Exergy is a word from engineering that refers to the part of energy, which is the part that can do work. Not all energy, like the heat energy in water, or air at room temperature, can perform work. So when we speak of “energy” in the sense of something (like fuel) being “consumed” or “used up”, it is really exergy that we mean. The link between exergy and economics is usefulness.
– Robert U. Ayres. Paris, 29 October 2014
Photosynthesis was (and is) the biological process that removed carbon dioxide from the primitive atmosphere and left some of the oxygen in the atmosphere and sequestered CO2 in the earth’s crust. That happened as living organisms, such as diatoms, in the oceans attached carbon dioxide to calcium ions to make shells for themselves and left them as chalk or limestone. This went on for billions of years. When the oxygen level in the atmosphere rose enough, the new ozone layer cut the UV radiation level and made life on land feasible. Plants moved onto the land, and thrived spectacularly during the so-called Carboniferous era, several hundred million years ago when the CO2 level was still quite high by present standards. For over a hundred million years immense accumulations of dead plant biomass were covered by silt from erosion of the land surface. Meanwhile the bodies of dead marine organisms accumulated in some places under the sea. These accumulations were gradually compressed and “cooked” (pyrolized) releasing some of the hydrogen and converting the rest of the mass successively into peat, lignite and coal or (in the case of marine biomass) into bitumen and petroleum.
These accumulations constitute an energy (exergy) resource that currently drives industry and human civilization. We humans are now “un-sequestering” those stored hydrocarbons, combining them with oxygen and putting CO2 back into the atmosphere. Moreover, we are doing this at a rate thousands or even millions of times faster than the original accumulation. This ultra-rapid dissipation of stored exergy in the form of hydrocarbons clearly cannot continue indefinitely, not because we will run out of carbon fuels immediately, but because the atmospheric buildup of CO2 cannot continue much longer without catastrophic climatic consequences (IPCC 2007, 2014).
– For Exernomics. Robert Ayres, Paris. 25 October, 2014
The future of energy will be driven by a combination of price and availability, as it always has. But in an uncertain world one thing is very sure, and that is that this combination is already in rapid transformation, so we are looking at a very different future indeed.
In my recent book (“The Bubble Economy”) , I have argued that the rising price of oil, in particular (because of its unique role as a fuel for mobile applications) together with the declining price of “renewables” creates an opportunity for long-term investors. It is estimated that $2 trillion/year must be invested in renewable energy to meet future energy demand without increasing carbon dioxide emissions. Surprisingly, perhaps, current trends suggest that – contrary to widespread assumptions – such investments can be very profitable.
New York City skyline during power outage
– R. U. Ayres. Support for public presentations in Cambridge, Carnegie Mellon, Washington DC, November 2014
I want to present four theses of possible interest. First, that economic theory today has not caught up with the changes in the world since Adam Smith and David Ricardo. Then externalities were comparatively rare and unusual. Today they are pervasive, thanks to urbanization, networking and globalization. The financial externalities associated with bubbles now far exceed in damage the profits to the bubble-makers.
Second, economic growth since that time has been demand driven because energy prices kept falling,– on average — until the beginning of this century. Future growth is not guaranteed in a world of “peak oil”, and oil price bubbles. It is not certain that our grandchildren will be much richer than we are. Secular stagnation May be caused by energy constraints.
Third, the policy response by central banks – low and lower interest rates, creates the condition for the next bubble. This cannot continue.
Fourth, there is a profit opportunity approaching with a huge payoff If grasped it will kickstart growth, reduce unemployment, ameliorate the Greenhouse effect and help solve the problems of the pension funds.
The problem of providing pensions for retirees is becoming acute. Dependency ratios are climbing in all western countries. By 2050 they will double in most western countries. In Japan, the number of retirees, now 35 percent of active workers, will reach 80 percent. Most European countries will have dependency ratios greater than 50 percent. The US, now about 20 percent, lags a little, because of continued immigration (mainly from Latin America), but the ratio will rise to 40 percent by 2050.
Exernomics is a concatenation of two words, economics and exergy. Economics is a discipline, with scientific aspirations, concerned with the production, distribution and consumption of goods and services in human society. It is also concerned with markets, trade and prices. It has been called “the dismal science” (by Thomas Carlyle), because of the Malthusian argument (c. 1799) that human population will always grow faster than food supply, whence the future of mankind was destined to be constrained by poverty and starvation. That didn’t happen during the following two centuries. So, in recent years Malthus has become an object of derision by mainstream economists, who have adopted a contrary doctrine of perpetual growth driven by unending innovation and substitution.
