Sharpe: Footprints in the air

George Sharpe
Investment Manager – Merrion Oil & Gas
George Sharpe, Merrion Oil and Gas investment manager

Gary Johnson (I like to call him Gary Anybody Else for President) has a video out to the old tune that goes, “Clowns to the left of me, jokers to the right, here I am, stuck in the middle with you!”  I like to consider myself a middle man, so to speak, and I think most of you are too! So let’s leave politics alone for a minute and see if we can find some middle ground on energy use and climate change. Here’s my story:

1. Man DOES impact the environment, and ultimately, the climate. There is no question that the CO2 concentration in the atmosphere has increased from 280 ppm to approximately 400 ppm since the industrial revolution, and not coincidentally, we just had the hottest July on record. Even though the deniers will argue most CO2 emissions come from natural sources and less than 5 percent from man, it appears we have tipped the equilibrium balance.  But CO2 concentrations have historically been many orders of magnitude higher than today.  The earth has seen this before.  The ocean was 100 meters higher than today when the San Juan Basin was deposited 100 million years ago, and there have literally been hundreds of thousands of “1,000 year” floods since that time. So while we should do what we can to mitigate our impact on the environment, it is a fantasy to think that in any way we can really control it. Also, whatever we do needs to be done rationally, given the realities of the math below.

2. EVERYTHING takes energy.  America’s incredible standard of living (all our stuff) is all because we have access to abundant, affordable energy.  When you talk about your “energy footprint”, you probably account for your two cars, appliances, furnace, AC, and maybe even the thousands of products made from petroleum.  But do you count that cotton shirt that was farmed, manufactured into a shirt, packaged and trucked to a Target near you where you drove to buy it.  EVERYTHING you have took energy to get it there.  When people talk about reducing their carbon footprint, nobody is really serious about reducing their ENERGY footprint.  Certainly not the likes of the DiCaprios, who leave the anti-fracking rallies on their private jets.

3. The world will continue to need MORE energy.  Seven billion people burn a lot of “btus” just to keep alive.  And as the standard of living rises in the third world, it will be on the back of increased energy use.  There are a billion Chinese who are hoping for a used car, a 27-inch TV, a new outfit for Friday night, whatever.  They want just a little of what YOU have. Data from the U.S. Energy Information Administration, or EIA, shows that China and India together have tripled their energy use since 2000, and the forecast is for that growth to continue.

4. Carbon energy will continue for some time to be the major source of the world’s energy. When you are poor, you are more concerned about what’s for breakfast than you are about the ambient temperature in the year 2100.  Not many Chinese can afford a Tesla, and even if they could, the electricity to charge the batteries has to come from somewhere.  So the world will continue, for the most part, to use the cheapest source of energy, which in China is coal.  Again, China’s coal use has tripled since the year 2000, dwarfing any reductions made by plant closures in the U.S.

5. Wind and solar can’t meet the world’s energy needs on their own.  Forget the poor Chinese, let’s take a look at the feasibility of the rich Americans meeting all our needs with wind and solar.  According to the EIA, in 2014, the US had 1043 GW (gigawatts) of generation capacity, with 91 GW being wind and solar and 774 GW being coal and natural gas, the balance primarily being hydro and nuclear, which the environmental extremists also hate.  In 2015, 12 GW of new wind and solar came on line.  Therefore, it would take 65 years of investment at 2015 levels to fully replace the carbon sources. If you account for EIA’s estimated 25 percent capacity factor due to intermittent sun and wind, make that 258 years.  Now account for the fact that only 40 percent of our current energy use is electricity, if you want to replace your Dodge with a Tesla and your gas furnaces with an electric heater, make it 650 years.

While we can and should start eating that elephant, we can’t do it in one bite.  The bottom line is that even if the current tax incentives were sweetened to dramatically accelerate the development, it is going to take many, many years before renewables are the primary source of energy.  In addition, because one still might want power on a cold, windless night, every single solar or wind farm has to have a backup source using carbon fuel that is available on demand. Relying solely on renewables sounds good on paper ... until you actually put it on paper.

In closing, I agree with encouraging investments in wind and solar (i.e., tax incentives) so that they become ever larger pieces of the energy pie as quickly as possible. However, do it through incentives, not by obstructing oil and gas drilling, which like it or not, YOU still need.  It would be a cold day in hell (i.e,, Washington, D.C.) if we tried to make renewables the entire energy pie right now.