Locking in the march of folly: of herding, theories about greater fools and Australia’s coal rush (part 2)

March of folly redux

The end of the coal bubble

We are at the top of the peak for fossil fuel extraction and as a source of energy: coal included.

Prices may continue to rise for a decade or more as demand for energy intensifies, but this is nothing more than speculative bubble that will spectacularly collapse.

How do we know this?

Apart from diminishing reserves the mother of all market corrections is coming: the climate is changing faster than anticipated.

Picture the world in but three decades with an additional 2c warming, a future in which the current heat wave devastating North America will be regarded as a mild summer.

In this scenario, coal prices will slam into the reality of climate change experienced by billions and collapse. Coal’s one advantage, the perception it is cheap and plentiful, will be seen more as a curse than a boon.

In this scenario the state of coal reserves will not matter becomes irrelevant. There is little doubt climate change will generate a range of policy initiatives to quickly – desperately – phase out coal and fossil fuel usage.

Countries will abandon coal as part of a massive mobilisation endeavor to mitigate rising temperatures. Treaties will come into place to slow and halt the extraction of coal. Billions of funding will pour into alternative sources of energy.

And if market friendly mechanisms fail to spur countries to switch from coal to renewable sources, we can expect economic sanctions against countries refusing to cease coal production.

In years to come, those soon to be opened coal mines and their supporting infrastructure will be seen as nothing more than monuments to folly.

The greater fool theory at play: coals future is limited, but the rush to exploit goes on

Expanding coal production is like betting your future on the tobacco industry.

Perhaps you might choose to ignore the health risks, the suffering of those with cancer or strain on the public funds for the short term.

But ultimately reality catches up.

The IEA has warned we are “locking in” dangerous climate change by betting on fossil fuels as a future source of energy:

Yet, despite intensifying warnings from scientists over the past two decades, the new infrastructure even now being built is constructed along the same lines as the old, which means that there is a “lock-in” effect – high-carbon infrastructure built today or in the next five years will contribute as much to the stock of emissions in the atmosphere as previous generations.

We seeing is the last throw of the profit-seeking dice: “Hurray! Dig it up before we can’t sell it any more!”

Because for the next 10 years or so there will be enough greater fools willing to dig up coal and sell it. But that too will have to stop. It’s inevitable.

But this will be a problem for the future, and is in no way reflected in next week’s opinion poll or babbling anxieties and concerns of the last market focus group.

So where does this leave us?

Locked into the march of folly.

History is unkind to fools

Our political and business elites have chosen to not only sacrifice their interests, but a liveable climate.

Gillian King at the blog “Thisness of that” writes perceptively about that failure. Inaction is not the fault of scientists – they’ve simply provided information – but with politicians:

What more can climate scientists do and say? They conduct the research and publish the facts. Their institutions have prominent websites about climate change (CSIRO, BOM, PIK, Met Office, NASA, NOAA, and more) and individual scientists have published books, websites and blogs aimed at general audiences…

Let’s stop pretending that political failure to act is the fault of scientists. It’s not. It’s the fault of politicians who choose not to know, choose not to lead, choose not to educate their constituencies. 

As I’ve stated many times, the problem is not that of our leaders are suffering form a case of information deficit.

The most privileged members of our society – politicians, business leaders, sections of the media and yes, even some in academia – have consciously and willingly ignored the issue.

Here’s a fact: they have all the data, projections and information at their fingertips. They have the means to influence the debate and the ability to implement policies that address climate change.

But a choice has been made; to ignore, to obfuscate, to deny and to pass the problem onto future generations.

One only has to look at the antics of the Australian leader of the opposition, Tony Abbott to see the choices our elites our making.

Abbott is currently touring Australia, popping up in supermarkets and fish shops claiming Australia’s very modest attempt at climate change mitigation (the so called carbon tax) will be the ruin of us all and promising to “axe the tax” the moment he gets into office:

 

Is it possible for the “climate change debate” in Australia to become even more insipid?

