall Street Journal, drilling permits on federal land have crashed to 171 in August from 671 in April of 2021 despite rapidly rising oil prices.)
More rational solutions include fast-tracking small, modular nuclear reactors, encouraging the further switch from burning coal to natural gas (a trend that is, unfortunately, going the other way now, as noted above), utilizing and enhancing carbon and methane capture at the point of emission, including improving tailpipe effluent reduction technology; enhancing pipeline integrity to inhibit methane leaks; among many other mitigation techniques. The essential consideration is to recognize the reality that the global economy will be reliant on fossil fuels for many years, if not decades, to come.
If the climate change movement fails to acknowledge the indispensable nature of fossil fuels, it will almost certainly trigger a popular backlash undermining the positive change it is trying to achieve. This is similar to what it did via its relentless assault on nuclear power in the 1970s, which produced a frenzy of coal plant construction in the 1980s and 1990s. On this point, it’s interesting to see how quickly Europe is reembracing coal power to alleviate the energy poverty and rationing occurring over there in late 2021 and early 2022. It has also now categorized natural gas and nuclear power as green energy sources, infuriating the extreme faction of the environmental movement. However, in my view, that was a big step toward political pragmatism. When the choice is between supporting climate change initiatives on the one hand and being able to heat your home and provide for your family on the other, is there really any doubt about which option the majority of voters will select?
Moreover, one of my other big fears is that the West is engaging in unilateral energy disarmament. Russia and China are likely the major beneficiaries of this dangerous scenario. (Please see the Appendix for an elaboration on this point.)
In 2011, the Nord Stream system of pipelines running under the Baltic Sea from northern Russia began delivering gas west from northern Russia to the German coastal city of Greifswald. For years, the Russians sought to build a parallel system with the inventive name of Nord Stream 2. The U.S. government fought its approval on security grounds, but the Biden administration has dropped its opposition. It appears Nord Stream 2 will happen, leaving Europe even more exposed to Russian coercion.
A closing thought for this chapter: Is it possible the Russian government and the Chinese Communist Party have been secretly and aggressively supporting the anti-fossil fuel movements in America? In my mind, it seems not only possible but probable. After all, wouldn’t it be in both of their geopolitical interests to see the U.S. once again caught in a cycle of debilitating inflation, ensnared by the twin traps of MMT and the third energy crisis?
[iii] Further driving home the probability of a multi-trillion-dollar annual price tag, at the 2021 COP 26 in Glasgow, India demanded $1 trillion from the OECD (i.e., developed countries) to fund its decarbonization efforts. Thus, it may be a situation where greenflation intersects with greenmail.
"Is it possible .. Russian government &.. Chinese Communist Party .. secretly/aggressively supporting .. anti-fossil fuel movements in America? " Hmmmm.. After all the cyber-attacks; stealing trade/tech info; supporting countless FaceBo/U-tube channels to scream America/West is collapsing & other warlike actions, do they really have resources left over for something like that ?={