Investing in precious metals 101

Summary:

 

Click the play button below to listen to Chris' interview with Chris Nelder (1h:10m:32s):

Transcript

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, of course, Chris Martenson. Today we're going to be talking about my favorite topic, energy. What's energy to us? It's everything. It's the master resource, the one that precedes all others. So, as long as we westerners cling to the idea that we don’t have to make any serious investments of time and money into our energy mix—that is, we just keep relying on coal and gas and oil to power our existing infrastructure—we'll be heading to an increasingly untenable future. But, as I've often said, if we're going to make different choices today, we really could affect the future in positive ways. Now, to help us to understand what the realities of and the opportunities in energy are is Chris Nelder, energy analyst, consultant, and media guest who's written about energy and investing for more than a decade. He is the author of Profit from the Peak and Investing in Renewable Energy. He's written for the Harvard Business-Review Blog, Financial Times, Alphaville, Scientific America, and many other publications. He consults with businesses and with government on the future of energy. Writes a column at Smart Planet, and blogs at GetRealList.com. I'm really excited to have him here. Welcome Chris.

Chris Nelder: Thanks Chris it's good to be here.

Chris Martenson: Oh, boy. I can't believe that this is our first podcast with you, which has to stand as one of the most profound lapses in our schedule.

Chris Nelder: [Laughs] Yeah. It's about time, I would say.

Chris Martenson: Exactly! Well before we get to the tasty opportunities that you are uniquely qualified to talk about, let's set the stage. The main point of energy is to perform useful work for us. Coal and natural gas spin turbines to provide electricity that powers electric motors such as those in our refrigerators and vacuum cleaners. Petroleum powers internal combustion engines—the ones that we have in our cars, trucks, boats, planes. So starting there with oil. When I google the term "peak oil is dead," I get 23,900,000 results. Apparently the concept of peak oil is dead. Is it?

Chris Nelder: Well, I think that the story arch is probably dead in the public consciousness because of course most people never really understood what it meant including a lot of the people who wrote about it in the mainstream press. In fact, I was just the other day reading a new article that's out in a new scientific journal where they did a study on the way that The Economist has treated the subject of peak oil. Really it was such an interesting little study because it sort of demonstrated what I had come to understand over the last 10 years, and that is that most people in the press, and in fact most people in the public, were only paying attention to the peak oil story when prices were high. And then when oil prices came back down, gasoline prices came back down, then all of a sudden peak oil is dead.

So, peak oil of course is not strictly about price. Price is just sort of a function or an outcome of the much bigger story and much broader situation that peak oil is. Most people just never spent the time to appreciate it, and of course it's a complex subject. You really have to put in a lot of time to truly understand that subject.

Most people, and especially a lot of writers in the mainstream press, just never put in that time. So, from a public-consciousness standpoint and from a meme standpoint, yeah, I would say that the peak oil story is dead. But personally as someone who's studied the subject for, as you said, more than a decade, I've never believed in it more than I do today because it was always a question of: When will the rate of new drilling fail to overcome the depletion rate of the mature fields? That's when the peak happens. And we're just about there.

My call for several years now has been that the global peak of oil production and the beginning of decline would be either late this year or sometime probably early next year. I'm still standing by that call. I think that the decline at first of course will be very gradual. Most people in the mainstream press probably won't pick up on it until a year or more after that. But, if you look at the many projects that are going on around the world that would add supply, and you start looking at how much supply do we need to have to add in order to overcome the decline of the old fields, I think that we're just about there.

Chris Martenson: Well that's an interesting statement. We had the Maugeri report coming out of Harvard, the business school there I think that it was. We've had a variety of other sort of cornucopian views that say, "hey, we actually have tons of spare capacity," and yet we look across the world stage and we see that the oil industry has collectively doubled its expenditures since 2005, and we're still kicking along somewhere between call it 74 million to 76 million barrels per day worldwide of crude and condensate.

That, first, tells me everything that I need to know, but secondly when I peer into the shale story, which is a lot of the drive behind saying that peak oil is dead, at least in the U.S., is this idea of the shale miracle with the story being that it was technology that suddenly came along and unlocked those plays. Have you studied shale enough? Do you have an opinion on what we can expect from those and on whether that narrative that has been spun is right?

Chris Nelder: Oh, absolutely! I've studied that question.

[Laughter]

Chris Martenson: I was hoping so.

Chris Nelder: Well, it's the most, as you say, it's kind of the biggest story on the supply side right now. In fact, if you look at all the rest of the world's production, and you take away the new shale production that we've had in the U.S., the world would've been in decline already. So, effectively, it's just the tight oil growth in the U.S. that has managed to keep production up. So then if you zoom in on that, and you say, "okay, of all of these different shale plays, how much more growth can we expect?" It's become clear, I would say in the last nine months or so, that growth in the Bakken is beginning to taper off. I think that we're probably going to be at the peak of Bakken production some time within the next 12 months. Don't really know.

The Eagle Ford—we might get another little bit of growth for another year or two, not a lot. I think that it's quite clear that after several years of the U.S. adding 1 million barrels/day of new production per year over the last couple of years as the tight oil boom really took off... we've exited that phase. We're not going to add a million barrels a day each year any more. The Bakken and the Eagle Ford together comprise about 75% or thereabouts of the total tight oil output.

