The Keynesian Quest for Energy Security
by Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission
September 16, 2009
The coming World Climate Summit, also called COP-15, is scheduled for a marathon 11 day series through December 7-18 in Copenhagen. This will bring together 192 presidents, heads of government or high level delegations, observers from a selected range of UN agencies and some other accredited organizations, selected NGOs and commercial sponsors, and carefully selected press and media. For the public getting in to these meetings is a lot more difficult, with open access sessions being the exception not rule. This has already resulted in accusations that COP-15 is essentially a closed-door forum where climate business will be pushed to the limit. Where national leaders will haggle in private for clear advantages and gains, here, and lower costs and losses, there.
National and international spending and investment plans to fight climate change are being constantly increased, to a background of government friendly media around the world being instrumented to tread a delicate line between climate change doomsterism and hysteria, and green economy utopia. This uneasy balance of doom and boom is needed to maintain public opinion in favor of coming carbon taxes, job losses, higher energy prices, and legislation to force a change in business practice and lifestyles. The better end in view, media and government spokespersons tell us, is climate and environment protection, sustainable green jobs, and increased energy security from local-produced alternate and renewable energy
The green economy utopia was prefigured at the April G20 summit in London, subtitled a 'towards a global green recovery'. The London summit was set to a background of continually rising Keynesian anti-recession spending, and rising estimates on how much spending climate change mitigation will need. Estimates come from a spiraling number of sources, ranging from national governments, regional entities such as ASEAN and the European Commission, the UN's climate change panel (the IPCC), the OECD and Davos Forum, the World Bank, economic agencies and even NATO. Outside the official entities, estimates are published by NGOs, professional associations, religious and political groups, and consumer groups.
Before about 2005, these estimates tended to be low, but forecasts of how much it will cost to fight climate change, since then, have radically risen. They now start around $ 200 billion a year, levered up by the 2009 Davos Forum to a very precise $ 515 bn a year, on average, for 2010-2020. Others extend to an average of more than $ 750 bn a year for the period starting next year, that is from 1 month after the Copenhagen summit.
This context therefore sets the scene for December 2009 Copenhagen meeting. Rational bets on the economic and financial results are resolutely set on big numbers. Taking a key example of sure and massive support from nearly all governments, the take-off of electric car production and sales, this sector alone could swallow an additional $ 75 bn a year, or more, as near-term investment, R&D, and spending support to get consumers to accept untried, and expensive new cars. Lithium and other rare metal needs for their production may be difficult to satisfy, recharging them en masse, especially in urban areas, will set a massive logistic and economic challenge, but after the ignominious failure of biofuels and agrofuels, electric cars are a kind of last best choice. Established renewable energy favorites like wind energy and solar electric power will also be ramped-up further.
Keynesian Boom and Bust
The December climate crisis meeting will surely open public spending flood gates ever wider, of course with the official hope this kick starts global green economic growth. While government friendly media, and politicians make a point of not seeing any relation between debt-based anti-recession spending, and the same for anti-climate change spending, these new debts will be cumulative. Possible amounts from both can become astronomic, making strong and sustained economic growth the only way to square the circle, and reduce the rising risk of systemic economic, fiscal and monetary failure.
Recent and continuing, massive anti-recession spending by nearly all G20 governments and their central banks is usually called Keynesian, because it features borrowing and printing money, racking up public debt, and hoping economic growth will soon "rebound", but present attempts differ significantly from previous. Original or classic model Keynesian recovery programs featured increased consumption as much as investment, but more often than not these exercises in economic tinkering ended with inflation and raised debt, and weak economic growth. Today, this outcome is no longer permitted - growth has to return, and rapidly.
Results to date for the current and massive anti-recession spending, almost entirely directed at saving the bank, finance and insurance sector, have been more than somewhat muted in the OECD countries, while China and India maintain their totally classic, totally conventional oil-fired and coal-fired industrial expansion, and urban economic growth booms. Depending on the dates concerned, for example 2008-2009 or 2008-2010, and of course the source of estimates, including the IMF, Keynesian-type spending will "inject" perhaps $ 4 000 billion through to December 2009, mostly into the bank, insurance and finance sector, only in the OECD countries. Through the period 2008-2010 estimates for this spending, from sources including the IMF, put the possible amount at up to $ 11 000 bn, on a worldwide basis. To give a comparative idea of what this means, the OICA estimated total turnover in the world automobile industry in its most-recent record year, 2007, at about $ 2 000 bn. OPEC total revenues at a year average of $ 100 a barrel would be around $ 1 050 bn. Spending by the world oil and gas industry in its recent highest year, also 2007, reached about $ 400 bn.
