Monday, May 16, 2011

Confusion will not end for everyone suddenly and at the same time

Confusion will not end for everyone suddenly and at the same time, but as clarity begins to emerge, it will become to more and more people that they have been confused. The likely report of the Secretary of Energy's Blue Ribbon Commission can be expected to reflect confusion, not clarity. And plenty others are confused. Much of the confusion is derived from ideology, and not just Green ideology. Robert Bradley, Jr., of is quite good at spotting the confusion of others, but unlike George Monbiot is unable to see how his confusion distorts his on thinking.

Bradley is correct in thinking that
(e)nergy is the master resource. Without it, other resources could not be produced or consumed. Oil, gas, and coal could not be replenished without the energy to manufacture and power the requisite tools and machinery. Nor could there be wind turbines or solar panels, which are monuments to embedded (fossil-fuel) energy.
Bradley also correctly judges that there are three reasons for
for regulating or subsidizing energy projects.
They are Analytic failure, Market failure, and Government failure. We see in the case of solar and wind generated energy an unending string of analytic failures, These failures have been exposed by analyses of future renewable energy focused plans and by case studies of renewable implementation. I will also argue that Robert Bradley, Jr. despite his success in spotting the analytic failure of others, still exhibits analytic failures of his own.

Market failure can have many sources. Clayton M. Christensen describes the reasons why large businesses fail when confronted with disruptive innovations, in The Innovator's Dilemma. Christensen, notes that businesses often develop new technologies, but often fail to capitalize on their own innovations. When their marketing department investigates the response of their existing customer base to the innovation, they find little interest. What the customer wants is performance improvements in existing technologies. And business theory holds that business success comes from listening to customers, and giving them what they want. Small markets do not justify big investments, and marketing may find that there is not a big market for the innovation. Companies which have large growth targets may not be interested in innovations that do not seem to bring big growth. Further the market effect of disruptive technologies cannot be analyzed because the market does not yet exist, and therefor no data is being generated. Without data, marketing does not have a clue. Most successful businesses do not engage in disruptive innovation. Indeed a disruptive innovation approach may involve what appear financial analyses to be bad financial decisions.

There are lessons to be learned in the rise of Apple during the last decade. Long term business success appears to require some risk taking on "Disruptive Technology." Apple provides an example of why this is the case,
Apple spent nearly as much on development of the iPhone as it did on its Leopard OS, according the company’s 10Q filed with the SEC. From the notes: “In the second quarter of 2007, the Company determined that both Mac OS X version 10.5 Leopard (“Leopard”) and iPhone achieved technological feasibility. During the second and third quarters of 2007, the Company capitalized approximately $27 million and $26 million, respectively, of costs associated with the development of Leopard and iPhone.”
Of course in the long run, Apple was hugely rewarded for its willingness to take a risk, but there are plenty of examples of attempted to develop disruptive innovations which failed, and may have even ruined the would be disruptive innovator. Sometimes disruptive innovators are successful over a period of time, only to fizzle out. For example Polaroid, which introduced an instant picture technology shortly after World War II. Initially Polaroid was extremely successful.
Between1948 and 1978 sales grew 23 percent and profits grew 17 percent, both annually.
Yet Polaroid eventually failed, brought down by a revolution in electronics technology.

Disruptive innovation may lead to mistakes. Steve Jobs suggests,
Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations.
Many business executives would not be able to accept Steve Jobs idea that making mistakes is part of the cost of doing business.

Disruptive innovations may also be rejected because it is suspected that the innovation will cannibalize sales of existing products. The iPad is doing that to Apple's traditional computer line, but Steve Jobs does not care in the slightest, because the company is growing. Thus there are business forces which tend to drive businesses away from producing disruptive products. Steve Jobs has shown how to build a great company through systematic use of disruptive innovation, and in doing so has illustrated the failure of the market as interpreted by classic businesses.

Yet in its wake Apple is leaving in its wake shattered competitors. In 2008 RIM, Microsoft and Palm dominated the Smartphone business. Today it is Apple. Thus failure is part of the market, businesses fail all the time, and markets may fail as a whole, because most businesses do not accomplish what Apple has.

Finally we have government failure. There is little doubt that Governments have failed in the energy sphere, for example in the development of advanced nuclear technology. The United States Government continues to fail.

