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Migrating to new Energy Paradigms Part 3 - Market Needs: Real vs. Perceived

Commodities / Energy Resources Jul 30, 2007 - 12:45 AM GMT

By: Brian_Bloom

This article focuses on the difference between real market needs and perceived market needs. When migrating from our fossil fuel energy paradigm we should avoid embracing new energy paradigm/s which are incapable of addressing real needs.

Many aspirant alternative energy technologies seek to address the perceived problem that our top priority is to reduce CO 2 emissions. In previous articles relating to Global Warming I have tried to demonstrate (and will try again later in this article to demonstrate) that rising CO 2 levels in our atmosphere are not the real problem. Our sun is ultimately causing global warming, which warming is being exacerbated by Greenhouse Gases. There is nothing we can do about this other than gird our loins. Given that Climate Change occurs cyclically, we need to prepare for the coming cycle of Global Cooling.

“Falling world energy production per capita” and “environmental pollution” are real (and addressable) problems. If we solve these problems then CO 2 levels will automatically fall by way of a bonus outcome. Conversely, if we focus on CO 2 emissions to the exclusion of the real problems, we may not survive the next fifty years – regardless of whether we are facing Global Warming or Global Cooling. 

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The most sensible response to Peak Oil would have been to begin migrating to a new, more powerful and non-polluting Energy Paradigm ten years ago. 

Unfortunately, the nature of the Private Enterprise system is such that it is brilliantly productive when the challenge is to build new, fast growing businesses in an environment where the entire industry is either immature or competitively unstable.  By contrast, with mature businesses operating within mature industries, a purist system of Private Enterprise may become counter-productive.

The natural inclination of large, well established organizations which have low unit costs of production and high cash flows tends to be to leverage off the Free Market system – which gives them an unfair strategic advantage. The playing field is tilted in their favour.

Quite reasonably (although perhaps ethically questionable) some cash flow is consciously applied by dominant businesses within mature industries to protect their market positions and to maintain the status quo. Consciously moving to block the emergence of innovative competitive threats is understandable behaviour, provided this is done within the law.  Lobbying lawmakers is one way of endeavouring to ensure that the law remains accommodative of such behaviour. Funding the political campaigns of lawmakers and/or trading favours with lawmakers might be pushing the envelope a bit. Orchestrating political nominations of both parties to ensure the presence of a marionette in the White House would be unacceptable.

Yes, solar power, wind power and biofuels are entering the market. However, these technologies do not represent a serious threat to fossil fuels because they are incapable of engaging in head-to-head competition with those technologies which dominate the energy industry. They do not represent alternatives which will allow us to migrate from fossil fuels. The fact is that fossil fuel energy paradigms have been shielded from competition precisely because of our insistence on adhering to a purist Private Enterprise system. There is no such thing as a panacea. When circumstances change, we need to adapt. Private Enterprise cannot be thought of as representing a solution in search of a problem.

From another perspective, Anti Monopolistic legislation has proven to be toothless against Oligopolistic industries – where a few organizations nominally in competition with one another band together to defend the status quo relative to each other and also against outside threats.

For those readers who have the time and inclination to want to understand the rationale, there is a Case Study attached hereto by way of an Appendix.

It is self evident that one real need of the market place is to migrate away from our dependence on a depleting (oil) energy resource because, for example:

1. Two thirds of all transportation within the USA is dependent on oil and,
2. As was demonstrated in article #2 in this series, energy in general and oil in particular ultimately “drive” the world economy.

Why would the oil companies be predisposed to address this real need to migrate away from oil?  Why would they behave in a manner that would hasten their own demise? In a system of Private Enterprise, it will never happen from within given their current thought paradigm, which is to milk their cash cows for all they are worth (see Appendix).

Question: So what's stopping the emergence of new (and serious) energy technologies to replace oil and coal via other, more innovative, Private Enterprise competitors?

