Sunday, July 05, 2015

Lab rats and the corruption of how we count

There's an old joke about lab rats in which the teller says he or she secretly suspects that all lab rats are prone to cancer and so all research about the risk of cancer in humans based on tests in rats is likely useless.

The Committee for Independent Research and Information on Genetic Engineering, a European-based research group, thought it would look into such a possibility.

Last week the group released its findings and that joke became a reality. The diet fed to most lab rats is so laced with pesticides, heavy metals, genetically engineered feed and other man-made contaminants that lab rats worldwide are indeed at much higher risk of developing cancer and other diseases and disabilities just from the food they are reared on.

This doesn't necessarily mean that certain substances thought likely to cause cancer in rats and possibly humans now somehow don't. Rather, the study calls into question practically all safety tests which rely on these rodents. And, in fact, it suggests that the dangers of many substances and genetically engineered plants may have been underplayed.

The researchers point out that some studies purporting to demonstrate the safety of genetically engineered foods fed significant amounts of such GE foods to control groups of rats. These rats should not have gotten any GE food in order that their health profile could be compared accurately to those intentionally fed GE food.

And, even if the rats in the control groups don't ingest the chemical or plant being tested--as is the case in a proper study--they still get sick at abnormally high rates due to their diet. That can make substances being tested appear safer than they truly are because it is more difficult to sort out which effects in the test group are due to the substance or plant being tested.

The butcher's thumb on the scale has long been a metaphor for skewing results of laboratory tests and public surveys. And today, there are so many opportunities for "the thumb on the scale." This matters because it is difficult to know what to believe in a world that is so complex that we are obliged to rely on experts for much of our understanding about how the natural and human-built worlds work and interact.

This week we were treated to the good news that the U.S. unemployment rate dipped to a cheery 5.3 percent. But what's called the participation rate--the percentage of working-age people employed in the work force--hit its lowest level since 1977. So, fewer people looking for work in part accounted for the lower unemployment rate. This suggests that there are still a lot of people having difficulty getting work. The all-inclusive U-6 number--composed of those who've given up looking for work (so-called "discouraged workers"), those working part time who want to work full time, and those who've simply disappeared from the unemployment rolls after benefits ran out--that number stands at 10.5 percent.

Changing the definition of what we count without making that change clear to the public is always a promising tactic among those who would like to mislead us. As I have again and again pointed out, the way we count barrels of oil in the world is seriously flawed for two reasons. First, we count a number substances which are not oil. The marketplace is wise to this, for while governments and companies count these non-oil substances as supplies, companies cannot sell them on the world market as oil.

Second, we treat estimates of "resources" of oil which are based on very sketchy evidence as if these resources will be ready and available to humans whenever we need them at the quantities we want and prices we like. This infographic from the otherwise sensible Carnegie Endowment for International Peace claims that humans have access to 24 trillion barrels of "oil" (a word which must now be placed in quotes). We've consumed about 1 trillion so far. That 24 trillion barrels presumably amounts to a 500-year supply.

But the truth is in the fine print. Some 6.5 trillion barrels are labeled as "technically recoverable." This means they are not necessarily deemed "economically recovered." Only a small fraction of such resources will ever be extracted due to cost and logistical constraints. This number includes a substantial amount of oil from oil shale (actually from kerogen) for which there is no known economically viable extraction method. It is instructive that actual worldwide reserves of "oil" from oil shale currently stand at precisely zero.

Only Estonia has made consistent use of oil shale by simply burning its abundant deposits directly to make electricity. Efforts to extract unsubsidized liquid fuels from oil shale have so far proven elusive.

The 24 trillion barrel number is even more sketchy as it is called "oil in place." This includes hasty and poorly supported estimates for which there is typically no drilling data at all (except for the tiny fraction--1.6 trillion--that represents known "reserves," a much more rigorously supported number).

