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Banking on Energy
Posted by Gail the Actuary on April 5, 2009 - 11:05am
This is a guest post by Chris Cook. Chris is Former Director of the International Petroleum Exchange, and is now a Strategic Market Consultant and commentator. The post was written prior to the G20 meeting which started April 2. In this post, Chris proposes that international trade be denominated not in dollars, but energy.
In the approach to the G20 meeting we saw two distinct threads of global policy emerging: one by the global debtor nations, led by the US, and another by global creditor nations, led by China.
In the US, we see Treasury Secretary Geithner's trillion dollar quantitative easing of the rich, which cannot work for two reasons.
Firstly, the problem is not a shortage of credit, but a shortage of the creditworthy. As asset prices and incomes continue to collapse, only the top few percent are now in a position to borrow, based upon the wealth which has become increasingly concentrated in their hands in the last 20 years of debt-disguised recession. The only solutions for the US are therefore fiscal.
Secondly, this initiative is based upon the premise that the creditors of the US will support these measures by continuing to buy assets denominated in an increasingly debased currency.
China's increasing impatience with the dollar as a global reserve currency is now quite overt and specific. Zhou Xiaochuan – the Chinese Central Bank governor – has published a thoughtful essay proposing that the IMF should take on the role envisaged by Keynes at Bretton Woods in 1944 as the issuer of a global reserve currency, Keynes' “Bancor”.
Russia's proposal for the G20 meeting is set out on the President's website and says, among other things
“....Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a "supra-reserve" currency by the whole world community.”
Alongside these proposals for multilateral solutions, energy market observers like myself noted with interest in mid February that China and Russia have already taken bilateral “Peer to Peer” action. This took the form of a 20 year $25 billion loan by China to Russia secured against crude oil supplies of some 15 million tonnes per year. It was not just the cynics who considered that this transaction will almost inevitably be tested to destruction by the dollar's decline relative to energy, and sooner rather than later.
At a high-level conference in Tehran in January I made a proposal in respect of an “Energy Standard” for international trade which was very well received, to the extent that it has been suggested that a presentation be made to the Economic Cooperation Organisation (ECO) states concentrated around the Caspian Sea, but extending to Pakistan and Turkey.
The concept is extremely simple, and it is that international trade should be denominated not in dollars, but in energy. Producers of energy, such as Russia and Iran may then-–in exchange for value received--issue Units redeemable either in electricity, or in “energy vector” fuels such as gasoline, heating oil, fuel oil and above all natural gas, which all have a fixed value denominated in energy.
Global transactions will then take place within the framework of an International Energy Clearing Union subject to the collective guarantees of energy producer and consumer nations generally. Both energy creditor nations – such as Russia, Iran, the GCC and Norway – and energy debtor nations, such as the US, UK and EU would all pay an amount into a global “energy pool” in support of the guarantee. The resulting balances would be deployed in massive investment in new renewable energy infrastructure and energy efficiency savings.
The US, which is the biggest energy debtor by far, could therefore be funded by the Pool in redeploying much of its increasingly baroque military expenditure not just into the “Green New Deal” proposed in the US, but also globally, in partnership with the immense UK and EU intellectual capital at the cutting edge of research and development.
The use of an “energy dollar” or “Petro” energy unit, as it was referred to in Iran, addresses one of the most pressing issues. This is the catastrophic waste of carbon-based energy in those countries blessed or cursed with large oil and gas reserves. Anyone who wishes to see the negative effects of gasoline available at 30 cents per gallon on the environment and on the quality of life, need only travel to Tehran.
President Ahmadinejad recently proposed to massively raise gasoline prices and to compensate the population with cash subsidies, and the Majlis threw out the proposal. The unitisation of gasoline, on the other hand, allows the price of gasoline to be raised to global levels, and for the population to be compensated with Units redeemable for gasoline. While some will continue profligate use of gasoline, most will cut back on gasoline use and exchange their Units for something else of value.
Perhaps the most interesting potential lies in the global market in natural gas, where Iran, Qatar and Russia own two-thirds of global reserves and recently instituted a Gas OPEC based in Doha. The unitisation and clearing of natural gas offers the potential basis for an International Energy Clearing Union, I believe. The massive loans which financed Qatar's LNG infrastructure may be refinanced interest-free simply by selling Units redeemable in natural gas to major consumers such as China, who thereby both lock in a price, and may found a new global energy-based reserve currency.
I believe that it is only through the use of an energy standard – rather than a fiat currency or gold - that the transition from carbon-based fuels to renewable energy may be painlessly made, and in so doing, allow the US, and other nations to repay their energy, and other resource debts.
President Obama, for his part, may dispense with the deficit-based “Cap and Trade” mechanism which, like emissions trading, attempts to monetise by political fiat something with no intrinsic value – which of course brings us back to Treasury Secretary Geithner's proposal also to do just that.
So I will conclude by saying, not for the first time, that oil is not priced in dollars: dollars are priced in oil, and recommend that the G20 turn their attention to a sustainable International Energy Clearing Union alternative to our current unsustainable global monetary system.
This story is cross posted at Seeking Alpha.
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This is really an interesting idea.
I am trying to figure out a little more about how it might work. Presumably, each country could keep its own currency, and the value of the dollar would become less and less, as it takes more and more dollars to buy a barrel of oil. Does this make sense? Or do you envision the world economy to work differently than this?
I am also interested in the details of how this might work, particularly on an intercontinental basis. Suppose at a future point the US has been fully able to capture its wind and solar resources, and has a surplus of energy, but it's all electricity. In such circumstances, the US would presumably issue notes that can be redeemed for electricity. But because of North America's relative isolation, it would seem to be very difficult to conduct trade with the rest of the world because no one outside of North America could redeem the notes for the actual energy. Say China were holding a few peta-joules worth of US electricity notes --how do they get actual energy for them? Any sequence of "currency" exchanges -- eg, US electricity notes for Qatar natural gas notes -- must end with the US notes in the hands of someone who can collect on them, yes?
As we have seen here in many discussions, electricity is convertible into energy vectors such as hydrogen, hydrocarbons or ammonia. The US could simply convert and sell these.
The clearing of energy obligations will be a function of a decentralised energy clearing union - a network of networks. I do not envisage a centralised clearing house or issuer, which IMHO constitutes a single point of failure, and is in any case probably politically infeasible for any number of reasons.
Besides, China would not wish be capable of redeeming its Units other than for current consumption and would prefer to hold them in reserve for use in exchange for something else she needs.
That is, after all, what a reserve currency is all about?
Chris Cook -
I assume this term 'energy vector' that you use is just a fancy way of saying 'energy form'. (Strictly speaking energy is usually not a vector quantity as it generally has no directional component, as least in the way it is being used in these discussions.)
In my view, the analogy of energy as currency can only be taken so far. On any given day you can convert your dollars to yen and then back again within losing more than a relatively trivial amount in fees. However, energy conversions are far more dissipative, often resulting in well over 50% of the initial energy input being lost. For example, if you go from electricity to hydrogen and then back to electricity again, you will probably loss well over 70% of the initial energy input required to produce the electricity in the first place. Keep doing conversions like that, and you will have next to no energy left.
For this reason, one does not 'simply' convert electricity into a transportable fuels such as hydrogen, hydrocarbons, and ammonia, as none of the conversion processes are simple and each entails huge losses of energy. I recognize that it is often worthwhile to suffer such losses to improve the 'form value' of the energy (that's why we have electrically powered hair dryers rather that coal-fired hair dryers), but that is another matter entirely.
Thus, the conversion of electricity into transportation fuels must be viewed more in terms of a business venture rather than something that can happen automatically just to get your energy into the right 'currency' so it can be traded globally.
Having said all this, I fundamentally agree that our currency badly needs to revert back to a type based more on something real. What that should be, I am not smart enough to say. However, it seems to me that one based solely on energy is highly problematic.
Energy as currency is in pervasive use albeit not in standardised forms (outside futures exchanges). It is bought and sold domestically and internationally all day long, generally in terms of oil and oil products bought and sold for dollars.
Note that the key point I am making relates to the use of Energy as a Unit of Measure or Value Standard - against which goods, services, fiat currencies, and new (Currency) units redeemable in energy use value, or land use value may be exchanged.
My proposal deconstructs and separates what are seen to be two of the functions of Money.
Chris Cook -
The fact that energy (mainly in the form of fossil fuels) is probably the world's largest single item of commerce does not automatically make energy a currency. The fossil fuels are physical entities that are bought and sold through the use of various currencies. I don't think there are too many transactions in which one party directly exchanges X barrels of oil for Y megawatt-hours of electricity.
Perhaps I am getting too hung up on the problems of physical energy conversion and not focusing on your main idea that a unit of such currency should be worth a specific amount of energy. But I still have lots of questions.
For example, let us say that I am in possession of something called a One Million BTU note. Does this mean that I can literally redeem that note and receive in some form one million actual BTUs of energy? If not, then what does the One Million BTUs printed on the face of the note really mean?
How and by whom is it decided how many of these One Million BTU notes (or electronic equivalent) get put into circulation? Is the total amount in circulation supposed to be equal to total yearly global energy production, only global oil and gas production, or would it be in terms of estimated reserves rather than production rates? Can't you still have inflation if more face-value BTUs are printed than physically exists? Will the Federal Reserve still be able to make BTUs magically come in and out of existence like it does with dollars?
How does stranded energy come into the picture? Say there is a large solar energy production facility in the Australian outback that only serves one remote portion of Australia. How does that captive and highly isolated energy production enter the global energy currency scheme of things, as it cannot be physically traded with any outside party?Does it still count in some way? Or doesn't it matter?
When oil production drops in the future, what happens to this energy-based currency? Does my One Million BTU note become more valuable because the physical entity backing it up has become more scarce? Or something else?
If the currency is being pegged to say BTUs, are those BTUs in the form of fuel before it is burned or say BTU equivalent in the form or electricity produced by a power plant? How do you avoid double accounting? For example you can have one BTU of coal going into a power plant and 0.4 BTUs of electricity coming out of the power plant. If you count both coal production and electricity production, you will come up with 1.4 BTUs, which is impossible, as you only started out with one BTU.
The devil will be in the details.
The devil is in the detail, indeed, and I certainly don't have all the answers!
What it means is that if you consume One Million BTU's you can pay for what you consumed with anything acceptable to the seller, which may be fiat money, fish, or whatever. But he will be obliged - through his and your membership of the Energy Clearing Union - to accept your note if you present it for redemption against BTU's consumed.
Note here the important distinction from a conventional - dated - debt or futures contract when you can mandate that he performs the contract and delivers money or product to you as the case may be. Redeemable Units make security of payment independent of security of supply.
In a stranded wind situation, Units redeemable in electricity would only be redeemable locally within reach of a private wire.
But Units redeemable in (say) ammonia could be issued and redeemed more widely if the stranded wind is used to fix ammonia - albeit there is an energy loss.
Note that while there is pricing, there is no "pegging" going on here.
So if gas is burnt in a CHP plant there will be the possibility of Units being issued in relation to future production of electricity and also in future production of hot air/hot water. Both may be monetised.
In the partnership structure I envisage, the gas supplier is tied in to a "community energy partnership" (an arguably optimal form of ESCO) as a supplier member, and may share proportionally with the "Operator" member in the revenues from sale of heat and electricity to "Consumer" members.
Using a "Heat Pool" model it is possible to finance retrofitting of (for example) CHP in a new way through an energy loan repayable through a "Heat Charge" to the pool by way of repayment of a loan denominated in BTUs.
As with any monetary system, there will need to be a monetary discipline over Unit issue, both in terms of transparency (who has issued what Units and what the open balances are) and provisions made into a default pool in case of default. This is where service-providers-formerly-known-as-banks could come in, with assistance from experts in the relevant field of energy production.
As carbon energy declines in availability then those holding Units would on the face of it have something more valuable, provided of course that they didn't wait too long to redeem them.
The fact that a charge/provision is made in relation to both positive and negative energy balances, would tend to concentrate a hoarder's mind, though......
Chris Cook -
Thanks for the clarification.
I now think that such a system, at least in theory, could be made to work. The further we get away from a debt-based fiat monetary system, the better, as such can only be viable in an ever-expanding economy, which may soon become a thing of the past.
For this system to work, strong and severe controls would need to be implemented to prevent Wall Street types from gaming the system, like they have done to our current one. As you say: discipline is key. And therein lies the rub, doesn't it?
Sticks and carrots are needed.
In a true partnership, interests are aligned, even though expectations may nevertheless prove irreconcilable, or partners may prove just plain incompetent.
Sticks and carrots; the matter of 'reserve' and 'currency' is not clarified.
A reserve regime balances capital flows between countries which use different currencies. This is done mostly by dollar- denominated swaps.
A currency is a national tender unit. Swiss Franc, British Pound, Japanese Yen. The Euro is a currency- like substance that lacks a lender of last resort. It is an agreement in principle and convenience created for political reasons. It would be very difficult to make the Euro into a hard currency like the 'Silver Certificate' US dollar. In the 'Good Ol' days' there were hundreds of American currencies; most banks offered their own paper monies - banknotes - lent against deposits. Legal tender laws made the US Treasury dollar the sole currency of the US.
A reserve regime does not need a new currency. An end to over- the- counter interbank currency and interest rate swaps would reduce volatility and tendency toward 'credit lockups'. Moving to exchange trading would accomplish this. Going further, taxing these derivatives out of existence would gain the Treasury some cash and remove the derivative overhang that threatens to unbalance capital flows (and umbalances them by inference currently).
That is, after all, what a reserve currency is all about?
Certainly a reserve currency shouldn't play favorites. The status of the dollar as a reserve currency works in favor of the US, inasmuch as they can "print" reserves for their own use. I understand the monetary arguments that are made in favor of using gold as a reserve currency, but most of those boil down to "countries can't just 'make' it, they have to 'earn' it through production of goods and services." Gold served fairly well as a reserve currency but not without some problems. IIRC, major gold strikes -- the conquistadors reaching South America, the gold rushes in California and Alaska -- were all accompanied by bouts of global inflation. And periods when new technology allowed production of other goods to increase much faster than the gold supply seem to have resulted in crashes of one sort or another. In addition, other uses for gold don't destroy it -- most of the gold shipped back by the conquistadors is still in "circulation" as bullion or jewelry or electrical contacts today. I would like to hear more arguments for and against a reserve currency "backed" by something whose other uses effectively destroy it. Not in a thermodynamic sense, of course, but in a practical one.
As we have seen here in many discussions, electricity is convertible into energy vectors such as hydrogen, hydrocarbons or ammonia. The US could simply convert and sell these... Besides, China would not wish be capable of redeeming its Units [based on electricity other than for current consumption and would prefer to hold them in reserve for use in exchange for something else she needs.
China is, in fact, in rather desperate need of electricity; Three Gorges, doubled coal production, and 30+ nuclear reactors planned or under construction are clear evidence of that. Electricity in North America is convertible to forms that could be transported to China, but at fairly miserable efficiencies. And turned back into electricity there, but again at fairly miserable efficiencies (eg, 60% for a combined cycle gas-fired plant).
It is fairly easy to argue that in developed countries, with one large exception (transportation using current technology) and a few small ones, most of the value of the heat-content of fuels, measured by the value of goods and services produced from it, is delivered through the electricity that the fuel can generate. And as is often pointed out here, much of the transportation could be electrified. This would seem to imply that kilowatt-hours are a more natural basis for the reserve, and would play no favorites between natural gas or hydro or solar or uranium. Could your proposal work if the resource "backing" the reserve currency were megawatt-hours generated?