Answer: High costs per kilojoule. Oil and Coal have a far lower cost per kilojoule than any other (currently available) energy technology. Private Enterprise is driven by a concept known as “Return on Investment”.  No new energy technology will be able to compete on price with oil and also yield a return on investment commensurate with the requirements of Private Enterprise investors.  The problem is therefore insoluble by Private Enterprise.  

Another real need is to clean up our environment. Pollution is contributing to respiratory diseases, auto immune diseases, raised oestrogen levels and reduced sperm counts in men, cancer, you name it.  One of the biggest contributors to this pollution is coal, which gives off clouds of particulate matter including carcinogenic substances which float around and are breathed into our lungs. CO 2 is the least of our worries. Yes, CO 2 is a Greenhouse Gas, but CO 2 also stimulates plant growth. Plants store carbon and give off the oxygen which we breathe; and some of this oxygen becomes ozone, which protects us from the sun's harmful rays. We shouldn't allow our attention to be diverted from the core issues, one of which is environmental pollution.

Unfortunately, once again, Private Enterprise is powerless to facilitate a migration away from coal, because coal is plentiful and it's cheap. No new energy technology will (at this stage) be able to compete on price with coal.

Having said this, the oil and coal companies are quite happy to stand aside and allow governments to foster energy technologies which do not represent a real threat to their vested interests. Isn't it interesting, though, how Governments don't seem to be encouraging energy paradigms which will represent serious competitive threats to fossil fuels? Coincidence? Maybe. Maybe it's just ignorance on the part of the politicians. Or maybe they're taking advice from the wrong “experts”. Or maybe they are not predisposed to want to bite the hand that feeds them.  Or maybe they just lack the backbone to draw a line in the sand, and say:  “Enough!”

But, if Governments are chasing inappropriate rainbows, and the fossil fuel industries have the market power to protect their vested interests against serious competitive threats, where does this leave us?

Fortunately, there are alternative strategies to circumvent this blocking power of the fossil fuel industries. One of these will be discussed in a later article. Private Enterprise still has an important role to play here. There is no need to throw out the baby with the bath water given that there are seriously competitive technologies waiting in the wings. They exist! We already understand the underlying science and technology. With some nurturing, the early stage ROI issue can also be addressed and the fledgling industries can leave the nest to fly on their own under the colours of the Private Enterprise sqaudron.

As an aside, whilst Nuclear Fission does represent a potential energy replacement for coal, it will bring with it a different set of environmental problems. It will also facilitate the ability on the part of every nation in the world to develop Nuclear Weaponry. Although many politicians are quietly aspiring to engineer an outcome where Nuclear Fission replaces coal, Nuclear Fission does not represent an appropriate alternative, particularly given the existence of other technologies which hold the promise of delivering a safer, more powerful, cleaner and cheaper outcome. Quite simply, the world has no need of a technology which is predicated on destruction of the atom – one of the foundational building blocks of the entire Universe.  Such an approach would be devoid of seichel. It would not pass the test of taqwa. If you get a sense that your political representative is positioning to defend the idea of Nuclear Fission, here's my advice: Vote to kick him/her out of office. Going forward, we are going to need people of wisdom in positions of leadership.  Let's move on.

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Now, for the sake of completeness, let's look at the perceived need relating to energy – which is to reduce CO 2 emissions. (I have written four articles on the subject of Global Warming to date, but the following hones in on the core issues).

Readers are requested to think about the implications of what is missing from the following table which appeared in a two page colour lift-out on Global Warming in Sydney's Sun Herald Newspaper, on Sunday July 15 th 2007.