Only an even tinier fraction of the remaining oil in place will ever be produced. To date about 35 percent of all exploited oil in place has been extracted. That was the easy stuff. The number falls precipitously to 5 to 10 percent for unconventional oil such as tar sands and tight oil for which there are known economically viable extraction technologies.

Everything else beyond that is just fantasy. We should remember that for more than a century, people have been trying to figure out how to get "oil" economically out of so-called oil shale of which there are huge deposits in the American West. We are still waiting for a breakthrough.

Moreover, none of these estimates tell us at what RATE we might get these resources out. And as I have pointed out again and again, rate is the most important number. You may inherit a million dollars. But if the trust controlling those dollars limits you to withdrawals of $500 a month, you will never live like a millionaire. We are all living like "oil millionaires" in the modern age because of the rate at which we've been able to withdraw oil from the ground. There is no guarantee that this rate can climb continuously, and, in fact, the growth of the rate of extraction has slowed dramatically in the last decade as we now seek out more difficult-to-get sources of oil.

The numbers that come our way are calculated and disseminated by people who have an agenda. It may be to be as objective as they can be given the constraints under which they labor. It may be to satisfy the views of financial supporters of a think tank or university research laboratory. The information may be intentionally skewed so as to deceive us (even if there are no outright lies). Or the information may simply be mistaken.

Nassim Nicholas Taleb, author of several bestselling books on risk, says that a good rule of thumb is as follows: If the numbers come from somebody wearing a tie (Wall Street economist or analyst, industry public relations department, captive think tank academic and so on), you ought to be very skeptical. By design messages from these people are intended to move markets, move merchandise and/or move public policy and are not a comment on the state of the physical universe.

If, however, the person telling you the numbers is not wearing a tie (a physicist or chemist, for instance), then it is more likely that you are getting numbers based on the physical realities of the universe that are open to inspection and verification by anyone with the necessary skills and equipment.

(With women, who don't typically wear ties, but are now in positions to give us both useful and skewed numbers, we need to include warnings for numbers which come from women in business suits versus those more informally dressed, especially if they come from the hard sciences.)

It's not that we should never accept numbers and use them to guide our work and life. It's that we should always be on the lookout for the not-so-hidden agenda behind those numbers and make our own determinations and adjustments as necessary.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, June 28, 2015

Taking a short break--no post this week

I'm taking a short break and expect to post again on Sunday, July 5.

Sunday, June 21, 2015

Radio Interview: Nuclear and other alternative energy sources

In lieu of my weekly post, I'm posting a link to a radio interview I did recently. Doug Goldstein, host of the personal finance show "Goldstein on Gelt," brought me back for a return engagement to discuss the future of alternative energy including molten salt reactors. The show was broadcast on Israel's English-language radio network, Israeli National Radio. Click here to go to the page containing the podcast.

To hear my previous interview on the swoon in oil prices, click here.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, June 14, 2015

No, BP, the U. S. did NOT surpass Saudi Arabia in oil production

Even the paper of record for the oil industry, Oil & Gas Journal, got it wrong. With the release of the latest BP Statistical Review of World Energy, media outlets appeared to be taking dictation rather than asking questions about which countries produced the most oil in 2014.

If they had asked questions, they would have ended up with a ho-hum headline announcing that last year Russia at 10.1 million barrels per day (mbpd) and Saudi Arabia at 9.7 mbpd were once again the number one and number two producers of crude oil including lease condensate (which is the definition of oil). The United States at 8.7 mbpd remained in third place.

The most important question they could have asked is this: How is BP defining oil? It turns out that oil according to the BP definition includes something called natural gas liquids which includes lease condensate--very light hydrocarbons that come from actual oil wells and are included in the oil refinery stream--and natural gas plant liquids which come from natural gas wells and include such things as ethane, propane, butane and pentanes. Only a small portion of natural gas plant liquids are suitable substitutes for oil.