As an engineer, I like the idea of an energy-backed currency because energy translates to "the ability to do stuff" in layman's terms, and as such it becomes a useful unit of trade in pricing goods and services. We would just have to make the money supply to grow and shrink in direct proportion to the amount of available energy. More energy means more money, but it's tied to real wealth in energy and not paper wealth which is subject to bubbles and manipulation. The real challenge is designing a clearing market that efficiently matches money supply to energy supply. If the currency inflated or deflated relative to actual energy supply, that would obviously be a problem. I don't know enough about finance and economics to figure this part out. Fractional reserve lending will inflate the currency out of control of the energy clearing market, unless central banks link interest rates to money supply.
I've thought of how to design currency backed purely by grid electricity. You could link a MW-h note to electricity deliverable on a major grid backbone with exchange rates for the remoteness of the supply and demand. I don't know how that would work internationally.
This is not straightforward to grok, because there is a genuine paradigm shift involved.
The "Energy Standard" - call it a "Petro" - I propose is just a unit of measure for value (as a metre is a unit of measure for length). It could be the amount of energy the average Joe is capable of producing in an hour, or the amount given off in the decay of x grammes of isotope y or whatever.
But IMHO a Standard - in order to be generally accepted and hence be worthy of the name - must be an amount that actually means something to people - so that they can relate to it, and use it as a reference point in exchange transactions.
I propose the energy produced from the combustion of 1 litre of n-Octane at 20 degrees C.
The International Carbon Unit
It's a definition I've lifted from Nick Bell except that the volume used is different, and Nick is referring to the monetisation by fiat of intrinsically worthless carbon emissions, whereas I am proposing the monetisation of the intrinsically valuable energy in carbon.....
What I am getting to is that we are used to the monetisation of IOU's issued by credit institutions, and do not understand the true relationship between credit (ie time to pay) and the circulation of "money's worth" such as goods and services, energy use value, and the use value of land.
I have recently made two major presentations in Iran. The first, last October, introduced the concept of the PetroTrust in the context of direct investment in energy production through the simple expedient of creating Units redeemable in energy use value.
The second in January was to a purely domestic - but extremely high-level - audience, and covered both credit and investment
Introducing the Petro
This presentation aims to show how Units of "Currency" - eg a Unit redeemable in a litre of gasoline - might circulate within what I call a "Credit Clearing Union". I take as an example of such a Union the Swiss WIR Bank where since 1934 Swiss businesses have extended credit to each other and settled debit balances with goods and services rather than with fiat Swiss Francs.
The point is that the WIR Bank
In other words Swiss businesses using the WIR are essentially exchanging "money's worth" of goods and services, but it could equally be energy or land use value) not in exchange for Swiss francs as a fiat IOU object (Currency), but by reference to the Swiss franc as a unit of measure (Value Standard).
We don't realise this, but wherever a barter system incorporates credit or "time to pay" the result actually is a monetary system. It takes a bit of getting your head around.
Returning to your point, electricity, and carbon-based compounds such as natural gas, gasoline, fuel oil, heating oil, all have a use over time, and a fixed value by reference to the "Petro" value standard.
Producers of any of these are all in a position to issue Units redeemable in their production, and they will tend to have a fixed price against the Petro for use as fuel. It is of course the case that other uses might have a greater value than fuel use (eg as a petrochem feedstock) and that would be reflected in the price.
There are too many variations in oil and oil products - and too many vested interests - to even contemplate global implementation in those markets, but I believe that the unitisation of natural gas, and the creation of a new global market in gas is capable of forming a basis for the International Energy Clearing Union I envisage.
The beauty of "unitising" renewable "MegaWatts" and energy efficiency energy saving "NegaWatts" is that we may exchange for value now something that costs us nothing to redeem in the future. eg interest-free loans (in dollar terms) but denominated in energy; used for (say) retrofitting CHP and then repaid out of the energy savings.
It's not Rocket Science.
What an "Energy Standard" gives rise to is what the technocrats (Hubbert was one such) refer to as "Energy Accounting" and I believe that it is the only way in which the necessary transition to renewables may be financed.
Finally, note that while the energy standard may be generic - energy as currency has the ability to be transmitted across borders via electricity or through vectors such as hydrocarbon-based fuels, ammonia or even water (if you think about it) - the majority of value which circulates in economies is actually based upon the use value of land.
In summary, in a "Credit Clearing Union" Units (Currency) of Money's Worth will circulate by reference to a Value Standard (Unit of measure) within a framework of trust (Guarantee Society) which is backed by payments made by both seller and buyer in respect of a mutual guarantee of performance.
Nationally redeemable currency units based upon location rental value are, as they say, another story, and one I covered in Dublin
Equity Shares: a Solution to the Credit Crash
when I gave last year's FEASTA annual lecture.
"The "Energy Standard" - call it a "Petro" - I propose is just a unit of measure for value (as a metre is a unit of measure for length). It could be the amount of energy the average Joe is capable of producing in an hour, or the amount given off in the decay of x grammes of isotope y or whatever."
So are you saying that all Countries peg their currency to this unit?
So the currency of little brown people will be of the same value as the currency of big,white, blue eyed people, (to steal from Lula)?
This sounds too fair and equatible to ever catch on.
Thanks again for all your work and I for one am going to go over this carefully and push it at every opportunity.
Cheers
Indeed not.
They will transact internationally by reference to this Unit, and if they have an energy shortfall (energy debit balance) in international trade then a global "Energy Pool" could be used to invest in energy savings and renewable energy production until their energy balance is in equilibrium.
Their own currencies could be based upon the other value created and circulating domestically, and for the most part this comes from the use value of land, and from the inherent ingenuity, skills, experience and sheer hard work of their population.
Units redeemable in land rental value essentially have exchange control built in, and while they may be acceptable outside the country of issue, they would only be redeemable in te country of issue. So all countries issuing land-based money would get to keep their own "seigniorage". The current position is that the US benefits disproportionally from dollar hegemony.
The idea of a land-backed currency was first detailed by John Lawin 1705, but he did rather b...er up the implementation in France in 1719, and the Mississippi Bubble (and, some say, the Louisiana Purchase) were the result....
Thank you for the interesting post. You have clearly done a lot of work on this, well beyond what you have provided.
Convertibility between energy and water came to my mind as well. So you would have a store of value redeemable in energy credits, with a nexus back to productive land and access to water. I'm trying to build a flow diagram in my head to better understand this. As you say, it's a paradigm buster for those not used to thinking in these terms.
You don't have to physically store reserves of energy to back your currency. Clearing markets could inflate and deflate the money supply in proportion to the energy supply and set exchange rates for delivering energy to specific locations.
What are you trying to achieve by this ?
It appears to be a variation on the Gold Standard, in which a huge skewed distribution on the resources (which is the global reality of the distribution of natural resources), at least with a fiduciary (fiat) money system, there is always the threat of inflation.
Under an energy system the only possible inflation is through the discovery of new resources, or the exploitation of energy/matter conversion. How would you price uranium ore (by it's potential energy content ?).
http://www.sofer.com/blog/keynes-on-the-balance-of-trade.html
"He was the principal author of a proposal—the so-called Keynes Plan—for an International Clearing Union. The two governing principles of the plan were that the problem of settling outstanding balances should be solved by 'creating' additional 'international money', and that debtor and creditor should be treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected, in part because "american opinion was naturally reluctant to accept the principal of equality of treatment so novel in debtor-creditor relationships".
His view, supported by many economists and commentators at the time, was that creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious consequences. In the words of Geoffrey Crowther, then editor of The Economist, "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos."
Under a non-inflationary system what incentive is there for neo-mercantilist and energy rich countries, to address any imbalances in trade. (At least currently they suffer from inflation in the foreign currency reserves they hold, and receive as payment).
http://en.wikipedia.org/wiki/Mercantilism
"Some other systems that do copy several mercantilist policies, such as Japan's economic system, are also sometimes called neo-mercantilist."
http://www.econlib.org/library/Enc/Mercantilism.html
What is the value of so called "intellectual property" or capital (Proposed European sources of wealth) when it can be distributed without cost (in fact failing to distribute it imposes a cost on society), and why cannot the Chinese and Indians use their vast numbers (as they are) as a source of leverage interllectual capital. Just as they currently use cheap labour to facilitate technology transfer.
And not only does the US Military (Proposed source of US wealth) require vast resources to operate, and would the american people accept that it's military be deployed, under foreign control.
More populous and poorer countries could provide troops, more cheaply even if less effective on the ground.
Even renewable energy has a energy vector cost, and given the arguments over EROEI, many do not come out well. Nuclear would be impractical if the embedded energy of the uranium ore was the basis of trade (rather than the cost of extraction and demand/market prices).
If everything is priced in embedded energy who can you add value, or is it just that the unit of exchange is fixed to a limited (and diminishing resource), resulting constant deflation or inflation of the value of non-energy activities to avoid deflation.
Every activity expends energy which is lost to the environment, and radient energy from the sun is insufficient (at least as currently captured).
What are the consequences for countries (including Japan) without native energy resources or cheap labour, what is their sustainable competitive advantage (David Ricardio).
In my view the only future is to expand the energy supply, through the use of Nuclear power (we cannot do this through fossil fuels and renewables are produce a disappointing gain (EROEI).
This would result in inflation in your energy model ? I don't think the global system could tolerate the shock resulting from use of a gold or other fixed standard, domestic use of the expantion of the money supply is another issue.
This is just a drive by comment (first impressions based upon a quick read, not a detailed analysis or deep reflection):
But your proposals seem fundamentally flawed, although I can see the attraction to the neo-mercantilist (China) and energy rich countries (Iran).
How do we address imbalances in world trade, are we going to see global energy mercantilism ?
In fact, renewable energy resources are pretty much infinite, and in the short to medium term the "quick win" from monetising energy lies in reducing energy consumption - even (in fact especially) in countries like Iran with huge energy resources and completely profligate use.
You are quite right. In fact the Gesellian mechanism proposed by Keynes at Bretton Woods is implicit in the Credit Clearing structure I advocate, which operates within a "Guarantee Society" framework agreement.
Both holders of debit and credit energy balances would be charged a "guarantee fee" for the use of the mutual guarantee of performance which comes from the collective membership of an "International Energy Trade Association" aka the market user group (as opposed to a guarantee from an intermediary single point of failure aka clearing house or central bank).
The pros and cons of renewables versus nuclear using an energy accounting/standard approach are interesting, and I lack the expertise to get to the bottom of them - however, I am sure the relevant expertise to do so is to be found at the Oil Drum, of all places.
Certainly in the UK at the moment, the average wind turbine could be funded simply by selling maybe 30 to 40% of its future production to investors as redeemable Units. These are essentially energy-based Exchange Traded Fund units, by any other name, but with the added attraction that unlike ETFs they are redeemable for the underlying. After a proportional share of production is allocated to a developer/operator partner, the balance can and should IMHO remain with the community.
Note for aficianados of futures exchanges that the Unit redeemable in energy I propose is essentially an undated and 100% margined futures contract. If you must have gearing, then you can simply borrow to buy Units.
Likewise, the cheapest energy of all - energy savings (which may have minimal to no running costs once capital expenditure is made) - may well be "self funding" using a "Pool" approach to invest directly in future savings, and to collect the necessary loan repayments by assessments on the relevant property - eg a "Heat Rate" .
Nuclear, on the other hand has both continuing fuel input costs, and also unknown decommissioning costs. So if a large part of the production is "sold forward" as I advocate, then the result could be problematic. Indeed it is this cost uncertainty which has tended to make nuclear "unbankable".
Note that I am otherwise agnostic in relation to nuclear, and am here looking only at the different approach to risk and reward implicit in funding with investment denominated in energy, rather than in "fiat" money with arbitrary rates of interest and rates of inflation.
Since the disintermediated and "Not for Loss" Market 3.0 market architecture I envisage has no place for intermediary rentiers extracting profits, then I think that a more collaborative global market may evolve.
ie the setting of a (high) price for energy and the equitable sharing and reinvestment of the global surplus value which results.
As I said above, both energy debtors and creditors would be obliged to contribute to what would essentially be a carbon energy pool, but which would evolve into an energy pool. On the subject of equitable distribution I have thought for some time that The Wade Formula had much to commend it. If the various nations bring their various skills, resources and experience to bear on our energy resource problems collaboratively within a partnership framework, then I think most things are possible.
It seems like in funding the wind turbine at 30% to 40% of its future production, you somehow need to account for the fact that wind, by itself, is not very useful. It either needs back-up batteries, or needs to be part of a grid which disburses it over a wide area.
When you analyze wind, it requires maintenance at least every five years. There are something like 8,000 parts in a wind turbine. At least a few of them wear out regularly, others will need to replaced as needed. In order for this to happen, a lot of things need to be in place:
1. Factories to make the parts.
2. Good international relations, and good transportation, to ship the parts to the needed users.
3. Maintenance of roads to the wind turbine site.
4. Availability of large cranes and trained staff to service the wind turbines
5. Electric grid in adequate repair to transport the electricity (also requiring many parts and large servicing vehicles).
6. Back-up power that can be quickly ramped up and down (natural gas or hydro) or battery backup.
The above does not include additional grid wiring, to make the system sufficiently stable when handling additional wind power.
If oil availability declines, it is not clear to me that very many wind turbines will able to operate for more than five or ten years, because of all of the dependencies on oil to service the wind turbines and the network the turbines are part of. If this is the case, it seems like wind becomes as "unbankable" as nuclear.
One could theoretically put together a unit that is reasonably self-sustaining (wind turbine, lots of backup parts, crane, multiple batteries which can replace each other when the first ones were out, local grid wires, and replacement grid wires and regulating equipment). The cost of this package would likely be more than the cost of the wind generated, but it would have a reasonable chance of lasting, say, 40 years. Because of the high cost, financing based on the electrical output likely wouldn't make sense.
Gail,
This is what I mean by 'true' sustainability. Any energy capture, conversion, and transport infrastructure must produce enough usable energy in excess of that going to consumers for other economic work, to cover all maintenance and reproduction of itself once its useful life is over. This cannot be accomplished as in your example by banking parts in advance. Everything must be manufacturable de novo. As of right now there is no evidence to suggest that renewable energy technologies have this property. Indeed the evidence is quite the opposite (e.g., EROEI with extended boundaries). As you note, the reliance on oil (or FF in general) is too pervasive. The question is, can we show that an alternative technology (or rather a mix of technologies, to accommodate issues like intermittency, collectively) can produce this excess usable energy to sustain itself AND have energy for other consumption?
It is likely that best-practices organic farming with no FF inputs is feasible if the population supported is sufficiently small. Huge questions remain about the efficient use of photosynthesis as the sole energy input into farming work (e.g., the horse and pasture model). For one thing, is it even possible to make plows needed to do efficient farming.
The farm example can be extended to solar energy technologies more generally. It involves combining food production (for labor) and material extraction, forming, manufacturing, delivery, etc. via converted and concentrated solar inputs (thermal or electrical). Unfortunately I am still some ways away from getting anything like a definitive answer (seriously hoping my work with Charlie Hall & co will advance this faster) but the early results are not promising. A solution might be found in materials science, but nothing involving exotics that would be energy intensive to produce. The best I can see is a small localized population using combination technologies and non-FF farming to produce enough energy for sustainable maintenance. A significant portion of the total usable energy (exergy) produced would go into maintenance with the remainder used for supporting the population in reasonable comfort. Of course what is considered reasonable is subject to personal opinion, I suppose.
George
I agree with you. Neither wind or solar come close to forming a sustainable closed system. Biodiesel might possibly form such a system, on a small scale, because it seems like it is fairly easy to make from oil seeds of various kinds.
I have a very hard time seeing wind or solar or tide being other than part of a big system. Solar panels which are made can last their normal lifetime, but we will never be able to make another one, without a lot of oil and gas inputs.
Even efficiency enhancements don't replicate themselves. You still need an energy source to run the more efficient machinery.
