Why fungibility matters. Take any of a number of hypotheticals: revolution in Saudi Arabia cuts 8 million barrels per day of global oil supply; congress passes strict prohibition on burning coal; revolution in Algeria cuts natural gas supplies to Europe; dispute with the Ukraine cuts natural gas supplies to Europe; peak oil creates oil production supply drops much sharper than expected. What do they all have in common? Answer: our ability to cope, adapt, and overcome these problems is largely a function of substituting with alternatives. And our ability to substitute with alternative sources of energy is a factor of how fungible energy really is–how easily we can bring alternative B to replace lost supply of energy A.
Truly fungible? Traditionally, the term fungibility is used to describe the notion that a given energy commodity such as crude oil is of roughly equal value if it is delivered to China or the US. This is critical because it means that a drop in consumption in the US is negated by an equivalent rise in consumption in China. Likewise, it means that it’s pointless to “remove our reliance on Middle Eastern oil” if that just means we buy the same amount of oil from elsewhere–the fungibility of oil simply tells us that when we stop buying from A and buy from B instead, the previous customer of B will now buy from A and little will change. But, of course, it isn’t that simple. If you’re protesting over the simplicity (naivete?) of my little A-B/B-A example a sentence ago, that’s because there’s no such thing as a truly fungible commodity. The point of this article is to discuss how the real world tends to intrude on fungibility of our various sources of energy and what this matters…
How do we define fungibility? Several ways. First, we can look at the characteristics of an energy source. Solar and wind supplies are seasonally, regionally, and temporally variable. In other words, sometimes the sun shines, sometimes the wind blows, and sometimes it doesn’t — in very different patterns in different places. Fossil fuels are geologically constrained. Hydro has its own unique set of availability characteristics that are largely a result of decisions and compromises in dam construction. All of our energy sources are geographically constrained to some extent–you can’t just “move” an oil field to China because that’s where the demand is. In this sense, very few energy sources are “geographically fungible.” Small nuclear reactors (as on naval vessels) and solar photovoltaics are eamples of energy sources that are geographically fungible, though one can argue that these are really conversion mechanisms, not sources. We can also define degree of fungibility by the characteristics of the energy produced. How easily can coal substitute for a shortfall in oil? How easily can uranium substitute for natural gas? Most importantly, we can define fungibility of an energy source by its characteristics transportability. Oil can be transported quite easily by tanker truck or tanker ship. Enriched uranium can be transported, as can liquified natural gas, coal, and electricity. It’s important to point out, however, that the different problems encountered by the different means of transporting various types of energy introduce differing degrees of fixedness to our energy system.
Demand fixedness. How fixed is our demand for specific characteristics of energy? How important is is that we have the “instant on” of a natural gas stove versus a slower electric induction cooktop. How much have we already invested in liquid fuel-driven transportation that is keeping us from quickly and easily converting to electrically-powered transport. How long would it take and how much would it cost to make the switch? What about electric light vs. oil lamps? And what about electricity for communications and computers? It seems quite difficult to substitute any other form of energy to that end.
Storage/time fixedness. Likewise, how does the timing of our demand for a type of energy relate to our ability to store that type of energy? If we want hot water for a 6:00 a.m. shower, it makes it more difficult to rely on a solar hot water heater. If we want reliable electricity supply from solar or wind then we either need lots of batteries or a very expansive transmission grid with localized capacity to generate surplus electricity. This is one of the key characteristics that makes liquid fuels so fungible–they store easily in a readily accessible form and are relatively easily transportable.
Transport/geological fixedness. Pipelines introduce a very significant element of fixedness into our oil and gas supplies, just as transmission lines do for electricity.
Other generators of fixedness that I’ll explore in future posts: Generation/conversion infrastructure fixedness; Project timeline fixedness; Fixedness due to sunk cost; Fixedness due to financing constraints; Geopolitical fixedness.
Is there a trend toward fixedness? While I’ve rambled a bit about these various sources, the real question that must be answered is whether our energy system is becoming less fungible, more fixed–and by implication less adaptable to crisis, less resilient, more brittle.