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The Paris Gravity Well, Part II: Trillionization

"We will not suddenly convert steel mills, cement kilns and road surfacing machines to operate on sunbeams."

Charlie said, "That's the trouble. You see it the way the banking industry sees it and they make money by manipulating money irrespective of effects in the real world. You've spent a trillion dollars of American taxpayers' money over the lifetime of the bank and there's nothing to show for it. You go into poor countries and force them to sell their assets to foreign investors and to switch from subsistence agriculture to cash crops. Then, when the prices of those crops collapse, you call this "nicely competitive" on the world market. The local populations starve and you then insist on austerity measures even though your actions have shattered their economy….

"You were intended to be the Marshall Plan, and instead you've been carpetbaggers."

— Kim Stanley Robinson, Sixty Days and Counting: Science in the Capitol (2007).

“With fundamentals changing slowly and risk appetite falling rapidly, the stage is set for a longer period of risk asset underperformance,” Jabaz Mathai, a strategist at Citigroup Inc., said.  “There is no quick fix to the headwinds facing global growth.”

"Similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009 … all either overlapped with a recession, or preceded a recession by a few quarters."

There has been a storm brewing since the last trifle with full-on collapse in 2008-2009. The extend-and-pretend debt balloon was reinflated and stretched to new enormities as Keynesian cash infusions fueled a Minsky Moment, if not a Korowicz Crunch.


The instability in finance is compounded by the instability in demographics. In Mexico City, Bogata and Rio they call them NINIs — the millions of youth between 15 and 24 who neither study nor work. They are now about a fifth of the population in the underdeveloping world, responsible for higher rates of homicide, gangs, and unwed pregnancy. Of those born to NINI mothers, there is a 22.3% greater likelihood of becoming a NINI, according to the World Bank. All this tinder simply builds, bides its time, wanders the streets, waits for a revolutionary spark.

As we said here last week, the trigger for the markets' sudden move may have been what happened in Paris but could not stay in Paris. When it filtered out from the December summit that 195 countries had actually done the unimaginable and set a goal of carbon neutrality, meaning phasing out net fossil fuel emissions by 2050, the financial sector was at first caught dumbfounded. The World Bank guys flinched.

Now it has sunk in. The Guardian reports:

Former OMB Chief David Stockman's recap
Investors face a “cataclysmic year” where stock markets could fall by up to 20% and oil could slump to $16 (£11) a barrel, economists at the Royal Bank of Scotland have warned. In a note to its clients the bank said: “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” It said the current situation was reminiscent of 2008, when the collapse of the Lehman Brothers investment bank led to the global financial crisis. This time China could be the crisis point.

Government subsidies are about to undergo a titanic shift. Many governments spend more on fossil-fuel subsidies than they do on health and education, more than a trillion dollars. Consumer benefits such as subsidized fuels and cheap finance add $548 billion per year. Government support for companies to expand production add another $542 billion just in G20 overdeveloped countries, and a mere top 8 of those will spend $80 billion of this kind every year, four times the investments going to renewables globally.

Tomorrow those same Big-8, and 188 others, will begin spending several times those trillions subsidizing renewables. Jeremy Leggett, founder of Solar Aid and Solarcentury, calls it "trillionization." It won't begin to fill the energy gap that the switch will create, but the psychology of sunk investment will be in charge from thereon out.

Oil producing states and countries are aghast. The "clear signal" that Paris sent was not what they were expecting. In Alaska, the Permanent Fund has been running in the red and the legislature is talking about an income tax. Had the Paris Agreement not come together, they might hope for a rebound of fossil prices and investments in drilling the North Slope and Arctic Refuge.

Petroblas, the national oil company of Brazil and wellspring of the Brazilian Economic Miracle, is now cash negative. It will be forced to turn to the government for a bail-out, but to where will its government turn?

In Mexico, the deficit is running 100 billion and the peso has dropped from 12 in 2014 to soon-to-be 20 against the dollar. If you have dollars you can get a meal in a good restaurant or a room for the night for 5 or 10 of them. So far in January the price rise of food for the average Mexican is alarming. Onions are up 19%, poblanos 15%, bananas 10%, tomatoes 9%.
 
The national oil company, PEMEX, came out on Monday saying it is not true that its operating with losses, but below the $26 per barrel it would be. On Tuesday the price dropped to $24.74. It closed the week at $22.77 but as we write this you can buy a barrel in Mexico City for as little as $20.32. Mexico's federal budget is entirely dependent on oil money and don't look now but Mexico, when it was petrodollar flush, became a net importer of most staple foods and many other essential commodities, which helps explain the grocery dilemma. Mexico now buys onions, poblanos, bananas and tomatoes from California. Also beans, corn and rice.

