Energy-supply systems tend to be highly centralised, large-scale and capital
intensive. Therefore they tend to be the subject of waves of investment,
consolidation, and eventual transformation as new technologies accumulate.
Since the periods of renewal and transformation require massive new
investment and therefore a transfer of resources from current consumption,
they are often stressful in social-stability terms and may partly coincide
with generalised recessions. However, in the past, capitalism has
successfully negotiated such transitions and renewals.
In 1955, Simon Kuznets (creator of national accounts and the concept of
Gross National Product) published his "inverted U" theory of capitalist
evolution: that income inequality rises in the early stages of development,
and falls as economies mature. (see LBO #80 (November 1997)which may still
be on Doug Henwood's website).
One conventional approach, based on Kuznets-type cycles, to understanding
current energy-supply concerns is to take account of investment cycles and
try to see how these interact with wider conjunctural phenomena, such as the
general business cycle, geopolitical considerations and so on. In this view,
there is no absolute lack of energy, but shortages may arise in
market-driven supply because of lack of infrastructure renewal, the result
of a period of low prices. There will be no apocalyptic melt-down, just
short-term supply difficulties and price spikes until raised profits lead to
new investment and more abundant supply. This argument is well put in the
following article, from the Kansas City Business Journal, 22 June 2001.
This argument is important because it tells us something about what is
likely to happen in the next few years, so we can learn from it. But it is
an argument from past experience, and that is not an accurate guide,
especially when entirely unprecedented things may be happening to
capitalism's all-important energy-base.
This argument that energy will always be available but is subject to
cyclical change in availability, leaves aside the question of whether or not
there is any ultimate resource constraint. The thinking is that enough
investment will always find new exploitable reserves and that given time the
energy markets, like all other commodity markets, will be self-correcting.
This is certainly wrong. There is too much hard evidence now of the
existence of severe constraints on future supply caused by reserve-depletion
and the failure to add new reserves/resources to the world's energy
portfolio. It is clear that conventional hydrocarbon reserves are strictly
finite. Unconventional reserves do also exist (Alberta tar sands, stranded
gas, deepwater gas etc) but they do not come cheap and may be irrecoverable
for enviornmental and other reasons. So the underlying assumption in the
Kuznets-type argument is too optimistic; nevertheless, Carlson in the
article below is right about one thing. It is clear that we are entering a
new period of sustained and much higher energy prices coupled with very high
levels of investment in new sources of supply, particularly in oil and gas,
and in the construction of new electricity generation capacity. This new
investment-wave, coupled with the effects of economic recession and new
forms of energy conservation (very easy in energy-guzzling nations like the
USA), which together help reduce demand for energy, ought in normal
circumstances to push the underlying problem away to another day. But
these, as I hope to show, are not normal circumstances.
Assuming conventional reserves, primarily of hydrocarbons, are strictly
finite, the next question (moving beyond Kuznets-type cycles of
infrastructure renewal), is whether the world economy can make the
transition to an entirely new energy-base in the future. Presumably this
would be some kind of hydrogen-based economy with much more conservation,
use of renewables (especially wind power), new kinds of nuclear such as
pebble-bed reactors, and more exotic things like fusion reactors, fast
breeders, and so on. This is serious stuff. If conventional reserves are as
finite as some think (me included), then if we don't transition to some
entirely new energy-base, we shall have to transtion back to chopping wood
and using steam engines to get coal. So some kind of transition is
inevitable. The question becomes, how messy will it be? How much of
humankind will be left even further behind, and will the resulting global
inequality, which would be far more severe even than today, be manageable at
all? The transition from coal and steam to oil and electricity took all of
the first half of the last century, and produced two world wars and a legacy
of absolute immiseration for two-thirds of humankind. Yet it should have
been easy: oil was plentiful, easily obtainable and far superior to coal.
Also, the global environment was far less stressed than it now is, and we
were still in Herman Daly's 'half-full world'. None of these advantage now
apply. The situation today is that the so-called hydrogen economy is really
just vapourware, wishful thinking. This is why I do not see how the kind of
global transition which is clearly necessary, can be accomplished by
capitalism without truly catastrophic human and ecological costs, eclipsing
the horrors of the last century. I'd be happy to be proven wrong. One of the
reasons for pessimism is that the notion of environmental Kuznets curves has
turned out to be so wrong.
As Cleveland and Ruth argue [see ref below for source], the environmental
Kuznets curve (EKC) is a widely-used indicator of sustainable development.
The idea behind EKC was that rising incomes eventually reduce the use of
resources and the emission of wastes. Thus, resource depletion and pollution
tend to fall as incomes rise, producing an inverted U-shape function.