Here’s a suggestion Mr Abbott: have a look at the 40,000 local temperature records that have been broken in the USA this year. Or perhaps the flooding that has displaced millions in India:

 

That’s what disaster looks like Tony.

Believe me; paying a few extra cents for my groceries seems a good trade off compared to the alternatives.

With that in mind, I cannot but help ask “Have men like Abbott no shame?”

History is unkind to fools, no matter how clever or successful they are in the short term. The passage of time and the unfolding of events will inevitably showcase the failings and poor decision making of elites who have sacrificed not only their interests, but those they claim to lead, in return for short term gains.

Across a broad spectrum of politics, business and the media we already recognise just who the fools are.

Hindsight will merely confirm.

We already know their names.

Locking in the march of folly: of herding, theories about greater fools and Australia’s coal rush (Part 1)

Bubbles past and future

The march of folly never ends

There’s a theory investors refer to called “The Greater Fool” theory.

Simply put, people will hang onto a bad investment in the hope they will sell it to a “greater fool” for profit. Indeed, some use it as a viable investment strategy to maximise short-term profits.

The collapse of the sub-prime market in the US is often cited as a recent example of the Greater Fool Theory in operation. Investment firms realised the entire repackaging of untenable loans into collateralized debt obligations (CDOs) was a house of cards bound to fail.

And yet those same firms continued to pump out “financial products” to unwary buyers (usually national, state and local governments) in order to maximise short-term profitability.

We all know how that played out in the end.

Alternatively some academics choose to explain speculative bubbles in terms of sociology and  neuroscience, defining the actions of investors as “herding” behaviour. Rather than making rational decisions individually, investors will simply follow trends:

“Herding can be defined as the phenomenon of individuals deciding to follow others and imitating group behaviours rather than deciding independently and atomistically on the basis of their own, private information.”

Whatever the reasons for the emergence and collapse of speculative bubbles, it’s now widely accepted that markets and individuals are far less “rational” than was supposed.

And what is true in markets, is true for human nature.

Individuals, governments and organisations will often pursue courses of action that compromise their own self-interest.

History bears this out: the march of folly never ends.

Elites will frequently pursue policies contrary to their own self-interest, deluding themselves they “had no choice” or that it “really was in their interest”. Thus some argued – and continue to do so – the invasion of Iraq was in America’s best interest. The Soviet’s invaded Afghanistan believing it was in their national interest to do so.

The Trojans rather liked the look of that marvellous looking wooden horse parked just outside their walls, thinking it would make a splendid addition to their collection of public art. Irony or folly, sometimes there is little difference between the two.

In Australia the march of folly is playing itself out once again.

It is driven by the desire for short-term economic and political gain. In other instances it’s about winning the “culture wars” that have raged between the old left and right since the mid-1980s.

And this new march, both foolish and sadly predictable, is fuelled by coal.

Herd of greater fools: Australia’s coal rush

Currently we are witnessing a spectacular march of folly in recent Australia’s “coal rush”.

It’s all based upon a simple premise: we’ve been digging the stuff out of the ground and flogging it for the last 30 years. Ergo, we’ll keep digging it out and making a profit for years to come.

Thus we are now seeing conservative governments in the states of Victoria and Queensland expanding coal mining in the hope it will prompt economic growth, employment and refill their emptying state coffers.

In Victoria, the increasingly unpopular Premier Ted Bailleu has agreed to expand the mining of brown coal – 40 billion tonnes of the stuff – in the La Trobe valley:

The State Government says talks to export brown coal from the Latrobe Valley have progressed quickly.

Earlier this year, the Government announced it was opening up Victoria’s vast brown coal reserves to export, if a company is able to develop technology to allow it to be dried and transported safely.

The Government says it is already in talks with an international consortia about a project to dry coal for export.

It is estimated the project could create 3,000 jobs during the construction phase, on top of about 300 on-going jobs.

Resources Minister Michael O’Brien says the proposal shows there is significant interest in a potential brown coal export market.

“When we met with a consortia last year to discuss Victoria’s brown coal, the Exergen and Tata groups were very positive about it,” he said.

