Minnesota's Energy Future?©

Dell Erickson

Minneapolis, MN
October 20, 2003

 

Overview
 

During the last two summers, gasoline prices jumped to almost $2 a gallon and natural gas prices last winter soared from $2 per thousand cubic feet to $12 over a remarkably short period.  In Minnesota, consumer bills for natural gas doubled and tripled from the preceding year.  Electricity that sells locally for 7¢ per kilowatt-hour (kWh) was sold in California for 33¢ per kWh.

Although often discounted ―or ignored today― industry analysts and scientists contend that the serious energy predicaments recently experienced nationally and acutely by California are prologue to looming chronic Minnesota and national energy dilemmas.  Yet, newspaper headlines documented how surprised the public was by the energy situation and increases in prices.  To the informed, however, the surprise was that energy prices remained low for many years.  In "Oil and Gas Availability: A History of Federal Government Overestimation", Dr. Charles Hall, et al, wrote,1

Surely those who had been listening to Hubbert and Davis all along were neither shocked by the energy crisis nor by our large dependence on foreign sources of oil. On the other hand, the average citizen was quite unaware of Hubbert's analysis and was dependent on official government estimates that we believe were outrageously optimistic. Reputable, although conservative, estimates from some oil industry analysts were discounted by many because they appeared (and may have been) self-serving to an industry trying to raise its domestic oil prices. Even now there is very little recognition or appreciation by the general populace of the precariousness of our petroleum situation and even less government assistance in understanding this problem or dealing with the inevitable future economic and social repercussions.


Government and public representatives’ responses to energy predictions give the appearance that today's energy dilemmas are analogous to the 1973 – 1974 energy (oil) crunch.  The differences however, are substantial.  The earlier episode was primarily politically contrived (OPEC) whereas today the U.S. population has grown substantiality while the supply of a number of basic natural energy resources are in question.  Yet, government authorities have generally attempted to shield the public from information regarding looming energy resource changes.  Most often overlooked is that the U.S. population in ‘73–74 was nearly 80 million fewer than today and beginning a favorable economic and environmentally sustainable trend.  Explaining the favorable trend, U.S. fertility was below 2.0 and legal immigration was at the traditional level of 200,000 a year or less.  Illegal entry was an insignificant factor.  Today, on the other hand, (excluding almost an equal number of illegal aliens) last year immigration was about 1.3 million and the U.S. population is soaring by approximately four million each year.  If the earlier sustainable trends had been allowed to continue, energy use today would have been equal to a population almost 60 million smaller than today.

Government appears out of touch.  Indeed, there have been fewer attempts to document our national and state energy situations than in prior eras.  Many policymakers today appear to lack sufficient information to make informed energy, growth, and sustainability decisions.  For example, written articles and commentary, including those by Minnesota Commerce Commissioner Jim Bernstein, Department of Natural Resource Commissioner Allen Garber, and data provided by Mr. Tom Gillespie, State Demographer, downplay or neglect to integrate the most fundamental of resource considerations —Minnesota's burgeoning population.

A fundamental reason is that a generation has passed since the environment and resources were topics of widespread concern.  A second reason is the schism between the public and the “elites” —primarily journalists, and government representatives— regarding growth and immigration.  Roy Beck and Steven A. Camarota in a study for the Center for Immigration Studies reported that “60 percent of the public regards the present level of immigration to be a 'critical threat to the vital interests of the United States,' compared to only 14 percent of the nation’s leadership” and that “70 percent of the public said that reducing illegal immigration should be a 'very important' foreign-policy goal of the United States, compared to only 22 percent of elites.”  The study found that because of President Bush’s amnesty and immigration policies, “70 percent rated Bush as poor or fair on immigration”.  The public to Administration disconnect implies that those in positions of responsibility are either not informed or answering to another constituency.2

In subsequent years government policies and public and natural resource awareness seemed awakened only long enough to hit the alarm’s snooze button with the nation quickly returning to its innocent slumber.  Unlike the earlier period dominated by environmentalists, today the forces compelling change are professionals, legions of government and private industry scientists.  Frequently, these are life scientists and professionals experienced at high levels in energy fields.  Also unlike earlier periods, there are a growing number of investment professionals alerting investors to impending scarcities and the outlook for, apparently, profitable energy and related opportunities.