Cleveland et al say that empirical analysis suggests that the relationship
holds for some air pollutants and deforestation. Some of the most optimistic
assessments of future materials supply and demand assume that rising incomes
will substantially de-couple material use and economic growth.
Most analyses did find support for the EKC hypothesis. The standard
explanation is based on assumptions about the materials demanded by an
economy through successive stages of development. In the early stages of
development when incomes are low, materials requirements also are low,
particularly for metals and building materials because such economies are
based largely on unmechanized agriculture. Industrialization drives an
increase in materials demand to build basic infrastructure: roads, railways,
bridges, factories, cities, pipelines, power grids, and so on. As
development continues, the need for basic infrastructure declines and
consumer demand shifts increasingly towards services, which are assumed to
be less materials-intensive.
This is the theory, but Cleveland et al have challenged it. The economy,
they say "is getting ``lighter,'' but that trend has little aggregate
economic significance. Despite claims to the contrary, there is no
compelling macroeconomic evidence that the US economy is decoupled from
material inputs."
In fact, Kuznets turns out to be wrong on both counts: inequality has
increased again, and there has been a rebound in energy and materials use.
Thus, attempts at substituting human capital for natural capital have
failed. Capitalism is the same old same old. It is still into gross growth,
and cannot escape faucet-sink use of the ecosphere. Sustainability is a
myth. As Cleveland et al conclusively demonstrated, 'dematerialisation' and
'virtualisation' of the economy have proven to be fictitious. In the
capitalist states, absolute and per capita consumption of energy and
throughput of materials continues to rise thru both recessions and booms.
There is no reason to suppose this will ever change. Capitalist growth
requires more energy. Where is this energy going to come from? Or rather,
from *whom* is it coming? Who will be asked to give up whatever they now
have, so that Europe, Japan and N America can continue to grow?
Mark Jones
----------------------------------------------------------
The future for energy prices is best told by looking at the past
Ken Carlson
Kansas City Business Journal 22.06.01
In past years, energy price forecasts by the Department of Energy's Energy
Information Administration in its annual Energy Outlook have been a good
proxy for the "consensus" forecast.
The latest forecasts are that real or constant-dollar wellhead prices for
crude oil and natural gas will escalate at less than 2 percent a year and
that the mine price of coal will have negative escalation between 1999 and
2020. However, do such forecasts provide a realistic view of the future?
The past often is a good guide when facing an uncertain future. Black &
Veatch has spent considerable effort since the mid-1970s energy crisis
evaluating the underlying factors that influence energy prices. This has
included examining energy price cycles going back to the mid-1800s.
The current thinking is that the recent rise in energy prices was excessive
and that prices will return to much lower levels from which a gradual
increase will occur through the year 2020 and beyond. One hundred and forty
years of history suggests that this will not occur.
Historically, energy prices have been cyclical with significant volatility.
Changes to the cost and price structure of the energy-producing industries
that occur during these 20- to 30-year cycles are dramatic. In 1998, energy
prices were at a historic low level. From such lows, prices have not
escalated at rates as low as 1 percent to 2 percent a year as is now being
forecast.
During the downward price trend of the last energy price cycle -- between
1981 and 1998 -- the productivity of labor, capital and energy production
efficiency improved at facilities producing crude oil, natural gas and coal.
Employment in the energy-producing industries was reduced by more than 50
percent. Fierce competition aggravated by oversupply forced prices lower.
To overcome the normal production decline at crude oil and natural gas
wells, a considerable number of new wells must be completed each year to
maintain production and to try to accommodate growth in consumption. Once
excess production capability has been depleted, additional production can
only come from the development of new sources of supply.
Near the bottom of the energy price cycle, only the cash costs of production
are covered. Producers are unwilling to invest additional capital to
maintain production or buy marginally better technology. The less
competitive producers either voluntarily or involuntarily (bankruptcy) leave
the marketplace. Others consolidate production activities or seek merger
partners. This was the trend from the mid-1980s through 1999.
As fuel prices are forced down to their variable cost of production near the
bottom of the price cycle, the price differentials among crude oil, natural
gas and coal also bottom.
This increases the demand for oil and natural gas relative to coal for
electric power generation. In the transportation sector, the popularity of
SUVs in the late 1990s is comparable to that of gas-guzzling motor homes in
the early 1970s, before the last energy crisis.
>From these cycle lows, prices rise dramatically. Suppliers of goods and
services throughout the energy supply chain begin marking up their prices to
restore profitability and expand production capability. Higher wages must be
offered to attract additional workers who must be trained. This reduces
productivity and increases costs.
