2014 – The Year Ahead

First, let me wish all my loyal followers a very happy and healthy new year!  So what exactly does 2014 have in store for us on the energy and environment front?  Below is a list of things that I am watching, please comment and bring any topics of interest to my attention.

  • Keystone XL Pipeline – Just today the State Department announced in their report that the Keystone XL Pipeline would have a minimal impact on the environment.  This report was greeted with calls for Obama to approve the project by Republicans and even some Democratic lawmakers much to the chagrin of environmentalists.  Critics of the report said it did not pay enough attention to the harmful practice of extracting the oil from the tar sands in the first place.  The proposed $7B project would carry 830,000 bpd of crude oil from the Western Canadian Sedimentary Basin and the Bakken Shale formation to Steele City, NE before moving on to refineries on the Gulf Coast.  Issuance of this report now begins a 30-day comment period for the public and a 90-day comment period for government agencies, as well as puts the heat on President Obama to take action.  As recently as June 2013 Obama stated, “Our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution.  The net effects of the pipeline’s impact on our climate will be absolutely critical to determining whether this project is allowed to go forward.”  Environmentalists have called approval of the pipeline “game over” for the planet.
  • California Drought – 9% of California is now in a state of “exceptional drought”.  While this might not sound like news to anyone who has seen the images of the forest fires in the Bear Republic, this is an extremely concerning issue.  In fact, “Thanks to the magic of science (and tree rings), we can now safely say that California hasn’t been this dry since around the time of Columbus, more than 500 years ago. What’s more, much of the state’s development over the last 150 years came during an abnormally wet era, which scientists say could come to a quick end with the help of human-induced climate change.”  Lack of rain combined with abnormally low snowpack could leave much of the state virtually dry within 60 – 120 days.  If you think this is just a left coast problem, think again – California is responsible for almost 12% of the country’s agriculture.
  • Emerging markets – If you have been watching the markets lately you have seen a dramatic reaction to perceived threats from emerging markets.  I’ll make it quick: Fed removes the free money punchbowl from the party; possible slowdown in China; currency trouble from Brazil, Turkey, South Africa and Argentina.  So what does this all mean?  Stay tuned and I will keep you posted.

Plus we have Super Bowl XLVIII, the winter Olympics and the World Cup all coming up.  What a great year this is going to be.

Welcome back Greenbacker’s!  It’s on!

Stay Classy,

Mr. Greenbacks.

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China’s Opportunity

This week’s Bloomberg Businessweek had an article titled On China’s Electricity Grid, East Needs West, that explained the mega cities of China’s east coast are consuming resources from the coal rich areas in the country’s far western provinces resulting in lengthy transmission lines and growing instability among the minority ethnic groups there.

coal chinaOne of the biggest problems with having cities so far removed from the natural resources that power those cities is transmission.  In China, freight railroads and river barges are already overloaded and overcrowded.  This led party leaders to push for development of interior regions of the country and build high voltage transmission networks called the West-East Electricity Transfer Project.  By 2020 the total capacity of this project is projected to equal 60 Hoover Dams.

china water scarcityThe second problem with this large-scale coal driven buildup is the lack of water resources available to produce steam in these plants.  Many of these planned coal plants are located in water scarce regions including Xinjiang and Inner Mongolia and has led to tensions with ethic Mongolians and Uighurs who depend on farming and herding for their livelihood.  By tapping already stressed aquifers and wetlands, there could be a larger problem looming.

Coal currently generates 80% of China’s electricity and the country is responsible for half of the annual consumption of coal worldwide.  Following the traditional model of building coal plants located far away from the end users is simply not the answer.  While high-voltage transmission lines are more efficient that shipping coal by rail or barge, much of the electricity produced is still lost in transmission.

solar chinaA better idea would be harness China’s production capacity of solar PV cells and adopt a domestic policy of distributed generation.  DG is sited near the end user of the electricity and therefore less vulnerable to losses during transmission.  PV cells can be placed vertically up the sides of the country’s many skyscrapers eliminating the need to clear land for ground-based systems.  Smart building design is another idea that could drastically reduce demand for electricity and save the country from building expensive, inefficient, centralized power plants.

Distributed generationChina’s massive infrastructure build out has been nothing short of extraordinary.  Now it has the opportunity to leap ahead of other developing nations by committing resources towards building the next generation cities.  Distributed generation, microgrids, and smart integrative building design can all help to make this idea a reality.