For example, the potential economic impact of the world's energy future is the subject of year-long 2001 research by the large and prestigious financial house of Deloitte & Touche.  The purpose of the study was to provide direction to management “caught up in the surging changes creating unprecedented uncertainties in today’s utility sector”.   The 76 page research report contrasted the energy positions of the pessimists and optimists (Cóilín Campbell & Jean Laherrere, for example) vs. the International Energy Agency.  Although not performed in a point-counter-point method, each position is illustrated by summaries and documentation.  Peripheral issues were raised —the geopolitics of oil is an important one, and there is a significant discussion of global warming.  Demonstrating their concern, the authors attempted to be dispassionate and objective yet a sense of urgency was evident.

In the section contrasting viewpoints of energy reserves, the report states under the heading “Decade of Depletion,” “some of our findings point to an energy crisis between now and 2010 … because reserves [may] prove to be not so vast as previously thought”.  The most outstanding feature of the report is that it was done at all.  The research clearly demonstrates that big financial concerns and utility managements share a profound concern regarding changing patterns of energy supply.3

Models of economic measurement underlay the inability to integrate the environment, resources, and economics into sustainable trends.  However, change is in the offing.  In Porto Venere, Italy, in May 1998 ecology and energy scientists and ecological economists assembled to examine economic and ecological approaches to balancing human society, resources, and the environment.

Some of their conclusions were:

·         Economic price does not adequately address the importance of energy to the economy;

·         Energy analysis may therefore offer quantification of biophysical constraints as a basis of real policy options for achieving sustainable economies;

·         Neoclassical economics (NCE) does not deal adequately with externalities such as environmental contributions, waste recycling, and resource values;

·         There are significant differences in quality and quantity between energy flows [of fossil fuels, alternatives, and renewables] in their current and potential contributions to society; and

·         The biophysical basis is the driving force of the economic system.

These reputable scientists and economists conclude that for routine economic and market decisions, typical economic models satisfactorily explain economic flows.  However, they state that “for larger scale issues including broad spatial and time scale questions, the NCE model fails completely to capture the biophysical basis that allows any economy to function.” (Original emphasis.)  Current economics does not “capture the biophysical reality of the actual systems and as such is unconstrained by laws of thermodynamics and conservation.”  Significantly, they state that conventional economics “cannot deal well with critical time-dependent issues such as depletion of resources or changes in the global life-support system.4

Those “biophysical constraints and laws of thermodynamics” are the subject matter of this paper.  Human tendencies toward short-term thinking are reflected in traditional economic models which come together to narrow the planning time horizon.  Traditional economics does not fully record the overriding importance of the ecosystem and resources in making sustainable economic decisions.  In this paper these considerations are evident in discussions of conservation, efficiency, and energy inputs versus energy outputs.

Government authorities and the media report that the difficulty is a short-term shortage of energy and claim a number of reasons, even that the problems are due to environmentalists!  Similar to statements heard elsewhere —including Minnesota— California Governor Gray Davis for example, says there are villains —industry deregulation, licensing procedures, and environmental regulations— preventing oil and gas drilling (in sensitive areas) and that California's problems are due to mischievous price gouging companies.  Governor Davis prefers to redirect responsibility for California's predicaments from local government policies to one of demonizing those greedy corporations.  (Likewise, the Governor appears to believe that California has claim to most of the water resources in the Western half of the country!)

Ironically, the same deregulation program began a few years ago intended to alleviate energy problems is now criticized for triggering energy dilemmas!  Yet, deregulation only involves allocation and prices; it doesn't create electricity or energy.  Economists agree that California's method of deregulation disrupted the economics of energy supply by disguising the price structure, setting prices fixed by the government at artificially low levels.  Legislatively set at an unrealistically low 6.5¢ per kWh, California became a socialist energy price nirvana.  As will be discussed further, the consequence was that California was destined to become an energy disaster and economic dependent, requiring massive state and federal subsidies to sustain its growth and large economy.

California Governor Davis appears unable to articulate a reasoned explanation for the lack of energy diversification or that fewer large baseline production facilities are under construction or planned.  The concentration of energy supply, primarily natural gas, to nearly monopolistic industries encourages non-competitive pricing —possibly encouraging suppliers to market supply in the most company advantageous method.  The reason for minimal new construction is not environmental —as will be seen, there is no prudent economic justification for the construction of large scale generating facilities.  Indeed, the benefits accrue to the existing and most energy efficient production and distribution facilities.  It's similar to shifting the chairs on the Titanic —the construction of new energy facilities merely facilitates consumption in times of already diminishing resources, at ratcheting costs— and encourages insalubrious political attention.