Taking $ 4 000 bn as the likely deficit spending to head off systemic bank and finance sector failure in the OECD through 2008-2009, this represents around 10.4% of total OECD GNP of about $ 38 500 bn in 2008, using OECD statistics. Economic growth needed to prevent this increase of public deficits from growing further is relatively easy to calculate - and high. For several most-indebted countries in the OECD group, 2010 will be a make-or-break year, of either strong economic growth finally trimming debt, or recourse to currency devaluation and national austerity programs.
Climate change spending, in this context, will only add to systemic risk unless growth is revived and sustained. To date, spending plans still lag behind recent and current anti-recession spending, driven by what is the biggest-ever deficit spending spree the world economy has ever known, but as noted above, state plans to spend on low carbon energy are on the rise. No reasonable forecast can however suggest that spending to head off climate change and pare the impact of peak oil will generate a quick fillip to economic growth. Even if the Evil Molecule CO2 is chased and banished from the economy and society, public debt will remain high, and will spiral if strong economic growth does not return, more especially because of pre-existing and extreme high levels of corporate and private debt, which helped trigger the crisis in 2007-2008.
The bottom line is always the same: the global economic, financial and monetary system is under threat, until and unless strong and sustained economic growth returns. If not, Keynesian bust could entrain central bank failure, in several of the most-affected countries, perhaps even the biggest.
Blind Bets on Green Growth
This underlines why the hoped-for result of the Copenhagen summit, a take-off in Global Green Growth, is ever more critical. Exactly like the Keynesian anti-recession spending boom in response to the surprising global finance meltdown of 2007-2008, however, the climate change and oil depletion crises are themselves poorly understood, richly mythologized, and highly able to generate surprise.
Web site support to the Copenhagen climate summit includes a listing of 'Big myths' about energy. Elsewhere on COP-15 sites, favored myths concerning climate change are quickly discussed and commented (http://en.cop15.dk/news/view+news?newsid=577). One key myth used to saturation point when climate change business and big government politics converged shortly after 2000 is however conspicuously absent: global warming has changed to global cooling for at least the past 4 years. Others glaring absences can be added, such as the role of the massive and rising quantities of methane wasted in world oil production, gas production, and gas transport by pipelines and LNG tankers. Probably because natural gas is a lot cheaper than oil, methane hunting trails far behind hunting the Evil Molecule CO2. The role of emitted particulates and aerosols, soil, dust and chemicals, in the range of several cubic kilometers emitted each year, is another heavily under-represented evildoer in the list of official climate change causes.
Climate change mitigation mainly and officially means hunting down CO2 emissions, especially from oil-burning, and perhaps, when or if clean coal tech can be made to work, from coal-burning. Taking only the second, spending needs to convert the world's rapidly growing number of coal-fired power plants, and transport captured CO2 to deep sequestration sites, ranges into the high hundreds of billion dollars. Data, to be sure, is controversial but a UN report in 2008 suggested that average cost impacts of full clean coal technology retrofits to power plants would raise delivered electricity prices by about 45%-90%. This would surely raise the attractions of solar and wind electricity, but will also surely raise electricity costs worldwide.
COP-15 has to provide blanket support to green energy. The myth of it being cheap is given heavy or extreme support, like the coming electric car revolution. Site material from COP-15 and linked sites rival each other with claims the entire world car fleet can Go Electric by around 2025, and that present total world electric power generating capacity could be substituted and replaced by wind and solar power, one day, with heavy economic savings and benefits over and beyond climate change mitigation. The revolution will not cause a ripple in the economy, jobs will be saved as well as created, world peace will be ensured through ending all oil wars. Surprisingly perhaps, nuclear power is heavily criticized in COP-15 web site content, as costly and unreliable. Organic or biological agriculture, as well as the biofuels are dismissed as non-starters due to low productivity and impacts on human food supplies.
Checking a list of official sponsors to COP-15 confirms that solar and wind electric power are now government friendly energy technologies, like the widening list of "climate-linked" investor funds, financial firms, brokerages and exchanges.
Green Shoots or Overshoot ?
The fight against climate change can only, at least during a long feed-in transition period, cause a rise in energy prices, through carbon taxes, CO2 limitation, and to favour the rapid entry of green energy. Growth of electric car fleets will surely need big subsidies to replace current oil fuelled car fleets. De-carbonizing electric power systems, agriculture and transport will require heavy spending, especially if the transition is given a shortened timeframe. In a similar way to the under-appreciated first response to debt-and-finance sector crisis of 2007-2008, which was followed by massive spending of borrowed and printed money, grandiose plans laid at COP-15 can quickly spiral up in their immediate costs, and borrowing requirements.