Measurement of Gases in 1770 and 1990
	1770	1990
Halocarbons	0ppm	0.28ppm
Methane	800 ppm	1700 ppm
Carbon Dioxide	280 ppm	350 ppm
Nitrous Oxide	285 ppm	310 ppm

The lift-out also contained the following quote: “The principal cause [of Global Warming] is an increase in emissions of carbon dioxide of industrialised countries in the past 200 years”

This table represents a shameful example of the intellectual dishonesty that pervades the raging debate on Global Warming.  The one item that is glaringly missing from this table is the most important of all: Water Vapour. Water Vapour is also a Greenhouse Gas. The following quote is from Wikipedia at  http://en.wikipedia.org/wiki/Greenhouse_gas

“The major natural greenhouse gases are water vapour , which causes about 36-70% of the greenhouse effect on Earth ( not including clouds ); carbon dioxide , which causes 9-26%; methane , which causes 4-9%, and ozone , which causes 3-7%”. i.e. Water vapour is roughly three to four times as important as CO 2 . 

Yes, I know that the scientists argue homestasis prior to the advent of man-made CO 2 , but how can they possibly know for a  certainty that CO 2 is the “swing factor” if they do not include in their calculations a before and after measurement for Water Vapour? My guess is that no one thought about whether or how to measure this across the planet in respect of the year 1770. Oh well. This key piece of information is not available to us. Let's just ignore it shall we? Let's just assume no change. Let's just be irresponsible in the manner in which we go about contructing our computer models.

Hands up all those who have heard the words “water vapour” coming out of Al Gore's mouth?

The lift-out contained not one single reference to water vapour – which pure logic tells us must have been increasing in our atmosphere in recent years, because increased sunspot activity has given rise to less cloud formation, and hence, less rain. That the humidity in our atmosphere has indeed been rising in recent years is evidenced by the fact that “pan evaporation” (the rate at which water in an outdoor pan evaporates) has been slowing. (Source: http://www.jonhs.net/freemovies/global_dimming.htm )

Without an accompanying rise in humidity, slowing pan evaporation is totally at odds with rising ambient temperatures. Rising temperatures without rising humidity would give rise to rising pan evaporation. Ergo, there must have been rising humidity – which is three to four times as important as CO 2 . Yes, there has been a Greenhouse problem. No it has not been “caused” by rising CO 2 levels.

Here is another gem of intellectual dishonesty that appeared in the Sun Herald's lift-out: “Studies carried out since 1961 show that the average ocean temperature has increased to a depth of 3,000 meters and that the oceans are absorbing more than 80% of the heat added to the Earth's climate system.”

This analyst asked a teacher of Chemistry to calculate the exact amount of relative energy required to raise the temperature of a cubic meter of sea water by one degree Celsius as compared to a cubic meter of air. His answer was “3,521 X” (i.e. Three thousand five hundred and twenty one times more energy is required to heat a given volume water by one degree C than is required to heat the same volume of air by 1 o C).

So, if our atmosphere covers 100% of Earth's surface to a height of 12km; and the oceans cover 66% of the Earth's surface to a depth of 3km; you do the math. (I'll even be happy for you to use an average depth of 1 km)

If the oceans have been warming for (only) the past 50 years, it has unarguably not been caused solely by absorbing “80% of the heat” in our warming atmosphere over that same time period. There must have been other causes too. Furthermore, the industrial activity prior to 1961 would clearly have been less than post 1961 activity – but, even if we double the 1961-2007 incremental amount of CO 2 , this would not have provided the necessary energy (by itself) to heat our oceans . This is the kind of selective disinformation that shatters the credibility of so-called professional scientists.

I have twice used the term “intellectual dishonesty”. The reality is that I do not believe the scientists are being dishonest. They are quite naturally worried about Global Warming and are looking for answers. I believe they are falling into a trap known as “selective perception”. That is often what happens when one is plagued by worry. One starts to grasp at straws in the hope of finding instant answers to deep seated problems.  One starts to become subjective regarding what is important and what is not important. Remember the Y2K problem that never materialised? Remember the hysteria then?

And that is the strongest possible argument I can make why we absolutely need men and women of wisdom in political leadership. We need people who are going to be able to take calm decisions based on an assessment of facts – as opposed to basing their decisions on voter orientation.

