I recently did a broadcast on the Hays Advantage reviewing the turmoil in the marketplace, tying it back to our outlook of last November. We also spent some time on Obama’s speech and introduction of some new regs on Climate Change. I pointed out that we need to do something as we are falling behind technologically what is happening in Germany, Japan and, to some extent, in China. I wrote about what Germany is doing a couple of years ago. I think we would all agree that regulations have a place, but it is not the best way to deal with this issue. At some point we need to have an explicit Carbon price which allows for economic decisions within a broad framework of rules.
Byron Wien, the Election, the Economy, Immigration, China, India, South America, Education–surprises!
Byron Wien does the most thorough job of putting together thoughtful, provocative and useful ideas on possible surprises for each year. I have been fortunate enough to know Byron and to participate in the Third Thursday group on which he draws, in part, to test both conventional wisdom and real surprises. I could not attend the December lunch this year as I was in India. Below is the email I sent Byron in late November. I will use that as the start of my thoughts on surprising things that could happen in 2012 and will then toss out a few additional ideas. Here we go:
“Byron, Am heading to India on Friday. Sorry I will miss your pre-surprise lunch. Am attaching copies of the text and slides I will be using in India. I don’t think they say anything you don’t know, but you might find something in there…My big surprise is that Joe Biden will not be the VP candidate in the coming election. Second surprise would be that the US does better than expected in 2012 given the debacle in Europe. Neither China nor India do as well as currently expected and China steps up to do something in Europe–maybe buy a Greek Island? They need Europe. Brazil starts to look a bit like Argentina–I think they are way understating their inflation rate. Capital flows our way and the RU dips into the 7′s before the election. If so, Obama wins in a walk. The really big surprise would be Huntsman as the Republican candidate–or maybe Obama’s VP candidate? What a ticket that would make. Jack”
The idea of surprises is to get people thinking away from trendlines. I use Byron’s definition, which is a personal belief that there is greater than a 50% chance of something happening where conventional wisdom is less than that. Let’s continue:
1) It is hard to see us getting through the year without an energy crisis of some type where demand significantly exceeds supply and oil prices spike once again. This could stem from trouble in the Middle East, Africa or Asia. It could be brought about by some covert action by the US that has been in the works for some time and comes to fruition within the next 10 months. There are too many possibilities for this not to have greater than a 50% chance of occurring within this calendar year. The combination of a hydrocarbon energy crisis combined with a major climate disaster somewhere in the world will lead to policy actions on the part of the US to accelerate both natural gas development and alternative energy development as well. Energy efficiency finally begins having its day. Talk of a carbon tax grows particularly as other countries implement implicit and explicit carbon pricing.
2) Contrary to a normally quiet year during a transition of leadership, to some extent forced by an “Asian Spring” throughout the region, China takes several bold steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress, combined with a desire by Hu and Wen to put more of their stamp on the future. This includes major acquisitions in the developed countries as well as the opening of manufacturing and service facilities. At home, R&D is accelerated particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced or eliminated and an explicit carbon tax is put in place. Following Australia’s lead and China’s moves, several Asian countries put in place mechanisms to reduce their use of conventional hydrocarbons for energy–although everyone finds that they have 200 million year-old hydrocarbons in shale formations and begins using the immature production technologies developed in the US, creating even more environmental disasters.
3) As the US economy grows, corporations find qualified hires difficult to come by. Enlightened corporations, led by GE, become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems which were supposed to do the job. Corporations become much more vocal about bringing illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the pool domestically. It becomes clear that a controlled amnesty program for current illegals in the US will add significantly to GDP and to government revenues. The tide begins to shift on immigration issues.
4) The US labor situation is aggravated in the short term by decisions on the part of several US corporations to bring manufacturing operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity and relative safety lead to better economics manufacturing locally. Caterpillar’s actions with its Canadian operations start the ball rolling. As stated above, US corporations take on a significant role in training and general education to meet their labor needs.
5) In spite of the demand for its natural resources, South America finds itself in much more turmoil politically and economically than one might expect. Natural disasters from climate change and it’s young mountain ranges compound economic issues from changes in export markets and a continuing misallocation of financial resources. Led, once again, by problems in Argentina, some degree of turmoil ripples north through the continent into Central America and requires more of the attention of the US than we have been willing to give thus far. Immigration to the US, both legal and illegal, accelerates as the US economy picks up steam.
6) India becomes a focal point. With an economy not growing adequately to provide jobs, upward mobility and political stability, India looks for diversions. Troops move north to “prepare” for confrontation with China, and west to confront Pakistan. Some elements internally are confronted as well. While the numbers show growth, the quality is somewhat problematic. Energy shortages push India toward even more aggressive alternative energy policies.