Surely under-perceived or ignored, rising anticipations of massive green economy spending, flowing along with current anti-recession spending, has likely changed the nature and type of recession we are experiencing. Around 60%, or more, of total climate change mitigation and related spending will go to the energy and transport sector, yet entire spending by the global oil and gas industry, as noted previously, was at most $ 400 bn a year in 2007. Taking the example of the world car industry, the challenge of All Electric, even by 2040 or 2050, is awe inspiring. Simply replacing the world's estimated current car and light road vehicle fleet of close to 900 million units, producing batteries for this new fleet, and recharging these at around 3kW to 5kW each, sets challenges not only for financial ingenuity but also for global economic credibility.
Impacts of new and massive, and sudden growth of world energy spending, on the energy industry and inside energy trading, could quite rapidly generate a worst case scenario. Even under optimistic scenarios, inflation in the world energy industry will sharply rise, whatever the oil price, for example in the electric power sector. Higher energy prices, simply due to rising intervention aimed at raising non-fossil energy in the total energy mix, as well as industrial and financial energy sector impacts, will quite rapidly spill over to food prices. As we know, equity and commodity traders were quick to enthusiastically recycle chunks of the “injected” Keynesian anti-recession largesse falling from above. Financial operators will fully profit from a new wave of funding, this time to fight climate change and head off peak oil.
Given present anti-recession spending, the extreme lethargy and unpredictability of the "real economy" rebound is even more striking and disquieting. Recovery from the 2008-2009 recession, certainly in OECD countries, will almost certainly be the slowest-ever, with many analysts judging it may take 18 months for major OECD economies to regain and restore 2007-2008 levels of GNP. One sure result will be the near impossibility of interest rates being quickly raised, to any substantial level, even when energy and food prices start rising through sensitive ceilings, like $ 100 a barrel for oil. This itself should sound warning bells in the world's chancelleries, but there is no official trace of this except statements from some central bankers that high levels of national, sometimes near hyper debt levels, will have to be reduced, of course in the longer-term
The key buzzword of 'sustainability' surely does not fit the current outlook for OECD economic recovery - yet the Keynesian spending spree to fight recession, and the coming wave of spending to fight climate change are predicated on strong economic recovery. Green energy and sustainability goals have now joined the wish list set in the aftermath of the Lehman Bros collapse and a string of finance, bank and insurance sector catastrophes. Retrospective analysis of how the crisis unwound through 2008-2009 suggest that initial under-reaction was followed by massive over-reaction. Exactly the same arguments can be applied to climate policy and spending to mitigate change.
G20 leaderships, at COP-15, will surely reiterate their determination to accelerate the shift to low carbon. They will set ever tighter CO2 emission limits across the economy and around the world, they will move towards an international carbon tax and/or carbon penalizing trade tariffs, with further and large financial and economic aid to Cleantech in both OECD and emerging economies.
Why they are doing this is in fact complex. To be sure, oil prices attained a peak of $ 147 a barrel in 2008, then crashed by about 75% before rebounding to around $ 70 a barrel as of early September 2009. Like oil prices, world climate trends are also fast changing and increasingly unpredictable, in a context where scientific evidence of climate change is massive, but contradictory as to its likely or probable most economically damaging results. Yet leaders of the 20 biggest economies in the world have sighted and fixed CO2 emissions, and to a lessening degree global warming (because evidence for this is now very contradictory), as the nearest-term, most powerful, publicly stated reasons to spend on non-fossil and oil saving energy sources and systems. Oil depletion is however certain to trigger both energy saving, and the growth of new supply sources, in a complex series of energy economic changes through the 2010-2020 period. One piece of this complex puzzle will be the short-term impact of low priced LNG, and continuing low traded coal prices, but rising uranium prices, and the multiple impacts of low carbon policies and legislation on overall energy prices, inflation and economic growth in energy intensive economies.
Underlying the apparent certitude of G20 leaders on these complex subjects, the same leaders must accept very low visibility on what is happening to their real economies. Perhaps worse, the basic driver for making a massive and rapid change to alternate and renewable energy, the stalking horse of Peak Oil, does not even figure in the public rationale and reasoning offered for why there must be ever-rising, increasingly massive spending, and muscular legislation to force a rapid energy transition away from the fossil fuels. COP-15 web site and hard copy publications carry little or nothing on the subject of oil depletion, despite this driver for energy transition being a lot more real than "runaway climate change", in the 2010-2020 short term.
