Armchair Economics
Current Musing
October 2019 Subscribe
The Carbon Crisis
“We have 12 years to limit climate change catastrophe, warns UN” suggests the UK’s The Guardian.
“The world is going to end in 12 years if we don’t address climate change” preaches political celebrity and Congresswoman Alexandria Ocasio-Cortez.
“Earth has 12 years to avert climate change catastrophe, warns UN report” says CNN.
“Scientists say we may have 12 years to save the planet from climate catastrophe” posts Facebook.
Twelve years, and we’re toast. Except this supposed prophecy was actually issued in October 2018, so now we only have 11 years before the end of time.
For perspective, what was happening eleven years ago?
It was 2008. We were entering the global financial crisis and the Great Recession. Prior to Lehman’s bankruptcy, there was no consensus among “economic scientists” suggesting we were about to experience dramatic financial and economic problems. All the “experts” were caught flat footed. Their foresight of the coming economic disaster was nonexistent.
2008 was also eight years after Y2K, hyped by all manner of well-renowned “experts” and the media. Y2K was going to destroy our computers and, thus, economy and society. Billions, maybe trillions, were spent on upgrading computers and software to avoid a digital confusion collapse on 1-1-01.
What happened on 1-1-01? Nothing but your typical New Year’s hangovers, maybe a little rougher than normal since people had to party like the world was ending. But Y2K mania caused such a poor allocation of capital in the late 90’s that it landed us in the 2001-02 recession.
Massive anxiety over Y2K’s supposed world-ending potential turned into nothing. Yet no warning was issued for the 2008-09 global financial crisis that almost destroyed our way of life.
Henny Penny is a European folk tale whose title character gets hit on the top of the head by a nut falling from a tree. Henny Penny then runs around warning anyone within ear shot that “The sky is falling! The sky is falling!” This triggers fear-based mania and chaos. A sly fox sees his opportunity. He begins to prey on—and eventually eats—each of the other story’s characters as they lose all rational thought.
In the United States, we know of Henny Penny as Chicken Little. Across the world, there are countless versions of this story. Its roots actually date back 2,500 years. Its long and global history suggests that humanity has fallen for “the end is near” story time and time again, generation upon generation upon generation.
Given our obvious proclivity for world-ending narratives that wreak havoc on our pocketbooks and emotional well-being, maybe we need to ask: Is climate change just another Henny Penny story like Y2K? Might we be wise to give this new “crisis” more study?
If the earth’s climate is truly misbehaving these days, and to the threat of human existence, why have we decided the culprit is hydrocarbons? Have we forgotten about the difference between causation and correlation?
What other climate influences might there be? Why haven’t governments poured millions into considering the other possible climate influences? Where are studies ruling out the other potential climate influences? Where is the comprehensive analysis and critical thought?
Nobody seems to know because the shouting and arm waving about evil hydrocarbons forces out any other perspective.
What’s at stake in our failure to consider other possibilities? What do we risk if we go blindly down the rabbit hole of rapidly eliminating hydrocarbons? We all need to ponder this— and for very good reason.
Unfortunately, we are already heavily invested in the effort to decouple our entire economic infrastructure from the source of energy humanity has depended on since…the day we discovered fire.
Fire is hydrocarbon. The hydrocarbon infrastructure we have today is as old as fire.
How easy will it be replacing an infrastructure that’s been around since well before the dawn of civilization? How much will it really cost? Where will that money come from? How long will it really take? At what pace could we do this without causing civilization economic pain? Who is going to force this change on countries economically dependent on hydrocarbons, or who just can’t afford to change? And, what if the climate culprit is not really hydrocarbons?
But since climate change is “settled science,” let’s walk through a “be careful what you wish for” scenario.
The US-based Energy Information Agency (EIA) reports that renewable energy’s share of total world energy consumption today is 18%, and its electricity generation represents 28%. EIA projections put total global renewable energy consumption at 28% and total electricity generation at 48% in 2050.
Wait, wait, wait! 2050?!?! That’s thirty years from now. We only have eleven years to save the world, 11 years to replace hydrocarbons with renewable energy.
If the EIA is right, it means our world will be depending on hydrocarbons for many more decades to come. Hydrocarbons will continue to dominate overall energy consumption and provide the majority of electricity generation through 2050.
So, here’s the problem—activists are seeking to eliminate our use of hydrocarbons immediately:
They are trying to stop fracking.
They are preventing clean burning natural gas pipelines from being built.
So, what happens when we prevent hydrocarbons from being produced? What happens when we starve hydrocarbon industries of capital? We produce fewer hydrocarbons.