None of the other plays—although there are a lot of them, and although some of them have very substantial resources—are just not prospective to become equally productive. The geology isn't good enough, the rates of the wells aren't good enough, or decline rates are too high, or the prices are just too high to produce that oil. At this point, I defer to David Hughes' model for U.S. tight oil that he articulated in his report last year for the Post-Carbon Institute: "Drill Baby Drill!" I think that it was just a wonderful report, very detailed, very transparent, very clear exactly where the opportunity is, and where it isn't. His call is that U.S. tight oil will peak probably around 2016.

You can go plus or minus from that a little bit, depending on how quickly we want to keep drilling. But, when you're working against the undertow of the enormous decline rates from these wells, you can only drill so fast to try to overcome that, and then at some point, you start losing that battle. So, if U.S. tight oil goes into decline sometime around 2016 or shortly thereafter, it becomes very difficult to see how the rest of the world can come up with new production and sort of take the place of U.S. tight oil to keep global production up.

The opportunity is certainly there in places like Iraq and Libya and so on where there are very substantial resources that aren't that expensive to produce. But then, you've got the geopolitical problems. Those places are just basket cases. You can't maintain stability in the operations and the security such that the big oil companies want to come in and lay down billions of dollars to work those prospects. So, although the resources are there, globally, that we could keep production up for another couple of years, in an ideal world—we're not in an ideal world. I think that when U.S. tight oil goes into decline the rest of the world will as well.

Chris Martenson: Well that's a fairly frightening prospect for myself because I've been waiting for my country to sort of come to this realization and to start making very different decisions. I've only been disappointed as we go along. So for example, I look at the natural gas that we get out of some of these tight plays. It's a fairly significant resource. It's not as much obviously as the president said. It's not 100 years, even with reasonable back-of-the-envelope calculations that include some increase in demand growth—which always happens, right? We find new things to burn it on. Sasol comes and builds a giant gas-to-liquids plant and wants 1-billion ft3 a day and etc. So, we find other uses. And so, we have to grow our consumption. So, what do we have, 30 years, 50 years? Who knows? It's some number in there.

I would have optimism if we were going to use that for a bridge fuel to build out the next energy infrastructure for the day when that is finally gone as well. Instead I find that they're trying to fast track LNG terminals, so that we can export it even though the United States is still a net importer. So, that's my personal concern. When you say that we're looking at a peak of oil around 2016 or so, as far as I'm concerned, that's almost tomorrow. When it comes to making big wholesale investments in infrastructure, that's not that long, Chris. That's pretty soon.

Chris Nelder: Oh, that's right around the corner. Yeah. That might as well be tomorrow, as you said. If we were an intelligent species, we would recognize in a very scientific way, as much as possible, what the prospects for these different resources are, and we would try to manage the use of those resources for the greater benefit of the species and for our economies. But we've never operated on that basis. I don't think that we ever will operate on that basis. If the world wanted to really maintain a nice, steady, even supply of energy and maintain nice, steady, even economies, the world would've begun transition efforts 30 years ago. And we would be well into that transition now, but that's not how we operate. That’s certainly not how the U.S. operates.

At times I get just a little bit envious of countries like China where they can just set a five-year plan and take a very scientific approach to: what are the resources available to us, how much do we need, what are they going to cost, and how do we manage our economy to fit within our energy budget? And then, let's just go and do that. To say "okay, 2013, we're going install 10 GW of solar power," and then do it. Which is equivalent to the entire installed base of solar power in the United States that's taken us over 30 years to build. They just say, "okay, we're doing that," and then do it in a year, and then the next year after that who knows, another 15 GW. Amazing! The ability that they have to just say, "okay, we don’t think that we've got enough oil available worldwide to let us follow the U.S. model and all drive around in cars and all fly around in airplanes, so we're going to put in high-speed rail." And then, over a very short period of time, I don't know what the total was, less than ten years, just build out an enormous high-speed rail system that connects all of their major cities, and get it done.

The latest interesting announcement was that Beijing is just going to take millions of polluting cars off of the road. They're going to do it in a year. They're going to say, "okay that's it. We can't have all of these polluting cars. We've got a real smog problem. All these cars gone." Boom! And then do it. I'm not saying that I would wish to live in China or to live under their economy or their political system. I am saying that it would be nice if we were able to take a rational approach to our energy use and then manage our use and our economies and our infrastructure accordingly. Instead we do everything on a political basis and according to whatever the market dictates.

That has enabled us to come up with a lot of innovation to come up with things like the shale boom. But it also means that we have, by completely taking our hands off of the reigns of our future and of our use of energy, we have committed ourselves to whatever the outcome is geologically or in terms of the market. I think what that's going to look like for the U.S. is that we're going to find ourselves in a declining situation with our oil supply, domestically, in the latter part of this decade. And then when you get out two or three decades from there, we're going to find ourselves [as] the most dependent country in the world on oil imports—which we have been of course for many decades previous—and really have no recourse.

I don't think that we can expect to just drop in natural gas as a replacement for oil and keep our economy moving along the way that it has been. I just don't think that that's realistic, especially if you look at the decline rates of the shale gas wells and you consider the fact that across the entire U.S., if you put all of the different shale gas plays together, it's really only the Marcellus where we have actual growth. All the rest net to zero.

When the Marcellus plays out—and we don't know when that's going to be, but it's not going to be in the distant future. Probably, what, within the next five years, ten years? Who knows? The Marcellus will be played out, and that'll go into decline. Then, where will we be? You have to really... when it come to peak oil, and when it comes to things like this, you really have to take a multi-decade perspective and try to think about: where do you want to be in 2030? Of course, that's not something that we seem capable of doing.