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Global Energy Challenge

First, let me start off by saying Happy New Year to all the Greenbacker’s out there.  I apologize for the wait in between posts but it has been a crazy couple of weeks.  Anyway, a few months back BP published their annual BP Review of World Energy 2012.  Below are some key charts created by Jeff Tollefson & Richard Monastersky and published in Nature.com.

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This chart shows the largest energy users as well as the relative breakdown of their energy supply.  Two spikes are clearly noticeable – the US and China.  Notice that the US is reliant on coal, oil, and natural gas for a majority of its energy needs while China is heavily dependent on coal, with oil coming in second.  The recent boom (no pun intended) of natural gas supply in the US has not only dropped the price of natural gas domestically, but also explains the price decrease of coal.  Economics proves if the price of x falls, the price of a substitute of x will also fall in order to keep demand steady.  In effect, the benefits of cleaner burning natural gas are offset by increased use of coal in other countries.

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The above graph simply illustrates world energy use in million tons of oil equivalent.  The final scenario shows what energy consumption would look like if we were to keep the 450ppm limit on carbon emissions.

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This last graph shows several interesting figures – the most interesting in my opinion is that China alone accounts for 49% of global coal consumption.  However, China’s rise these past three decades has been simply amazing.  Already there are more than 170 cities in China with populations over a million.  Fueling this rapid expansion will require significant increases in coal, oil, natural gas, and renewable energy.  By leveraging the power of new technologies and global markets, renewable energy can compete with fossil fuels.  Lets hope that renewable energy plays an even greater role in mankind’s future than current trends predict.

World Energy Outlook 2012

The International Energy Agency released their 2012 version of World Energy Outlook today and it featured some interesting highlights.  Here are some of the points that peaked my interest:

  • In 2011, fossil fuel subsidies grew 30% to $523 billion while renewable energy received just $88 billion.

Fossil fuels according to the New Policies Scenario:

  • The US will become the largest oil producer by 2017, a net exporter of natural gas by 2020, and will be almost energy-self-sufficient (in net terms) by 2035.
  • Global oil demand increases by 7mb/d to 99mb/d in 2035 at which time price reach $125/ barrel (real terms) = (over $215/ barrel nominal terms).
  • The gas boom in North America will reverse the direction of the international oil trade, with almost 90% of Middle Eastern exports destined for Asia. 
  • Natural gas demand increase by 50% in 2035, with most of the production coming from the US, Australia, and China.
  • By 2035 we can achieve efficiency savings equivalent to 20% of global demand in 2010. 
  • By 2015 renewables become the world’s second-largest source of power generation, closing in on coal as the primary source by 2035. 

In the Efficient World Scenario, greater efforts are placed on energy efficiency measures that would cut the global demand by half.  Other benefits realized in this scenario include:

  • Global oil demand would peak by 2020 and be 13mb/d lower by 2035. 
  • “The accrued resources would facilitate a gradual reorientation of the global economy, boosting cumulative economic output to 2035 by $18 trillion, with the biggest gains in India, China, the United States and Europe.”

This is all well and good, but there are a few things to note about the conclusions:

  1. Energy sufficiency does not mean that we will be insulated from the price spikes on the global market.
  2. Approximately 55% of America’s energy self-sufficiency is from increased production – the remaining 45% is from increased energy efficiency measures such as better gas mileage in cars and trucks, more efficient buildings, and smarter appliances.
  3. Electricity prices in the US will be about half that of Europe as power plants switch to cheap natural gas.  This will be a huge boom for the economy as heavy industry repopulate parts of the mid-west.  However, in terms of climate change, increased use of natural gas will be offset by increased coal usage in the developing world.

Finally, and very sobering, the report concluded that the unless a global emissions agreement is implemented by 2017, the planet will not remain within the 2 degree Celsius range that most scientists agree is the upper safe limit on warming.

What Goes Up, Must Come Down

“Mr. Greenbacks, Back in March you said oil prices are on the rise and we could see $5 gas by summer.  What happened?”