These aren’t all of the surprises we will find in 2012. I must say I continue to be optimistic about the US in spite of the crazies in Washington and the anger, bigotry and fear manifesting itself during the Republican primary battles. All of those who were planning on moving out of the country if Obama was re-elected–the ABO crowd– or any of the Republican choices–the ABAR crowd, might want to reconsider.
The short answer is maybe. It would require that vehicles being sold ten years from now would have to average 75 miles per gallon—not impossible, but improbable–unless. It requires political will, higher and real CAFE (fuel efficiency) standards and continued technological improvements or a gasoline price that rises substantially. The latter two are the factors about which I have the most confidence.
I hate to do this, but we need to understand the numbers. Try and stick with me on this. These numbers are rough but get us into the ballpark.
We import 9 million barrels of oil a day, about half from OPEC by the way. So we need to get rid of 3 million barrels a day or 1.095 Billion barrels a year. Now, those barrels don’t just go into making gasoline, but let’s make the leap of having all that reduction come from gasoline. Based on refining experience, each barrel of oil typically produces about 19 gallons of gasoline (there are 42 gallons in a barrel). If we are to get rid of 3 million barrels of oil per day that means we need to reduce gasoline consumption by about 46 Billion gallons (42 gallons per barrel x 1.095 Billion barrels); that’s out of the 160 Billion gallons consumed each year by the 240 million vehicles on the road today. (Notice that I capitalize Billion. We are talking BIG numbers.) Those vehicles, each traveling about 12,000 miles a year, are actually averaging about 18 miles per gallon. To think about it another way (inverted), each vehicle is consuming about 0.0556 gallon per mile or 0.00132 barrel per mile. Pretty exciting so far…
Over the next ten years at a scrappage rate of 5% a year we will replace half of those 240 million vehicles. That’s where the reduction in consumption has to come from. Let’s calculate what the mileage improvement has to be to eliminate those 1.095 Billion barrels a year. Currently the half of the fleet that will be scrapped, which is less efficient than the whole fleet, is likely consuming about 1.8 Billion barrels a year or 4.93 million barrels a day. We would need it to be consuming only 1.93 million barrels per day or 0.705 Billion barrels a year or 29.61 Billion gallons per year. If each vehicle in that half of the fleet is traveling 12,000 miles a year it would have to be averaging about 49 miles per gallon. You can do this calculation yourself by dividing the total mileage for the fleet (1.44 Trillion miles) by the gallons expected to be consumed (29.61 Billion). To get that average for the 120 million vehicles assuming a linear increase in miles per gallon over that ten-year period, the vehicles bought in 2022 would have to be averaging 75 miles per gallon. While the all-electrics are already getting over 100 miles per gallon equivalent and many of the hybrids over 50 mpg it is still a stretch to think that we will get the average on all vehicles sold in a year up to 75 miles per gallon in 10 years or about 50 miles per gallon in 5 years. It is not impossible, but would require one hell of a change in the growth path for highly fuel-efficient vehicles, supported by significantly higher CAFE standards. The problem is we are starting with only 40% of all vehicles being subject to the higher CAFÉ standards. We have a lot of light trucks and real trucks on the road.
We should strive for all 3 million barrels a day coming from fuel efficiency. As I said, political will, CAFE standards, and technology are required, and higher oil prices are a given unless we do this. And, by the way, every million barrels a day of gasoline we don’t use, reduces CO2 emissions by 148 megatons per year.
In the State of the Union address President Obama announced a goal of 1 million electric vehicles on the road in the United States by 2015. Part of that plan involves continuation of some existing incentives such as the $7500 credit on a purchase, but some new incentives and actions as well—incentives to communities for vehicle fleet conversions, HOV access and other steps. In addition the GSA will purchase 40,000 alternative fueled and fuel-efficient vehicles as replacements for aging vehicles in its fleets. 1 million sounds like a nice number, and we have to start somewhere, but let’s hope the number is significantly larger.