Gotta love those World Bank guys.

Venezuela, which surprised everyone by signing the Paris Agreement at the final hour, declared an economic emergency on January 15. France, which foolishly drank too much atomic kool aid thinking it might spare itself from petrocollapse, has a budget shortfall of 2.2 billion dollars and declared national economic emergency on January 17. The jobless rate in France, the eurozone's 2d largest economy, is above 10%, compared with a 9.8% EU average.

Andrew Roberts, RBS’s credit chief, said:

European and US markets could fall by 10% to 20%, with the FTSE 100 particularly at risk due to the predominance of commodity companies in the UK index. London is vulnerable to a negative shock. All these people who are long [buyers of] oil and mining companies thinking that the dividends are safe are going to discover that they’re not at all safe.

We suspect 2016 will be characterized by more focus on how the exiting occurs of positions in the three main asset classes that benefited from quantitative easing: 1) emerging markets, 2) credit, 3) equities … Risks are high.


Zero Hedge reports:

"For dry bulk, China has gone completely belly up,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo, talking about ships that haul everything from coal to iron ore to grain. “Present Chinese demand is insufficient to service dry-bulk production, which is driving down rates and subsequently asset values as they follow each other.”

“China’s slowdown has come as a major shock to the system,” said Hartland Shipping’s Prentis. “We are now caught in the twilight zone between shifts in China’s economy, and it is uncomfortable as it’s causing unexpected slowing of demand.”

The continued collapse of The Baltic Dry Index remains ignored by most.

According to  Zero Hedge:

The North Atlantic has few to nil cargo traveling in its waters. Instead, the giant container ships are anchored. Unmoving. Empty.

Commerce between Europe and North America has literally come to a halt. For the first time in known history, not one cargo ship is in-transit in the North Atlantic between Europe and North America. All of them (hundreds) are either anchored offshore or in-port. NOTHING is moving.

This has never happened before. It is a horrific economic sign; proof that commerce is literally stopped.

The slow response to the Paris outcome has been a complete portfolio review by every actuary and bean-counter in the biggest banks and investment houses, pension funds and mutuals. Hedge fund managers are scratching and sniffing for places to park billions being lifted from soon-to-be-stranded fossil assets. The clean-tech market, signaled first by China, is reacting by recycling cash out of fossil holdings.

Peter Sinclair of ClimateCrocks.com reports:

The Energy Information Administration calculates in its 2015 analysis that the average U.S. levelized cost for new natural-gas advanced combined cycle plants is 7.3 cents per kilowatt-hour — the same as solar.

However, to compare accurately, we have to add about 10 percent to the cost of solar to firm up this variable resource. So we’re close to cost parity, but not quite there.

At $1 per watt, the levelized cost falls to just 5.7 cents per kilowatt-hour, well below cost parity with new natural-gas plants. With two-axis trackers and the best solar resources, which increase the capacity factor to 32 percent, that cost falls to just 4.5 cents per kilowatt-hour. We’re headed to $1 per watt as an all-in cost in the next five to 10 years.
Bloomberg New Energy Finance reported last summer that wind power was the cheapest source of power in the U.K. and Germany in 2015, even without subsidies. The article’s tagline reads: “It has never made less sense to build fossil fuel power plants.” The same article highlights the feedback loop that solar and wind power have in terms of reducing the cost-effectiveness of fossil fuel power plants due to the dispatch order of renewables versus fossil fuel plants.

The solar singularity is indeed near (here?) in the U.S. and increasingly around the world. I described previously that 1 percent of the market is halfway to solar ubiquity because 1 percent is halfway between nothing and 100 percent in terms of doublings (seven doublings from .01 percent to 1 percent and seven more from 1 percent to reach 100 percent). The U.S. will reach the 1 percent solar milestone in 2016. We’re halfway there. Buckle your seatbelts.

There are plenty of unemployed oil workers ready for retraining. James Howard Kunstler: 

So, in 2015, the shale oil companies laid off thousands of workers, idled the drilling rigs, and kicked back to pray that the price would go back up. Which it didn’t.... The landscape of North Dakota is littered with unfinished garden apartment complexes that may never be completed, and the discharged construction carpenters and roofers drove back to Minnesota ahead of the re-po men coming for their Ford F-110s.

To see what does well in the new, post-Paris domain, watch stocks like First Solar (FSLR), Renewable Energy Group (REGI), SolarCity (SCTY) and Siemens (SIE) over the next quarter, and mutuals like Firsthand Alternative Energy (ALTEX), New Alternatives (NALFX) and Guinness Atkinson Alternative Energy (GAAEX). Some of these know their audience and have vowed to screen for social justice. Gabelli SRI AAA says, for instance:

The fund will not invest in the top 50 defense/weapons contractors or in companies that derive more than 5% of their revenues from the following areas: tobacco, alcohol, gaming, defense/weapons production....