Well, Europe happened. . . and China happened.  So basically, fear has taken over.  When I posted Pain at the Pump back in March, Europe was but an afterthought for the world’s markets.  After years of worrying about Greece, people began to forget about it and concentrated more on the good news rather than the risks that lay ahead.  Then all of a sudden Greece became a very real and imminent problem.  Spain and Italy also contributed to this fear and finally it appeared that China was going to come in for a ‘Hard Landing’ – meaning that their rapid growth rates of >10% a year may not continue.  China in fact has been the engine that has been driving most of the worlds consumption, whether it be oil from the Mid-East or Africa, iron ore from Brazil, or coal from Australia.   So now fears of a new global turn-down seem very real, hence the drop in crude prices.  As of 6/6/12, the spot price of BRENT and WTI have come in to $100 and $84 respectively.  This drop will soon reflect in lower prices at the pump, but lets not forget what $4/gal of gas felt like.  Lets use this opportunity to continue our push for more efficient usage of our resources.  After all, this too shall pass, and the economy will begin to grow again.  When demand kicks up you will see an increase in prices yet again, and we will be back to square one.

China’s Green Tech Innovation

For years the West has relied on an old premise that innovation in technology will create new jobs, if not new industries, to keep our economy rolling. This belief softened the fallout from the off-shoring of our manufacturing base. We figured as long as we can keep inventing new products, we can outsource the production to a low cost area, and still maintain a high tech economy. As I said earlier, when you give up production of a product, you also give up the opportunity for innovation on that product, or at least the opportunity to innovate on the process of producing that product where small innovations can bring further efficiencies and even new products to market. Right now, energy is the problem in China and the government has committed all efforts to solving this problem by building coal, wind, nuclear, hydro, and solar power plants to address their energy needs. The might of the state is enormous – every week a new coal power plant opens in China! China is now the largest emitter of GHG’s in the world, but they are also the largest market for clean tech energies as well.
China’s twelfth five-year plan calls on the National Energy Administration (NEA) and the Ministry of Science and Technology (MOST) to research, develop, and finance clean technologies not only for domestic use, but also for export. It is estimated that the government funnels over $50 billion for R&D through these organizations alone.
This state-backed plan seems to be good news. First, the US and China are the two biggest polluters, accounting for 40% of emissions and 40% of energy consumption, so any plan to lessen the emissions in either country is a score for the earth and her citizens. Second, many large businesses will benefit through the partnerships formed with their Chinese counterparts. However, this creates a reversal from the prior paradigm of Western innovation being sold to emerging markets. It now would be the US clamoring for Eastern technology. This would have enormous monetary policy impacts as well as lead to a dramatic increase in the trade gap. While the US is in deadlock, with republicans refusing to touch defense spending and democrats refusing to cut entitlements, the only area of the budget that suffers is the discretionary spending side. Take a guess where the funding for education, technology, and research and development come from? In any case, as people live longer the global population is going to grow. As more and more countries develop, energy supply is going have to expand dramatically in order to keep up with the demand. Not only do we have to find new sources of energy, but we need to make products that use energy more efficiently. Now is the time for all of us to act – and this begins with innovation to the current technologies.

Trade Wars

Forbidden City A long time ago in a galaxy far, far away…. no wait, that was Star Wars, what did I want to write about?  Oh yeah, Trade Wars!   Let’s try this again . . .Not so long ago, in a city just as dysfunctional as the late stages of the Galactic Republic, but centered in the US and called Washington D.C., a bill passed the Senate . . .