Gail wrote:
"Neither wind or solar come close to forming a sustainable closed system...I have a very hard time seeing wind or solar or tide being other than part of a big system."
There is no energy source that comes close to forming a sustainable closed system with the assumptions you make. If we are concerned that gas and oil go away without anything to sustain the manufacture of parts for energy systems, all energy systems will begin to fail. If you are implying that wind and solar have a negative EROEI, I'd like to see the evidence. The evidence I've seen to date shows a highly positive EROEI;
http://www.nrel.gov/docs/fy04osti/35489.pdf
http://www.wind-works.org/articles/EnergyBalanceofWindTurbines.html
http://www.nrel.gov/wind/pdfs/37942.pdf
What are we left with, then, as our options? Living without energy inputs is the obvious first answer, like the Amish. But the Amish are dependent upon the rest of the energy system for many aspects, including steel for plows, harness fittings, horse drawn equipment (threshers, sickle bar mowers, cultivators, etc), all kinds of hand tools (scythes, saws, hammers, etc), and even metal milk jugs for dairy.
What kind of truly sustainable lifestyle are you envisioning; how will it be powered and what kinds of technologies will continue to be available?
Will, good thoughts.
I'd note that the NREL study uses data that's 10-15 years old. PV manufacturing energy inputs have been reduced sharply since, largely due to thinner silicon wafers, and partly due to new non-silicon cells that use much less energy, such as those from First Solar.
2nd, Cleveland's result of about 18:1 (which seems to get most of the attention on TOD) is based on old data from smaller wind turbines - the trend of increasing E-ROI with increasing size is quite clear in his charts.
"As of right now there is no evidence to suggest that renewable energy technologies have this property. Indeed the evidence is quite the opposite (e.g., EROEI with extended boundaries)."
Have you seen such a quantitative analysis? Could you point me to it?
As I indicated, I am engaged in this analysis right now. Unfortunately the data are weak to non-existent (at least publicly). I hope to develop some approaches next fall when I visit SUNY-ESF and get a handle on what Charlie Hall and his students have been doing to date.
My very tentative conclusions are based on a preliminary model of boundary conditions and estimates of energy requirements. I do not feel prepared to publish until I get some peer consultation and much better data. But even so, this early estimate doesn't bode well. For example, if you consider wide-scale energy inputs to most forms of PV, you end up with energy consumption just to produce usable energy at nearly twice the exergy produced over a thirty year life span (for polycrystalline and amorphous silicon both!). I stress these are preliminary only but the disparity doesn't fill one with a great deal of hope.
Analysis thus far has included labor (all the way back to farm inputs to sustain a family of four), electrical, heating, and amortized embodied energy in plant and equipment (so operational and capital energy investments) based on two solar PV plants who were willing to share data. I'm afraid I cannot divulge details because of an agreement with the companies that this was strictly proprietary information. Sorry. I know this is a weak argument, but it is the best I can do for the moment.
Perhaps if a political mandate were advanced for companies involved in alternative energy to divulge their data we might make some meaningful progress. But I am looking for round-about ways to get some of the data anyway. Wish me luck!!!
Good luck on your work personally I've already rejected the current approach to renewables.
They are a bit of a side show instead I'm focusing on storage which is probably the most important problem to solve with a lot of work on liquid nitrogen. Next I'm focusing on solutions with zero moving parts that can be build in a local machine shop with maybe some basic foundry capabilities.
One side area I want to chase is windmills built out of bamboo or bamboo coats Styrofoam. Basically model airplane construction concepts. And also associated with my LN2 work use compressors in the windmill instead of electric motors. A common design for agricultural windmills is to use a windmill running a compressor to run a bubble pump to pump water.
Instead of coming up with something that requires skilled manufacturing see if there is a middle ground that allows local manufacturing in any reasonable shop.
Instead of economies of scale we do parallelization at the heart of the concept is the piece work business model.
http://www.michigandaily.com/content/cottage-industry-thats-not-cottage-...
Whats surprising to me is that the alternative energy companies have simply used the standard business models from the oil era effectively without question.
I doubt seriously that these companies will last and the technical issues raise by Gail are only the tip of the iceberg.
You really have to go back to the 19'th century and start with vertical integration. Business that do that will be succesful with the world needs alternative energy for real.
George wrote;
"if you consider wide-scale energy inputs to most forms of PV, you end up with energy consumption just to produce usable energy at nearly twice the exergy produced over a thirty year life span...I know this is a weak argument, but it is the best I can do for the moment."
This has already been looked at by NREL (dependent on location);
http://www.nrel.gov/docs/fy04osti/35489.pdf
What auspices are you performing your research under? Who is funding it? Will the results be published in a peer-reviewed journal or government publication?
This is where EROEI gets interesting if you include the energy pyramid i.e the workforce required to produce support install etc. You find that regardless of the nature of the industry the support pyramid is self similar. Most industries require the same number of support people regardless of the nature of the primary industry.
A fairly easy case to study is and isolated manufacturing plant in a small town that employees X number of employees say 500. These towns often have a population of 2-3 thousand. And they often rely on surrounding larger towns for services like hospitals and larger stores and specialists in various trades. We ignore for the moment the support pyramids for the factories producing components for the assembly plant. Regardless the productivity of the primary worker has to be extremely high on a goods basis to support his/her support pyramid. And of course we have complex management systems on top taking in general 10-50% of the profits.
Another example is agriculture we claim that less than 2% of the work force is involved in agriculture but when you expand this to include all the food preparation formerly done at home you find a surpringly large and complex food industry exists between the growth and harvesting of the plants and the final consumption of the food. When 40% of the population worked on the land they also worked as their own food preparers with at most a shared miller used for flour.
If this industry is a primary energy industry then it has to support its own pyramid similar to any typical primary industry and provide energy for all the other support industries.
As near as I can tell this complex pyramid requires a EROEI of 20:1 -10:1 just to break even. Next of course our complex web is based on growth so there has to be some excess this makes it reasonable to assume a growth based return of 30:1-15:1 or so for a growing economy.
This is derived from noticing that on average every primary worker tends towards about 10 support workers or so that provide services or value enhancement of some sort. Assembly, food packaging, Engineering etc. This gives about 10:1 for the workforces alone and then you have the industrial energy needs which are variable but anywhere from the same to half what the workers use.
This surprising conclusion can readily be reached directly by assuming the society works at maximum power and that for most of the time the societies complex web was created the EROEI was indeed in the 30:1 -20:1 range at least.
So you actually know the right answer any calculation that does not come up with a similar result for any energy source can be immediately discarded as incomplete. You simply don't have to argue the details its trivial to know exactly what our society needs to operate it needs the return that its always had.
If we take the direct replacement costs as 26 years with a life span of 30 then 3*10 = 30 or solar cells have a EROEI of about 10:1. Now however we have to account for the fact that solar is constrained by geography. As a first approximation lets assume the average retrofit installation is actually 50% efficient i.e the real EROEI for installing solar cells on our arbitrary situated cities and dwellings is 5:1.
If true a couple of things are obvious first they probably are energy negative next no way can they support the complexity of our civilization directly. I.e we can't just transform our economy to run on solar. We need to design for it and we need to learn to live with less energy. At last but not least we probably actually need much better solar cells. Given silicon has some inherent constraints since its a metal one would assume that realistically organic or organo-metallic solar cells are probably the right answer. Plants think so.
Can you build an advanced society based on renewable sure. It would be quite different from our current one since it operates under different constraints. Overall it would be one that would minimize energy usage to reduce the costs of building energy collection equipment.
Can we transform our society ?
Doubt it a fairly simple analysis shows that it probably does not pencil out. This does not even include ramp up costs etc etc. All kinds of one time infrastructure and complexity transformation problems are ignored.
Can we some how smoothly transition to this greener pasture world of butterfiles and EV's and PV cells on every roof with no pain ?
Even more doubtful far more likely is a partial transformation for some given our concentration of power in our modern society and this sort of inequality places tremendous strain on social systems that would already be strained by falling EROEI of our current energy sources.
Better to just right or current society off and focus on laying the foundation for its replacement.
This not surprisingly means considering viable business plans for this new society. Across the board the current renewable energy industry fails miserably on just this basic level. Not only is it a technical failure but its a massive social failure as well. At the end of the day its just one more massive misallocation of resources before we are finally forced to really think about how to live without oil.
All I can figure is that everyone is so enthralled with the possibility of a silver bullet so that they can continue BAU and be somewhat assured that they can readily transition when needed that no one really looks at the problem. Just like we bought into oil. However unlike oil its doubtful that alternative energy can even deliver at all so at least the last crop of liars and snake oil salesmen will be found out fast instead of being able to leverage a lie for 50 years.
And last but not least you can simply dismiss what I'm saying as some rant but given the problems society is facing I've got no love for this last round of BS spewed forth by idiots.
We don't have time for this crap.
There is a trap in assuming that one has to start looking at the impacts of the workers of a facility; renewable energy sources do not in and of themselves contribute to a higher birth rate, so no additional people should be considered to be added by a PV plant. Those people employed by said plant would otherwise be working somewhere else, on welfare, or starving. The flip side of the coin is that many rejoice when an industry brings jobs to a region or country hit by unemployment. Here you seem to be saying that is a negative. And why stop there? Those people also require food, shelter, and many services, supplied by other people who themselves require food, shelter, and services (from other people). Eventually you would have the entire population of a country on your list (and those of the countries that export to the nation under investigation).
Memmel, you're misunderstanding EROEI. Try to think of net energy instead.
If we, as a society, go from 1000:1 EROEI to 100:1, it makes no difference at all. It means that the energy input cost of providing energy has gone from .1% of the output value of the energy to 1%. That's nothing. For gasoline, for instance, it would mean an increase in cost from $2 to $2.018.
Going from 100:1 to 10:1 is larger, but not very important: energy input costs rise from 1% to 10%, and we start to deplete resources a little faster, but not that much (to be precise, 9% faster). For society as a whole, perhaps the energy sector goes from 10% of the economy to 11%. A bit of a hit (that's a one-time, effective drop in income of 1%), but in the long run not important.
Put another way, a drop in E0ROI from 40:1 to 20:1 only decreases the net energy surplus from 97.5% to 95%, for a decrease of 2.5% -hardly significant.
No Nick I think I do understand it.
I'll convert to money. You borrow 100 dollars to buy and article that only goes up in value and put 20 dollars down it drops in price 20% you have lost 100% of your investment.
When I talk about the pyramid its the leverage that we have applied to energy in conversion to other forms of wealth. With leverage levels of 10:1 to 100:1 obviously a small drop in EROEI can wipe you out. The pyramid of support personal on top of high EROEI is for all intents and purposes pure leverage. If I borrow 100 dollars to buy something that I expect to go up in value and put 1 dollar down and it drops 2.5% I'm wiped out and my creditor also takes a loss.
The basic pyramid of 10 secondary uses or workers for a primary resource gives a leverage 10:1.
At 40:1 with 10:1 leverage you get 4 units of energy per worker. At 10:1 EROEI your get 1 unit or it drops 75%.
Say we leverage energy at 100:1 i.e for every unit of energy we use 100 people are employed.
So if your getting 40 per 1 energy input each worker excess .4 units.
If its 10:1 then the same 100 people have .1 units
Obviously I'm assuming a constant ratio i.e you can input 1 unit period. You either get 40 or you get 10 back. Expanding the number you input tends to have difficulty expanding greater than population. Obviously you can always double or triple your extraction rate as EROEI declines but can you do it faster than population grows ? I.e does the energy industry take up a larger segment of the overall economy ?
Your approach is assuming your free to double your extraction rate so your effectively saying you go
from 40:1 to 40:2. In making this claim your claiming you can effectively simply double the size of the energy industry and it will double its output problem solved. Thats not the way it works in general. Certainly in the US this has been the game we have played and its a factor. But as you approach 10:1 you have to double again to 40:4 now the energy industry is effectively four times as large as it was before.
Now to double the size of the energy industry we would assume we need to pay them twice as much.
Basic economics. Well to pull that off we need to double our leverage i.e go from 100:1 for a unit of energy per capita to 200:1. Now of course the original 100 don't want to give up much energy so they only allocate say .1 units to the entire 100 or these people get 0.001 units or 0.1%.
Hmm sounds good lets convert this to wages.
The average American make say 30,000k annually your average Chinese makes 2000.
2000/30000 = 0.066 or 6% Ok so we shared just a tad more then I claimed but not much.
Now lets assume your ability to extract energy peaks as you pass 20:1 i.e you can't double the industry in we can assume its shrinking. Lets jump right to the heart of the problem and look at it with a 10:1 EROEI or to go with the original ratio. 20:2 Now you can't go beyond 2 and expand.
So now you have 300 people sharing 20 units of energy not 40. How do you solve this problem.
Well hmm lets take 80% of that 100 that we let use a lot of energy and force them to use 6% like the other 200. So 20/280 get 92% of the 20 or 18 units and the remaining 280 get 2 units.
You get the point a massive increase in inequality as EROEI declines once growth of the energy resource stalls. Effectively 90% of the global population becomes poverty stricken.
We have 6 billion people in the world and this implies that about 60 million retain a relatively wealthy lifestyle. Now whats interesting is the population actually grew as EROEI declined initially only a small precentage got the 40:1 in the first place and this was obviously shared on a weighted basis as EROEI declined and the overall energy base expanded. The combination of expanding base and massive and increasing inequality hidden by the concentration of wealth at the top worked to really hide the entire situation for a while and it looks on the surface like what your claiming.
But thats not really the way it works. Given the inability to expand and the ability to not distribute energy or rather the fruits of energy usage equally at the end you get a massive contraction as the remaining energy or its fruits are kept concentrated in the hands of a few.
This is actually how ancient low EROEI renewable societies worked. They had a EROEI of 4:1 2:1 and generally only the top 2-10% of the population lived a nice life comparable to any modern lifestyle if not better because of the use of slaves or servants. If you don't agree with my approach simply work through how they lived under constrained low EROEI conditions.
This is why the modern support pyramid is critical as EROEI declines they support pyramid both broadens and sharpens.
Also it does not really matter what the absolute levels are 1000:1 or 100:1 etc its a problem of halving or doubling the EROEI and hitting constraints on expansion and the distribution through the population of the fruits of labor. This is why I tried to use my earlier example of a "perfect" society with a EROEI of 1000:1 and equal distribution of resources. Regardless of where you are on the curve your changing the resource distribution pyramid once you both peak in your expansion ability and in your EROEI.
Our current case is interesting because I'm fairly confident that as we fall from 20:1-> 10:1 that we reach the point that we can no longer maintain or civilizations complexity.
This implies that its not a simple case of 300 peoples using half the energy as EROEI declines but of say 200 people using the remaining energy with 100 getting zero. As you go from 20:1 to 10:1
your reduce your leverage from 300:1 people per units to 200:1 people for units and simply discard 100 people. Then you split the energy distribution 50:150 when it was 100:200 between have and have nots. 100 lose 100% and 50 loose 95%. 50 are left sitting pretty.
This would be the US with effectively 30-40% unemployment and 20% working to stay alive. I.e your standard deep depression.
Given where things are right now I'd guess we are between 15:1 and 10:1 some of the still existing leverage is acting like momentum making it look like we are between 20:1 and 15:1 but this same leverage probably allowed us to overshoot in the first place as we passed under 20:1.
Given where we are at we a flirting with the inability to even have a technical civilization of any size. A high tech civilization requires a certain EROEI my guess is 20:1. Unlike my other example of going from 1000:1 to 250:1 this higher tech civilization is not endanger of literally losing technology but in losing the equitable wealth distribution. However one suspects that if we ever did reach that point that their are thresholds. Say a civilization with a 1000:1 EROEI can support starflight while one with 250:1 can no longer afford to launch starships.
We of course seem to have fallen off the first step.