Production of natural gas plant liquids in the United States has grown rapidly as a result of increasing exploitation of natural gas in deep shale deposits, so-called shale gas. These liquids are useful, but they are not oil and only displace oil in a minor way. Moreover, their energy content is around 65 percent that of crude oil and so counting barrels of natural gas plant liquids as equivalent to oil is doubly misleading.

The second question media outlets could have asked is whether natural gas plant liquids can be sold as oil on the world market. The answer is a resounding "no." In fact, major exchanges accept neither natural gas plant liquids nor lease condensates as satisfactory delivery for crude oil. And, if we subtract lease condensate from each country's total, U.S. production will actually look relatively lower. It turns out that U.S. wells now produce a higher proportion of condensate as a result of growth in oil extraction from shale deposits (which tend to be rich in these condensates).

All of this leads my friend and colleague, Texas oilman Jeffrey Brown, to point out the following: If what you're selling cannot be sold on the world market as crude oil, then it's not crude oil. The implications are fairly obvious: The world has substantially lower oil production than widely believed, and growth in world oil supplies has slowed considerably in the last several years. Using the BP definition of oil, world production in 2014 was 88.7 mbpd. Using the stricter definition of crude oil including lease condensate, the number was 77.8 mbpd. Big difference!

Growth in oil supplies according to BP from 2005 through 2014 was 8.2 percent. Using the stricter definition, growth was 5.4 percent, which is down from 15.7 percent for the previous nine-year period. (Worldwide numbers for crude oil excluding lease condensate are not available.)

So, BP and the oil industry have one definition when referring to oil supply--one designed to create a rosy picture of the future--but must bow to the market's definition when they actually want to sell oil to somebody. Who would you accept as the better authority on what constitutes oil, the buyers or the sellers?

All this is not to deny that oil production in the United States is rising, and has been doing so rather quickly. But, this must be put in context.

First, although the United States produced 9.6 mbpd of oil proper for the week ending June 5 according the U.S. Energy Information Administration (EIA), it had net imports of 6.2 mbpd. (For comparison, OPEC reports that Saudi Arabian oil production as of May 15 was 10.3 mbpd.)

Second, even the ever optimistic EIA expects U.S. oil production (crude oil including lease condensate) to decline after 2020. This implies that the United States will continue to be a large importer of crude oil. One independent analysis based on actual well performance suggests that the EIA projections are probably correct in the short run, but far too optimistic in the long run. American production may not remain near current levels for very long and, in fact, may drop considerably in the next two decades.

It's difficult to call out the venerable BP Statistical Review of World Energy, especially when one considers that BP does this as a service to the world. The company spends money gathering and organizing data on all kinds of energy and makes that data freely available to anyone who wants it. On the other hand, we should recognize that BP has substantial U.S. investments, and this may color its view on the future of U.S. oil production. Downbeat assessments don't do anything for stock prices.

Perhaps the most important thing to remember about oil supplies is that oil is a worldwide market. It is worldwide supply that matters, and supply from every country needs to be seen in this context.

The current slump in oil prices has many believing that supply will continue to be ample in the long run. But, we ought to consider that the rate of oil production in the United States may be nearing its peak and that all of the production growth in oil worldwide since 2005 has come from just two countries, the United States and Canada. That should make us more cautious about projecting the triumphant pronouncements of one of the world's largest oil companies very far into the future.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, June 07, 2015

Delayed gratification for OPEC, more pain for investors

Delayed gratification is said to be a sign of maturity. By that standard OPEC at age 55 demonstrated its maturity this week as it left oil production quotas for its members unchanged. It did so in the face of oil prices that are about 40 percent lower than they were at this time last year, delaying once again a return to the $100-per-barrel prices seen during the past four years.

Why OPEC members chose to leave their oil output unchanged is no mystery. The explicit purpose for keeping oil prices depressed is to close down U.S. oil production from deep shale deposits--production that soared when oil hovered around $100 a barrel, but which is largely uneconomic at current prices. That production was starting to threaten OPEC's market share.

