BP’s Chief Economist Flunks Logic

I sometimes read the Foreign Affairs magazine, as the articles are written by influential people, some of whom appear to be remarkably knowledgable and sane.

However, trying to read a recent piece by BP’s Chief Economist Christof Ruehl was a journey with little progress, so I’m sorry to admit I couldn’t bring myself to finish digesting it.

The man’s head appears to have been spun, or he might have had a mission to spin his readership. All the same, it’s worthy of a Koan award (see YouTube on this page).

“Global Energy After the Crisis : Prospects and Priorities” by Christof Ruehl, Chief Economist of BP plc, writing in Foreign Affairs Magazine, Volume 89, Number 2, March/April 2010 :-

http://www.bp.com/liveassets/bp_internet/trinidad_and_tobago/STAGING/home_assets/christof-ruehl-global-energy-after-crisis.pdf

NOTES ON THE ARTICLE

“Nonrenewable fossil-fuel energy and nuclear energy are produced by first converting and then burning natural resources.”

I beg your pudding ? Nuclear fuel is “burned” ?

“Because these resources are finite and unevenly distributed, they seem to become increasingly hard to come by when global economic activity expands.”

They don’t “seem” to become harder to come by, they “actually” become harder to come by, as time goes by, because they’re finite. It’s got little to do with the state of consumption rates in the economy. It’s got to do with the cumulative extraction amounts compared to the finite total sum.

“…the fear that the atmosphere’s capacity to absorb carbon emissions caused by humans may be exhausted long before humans’ capacity to find hydrocarbons in the earth’s crust and burn them for energy is.”

No, really, there’s no problem with continuing to pile increasing amounts of Greenhouse Gas into the atmosphere. The atmosphere can take it – it’s got over 99% capacity left. The atmosphere can continue to absorb carbon emissions for practically ever. The problem is that the carbon dioxide is not being absorbed out of the atmosphere fast enough by the plants and strata on the land and at sea to sustain a habitable environment.

“In many places, the main means of addressing these concerns has been to rely on markets, which make it easier to diversify supply and demand, substitute fuels, and make the most of the gains in efficiency brought on by technological change.”

I’ve got some news for you – the only substitution in fuels going on at the moment in BP is from dirty fossil fuels to extra-dirty fossil fuels. And as for technology, well, the more technology is deployed, the higher the carbon emissions. As technology gets more efficient, it gets more economic to roll out more technology leading to more emissions, not less.

“markets…the idea of putting a price on carbon has extended this approach to protecting the environment.”

Pardon ? How does putting a price on increasing volumes of trade protect the environment ? The more fossil fuels get traded, the more carbon emissions there are.

“But now global energy consumers are losing trust in these pricing mechanisms. In the five years prior to the summer of 2008, oil prices rose by 370 percent, traded coal by 460 percent, and natural gas by 120 percent. The prices of other raw materials, metals and even food increased in lockstep.”

Well, it’s not the price on carbon that’s caused this massive rise in the cost of energy and basic resources. Carbon pricing has not been comprehensively applied yet, although there are strong intentions to do so, even though there has not been much acceptance of the idea (for a range of very sound reasons).

“The only other time since World War II that prices rose that much was in the early 1970s. Back then, as recently, prices were driven by a surge in global economic growth.”

That’s potentially a bit of historical revisionism – in the early 1970s the American oil production peaked, so you could say that higher prices were a direct result of scarcity conditions.

“Yet the composition of growth differed markedly in these two instances. In the 1960s and early 1970s, economic growth – and with it growth in energy consumption – was driven by mature high-income economies; in the early years of this century, emerging-market economies got into the driver’s seat.”

It wasn’t the “driving seat” the emerging-market economics jumped into. The economic growth of such countries as China was the result of the globalisation pact – outsourcing production to China created massive trade volumes.

“Measured at market exchange rates, the contribution to global growth of the economies outside the Organization for Economic Cooperation and Development grew from about 20 percent in the early 1990s to 50 percent today.”