"I'll convert to money"
That's not a useful analogy. The EROEI ratio doesn't really have much in common with a equity:debt ratio. It's much more similar to a Gross Profit/manufacturing cost ratio.
Any business would be delirious to have a Gross Profit/manufacturing cost ratio of 10:1 or higher, and if they had that, it would matter very little if it was higher than that. The difference between 1000:1 and 100:1 would only be 90 cents of profit. 1000:1 would give 10cents of cost, and $90.90 of profit. 100:1 would give $1 of cost, and $90 of profit - there's very little practical difference here.
You're focusing far too much on E-ROI, and too little on the basic question of the net energy production which supports society. Again, the difference between an E-ROI of 1000:1 and 100:1 is the difference between an energy surplus of 99.9% and 99% - really no difference. It's installing an extra 1 windmill for every 100 in the windfarm.
Now, you seem to feel we're running out of energy. 1st, the US in particular can easily reduce it's energy consumption quite a bit. For the last 100 years we've had surplus energy - the cost of digging it up, moving & processing it, and most of all, turning it into useful work, have been the limiting factors. In that world, efficiency was unimportant, but we can power a Chevy Volt with 1/20 the BTU's used by a Suburban.
We have had a surplus of net energy: more than we needed. In almost all of the history of oil, the producers' main problem has been what to do to keep prices from crashing in the face of excess production. In that world, efficiency was unimportant, and so we need much less than we currently use.
We can easily use this surplus of net energy as a cushion in the transition to high-E-ROI renewables.
Thanks for putting the effort into explaining this boundary selection problem. Many people doing EROEI analysis conveniently choose a boundary very close to the equipment or process and assume that whatever other components fall outside that boundary can't be significant. Of course they are wont to justify this assumption! Best example I can think of was the corn ethanol work from five-six years ago.
Since memmel has made the case for what boundaries are applicable in EROEI considerations (below) I won't belabor the issue further. But I wonder if you or Nick have actually read the referenced papers? If you had you would see that the life cycle analysis looked mostly at direct electricity costs for building cells and mounting equipment, etc. They were mostly interested in seeing if the energy produced from PV would offset the emissions of traditional power plants over the life of the PV cells. Their inclusion of the energy pyramid factors, such as amortized contributions of energy invested in building the manufacturing equipment or running the farms that fed the labor/management, or fuel equivalents for delivering and maintaining installations, etc. were not considered.
See: Dones, R. & Frischknecht, "Life-cycle Assesment of Photovoltaic Systems: Results of Swiss Studies on Energy Chain", a paper you cited (through what appeared to be the cheer leading efforts of NREL) Both the containing proceedings (Progress in Photovoltaics: Research and Applications) and the paper cited do not support a total energy payback or closed-system self-sufficiency conclusion as you seem to imply.
http://www3.interscience.wiley.com/cgi-bin/fulltext/10006704/PDFSTART
Insofar as your somewhat impertinent questions about auspices, etc. You should know that I am funding this research myself with a little help from my university. I am not out to prove or disprove anything so my financial sources are moot (if that is what you were implying). As for publication, that is the intent of every researcher is it not? But one has to have results that will stand up to peer review before submitting for publication and I explicitly acknowledged that my results are extremely preliminary and not ready for prime time.
George, a few questions.
1st, are you just looking at solar? I should think that wind is much more important. Do you agree that wind's EROEI is sufficiently high?
2nd, we seem to be back at the very difficult boundary question. All of our energy production is, by definition, consumed by society. If one assumes that the entire society (all of farming, government, services used by manufacturing workers, etc) is necessary to support a component industry, such as energy, how could one ever have an overall energy-industry EROEI that was not equal to 1:1, with individual sources above and below 1:1 depending on their relative productivity?
3rd, how do you account for energy quality? Given that electricity requires 2-4 units of primary energy to produce in a heat engine, and that electricity can produce 2-4 units of heat in a heat-pump, I should think that electricity BTU's should get 3x the credit of primary energy sources.
4th, what about other, much less expensive sources of solar, such as CSP, and First Solar's CdTe?
5th, are you using up to date data? For instance, the NREL study uses data that's 10-15 years old. PV manufacturing energy inputs have been reduced sharply since, largely due to thinner silicon wafers, and continue to fall quickly.
1. Yes I am just looking at solar, in part because that is the industry I worked in in the 80s. But the principles involved in determining net energy gain (or loss) are the same. On the face of it wind does appear to have a lower energy input requirement but I don't think the conclusion is in that even with its intermittency issues and high costs of grid build-out it will fare better than solar (thermal or PV). The point is we just don't know. To date most analysis have been more like advocacy than real science. People are making claims to garner support, I think.
2. In the limit you are right. The EROEI of all of society would be 1:1 or slightly better. That is in a steady-state condition. We are an energy web or network, not a strict hierarchy. However, there are ways to analyze networks that have tree-like properties to eliminate the overlap (flow network analysis). We can tell where the primary sources and sinks are and determine how much energy feedback is needed to keep the sources producing. It won't be easy but it will need to be done.
3. Absolutely energy quality (or thermal equivalence properties) have to be taken into account. That is part of the whole issue. That is also why I like to base things on exergy rather than raw energy (or even emergy) since it takes into account coupling the potential difference and prime mover/heater properties and is based on actual work accomplished or accomplishable.
4. Have no opinion at this time. With solar and other alternatives it always comes down to the potential difference between source and sink. Is there enough umph to power the work we want to get done? The fact that you can walk around in sunlight should tell you something in the limit!
5. I'm trying to establish sources of data. I referenced those older papers by way of seeing how other people have tackled the problem.
George one thing you have to remember our ancestors where not stupid I've been to the roman ruins and their lifestyle was actually arguably better than our own minus some medical care ( of questionable value). Same for that matter what I saw in china. Given the hygiene level was high in the upper classes with regular baths and fresh food they only suffered from some diseases we can cure.
Next the biggest difference is probably their understanding of chemistry and maybe some mathematics.
I'd argue on the math side they seemed to develop mathematics as needed and for the most part had a good theoretical basis for the math they explored. I'm not sure differential equations where all that useful given that they rarely dealt with high accelerations. I suspect that cannon balls not apples had a lot to do with us uncovering differential equations. Its only when the second derivative is obviously changing that difference equations become "obvious". Without gun poweder linear approximations and geometry worked quite well.
Sorry to take off on a tangent :)
But my point is that the biggest difference seems to be our understanding of chemistry in a fundamental sense and later or about the same time electricity. These two key area of knowledge lead to advances of varying divergence from our ancestors. Refrigeration something we take for granted is of dubious value if you think about it. Did we really gain anything useful from it ? Think hard.
Without refrigeration we would be limited in how we exploited the Oceans so did we gain or lose ?
Without refrigeration we would be forced to eat fresh locally grown food did we gain or lose ?
Did our medical advances and associate population growth result in a gain or loss ?
And plastics ????
I think you will find that our inventions turn out to have very small real regimes of utility in a renewable low EROEI society.
This is important because if you really think about it you realize that introducing our inventions into a low EROEI society would probably act in general to destroy and destabilize the society.
Even good communication has its downside since people may become disgruntled with their lot believing others have greener pastures. Ignorance is bliss.
The point is if you really dig you come to the conclusion that these people generally did maximize their societies to a large extent under the constraints of low EROEI most of our modern inventions turn out to be questionable.
You have to have faith that they did a fantastic job many of the civilizations lasting far longer than our oil based society looks like it will last. They worked within the constraints and in general on average most people where dirt poor.
Can we do better given our current knowledge levels ? Probably but just as probable the current concepts and assumptions we are making about renewable energy and the problems it can solve are simply false. We are not our ancestors creating a real society under real constraints.
I'm absolutely not agianst renewable energy and technology in the sense I think we can create a truly better society than our ancestors based on renewable using the basic knowledge we have learned and some of the technology but probably repurposed to the point we would find it barely recognizable. We literally and fundamentally have to think differently from the way we do now.
The constraints are completely different from our current society.
I've tried to express this with business plans and social complexity pyramids etc etc.
Maybe I can give you a example of how I think.
I switched from using foam from a can for shaving to a brush. One of the posters on the oildrum exchanged me explaining how to use a toilet with no paper just water in exchange for a strait razor.
A gift that classifies as a true double edged sword. Given the nature of the trade I'll leave my benefactor unnamed.
I got a used belt from the local shoe repair shop for free and am trying to learn how to sharpen the razor. I need to do a bit more work.
My point is I looked at a simple case of shaving the modern way vs the old fashioned way. With a bit more expertise making soap brushes and razors my shaving kit is now 100% locally sustainable as soon as I learn how to sharpen a razor.
This is the right way to think about a renewable society.
Learn to use a strait razor.
memmel,
Forgive, but was this meant for someone else? I'm unclear as to what I said that motivated this didactic bit.
Since you brought up the Romans, I urge anyone who hasn't read it to get a copy of Thomas Homer-Dixon's "The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization". He analyzed the 'fall' of Rome in terms of energy depletion. Quite an instructive read.
Just I think you can understand it :)
The problem is the entire complexity level and partitioning support chain or pyramid real solutions have to deal with and explain how they change this. Whats actually alarming is how little of our technology is really all that useful at the end of the day.
The basic scientific knowledge remains useful but it seems more of as a base to solve completely different problems. When you look at electricity for example the one use case that seems to absolutely require electricity is advanced long distance communication. Every single other use case can be questioned and found non-essential. The minute amount of electricity needed for communication can readily be produced and even here photonics offer and alternatives. And rapid long distance communication is not a necessity its a nice to have.
Setting that to the side if other than communications all we really have thats of true value today is our scientific knowledge then real solutions will by necessity be based on fairly basic principals reapplied. Do we need electric motors ? Can we live without them ?
You look back at the old woolen mills of the 18'th century that replaced dangerous belt drives with electric motors and wonder about replacing them with compressed air instead.
Then you wonder exactly why we need complex centralized cloth manufacturing in the first place can the manufacture of woolen and cotton cloth be moved back to the farm ?
This does not mean you don't use engineering solutions but would it not be better in and energy constrained world to ship only finished goods once directly from the farm ?
If you can build long lasting stable machinery thats readily reparable why not distribute manufacturing to the source. Or maybe in some cases you only distribute raw materials and finished goods only travel a short distance to their use. I'd argue that for the case of clothing that cloth is probably arguably the best form of transit. The combination of both manufacture of cloth on the farm and localization of the farm close to the cloth users gives the best of both worlds. So if you think about it a bit you see that the problem that needs to be solved in this case is probably determining if a it makes sense to distribute cloth manufacturing. Is there and engineering solution thats viable. If so does it need electric motors :)
And of course in this example you get the added benefit that with cloth manufacturing localized at the site that the fibers are produced the system naturally balances if the producer generates and excess of fiber vs demand then they simply cease production of fiber and expand some other form of agriculture. They plant soybeans instead of cotton or graze cattle instead of sheep.
You start seeing that by stockpiling the raw materials at the source and diversifying that other problems of supply and demand become simpler to handle. Intrinsic self regulation starts to propagate.
But also it should be obvious that these are new solution or a reformulation of our knowledge base its not a simple direct substitution problem.
Another didactic bit but I think you understand what I'm saying. I suspect that in 10-20 years a whole lot of people will painfully learn to think this way.
Since memmel has made the case for what boundaries are applicable in EROEI considerations (below)
I didn't see what you are referring to; please state your case in your own terms.
Sorry Will but I'm done. I've written extensively about the background for this analysis in my blog. If you are really interested I suggest you go there. Or wait to see if I am lucky enough to get a paper published, I suppose.
I will point out that you did not answer my question about whether or not you had read at least one of the papers you cited as showing that solar PV has a net energy gain. I provided a direct link (as opposed to a mere mention in a publicity document). If you can't figure it out from what I have already written and the limits of their analysis then, well, too bad.
I do apologize for the misdirection in my post. I meant '(above)' rather than (below). Got a bit confused on the order of events and the nesting.
I've written extensively about the background for this analysis in my blog.
Any particular blog entry about boundary points for determining EROEI? I've looked at the most recent one on energy and don't see anything pertinent to this subject, and sifting through your archives is a time-intensive task.
Raw energy i.e simple extraction or concentration of a resource takes and energy gradient.
Be it a damn, a solar pane, a well etc. You create a gradient using energy. The energy input to harvest energy is in a sense sharpened via quality transformations less energy converted to high quality uses can harvest more energy then was embodied in the quality transformations.
You have to include all of the quality transformations backing the direct extraction of a energy resource and their associated energy usage. This becomes quickly a problem of a complexity pyramid everyone needs a supporting finite and fairly constant amount of medical care regardless of industry i.e workers in the energy industry use about the same amount of medical care as workers in the auto industry etc. Its just a partitioning problem and the pyramids of support workers are self similar. If your looking at the support for the auto industry then a oil industry worker is a member of the support pyramid if your looking at the oil industry then its effectively the same pyramid with the two people exchanging roles. On top of this large pyramid you have the direct energy costs of the particular industry which forms a fraction of the total.
Now as you expand the boundaries you can discern the truth. True EROEI including the quality transformations is always 1:1 for every joule of energy extracted we reinvest it 100% into the overall support web. By including the pyramid you balance the the energy usage equation.
Thus like every worker sees himself as the center of the universe with all industries working to support him expand the bounds far enough and all energy extracted is dissipated into the support pyramid.
When you can no longer expand the total amount of energy extracted and keep it constant to rising on a per capita basis then you have to change the partition of the energy extracted across support industries. If the direct EROEI is declining you need to allocate more energy directly back to the energy industry and remove this from other industries. This does nothing to lesson the demand from the support pyramid and prices increase. Eventually you have no choice but to eliminate the complexity of the support pyramid first by reducing the number of people allocated to a certain task or industry then finally elimination of most of the industry.
Now alternative energy advocates claim they can solve this problem of a shrinking pie with a larger slice of the pie going to the energy industry by using a very small pie and giving the energy industry 10 times as much of the pie. Next and even worse you have to bootstrap the industry off of the old pay so you need a fair slice of it say 5%.
Everyone gets less pie for a long time. Eventually a few decades from now you may grow the renewable pie to the point that the complexity level is similar but with different partitioning but thats a long term situation.
The problem is everyone in the alternative energy industry are a bunch of liars and snake oil salesmen they in general make the claim that they can painlessly transition our current complexity level over to a new resource without any change in either the complexity of the system or the partitioning.
The whole game is a bunch of crap and simply one last ponzi scheme for making money.
Alan's electric rail proposal stands as the only single proposal that actually works it introduces a structural change that forces a reparitioning of the energy pie.
Westexas's ELP proposal also ranks at the top and is really a generalization of Alans rail proposal they change how we partition the pie.
Only after you embark on a repartitioning effort can you introduce meaningful and real transitions to alternative energy sources as they are developed to support the new less energy intensive partitioning of the worlds resources amongst a substantially different allocation of goods energy and labor.
Take my example of refrigeration which is a tool just like alternative energy. It can be used for good say to keep medicines cold in a tropical environment but it can also be used to create huge factory fishing fleets to scour the oceans of fish. Intrinsically its neither good nor bad.
Alternative energy today is making the claim that its capable of being the support source for this vast fishing fleet allowing us to continue to exploit the world as we are today without change. The truth is all it can really do is keep medicines cold it can't really support use in the manner we are accustomed to living.
Intrinsically of course the problem is alternative energy attempts to replicate the same support pyramid that oil supported with far less return it simply cannot be done. And worse of course we are trying to do it as the oil based pyramid itself is failing.