If OPEC were to cut its oil production now and drive prices back up, it would only lead to increased drilling in the United States and loss of market share. In fact, even as spot oil prices sank below $45 per barrel in the United States earlier in the year, investors continued pumping money into U.S. oil drilling. According to The Wall Street Journal U.S. oil companies sold almost $17 billion in new shares in the first quarter of 2015, more than they sold in any quarter last year when prices were much higher.

Preliminary estimates by the U.S. Energy Information Administration show that oil production continues to grow in the United States despite low prices. (The final numbers won't be in for months.) New investors in U.S. oil company shares must believe they are catching the bottom and will have a very profitable ride up from here. This demonstrates that OPEC's work is not done and accounts in part for the decision to leave production quotas unchanged.

OPEC's next task is to convince those making new investments in oil that rather than catching a bottom in oil prices, they have caught a falling knife. The cartel must dampen enthusiasm for investment for the long term if the organization's members are going to benefit. A crippled U.S. oil industry without friends in the investment world is the only way to assure that rising prices won't simply lead to a stampede back into U.S. shale deposits.

How long will investors in those deposits have to suffer before they say, "Never again"? My guess is at least another year. And, the pain for those investors might get much worse in the meantime. With the prospect of a nuclear agreement between Iran and the United States and Europe, Iranian oil exports could ramp up considerably as economic sanctions end. Disruptions elsewhere--Nigeria, Libya, and Iraq, for instance--might ease and further add to world exports.

For Saudi Arabia, OPEC's largest exporter, winning the oil price war with U.S. producers in the next year may be part of a broader strategy meant to maximize Saudi revenues as production in the kingdom hovers at an all-time high over the next decade before beginning a decline.

The Saudis have already said they have no plans to expand beyond their current capacity of around 12.5 million barrels per day. Is this because they choose not to or because they can't? Only the Saudis know. The idea that the country is essentially on a production plateau that may not last for the long term would explain why the Saudis want to crush the U.S. domestic oil industry now rather than wait for declines in U.S. production expected after 2020.

Under this scenario the Saudis want to raise prices while maintaining their current volumes well before then in order to take advantage maximum all-time flow rates that could be over by the mid '20s. This scenario has major implications for a world that as recently as 2011 was counting on more than 15 million barrels per day from Saudi Arabia by 2035.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 31, 2015

The energy revolution will not be televised

Three recent news items remind us that energy transitions take time, a lot of time--far too much time to be shrunk down into a television special, a few talking points, or the next big energy idea.

For example, the complex management task of putting together the international fusion research project called the International Thermonuclear Experimental Reactor (ITER) has resulted in estimated final costs that have tripled since the 2006 launch. Fusion could theoretically offer clean and abundant energy almost indefinitely because it uses ubiquitous hydrogen* as fuel and creates helium in the process. (Water you'll recall is two hydrogen atoms and one oxygen atom and is therefore the most abundant source of hydrogen.)

Despite nine years of effort, ITER has yet to carry out a single experiment; and, the project is not expected to do so for another four years. The idea for such an international project was hatched in 1985 during a summit between U.S. President Ronald Reagan and Mikhail Gorbachev, the leader of what was then still called the Soviet Union. Thirty years later fusion is still receding into the horizon of our energy future.

While there are certainly issues that are managerial rather than merely technical, the technical challenges remain enormous. After decades of experimentation, no laboratory has ever produced more energy from a fusion reaction than it took to create it. One of the most promising tests was performed last year at the National Ignition Facility of the Lawrence Livermore National Laboratory in California. This test produced about 17 kilojoules which was more energy than was used to create the fuel. Problem is, the lasers that initiated the fusion consumed about 2 megajoules or 118 times the amount of energy created by the test.

Keep in mind that this test is still considered one of the most promising. That tells you how far away we are from nuclear fusion as a method for producing electricity.