Usually, several years of rising prices occur before consumers realize they
are not experiencing an aberration in the long-term downward trend in
prices. It often is near the top of the price cycle when consumers convert
energy cost-reduction plans into action. For example, the article "Eastern
Utilities Get Started on Conversions Back to Coal" appeared in the August
1980 edition of Electric Light and Power, the same year international oil
prices peaked and one year before domestic crude oil prices peaked.
The free movement of prices results in adjustments to supply and demand,
allocation of resources and substitutions that maximize economic
efficiencies. However, regulatory controls often have exacerbated shortages
and price spikes.
Historically, this has led to large price disparities between competing
fuels. For example, the average wellhead price of natural gas was less than
the mine price of coal until 1978.
Price controls placed on domestic crude oil in 1971 produced a large price
disparity between much higher-priced imported crude oils and regulated,
lower-priced domestic crude oils.
In 1978, Congress passed the Natural Gas Policy Act, which mandated the
phased decontrol of natural gas wellhead prices. In this same year, the Fuel
Use Act was passed. It stated that all electric utilities should discontinue
using natural gas in generating electricity after 1990. This led to an
abundance of natural gas and low prices.
In 1988, the Fuel Use Act was amended to allow electric utilities to again
use natural gas for electric power generation.
Greater environmental awareness in the 1950s, 1960s and 1990s led to more
stringent environmental regulations. This, combined with low oil and natural
gas prices relative to coal, motivated electric utilities to switch from
coal to oil- and natural gas-fueled power plants in the early 1970s and
again in the mid-1990s. In many respects, the 1990s have replayed the
experience before the energy crisis of the 1970s.
There are strong indications that the low prices for crude oil and natural
gas in 1998 and coal in 1999 are indicative of key turning points in the
energy market that occur every 20 to 30 years.
When a new energy price cycle begins from a cycle low, a significant amount
of time is required to "recapitalize" the energy producers and their
suppliers of exploration, development and production equipment and services.
It then takes time to explore for and develop new reserves. The result is a
rapid increase in energy prices that is sustained for several years.
Ken Carlson is a fuels consultant in the energy sector consulting services
group of the energy services division at Black & Veatch. He may be reached
at carlsonke@ bv.com.
The Business Journal of Kansas City - June 25, 2001
http://kansascity.bcentral.com/kansascity/stories/2001/06/25/focus2.html
-------------------------
Cleveland et al ref:
Indicators of Dematerialization and the Materials Intensity of Use: A
Critical Review with Suggestions for Future Research
Cutler J. Cleveland Matthias Ruth
Center for Energy and Environmental Studies and Department of Geography
Boston University, 675 Commonwealth Avenue, Boston, MA 02215, USA
phone: +1-617-353-3083, fax: +1-617-353-5986, email: [EMAIL PROTECTED];
[EMAIL PROTECTED]
Background Paper for the Scientific Planning Committee, Programme on
Industrial
Transformation, International Human Dimensions Programme on Global
Environmental Change,
Amsterdam, The Netherlands, February 12-13, 1998
See also:
PUBLICATION LIST FOR CUTLER CLEVELAND
----------------------------------------------------------------------------
----
Books:
Hall, Charles A.S., Cutler J. Cleveland, and Robert K. Kaufmann. Energy and
Resource Quality: The Ecology of the Economic Process. (Wiley Interscience:
New York, 1986). (Reprinted by the University of Colorado Press, Niwot, CO
1992).
Costanza, Robert, Charles Perrings and Cutler J. Cleveland (Editors). The
Development of Ecological Economics (Edward Elgar Publishing, Hants,
England, 1996).
Cleveland, Cutler J. and Robert K. Kaufmann. An Introduction to
Environmental Science: An Integrated Systems Approach (in preparation,
Benjamin/Cummings Publishing: Redwood City, CA).
Cleveland, Cutler J., Robert Costanza and David Stern (Eds.). Designing
Sustainability: Building Partnerships Among Business, Society , and the
Environment (in preparation, Island Press: Washington, D.C.).
Peer Reviewed Journal Articles, Book Chapters and Reports:
Pimentel, David, M.A. Moran, S. Fast, G. Weber, R. Bukantis, L. Baillet, P.
Boveng, C. Cleveland, S. Hindman, and M. Young. Biomass Energy From Crop and
Forestry Residues. Science 212: 1110-1115 (1981).
Hall, Charles, and C.J. Cleveland. Petroleum Drilling and Production in the
U.S.: Yield Per Effort and Net Energy Analysis. Science 211: 576-579(1981).
