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Inequity: Energy Risk and the Future

Fuel Reserves and Risk

If you were to awaken tomorrow morning to find a shattered and empty piggy bank on your preschooler’s bedroom floor, I dare say there would be hell to pay. The police would be summoned and perhaps even the media would report on the evening’s news of a dangerous and malevolent predator at loose in the community.

As the hammer descends however, in plain view, on our kid’s economic and environmental prospects, we are, for the most part, catatonic. Or perhaps anesthetized by the newspeak bought and paid for by the economic hedonists who are more than willing to offload the cost of their indulgence on the young and yet born.

And what a cost it is.  Four years ago the insurance company Allianz SE put the value of the infrastructure in the world’s largest coastal cities at risk to sea level rise at $28 trillion.

A few months ago researchers warned that a catastrophic methane release from the thawing arctic could cost up to $60 trillion.

These are mighty big hits on small piggy banks but the environment isn’t the only part of our children’s future we are placing at risk. So too is their economy.

At Cancun Mexico in 2010 politicians agreed to try to keep climate change limits to 2°C. “With a view to reducing global greenhouse gas emissions so as to hold the increase in global average temperature below 2°C above pre- industrial levels.”

The 2012 International Energy Agency World Energy Outlook points out that in order to achieve this goal, “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050”.

The Carbon Tracker Initiative hypothesizes that only 20% of total fossil fuel reserves can be burnt by 2050, therefore the global economy faces the prospect of assets becoming stranded, with the problem only likely to get worse if current investment trends continue.

Currently fossil fuel companies are valued on the basis of their proven reserves. If a large percentage of these reserves can’t be burned, shareholder’s and investors are at serious risk as are the markets themselves which are heavily weighted in carbon and its ancillaries.

But even if this were not the case, as Jeff Rubin points out, Peak Oil Is About Price, Not Supply. “It is a concept rooted more in economics than geology. It doesn’t matter if there are billions of barrels of oil waiting to be tapped from oil sands or oil shales if the prices to extract them are beyond our economies’ capacity to pay.”

Professor James Hamilton informs us we probably have already reached that limit by pointing out 10 out of the last 11 US recessions have been associated with oil price spikes. Spikes that are bound to increase as fossil fuels get rarer and more difficult to produce.

The Carbon Tracker Initiative says, “capital spent on finding and developing more fossil fuel reserves is largely wasted. To minimize the risks for investors and savers, capital needs to be redirected away from high-carbon options.”

Those options, their potential and drawbacks are itemized here.

The problem is a quick buck is hard to resist and fossil fuels represent the quick buck, whereas the alternatives face years of development and build out.

Capital seeks the highest rate of return, but what if we are using the wrong metric to gauge that return?

When we do not account for anywhere between $28 and $60 trillion dollars in ramifications from current economic activity, I submit that is exactly the case.

When we credit the GDP with tens of billions of dollars for cleaning up after storms and damages from drought, as if this was a benefit to the economy we do nothing but kid ourselves.

Insurance is the equitable transfer of a risk of loss, from one entity to another in exchange for payment.

Equity is a stock or other security representing an ownership interest.

Since there is a substantial risk from current activity and the alternative energy sources that can mitigate that risk require significant investments that will take longer to pay back than fossil fuel investments – assuming of course there will be a pay back, which might not be the case with fossil fuels if the resources remain locked in the ground, what is needed is a hybrid between insurance and equity, or Inequity, to finance our future energy needs.    

If we do not move to such a system, or find some other way to move away from fossil fuels then we are only making of our children and grandchildren greater fools.

Photo Credit: Future Energy Risk/shutterstock

Jim Baird's picture

Thank Jim for the Post!

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Max Kennedy's picture
Max Kennedy on November 8, 2013

What can be said?  YES!

Jessee McBroom's picture
Jessee McBroom on November 9, 2013

Thanks for the post Jim. This is all too true. I believe the World Bank cutting credit lines to companies that are fined for environmental impact transgressions is a good start.

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