Also, just recently the U.S. Environmental Protection Agency (EPA) announced that it will be reducing industry production quotas enacted by Congress for renewable liquid fuels such as ethanol and biodiesel. The EPA has the statutory authority under the 2007 law to adjust such quotas. But few back then anticipated that the quotas would be adjusted downward so severely. The law set the quota at 20.5 billion gallons for 2015. The EPA has reduced the quota to 15 billion gallons. The Bloomberg piece cited above notes that "[t]he agency also set levels for 2014 at the level produced by the industry."

The nation's corn growers--who provide the feedstock for most of the ethanol produced in the United States--say they may sue because the EPA is ignoring the law. But the corn growers and the nation will likely find out in the course of such a suit that the EPA is merely bowing to the laws of chemistry and the dictates of economics. The previously hailed quick advances in what is called cellulosic ethanol--which can be made from practically anything containing cellulose such as wood chips and plant waste--have not materialized. A few commercial-sized cellulosic ethanol facilities now exist, but nowhere near the number expected by now back in 2007. And, the jury is out on whether such operations will be viable.

Finally, energy maven Vaclav Smil wrote a piece for Politico discussing the difficulties in making an energy transition from one kind of dominant fuel to another. Despite all the hype from technology gurus touting an imminent takeover by solar, wind and biofuels, historically such transitions have taken decades. The technologies for energy production are simply not analogous to the technologies behind advances in computer chips.

Inventor and futurist Ray Kurweil's prediction that solar energy will become practically the only source of power in just 16 years illustrates the failure of technology-oriented minds to understand the constraints on energy transitions. He predicts a doubling every two years. That will sound familiar to those in the computer industry where a doubling in the computing power of microchips has occurred about every 18 months.

Energy transitions, however, move slowly--egregiously slowly--compared to advances in such fields as biotechnology and integrated circuits. Smil recounts the climb from 5 percent market share to 25 percent market share for oil and natural gas:

After crude oil claimed 5 percent of the total American energy supply in 1905, it took 28 years to reach 25 percent, and the rise was even slower for natural gas, 33 years from 1924 to 1957. Today, despite the attention lavished on solar cells and wind, those up-and-coming renewables have yet to reach even the 5 percent mark.
Globally, energy transitions have been even slower than in the U.S., with crude oil taking 40 years to go from 5 percent to 25 percent of the global primary energy supply, and it looks as though natural gas will take 60 years to do the same.

On a percentage basis renewables are growing rapidly, but from a very small base. Smil comments:

Electricity generation by new renewables has been growing fastest, but it is far from taking over: at 7 percent in 2014 it was still only about a third of all electricity generated by the aging nuclear stations. And because electricity is only a part of the overall energy supply, the contribution of new renewables (wind and solar) to the country’s total primary energy consumption (including all industrial and transportation fuels) remains very modest: it rose from just 0.1 percent in the year 2000 to 1 percent in 2010 and to 2.2 percent in 2014.

What those who map the rapid increase in computer power onto our current energy transition miss is the infrastructure problem. Consumers and businesses seem to have little concern over junking computers that are only a few years old in favor of the newest models. The turnover in the computer infrastructure is quite rapid.

Not so with energy infrastructure. Power plants are made to last decades. And, they are often upgraded rather than replaced. Currently, fossil fuels produce the bulk of the world's electricity, some 67 percent in 2012, according to the latest figures available from the U.S. Energy Information Administration. Nuclear power plants produce almost 11 percent. Hydroelectric produces almost 17 percent. All other renewable electricity production accounts for just under 5 percent. Very little of the existing electricity generation infrastructure is coming down soon.

What this means is that far from replacing existing fossil fuel generating plants, renewables are simply going to add to total electricity generation as demand grows. That's a good thing. But renewable energy expansion as it is currently structured is going to do little to reduce greenhouse gases. In fact, in the United States the decline in carbon dioxide emissions from the peak in 2005 to a level 12.8 percent lower in 2012 was due almost entirely to the substitution of natural gas-fired electricity generation for coal-fired generation. But emissions resumed their upward march in 2013 and 2014 as the most polluting of the coal-fired plants had already shut down.