Chris Martenson: I put that under the Should category. We should be doing things differently. By the way, businesses operate the way that you describe China operating all the time. It's called strategy. You ask two questions. You say, where am I trying to go, where would I like to go? That's your vision. The second thing is well what are my resources? You never have as many resources as you hope or want, and so that's what I would love if my country said, "here's 2030. This is what we would like it to look like. Oh, it's going to take this much to get there. Okay. We're going to need this much of our resources to go towards that build-out effort. Great! What do we have left over?" Then you can make some decisions about that, but we're not doing that.

So that's on the Should side. Now, what I want to ask you about in particular is on the Can side. What can we be doing? My own personal story around this, which I'm sure my listeners will have heard for the 30th time, but it just makes so much sense. When I put solar-thermal panels on the roof of my house in Massachusetts—I'm not in Hawaii and I'm not in Arizona. I'm in Massachusetts. We're not in the greatest solar zone in the universe, but these things penciled out very quickly as a replacement for the oil-heated water that I had prior to getting these solar-thermal panels. When I penciled this out and put it in a spreadsheet, eight-year payback with the tax credits wrapped in, and if they last 25 years, an internal rate of return well over 100%—as long as oil doesn't go to zero that is.

It created local jobs for the installers. The technology is 1970s. I think that the controller might be more modern than that, but otherwise it's the pump and some tubes and a couple of boxes. And so, I'm burning less fossil fuels. There's less carbon going into the atmosphere. There's less oil being burned to heat water. The sun heats stuff extraordinarily. It's 1970s technology. Because I have them up on my roof, there's now one more house on my street, but I think that we're the only two houses in town.

Chris Nelder: That's absolutely a no brainer. As you say, it's not advanced technology. It's basically plumbing, doing solar hot water. Most of the stuff that's out there today is in fact 1970s technology, but in reality we were doing solar hot-water systems here in California over a century ago. This is old technology. In fact, I've just started reading John Perkin's wonderful book, Let it Shine: A 6,000-Year History of Solar Power. It's just amazing! We've been doing solar—originally of course with thermal systems—to boil water, to provide process heat or something like that for millennia as a species.

He goes all the way back to ancient China, ancient Greece, ancient Rome. There was a lot of solar thermal experimentation going on in Europe in the 17th, 18th, and 19th Centuries, and really a lot of that progress was sort of halted by the widespread development of coal, and then later oil and natural gas. But it's always been a viable technology. So in your case where you're replacing fuel oil with solar thermal to provide domestic hot water, yeah, absolutely a no brainer.

In Africa, other parts of the developing world where you're replacing kerosene lanterns with solar PV, absolute no brainer. You're going to get a simple payback on that in just a couple of years and maybe less than a year in some cases. The hard part is, where you're using, for example, solar PV to produce electricity in a place like Seattle where you've got very low solar resource, and you're trying to compete with cheap hydropower off of the grid—there it's tough.

When you're on an island in Hawaii, and you're trying to produce PV solar power, and you're competing against imported oil to run generators, no brainer. It pencils out really fast. So, it's always a question of: what fuel are you trying to replace? What's the price of that fuel? What's the availability of your renewable resource? And so on.

But, when you look at the long trajectory of falling costs for wind and solar, especially over the past decade, and you look at the trajectory of fossil fuel prices, which are, globally speaking, just creeping up and creeping up, it's just become quite clear to me that we've reached a tipping point where renewables will continue to gain market share against fossil fuels sort of forever. This is just not a reversible situation anymore.

It's too easy to sort of fail to appreciate that when solar is still less than 1% of total energy, and when wind and solar together are about 4% of the U.S. grid supply. You can say, "well, that's just so small, and we always need base load power, and yada yada." No. That's not the right way to look at it. You have to appreciate 30% compound annual growth rates. You have to look at grids like Germany's where they've got 25% of their total electricity supply now being provided by renewables, and at the same time, the most stable grid in Europe. That's in the context of phasing out their nuclear power.

While they had a short-term, couple-year increase in coal fire power, which was mainly making up for the loss of nuclear power, even that is starting to go into decline now. So, when you look out a couple of decades, it's just absolutely clear, just completely indisputable to me that the world is not only in energy transition, but has been for about a decade now depending on where you want to start the clock. That is irreversible. That will continue. It will primarily happen on the basis of cost because renewables have just gotten cheaper than coal and natural gas and oil in various places. As a lot of the big bank analysts have said over the past year or so, by 2020, in most of the world, wind and solar are going to be the cheapest way to put up a new KW of capacity.

So, when you've reached that point where, without subsidies, renewables are cheaper than fossil fuels, then it's kind of game over for the fossil fuels. It'll take many decades to replace them to a high degree. It'll probably be 2040 - 2050 before we get to very high penetration rates in various parts of the world. It'll probably be later in the century before we get to the point where certain countries can be 100% or nearly 100% powered by renewables. But, I think that we're absolutely on that trajectory. I don't see anything that would take us off of that trajectory.

Chris Martenson: Well, let me connect a couple of dots in your story there. I was talking with the chief investment officer for a European bank on a podcast just yesterday. He was mentioning that the German story—they do have a lot of renewables. They also have very high electricity costs. BMW just moved a engine factory to Seattle. So, there are a couple of dots that just sort of strum together. And so, there still is this perception that renewables are expensive. So, I'm wondering: if we look at like the Spanish story around solar, a lot of investment in solar, and I don't know what's going on necessarily because the Spanish economy has got a lot of issues going on with it, but there seems to be a lot of discussion that the solar investment is not working out for them at this point in time. Have you looked at that at all?