Hall, Charles, Cutler J. Cleveland, and Mitchell Berger. Yield Per Effort
and Net Energy Analyses of Several Domestic Energy Industries. In Energy and
Ecological Modeling, W. Mitsch, Ed. (Elsevier Scientific, NY, 1982), pp.
715-724.
Cleveland, Cutler J., Christopher Neill, and John W. Day, Jr. The Impact of
Artificial Canals on Land Loss in Barataria Bay, Louisiana. In Energy and
Ecological Modeling, W. Mitsch, Ed. (Elsevier Scientific, NY, 1982), pp.
425-434.
Hall, Charles A.S., Cutler J. Cleveland, and Robert Kaufmann. Time Series
Analysis of Energy and the U.S. Economy. Integration of Ecology and
Economics: An Outlook for the Eighties, Ann-Mari Jansson, Ed. (University of
Stockholm, Stockholm, Sweden, 1982), pp. 69-72.
Cleveland, Cutler J. and Robert Costanza. Net Energy Analysis of
Geopressured Gas Resources in the U.S. Gulf Coast Region. In Energy and
Ecological Modeling, W.J. Mitsch, Ed. (Elsevier Scientific, NY, 1983).
Cleveland, Cutler J. and Robert Costanza. Net Energy Analysis of
Geopressured Gas Resources in the U.S. Gulf Coast Region. Energy 9: 35-51
(1984).
Cleveland, Cutler J., Robert Costanza, Charles A.S. Hall, and Robert
Kaufmann. Energy and the U.S. Economy: A Biophysical Perspective. Science
225: 890-897 (1984). (Winner of the 1985 National Wildlife Federation and
American Petroleum Institute's Environmental Publication Award, and a Sigma
Xi Publication Award); (reprinted in Costanza, Robert, Charles Perrings and
Cutler J. Cleveland (Editors). The Development of Ecological Economics
(Edward Elgar Publishing, Hants, England, 1996).
Cleveland, Cutler J. Biophysical Economics: Historical Perspective and
Current Research Trends. Ecological Modelling 38: 47-73 (1987); (reprinted
in Costanza, Robert, Charles Perrings and Cutler J. Cleveland (Editors). The
Development of Ecological Economics (Edward Elgar Publishing, Hants,
England, 1996).
West, R.E., Frank Kreith, and Cutler J. Cleveland. Energy Analysis for
Renewable Energy Technologies. Transactions of American Society of Heating,
Refrigerating, and Air-Conditioning Engineers 93: 999-1010 (1987).
Cleveland, Cutler J., and Robert Herendeen. Solar Parabolic Troughs:
Succeeding Generations Are Better Net Energy Producers. Energy Systems and
Policy 13: 63-77 (1989)
Cleveland, Cutler J. and Robert Kaufmann. Forecasting Ultimate Oil Recovery
and Its Rate of Production: Incorporating Economic Forces Into the Models of
M. King Hubbert. The Energy Journal, 12: 17-46 (1991). (Winner of
"Outstanding Paper for 1991" Award, International Association of Energy
Economists); (reprinted in Costanza, Robert, Charles Perrings and Cutler J.
Cleveland (Editors). The Development of Ecological Economics (Edward Elgar
Publishing, Hants, England, 1996).
Kaufmann, Robert K., and Cutler. J. Cleveland. Policies to Increase U.S. Oil
Production: Likely to Fail, Damage the Economy and Damage the Environment.
Annual Review of Energy 16: 379-400 (1991).
Piccot, S., T. Lynch, R. Kaufmann, C. J. Cleveland, and B. Moore. Analysis
of Radiatively Important Trace Gases (RITG) Emissions: Development of a
Trace Gas Accounting System (TGAS) for 14 Countries. Research Report No.
EPA-600/9-91-019, Environmental Protection Agency, Washington, D.C. (1991).
Cleveland, Cutler J. Physical and Economic Aspects of Natural Resource
Scarcity: The Cost of Oil Supply in the Lower 48 United States, 1936-1987.
Resources and Energy, 13: 163-188 (1991).
Cleveland, Cutler J. Natural Resource Scarcity and Economic Growth
Revisited: Economic and Biophysical Perspectives. In Ecological
Economics--The Science and Management of Sustainability, R. Costanza, Ed.
(Columbia University Press, NY, 1991), pp. 289-317.
Cleveland, Cutler J. Yield Per Effort for Additions to Crude Oil Reserves in
the Lower 48 States, 1946-1989. American Association of Petroleum Geologists
Bulletin, 76: 948-958 (1992).