Ladies and gentlemen, if we are going to abrogate our God given ability to think for ourselves then, frankly, we will deserve what is coming down the turnpike. However, if we stop this hysterical debate and we start to think about how to solve the various real problems with which we are faced, we will discover that we already have the necessary ability to cope with most of the problems facing humanity – including so-called overpopulation.

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With all the above in mind, let's just try to ignore the fear-laden emotional static regarding Global Warming that is being fomented by our so called leaders, and let us look at the processes involved in commercialising the new energy technologies which might replace Fossil Fuels.  I have mentioned the question of financial risk – of not being able to realise the desired Return on Investment – and I have indicated that this issue can be finessed. A strategy for finessing it will be articulated in a forthcoming article.

I now want to turn the reader's attention to a concept known as “technical risk”. This is the risk that the technology being contemplated will not address the real technical need.

Let's take solar power as an example:

Solar Power suffers from the disability that whilst it can deliver voltage, it has a limitation in its ability to deliver amperage. Wattage, the power needed to light light-bulbs, for example, is calculated by multiplying volts X amps.

To simplify this subject for the average reader, it should be explained that there are four important characteristics of electricity:

• The amount of electrical charge that needs to be stored or delivered (This is measured in electrons or Coulombs)
• The pressure at which this charge is delivered (Voltage)
• The rate of flow of this charge (Amperage)
• The resistance to this flow (Ohms)

It's easier to understand the concept of electricity if you think of water trickling through a garden hosepipe vs water gushing through a fire hose.

Solar Power technology is equivalent to the garden hose example. It typically cannot generate sufficient electrical power to drive all your household appliances, for example, let alone power industrial machinery.

Let's now look at one likely set of outcomes of failing to adequately address technical risk.

In Australia, both the Liberal Party and the Labor Party (equivalent to the Republicans and Democrats in the USA) are competing with each other to give “incentives” to householders to install solar water heating systems. For example, I might be able to get a $1,000 subsidy to install a $4,000 system.

The net effect of this will be the following:

1. I will land up with $3,000 more debt if I don't have the ready cash.

2. My hot water might cost me a few dollars less a month to heat

3. CO 2 emissions in the environment may or may not fall. It is important to understand that the coal fired power plants will still need to operate to deliver electricity with amperage. Currently, my own family's hot water system is an “off-peak” system.  i.e. It draws on  “stand by” electricity during the night that has to be produced by the coal fired power plants in any event – because the alternative is to shut down the plant at night or waste the energy it generates. You can't just “shut down” a coal fired power plant during the night and then start it up again in the morning.

4. Given 3 above, what, exactly, will a Solar Powered water heating system achieve relative to the real needs as articulated above? The real needs – to migrate away from fossil fuels as a source of “energy” and to clean up pollution in the environment will be largely unaddressed. Even the perceived needs will be largely unaddressed. Such is the wisdom of our incumbent politicians whose primary area of focus is votes flowing from full employment.

5. Assuming half the Australian population live in houses, and assuming 4 people per household, the amount of money that the Australian Government will waste on this nonsensical idea will be:

(20million population X 0.5)/4 * $1,000

= A$2.5 Billion

6. Finally, and most importantly, when a new energy technology does come along that can do the job of delivering both voltage and amperage, neither the Australian Government nor the Public (which will have invested up to A$7.5 billion) will be able to afford to pay for the new technology.

There is an economic term to describe 5 and 6 above. It's called “mal-investment”.

This is not to say that there is anything fundamentally wrong with Solar Energy technology or that we should stop pursuing its improvement. It merely highlights the fact that Solar Energy offers only half a solution at present. To be able to address a real need, Solar Energy will need to be coupled with a sophisticated electricity storage technology which can be tapped at will – like a dam stores water for later usage. A non chemical (non battery) technology for storing electrons or Coulombs to be drawn down as and when needed – if it could be developed and commercialised – will represent an energy technology that will have the capacity to address real needs.  When that particular technology becomes available, Solar Power will come into its own.