We don't just need to conserve energy we need to develop a new lifestyle that is less energy intensive intrinsically with shorter supply lines and reduced complexity and resource usage in all aspects of life. I'm arguing that the only solution is efficiency via reorganization so society as a whole and the new support pyramid fits comfortably within the constraints of renewable energy resources. Building windmills to provide electric power to suburban homes is a complete and utter waste of time its simply senseless and solves nothing. Same for EV's same for almost every single proposal currently being made.
Building windmills and PV to power electric rail lines is completely and fundamentally different.
Its a fundamental transition.
Sorry to come off as harsh but so little of our efforts pass the bullshit filter that the small amount thats real is discounted as long as the fundamental claims are false and misleading.
I'm actually angry because we can't play games and tell lies this time we have to transition for real ponzi schemes to make a few people rich selling alternative energy lies are not the solution.
Turbines don't exist in isolation of course, and require to be connected with other resources in a coherent way. Dr Gregor Cziszch of Kassel University made an excellent presentation at Claverton re a European SuperGrid concerning his holistic proposal stretching from Morocco to Norway, and from Ukraine to Ireland, and which stacked up pretty well even with conventional economics.
I guess it must have been dissected here...
The point is that by monetising future renewable energy production, such strategic load balancing infrastructure can be financed at nil cost in fiat money terms, since redemptions of Units sold or exchanged for fiat money now, to build the infrastructure, will cost nothing to redeem in years ahead.
I think that the greatest potential of the "Global Master Partnership" monopoly enterprise model I envisage is that it enables a new strategic approach, through ramping up prices to demand destruction levels on the one hand, and giving rise to massive pools of investment from unitising and sharing the resulting surpluses on the other.
The problem with OPEC is not that it is a cartel. It is that it is NOT a cartel.
The requirement is to create two cartels: one of producers, the other of consumers together comprising International Energy Trade Associations. A cooperative of service providers then provide for these IETAs all necessary functions for the operation of the market infrastructure on a "Not for Loss" basis. Any necessary Capital simply comes from selling forward some of the production .
As I said, it is by monetising savings that the real cutbacks in consumption may be made, particularly in profligate producer countries. Indeed, through the use of a global pooling arrangement it is possible to envisage countries essentially being paid (through seigniorage) for actually leaving proven reserves in storage in the ground and monetising them.....
There is already a transition by IOCs from "For Profit" development and transaction intermediaries to service providers operating in partnership with NOCs. I believe that this disintermediation - which is the logic of the Internet - will gradually remove the rent-seeking by intermediaries which is one of the principal causes of the problems we face.
Gail -
While yes, if oil were to suddenly disappear, it would probably not be possible to maintain large wind turbine systems for very long. However, that is not likely to happen, at least not all at once. Over the long haul, it could be a concern, but I think that it is one which could be worked around, given enough lead time.
As to parts, maintenance, construction, etc., wind turbine technology is fairly low-tech, in that there is little about a large wind turbine that could not be manufactured by entities with basic moderately large industrial metal-working capabilities. The blades would be a challenge but not an insurmountable one. No NASA stuff here. I would submit that almost any second-tier country could manufacture and maintain large wind turbines without having to enter some sort of high-tech regime. If you can build a crappy little car, you can probably build wind turbines.
As far as maintenance goes, I think that is largely a non-issue, as almost any entity with large construction capability and some mechanical know-how would be up to the task if given some minimal level of resources.
Now, once we start getting into energy storage to smooth out the inherent intermittent nature of wind power, then that is where the serious problems begin. And those problems begin once wind power reaches some critical fraction of the total grid capacity. I think this will become a fundamental limitation on the extent that wind power proliferates.
To put it another way, if say a country like Cuba, where they still drive vintage 1950s US cars coddled into old age due to the decades-long embargo, wanted to get into alternative energy, I doubt that a modest version of wind power would be beyond their capability (of course, the Caribbean isn't a very windy place except during the hurricane season when it is too windy).
So, in conclusion I would say that wind power is probably the least dependent upon a highly sophisticated technological infrastructure. I view it as sort of at the opposite end of the bell curve in relation to nuclear power.
I don't have problems with modest versions of wind power. After all, windmills were used on farms many, many years ago.
My problem is with the huge, high tech versions. The bigger they get, and the more high tech they are, they harder they are to maintain with less resources. Some of these things can be done, but I suspect that if they are done, there will be gaps when the wind turbines are not operable. Liebigs law of the minimum is a problem that doesn't go away.
Gail -
I'm not sure that Liebig's law is all that applicable here. As I understand it, it was developed in the agricultural area and has more to do with limitations to agricultural yields than with doing things of a mechanical nature.
Servicing a large land-based wind turbine is probably no more difficult than servicing a large municipal elevated water tank. Basically, you need a rig to get up there, and then some stuff to move heavy equipment down and then back up. This sort of thing is done all the time in the construction industry. No big deal.
Offshore wind poses more serious problems. But then again, offshore wind offers.... more wind. We already have a whole variety of specialized marine vessels that can do far more difficult things (such as acting as a tow truck for transporting the damaged USS Cole halfway around the world). Or towing a monster oil rig out to sea.
If we ever get to the point where we become incapable of servicing something as relatively simple as a wind turbine, then we would indeed already be in a Mad Max world.
" it is not clear to me that very many wind turbines will able to operate for more than five or ten years, because of all of the dependencies on oil to service the wind turbines and the network the turbines are part of."
I just have to repeat, here, that "dependencies on oil" are all short-term: electricity can replace everything but long-distance air (and that's small enough to be handled by synthetic or bio-fuels).
Dependencies on oil are short term only if you have enough capital to finance building replacement machinery. In a world with declining energy supply, it is not clear this is the case.
"In a world with declining energy supply, it is not clear this is the case."
First, we're not in a world with declining energy supply. Not even oil is limited by supply at the moment, though we may well see that in a couple of years. In the US, there's no realistic prospect of inadequate electricity caused by real, physical limitations - wind was 32% of new generation last year, and we have enough coal for 200 years, at current levels.
Further, we only need a small fraction of today's overall investment level to maintain and expand electrical production. It seems highly unrealistic to suggest that we wouldn't prioritize energy investments, either by market forces or by government fiat.
Sorry to disappoint you Nick, but we are in a world of diminishing NET ENERGY. The declining EROEI of oil and other FFs since the 70s has been steadily eroding our total exergy supply. Coupled with the realized peak of oil production (and its impact on coal and natural gas) we are now in an age of declining total net energy available to do economic work. This is the real root of the current economic crisis and sooner or later our 'experts' are going to get it.
"Sorry to disappoint you "
I'm puzzled by that remark. On the one hand, I should think that such a thing would be disappointing to any rational observer, were it true. On the other, it's a bit personal....
" we are in a world of diminishing NET ENERGY"
1st, I'd be curious to see the proof of that. Sure, E-ROI has declined a bit for new oil and NG, and there are some lower net-btu contributions to oil, such as ethanol, and NGL's. OTOH, coal and NG are expanding.
2nd, you're exaggerating the importance of E-ROI. A drop from 40:1 to 20:1 only decreases the net energy surplus from 97.5% to 95%, for a decrease of 2.5% -hardly significant.
3rd, it doesn't matter. I said that "Not even oil is limited by supply ". Oil production isn't limiting GDP, nor has it - world GDP grew 35% in the last 5 years, with flat crude production. US growth was hurt by it's trade deficit (and a bubble in it's home equity collateral), not by a lack of oil.
"we are now in an age of declining total net energy available to do economic work"
Perhaps. We may choose to go from Suburbans to Priuses, and reduce our oil consumption by 80% (for that individual example - 50% overall), and that would be a big improvement in every way. Or, we may move to plug-in SUVs, and substitute wind power instead. That would be unfortunate for those of us who don't want the road cluttered by dangerous quasi-military vehicles, but resource limitations aren't going to stop it.
"This is the real root of the current economic crisis "
No, it's not. Our current crisis is caused by a chronic trade deficit, caused in part by unfortunate (for the OECD) distribution of oil resources, and in part by miserable US foreign, trade and energy policies.
From Coal: Research and Development to Support National Energy Policy:
There's no real disagreement here - what disagreement there is, comes from a different frame of reference.
1st, they say "it is clear that there is sufficient coal at current rates of production to meet anticipated needs through 2030". I would argue that's probably all we need, for the transition to renewables.
2nd, they say "there is probably sufficient coal to meet the nation’s needs for more than 100 years at current rates of consumption". I would argue that's certainly all we need, for the transition to renewables (or fusion, for that matter - in 100 years things will be very different).
Finally, they say that there are risks beyond 100 years: the coal is there, but that 1) the US might dramatically increase it's rate of consumption - I think that's highly unlikely, 2) other issues may get in the way. Well, if we really were to face a situation where our economy's collapse could be prevented by digging up our national parks...the national parks wouldn't stop us.
All in all, I'd say that report supports what I'm saying: " In the US, there's no realistic prospect of inadequate electricity caused by real, physical limitations".
I don't see the problem of inflating money supply in proportion to energy supply. We should be so lucky. More energy means more real wealth. The huge problem with our financial system is inflating paper wealth to hide the stagnation and decline of net energy. In a world of declining net energy, an energy-backed currency will be deflationary, but at least it would reflect the physical reality underlying the economic reality.
"More energy means more real wealth"
Not really. More applied energy (exergy, or work) means more wealth.
For the last 100 years we've had surplus energy - the cost of digging it up, moving & processing it, and most of all, turning it into useful work, have been the limiting factors. In that world, efficiency was unimportant, but we can power a Chevy Volt with 1/20 the BTU's used by a Suburban.
I called it "net energy", but yes, I think we have the same idea.
You might be a little off with that 20x factor, though. I doubt the Volt gets the equivalent of 280 mpg (14mpg * 20), even if you compare the heat energy of gasoline with the equivalent unit energy of electricity. Electric power plants have higher thermal efficiency than automobile engines, but you're still talking 35-45% efficiency from heat to electricity minus transmission and charging losses.
Well, light vehicle gasoline engines are small and often run inefficiently, so they're only 15-25% efficient (mostly less than 20%), and my memory was that an Suburban, in real world traffic, got less than 10MPG.
Assume 9MPG. A gallon of gas contains 35 KWH equivalent, so that gives 4 KWH per mile.
An efficient EV like the Chevy Volt gets .2KWH/mile:that's 20:1.
"I called it "net energy", "
Well, I meant that we have had a surplus of net energy: more than we needed. In almost all of the history of oil, the producers' main problem has been what to do to keep prices from crashing in the face of excess production. In that world, efficiency was unimportant, and so we need much less than we currently use.
To me this scheme seems analogous to someone who is having great difficulty solving a complicated mathematical problem and concluding that if he just changes the coordinate system in which the equation is expressed then everything will automatically fall into place. Or to put it another way, what is to prevent the same problems, distortions, and abuses experienced with one system from eventually carrying over in the new system?
How long before various financial operators start wheeling and dealing in some form of energy denominated derivatives whose total notional value exceeds the entire world's known fossil fuel reserves? Will some entity like AIG start selling default insurance on such transactions that they will never be able to make good on? Will people and whole countries take on a level energy-denominated debt that they will never be able to pay back?
Maybe I just don't fully understand how this scheme would work in the day-to-day world of buying and selling, but any sort of centralized global monetary system makes me extremely nervous, more due to political concerns rather than economic ones. No doubt any such scheme will be highly beneficial to some group of people, but not likely to anybody who actually does honest work for a living.
I don't yet understand the details of this approach, but it seems to me to be in the direction of what I have been saying all along needs to be done. Our current debt-based monetary system needs to grow exponentially, for people to pay back debt with interest. This works in the short term, until we start hitting resource limits, as we have recently. Then the inability of the actual resources grow rapidly enough to match the needs of the monetary system causes the monetary system to collapse. As I see it, this is our current problem (and precisely what M. King Hubbert talked about many years ago).
I would see the new system to be much more constrained as to the amount of "funds" available. Unless we find true substitutes for fossil fuels, the total supply of energy resources will decrease over time. To me, this means that the energy based system will not retain value in the way we are accustomed to (and earn interest as well!), but this is the way the real world is. To make a system work, we need to imitate the what is truly available to us.
The nature of our transactions will need to change to imitate the nature of our energy resources. Those who have access to energy (and the means to extract it) will be able to make long-term, based on the amount of resources at their disposal. The rest of it most likely will not be able to make these promises.
As I said above, in response to your first query, an Energy Standard approach within an International Energy Clearing Union actually IS the Energy Accounting advocated by Hubbert and other Technocrats.
But note that energy use is only one of the resources an economy requires, and I believe that a similar legal and financial approach ("enterprise model") may also enable the unitisation of:
(a) the value of location use which underpins over 60% of money created (through interest-bearing mortgage loans); and
(b) the use value of labour and knowledge that underpins the credit of humans individually and collectively.
As for "interest" - don't get me started......! ;-)
We actually had a post on The Oil Drum about the Hubbert and the Technocrats, in December 2008.
Energy is an abstraction like grain and metal. At least gold is concrete. Any system using energy as it's basis of value is even worse that the dollar.
The dollar while being a fiat currency still has a market in which it can be traded. Energy can not be traded. It only exists in its forms. No force can be measured that is not concrete just as no bushel of grain can be measured. Only forms of grain such as corn or soybeans exist. The same is true of metal. Metal can not be traded. It only exists in its form such as gold or iron. Good luck trying to buy or sell a ton of metal.
Energy is the same. It can not be traded. Only its concrete forms can be traded because it is an abstraction. What is being proposed here is not an energy currency, but a liquid fossil fuel currency. What is the point? The Peak Oil aware know that the liquid fossil fuel supply is likely to decline in the future. So that means that the money supply would also decline. At least with gold the money supply is stable since most gold ever mined still exists. This proposal means that the world is condemned to recession/depression due to an ever decreasing money supply. It would be the gold standard on steroids.
The dollar already is the defacto liquid fossil fuel currency because it is widely used and accepted as such. Those who want to buy the liquid fossil fuel they need only have to purchase dollars to do so. Any new currency would have to have the liquidity and the the world wide acceptance of the dollar to succeed.
A currency backed by an abstraction that no one can trade is dead on arrival.
Gold has little or no use value, although it is indeed pretty to look at for thousands of years. You can't eat gold, live on it, or use it to send e-mail.
Energy is being traded in huge amounts daily, and is anything but an abstraction. It has global and worldwide acceptance in exchange.
The distinction I am making is between the use of energy as an abstract Unit of Measure - or reference point - and the use of different forms of redeemable Energy Units as currency. Huge amounts of energy are currently exchanged for value by reference to the dollar as a price benchmark, and this energy could in the future be exchanged by reference to a Petro "Value Standard"
In fact Units redeemable in electricity and in natural gas would not be Petros, but would have a fixed price by reference to Petros, although anything but a fixed price by reference to anything else.
The dollar can and will fall by reference to energy - the only question is to what extent, and when?
This proposal could be massively deflationary. In general, as a monetary base declines there is a responsive decline in GDP and a rise in deflation and unemployment. Gold has the advantage in that it stays relatively constant in supply, while when energy declines there will be a concurrent reduction in the monetary base, causing our debt problems to become overwhelming.
I think that there is pretty much unlimited supply of sunshine, wind and tide to harness. The only question is how we may finance the transition to its use, and do so in a way which tends to make the best use of the energy we do have.
I believe that the monetisation of energy is a necessary, but not sufficient, step towards achieving this transition.
I also advocate the mobilisation of our other resource commons of location/land (upon which over two thirds of money in existence is based) and labour/knowledge. This may be achieved using a similar - partnership-based - enterprise model to that which I advocate for energy, instead of the unsustainable and conflicted forms of finance capital even now falling down around our ears.
Deflation is only seen as negative in an economy rooted in the inexorable mathematics of compound interest-bearing debt. If we weren't so credulous as to accept such anti-value as money, deflation would be seen as the boon it is....