Cleveland, Cutler J. Energy Surplus and Energy Quality in the Extraction of
Fossil Fuels in the U.S. Ecological Economics, 6: 139-162 (1992).
Kaufmann, Robert K., and Cutler. J. Cleveland. Failures and Impacts of Oil
Policies in the U.S. Solar Today, 6: 38 (1992).
Mitchell, Catherine and Cutler J. Cleveland. Resource Scarcity, Energy Use
and Environmental Impact: A Case Study of the New Bedford, Massachusetts
Fisheries. Environmental Management, 17: 305-318 (1993).
Cleveland, Cutler J. An Exploration of Alternative Measures of Natural
Resource Scarcity: the Case of Petroleum Resources in the U.S. Ecological
Economics, 7: 123-157 (1993).
Cleveland, Cutler J. and David I. Stern. The Scarcity of Forest Products
Revisited: An Empirical Comparison of Alternative Indicators. Canadian
Journal of Forest Research, 23: 1537-1549 (1993).
Cleveland, Cutler J. Re-Allocating Work Between Human and Natural Capital:
Examples from India and the United States In Investing in Natural Capital:
The Ecological Economics Approach to Sustainability, A. M. Jansson, C.
Folke, R. Costanza, and M. Hammer, Eds. (Island Press, Covelo, CA, 1994),
pp. 179-199.
Ruth, Matthias and Cutler J. Cleveland. Nonlinear Dynamic Simulation of
Optimal Depletion of Crude Oil in the Lower 48 U.S. Computers, Environment,
and Urban Systems, 17: 425-435 (1993).
Cleveland, Cutler J. Basic Principles and Evolution of Ecological Economics.
In Ecological Economics: Emergence of a New Development Paradigm,
Proceedings of a Workshop sponsored by the Institute for Research on the
Environment and the Economy and the Canadian International Development
Agency, November 7-10, Rockland, Ontario, Canada. (Institute for Research on
the Environment and the Economy, Ottawa, 1993), pp. 25-41.
Tognetti, Sylvia S., Robert Costanza, Lourdes Arizpe, Cutler J. Cleveland,
Herman Daly, Anil Gupta, Juan Martinez-Alier, Peter H. May, Mark Ritchie,
Jack Ruitenbeek, and Olman Segura. Poverty and The Environment: Reconciling
Short-Term Needs with Long-Term Sustainability Goals. (United Nations
Environment Program, Nairobi, 1994).
Cleveland, Cutler J. Resource Degradation, Technical Change, and the
Productivity of Energy Use in U.S. Agriculture. Ecological Economics, 13:
185-201 (1995).
Cleveland, Cutler J. The Direct and Indirect Use of Fossil Fuels and
Electricity in U.S. Agriculture, 1910 to 1990. Agriculture, Ecosystems, and
Environment, 55: 111-121 (1995).
Cutler J. Cleveland and Matthias Ruth. Interdependencies Between the
Depletion of Minerals and Fuels: The Case of Copper Production in the U.S.
Energy Sources, 18: 355-373 (1996).
Ruth, Matthias and Cutler J. Cleveland. 1996. Modeling the Dynamics of
Resource Depletion, Substitution, Recycling, and Technical Change in
Extractive Industries. In Down to Earth: Practical Applications of
Ecological Economics, R. Costanza, O. Segura and J. Martinez-Alier, Eds.
(Island Press, Covelo, CA), pp.301-324.
Kaufmann, Robert K. and Cutler J. Cleveland. Measuring sustainability:
Needed--an interdisciplinary approach to an interdisciplinary problem.
Ecological Economics, 15: 109-112 (1995).
Costanza, Robert, Cutler J. Cleveland and Charles Perrings. 1996.
Introduction. In The Development of Ecological Economics Robert Costanza,
Cutler J. Cleveland and Charles Perrings, Eds. (in press, Edward Elgar
Publishing, Hants, England), pp xiii-xxix.
Cleveland, Cutler J. and Matthias Ruth. When, Where, and By How Much Do
Biophysical Limits Constrain the Economic Process? The Contribution of
Nicholas Georgescu-Roegen to Ecological Economics. Ecological Economics (in
press).
Cleveland, Cutler J. and Robert Kaufmann. Natural Gas in the U.S.: How Far
Can Technology Stretch the Resource Base? The Energy Journal (in press).
Cleveland, Cutler J. and David I. Stern. Indicators of Natural Resource
Scarcity: A Review and Synthesis. In The Handbook of Resource and
Environmental Economics Jeroen C.J.M van den Bergh, Ed. (in press, Edward
Elgar Publishing, Hants, England).
www.cees.org