There is wide consensus that the Chinese yuan is considerably undervalued with some economists citing ranges between 20-40%.  While the renminbi is officially classified as a “managed floating exchange rate” whereby it is allowed to appreciate or depreciate within a narrow band against a basket of currencies, it sure feels like it is pegged to the dollar at a steep discount, dramatically lowering the cost of Chinese goods for export.  This also has the effect of a tax on US imports to China, making foreign goods seem more expensive on the Chinese market.  This has been a constant thorn in politicians’ sides over the past few years, especially those whose constituents reside in hard hit areas of the economy such as manufacturing that saw many jobs go overseas.  It is an old and familiar dance much like the hustle – politicians make noise about the undervalued currency, China reminds us that they want to get off the dollar as a reserve currency, a few months pass and just when it seems that the politicians want to implement protectionist policies, the value of the yuan magically increases and the calls for action fade.
Why this time is different
Unfortunately, this time seems different because just as the US is preparing for an election in 2012, China is ready for a political transition as well, and leaders on both sides of the Pacific want to look strong for their populace.  In this atmosphere, even minor disputes run the risk of being hyped-up.  Does anyone really want to see a trade war break out between the two largest economies in the world?  That spells doomsday for the global economy as a whole.
Mr. Greenbacks goes to Tiananmen SquareI had the pleasure of traveling to China earlier this year and one of the major lessons learned in dealing with Chinese is the concept of “face”.  I can hardly do this concept justice in just a few sentences, but hear me out.  “Face” is your reputation, but it is much more than that, it is your code of conduct in forming relationships – from new acquaintances to family elders.  I take it back, this is almost IMPOSSIBLE to explain in words.  Basically, it means not humiliating anyone in public – ever.  In the Chinese culture, it is acceptable to lie to a person in order to save face.  “No” is a very hurtful word and damaging to any relationship.  An example of this would be a street vendor selling souvenirs – while you might not want anything to do with this, you cannot simply say “No, get this crap out of my face” as we would here in New York.  In Beijing, you have to say, “It is very nice, but too expensive.”, or some form of lie to let the retailer “save face”.  This includes avoiding backing someone into a corner in an argument, you must always leave them a way out in order to preserve face.  Often the Chinese will lie directly to you, but their body language will tell you the real answer.  This is all done for the concept of “face” and to preserve the relationship.  It cannot be stressed how important this is in dealing with the Chinese culture.
Saber Rattling
So now the Senate passes this bill and calls China’s leaders out to the whole world, completely ignoring this concept of face.  Response – China lets the value of the yuan fall even further.  Now we have hard line politics being met with hard line resistance.  The problem with currency accusations is that they eventually morph into trade wars, add more fuel to the fire and trade wars become real wars.  As economist Frederic Bastiat once said, “When goods don’t cross borders, soldiers will.”  History tells us that China has never been an imperialist country, but they have, over the past few years, developed a blue water navy and began to exert their influence over an expanding area, from coastal protection to patrolling international waters that the US maintains shipping routes through.  Could more serious confrontation lie ahead?
Yuan Appreciation
The problem with the bill in the Senate is that it was a very public spectacle over a problem that has been solving itself.  From 2009 to early 2011, the analysis found, the yuan appreciated by just 4% in nominal terms, but by 17% in real terms, after accounting for inflation.  Other studies put the yuan appreciation at 30% between 2005 and today.  It should come as no surprise to China that they need to rebalance their economy from exports to domestic consumption in order to keep growing.  A floating yuan would give the government more flexibility in their domestic policies such as battling inflation as well as prove to other nations that China is committed to a level playing field.  Due to rising labor costs in the Middle Kingdom, manufacturers are already coming back to the US or moving their shops to other low cost Asian nations such as Vietnam.
Is the Measure Warranted?
Most economists will tell you that capitalism combined with free trade is the single biggest creator of wealth in history.  You will not find argument here, billions of people are now being lifted out of poverty due to the developed world’s appetite for cheap goods.  Even if one country is great at producing many goods, the concept of comparative advantage allows other countries to enter into the fray and begin to trade.  But while free trade is great for developing nations, what about America and other developed nations?  What we get in return is cheaper goods and soaring company profits, good for investors, bad for workers.  America has always been the creator, the inventor, and the producer.  We would then manufacture these new innovations on our shores (south and mid-west actually) for domestic consumption as well as export.  Now however, we have given up our manufacturing base.  We have outsourced and outsourced until the only possible play we have left is the service industries.  As education improves in developing nations, this advantage will become less and less.  New generations will have to compete with globally connected, highly skilled, low-wage workers.  So what is the answer for America?  How do we put America back to work?  That will have to be another post, so stay tuned.  One thing is sure, though, this bill is the wrong way to get results.  Not only would this bill fall apart in front of the WTO, but it also runs the risk of retaliation from other countries possibly convinced that the rounds of quantitative easing were a ploy to keep the value of the dollar low.  When countries stop trading, we all lose.  So instead of figuring out ways to build walls (pun intended . . . see photo below) to prevent trade, shouldn’t Congress worry more about optimizing the conditions for the next growth industry such as improved infrastructure, broadband or clean tech that will pull our country out of this funk?  After all, isn’t there an American jobs bill somewhere on their desks?Fordham MBA's on the Great Wall of China