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(You are at Part 5 of The Energy Chain, if you would like to start at the beginning part, click here.)

So far in The Energy Chain, we have looked at past energy uses and developments. Before we look at future and alternative energy uses and developments we need to look at why those "alternatives" are not the "main" sources of energy today and why it has been, and in most cases, still is, such an uphill battle in order to gain acceptance.

Please read the following excerpt very carefully. This is the "governing dynamics" (attitude) that is driving present day government economic policies and big business agendas. [Emphasis is ours]:

"Should we be taking steps to limit the use of these most precious stocks of society's capital so that they will still be available for our grandchildren?

"Economists answer this question in two ways. First, they point out that fossil fuels like oil and gas are finite but not 'essential.' An essential resource is one, like oxygen, for which there are no substitutes. Substitutes exist for all the energy resources. We can substitute coal for oil and gas in most uses; we can liquefy or gasify coal where liquid or gas fuels are needed; when coal runs out, we can use higher-cost solar energy, nuclear fission, and perhaps someday even nuclear fusion. These last three are superabundant in the sense that when we run out of solar energy, the earth will already be uninhabitable.

"A second point concerns the relative productivity of different assets. Many environmentalists argue that energy and other natural resources like wilderness areas and old-growth forests are very special kinds of capital that need to be preserved so that we can maintain "sustainable" economic growth. Economists tend to disagree. They look at natural resources as yet another capital asset that society possesses -- along with fast computers, human capital in an educated work force, and technological knowledge in its patents, scientists, and engineers. Both economists and environmentalists agree that this generation should leave an adequate stock of capital assets for future generations; but economists worry less about the exact form of capital than about its productivity. Economists ask, Would future generations benefit more from larger stocks of natural capital such as oil, gas, and coal or from more produced capital such as additional scientists, better laboratories, and libraries linked together by information superhighways?

"The substitutability of natural capital and other kinds of capital is shown by the production indifference curve or 'isoquant' in Figure 18-2. We show there the amounts of the two kinds of capital that would be required to attain a certain level of output in the future (Q*), holding other inputs constant. That output can be produced at point C with a conservationist policy that emphasizes reducing energy use today, leaving much oil and gas and relatively little human capital for the future. Or it might be produced with a low-energy-price and high education strategy at B. Either of these is feasible, and the more desirable one would be the one that has a higher consumption both now and in the future.

"Note as well that the isoquant hits the vertical axis at point A, indicating that we can produce future output level Q* with no oil and gas. How is this possible? With the greater scientific and technical knowledge represented by point A, society can develop and introduce substitute technologies like clean coal or solar energy to replace the exhausted oil and gas. The curve hits the axis to indicate that in the long run, oil and gas are not essential." (ECONOMICS, Paul Samuelson and William Nordhaus; McGraw-Hill, 1998, p. 328)

OK, now...DEEP BREATH.

In English, what they are saying is that oil and gas are not essential to the world because technology will always overcome resources.

Ahh...technology (play Star Trek theme song here)...

NEOCLASSICAL ECONOMICS

Definition:

"Neoclassical economics, the form of economics derived in the mid-19th century that prevails today, focuses on problems related to value decisions, the behavior of economic actors, and the working of markets." (The Need to Reintegrate the Natural Sciences with Economics, Charles Hall, Dietmar Linderberger, Reiner Kummel, Timm Kroeger, and Wolfgang Eichhorn, August 2001 / Vol. 51 No. 8 BioScience, p. 663)

The writers continue the definition [emphasis ours]:

"These problems belong to the sphere of the social sciences (many of which, incidentally, have their own problems with neoclassical economic theory; see, for example, Marris 1992). But the wealth that is distributed in the markets must be produced in the hard sphere of the material world where all operations must obey the laws and principles of physics, chemistry, and biology. Our concern is that most production models of economics are not based on these biophysical laws and principles; in fact, they tend to ignore them (Georgescu-Roegen 1971, Daly 1973, 1977, Kummel et al. 1985, Leontief 1982, Cleveland et al. 1984, Hall et al. 1986, Hall 1992,2000).

What they are saying is that the major economic theories in use today were developed in the mid-19th century and are not grounded in any sort of a "whole world" reality. Given the excerpt that we opened with it is easy to see that there is definitely something amiss.

But wait, you say! That could not be! Surely our governments know best!

Well, let us hear from the Chief Economist of the largest corporation on the Earth today, the United States of America, Alan Greenspan:

The Fed chairman rejected theories that the world will soon run out of oil.

"If history is any guide, oil will eventually be overtaken by less-costly alternatives well before conventional oil reserves run out," Greenspan said.

In addition, new technologies to preserve existing oil reserves and stabilize oil prices will emerge in the years ahead, he said.