Thus I agree with Bradley's analysis that Analysis, the Market and Government itself can all fail. The next stage of Bradley's argument is much more problematic. Bradley makes a number of very questionable claims:
1. Estimated quantities of recoverable oil, gas, and coal have been increasing over time according to the statistical record. Human ingenuity in market settings has and will continue to overcome nature’s limits, leaving in its wake errant forecasts of resource exhaustion. The resource challenge is political: allowing access and incentive so that the ultimate resource, human innovation and entrepreneurship, can expand new energy supplies and multiply its productive uses. Resourceship is a useful term to describe human inguenuity applied to minerals.
2. Energy security in the electricity market is assured by abundant domestic coal and the fact that almost all of U.S. gas imports are from Canada. Most of the oil needed for transportation comes from domestic supplies supplemented by imports from a variety of countries led by Canada and Mexico.
3. The global warming scare is plagued by open scientific questions, economic tradeoffs, and the reality that carbon-based energy is requisite to economic growth. Carbon rationing (via the Kyoto Protocol) is a failed policy for the developed world and a nonstarter for the developing world. Not only have targeted reductions proved to be elusive, the economic costs of carbon rationing are not unlike those from (postulated) deleterious climate change.

First, as any careful reader of The Oil Drum will tell you, the problem is not total reserve, it is the economics of recovery. As reserves shift from big and easily exploited resource blocks, to smaller and more difficult to exploit blocks, it becomes more and more expensive to exploit the resource, until a point is reached at which it requires more energy to recover the resource than is gained by the recovery. Before we reach that point, the total return from recovery efforts will begin to drop, and resource prices will begin to rise. That appears to be beginning to happen with oil. While it has been argued that the price of natural gas will remain at historically low points for decades to come, this appears to be questionable at best.

Secondly, even if the oil and coal comes from North America, competition for North American produced oil and coal will drive its price up. North American origins of oil and gas will not make it cheaper here than elsewhere.

Thirdly, Bradley fails to distinguish policy issues related to Anthropogenic Global Warming (AGW), with the scientific validity of AGW concerns. He is quite correct that carbon rationing is likely to fail, but incorrect in assuming that carbon based energy is required for economic growth. It is possible to substitute a non-carbon energy source for carbon based energy at a cost that would be sufficiently low to drive carbon based energy out of the market, if it is desirable to do so.

Fourth even if fossil fuel sustainability were possible for some time to come were both possible and practical, there are considerable human health and safety costs for doing so. These costs involve the expenditure of real money, but rarely is that expenditure directly reflected in the cost of energy.

Bradley fails to acknowledge the imperfections of the market, and indeed his writings often reflect that imperfection. It is clear that Bradley is an advocate for the fossil fuel industry and that he relentlessly makes its case, but he fails to see the merits of the cases against fossil fuels. He denies peak oil, peak coal, and peak natural gas, as well as the fossil fuel, CO(2), climate change link. Finally he denies the need of disruptive technology. Bradley is much better at spotting the flaws of the renewable advocates than he is at spotting the flaws of the fossil fuel mob. He remains an advocate of business as usual, and fails to ackowedge either the possibility of disruptive innovation in the energy field, or in its necessity. If it requires governmwntal intervention to launch such a disruptive innovation, so be it. Business as usual cannot go on, and business as usual has not produced the innovation.

We are now at the critical point at which confusion is beginning to end, but confusion will not end for everyone suddenly and at the same time.


donb said...

It is interesting to think about disruptive technologies and the failures of various companies to take advantage of the new technologies.

Take the failure of Polaroid. It did not fail because people stopped taking photographs. The disruptive technology of digital photography has caused picture-taking to explode, as the cost per shot has become trivial. If Polaroid had been able to develop a small, light weight digital camera that prints photos, they might still be a force in their niche of the market.

Similarly, the use of energy is not going away. The disruptive technology is the source of that energy. For electricity, the end user doesn't need to know or care what the source(s) may be. The disruption comes at the generation end. The generation needs to be made clean and economical. This is the promise of advanced nuclear reactors.

Of course, here lies the crux of the problem. Obtaining those advanced reactors is no small matter. Substantial development work is needed. The potential users do not have the resources nor expertise. Potential suppliers have to come up with substantial development capital. They also deal with a government agency that has not even been able to see the completion of a single conventional reactor under its rules during its four decades of existance, much less start on licensing something that doesn't use presurized water as a moderator and coolant.

The shame is that there are many excellent ideas for new reactors. But the obstacles of cost and licensing have been greatly enhanced by fear, uncertainty and doubt. This FUD has been generated not only by pseudo-environmentists, but also government regulators and incumbant nuclear suppliers.

Martin Burkle said...

This article is very well written. It is all about the same idea. It begins and ends with almost the same words. It describes a way of thinking about energy supply, but it really does not jump to the conclusion. Now I have to think about confusion and possible paths to less confusion.
Nicely done.


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