The relatively constant supply of gold is not an advantage, I think, but a disadvantage, since the global economy far outstripped the supply of gold long ago. Moreover, the limited supply and the inconvenient facts of routine hoarding and manipulation, make gold probably the most unsuitable basis there could be for a reserve currency, and I say this from a reasonably informed background in market regulation as a former Director of a global exchange.
I believe you haven't the faintest idea what you're talking about.
The sentiment is right. The direction Chris points is right. But the proposal remains weak from the standpoint of biophysical economics. Essentially, my take on this is that Chris, and many others, are trying to solve a neoclassical global economic problem using the outline of what could be a real biophysical solution. Basing currency on an energy standard is the right way to go, but only if you use the right standard basis and establish some strong biophysical conditions.
The model for all economics ought to be life itself. Living systems obtain material resources by doing biophysical work. This work includes expanding structures (growth) when appropriate, repairing and maintaining structures against the vagaries of injury or entropy, and processing information in anticipation of future requirements (storing energy as might be required in the future). Our human existence in social settings is really an extension of this basic process of life but extended outward through technology and readily gotten energy. Our energy cocoon is just a much more complex and elaborate form of metabolism.
Life, long ago, found the way to handle energy flow to create organization through 'meaningful' work. Evolution established the criteria of meaningfulness. At the root of this is the coupling of energy that is 'available to do useful work' with the work processes themselves. And this is the crux of any attempt to define, standardize, and use a currency. Energy that is available to do useful work is a fraction of the total energy flowing through a system. Its availability depends on its potential difference between source and sink, its form (electricity vs. liquid fuel), and the prime mover/heater (efficiency of conversion in doing work, etc.) The mere existence of an energy source cannot be used as a basis for valuation. Living systems have developed very clever ways to convert raw energy into usable form (e.g., adenosine triphosphate molecules, ATP) and couple that with useful work (e.g., synthesizing proteins, etc.). A monetary instrument in the economy ought to have the same characteristics. The value of the money should be based on a standard of useful work, not just an arbitrary conversion from a unit of fuel.
I genuinely applaud Chris' effort to turn attention to the need for a standardized physically defined basis for monetary instruments. But it should be derived from biophysical models and based on sound physical and metabolic theory rather than as a patch to 'fix' an otherwise broken system. I concur with joule that just changing the framing will not solve the myriad problems, especially given the proclivities of humans to solve their personal metabolic problems by boundless acquisition! We must understand the energy balances very firmly. We must not expect that standards tied to fossil fuels, or even nuclear, will fix anything. Energy is energy is energy. But the only real sources of sustainable energy are the sun, geothermal, and tidal, and then only if our energy capture and conversion technologies can be self-sustaining while producing enough high potential energy to run our economic engine.
For a look at more of these issues you are invited to read here: Question Everything: Biophysical Economics.
George
PS. x, if you think energy is an abstraction, try surviving the energy in a bomb blast. It is true that energy is defined as that which does work, but work is real. If anything, gold as a unit of value is an abstraction.
Thanks, George for that welcome input. A pure energy standard is not "bound" to any particular form of energy, renewable or otherwise. It is merely a unit for measuring value.
I most certainly do not rule out the bio-energy aspects, and indeed recently made an outline proposal to the Scottish Forestry Commission (who were intent on flogging off the Scottish forests to multinationals) for the creation of a "Wood Pool". ie the ability to invest in the energy value of carbon sequestered in trees, backed by fuel use of the existing mature estate - although much of the wood will have value far in excess of mere fuel use, that is what underpins it.
I am also interested in how (say) the use of new hemp-based building materials may replace energy profligate building materials, and how the energy savings may be thereby monetised. The unitisation of the energy value of carbon opens up some interesting new possibities here, I believe, but it is not an area I have pursued (yet) to a pilot scheme...
I don't see "unitisation" and an energy standard as a patch, but a complete change of the legal and financial paradigm. Moreover, it is a paradigm which is emerging quite independently of anything I am doing - I am merely observing, documenting, analysing and publishing my observations wherever I have an audience....
The two most important aspects of any historic monetary unit are portability and consistency in value.
A major probably with energy is that when it moves it loses some value. This is basic physics. It takes energy to move energy.
I'm not sure you can reconcile these two issues.
On the other hand, I'm not sure it's necessary to reconcile these two issues.
It would certainly "relocalize" the economic structure around local energy resources very quickly. And energy depletion issues would probably be taken more seriously if that was the main store of value - instead of assuming that paper money is better than a real resource.
Still, I think the current unraveling of the leveraged banking is a great start. Next up would be ending fractional reserve banking. Then we could transition to a real economy built on a real physical basis of energy, metal or food (or some combination).
This is a generational change, though. Don't expect this to be quick or easy...it's a long way down to a physical based economy.
The reserve currency will ALWAYS be the currency of the current "hegemonic" power. It can only be replaced by defeating the hegemonic power.
Any such proposal, of course, also underestimates the importance of technology. How many barrels of oil are "stealth" technology, and "missile defense" worth?
I argued in October 2008 in Asia Times that US hegemony probably ended quietly - in a Suez Moment - probably in a conversation between a Chinese official and Hank Paulson.
Now, while the US is in a position to prevent anyone else imposing hegemony, it is no longer in a position to impose its own, I think.
I'd not treat China is some sort of unified entity no more than the US is. I expect a coup in China with the winners joining in the new currency under construction and the losers like the US left with a massive amount of debt.
If you did you will find that they are in a situation not all that different from the US with a massive amount of poor investment and bad loans.
Now who knows how it will actually turn out but you can bet that you will have a banker revolt in China if they do decide to create a real currency. They have no choice but to shed the debt and ill made investments of the communist party.
Just like us they have to protect and defend their currency against devaluation by their own government.
Fantastic and relevant post on Mish's site.
http://globaleconomicanalysis.blogspot.com/2009/04/case-shiller-march-20...
Core article
http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematic...
Whats important is that the poster recognizes that expanding the money supply like we are doing now had a differential inflationary effect tending to inflate the prices of consumable goods paid for with cash and do little to stop debt deflation.
Thus if you look at alternative currency proposals all based critically on a move away from fractional banking once quickly sees that they make sense in a world without growth but they do absolutely nothing to help us with our current debt. Most of our current debt will be defaulted on regardless of what you do.
And now like Japan most of the bad debt is being concentrated into the various governments which intend to eventually massively devaluate their currencies since all are doing it this means effectively devaulation against energy. The exact opposite of the proposal outline here. If they don't then they default.
The Banksters don't really care either way they recognize whats going on and are themselves pulling back from fractional lending and amassing piles of assets. Certainly the overall banking system is itself shrinking and consolidating but you have to see the forest for the trees the banks that win this deflationary contraction will be debt free and setting on piles of cash and assets having purchased the best assets for cheap from failed banks and washed assets through the government taking anything of value.
The they probably will eventually move first a an currency basket then to and asset backed currency with energy one of the components. Farmland has just as much value as oil so so a asset backed currency system will itself probably be basked based it makes no sense to ignore other sources of wealth.
The most important thing to recognize is that the Bankers don't care what happens if they are successful in unloading debts onto the various worlds government and then prevent them from massively inflating the fiat currencies into nothingness before they develop a measure of wealth independent of these heavily indebted government then they won.
Peak oil does not even really matter to them as I've argued before they will simply ensure they get a bigger slice of the smaller pie.
So whats surprising is that the right answer moving away from fractional banking then away from fiat does nothing to solve any problems its just a natural evolution of our banking system back to a world without growth. It pretty much has to happen this way. However the fact that Governments have stupidly taken on debt that can never be repaid ensures that the real problem is our governments are no longer solvent. And worse in a new non-expansionary world they cannot hide it.
My opinion is that the only way to truly save ourselves on the financial front is to force the current banks into default dismantle them and create new banks that first no longer practice fractional reserve lending then move increasingly to a fully asset backed currency. Any other solution leaves the world governments crippled.
IMO they have firm control of the governments of the USA, UK and a few other countries but IMO not all governments are under the control of global financial interests. Doug Noland who is very astute feels that China has the ability to engineer the next global bubble because of their huge reserves. IMO China's recent comments about dollar potential weakness are misread in that it is not solely about losing money on dollar reserves-China is preparing the way for the ascent to world reserve currency status by the Yuan. Already, the number of countries for which the #1 customer is China is numerous-the USA has had a favored middleman position but those days are numbered IMO.
My take is that banks as credit intermediaries are in fact obsolete, and that networked Peer to Peer Finance will see a transition by banks to service provision - at least of those who "get" what's happening.
This willnot be a generational shift - it will occur virally, at a similar speed to the adoption of Hotmail, Napster and Facebook.
The misconception at the heart of conventional economics is that unsecured debt/credit - which enables the flow of goods and services and the creation of new productive assets - is functionally equivalent to the secured debt/credit which finances existing assets.
It is not. The massive flow of credit into the economy to replace toxic property-backed credit will be just as static as the credit it replaces. It merely replaces one obligation with another, and a collective State fiscal deficit caused by the lack of taxable income will replace the individual deficits caused by inadequacy of individual incomes to pay housing debt.
Until this new credit = money which has bailed out the rich is lent or spent into circulation, there will be no improvement, and the sad fact is that most wealth has become concentrated in too few hands (as it always does when compound interest on debt is linked to exclusive private property in land). Banks will not lend to projects or people perceived as un credit-worthy, and that problem will not ameliorate for years, if ever.
I advocate - through a consensual debt/equity swap into new quasi equity units in property rentals - the evolution of the greater part of a National Debt into what would instead be a "National Equity".
Well thats rather to point it won't be lent or more accurately probably only lent at exorbitant interest that cannot be repaid with the addition of a significant downpayment. Worse in many ways than a typical loan shark.
You lend money at 20% with 50% down the creditor defaults and you resale the property at say 80% of the market price or +20% over the loan value or the debtor does the same selling at 80% or less of market value to retire the loan.
Goods actually rapidly approach a fairly stable price and the banksters win regardless.
Rapid devaluation in asset prices increases the pool of credit worthy customers even as their absolute savings levels remains low. The combination of high down payment requirements and high interest rates work to ensure banks are effectively lending from reserves not fractional reserve lending. The property itself acts as the asset backing the debt in a real sense since the loan value can be recovered.
Your correct in that there is no improvement and thats simply because elimination of fractional reserve lending simply does not solve our current problems moving to asset backed currencies will be done simply because thats what functions in a deflationary environment it does nothing to solve the mess left over from the previous inflationary expansion.
The only solution is default either through currency destroying hyperinflation or via outright sovereign defaults. The fact that a future monetary system in a declining world must be based off of some sort of asset backed non fractional reserve type of financial system is more a statement of fact it has to work that way if you wish to have any sort of financial system greater than gold and silver coin.
But recognizing this fact does not make it a solution to our current crises which obviously has no "easy" solution.
The problem is thus not our financial system but the fact that the debtor thats going to go into default are the elected government or the representative of the people. The remaining power is thus concentrated in the hands of unelected banksters not only beyond the control of the people but beyond the control of any national government. They have effectively managed to adroitly ensure that its the debtors that default with little impact on the creditors.
Its a power game and the issue is not that the world is going to be a lot crappier for most people but that this crappier world can be ruled as a global entity.
Lets say the Germans won WWII or the Russians won the cold war or say the Americans did. The ruler would be left with a world that was arguably in a lot worse shape than before the war but thats not the point the point is they rule it. The winner does not care what he destroys to win since they are confident that by ruling the world they can generate enough cash flow for the wealthy to more than cover the real decline in average wealth. They can always take more and concentrate wealth further to ensure the rulers are more powerful then any king that has ever lived. When absolutely required to support their lifestyles they can ensure a minimal amount of technical progress continues but thats froth at the top.
The G20 leaders should read "Prescription for the Planet," by Tom Blees. This is it! This is the way to go! The revolution is NOW! Finally, an energy plan that demonstrably will work, using current technology!
The system you describe (oil/energy as a currency) is reality today - it's just that as a currency, oil/energy is a relatively minor currency as it is expensive and awkward to hold in vast quanitites once removed from a reservoir.
True.
But what I am proposing allows producers to monetise what's in the ground in a new way, the conventional way being either to sell ownership (getting rarer by the day) or borrowing against it - which the credit crunch is making increasingly difficult.
More to the point, the global ("Master Partnership") dis-intermediated market architecture I advocate can apply incentives to saving energy and even leaving it in the ground.....
In terms of allowing producers to monetise oil in the ground: stated oil reserves estimates of many nations are questionable (especially since the 1980s reserves inflation and static reserves estimates since). I would think that creditor nations would not trust that their oil reserves are safe in the ground of a foreign nation and would instead want it pumped out and delivered.
In terms of a dis-intermediated market, isn't a market with few producers and a huge number of consumers (such as the oil market) always more efficient when there is an open and low entry cost intermediation mechanism with a profit incentive? Competition ensures that the profits of the intermediation mechanism are reasonable.
In other words, could a company like Saudi Aramco sell its oil directly to every individual petrol station in the world more efficiently than the current distribution system? I would argue that the current system is easily more efficient.
But you are documenting precisely the unsatisfactory situation which applies now, precisely because of the perverse effects of our current transaction-based market.
The point is that the reserves would not be "theirs" in terms of ownership. They have instead a "quasi-equity" claim of indefinite duration (being redeemable and undated) against a "Pool" of energy into which producer nations have made supply commitments, and which is backed by:
(a) guarantees from producing and consuming nations generally, themselves backed by provisions into the Pool;
(b) material in storage or in transit which is owned collectively/ in common but held in the stewardship of a Custodian.
Consumers would have the ability to present a Unit in payment for supplies received from the Pool and emanating posibly from the issuing country but likely from another, with obligations then cleared within the "Clearing Union" framework. Producers would have an incentive to be honest and to allow access to the service provider whose job it would be to verify reserves. Both supply and payment defaults would be made good by the Pool, again managed by a service provider.
The profit incentive - coupled with the opaque and complex "on and off exchange" transaction-based markets we currently have - is what leads to the wild swings and volatility we currently see in the oil markets.
The Pool mechanism I advocate would involve periodic auctions between physical producers and consumers which would produce clearing prices in terms of local currencies against the Petro - at which oil and products would be delivered into, or delivered out of, the virtual global "Pools" of hydrocarbons held in transit and storage by the Custodian, probably in "free zones".
The demand of retail and wholesale buyers would be aggregated or pooled. There would be no profit for intermediaries, who would instead operate as service providers competing to provide the best and most efficient service in return for their agreed proportional share in the throughput.
Retail customers would pay this spot price in local currency, or alternatively use redeemable Units previously acquired on the global market in such Units.
Naturally I would not advocate addressing initially the vested interests of the existing market in crude oil. That is why I aiming at natural gas - and Gas OPEC - where there is no established market, but where there is huge potential for both unitisation to replace secured debt, and for a new disintermediated global market architecture in gas along the lines I describe.
The fact is that to pay a profit to rentier shareholders is inefficient when the necessary capital may in fact be sourced from productive stakeholders.
What would happen to all of the existing debt?
Unitisation of future production replaces secured debt with what is essentially a new form of equity not dissimilar to a redeemable preference share - but redeemable IN KIND, and in a less conflicted legal structure than a Company.
That's why unitisation of property rentals is a
Solution to the Credit Crunch
Long term investment, such as by Sovereign Wealth Funds and Pension Funds would be the source of the funds necessary.