"We will begin the transition to the next major sources of energy perhaps before mid-century as production from conventional oil reserves ... is projected to peak," Greenspan said.

(Oil has sapped GDP growth: Greenspan, Gregory Robb, CBS Marketwatch.com, Oct. 15, 2004.
Remarks by Chairman Alan Greenspan - Oil, To the National Italian American Foundation, Washington, D.C., October 15, 2004, full text here: http://www.federalreserve.gov/boarddocs/
speeches/2004/200410152/default.htm

Do you remember the last segment we did on Oil / Natural Gas? Remember that the current number of gasoline and diesel engines in the world today was well over 1 billion in number?

Let's review the statement about gasoline:

Gasoline has a tremendous amount of stored chemical energy.
It is also very compact, easily contained and transferred, very portable, and can be converted very simply into a lot of mechanical energy to do WORK.

There is no technology in development or even theoretical that can do what gasoline can. The same goes for hydrocarbons in general. Well, how about HYDROGEN, you say? The hydrogen economy! The Governator Schwarzenegger's battle cry!

Question: Who is going to pay for switching over the 1 billion engines to hydrogen?
Has anybody figured out the cost of this? Forget cost, how about time? Any ideas on how long it will take to retrofit 1 billion engines? What about energy? How many MJ (megajoules) of energy does it take to make one (1) engine? How about 1 billion engines?

According to the auto industry, the top 10 auto manufactures produced 50 Million vehicles in 2002 alone (http://www.autoindustry.co.uk/Hidden/companies/vehicle.xml). Given that the life expectancy of a new vehicle is 10 years, if the auto industry geared up to produce hydrogen vehicles it would take more than 10 years to simply keep up with the current replacement schedule of 500 million vehicles. That is more than 500 million engines short. This is also assuming that energy prices and production remains stable...which it is not.

But today's economists, the same ones that lawmakers turn to when they are writing policy that affects YOU, do not believe that gasoline, oil, hydrocarbons, or any other energy resources are "essential". So don't worry.

Here is a graphic of what the Neoclassical Economics System looks like:

Figure 1 (Two Paradigms of Production and Growth, Professor Robert U. Ayres, Dr. Benjamin Warr, Center for the Management of Environmental Resources (CMER), INSEAD, France)

Does this system diagram seem a bit strange?
As long as profit goes up and product costs decline, there will be more money for the consumption of goods and services...which will make profit go up and product costs decline, so that there will be more money for the consumption of goods and services...Hey! Wait a minute...This looks like an endless loop!

But the 2nd Law of Thermodynamics says that you cannot create an endless energy-exchange system without the introduction of an outside energy source.

But there is nothing in this "system" to INPUT into the system. It simply keeps on looping. (Its a bit loopy.)

That is the definition of a perpetual-motion machine...and cannot exist within the physical structure of this current universe.

"In the closed economic system described by Walras (Walras 1954), Cassel, (Cassel 1932) von Neumann (von Neumann 1945) and Koopmans (Koopmans 1951), every product is produced from other products made within the system, plus capital and labor services."

"Lacking any linkage between the efficiency of materials and energy use and productivity, there is no theoretical incentive to become more efficient. There are also no consequences from generating wastes and pollutants. In the closed Walrasian equilibrium system, where all products are abstractions, there is no such thing as material waste. The neo-classical conceptualization implies that wastes and emissions ñ if they exist at all ñ do no economic harm and can be disposed of at no cost." (Two Paradigms of Production and Growth, Ayres, Warr, pg. 2, 5)

Time to look at another point of view on economics.

ECOLOGICAL ECONOMICS

Dr. Robert Costanza, of the Gund Institute for Ecological Economics, University of Vermont Rubenstein School of Environment and Natural Resources, defines Ecological Economics this way:

Ecological Economics transcends traditional disciplinary boundaries in order to address the complex interrelationships between ecological and economic systems in a broad and comprehensive way.

Here is an example of an Ecological Economic System:

Ecological Economic System Showing Input and Output
(The Need to Reintegrate the Natural Sciences with Economics, Charles Hall et al. p. 664)

Here is an expanded version of the Ecological Economic System (click picture for a large version):

Expanded Ecological Economic System: Economics of Life
(The Need to Reintegrate the Natural Sciences with Economics, Charles Hall et al. p. 665)

Notice how the Ecological Economic System closely matches what happens in real life? There are INPUTS into the system in the form of Solar, Geophysical, and Nuclear energy; NATURAL RESOURCES; as well as OUTPUT in the form of consumption and waste. Every aspect of this system has an energy (exergy) value and can be plotted numericaly.