Note : the measurement is described in units of percentage of global growth. So, this is not the size of whole economies that are being compared, but the rate at which they are growing – that is, creating debt and printing more money to put into circulation.

“And the rising influence of the developing world is disproportionate in energy markets: the non-OECD countries’ share of the growth in global energy consumption rose faster than their share of global economic growth over the same time period; it accelerated to more than 90 percent.”

Well, that’s to be expected. The non-OECD countries have not been great users of energy in the past, but to support their globalised activities, they need to use more energy. This is a real amount, counted in real units of energy, but priced in US Dollars.

Economic growth will be denominated in US Dollars too, so all prices depend on the purchasing parity power of the US Dollar, which has been sliding deep, deep down as the American economy has been falling of the Ponzi Scheme cliff.

“Energy intensity, the energy needed to produce one unit of GDP, in the developing world is three times as great as it is in the developed world. Using other exchange-rate definitions lessens these diffferences…”

But…GDP includes exports and includes imports…if China (for example) was selling raw materials at a discount to the United States (for another example), then their GDP will always be at a disadvantage.

It’s not energy intensity we are looking at here, but trade parity.

And of course, using other Exchange Rate definitions will certainly lessen the differences !

“Something will have to give over the next few decades: either energy efficiency will have to increase or growth in the emerging-market economies will slow down. No one wants growth to slow, but how can efficiency increase, especially in light of the economic crisis of 2007–9? On the back of tremendous volatility in the energy markets, the global recession caused demand to fall, spare capacity to rise, and prices to drop for all major fuels.”

Why does anything have to “give” ?

And you cannot compare energy efficiency with cost efficiency, as Christof Ruehl does here. Energy efficiency actually still implies Carbon Dioxide emissions efficiency, as over 90% of the energy in major countries is Fossil Fuel-based. It is still comparatively cheap to burn Coal, compared to Natural Gas, so burning Coal is more cost efficient, despite all the attempts to create emissions trading markets. Yet Coal is less carbon-efficient than Natural Gas. So more cost-efficient can mean less carbon-efficient.

“At market exchange rates, the average per capita income in non-OECD economies is $2,300, compared with $32,000 in the OECD.”

Why is that ? Because raw material sourcing economies don’t have as much PPP purchasing parity trading power with other countries. The rich countries have continued with their “extractative” model of governing world trade, putting all the resources of the poor countries at the disposal of the rich countries at low cost.

“Developing countries are energy intensive partly because of various ine/ciencies, particularly the widespread subsidization of energy.”

And the OECD countries don’t subsidise energy ? (They do, actually. Huge amounts.)

The non-OECD countries are actually more efficient in energy terms, as the majority of people on the planet use around a tenth of the energy that Europeans (for example) use.

“But the main explanation lies in the nature of economic growth. Comparing growth in developing and mature economies is like comparing apples and oranges: In mature economies, growth only gradually reshapes the sectoral composition of GDP and employment, and its principal effect is to expand the service sector. But in emerging-market economies over the last few years, growth has caused unprecedented structural transformation. Hundreds of millions of people have left low-energy-intensive activities, such as agriculture, for energy-intensive activities, such as construction and industry. And it is this process of industrialization that increases an economy’s energy intensity.”

Er, yes. That’s what “economic development” has been doing everywhere in developing economies : building energy-intensive infrastructure and energy-intensive manufacturing and energy-intensive transport.

And the only reason that “mature” economies can progress along carbon-efficient paths to a service-based model is because all the carbon-intensive manufacture and industry has been outsourced to developing countries.

“Since the late 1990s, growth in power generation has been accelerating in the non-OECD countries and decelerating in the OECD countries.”

Yes, non-OECD countries have been developing. That’s the pearl we offered them in order to allow us to continue to strip their territories of natural resources at low prices.

“Another pattern has emerged: power-generation growth in the non-OECD countries overall exceeds GDP growth, and this is not the case in the OECD countries.”

Yes, that’s because the non-OECD countries choose much cheaper, dirtier fuels, because they are poorer.

It’s no good. I can’t read any more of this.

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