By way of example re energy - Unitisation of (say) Qatargas production and sale of the Units to the Chinese or Japanese would:
(a) dramatically cut the financing cost by replacing existing massive secured debt with a n interest-free loan (interest-free if unitisation is at market price);
(b) allow both the Chinese/Japanese and Qataris to hedge gas prices;
(c) give the Chinese an energy denominated reserve investment which is likely to hold its value better than dollar denominated T-Bills; and
(d) give them a pool of Units which would be acceptable by virtually anyone else, but particularly by those (like the Brits) who buy (or may buy) Qatari gas in the future
I suppose this leaves a lot of left over debt, since we at this point seem to have more debt than assets. We expect this to happen with any system - it seems like a fight will ensue over who has the real right to assets.
any global system tradable by computer will be gamed. The less comprehensible the worse this will be. With energy it will be rapidly depleting over twenty to thirty years so yes to avoid deflation you have to have a rapid ramp up of alt energy. It'S worth a try but all the players have to agree and even a conventional fiat basd distributed systm as th Chinese suggest is not being accepted by Washington so I bet WWIII will proceed anything like this. In the end some group has to be in charghe. Distributed power is arcipe for disaster, see Quebec or Belgium. The ECU will maybe last awhile.
Chris,
Your statement;
"As asset prices and incomes continue to collapse, only the top few percent are now in a position to borrow"
must be wrong, 30% of households owning a home have no mortgage, not all will have an income to borrow much but certainly more than a few % can and do; proof auto sales last month, were they 2-3% of Feb 2007?( ie only only a few percent) or more like annual rate of 8Million( indicating at least half the households who normally buy new cars are still able to borrow and a lot of households can borrow or pay cash for second hand vehicles).
The loan from China to Russia, it's common to have resource companies, or countries to pay back loans in commodities.
Chris, you say "The US, which is the biggest energy debtor by far..". Does your calculation include the energy contained in goods which the US exports (including food, aircraft, and so on)? I realise that on a primary level the US appears to consume more energy than contained in US-sourced coal, oil, nat gas, and nuclear. However, the US exports a lot of this energy in finished goods.
I'm looking only at transactions in energy for fuel use, rather than at the energy embedded in exports etc.
That gets far too difficult!
Plus we would have to look at the energy in goods we imported to balance the equation.
This sounds like a terrible idea.
People will start digging up energy like crazy, quickening the inevitable depletion of fuels.
Then there will be hoarding of energy.
Rentier states will be unjustly enriched and lying about their reserves will be even worse.
How would you borrow 'energy' for capital investments.
Of course, oil speculators would have a field day.
Clearly you do not understand what I am proposing, and I must therefore apologise for my lack of clarity
As is usual for me 'extremely simple' proposals for monetary reform are completely opaque. I do not understand what is being proposed here well enough to even ask an intelligent question for purposes of clarification. In general I do not understand how commodity backed currencies (whether that commodity is energy or anything else) are going to help with the transition to a sustainable economy. It is conceivable to me that properly defined global commodity backed currency could help to prevent or curtail currency speculation and could prevent the U.S. from consuming global resources out of proportion to its productivity, both of which are desirable goals in my view. However, a transition to a sustainable system of production means that our economic system needs to be driven primarily (though not necessarily exclusively) by long term ecological intelligence rather than by the desire for short term profit. How the above proposal does anything to bring such intelligence to focus within the economic system is completely mysterious to me.
Consider a preindustrial civilization whose primary energy source is agricultural production. Suppose that they have highly productive farm land and warehouses filled with several year supply of grain. What does the "backing of their economy" by these grain warehouses mean? It means that their economy will not collapse on a time scale of the number of years of grain supply they have in store. If, however, they are keeping their warehouses full by methods of agricultural production which are losing topsoil and nutrients then this civilization will eventually go down hard in spite of their current economic 'health'.
What this hypothetical civilization needs to do is to develop sustainable means of food production, and if such sustainable techniques result in substantially lowered total output then they are going to have to get used to less material wealth. The fact they have been measuring their wealth in bushels of grain stored will not stop this transition from being painful. Unless you develop a currency backed by future productivity currency reform in and of itself cannot bring about long term economic stability.
Chris, 3 questions:
Wouldn't it be a heckuva lot simpler for oil exporters to solve their problem of over-subsidized fuel, by raising internal prices and issuing ration cards for a family allotment of subsidized (or free) fuel?
If you have a currency backed by more than one form of energy, how do you solve the problem of arbitrage between the different forms, as each becomes more or less abundant? Silver and gold used to have this problem - one or the other would disappear from circulation.
Couldn't anyone who built a wind turbine mint money? Perhaps that's the goal, but isn't that a self-destructing system?
Rationing is one way of doing it, but rationing by price is IMHO better.
So in the US we would gradually raise the gasoline/ nat gas etc prices through the introduction of a carbon levy.
The levy creates a "Carbon Pool" (a network of local pools - this should be on a state by state basis) funds of dollars available for investment in renewables (Megawatts) and energy efficiency (Negawatts).
Redeemable Units in the Pool are then distributed equally to all as an Energy Dividend, and may be redeemed either against renewable energy consumed (from the renewables financed by the Pool) or in repayment of an interest-free energy loan (by the fund again) made to fund energy savings (eg local CHP).
These Units would probably begin to circulate as currency.
eg KiloWatt Cards
You will see that unlike with a Carbon Tax, people would actually see themselves getting something of value in return.
The use of the energy standard, and the "Energy Clearing Union" provide the framework within which the transition will be made. The funding mechanism for that transtion is the "carbon levy" and carbon pool" above.
Note that any community could set up a Community Energy Partnership LLC tomorrow. These could then link up to share the costs of area infrastructure, and hence to regional and national level.
Currently developers come in and enclose the wind commons - I see no reason why communities should not enter into partnership arrangements with developers instead, or more likely do the development themselves.
"Rationing is one way of doing it, but rationing by price is IMHO better. So in the US..."
I was asking about energy exporters, like Iran. Wouldn't it be easier for them to raise the price of gasoline to world market levels, and issue coupons to households for a limited amount of free or low-priced gasoline?
In your proposal, you seemed to be proposing a currency backed by more than one form of energy (electricity, NG, etc). How do you solve the problem of arbitrage between the different forms, as each becomes more or less abundant? Would you have fixed exchange rates? Again, silver and gold used to have this problem - one or the other would disappear from circulation.
Finally, couldn't anyone who built a wind turbine mint money? Eventually supply would overwhelm demand. Perhaps that's the goal, but isn't that a self-destructing system?
Okay, there is good and evil here: having a reserve basis for any/all currencies besides wishfull thinking (current) is a GOOD idea. A good side of the good idea is where day- to- day business causes the conservation or improvement of the basis. A gold basis satisfies this requirement because using a gold- backed currency does not compel the holder of the physical gold to throw a percentage of it into the ocean.
Reserve status cannot be confered, it is accepted. Events on the ground - not in bureacrats' offices - elevate a currency to reserve status. That the dollar is the reserve currency and unit of capital movement is an observation ... not a coronation. The actions of the US government which call into question the value of the dollar are aimed at ending the financial crisis. They are not intended to effect the dollar or its status per se. The same cannot be said about the intentions of the promoters of alternative reserve regimes.
Using an international currency- like 'marker' to facilitate capital flows is superfluous. If any of the trading countries did not want to use IMF marker, whether denominated in btu's, oil barrels or Swiss cheeses, they would not be accepted by the others. Gold was useful for managing capital flows because it is truly neutral and has inherent and persistent value everywhere; markets determined relative values between currencies and gold. Arbitrage was managed by moving gold between countries as needed. Theoretically, the SDR's could do this, but as soon as it was perceived to be the tool of a particular country, its usefulness would cease. Since the IMF is a creature of he US government, any marker would be considered a proxy for the dollar. Why not just stick with the dollar?
Creating an energy basis would be very difficult; the commodity value of the 'energy' could easily be arbitraged against any financial value that the marker would gain in its own trading. If the marker gained commodity value in its own regard, it would generate capital outflow problems similar to what has happened repeatedly; currency runs in Mexico, Russia and South- east Asia. If the marker lost value, it would cause inflationary pressures in poor countries that depended on it; in other words, the marker's change in commodity value would cause downstream cyclical capital and credit problems for the countries that the marker's use was designed to prevent.
Traders could buy or sell energy by using the capital flow markers as derivatives, effecting the capital markets adversely.
Oil would be a poor reserve basis for either a currency or a reserve - capital flow management- regime. Oil in the ground is worthless. After it's burned it's also worthless. The distance between worthless to worthless is very short. The same is true for other prime forms of energy. Here today, gone later today. This is what undid the Petrodollar. Utility/value relationship of oil is biased toward utility and against value.
Consider value: when oil or other forms of energy are valued (priced), it is the ability of the poorest to pay, not the wealthiest which determines the highest price offered. Consider this 'marginal- marginal utility' or that some marginal utilities count more than others. That utility to a small farmer who needs diesel to run an irrigation pump or truck his goods to market is much greater than to a wealthy man who 'needs' to put diesel into his yacht. It is a matter of weight of interest: that of the farmer to survive outweighs the interest of the yachtsman to enjoy an afternoon. Outcomes of marginal utility are asymmetrical. When prices rise, it is the poor who riot and destabilize countries, overthrowing governments ... yacht owners do not. Also, high prices paid to producers destablize by way of inflation. Saudi Arabia would love to sell its oil for $1,000 a barrel. Inflation would rip through the Saudi economy. This could lead to anything including the overthrow of the monarchy.
America could afford $1,000 oil (theoretically) but the nuclear- armed Pakistanis couldn't. The country would go belly- up and who can predict the consequences? The producers have to keep the prices low enough to not scare the horses ... and watch their 'wealth' get burned up by lazy Americans in gas guzzling cars. Life is unfair!
Chris Cook, your appreciation of the source of the problem is incorrect, in my opinion.
The problem is a shortage of real income. The basic idea of credit - or creditworthiness - as a substitute for income is proven false by the unwinding of the past two years. I am as poor as a mouse, but I can borrow $30,000 @ 3% with a phone call. Why can I? Because I have always paid my bills. Why would I? With little income I cannot possibly pay the future bills. Any solution to today's fiscal problems - which are both the continuation and outcome of the past fifty years' fiscal problems - must include more real relative income.
With more widely distributed income, the other tricky cash- flow problems solve themselves. With more widely distributed credit there is simply more inflation leading to widespread insolvency ... the other cash- flow problems become more amplified.
If you mean by, "the last twenty years of debt- diguised recession" do you mean episodic disinflation against a background of steady monetary inflation resulting from Keynesian stimulus and expanding credit? Why stop with 20 years? All the 'growth' of the past fifty years has been inflation. The returns from 'investment' have been anti- economic, that is, counterproductive. What is the marginal return on that last Pizza Hut?
What are the purported aims of this new regime as opposed to venal self- interest on the parts of its promoters? Is the aim more inflation or more deflation? A Niewe Reserve Currency superimposed on existing currencies would be another 'derivative', a Credit Default Swap with a picture on it. If the aim is to conserve, how would the new reserve actually work to encourage conservation? The IMF is a bank, it has its roots in capital flows and none in natural resources. How would it measure anything non- monetary?
The IMF does a terrible job with capital flows! It is a backwater for Marxist or quasi- freemarket ideologues, battling each other in the rest rooms of the IMF building. One group or the other is in ascendency depending on the day of the week. What will change with the introduction of the new regime?
Within the ambit of national currency rather than international capital flows, if the measurement of the reserve basis is switched from oil to 'energy' to power or exergy or whatever, the result is the same; if fuel is CONSUMED in sufficient quantity to form the reserve basis of any currency that level of consumption would serve to diminish the reserve. This is exactly the Rathenau 'war footing' system that exists currently, in all countries where the statistical measure of 'production' - as a proxy for energy consumption - is the measure of increases in the money supply and the ability to expand credit. This is and always has been inflationary: the currency (or currencies) in circulation is NOT diminished in step with the exhaustion of the reserve. The outcome of the petro regime is identical to the current regime, what is the advantage of one over the other?
Eventually the Petro- whatever would be simply fiat, its reserves exhausted and economic activity suspended as a result. There would be no reserve basis at all. At that point its only possible value of the currency could be its speculative commodity value. If it was made a proxy for gold, why not simply use gold?
On the other hand, conservation of the energy- reserve would limit economic activity. Conservation would increase the regime's 'hardness' but would limit consumption. At some point an non- conserving regime would be adapted to satisfy the demands of the populace. Basing the SDR on petroleum would indicate a (short) transition to fiat. Why not just go straight to fiat? Because the regime would be a proxy for the dollar ... why not stick with the dollar.
For the SDR's to be a currency they would have to circulate, and be measured by the markets; their greatest value would likely be as instruments of arbitrage and speculation. As such, they would create far more volatility than they would mitigate. The intention to create these as reserve instruments serves to confirm imbalances that favor certain countries over others. This 'favoring' value relative to currency value can also be arbitraged. China pegs the Yuan to the dollar at a low rate; this gives China a structural trade advantage. The Chinese don't trade the yuan and hold reserves of dollar denominated securities to defend it against arbitrage; that is, the yuan and the dollar have an exchange value in one market and different exchange values in other markets. A persistent outcome of fixed exhange rates is for speculators to use these value differences to attack the weaker currency's reserves - the Chinese dollar reserves have greater value relative to yuan otherwise the Chinese would not hold them. If the SDR's were considered by the market to be a proxy for the Yuan, currency speculators with access to borrowed SDR's would use them to attack the yuan.
The Chinese should be very careful of what they wish for ...
The entire (real) basis of the yuan- based economy is the dollar and other foreign exchange reserves; the colossal Chinese fiat regime is built upon this relatively small foundation. In my opinion the yuan is worth very little. What the Chinese themeelves do regarding FX indicates the Chinese feel the same way about the yuan as I do.
The Chinese are immature, they desire the IMF to bestow upon them a replacement reserve with value independent of the dollar. They believe doing so would insulate the Chinese from any outcome including them dumping their dollar reserves ... at no cost to China. The cynicism and arrogance of the Chinese is breathtaking. Fortunately for all, including the Chinese, it is beyond the power of the IMF to do such a thing; banks can trade in forms of wealth that already exist, but they cannot create it.
Martin Hutchinson suggest the Chinese go onto gold. He confuses national currenciies with international capital flow management as well:
The result again would be China losing its reserves even if it managed to get its hands of some gold. What would be the price of gold in yuan? This is an interesting question becaue the only reason for a high price of yuan to gold would be China's dollar peg. The yuan would be a proxy for the dollar even if it wasn't perceived to be so. The US buying gold would be the same as the Federal Reserve buying longer termed Treasury securities. With small amounts of gold available for a flood of dollars, gold prices would skyrocket and the result would be instant dollar devaluation. Oops! There go China's dollar reserves! Perhaps this predicted outcome is incorrect but the Chinese need to dollar peg for the trillions it earns in trade with the US. Abandoning that trade by abandoning the peg would be very risky for the Chinese. It is hard to see that the outcome would be unfavorable to the Chinese; the uncertainty would cause them to defer.
Even if this exchange issue could be avoided, questions would arise from liquidity; whoeever sold the gold and bought the yuan would charge a high discount - devaluing the yuan immediately - since there is little market for yuan and the gold seller would not want to get stuck with fistfuls of them. If the gold seller lent yuan to US interests for dollars, the yuans could be sold back to the CBOC for that bank's dollar reserves, shorting the paper yuan for dollars against the 'gold' yuan. This would cost the Chinese their dollar reserves and cause a FURTHER devaluation ... but could actually be profitable for the Chinese since they would gain more perhaps on devaluation - and on more trade to the US - than they lost through the raid on their reserves. Then, they could sell the gold and make money (dollars?) on that!
BE ALL THAT AS IT MAY:
None of this currency nonsense reaches the non- economic issues that are most central; the development activities that are causing the rapid ruination of the entire planet. A Niewe Zimbabwe Dollar or whatever the dudes @ China.com want to call it is completely irrelevant.
I have ranted about this here and here and here and here.
Enough already ...
I am entirely in sympathy with your critique/rant.