There are over 240 million vehicles on the road in the US now, and a replacement of 5-7% of those vehicles a year. Those vehicles average about 20+ miles per gallon. Replacing 0.4% of the fleet with vehicles averaging, let’s say, 100 miles per gallon equivalent, under the most optimistic assumptions reduces our oil-equivalent consumption by about 12 million barrels a year and CO2 consumption by about 4 million tons. Unfortunately, we import 9 million barrels of oil a day. However, it’s a start! It also has the effect of stimulating activity in electric vehicles and associated and competitive technologies. Importantly, it will stimulate activity on increased fuel efficiency of all types. In my view, this is where we need to focus—set very aggressive targets on average fuel efficiency for each manufacturer selling in the US with a goal to getting the whole fleet—all 240 million vehicles–up to 60 miles per gallon or better in 25 years. That does start making a big dent in CO2 emissions and our dependence on foreign oil. I have written about this in earlier posts, (see TRADE DEFICITS, ENERGY INDEPENDENCE AND, OH YES, CO2 EMISSIONS—November, 2009). In other words, provide incentives for fuel efficiency in general. With electric having the potential for the highest efficiency, the credits and other specific incentives there will drive the rest of the industry, but lets get more explicit on very aggressive fuel efficiency targets. The competitive juices and the resulting innovation will get us there. President Obama talked about out-competing and out-innovating the rest of the world. That has to start with competition and innovation at home. More to come.
It is worth seeing the commercial version of “Cool It.” Hurry, though, since I don’t think 4 people in an audience at each showing will be commercially viable. Ondi Timoner must have gotten more control over the final product than I thought she would. The commercial version is quite balanced. There are some fairly sharp digs at Al Gore and “An Inconvenient Truth,” but a recognition that Gore brought the topic of Global Warming to the forefront. Let me get some of the critiques out of the way: There’s a little too much of “We’ve only seen a one foot rise in sea levels in the last century,” “… life is good with standards of living having risen substantially,” etc. In other words, “We’ve jumped off the 50-story building and as we pass the 25th floor things actually look okay.” Bjorn Lomborg points out that there is a bell curve of potential global warming outcomes and the alarmists only use the low odds extreme possibilities to make their case for immediate action and large expenditures. However, he turns around and uses the least possible impact of the current actions on temperature change and sea level rise to make his case for diverting resources away from climate change toward other pressing needs. He is right regarding the need to address other issues, poverty, health, housing, etc., but, as Ned Babbitt points out in a comment below, Lomborg doesn’t provide a lot of documentation for the expenditure levels he calls for. Those may exist in his book of the same name. I could go on, but these are all just nits. Go see the movie!
Lomborg goes out of his way to affirm that he is a true believer in global warming, that man is the big contributor to the path we are on, and that we need to do something about it. However, he believes that the solutions being implemented, cap and trade, electric vehicles, windmills, solar PV are just not adequate today to deal with the problem and much of the dollars being invested could be put to better use. I have to agree except in the case of the transportation industry, where I believe the solutions are there—they just haven’t been implemented. Elsewhere, the technologies we are using today are just not adequate to solve the problems in an economic fashion without an explicit price on carbon. The documentary spends a fair amount of time on geo-engineering, which Lomborg thinks may be necessary as stop gaps because we won’t have developed the economic solutions that can move us away from a carbon-based energy system in the right time frame. His call is for spending more of the money on new technologies and innovation and less on today’s implementation, and in the process freeing up capital to deal with the other needs of the global society. The documentary supports the case by taking us on a whirlwind tour of some of the new technologies in the developed world that could get us to the right solutions. Whether it is Nathan Myhrvold’s work on 4th generation nuclear technologies, Stephen Salter’s work on wave energy or cloud whitening, or Hashem Akbari’s work on mitigating the urban heat effect, the journey through the new technologies is exciting and encouraging. The solutions are there, in the lab, in prototypes or in a scientist’s head.
Unfortunately, most of the solutions don’t fit today’s venture capital model of low investment and quick return, which is still available in various aspects of the internet space. The work that is being done is occurring in university labs based on government grants and other non-profit funding with the exception of the Myhrvolds of the world who are recycling the capital from earlier software/internet ventures into this new and exciting field. The other small exception is in those few cases where adaptation, primarily to rising water levels is already a requirement. The Dutch cannot really afford to take the chance that the low end of the distribution curve of climate change will be the end result. I don’t think the rest of the world can either.
We have to create the financing models that allow these innovations to progress to the next levels. Whoever does will own these technologies and the fruits of their implementation for their own geographies and certainly for the benefit of their own economies. Lomborg’s whirlwind tour doesn’t get outside the developed world, but the innovation and implementation are occurring in the developing world at a startling pace as well. Go get excited by the view of what can happen as presented in “Cool It,” and put some thought as to what needs to be done to move these innovations and others toward practical reality.