Chris Nelder: I've looked at both of those stories. People who would like to put down the energy transition or to put down renewables love to raise all of those points that you just mentioned. First of all, in Germany, the increased use of renewables is not the primary reason why their grid-power prices are so high. The grid-power prices are so high... it's a complex situation. I don't really want to get into it now. I don’t even think that your listeners would care about all of the details because a lot of it has to do with the way that the various tariffs are structured and who gets discounts and who doesn't and so on. Wholesale electricity prices in Germany are not the highest in Europe. It's the retail prices. The retail prices are so high in a large part because they've given industrial and commercial users a break from having to pay for the renewables and from having to pay for the feed-in tariff. They've pushed the entire cost of that onto the residential sector. Interestingly enough, it's still overwhelmingly popular in Germany. The vast majority of Germans are still supportive of it, even though they've given industry a massive break in their renewable power... in having to pay for the energy transition.

Secondly, a big part of the higher cost in Germany has had to do with the fact that they still got a significant part of natural gas in their power supply. Natural gas is extraordinarily expensive in Germany. A third component is that Germany has been, to a large degree, a net exporter of electricity for the last several years. And so, if you really take a proper look at how much have renewables contributed to grid-power prices in Germany, it's not at all what it's been made out to be. In fact, if you look at what prices would have been without renewables, they would be higher than they are today because renewables have effectively brought down their consumption of higher costs fuels like natural gas. So, that's as deep as I want to go on the Germany subject right now.

As for Spain, Spain really screwed up its feed-in tariff construction. They just blew it. They put in a feed-in tariff that was just far more expensive, far more generous than they should have.

Chris Martenson: Chris can you define "feed-in tariff" for our listeners?

Chris Nelder: A feed-in tariff basically is a price that renewable generators—like if you put a solar system on your roof, or you build a ground-mounted solar system or a wind system, and you put renewably generated kilowatt hours on the grid, you get a certain price for those kilowatt hours, and it's higher than the grid price. So, it's usually about three times what the retail rate is. But, there's different feed-in tariff structures. In every country that has implemented them, they're all a little different. They're all set at different levels.

Germany's feed-in tariff started off at a very generous level, and they have followed, very accurately, a planned schedule of reducing the level to the feed-in tariffs to the point now where a lot of people are putting up solar systems in Germany without the feed-in tariff because it's actually now just cost competitive. It's at grid parity. People can make money by just putting up a solar system and just participating in the regular energy market without the need of a feed-in tariff incentive.

Spain really screwed up the construction of its feed-in tariff. Again, another complicated subject that we probably don't want to get too deep into, but they set their tariff level too high. They didn't cap it. The amount of projects that they were going to allow to participate in the program—they didn't do sufficient oversight on those projects to make sure that they were all properly built. And so, there was just kind of a free for all.

They had people building arrays that were not productive, that were badly oriented, that were overbuilt, and so on. So, those who would use the Spanish example as a reason to say that renewables are dumb all over the world are just... they're really distorting the whole question and just trying to take the worst-case example to try to put renewables down. But, if you look globally at how solar power and wind power have performed in Denmark and Germany and Portugal and the United States, and how solar in particular in the United States is really taking off in Hawaii where it's replacing oil... you just get a very different picture.

Chris Martenson: I'm fully convinced that some point between here and oh, 1,000 years, but it could be much sooner, we will be on 100% renewables because there will be no fossil fuels out there. We will have used them all up. Maybe that comes in 100 years, I don't know. So, we're heading towards a pure renewable future one way or another, much like my great-great grandfather might recognize or somebody a little earlier than that. So, I'm there on that. We've got a lot of detractors saying that it's too expensive. Obviously we don't add up all of the externalities in the cost structures. Even like right now when people say, "oh look! Shale oil is competitive at $65/barrel." We're not adding in all of the bridge and road damage, and the eventual capping of all of those abandon wells to arrive at that price. That's just an instantaneous price-at-the-wellhead kind of calculation.

So, when I look at this from a real macro perspective. You threw some numbers out. You said that by 2050, we'll have this amount of penetration. Maybe it's the end of the century, so 2100, we sort of get to a more complete picture.

I think about the time, the scale, and the cost involved in energy transitions. Vaclav Smil, out of Canada, the professor, he's got a nice book on that subject. He noted that an energy transition, left to market forces, is 40 to 60 years in duration before you get to 50% penetration. Will it take that long with renewables, and do we have that amount of time?

Chris Nelder: I have Smil's Energy Transitions book. I read it in detail. My copy is well dog eared and highlighted and underlined and commented in the margins. I have a lot of problems with his conclusions, or at least with the way that they've been just sort of repeated in the press. He actually makes a more nuanced argument than most people appreciate. But, even his own editorials just sort of dismiss renewables, and dismiss peak oil because of the scale issue. Number one—and I actually wrote a pretty detailed response to that book at Green Tech Media last year called, "Watt's up Vaclav?"

First of all, you can't take the history of energy transitions and just apply that directly to the future because things happen faster now than they did 60 years ago. We are deploying renewables at a very rapid rate. So, that's point one. Point two, he argues that you don't really get a significant growth... rather you don't get to the point where a new fuel becomes really significant until you get sort of the upward part of the hockey stick. He says that that's long in the future. I've looked at the data, and I say, no. Actually we've been on that upward part of the hockey stick for a good couple of years now. When you're at 30% compound growth rates, that's where you are.