There is a psychology that sets in once the corner is turned on fossil investments that may make a big difference in the political debate about climate change. For more than half a century the GOP, the Fossil Lobby and Wall Street have blocked, cut or delayed investments in renewables and papered it over with greenwash. Forced by pledges made in Paris — and a legally-binding agreement with the word "shall" used 143 times — and the emergence of a huge new global competition to begin not only unchaining the clean-tech sector, but to actively promote it with subsidies, research grants and moonshot-scale deployments, the psychology of chasing after sunk investments will drive an apolitical energy conversion.

Moreover, 350.org and Greenpeace are ramping up campaigns to make sure the promises made in Paris are kept.

No pipelines, no mines. You said 1-point-5!
No pipelines, no mines. You said 1-point-5!
No pipelines, no mines. You said 1-point-5!


Clean energy will not deliver a 1:1 replacement for fossil fuels. Get over it. We will not suddenly convert steel mills, cement kilns and road surfacing machines to operate on sunbeams. But the investments we do make, and the worsening weather, will drive us to make even more and ever larger investments, in a forlorn search for a full replacement. While wasteful, it is not nearly as wasteful as the industrial and military investments of the past century or more.

Persian Gulf wars, going back to antiquity, have never been fought over sunlight. As David Stockman recently recalled:

[A] 45-year old error ... holds the Persian Gulf is an American Lake and that the answer to high oil prices and energy security is the Fifth Fleet.
***
That doctrine has been wrong from the day it was officially enunciated by one of America’s great economic ignoramuses, Henry Kissinger, at the time of the original oil crisis in 1973. The 42 years since then have proven in spades that its doesn’t matter who controls the oilfields, and that the only effective cure for high oil prices is the free market.

The switch to sunlight will make the lives we are living better for many, especially those on the front lines of the oil wars, even as we continue towards an Anthropocene Armageddon with little sign of being able to change that trajectory.

Guy McPherson is fond of reminding us, after University of Utah professor Tim Garrett's deft analysis, that industrial civilization is a heat engine.

In a well-read article in Climate Change in November 2010, Garrett ran the simple arithmetic:

Specifically, the human system grows through a self-perpetuating feedback loop in which the consumption rate of primary energy resources stays tied to the historical accumulation of global economic production — or p×g — through a time-independent factor of 9.7±0.3 mW per inflation-adjusted 1990 US dollar.

If civilization is considered at a global level, it turns out there is no explicit need to consider people or their lifestyles in order to forecast future energy consumption. At civilization’s core there is a single constant factor, λ = 9.7 ± 0.3 mW per inflation-adjusted 1990 dollar, that ties the global economy to simple physical principles. Viewed from this perspective, civilization evolves in a spontaneous feedback loop maintained only by energy consumption and incorporation of environmental matter.

Unsold cars sit on receiving docks all over the world
Because the current state of the system, by nature, is tied to its unchangeable past, it looks unlikely that there will be any substantial near-term departure from recently observed acceleration in CO2 emission rates. For predictions over the longer term, however, what is required is thermodynamically based models for how rates of carbonization and energy efficiency evolve. To this end, these rates are almost certainly constrained by the size and availability of environmental resource reservoirs. Previously, such factors have been shown to be primary constraints in the evolution of species


What this means is the same thing that Gail Tverberg, Richard Heinberg and many others have been saying for a very long time — modern economies are a product of cheap energy. Take that away and they crash and burn. That’s the good news. Garrett says there is no other climate remediation model that works. Civilization is a heat engine whether it is powered by nuclear fusion or photovoltaics. The global economy must crash for humanity to stand a chance. McPherson would take it a step farther and say it is already too late, enjoy what time you have.

The famous Fermi paradox raises the question: why haven’t we detected signs of alien life, despite high estimates of probability, such as observations of planets in the “habitable zone” around a Sun-like star by the Kepler telescope and calculations of hundreds of billions of Earth-like planets in our galaxy that might support life. To produce a habitable planet, life forms need to regulate greenhouse gases such as water and carbon dioxide to keep surface temperatures stable. Early extinction, before interstellar communication, solves the Fermi Paradox. So does merely the extinction of civilization capable of interstellar communication without the same degree of trauma. No civilization, no heat.

But wait! Can that excess heat civilization is producing be turned into air conditioning for the planet? Is there a permacultural decroissance that could rescue our genome? Stay tuned, but first, next week, we play the Trump card.

What do you think? Leave a comment below.

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