More importantly, when fundamental policy change is crucial, the assigning of responsibility to price manipulation or the construction of additional facilities deludes the public into believing the solution is simply a matter of continuing development and social patterns formed in an earlier period of history.

States generally fail to integrate population and energy policies into programs designed to achieve a sustainable balance between the natural and human impacted environments and resource economics.  This paper addresses those deficiencies basing its findings on private and government scientific research.  The conclusions reached in this examination may seem contrary to the essence of some politicians: the state of Minnesota and the nation should implement policies and specific solutions at this time in order to remedy existing and prevent looming energy and growth imbalances.  Minnesota or California should be considered templates applying equally to the other states and to the nation.

Part I presents the fundamental demand side of the equation —growing energy demands from a growing population and the primary source of growth —legal and illegal immigration.  Although severe, the environmental consequences of growth are only briefly mentioned.  The section on immigration includes four short but directly related diversions: a discussion of the ethnic and cultural transformation underway, economics of immigration, implications for Social Security, and a discussion of Mexico's President Vicente Fox’s U.S. as Mexico’s “Northern Territory” policy.

Part II discusses the four primary energy resource reserves.  The Olduvai Theory provides the paper's energy context.  The theory describes the relationships between availability of energy resources, population, and industrial society.  Highlighted are the associations with the critical resources of oil, natural gas, coal and nuclear power.  It is labeled a “theory” because it is not reproducible and is only fully understood after the fact.  Coal will play a substantial role in facilitating the transition to a sustainable society.  Other than the construction of technologically advanced coal generators, further development of fossil-based energy is invariably uneconomic and unsustainable.  In energy terms, the present decade is likely to witness maximum energy use in Minnesota; the U.S. and the world will experience significant changes in resource use patterns.  Implications for industrial society are discussed.  Confronting resource limits will require careful planning and state and national social cohesiveness.

For the most part the economical and competitively priced energy resources have already been consumed and as Minnesota taconite mining illustrates, the remaining resources are increasingly of lower quality or available only at steeply increasing production and distribution costs.  Even less acknowledged is that the world's energy resources are following the identical pattern.  In a circular fashion, extraction or mining of numerous resources requires petroleum.  As petroleum resources decline, the wherewithal of societies to access and process other resources becomes increasingly difficult.  One important implication is that resources will remain available but uneconomic.

Energy optimists state there are sufficient oil resources to last well into the 21st century and that industrialized society is unlikely to run out of natural gas or other energy resources.  The reason they offer is that as resources become increasingly scarce prices will increase and encourage development of additional supplies.  Pricing economics and supply are discussed.

It cannot be overstated that this position is a high-risk belief gambling the future of society against science.  Scientists have determined the actual and possible reserves and make allowances for unknown and undiscovered reserves.  Known, anticipated, even unproven and unknown discoveries are all included in the graphs, calculations, and conclusions included in this paper.  Price does not determine supply as much as physics.

Part III discusses the frequently mentioned remedies of conservation and expanded use of proposed alternative energies.  The conclusion is that these often provide a false sense of security; further development of proposed alternative energies frequently intensifies the energy situation they propose to remedy.

Technological and economic optimists misconstrue the 2nd Law of Thermodynamics.  It can't be repealed.  Each stage of additional processing requires additional energy.  Thermodynamics describes the energy transfers in converting one energy form into another.  Simply stated, this is Barry Commoner's famous admonition that there is “no free lunch”; there are energy costs that cannot be avoided.  According to the World Book Encyclopedia,5

Thermodynamics is the study of various forms of energy, such as heat and work, and of the conversion of energy from one form into another. Engineers, chemists, and physicists use the principles of thermodynamics in understanding events in nature and in such activities as designing machines and calculating loss or gain of energy in chemical reactions.

 

Thermodynamics is based chiefly on two laws (principles). The 1st Law states that energy is a system, which may be anything from a simple object to a complex machine, cannot be created or destroyed. Instead, energy is either converted from one form into another or transferred from one system to another. For example, a heat engine, such as a gas turbine or nuclear reactor, changes energy from fuel into heat energy. It then converts the heat energy into mechanical energy that can be used to do work. The total amount of energy always remains the same.

 

The 2nd Law of thermodynamics deals with the natural direction of energy processes. For example, according to this law, heat will, of its own accord, flow only from a hotter object to a colder object. The 2nd Law of thermodynamics accounts for the fact that a heat engine can never be completely efficient —that is, it cannot convert all the heat energy from its fuel into mechanical energy. Instead, the engine transfers some of its heat energy to colder objects in the surroundings.