Over a period of 20 years of searching, this analyst has identified four (maybe five) different alternative energy technologies which seem to have the ability to allow us to migrate from fossil fuels. Three of these are not yet on the commercial radar. Two of the four will allow us to move away from our dependence on oil within a decade; and CO 2 emissions will fall by up to 25% during that time period by way of a bonus. The other two will require a longer time to commercialise, but there is a 2012 deadline by which we will need to have developed a head of steam – as will be explained in the next article in this series.

The technologies themselves are too complex to discuss in articles such as this and to attempt this would be to invite ridicule and failure. However, by going to the hotlink at http://www.beyondneanderthal.com/sample-chapter.html you will start to get a feel for them. Please understand that this statement is not a “commercial advertisement”. I have no financial interest in any of these technologies. Although I will benefit from the sale of the novel which introduces these technologies, ultimately I am being driven by the need to solve problems so that your and my kids and their kids can have hope for a better life.

Brian Bloom

www.beyondneanderthal.com

Appendix  

Case Study: Why Anti Monopolistic legislation is toothless against Oligopolies

A brief glance at Exxon's financials over the past few years shows that their Gross Mark-ups have remained fairly constant at around the 75% level. Thus when the oil price rises from (say) $45 a barrel to $70 a barrel – or by 66% - Exxon will raise the price of its product by roughly 66%. But their other costs do not rise by 66%.  Let's not pull any punches here. Their actions (and others in the oil industry) have been nothing short of price gouging.

Question: How do they get away with this?

Answer: Their competitors are predisposed do the same thing. There is no real competition within the Oil Distribution Industry. The threat to the oil companies (if any) will lie outside the industry.

To understand this, we need to look at the numbers.

Let's assume that there are two oil companies in the world. One sells 40 million barrels of oil a day, and the other sells 35 million barrels a day. They are nominally in competition.

Now let's assume that the oil price rises from $45 a barrel to $50 a barrel – or by $5, and that company A and company B react differently.

Table 1: Impact on wholesale prices from differing pricing policies

Company A
Old Cost	New Cost	Old Price (Cost plus 75%)	New Price ( Mark – Up $5 + 75%)
$45	$50	$78.75	$87.50
Company B
Old Cost	New Cost	Old Price (Cost plus 75%)	New Price ( Mark – Up $5 only)
$45	$50	$78.75	$83.50

Given the difference in pricing strategy of the two companies, what is likely to happen in the market place?

We have all seen motorists lining up around the block to save as little as four cents per litre in the price of gasoline. The obvious response of “the market” will be that some customers will buy from company B who used to buy from company A. For the sake of illustration, let's assume that 10% switch from buying company A's brand to buying company B's brand.  Let's say that company B wins 4 million barrels in market share from company A.

The result will be:

Table 2: Assumed changes in volumes which flow from price changes

	Old Volume (Barrels per Day)	New Volume bpd
Company A	40 m	36m
Company B	35 m	39m

The impact on profitability of the two companies as a result of this will be:

Table 3: Impact on Gross Profits

	Previous Gross Profits	New Gross Profits
Company A	40 m X ($78.75 - $45) = $1.35 billion	36m X ($87.50 - $50) = $1.35 billion
Company B	35 m X ($78.75 - $45) = $1.1825 billion	39m X ($83.50 - $50) = $1.3065 billion

Company A's profits will remain stagnant, whilst Company B's profits will rise by $125.25 million a day. Furthermore, Company B will now be the new market leader.

Let's now assume that company A finally comes to understand that it made a mistake by raising its price too much, thereby allowing the competitor to win market share. What can company A do about this to retrieve the situation?