Martin Ferguson, the Federal Minister Energy and Resources and known climate change sceptic, is cheering it on:

ABC News reports Ferguson backed the plans at an international energy conference in Melbourne this week.

Victoria Minister for Energy and Resources Michael O’Brien also supported the plans and said there was a “massive interest” in VIC brown coal.

In Queensland, conservative Premier Campbell Newman is prepared to risk the health of the Great Barrier Reef in a rush to open up mining and ports:

A WORLD Heritage mission wants tough new environmental conditions placed on coal and gas port expansion applications, pending the outcome of a strategic review into the combined threat they pose to the Great Barrier Reef.

Developers could be forced to accept new “precautionary” environmental rules or withdraw their applications and resubmit them when the strategic review has been completed in 18 months.

The co-ordinator of the UNESCO World Heritage Centre’s marine program, Fanny Douvere, yesterday declared that the Great Barrier Reef, one of the world’s most important environmental assets, was “at a crossroads”.

These governments are simply hoping to emulate their compatriots in Western Australia, where mining has not only been booming, but delivering handsome royalties to government coffers (and wealth for certain mining billionaires).

Nor is it the conservatives alone extolling the wonders of coal.

Prime Minister Julia Gillard has been touring Queensland in the hops of bolstering support for her flailing government by promising coal with have a long-term future:

Ms Gillard told Fairfax Radio coal jobs would increase under her plan.

“There will be growth in jobs in coal,” she said.

“The demand for coal will continue very strong. In terms of the impact of carbon pricing on coal mining the average impact is $1.40 per tonne.

“This is in the situation where coal prices have more than doubled, so we will see continued growth in coal mining.”

Across the political spectrum, it appears our leaders share the same set of assumptions.

How should we respond to climate change?

Dig up more coal.

How can we prompt alternative sources of energy?

Dig up more coal!

How can governments continue to fund essential services like education, healthcare and police forces?

Why, dig up more coal!

Is it me, or do our leaders seem rather unimaginative?

March of folly redux.

Permit me to mix up metaphors and popular culture: we’ve set sail on a ship of fools, herding us off the map, all the while drawn by the promises of coal.

Locking in the march of folly: the coming of peak coal

According to BP, there are enough global reserves of coal for us to happily burn through for the next 150 years.

And yet even now there are whisperings of peak coal with production peaking coming much sooner than anticipated, perhaps in the next few decades (2025 by some estimates).

Australian reserves at around 75,000 million tonnes are thought to be viable (that is the cost of extraction remains profitable) to about 2050. Indeed, some research suggests peak coal could hit us sooner:  

Professor Geoffrey Evans and PhD student Steve Mohr from the University of Newcastle have developed a new mathematical model to predict the future of coal production.

Their research reveals that the world’s coal production could peak between 2010 and 2048, and Australia’s coal production sometime after 2050.

The researchers applied their new model to all coal-producing countries and, unlike previous models, took into account supply and demand influences.

And that:

“We need to start thinking now about the future supply of coal and how best to manage the resource. This is another warning that we cannot wait for coal to peak, we need to act now to plan for the future.”

Thus there can be no greater monument to folly than an open-cut coal mine or breaking ground for a new coal-fired generator.

That we continue to ignore coal’s environmental impact is madness.

The International Energy Agency (IEA) warns we are playing a dangerous game, and that we should be alarmed about rising levels of investment for fossil fuelled power stations:

The world is likely to build so many fossil-fuelled power stations, energy-guzzling factories and inefficient buildings in the next five years that it will become impossible to hold global warming to safe levels, and the last chance of combating dangerous climate change will be “lost for ever”, according to the most thorough analysis yet of world energy infrastructure.

Anything built from now on that produces carbon will do so for decades, and this “lock-in” effect will be the single factor most likely to produce irreversible climate change, the world’s foremost authority on energy economics has found. If this is not rapidly changed within the next five years, the results are likely to be disastrous.

“The door is closing,” Fatih Birol, chief economist at the International Energy Agency, said. “I am very worried – if we don’t change direction now on how we use energy, we will end up beyond what scientists tell us is the minimum [for safety]. The door will be closed forever.”