At the Hamptons International Film Festival, I saw “Cool It,” the new documentary directed by Sundance two-time Grand Jury Prize winner, Ondi Timoner (“Dig!,” “We Live in Public”). It features Bjorn Lomborg, author of “The Skeptical Environmentalist,” and a pariah in many climate change and environmental circles. I thought it would be good to “know one’s enemy,” and went armed with facts and data to refute what I expected to be hyperbole and assertions in the documentary. This was the first US showing of the film. It was very poorly attended as one might expect, given the environmental views of many of the Hamptons’ weekend residents. A mistake.
The documentary actually presents a quite balanced view of climate change. Balanced in the sense of putting Climate Change into perspective along with all the other global problems we face today. Lomborg is actually a strong believer in the likelihood of climate change. He also believes that the polarization on the topic brought about by some of the hyperbole coming from the climate change zealots has been a detriment to progress on solving the problems. I think he does understate the risks in an attempt to present a “balanced” view, using some of the same techniques that he accuses the zealots of using. However, his conclusions are valid—the primary one being that more of the dollars that are going toward today’s solutions would be better spent on research and development at this stage, to come up with true economic innovations that would speed the shift away from carbon based energy. This version of the film doesn’t talk about the need for a higher price on carbon, although it is my understanding that earlier cuts did.
I suspect that by the time this film hits the commercial theaters the final producers’ cut will be more of a polemic against Al Gore and others who have been a big part of raising awareness on this issue. I hope to see it when it becomes commercial, and I would urge others to do the same. I also hope that an earlier cut makes it to the Internet so one can compare the director’s apparent intent with the final product. Timoner’s responses to questions after the screening portrayed an intelligence and understanding that is already not showing up in each cut as it makes its way from the film festivals to the multi-cinemas for mass consumption. Lomborg will likely continue to be viewed as a pariah in certain circles, when his thoughts should be broadly incorporated into our efforts to deal with this and other serious global problems. Read the book. See the movie. And get your hands on a director’s cut, if you can.
In his January 10 Op-Ed piece in the NY Times, http://www.nytimes.com/2010/01/10/opinion/10friedman.html?scp=8&sq=tom%20friedman&st=cse, Tom Friedman makes several points about where things stand in the Energy Technology race and reaches the conclusion that China may be winning and will continue to win unless the US gets serious about energy legislation and carbon pricing. In recent days, starting with the State of the Union address, we have heard a bit more noise from the current administration on the energy front–nuclear power, additional subsidies, no capital gains on start-ups and maybe, a cap-and-trade system or some form of establishing a price on carbon. Maybe it will happen, and, maybe it is necessary for the developed world, where replacement of existing carbon-based energy is the principal requirement. In China, India, and much of Asia, new energy sources can be put in place to meet demand growth—a very different set of economics. And the markets are big enough to drive prices down a volume-related cost curve in addition to cost reductions from new technologies and systems. It allows room for more experimentation. It is a requirement if one really wants to be energy independent. Last year China did import 4.1 million barrels of crude oil a day, a little less than half of what the US imports. But this is likely to grow as auto sales grow, unless… See the April post, “China and Electric Cars—The Stakes Have Been Raised.”
China doesn’t appear to need a price on carbon today to look for alternative energy sources. It understands the relentless energy demand it faces as its economy grows and the pressure that would put on existing energy prices. And it understands, politically, it cannot continue to pollute its air and water. In my visits there I have even seen some evidence that it understands the Climate Change risks from continuing CO2 emissions.
A brief story: In June, 2008, at a UNEP meeting in New York, I was asked if I could name one thing that one country could do that would accelerate the path toward alternative energy adoption and CO2 reduction. I responded “I guess the expected answer would be that the US should do almost anything. But since I do not think it will, my answer would be for China to institute a $50/Ton Carbon tax. This would accelerate the pace of change in China and would likely shame the rest of the world into responding in kind or with a serious cap-and-trade system.” Immediately the Chinese delegate asked to speak. She started with a very logical argument that China was in the early stages of entering the developed world with a low GDP per capita and such a tax would be a burden on many of the people finding their way into its new economy. However, she closed her statement by saying that China could not institute such a tax unilaterally (my emphasis). An interesting choice of words. The truth is, if China did institute an internal carbon tax, it would dramatically accelerate its alternative energy adoption and innovation. The US would spend way too much time figuring out how to respond and would then be in real trouble in Tom Friedman’s race.
At the moment, it is still a race. We shouldn’t require a price today on carbon to stay in the race. It should be apparent that the present value of tomorrow’s prices for carbon and the cost of climate change would justify alternative energy adoption and innovation today. Unfortunately, our system seems to require that the price be explicit before we really get serious. And, maybe, once the Western World as a whole has an explicit price, Asia will get explicit as well. Then we will see if it stays as a race between countries or simply becomes the race to save the planet.