As for liquid fuels, decades of trying have only resulted in marginal inroads from non-petroleum substitutes. Petroleum-based fuels still account for 95 percent of all transportation fuel in the United States as of 2014. World numbers are hard to come by. The World Petroleum Council states that the global share for petroleum in transportation fuels is 80 percent, but cites no source.

So what does all this imply? Is there anything we can do to speed up the transition?

Of course, we could all sit back and simply hope for technical breakthroughs that will make it irresistable--in other words, highly profitable--to adopt low-carbon energy technologies on a massive scale quickly. But, history recommends against this passive course.

While some decry subsidies given to wind, solar and biomass technologies, there is an almost immutable law of economics which justifies these, to wit: If you subsidize something, you will get more of it. And, that's what policymakers behind the subsidies want. What the critics of such subsidies fail to note is that governments worldwide currently pay out $550 billion in subsidies annually for the production of oil, coal, and natural gas, more than four times the subsidies for renewables including wind, solar and biomass--which again proves that when you subsidize something, you get more of it. And, we have gotten a lot of fossil fuel production.

Why not just take that $550 billion and devote it to research on and production and deployment of renewable energy? That would be okay. But a much better use of that money would be spending it on known technologies that drastically REDUCE our consumption of energy. If, as Vaclav Smil contends, we are in for a long, slow slog on the path to a renewable energy economy, then the course with the least risk and probably the greatest return would be to reduce our energy use.

We have the technology to reduce building heating and cooling energy use by 80 to 90 percent. It's called passive house technology though it is now also being applied to apartment, commercial and industrial buildings. The cost for this in new buildings is about 15 percent more and typically lower. The energy savings over the life of building far outweigh the initial cost. We still need to figure out how to do cost-effective retrofits for similar deep energy reductions in existing buildings. But there are many smaller cost-effective steps currently available to homeowners and businesses. Some of these are already being subsidized, and subsidizing them more would be a good idea.

When it comes to transportation, the advent of ridesharing and car-sharing is rapidly changing the public's view about automobiles. No longer do people need to own a car so much as have access to it. Combine this with an expansion of hybrid vehicles and efficiencies can quickly build in the transportation sector.

There is much more that we can do and that we know how to do to reduce energy use, especially energy produced by fossil fuels. But a corollary to the above mentioned "law" of economics concerning subsidies is one concerning taxes, namely, if you want less of something, tax it. A high and rising carbon tax would go a long way toward speeding the energy transition. It would incentivize households, businesses, nonprofit organizations and government, that is, everybody, to reduce fossil fuel use and to choose renewables instead.

Even with these efforts our current and increasingly urgent energy transition would still take a long time. But we would have more assurance of a positive outcome with regard to climate change if we choose now to start on a course toward dramatic reductions in energy use. And, coincidentally, this would make it much easer for renewable energy to replace fossil fuels since we would ultimately need far less energy production to replace them. The renewable energy economy could then arrive sooner and with far less direct investment than previously imagined.

____________________________________________________________________________

*Typically, fusion reactors use very specific forms of hydrogen such as deuterium which has a neutron in addition to hydrogen's proton and constitutes only one in 6,420 atoms of hydrogen found on earth. But that's still a huge amount. Tritium, a form of hydrogen with two neutrons, is produced inside reactors. While radioactive, it is benign enough to use in making glow-in-the-dark watch hands.

P.S. The title of this piece is an allusion to the song The Revolution Will Not Be Televised written and recorded by Gil Scott-Heron in 1970.


Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 24, 2015

Is the slowdown in productivity growth a result of energy costs?

Slowing productivity growth in the United States has been in the news in recent months. It has become a concern to policymakers because they believe it is one of the primary contributors to a middle-class economic squeeze according to the annual report of the White House Council of Economic Advisors.

Simply put, productivity growth refers to the growth in economic output per worker or more precisely, per hour of work. When this growth slows, the potential for real wage increases diminishes since the growth in wages typically reflects the ability of workers to create more output per unit of time.