Here are two more examples of the Conventional Model of the Economy and the Expanded Ecological Economic System (click on the pictures for larger versions):

(Visions, Values, Valuation, and the Need for an Ecological Economics, Robert Costanza,
June 2001 / Vol. 51 No. 6, BioScience, pg. 461)

THE EVOLUTIONARY PARADIGM (Ayres, Warr)

Economists Emeritus Professor Robert U. Ayres, and Dr. Benjamin Warr, of the Center for the Management of Environmental Resources (CMER), INSEAD, France, have outlined the "Evolutionary Paradigm" of economics:

"...the disequilibrium evolutionary paradigm discussed hereafter characterizes the economy at the macro-level as an open multi-sector materials/energy processing system. The system is characterized by a sequence of value-added stages, beginning with extraction of crude resources and ending with consumption and disposal of material and energy wastes, which can do harm if not eliminated." (Two Paradigms of Production and Growth, Ayres, Warr, pg. 5)

WHY DO NEOCLASSICAL ECONOMISTS THINK THE WAY THEY DO?

No, that was not a joke...but some may think so.

VALUE: If it has no value, it is not even considered in the equation.

"The history of economic thought is replete with struggles to establish the meaning of value, both what is it and how is it measured. Aristotle first distinguished between value in use and value in exchange. The distinction between use and exchange value has been "resolved" several times, but it remains an important issue even today." (Value Theory and Energy, Robert Costanza, University of Vermont, Encyclopedia of Energy, Volume 6., 2004, Elsevier Inc., pg. 338)

ENERGY has a VALUE problem with neoclassical economic theory due to one major point: the cost of energy has been cheap!

"The conventional neoclassical view of the low importance of energy and materials dates back to the first stages in the development of neoclassical economics. Initially the focus was not so much on the generation of wealth as on its distribution and the "efficiency of markets." Consequently, the early thinkers in economics started with a model of pure exchange of goods, without considering their production."

..."Here lies the historical source of the economists' underestimation of the production factor energy, because in advanced industrial market economies the cost of energy, on the average, is only 5% to 6% of the total factor cost (Baron 1997). Therefore, economists tend to either neglect energy as a factor of production altogether or they argue that the contribution of a change of energy input to the change of output is equal only to energy's small cost share of 5% to 6% (Denison 1979,1984)." (The Need to Reintegrate the Natural Sciences with Economics, Charles Hall, Dietmar Linderberger, Reiner Kummel, Timm Kroeger, and Wolfgang Eichhorn, August 2001 / Vol. 51 No. 8 BioScience, p. 666)

So, low cost has come to mean low value.

In neoclassical economics, one can also readily see how little value is placed on resources, since resources can be substituted for other resources [emphasis is ours]:

"...[In neoclassical economics:] On the production side, inputs are also considered to be substitutable for one another. Machines and technology can substitute for people and natural inputs."

"...[But the reality is:] On the production side, no number of lumbermen is a substitute for timber when there is no timber. Production may require certain inputs, but at the same time there may be substitutability between others...As Krutilla suggests, there may be close substitutes for conventional natural resources, such as timber and coal, but not for natural ecological systems."(Value Theory and Energy, Robert Costanza, University of Vermont, Encyclopedia of Energy, Volume 6., 2004, Elsevier Inc., pg. 341)

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Cutler J. Cleveland (used with permission)
	Biophysical Economics: From Physiocracy to Ecological Economics and Industrial Ecology - this is a MUST READ	(384k) [download]
	Energy Quality, Net Energy, and the Coming Energy Transition	(192k) [download]
	Aggregation and the Role of Energy in the Economy	(144k) [download]
	Net Energy from the Extraction of Oil and Gas in the United States	(176k) [download]
Robert Costanza (used with permission)
	Visions, Values, Valuation, and the Need for an Ecological Economics	(276k) [download]
	Value Theory and Energy - this is a MUST READ	(120k) [download]
	Managing Our Environmental Portfolio	(172k) [download]
	Costanza, R. 2000. Visions of alternative (unpredictable) futures and their use in policy analysis. Conservation Ecology 4(1):5. [online] URL: http://www.consecol.org/vol4/iss1/art5
Charles Hall (used with permission)
	The Need to Reintegrate the Natural Sciences with Economics	(424k) [download]
Cutler J. Cleveland; Robert Costanza; Charles A. S. Hall; Robert Kaufmann
	Energy and the U.S. Economy: A Biophysical Perspective	(948k) [download]
Robert U. Ayres and Benjamin Warr (used with permission)
	Useful Work and Information as Drivers of Growth	(668k) [download]
	Two Paradigms of Production and Growth	(580k) [download]

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For you Star Trek fans, someone sent us a bluegrass version of the original Star Trek
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