July 3, 2006 Doug Noland's Credit Bubble Bulletin column, published every Friday on the Prudent Bear website, is about the most comprehensive and regularly intelligent view of the financial scene going. Noland ran an especially interesting piece this past week and it deserves some discussion (Note: you have to scroll way down to the end of his column under the sub-head Realty Check for this.) In it, Noland says:
. . . it appears certain that we are in the early stages of an enormous spending boom necessary to deal with the rapidly changing energy and climate backdrop. The scope of the required research and development could be unprecedented. The investment boom throughout the energy and alternative energy sectors appears poised to rival (and likely exceed) the technology boom. The auto companies will need to gear up to develop and sell smaller, more fuel efficient and cleaner automobiles. There will be rising demand for smaller, more energy efficient homes likely in milder climates, as well as demand for efficient appliances and heating and cooling systems. Across the board, businesses will be forced to be more energy efficient.
It is certainly plausible that our society's efforts will have to take a very sharp turn into different areas of endeavor than, say, suburban house-building, theme park promotion, celebutante infotainment services, casino management, and RV sales. And it would make sense that a lot of investment money would start heading to different destinations. Noland himself indicates that this shift could be disruptive. But he seems to come down on the side of an incipient transformative boom.
For now, it is safe to assume that the current investment boom in ethanol, biodiesel, solar, geothermal, solar, nanotechnologies, oil and gas exploration, and myriad other energy, environmental and conservation technologies create an almost endless source of demand for financial, human and natural resources. And, importantly, for now the Credit system is able and willing to finance this boom.
I think Noland leaves out two crucial parts of the story. While much investment and the work of many people will go into re-shaping and retrofitting the infrastructure of daily life, the bottom line will be a society that has to make do on substantially less net energy than has been the case for the past hundred years. And any way that you cut it, less net energy means less net productive capacity and ultimately less net wealth generated. Since financial instruments are based on the hope and expectation that society will generate more wealth, then this is a predicament for finance generally.
Perhaps Noland posits some kind of superior lean-and-mean machine of a re-tooled economy that will actually generated more wealth using less energy, but personally I doubt this will be the outcome -- especially when you start adding up the externalities of climate change, geo-political conflict over remaining world energy resources, and domestic sociopolitical strife incurred as Americans fight over the table scraps of the 20th century. The model of an economy that produces more wealth as its basic energy inputs contract is a contradiction in terms, in essence just another perpetual motion device.
Which leads to the second thing Noland leaves out: the consequences of the massive mis-investments we have already incurred in the crap that is already out there, namely the gigantic easy-motoring utopia of suburbia. Wind, solar, bio-fuels, tar sands, coal-derived-liquids, used french-fry oil, nuclear fission -- none of these things will rescue American suburbia from the twilight of oil and natural gas. There is a great wish abroad in the land that these alt fuels would come to the rescue, but I believe it will never get beyond the wish stage. I think most of this mis-investment will end up simply written off as a dead loss. And the sheer loss of wealth incurred in this process would take us back to the previous point: socio-political turbulance. As suburbia hemorrhages value, the formerly middle classes will freak out over their personal losses.
Finally, it is interesting to see that Doug Noland has fallen into what has become a widespread delusion among people who ought to know better -- that energy and technology are virtually the same thing, mutually substitutable, that if you run out of energy just bring in new technology. This is really becoming the central misunderstanding of our time.
We have invented a lot of nifty things in the past hundred years, but it has all been made possible by cheap fossil fuels and cheap electricity, which depends on the cheap fossil fuels. Even nuclear power, which was once (but no longer) heralded as "too cheap to meter," owes its existence to the fossil fuels that make all the mining, construction, and maintenance possible. The truth is, we have nothing better to plug into except the fossil fuels, and all the substitutes and schemes currently known will not even make up for a fraction of our losses as we enter the era of energy resource scarcity.
So, getting back to Noland's original point: might we enter a fabulous boom based on "a transformation of the global energy infrastructure?" We'll certainly try, but we'd better prepare ourselves to be disappointed, and to make other arrangements as that happens