He has said that this stuff is just too expensive, and that it's not cost competitive. That data is just completely out of date. He stops the clock on comparing the cost of, for example, solar to fossil-fuel power conveniently a couple of years ago before renewables really started to get cheaper than fossil fuels.

The other part of it is that energy transition is almost a fuzzy concept. I use the phrase, "energy transition," I guess maybe in sort of a casual way to talk about the fact that we are in fact beginning to substitute some fossil fuels with renewable power. But, in the way that he discusses it, if you look back, in many cases we haven't actually done substitution. What we've done is added a new fuel supply while the old fuel continues along at kind of the same rate. So, I would hesitate to call those "transitions." I would say that, if you look back at let's say the last 150 years of global energy supply, what you mostly see is new wedges stacking on top of old wedges, not actually substitution.

So, when he says that it's going to take 50 years for renewables to have a significant market share or to replace fossil fuels at some significant level, I say, yeah. Okay. Well, let's talk about how much. In fact, I think that this transition is actually going to be a substitution where, in the previous case, it wasn't. If you take that concept in mind, then really the substitution of renewables for fossil fuels is much more impressive. It's actually doing displacement, whereas, oil and natural gas did not displace coal. They just added to the total supply.

One of the few instances where we actually did a true substitution is when we started using petroleum to replace whale oil. That was what? A hundred and fifty years ago at a much lower level. So when you're actually doing substitution of fuels—when you're replacing fossil fuels with renewables at today's levels of consumption, it's much more impressive than just the sort of timespan narrative that he's put forward.

Chris Martenson: Well now Chris, when I look at total world, I'll just constrain myself to electricity use, that's been going up and up and up. Arguably, at least from data I've looked at, China has gotten to a lot of its growth through horrendous rates like 7% growth in energy, electricity production per year for a ten-year span. That's a full doubling of their electricity output in that ten-year span. They've achieved a lot of that with coal. One statistic I heard was that they were tossing in a new coal-fired plant per week. So, when we look at that, is China, even as aggressive as they've been—$60 billion/year or whatever they've put in clean energy. I think that they were talking $800 billion over ten years, they had a huge number that was really impressive. Is that additive or substitutive for them at this point?

Chris Nelder: Well, China's consumption of coal is still growing. So, I think that it depends on how you want to phrase it, right? If they had not put in all of this renewable capacity in the last, let's say, two or three years I think that they almost certainly would have done that same capacity with coal instead. So, it wasn't quite a substitution, but it wasn't quite additive either. I would say. I mean, there's no question that what you said is correct. China did power its big lift into sort of a more or less modern industrial society mainly on the back of coal. They still burn more coal than anyone else in the world by a long shot. It will be a long time before they can phase that coal power out, because it was cheapest.

But again, I think that the concept or the idea that's been tossed around there building a new coal-fired power plant every week. That's getting a little out of date now. That was true let's say three years ago. It's not so true today. It depends on what you mean by a new coal-fired power plant every week. The fact is that they've actually phased out a very substantial part of their older coal-fired power that was just really inefficient and dirty. Some of these new plants that they're putting in are actually replacement plants. They're not new capacity.

Second, their growth rate of their consumption of coal has really tapered off very dramatically. It's down at just sort of like kind of average first-world levels of growth at this point, while their adoption of renewables is actually increasing at just a phenomenal rate. So, we have to be very careful when we just sort of take these casual ideas that have just been sort of tossed around about how China is all about coal, and how they're putting in a new coal-fired plant every week and all of that stuff. No. China is actually executing one of the most deliberate and impressive pivots to renewable energy right now in the world. It's phenomenal what they're doing. When we get another five - ten years down the road, if they keep on the way that they have been, we're going to be looking at a very different narrative.

Again, the idea that in one year, 2013, China installed more solar capacity than the entire United States has, after 30 years of building it, you have to take a pause on those kinds of narratives and go, "hang on. There is something very different going on here." They are going to continue to deploy a vast amount of renewables. By the way, a lot of that renewable power that they've deployed in the last few years has been hydro. They've got still some very ambitious hydro plants that they're building. Now, I don't want to weigh in right now on whether that's a good idea or a bad idea because certainly there are some pluses and some very severe minuses to building these giant hydro projects in China. But at some point, as the U.S. did many years ago, they're going to reach a point where building big hydro isn't really something that they can keep doing.

But at the same time, they're already scaling up their use of solar and wind. And, they're deploying them at a phenomenal rate. At some point, they are in fact going to be truly displacing coal. Their coal consumption will start to turn down. Now, I haven't had the opportunity to really dig into that data—by the way, that data is really hard to get in the first place—and to take a look at the growth rates, and to do some modeling and to understand exactly when China's coal power will start to decline. My gut feeling is that it could be like within the next 10 years or so.

Chris Martenson: And, their installed base of renewables compared to their total, is that about the same as the rest of the world? You said what? About 1%?

Chris Nelder: I'm sorry Chris. I don't have that number off of the top of my head right now.

Chris Martenson: Alright. So, what I'm trying to get at is the time element in all of this, which is even if we're installing at… there are a couple thing in this story for me. The first is that a lot of this comes from the supply side, which is: How do we continue to supply additional electricity—just to pick on electricity—to ourselves at the rates that we've been accustomed to. The other side of the story that I'm really excited about is the conservation side. I truly believe that a watt not used is worth many times its weight in watts that were produced. And so, the thing that's been really impressive to me is to look at the numbers of ways that we can, if we choose—again this is where the choice element comes into this story—if we choose, we can build buildings that have a fraction of the energy consumption of standard building technology.

