Industrial societies turn their citizens into image-junkies; it is the most irresistible form of mental pollution… Ultimately, having an experience becomes identical with taking a photograph of it.
—Susan Sontag
Eric Janszen, founder of iTulip, has caused quite a stir with his Harpers’ article The Next Bubble: Priming the markets for tomorrow’s big crash. Janszen’s thesis is that the web and housing overvaluations were not an accident—the American economy must lurch from bubble to bubble to keep the “growth” party going, so another bout of irrational exuberance is required to make everything right now that the housing market has gone belly up.
What will the next economic bubble be? Janszen predicts alternative energy and infrastructure (Alt E&I) will be the next big thing, an explosion of economic activity and imaginary wealth that will make the tech and housing bubbles pale by comparison.
Alt E&I 1.0 — The Ultimate Bubble?
The U.S. is well into the formative stage1 of Alt E&I asset-price inflation (graph left) according to Janzsen, who defines the main economic drivers of the new bubble as 1) the need to recover from recession; 2) weakness in the dollar; 3) loss of petrodollar liquidity; 4) energy security; and 5) peak cheap oil. This last item may sound strange to some, but on second thought, oil is still pretty cheap compared to its true value. The coming price rises will propel dreams of renewable, cost-competitive electricity and substitutes for liquid fuels—in the case of plug-in hybrids (PHEVs), this amounts to the same thing.
Alt E&I is also known as “cleantech”. Janzsen does not mention anthropogenic climate change as a cleantech driver, but that goes without saying. Reducing carbon emissions trumps all the economic factors now that, after a 15 year struggle, the informed public is officially terrified by global warming. Janszen weighs in—
Improbably, [former Vice President Al] Gore threatens to become the poster boy for the new new new economy: he has joined the legendary venture-capital firm Kleiner Perkins Caufield & Byers, which assisted at the births of Amazon.com and Google, to oversee the “climate change solutions group,” thus providing a massive dose of Nobel Prize–winning credibility that will be most useful when its first alternative-energy investments are taken public before a credulous mob.
In the cleaner and greener world to come, you will recharge your PHEV/E-85 car or fill-up your hydrogen fuel cell car by drawing electricity (or making hydrogen) from a grid powered by solar photovoltaics, wind turbines, ocean waves and geothermal energy. Unfortunately, these alternatives will likely replace at most 15% of current electricity consumption by 2030, and won’t meet peak demand spikes at all, so we will need clean coal (a.k.a. NeverGen) and more nuclear reactors to provide the juice when everybody turns their air conditioners and compact fluorescent light bulbs on at the same time during each summer’s killer heat wave.
Reality aside, what could be better than the cleantech boom? Abundant renewable energy, no serious interruptions to shopping, saved from the perils of global warming, life goes on! This is the promise of Alt E&I 1.0, the cleantech revolution.
No lifestyle changes will be necessary because we might be running a bit low on recoverable fossil fuels or other commodities by 2030 if not well before then—this is inconceivable. Only a few cranky, eccentric Earth Science-types, Ecologists, and Physicists who worry about unsustainable growth and net energy returns think resource depletion is a problem. They can safely be ignored.
Doubters like Jim Kunstler, who thinks the U.S. won’t recover from the housing bubble, should take note that the cleantech surge is coming along very nicely. Citigroup’s Pamela Flaherty told NPR’s Living on Earth that the bank has made a 10-year commitment “to invest and lend [$50 billion] in renewables and clean technology.” JPMorgan Chase and Morgan Stanley are making similar commitments. These Wall Street banks partnered with Citi to create the Carbon Principles, which define guidelines for cleantech investing.
Wired Magazine, always enthusiastic about any bubblicious activity, cites a report by Ernst & Young and Dow Jones VentureOne showing the 2007 boom in venture capital (VC) cleantech investing (graph above left). In the oddly named Investors Find Green Technology Is Not an Easy Win, Wired’s Alexis Madrigal found the inevitable—and green—silver lining that follows from what Kunstler terms “the psychology of previous investment”—
Investors are hoping their clean-tech investments will topple another aging cash-rich industry: energy. Egged on by IPOs in the clean-energy industry, but particularly in solar power, a host of venture capitalists has raised clean-tech or green-tech funds. In the first three quarters of 2007, 168 separate investments channeled $2.6 billion into clean-tech startups, according to Thomason Financial and the National Venture Capital Association…
VCs aren’t in it to save the world: The only green discussed at the Venture Summit West panel was the color of money. But if these investments help mitigate climate change by reducing our dependence on carbon-heavy fuels like coal and oil, so much the better…
But [Erik] Straser [general partner at Mohr Davidson, which is heavily invested in clean-tech] stressed that, while the financing and technical risk is higher than media and internet investments, the market risk for clean tech is actually lower than other sectors. “Whether all 19-year-olds want to use their cellphones in a certain way, that’s not as sure a bet,” said Straser. “But if I offer you transportation fuel for a penny, I’m pretty sure you’ll buy it.”