You are quite correct that in my article I am addressing how one might re-base the monetary system
But that is only one strand of my work, and one aspect of the necessary holistic solution.
My point in mentioning the lack of creditworthiness is simply that through the lethal combination of compound interest on debt, and absolute private property in commons such as land, resources have once again become concentrated in ever fewer hands, as they have always done throughout history since Babylonian times, at least.
When I said the solution is fiscal, what I mean is that systemic fiscal reform is necessary, and by that I do not mean the sharing of risk - which is what credit clearing within a guarantee society is about - but the sharing of resources, which you refer to here.
Firstly, let me say that I believe in the taxation of privilege rather than people.
So I advocate three key policies.
Firstly, a Location Benefit Levy - or tax on land rental values - which is the tax advocated by Henry George in respect of the privilege of the exclusive Commons of land/location.
Secondly, a Carbon levy - which is a tax on the privilege of the exclusive use of the Commons of non-renewable carbon energy, although I would also make a lesser levy on the "enclosure" of renewables.
Third, a Limited Liability Levy - which is a tax on the gross revenues of "For Profit" entities whose investors benefit from the privilege of Limited Liability.
I believe that these are not only equitable, but they are also simple and unavoidable, and sweep away huge unnecessary costs both in the public and private sector.
I would also get rid of means tested benefits, and from the proceeds of the levies make a payment as of right - a National Dividend - to all citizens.
All nice and Utopian of course, but in fact I believe that the adoption of the partnership-based legal and financial frameworks I advocate will enable us to introduce such sharing arrangements extremely simply and straightforwardly. I think that it is entirely possible that such "Peer to Peer" finance will spread virally at the same rate as Napster, Hotmail and other similar.
Indeed, as I say here
http://www.slideshare.net/ChrisJCook/equity-shares-a-solution-to-the-cre...
I believe that the "Unitisation" of property/land is the only way out of the current Credit Crunch.
Essentially I am advocating a debt/equity swap on a massive scale.
The reason I am optimistic as to the outcome is that businesses are already adopting partnership solutions - the use of LLCs and LLPs is now pervasive - and they do so because:
(a) they can; and
(b) they work.
In the networked global market architecture I envisage there is no central IMF style issuer. There is no "organisation" at all in fact. The clearing of credit and - more to the point, the sharing of resources - takes place within an agreement I call a "Global Master Partnership".
This partnership is not an Organisation- it is an agreement. It doesn't do anything, own anything, contract with anyone, or employ anyone. It is the framework within which the members operate, and a market service provider consortium provides necessary services to the market users.
So there is no central issuing authority of a fiat "Petro". God preserve us from that.
The Petro I advocate is a Value Standard accepted by market participants as the pricing reference for the exchanges for value of the Units which THEY issue and redeem subject to a mutual guarantee.
Time presses and an inadequate reply would be as bad as an incorrect reply.
One of the things that is taking place in the 'greater world' right now is a realignment of ambitions. As time and events pass, the impetus to do certain things that seemed important just last week ... are waning. Just today the Middle East countries abandoned their common currency initiative. It was designed mainly to combat the effects of dollar inflation on local economies transfered by the oil producers' dollar peg. It is hard to see whether the oil/finance ministers have calculated the effects of deflation on their ambitions ... or whether alteratons in their schemes are to be forced upon them as it seems to be the case already. It is also a question whether this deflation will be permitted to benefit the publics of these countries or will it become an evil tool of authority. This is very critical, as you pointed out with the Iranian example, the relationship between ruled and authority is uncertain.
This uncertainty is where the issue becomes complex. There are agreements and 'agreements'. Most come up short and the time for grand gestures is comeing to and. One one hand there are economic imperatives and on the other are shifting politics that warp the context for the imperatives. Bretton Woods was more of a political agreement than an economic one. It presumed American politial dominance. It seems to me the G20 presumes American dominance; that what the Americans agree to do or agree to surrender is what matters. This assumption is also being altered by events.
Just sticking to the theme of re- basing the capital flows and monetary system it is apparent that there is one common idea or ... reflection of the creeping (international) sense that things are horribly, horrible wrong and that any idea to escape consequences is fair game to try. A new reserve regime ... so goes this line of reasoning ... can do little harm to anyone except the (greedy) Americans and they will go along anyway. This is because they are already printing massive amounts of liquidity and are thereby overcommited to a particular 'stimulus' tactic that has eliminated room for to maneuver. As part and parcel of this tactic the Americans are certainly agreeable to surrendering the hegemony of the dollar ... for the good of the world's working people as well as to stimulate economic 'growth'.
"In for a pence, in for a pound" I think this is how it goes.
Bold experimentation is fine, but the cause and effect relationships must be thought out; but for all concerned and to unintended consequences; there is only one chance to get things right. An agreement is not of much use if its implementation is so fraught with hazards that the risk can only outweigh any possible benefits ... or would precipitate the catastrophe the effort is designed to prevent in the first place. Adopting a new reserve regime is far easier when there is less marketplace tension. The interface between adminstration and the markets is the void that is likely too hard to leap. The markets are used to the status quo and in such dire times as these there would be great resistance any change unless it is clearly beneficial to market participants first.
I might take your idea one step further and suggest no currency basis at all ... and rely on continuous adjustments within the various bilateral agreements - the framework providing for a constant alteration of value assessments over the term of the agreement. The analog is an airplane that is unstable by design, too unstable to fly without a computer onboard to continuously adjust flight control surfaces. A third party could hold various swaps as hedges against risk exposure by either party, the swaps themselves would be the basis. In essense, the parties would be printing their own reserve currency based upon what they are trading ... for the term of a particular trade. Intermediated barter ... or a more organic merchantilism would be a way to describe this. It would be a linear progression from the abstract scheme used today to an even more abstract scheme, except trading goods not hedges would confer value in the aggregate. The concept rather than any particular trade of group of trades would become the 'currency'. This would be market based; it might better fit a future world where there is more (physical) risk and almost no supply- chain 'trade'. This would also be effective even if there was a dramatic slowdown to oil/energy trade ... The hedges would be imperfect, as they would settle after the fact whereas the hedges applied against the dollar reserve currecy would be - and are now - more immediatele effected by speculation. Trading the swaps without holding some goods would be pointless because it would not effect the aggregate of goods trades.
This begs the question; why is the current approach necessarily best approach? Slowing down capital flows would be a good thing and a more regular settlement process might allow uncertainty to gain hedge value on its own account.
A clearing house would make the non- reserve reserve easier to manage. The swaps would indicate the level and parties to trades and the aggregate could be measured. Sub- markets where trading swaps denominated in whatever goods are traded physically at any moment would prevent a particular value relationship from becoming a denominator ... and thence being arbitragable against. This, in my instinct ... that this would avoid a problem with a work or energy- work based reserve marker. Such a marker would likely in the end act as the dollar does today and the effects of the dollar on trade that originate in non- trade environments... like the Fed's printing press.
As far as the rest of your scheme ... it is also worthy of much more time and critical analysis than is available here. Your overall scheme is too grand in sweep to consider in a comment, even a long post would not do the topic justice. I personally favor decentralization with the minimum of interference needed to keep the bandits outside the banking houses. The wealth of a country lies in its people and what they do ans not with the governemt and what it fails to do. Or fails by attemptng to do.
I guess I consider myself to have at least one foot in the Menger/Von Mises camp.
There is a lot of desire to deconstruct the modern corporation and reduce its baleful impact on politics - more that its economic impact. Corporations have corrupted politics almost past any point of no return. Of course, any entity can becme corrupt and corrupting particularly if it becomes large and powerful enough.
Is there a time value of energy? Is it negative, since it costs money to store oil, or is the opportunity cost and default risk higher on a joule than a dollar, so rates should always be positive?
Do workers get paid in Watts? Do they get paid at a multiple to the amount of energy they put in? Is manual labor more expensive than white collar work, because the workers put in more energy?
So an education will give you the rights to consume more energy? (I guess this one holds water)
If you're out of water, instead of it just costing energy and dollars to desalinate, it will just cost energy...or, how's that work?
How do I pay my electric bill, I just have to replace what I consume? Then how does the utility earn a yield? For that matter, how does anyone earn a yield, if energy can't be created or destroyed, yet it costs energy to produce it?
I think there is a reason credit and debt can't be measured in current derivatives of SI units, especially units of measure which can be consumed/converted into other forms of economic benefit.
...just thinking out loud. It's late, and I’m tired. Forgive me if my rhetorical questions sound harsh, they are purely the words of a devil's advocate.
Chris,
Sorry for throwing in the kitchen sink in my previous post, but I was just reacting to what you posted.
Everything from alternate energy, to Iranian issues with taxation on energy, to the theory of money and how banks operate.
And I can take issue with them all including your world view.
But on a global scale you have to address the inequality of the distribution and consumption of resources, using a fixed or deflating unit of exchange, like a gold standard or the Petro.
http://news.xinhuanet.com/english/2009-03/24/content_11063193.htm
No that is a mercantilist view (as endorsed by Chris Cook), and is not shared by everyone, as I stated explicitly, one way to address a global imbalance of trade is inflation for the debtor countries currencies. Especially the reserve US dollar. Removing this safety valve, would not remove the underlying source of strain (mercantilism, resource distribution/consumption, trade imbalances etc).
Chris Cook:
Good for Qatar, but there was nothing to stop Qatar bartering future LNG production for investment in infrastructure with China or anyone else, they chose to use the current financial system to achieve the same ends.
The Wade formula for example, is just an attempt to re-draft the deals or structures already in place.
http://www.alertnet.org/thenews/newsdesk/L14929634.htm
You have the additional problem with the Petro, that we consume (and for economic purposes destroy) energy, most of which comes from depleting resources and is subject to other constraints - e.g. climate change). You cannot talk about renewables been in reality free, and or inexhaustible or infinite. (But Gail covered that issue to some extent).
Chris Cook
History suggests another outcome, If you still want a neo-mecantilist world, see the following:
http://www.panarchy.org/keynes/national.1933.html
There is much wrong with the western banking system and the theory of money as currently practiced.
But on an international scale you have to square the resource distribution/consumption circle in world trade and mercantilism (defection in the prisioners dilema).
The best we can hope for is a Nash Equilibrium, a unstable form of which, is what we have at the moment.
I think I covered most of your points in my response to Steve.
My article addressed primarily addressed Debt/Credit/Money - which is one of the Twin Peaks of finance which have caused our problem.
The other Peak is "Capital", and the whole subject of property relationships, equitable taxation through sharing of resource commons, and the "For Profit" business model.
I have probably done more work in relation to this aspect that to any other, through the development of what I call a "Capital Partnership" enterprise model.
Chris,
A fascinating subject that bears further scrutiny and shaking-out; the devil truly is in the details, but your examination is a much needed first step.
One point I wanted to focus on is your statement "dispense with the deficit-based “Cap and Trade” mechanism which, like emissions trading, attempts to monetise by political fiat something with no intrinsic value".
If one assumes that AGW is occurring and will continue to occur, then emissions reductions will have value in the mitigation of ongoing and future impacts to civilization, with discount rates being a subject for debate, as well as who bears the effects, as in "The Tragedy of the Commons". If one does not assume or factor in AGW in any form, then your statement would be correct.
Also, how would this energy based monetary system devalue an energy source's worth based on pollution streams such as SO2, CO, O3, mercury, etc? Or would you look to other mechanisms (i.e., regulations and fines) to handle this?
The following story may illustrates some of the problems:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/511057...
A fixed exchange rate in Petros, would prevent currencies from devaluing,
relative to each other but not address the causes of the imbalances. Even if in the current system, some of the devaluations are politically motivated and actually operate to increase imbalances.
Sorry to be negative, but you appear to be starting from a set of assumptions, and assuming the solutions are simple, at least in the context on international trade.
As for 'cap and trade' this is simply a piglovian tax on a negative externalities, as per coase's theorem. (If you with to pursue the background).
You could just raise the price of energy, but this should be internal to the countries (like the tax on fuel in Europe, another piglovian tax) to prevent the capture of value by the producers.
You do not need to use energy as currency to impose piglovian taxes.
For reference:
http://en.wikipedia.org/wiki/Pigovian_tax
http://en.wikipedia.org/wiki/Coase_theorem
The Oil Drum | Banking on Energy
Correct.
Money and Capital; Monetary and Fiscal are like Chalk and Cheese.
Luis de Sousa suggested I might post on the subject of market architecture and investment/fiscal issues. If people are interested, I could certainly do that in due course,although someof my thinking can be found upthread.
This fascinating post is up on Seeking Alpha, where I posted my article as well...
Oil as Money and the Decline of Energy Earnings
While helpful, the chart below from the article identifies only the relationship between oil prices and the DOW, and does not cover electricity prices. Different categories of industry will vary widely in the amounts of energy source they (currently) require.
A new currency will evolve de facto as soon as major international traders demand that their payments be tied to an index of energy or other liquid tangible asset, like metal, protein: you name it.
When dollar inflation spirals it won't take long.
Global currency and governance is probably going to be a natural outcome of our increased communication speeds.
Isaac Asimov said that an empire's size is predicated on it's speed of communication. The Roman empire was dependant on the horse and so could not grow any further.
I recommend the Emergy as the currency. The total embodied energy of a commodity.
http://en.wikipedia.org/wiki/Embodied_energy
A better measure of value than embodied energy is negative entropy or syntropy. We may expend energy in the production of a commodity - but it is not the energy expended but the useful syntropy that has economic value.
http://en.wikipedia.org/wiki/Negentropy
Carbon tax is justified as a form of pigovian tax, however, in the form of cap and trade, it is an attempt by industrialized nations to grab the proceeds from the sale of pollution rights, the costs of which will be passed on to the wider consuming public of the world. Yet another private privilege/public liability scam.
This entire idea misses the point. The fundamental purpose of money is to provide a stable store of value to facilitate trade. I see nothing in this convoluted idea that would accomplish that goal. What it would do is create an incredibly inefficient system of subsidies for "renewable energy" administered by, essentially, the UN. The rest of this discussion is just noise.
However, the flip side of your assertion about stably storing value is that "money" operates as a social contract with certain inherent promises built into that contract.
One of those contractual promises is that society, in general, will supply some good or service of essentially same value to the bearer of the money (i.e. currency) at the time and place where the bearer presents the "money" for redemption.
That begs the question of what happens when society cannot fulfill its part of the bargain?
In other words, what if society has insufficient oil or insufficient other resources to make good on the promise?
At that point you have a breach of the contract and the "money" no longer provides a stable store of value. The system collapses.
Are we there yet?
Capital is a store of value. Credit facilitates trade.
As for Money, I agree with E C Riegel's analysis.
Wherever a barter system incorporates "time to pay" or Credit, the result is a monetary system. The proof - since 1934 - has been the Swiss WIR bank, which essentially uses the Swiss Franc not as a "currency" and still less as a "store of value" but simply as an abstract Unit of Measure or Value Standard.
What subsidies?
Firstly, it is impossible to subsidise an energy value standard, any more than one could subsidise a metre or a kilogram, which are also Units of measure.
Secondly, the unitisation of energy by producers to give energy-based currency (circulating alongside other currencies by reference to the value standard) actually gets rid of the need for subsidies.
And what on Earth does the UN have to do with anything?
Are you sure it's the idea that's missing the point?
Chris,
I think I understand what he is trying to say.
The UN would represent a further diffusion or spreading out of the responsibility to redeem the value of the globalized currency.
In cases where you have a bearer of US dollars, then it is the US government that is made responsible in some way to assure that the US-backed money does not become devalued too rapidly (due to hyperinflation).
With a globalized currency, the US government can wash its hands of responsibility and say, Hey it's not us; it's some global institution that is responsible for seeing to it that this new global currency retains its value. Go complain to the UN.