And what happens when we produce fewer hydrocarbons while they are still growing globally in demand? It drives up the price.
And what happens when the price of hydrocarbons increases? It drives up the cost of transportation and power. And since transportation and power are necessary inputs into virtually every industrial and consumer good around, the cost of all manner of things will also go up.
But inflation today is benign, you say?
Over the last thirty years, as goods production shifted from higher-labor-cost developed economies to lower-labor-cost emerging economies, lower labor costs absorbed any rising cost of hydrocarbons in the ultimate cost of goods. However, this ship has sailed. Today, the inflation buffer provided by outsourcing labor to emerging markets has mostly, if not fully run its course.
In addition, over the last thirty years, the cost of capital has collapsed. Thirty years of continuously lower cost of capital also provided a buffer to any hydrocarbon cost increase. Here again, this ship has mostly sailed given where interest rates are today.
No less, the Henny Pennys are adamant in their calls for an immediate end to hydrocarbons—even as their demand grows, and even as the EIA anticipates their energy dominance for another thirty years. What could go wrong?
Activist efforts to block hydrocarbon production and transmission, and their efforts to starve the industry of capital, could lead to severe economic damage.
Higher oil prices are essentially a tax on consumers. If 70% of US GDP is dependent on consumption, what will consumers do with less money in their pockets because they have to pay more for transportation, more for electricity and more for consumer goods? End result, they will consume less.
Lower consumption leads to lower GDP, which means lower tax revenue. Lower tax revenue means greater government deficit spending. Greater government deficit spending means more government debt. If we worry about today’s sovereign debt to GDP ratios of 100%+, what’s the repercussion of rapidly and measurably growing debt because higher hydrocarbon prices put economy into the ditch?
Shall we increase taxes to make up the difference? Increasing taxes without corresponding increases in wages decreases consumption, which decreases GDP, which decreases tax collections, which…
Where’s the end to this “eliminate hydrocarbons, or else” story? It’s economic recession at very best. Trying to eliminate hydrocarbons ASAP could unleash a death spiral similar to the 2008/09 global financial crisis. This is only one part of the potential carbon catastrophe. There’s more.
Before severe economic pain shows up, countries will experience civil unrest. It’s already happened in France with the Yellow Vests Movement. French President Macron wanted to increase taxes on hydrocarbon energy. The labor class erupted!
Climate change elites can live in high carbon footprint housing, fly around in high carbon footprint airplanes and private jets, stay at high carbon footprint luxury hotels, attend high carbon footprint conferences and be shuttled around with their entourages in high carbon footprint vehicles without worrying about increasing energy costs…because they are not paying the bill.
Taxpayers are paying the bill. And middle-and lower-income citizens are paying the bill.
Reducing the production of hydrocarbons as their demand rises increases their price. It’s simple supply and demand. The resulting inflation falls on the Average Joes whose wages haven’t kept up with inflation. With much higher hydrocarbon prices, Yellow Vests will appear around the world. If trying to eliminate hydrocarbons too quickly leads to economic collapse, imagine the civil unrest. Yet there’s still more.
The winners of higher hydrocarbon prices will of course be the hydrocarbon producing nations, many of which care less about climate change mania. Several of these countries are geopolitical bad actors. No outside country will be able to control their climate change policy positions, nor their behaviors. What happens when we give bad actors more money by consuming their ongoing and growing hydrocarbon production? They will surely increase their level of bad acting.
If current activists’ efforts, particularly in the United States, lead to a measurable drop in oil and gas production, we could easily experience economic calamity; civil unrest that grows measurably; and increasing global chaos as bad actors benefit from an economic windfall.
Given these possibilities, should we not spend a little more time, spend a little more money and give a little more consideration to other influences on climate? Should we not consider humanity’s long record of falling for “end of world” narratives that don’t play out (Y2K)? Should we not also consider our inability to foresee a crisis that almost destroyed our world (2008/09)?
Consider that the capital misallocation of Y2K was likely one of the influences that eventually pushed us into the global financial crisis and Great Recession (2008/09). Is today’s Henny Penny hysteria already causing a large misallocation of capital like Y2K? Is climate change mania also going to create an economic crisis that will sneak up on us like 2008? As we try to save the earth from evil hydrocarbons, are we unknowingly destroying economy?
Maybe we should step back from the Henny Penny mania to consider what could happen if we rapidly eliminate hydrocarbons. If we do not take a moment to view things with more caution and common sense, a yet unknown fox may eat us all.
Douglas A. Leyendecker
713-862-3030
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