For the most part, we still build standard buildings. That's like with insulation, HVAC, where you're combining your heating and cooling cycles and doing COGEN and all of that stuff, which frankly some of that has been on the table for one or more decades as existing technology. So what I'm interested in is both trying to understand the scale issue of replacing our current production, and then as well, what we can do on the other side of this story, which is more around efficiency, which I think gets less press, but to me, it's actually the more exciting side of this story.

Chris Nelder: Yeah. I absolutely agree. Let me just take a little step back from that question, and point out that I don't think that it's possible for the U.S. economy—just for one example, but really it's true globally—to execute a transition from fossil fuels to renewables and to do that at current levels of energy consumption. So that means that as part of this transition, we must actually reduce our total consumption of energy. Just sort of off of the cuff, I think that globally we should be looking at at least a 1/3 reduction. Most of that would have to take place in the OECD and in China.

So, if you think about that, how do you accomplish this massive reduction in fossil fuel consumption? The easiest way to do it just right off the bat is, as you say, energy efficiency upgrades in the built environment because we've just got these enormously inefficient and leaky building where you've got just massive thermal exchange. That is very doable. Energy efficiency is, in almost every case, something that pays off very quickly and very handsomely. It's not sexy. For whatever reason, people don't find it that interesting. They don't want to write about it. They don’t want to invest in it. But, the opportunities are absolutely fantastic. It's not just buildings. It's everything. It's street lighting.

There are just massive opportunities there. I think—well, we already have, especially if you look at the green bond market—we already have billions of dollars flowing into these kinds of projects globally now. But, I think that there's going to be just a huge increase in rebuilding and retrofitting and putting in various kinds of energy efficiency upgrades around the world. In fact, I just finished doing a study for the State of Maryland looking at a program where there's a facility that was funded by all of the major utilities and then administered by the state to pay for weatherization improvements in low-income households. The rate of return over 20 years on those projects is just fantastic! It's just a fantastic investment! So, yeah.

I think that we're going to do a lot more of that. We are going to figure out how to stop thermal losses. Eventually, we're going to have to tear down some buildings that are just unfixable and start over because in many cases it's just actually more cost effective to do that than to try to fix an old, badly designed building. Zero-energy homes have been a thing of the present for many years. There's no reason that we can't be building a lot more of those. Passive house design is a proven technology. It's been working all over the world for decades now. It's just amazing to me that we don't do that just sort of routinely as a matter of course.

Too many of our building standards are just weak. They're just badly designed. Even the Title IX requirements in California are just far too lax about requiring efficiency, high efficiency building materials in construction. California has one of the most advanced codes in the nation that way. So, we're decades behind adopting technology that's been proven and cost effective for decades now. It's just sort of silly.

But once you've gone through the built environment and made it more cost effective … by the way, that's something that Germany has done very effectively. One of those simple, and I think really kind of brilliant policies that they put in place to encourage that is that they offered, I think that it was close to zero-interest loans for homeowners who want to do efficiency upgrades in their homes. So all across Germany you've had this wonderful—years now of people replacing windows, putting in insulation and doing all kinds of efficiency upgrades on their homes because it effectively doesn't really cost them anything to do that.

Chris Martenson: Zero-percent loans? What if the bankers needed that money instead?

Chris Nelder: [Laughs] Yeah, well. It's all a matter of priorities isn't it? I mean.

Chris Martenson: Exactly!

Chris Nelder: One of the things that I think American audiences really fail to appreciate is that countries like Germany and Denmark and some of the more advanced countries in terms of their adoption of renewables and advanced building technologies—one of the main reasons why they've done that so much more aggressively than us is that they don't have the option of telling themselves pretty little lies about how fracking is going to turn them into Saudi America or whatever. They don't have significant amounts of oil and gas on which to fall back. And so, they have been forced to think about what they can really do with renewables. And, America is really far behind the pack in terms of our use of these very cost effective, very viable technologies, in a lot of ways, just because we have a very powerful fossil-fuel industry that has hired a very powerful lobby.

Those people essentially own a lot of our people in congress. They've been very effective at sort of telling us these pretty little lies, and scaring us with these ideas that renewable are more expensive and that they're going to crush the economy and blah, blah, blah, while they completely ignore the success of this stuff in other parts of the world. So, it's very much a political thing as to how we choose these priorities. It's not really about the free market. It never was about the free market. It's really about who's got the money; who's got the power. Gold rules as they say.

Chris Martenson: Or at least fiat money rules. This is the part that’s frustrating to me because there's so much that we can and should be doing. It makes sense in all of these dimensions. You might just find yourself living in a building that's more comfortable, that is actually a healthier environment, that is cheaper to operate. There's a guy a talk to who owns a company where they're doing fairly high-end large commercial things including retrofits to existing gas-fired power plants where what they do is they very ingeniously use cooling as part of the heating cycle. They make really excellent products where he can just sit down with you and say, "look, when you build a building, 70% of the cost of this building over its life is going to be the heating and cooling." So, it's obviously the dominant driver. But there's this disintermediation between the parties because the guy who builds the building, and the gal who buys it, and the person who leases it, all are usually different parties. And so, none of those parties actually has a direct interest in energy efficiency because of their timelines and the decisions and how they're making it, it's pretty rare. So, we find that we build the cheapest buildings rather than the best buildings, and that happens over and over again, still.