As a growing body of research documents, overall energy production is becoming an energy “sink”.  The term “energy sink” is used because its manufacture resembles a sink with its endless drain: an energy sink uses greater amounts of energy to produce energy than the energy output available to industry and consumers.  The significance of an energy sink is that it exacerbates the very energy problems it intends to solve.  This is true no matter the price of energy.  The search for alternative energies underscores this fact —the production of ethanol or “bio-diesel” are unambiguous examples.  Because of thermodynamics there can be no perpetual motion machine: the production of alternative energies is counterproductive to long run sustainability.  Even the most productive alternative —windcommerce― has serious deficiencies including economics.  Going forward, the price of $0.50 worth of consumable energy could cost more than $1.00 to produce.

Disregarding the difficult price consequences, the function of alternative energies is to help bridge the Olduvai Gorge to sustainability.

Part IV examines real world energy consequences of water and energy shortages and U.S. food production and draws parallels between the California and Minnesota methods of energy generation.

Combining the preceding four parts, Part V discusses Minnesota's future energy situation.  Two energy demand and construction cost scenarios are presented: status quo and a sustainable path.  Part V concludes with a discussion of the government's response to the problems of growth i.e., “smart growth” and environmental organizations’ fading leadership role.  The Sierra Club’s reversal from prior ecologically based environmental positions is used as an illustration.

As foretold by environmentalist and energy experts two or three or more decades earlier, the U.S. energy future has arrived.  If the U.S. not had moderate winter weather the previous two years, the predicted energy problems would have become evident sooner.  The winter of 2003 – 2004 is likely to be a watershed point in the history of U.S. natural gas.  The fact that Minnesota and the U.S. are standing near the precipice and so obviously dependent on the vagaries of weather is discouraging.

What is the right approach to remedy the core dilemma?  Recall that Limits to Growth (Meadows) was questioned only to the dates of decline, not to its conclusions.  The Limits to Growth was the outcome of the “Club of Rome”, a group of 30 individuals called together in 1968 by Dr. Aurelio Peccei, an Italian industrialist.  The group’s charge was to discuss the present and future of mankind ―thus the report’s subtitle: A Report for the Club of Rome’s Project on the Predicament of Mankind.  The report’s conclusions were based on analysis of five trends: industrialization, population growth, increasing malnutrition, depletion of non-renewable resources, and a deteriorating environment.6

Written in 1972, the fundamental conclusion was that if present trends remain unchanged then “limits to growth on this planet will be reached sometime within the next one hundred years.”7  Of more importance is that it is “possible to alter these growth trends and to establish a condition of ecological and economic stability”, “the state of global equilibrium”.8  Surprisingly, perhaps, the model assuming the discovery of five times the proven reserves of petroleum and of natural gas, indicated that oil will essentially be depleted approximately in 2022 and natural gas a year earlier, 2021.9

Compounding growth is responsible; both resource use and populations are growing exponentially, on a per person basis more people are consuming more energy resources.  “Limits to Growth” or the “World-3” or similar models would say there are positive feedback loops.  Increasing energy use increases wealth and energy consuming assets, which in turn encourages additional people and resources.10  The reason for these forecasting models is not, as sometimes reported by the media, to be like the street vagrant carrying the sign “the end is near”, but to indicate a constructive program and time frame for dealing with the situation.  The goal is to provide a framework leading to a sustainable society.

Moreover, the “Beyond the Limits”, World-3 model demonstrated that when technology or substitutes were employed the greater the likelihood that multiple resource constraints would be encountered more or less simultaneously and therefore fewer the possible remedies.11  It also implies that populations will have grown larger, increasingly vulnerable, and the consequences more unprecedented.12

Isn't there a moral conundrum involved as well?  Attempts to increase resource supply and use at this time only misallocates supply from existing children and generations of children yet to be.  Because standards of living are directly correlated with energy use, growth in Minnesota or the U.S. gravely exacerbates that intergenerational economic and resource shell game.

Contrary to the California Governor’s opinion, California’s, Minnesota’s, and the U.S.’s energy predicaments are not due to environmentalists or some malevolent corporate conspiracy.  It's a longage of people more than a shortage of resources.  Nature and resources bats last.

These are the themes discussed in this paper.  Because of its overarching role, the paper begins by discussing the issue generally downplayed or overlooked ―population growth and its energy and resource implications for Minnesota and the nation's future well being.
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Used with permission of Dell Erickson
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