Ironically, this adds further impetus to what will be huge long-term intervention in the economy, as Peak Oil reinforces the public claims of a CO2-only climate crisis marked by runaway, or extremely rapid increase rates for global average temperatures. As noted above, the myth of CO2 being the sole cause of climate change, and global average temperatures rising fast are perhaps the two biggest climate myths that exist. Reinforcing the mythic component, COP-15 site content, and linked sites give prominence to the specter of a new and Biblical Flood coming by about 2075, which can only be thwarted by serried ranks of windmills, solar collectors and electric cars in a pristine, green environment.
Uncharitable analysts and commentators will suggest the Keynesian spending spree of 2008-2009 has let the djinn out of Aladdin's lamp. The new habit of big deficit-financed spending is now ingrained, and has increased the apprentice sorceror's spending habits. There is now no way back. Big spending must continue.
How this spending to fight climate change will be financed makes appeal to Keynesian miracles. Some G20 leaders, borrowing from Lord Stern's creative accounting of 2006, already respond at press conference grilling that big spending, today, will create beneficial climate and environment multiplier impacts by about 2030-2050. Stern's report on climate change, we can note, included projected scenarios in which economic damage from climate change could or might attain $ 50 000 bn a year late in the century, but in a global economy whose output had risen to $ 200 000 bn a year, in 2006 dollar value, from today's value of around $ 60 000 bn a year.
Much more prosaically, in the real world, strong economic growth and high oil prices are the two-only rational drivers for rapid and non-subsidized growth of alternate and renewable energy sources. This means 2008-peak level fossil energy prices, for oil, natural gas, coal and uranium, and the rip-roaring Petro Keynesian growth of 2004-2007. Only these provide a rational economic basis for spending plans of the type forecast at the 2009 Davos Forum, that is an average $ 515 bn a year through 2010-2020. Radically increasing energy sector spending is only economically justified when there is high economic growth. When economic growth is depressed, possibly on a long-term base, the energy economic rationale and urgency for energy transition will diminish, without strong intervention and heavy government spending.
To be sure, Keynesian spending defenders will firstly argue that Petro Keynesian growth crashed with an explosion of oil prices, in 2008, so energy sector intervention could be a way to avoid this. The scale of the deficit-spending and legislative forcing of alternate and renewable energy ignores the rising possibility that heavy deficit spending for energy transition can itself trigger a new cycle - in this case a cycle of much higher energy costs in a context of increased uncertainty, faster global economic change, and rising energy price volatility for any market, anywhere.
Further distortion of energy markets could or might quite rapidly de-converge or re-segment the painful and cumbersome unification of energy markets - which is one key part of the European Union's decarburizing strategy, given the misleading 'unbundling'. In this case, as in other regions, the net result will be higher final energy costs, especially for enterprises. On purely theoretical grounds given the certainty of rising intervention, the implicit trend of 'post fossil' energy economic structure is a rapid shift towards a heavily electrified economy, due to most major present alternate energy systems delivering electricity as their useful output. On pure energy economic theory, this presents as many challenges as opportunities. As a simple example, the coming and short-term surge in cheap LNG supplies through 2010-2013 will almost surely make natural gas the preferred energy source for new electric power plants, whatever the emissions of CO2, and raise the level of subsidies needed to force non-fossil energy into the electric power mix.
More than 35 years of studies by hundreds of analysts and scholars have as yet to resolve the basic question of oil prices and economic growth. Through 2007-2008 the constant rise of oil prices to extreme highs was surely one driver in the mix of factors that led the global economy into recession, but just as surely not the only factor. Over the past 10 years, coal and natural gas demand has risen much faster than oil, mainly due to price, in a global economic context of rising energy intensity. The market driven shift to increasing electricity demand in the economy could appear an open door for now heavily intervening to force the role of alternate and renewable energy, but how fast this process can go is a major unknown.
The global economy itself, is also an unknown. Like energy markets, it could itself de-converge, with Chinese and Indian de-coupling meaning what it implies, that is more national-centric and autonomous economic development and growth, with reducing, not rising linkage to the OECD economy. Factors like international transportation costs, closely oil-linked and difficult to substitute with alternate energy, will tend to re-localise economies, over and beyond any government moves to intervene in the energy economy, raising final energy costs. In the short-term, nothing assures a smooth and rapid rebound for the economy, perhaps even the reverse in the form of double-dip.
Adding the uncertainties together, the Keynesian quest for low carbon energy, supposedly to save the world from climate catastrophe, could intensify global energy economic volatility in a number of ways. The net result is hard to call at this time, but its feedback to economic recovery will be to raise incertitude and volatility on energy markets, and for energy sector investment, at a time when energy transition is now accepted and agreed as necessary - but how ?
© 2009 Andrew McKillop
Andrew McKillop | Author & Consultant | Email