Chris Nelder: That's exactly right! That's one of the key conclusions from this project that I've been doing with the State of Maryland. By investing our money according to only what costs the least up front and not paying attention to the total cost of ownership, especially when you're talking about something like a building that's going to sit there and suck power for 30 or 40 years, you're making a huge error.

If you were a home owner, or let's say that you needed to buy a car, and you thought "oh, wow! I can buy a car for $10,000 that gets three miles to the gallon, or I can buy a car for $20,000 that gets forty miles to the gallon." Would you just instantly go out and buy the car that gets three miles to the gallon without even thinking about it just because it's cheaper? Or would you actually get out a little spreadsheet or get out a pencil and a piece of paper and just spend five minutes to try to figure out which one is cheaper to own? Any intelligent person would do the latter. And yet, that is not how we go about choosing buildings, particularly at the state-government level. That's not how we go about the analysis.

We've just got it, in some cases actually written into law, that the state should just buy the thing that's cheapest up front. There is no requirement to think about the total cost of ownership. So, we do a very bad job of cost-benefit analysis and thinking about the long term. If we did a better job with that stuff, it would just be absolutely routine to put up buildings that are energy efficient. Yeah you're right. It's a total failure of analysis that we don't.

Chris Martenson: Yes, indeed. And so we're getting to this part of the story where it's clear to me that we have to shift our narrative. But, it's obvious to me the more I run the numbers. I'm like you. The more that I burrow into peak oil and really understand all of the differences between bitumen and kerogen and light oil and tight oil, and all of the different pieces and how it's gotten and what the energy return on them are and what the actual basins happen to be and source rocks and all the rest. You dive into that detail. The further I go, the more convinced I am that this story is not only exceptionally real, but that it's bearing down on us pretty rapidly and it's going to happen within just a few short years, we'll have to grapple with just that first component of the energy story around petroleum.

And oh, by the way I talk to people in the industry. Just talk to any wildcat or geologist out there, and they'll tell you exactly how hard it is to come up with a new prospect. It's very difficult and getting harder. And so, it's going to take time to reorient our priorities so that they're really embedded not just in our consciousness, but in our laws and our building codes and all of the things that really have to be done to get that really inserted.

So, from your perspective, are you finding in dealing with entities like Maryland—where are we on this awareness cycle? Are we getting there? Are we still pretty early in this, or how much rock are you rolling up the hill on these things?

Chris Nelder: Well, you know how it is Chris. The market always explodes right after the VIX has fallen to low levels. That's just how we roll. I would say that in the case of Maryland, the reason that we're doing the project there is because Governor O'Malley is very interested in data-driven government. He has a very progressive perspective on energy. He's really interested in this stuff, and really wants to know: what's the best use of state funds? How should we think about making these long-term investments? In other states, not so much. It very much is a state-by-state kind of a question. So, I'm hopeful that the analysis that we've done for Maryland will really get some attention from other states. They'll begin to look at the way that we've done the analysis and say, "huh, maybe we should do something similar to that for our state." I would say that it really just sort of depends, again—in terms of how Sisyphean your effort is—it really depends on which state you're talking about. It's going to be a lot easier in a place like Maryland or California or Massachusetts or Vermont or Oregon than it is in, I don't know, Texas or North Dakota where they're producing a lot of oil. That's just the sad fact of it. Again, it's very much a political question.

Chris Martenson: Alright, so you've studied this obviously very intently. I'm really interested in your level of optimism. As you look forward, understand that we're going to have to dial back our energy usage in total through efficiency, that's great. And, we're going to start to transition forward into other forms of energy alternatives, we'll call them for the moment as a big sort of catch-all bag. How optimistic are you that we'll be able make that transition in a reasonably non-disruptive way?

Chris Nelder: Yeah, define "reasonably non-disruptive."

[Laughter]

Chris Martenson: People won't get tossed out of their homes or their work or all of that. We all get to keep our jobs. That to me is reasonably non-disruptive.

Chris Nelder: It's so difficult to say. This is where you get into the domain of unknown unknowns. I really find it difficult to say. So much of it depends on the individual decisions that a couple of hundred million of us make over the next couple decades. As I think you were quite right to tell the extra environmentalist guys a few months ago, who knows? Who knows what those decisions will be? Who knows what the future will actually turn out to be, depending on how we approach it? I will say that there's... I do think that there's a relatively—I don't want to say "painless" or even "stable," but I do think that there's the option of a modest disruption. Let's put it that way. It's still on the table. If we were to really come to grips with the fact of the data and what it is that we should start doing and really put policies into place. But of course, that would depend on either not using politics as our guiding star for what we do, or finding a way to reorient politics so that it's actually paying attention to facts.

I don’t know how much of a likelihood that I'm going to put on that for the United States right now, but that option in terms of the full range of possible futures and what options we have available for us, that option is in fact still on the table. I don't think that 10 years from now it will be. I think that what we do over the next ten years is going to be enormously determinative of what our future options will be. Because if in fact global oil supply goes into decline starting next year as I think it will—or even a year later concurrent with the peak of U.S. tide-oil production—when you get 10 years down the line from that, the disruptive effects on global trade will be non-trivial. And then, it will become more difficult to just get things done. It'll be more difficult to get parts. Your project execution is going to really slow down. Your supply chains are going to slow down. You're going to have interruptions. And so, that will really have an outsized effect on what our future option will be.