Transportation fuel for a penny—sign us up! Straser is certainly right that the market risk for cheap alternatives to oil, should they actually exist, is negligible, but his rose-colored view glosses over the enormous technical risks in cleantech. Joseph Romm, a climate change insider who does not understand the risks of oil depletion, knows that the world can’t wait for disruptive clean-energy technologies to solve the climate change problem because non-incremental breakthroughs 1) hardly ever happen and 2) rarely have a transformative impact on energy markets even when they do happen.
A realistic view of technology risks will not deter the coming Alt E&I 1.0 investment juggernaut as long as there is money to be made, at least for the Erik Strasers of this world.
All Hat, No Cattle
How will the cleantech bubble work? This homemade flow chart (left) uses the Dot-Com model to describe how the coming overvaluation of alternative energy technologies might work itself out over the next decade. The diagram is meant to be self-explanatory, but such a dry presentation does not capture the full flavor of how asset-price hyperinflation works. For a more visceral experience, based on the current Web 2.0 social internet mini-bubble, you will need to watch the video.
Click to watch the video!
A report from Lux Research, “Clean Technology” Takes Off With $48 Billion In 2006 Funding, But Energy Bubble Looms, confirms that the cleantech revolution is following the Dot-Com model but predicts that trouble is just around the corner. It is worth quoting at length.
New York, NY – April 30, 2007 – “Clean technology” has captured the attention of government, corporate, and financial leaders, with spending on R&D rising to $48 billion in 2006, up 9% from 2005. However, the warning signs of a bubble are flashing in the energy technology segment, where initial public offering (IPO) values and venture capital deployments more than doubled last year – setting the stage for a boom and bust…
“Cleantech encompasses innovative technologies specifically designed to optimize the use of natural resources and reduce environmental impact, with five top-level segments: energy, air, water, waste, and sustainability,” said Lux Research President Matthew M. Nordan. “Driven by solar and biofuel deals, the energy segment looks overheated – there’s no way that more than a fraction of the 930 energy start-ups operating worldwide can possibly succeed…”
Cleantech takes high priority: George Bush’s 2007 State of the Union address emphasized alternative energy and action against climate change; CEOs at firms from GE to BP to Toyota tout their new revenue streams from cleantech; and bellwether venture capitalist John Doerr calls cleantech “the largest economic opportunity of the 21st century.”
Total cleantech R&D funding hit $48 billion in 2006, with energy claiming the lion’s share. Of this, government funding totaled $24 billion in 2006 with energy taking 57%; corporate R&D spending hit $22 billion in 2006 with energy accounting for 55%;
Will the cleantech bubble stumble out of the starting gate? Or will there merely be a short-term early-stage shakeout? Can John Doerr, the Tech prophet who “directed venture capital funding to some of the most successful technology companies in the world including Compaq, Netscape, Symantec, Sun Microsystems, Amazon.com, and Google, as well as Friendster, Go.com and myCFO,” be wrong? It’s not very likely. After all, there’s not that big a difference between energy and pixels on a screen, right? And there’s a carbon tax in America’s future. Remember, these VCs are making money and inadvertently saving the Earth at the same time, it’ going to be Win-Win for all of us—this isn’t just some Facebook monkey business.
Janzsen gives the preconditions for any bubble:
We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.
Lurking in these preconditions lies the true nature of the bubble—it is primarily a social, not economic, phenomenon, driven and sustained by every potential investor’s desire to catch the fashionable train before it leaves the station, not to mention the eternal American urge to get something for nothing. Add in the fact that it’s all for a really good cause, just like the good war when the everybody pulled together, including Tom Hanks, to defeat Evil’s transparent threat, and the very convenient truth that no one knows anything about Physics, and you’ve got a perfect recipe for some bubbly Clean Energy Redemption. Break out the Champagne!
Meeting some of our energy needs from non-fossil fuel sources is an indispensable step forward. Solar is Good. Wind is Good. No serious person disputes their value. On the other hand, a Bubble is Not Good. Unrealistic expectations, irrational exuberance and imaginary wealth will not help us work out our energy future.
Should the Alt E&I 1.0 “revolution” meet Janszen’s cynical expectations, some good projects will come from it, but mostly it’s going to be All Hat, No Cattle, as they say down in Texas. The eventual collapse of the “new new new” economy would ruin us all, leaving us to face a depleted future without the means to even muddle through the chaos. Making the necessary changes to the way we live should not be subject to the worst depredations of Capitalism. We don’t need another bout of insanity. Deal with reality or it will deal with you. Silicon Valley fantasies are not a substitute for leadership and concerted, purposeful change.
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