But the mainstream has ignored the fact that one resource has no substitute. It is “useful energy” or – in techno-speak – exergy.
The standard theory of economic growth, which is the basis of every economic forecasting model used by governments, business or international agencies, says that economic growth is automatic and will, therefore continue at historical rates indefinitely. Both liberals and conservatives believe this, though conservatives influenced by the “Austrian School’ (von Mises, Hayek, et al) warn that growth may be adversely affected if governments interfere with the magic of the Market by excessive regulation or in other ways. The problem is that they are both chugging along the wrong track. Their mistake is so fundamental that it has become invisible. But, as I say, the problem is really simple: virtually all modern economists neglect the role of energy. Or, more accurately, they regard energy as an intermediate output of capital and labor. The idea underlying the standard theory is that capital and labor, in some combination, “produces” coal, some other combination “produces” oil, and so forth.
The standard neoclassical theory taught in the economic departments of major universities and accepted by most of the economists who advise governments (and business leaders) attributes economic output (GDP) and economic growth to cumulation of only two so-called `factors of production’ namely capital and labor. These two factors are assumed to be freely substitutable for each other but not complementary.
The reasons for this assumption are more historical than logical. Natural resources or `gifts of nature’ were originally attributed to `land’ which later in the 19th century was absorbed into the larger category `capital’. Of course sunlight — needed by plants – can be thought of as proportional to the area of the land on which it falls, hence as a kind of indirect attribute of the land itself. The same can be said of natural rainfall and benign climate.
In any case, standard economic theory, as it evolved in the two centuries up to the first “energy crisis” in 1972, did not treat energy per se as a ‘factor of production’. In standard economic growth theory useful energy was (and still is) treated, instead, as an intermediate product of labor and capital. Somehow, a combination of labor and capital are supposed to produce energy. This makes a certain sense if we think of a coal mine or an oil well as an energy producer. Of course, mines and wells are no such thing. The useable energy was there in the ground – a gift of nature, in fact – and what the capital and input did (does) is merely to extract it. A well is useless junk when the oil is gone, and an exhausted mine is likely to be a blot on the landscape if not actually hazardous.
The works of Ayn Rand have become a huge socio-cultural phenomenon. This phenomenon is, currently, of significant and growing political and economic importance in the US. Despite her lack of education or experience in economics, social science, or political science, she was a remarkably successful novelist, whose ideas were formed by her early life in revolutionary Russia, which formed her anti-collectivist political agenda. Her three novels have sold 55 million copies, and her most influential book, Atlas Shrugged –– which sold 70,000 copies in its first edition — now sells 500,000 copies per year.. Her simplistic ideas have been widely accepted in conservative Republican political circles. In fact, despite the naivete of her theories, both the Libertarians and the Tea Party are essentially based on them. So who was Ayn Rand and why does it matter to serious academic scholars today?
It’s been almost six years since the fall of Lehman Brothers plunged the global economy into a deep recession. Recovery has been slow. Fiscal policy has been stalled due to a conflict, both real and idopogical, between those who advocate more tax reduction and those who worry about increasing government budget deficits. Monetary policy, a blunt tool at best, has been focused on cutting the cost of money to banks, in the hope that the banks would then increase their lending to businesses — especially to small and medium-sized companies, that are the biggest employers and job creators. Unfortunately, the banks have not been very accommodating in this regard, since they – in turn – have to satisfy risk-minimization criteria set by the Bank of International Settlements (BIS) in Basel. What happens is that excess money not being invested in the “real” economy is likely to create another bubble. It may be real estate. It may be a commodity bubble (rare earths? platinum) or oil. It may be the stock market, whole or in part.
Energy security is back in the news. The US 5th fleet based in Bahrein protects the flow of half of the world’s oil exports through the Straits of Hormuz, yet nine-tenths of that output goes to Europe and Asia. Russia, already the world’s largest producer, wants to drill in the Arctic with no interference from Greenpeace. China wants to enforce exclusive rights to drill in the South China Sea. The Obama administration is under heavy pressure to allow a controversial pipeline to move oil from Canadian tar sands to refineries on the US Gulf Coast. Underlying all this activity is a simple fact: every barrel of oil that once cost $1 to find and produce in Texas or Saudi Arabia has to be replaced by another one that will cost more than $100 to find and produce. And the economy of every industrial country now depends on oil.