Logic dictates that, if it wants to win back customers, company A will now have to cut its prices to beat the price of Company B in the market. Clearly, company B is not going to stand still for that, so it will also cut prices – and a price war will erupt which will severely damage the profitability of both companies. It needs to be understood that the costs of both organizations will be largely fixed. We are dealing with mature businesses in a mature industry. There will only be stability in the market place if Company A charges a price which Company B can live with, and vice versa. So, they let sleeping dogs lie and they both raise the price by the same amount.  But why do they both choose to raise prices by $8.75?  Why don't they both raise their prices by $5? Isn't this collusion? Isn't this illegal?

The answer is that they don't even have to discuss this strategy to agree on it.

This is the impact on profitability of both companies if they both raise their prices by $8.75 ($5 plus 75%).

Table 4: Incremental profit from collaborative pricing policy (75% of $5 = $3.75 per barrel)

Company	Scenario 1 as above	Scenario 2: Both companies raise price by $5 plus 75% (Extra $3.75 profit per bbl)
Company A	0 (no change in profits)	40 mil bpd X $3.75 = $150 million per day
Company B	$125.25 mil per day	$131.25 mil per day

Conclusion: There is no purpose to be served by Company B rocking the boat. It will make more profits by just following company A's lead, and the incremental profits will be more certain.

If the writer of this article can see this outcome so clearly, you can bet your sweet patootie that the CEO's of both company A and company B can also see it. They get paid megabucks to see it, and their bonuses are dependent on their seeing it. The last thing either CEO or either Company wants is a price war in an environment where dwindling supplies of product are rising in price. Only an idiot would cut prices in the face of shrinking supply in a mature industry where you are selling an essential product. Only a pussycat would raise prices by $5 to match cost increases. That would be like throwing away over $130 million additional profits a day! The strategy of oil companies under circumstances of dwindling oil reserves would be maximise cash flow while they can. “Hey guys! Our business model is to mark up at cost plus 75%. No one has the right to tell us how to run our businesses.”

Incidentally, the arrival of Peak Oil is also why the oil companies are not spending sufficient money on maintenance of the refinery infrastructure; and that's why the gasoline shortages are only going to get worse. See: http://www.twincities.com/national/ci_6433722?nclick_check=1 .  There is clearly a conflict of interest here. To further their own interests, the oil companies are quite reasonably (but unethically) behaving in a way that is contrary to the interests of the community.  What has been the response of our politicians to this price gouging? Zero! In fact, it was reported in the media a few weeks ago that one service station in the USA was prosecuted for failing to raise prices by a fixed percentage!

By Brian Bloom
www.beyondneanderthal.com

Since 1987, when Brian Bloom became involved in the Venture Capital Industry, he has been constantly on the lookout for alternative energy technologies to replace fossil fuels. He has recently completed the manuscript of a novel entitled Beyond Neanderthal which he is targeting to publish within six to nine months.

The novel has been drafted on three levels: As a vehicle for communication it tells the light hearted, romantic story of four heroes in search of alternative energy technologies which can fully replace Neanderthal Fire. On that level, its storyline and language have been crafted to be understood and enjoyed by everyone with a high school education.  The second level of the novel explores the intricacies of the processes involved and stimulates thinking about their development. None of the three new energy technologies which it introduces is yet on commercial radar. Gold, the element , (Au) will power one of them. On the third level, it examines why these technologies have not yet been commercialised. The answer: We've got our priorities wrong.

Beyond Neanderthal also provides a roughly quantified strategic plan to commercialise at least two of these technologies within a decade – across the planet.  In context of our incorrect priorities, this cannot be achieved by Private Enterprise. Tragically, Governments will not act unless there is pressure from voters. It is therefore necessary to generate a juggernaut tidal wave of that pressure. The cost will be ‘peppercorn' relative to what is being currently considered by some Governments. Together, these three technologies have the power to lift humanity to a new level of evolution. Within a decade, Carbon emissions will plummet but, as you will discover, they are an irrelevancy. Please register your interest to acquire a copy of this novel at www.beyondneanderthal.com . Please also inform all your friends and associates. The more people who read the novel, the greater will be the pressure for Governments to act.

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