I would say that also some much more severe scenarios are absolutely on the table. If we do absolutely nothing and just sort of continue along on the status quo, I think that the U.S. could find itself in a world of hurt 20 years from now when our tight oil boom and our shale-gas boom is long in the past, and we're now competing very strenuously with the rest of the world for the few barrels that remain of global exports. Imagine 20 years from now, if the U.S. hasn't really been aggressive about transitioning to rail and to renewable energy, and we're looking at $20/gal gasoline, that's going to be tough. That's going to be really tough. I think that if we were looking at $10/gal gasoline ten years from now, I think that we would have a very hard time doing that. So, it really depends entirely on what choices we make.

The one thing that makes me perhaps more optimistic than some is that: A.) I recognize that renewables are about to become the cheapest way to generate a new kilowatt hour of power; B.) I recognize that the days of fossil fuel growth are very numbered and soon will be behind us; and C.) I think Americans with their sort of "can-do" attitude, when faced with a truly existential challenge that this is, will grab their bootstraps and get to it, and could make some changes in a pretty radical fashion.

I think that the political polarization in this country that might make us despair about the possibilities of a strong energy transition in America are really more the domain of pundits and of talking heads and of people just trying to get a story than they are of regular folks on the ground. You look at how quickly and how vociferously people in places like Georgia, Kansas, Iowa—good solid red states—are getting enthusiastic about renewable power. You've got to say, you know, this whole political polarization thing that has stymied our progress so far may not be all that deep. This might be something that could actually be sort of sloughed off and put in the dust in a pretty quick fashion.

I think it will be because, ultimately, renewable power is totally patriotic. It's about being self sufficient. It's about using your own resources. It's about using free energy that nature provides. It's about keeping money in your community rather than sending it away to some giant corporation somewhere else. It's about community resiliency because the more power that you generate within your own community, the less dependent that you are on some power plant maybe even in some other state. It's a totally conservative, conventional, and patriotic thing to have renewable energy.

I think that the main limitation on renewable energy in the U.S., particularly in sort of right-wing political parts of the U.S., has been a question of cost. If you take that cost advantage away from fossil fuels, as is already happening, that whole seemingly enormous bulwark of right-wing resistance could just turn into dust, like, in a heartbeat.

Chris Martenson: Well, the good news from my vantage point is that we do not discuss politics at all on my site. We have people there discussing the data and having good fact-based discussions. Every so often politics will rear its head and people who have been otherwise pleasantly conversing suddenly hate each other. We've learned that there's a lot of common territory where if we just get together around what's really actually truly important—and those happen to be the actual challenges that we're facing, the predicaments that lie before us and the opportunities that exist in those as well. So, one of the key takeaways that I've gotten from this from you is that if somebody who is 25 is asking you what they should do with their life, I will say, "renewables."

Chris Nelder: That's the question that I always give those people. I hear from those 25 or 19 years olds as well. What should I do? I tell them to go into renewable power. The opportunity is just limitless. There is just no end to the amount of work that we need to get done in energy transition. We actually need a lot more people than even all of our new college graduates could provide. We need a lot of people from other industries to come over to energy and to help us get this job done. Because, of course, every year that we delay, it just becomes more and more of an urgent thing that we're going to have to pull off a lot more quickly than we really wanted to. I mean, as I said near the beginning of this conversation, this is something that we should've been aggressive about 30 years ago, and never taken our foot off of the gas. We started going there in the early '70s with the Arab oil crisis but then we took our eye off of that ball and went back to thinking about fossil fuels. That was just an enormous mistake. So now we have what's going to be just a really huge task that we have to accomplish in a very short period of time.

Chris Martenson: Indeed. With that, I'm going to... I could talk about this forever with you. We're probably going to have to follow up because I'm very interested in what the specific opportunities would be, and dig down, so maybe we could do that at some point. I'd like to leave listeners with a way to follow you. I mentioned it briefly: GetRealList.com.

Chris Nelder: Yeah, just like it sounds. GetRealList.com. That's with two l's. I'm also pretty active on Twitter if people want to follow me. It's @nelderini.

Chris Martenson: Nelderini?

Chris Nelder: Nelderini, yeah. My last name with an ini on it.

Chris Martenson: Alright. Nelderini. @nelderini, you can follow in there, and it sounds like you've got a number of interesting reports that people could sort of dig into. I'm specifically interested, and want to direct people to this idea of actually thinking about what transition really means. That word needs to be unpacked a little bit because I do think that the subtleties that we've heard about here, which is are you replacing or are you stacking energy forms on top of each other? That's a good concept. So, lots to think about. Obviously, this is one of the major challenges that we're going to be facing. If we have to suddenly confront it beginning in 2016, as Chris has been suggesting with the worldwide recognition of an actual peak in oil, boy, the urgency will dial up a few notches. Let's hope that we take the right course of action and turn inwards, and figure out how we redirect our resources in this country because the alternatives are not good.

Chris Nelder: Well, I have a variety... obviously, I've written hundreds and hundreds of articles about this stuff from all aspect of fossil fuels and renewables and transition and a little bit about the political dimensions and the social dimensions of all of that. All of the stuff the I've written, whoever I've written it for, I post at the very least a link to my blog. So, the folks go to getreallist.com. If they want to use the search box in the upper-left-hand corner, that's a pretty good way to find different things, different topics that I've written about. But yes, I've got a wealth of material there to explore. I try to really provide links to all of my sources and to all of the data, so that people just don't have to take my word for it, they can go and look at it themselves.

Chris Martenson: Fantastic! Well, with that, Chris, thank you so much for your time today.

Chris Nelder: It was a pleasure Chris.

About the Guest
Chris Nelder

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California.

Related content
» More

No Comments

Login or Register to post comments