Despite these risks of locking in significantly dangerous levels of warming, governments continue to willfully turn a blind eye to the problem.

Running on empty: leaked cable reveals Saudi reserves lower than publically stated

Many readers have alerted me to recent Wikileaks cable about Saudi oil reserves. Hat tip to all!

It is worth seeing the full text of the leaked cable:

SUMMARY: On November 20, 2007, CG and Econoff met with Dr. Sadad al-Husseini, former Executive Vice President for Exploration and Production at Saudi Aramco. Al-Husseini, who maintains close ties to Aramco executives, believes that the Saudi oil company has oversold its ability to increase production and will be unable to reach the stated goal of 12.5 million b/d of sustainable capacity by 2009. While stating that he does not subscribe to the theory of “peak oil,” the former Aramco board member does believe that a global output plateau will be reached in the next 5 to 10 years and will last some 15 years, until world oil production begins to decline. Additionally, al-Husseini expressed the view that the recent surge in oil prices reflects the underlying reality that global demand has met supply, and is not due to artificial market distortions. END SUMMARY.

Note how al- Husseini does not “subscribe to the theory of peak oil”, but non-the-less admits production will plateau in the next 5-10 years.

Cognitive dissonance aside, it is a remarkable statement.

Yep, peak oil is around the corner folks.

No just in case you think this falls into the “nothing to worry about” category, another leaked document puts things into perspective…

Late last year a report prepared by the German military was leaked noting the following impacts:

Oil will determine power: The Bundeswehr Transformation Center writes that oil will become one decisive factor in determining the new landscape of international relations: “The relative importance of the oil producing nations in the international system is growing. These nations are using the advantages resulting from this to expand the scope of their domestic and foreign policies and establish themselves as a new or resurgent regional, or in some cases even global leading power.”

Increasing importance of oil exporters: For importers of oil more competition for resources will mean an increase in the number of nations competing for favour with oil producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, “this could result in a more aggressive assertion of national interests on the part of the oil producing nations.”

Politics in place of the market: The Bundeswehr Transformation Center expects that a supply crisis would roll back the liberalization of the energy market. “The proportion of oil traded on the global, freely accessible oil market will diminish as more oil is traded through bi-national contracts,” the study states. In the long run, the study goes on, the global oil market, will only be able to follow the laws of the free market in a restricted way. “Bilateral, conditioned supply agreements and privileged partnerships, such as those seen prior to the oil crises of the seventies, will once again come to the fore.”

Market failures: The authors paint a bleak picture of the consequences resulting from a shortage of petroleum. As the transportation of goods depends on crude oil, international trade could be subject to colossal tax hikes. “Shortages in the supply of vital goods could arise” as a result, for example in food supplies. Oil is used directly or indirectly in the production of 95% of all industrial goods. Price shocks could therefore be seen in almost any industry and throughout all stages of the industrial supply chain. “In the medium term the global economic system and every market-oriented national economy would collapse.”

Relapse into planned economy: Since virtually all economic sectors rely heavily on oil, peak oil could lead to a “partial or complete failure of markets,” says the study. “A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis.”

Global chain reaction: “A restructuring of oil supplies will not be equally possible in all regions before the onset of peak oil,” says the study. “It is likely that a large number of states will not be in a position to make the necessary investments in time,” or with “sufficient magnitude.” If there were economic crashes in some regions of the world, Germany could be affected. Germany would not escape the crises of other countries, because it’s so tightly integrated into the global economy.

Crisis of political legitimacy: The Bundeswehr study also raises fears for the survival of democracy itself. Parts of the population could comprehend the upheaval trigged by peak oil “as a general systemic crisis.” This would create “room for ideological and extremist alternatives to existing forms of government.” Fragmentation of the affected population is likely and could “in extreme cases lead to open conflict.”

Crisis. Instability. Failure.

Let’s throw in climate change just for fun!

And what are governments doing to meet this challenge?

Oh that’s right…

Nothing.

In my mind, the need to adapt is even greater.