To the obstensibly naive observer the following idea may seem a plausible explanation: Higher-cost energy inputs into the production of goods and services reduce productivity growth because the economic output per dollar of energy consumed declines. And, though energy inputs aren't the only thing to consider, they are important. The high energy prices of the last decade or so may be, in part, responsible for low productivity growth. (Conversely, low energy costs would imply more output per dollar of energy consumed.)

But strangely, almost all economic models for productivity consider only so-called "tangible" factors, that is, labor and capital. In the bizarro world of modern economics, energy and materials are not considered "tangible."

Now, the way in which that productivity growth which is attributable to "technological advances" is typically calculated is to add up contributions to productivity growth from labor and capital (machines, buildings, vehicles, tools of any kind) and then subtract this sum from the known amount of total productivity growth. What is left is the so-called "residual" which is presumed to result from "technological advances" caused by increases in human knowledge. These advances and the increases in capital per worker are assumed to be the drivers of productivity growth.

Let me explain this from a slightly different angle: Obviously, if you work more hours, you will be more productive. But your output per hour will remain the same, barring some new input such as better, more efficient machines to work with or more efficient techniques, both resulting presumably from an increase in knowledge.

Note that there is no way to measure this "knowledge factor" directly. It is merely assumed that the unknown portion of productivity growth comes from "technological advancement."

But, energy researchers asked long ago whether productivity growth might be affected by changes in the quality and cost of energy inputs. Authors of a paper entitled "Energy and the U.S. Economy: A Biophysical Perspective" which appeared in Science in August 1984 noted the tight correlation between economic growth and energy consumption. They also noted that labor productivity increased with increasing energy consumption per employee. While not dismissing the effects of technological change, they believe that energy has had a central role in the persistent rise in labor productivity witnessed for most of the last century up to the time of publication:

From an energy perspective, productivity gains are facilitated by technical advances that enable laborers to empower their efforts with greater quantities of high-quality fuel embodied in and used by capital structures.

Notice the use of the term "embodied." The researchers recognized the energy necessary to produce the capital equipment used by workers. This is called the "embodied energy." The researchers also noted the following:

We found that in the U.S. manufacturing sector, output per worker-hour is closely related to the quantity of fuel used per worker-hour. A similar relation exists in the U.S. agricultural industry.

The mining sector also fits this pattern. While productivity per worker-hour has increased or, in some cases, merely stayed flat, the energy data showed just how much more energy was needed to achieve stable or growing productivity:

Technical improvements in the extractive sectors have made available previously uneconomic deposits only at the expense of more energy-intensive forms of capital and labor inputs. Physical output per kilocalorie of direct fuel input in the U.S. metal mining industries has declined 60 percent since 1939, although a few exceptions to that trend are known. The energy cost per ton of metal at the mine mouth for industrially important metals such as copper, aluminum, and iron has risen sharply as their average grade declined. For all U.S. mining industries (including fossil fuels), output per unit input of direct fuel declined 30 percent since 1939.

These findings suggest that fuel costs, fuel quality and fuel availability can be limiting factors in productivity across the economy. The idea that energy inputs used in production are central to productivity isn't so counterintuitive after all. And yet, in a sampling of recent coverage of the productivity issue, not one piece mentioned energy. (See here, here, here and here.)

One of the authors of the research cited above, Charles A. S. Hall (now retired), says that the report's findings need to be updated to see whether the relationships his team discovered still hold. It would seem wise to follow up given the exceptionally slow productivity growth associated with the period of rising energy prices before the crash in 2008 and to a certain extent with high average daily oil prices from 2011 through late 2014 (though, as one might expect, this is not even mentioned as a possible explanation in the piece cited.)

Whether such updated research would confirm the original findings can't be known. Whether it would make any difference to mainstream productivity models is known. Such new findings will make no difference whatsoever until the economics profession recognizes the central role of energy in the productivity of the workforce.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.