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The Problem that can throw us back into the age of horse-drawn carriages

Tuesday, April 8th, 2008

In future, if we look back at 2008, will we find that it is the year of the turning point in terms of global growth? Right now, for all intents and purposes, the US is in recession. Japan looks like it is falling back into recession again. Western Europe seems to be sluggish. But there are other bright spots, namely the BRICs (Brazil, Russia, India, China and perhaps the Middle-East and Eastern Europe) countries. (We know we are generalising here, but we are doing so for the sake of brevity because the focus of today’s article is something else). Thus, there is little wonder that although the IMF is lowering forecasts for global growth, it is still positive (i.e. their forecast does not point to a global recession).

But what is the greatest danger facing the global economy today?

Recently, we read BHP to use half of state’s electricity in the news media:

BHP Billiton will need nearly half of South Australia’s current electricity supply to power its vastly expanded Olympic Dam copper and uranium mine.

China is growing rapidly in a massive scale. Such massive growth requires massive amount of metals for building skyscrapers and infrastructure. Mining and producing all these metals requires copious amount of electricity. Copious amount of electricity requires copious amount of energy. The recent snowstorms in China shows that the entire nation has a very narrow margin of energy supply before serious disruptions occur. If China is to grow further, its current supply of energy is inadequate. China has abundant coal (it used to export coal). But today, there is not even enough for her energy needs. By now, you should be able to appreciate what is involved (in terms of energy usage) to keep China in its trajectory of growth. And we have not included India into the picture.

Maintaining the way of life in the developed Western nations requires huge amount of energy. As we said before in Smart money in alternative energy?Part 1: current energy quandary,

The most important ingredient that drives the efficiencies, comforts, automation and wonders of today?s modern way of life is energy. The trains, cars, ships and aeroplanes that transport massive quantities of people and goods over vast distances quickly require energy in the form of fuel. The heavy machines that do heavy physical work far beyond the scope of human labour require energy too. The powerful computers that process and store vast amount of data and information as well as automate mental labour requires energy in the form of electricity. The heating in winter and cooling in summer of our abode requires energy too. Take energy away and our modern way of life will very much grind to a halt and bring us back to the hard life of our ancestors. In fact, contemporary life rests on the premise of abundant and cheap energy. Therefore, whoever controls the supply and provision of energy controls power and wealth.

To elevate the way of life in developing nations (e.g. India, China) to a level that is on par with the developed Western world requires a greater initial upsurge of energy use. After that, to maintain that level of way of life for all these additional billions of people, the world will see a permanently much higher plateau of energy usage indefinitely. It should be clear by now the gravity of the implications of such projections.

Can the earth supply enough energy fast enough to allow the developing world to embark on such a path? The earth may have plenty of energy under the ground (i.e. coal, oil and gas), but can humanity extract them fast enough for such unceasingly growing usage? An analogy for this question would be to imagine yourself trying to breathe through a straw. Yes, there may be plenty of air around you, but if you have to breathe through a straw, there is no way you can do strenuous exercise without turning blue. There are two big-picture issues with regards to the world’s energy supply:

  1. Peak Oil. As we said before in Is oil going to be more expensive?,

    Put it simply, the Peak Oil theory states that the world?s oil production has reached the peak and is entering the stage of terminal decline. One common misunderstanding of Peak Oil is that the world is running out of oil. No, the world is not running out of oil?the world is running out of easily accessible oil.

  2. Energy production capacity Even if you do not believe in the Peak Oil theory, there is another problem. There is not enough infrastructure to extract oil and natural gas from unforgiving and inhospitable terrains (e.g. Arctic, Siberia, undersea). Oil extraction is one problem. Refining them is another infrastructure challenge.

Next, even if energy supply is not a problem, there is another headache- global warming. Burning all these oil, natural gas and coal will release colossal amount of carbon dioxide into the earth’s atmosphere. It will be a sad irony if China and India achieves the same level as the West in the way of life, only to face environmental disasters that will drag them down again.

In summary, supplying environmentally sustainable energy indefinitely at a rate fast enough is a colossal global problem that must be solved. If not, the latter generations will not live better than the current generation. That is where the best investment opportunities lie.