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Energy & Creative Destruction: Fossil Fuels Triumphant

Creative destruction , a term popularized by Joseph Schumpeter, is the market process whereby bad is eliminated, the better replaces the good, and past performance gives way to new strategies and victors. No firm is forever, and financial loss is a characteristic of capitalism, as is the more used term profit.

Energy is the story of creative destruction. Coal gas and later coal oil replaced a variety of animal and vegetable oils, including whale oil, camphene oil, and stearin oil. Crude (mineral) oil then displaced manufactured (coal) oil, just as later natural gas would displace manufactured (coal) gas.

Coal itself displaced primitive biomass (burned plants and wood) and other forms of renewable energy, such as falling water and wind. Fossil fuel was a concentrated, continuous-burn industrial-grade energy.

The intensity of fossil energy can be understood as a stock of the sun’s work over the ages, not a dilute flow from the sun (solar, wind)–or a low-density mass from limited years of sunshine (biomass). “The ancient resource pattern depends primarily on animate energy and hence on current solar radiation,” Erich Zimmermann explained. “The modern resource pattern is built around stored-up solar radiation.”

Beginning with Jevons (1865)

W. S. Jevons explained how coal (and by implication, gas and oil) were uniquely suited for—and indeed, prerequisites for—the machine age. [T]he economy of power … consists in withdrawing and using our small fraction of force in a happy mode and moment,” said Jevons, the father of modern energy thought.

Given fossil fuels, the unreliability of wind power and water flow were overcome. “The first great requisite of motive power is, that it shall be wholly at our command, to be exerted when, and where, and in what degree we desire,” Jevons explained. “The wind, for instance, as a direct motive power, is wholly inapplicable to a system of machine labour, for during a calm season the whole business of the country would be thrown out of gear.”

But even if wind were consistent and storable, it was still too little from too much. Jevons explained:

No possible concentration of windmills … would supply the force required in large factories or iron works. An ordinary windmill has the power of about thirty-four men, or at most seven horses. Many ordinary factories would therefore require ten windmills to drive them, and the great Dowlais Ironworks, employing a total engine power of 7,308 horses, would require no less than 1,000 large windmills!

Biomass was no escape. “We cannot revert to timber fuel, for ‘nearly the entire surface of our island would be required to grow timber sufficient for the consumption of the iron manufacture alone.’” And on geothermal: “The internal heat of the earth … presents an immense store of force, but, being manifested only in the hot-spring, the volcano, or the warm mine, it is evidently not available.”

Water power had reliability problems compared to coal and locational issues as well. Explained Jevons:

When an abundant natural fall of water is at hand, nothing can be cheaper or better than water power. But everything depends upon local circumstances. The occasional mountain torrent is simply destructive. Many streams and rivers only contain sufficient water half the year round and costly reservoirs alone could keep up the summer supply. In flat countries no engineering art could procure any considerable supply of natural water power, and in very few places do we find water power free from occasional failure by drought.

Furthermore,

The necessity … of carrying the work to the power, not the power to the work, is a disadvantage in water power, and wholly prevents that concentration of works in one neighbourhood which is highly advantageous to the perfection of our mechanical system. Even the cost of conveying materials often overbalances the cheapness of water power.

Dense Energy, Real Energy

In reference to California’s 1920s energy picture, the father of the modern electricity industry, Samuel Insull, explained how so-called white coal (hydroelectricity) required steam-plant backup for reliability.  And so it came to be in Enron’s time, when a bad water year in California triggered an electricity crisis in light of government retail price ceilings, setting the stage for the company to game the wholesale market.

Steam plants, Insull added, could be situated near the load, unlike hydro production, which was at the river.

Jevons’s energy-by-energy analysis is as true today as it was when penned in 1865. Coal could be burned continuously and evenly, avoiding the intermittency of wind or sunshine. Coal did not depend on the season or on a weather condition, as did water flow. Coal was storable and transportable. Coal production and combustion needed far less surface area than would a similar amount of renewables.

In short, there could not be a return to the chancy, inflexible, dilute energies of the past—which were, ironically, all renewable from a physical viewpoint. [1] Seizing upon this point, Jevons was the first intellectual to question the ability of renewables to serve as primary energies for industrial society.

Coal as Wonder Fuel

“Coal, in truth, stands not beside but entirely above all other commodities,” Jevons concluded. “It is the material energy of the country—the universal aid—the factor in everything we do. With coal almost any feat is possible or easy; without it we are thrown back in the laborious poverty of early times.” As the “source of fire … of mechanical motion and of chemical change,” coal was “the Mainspring of Modern Material Civilization.”

This wonder fuel, Jevons added, was “the chief agent in almost every improvement or discovery in the arts which the present age brings forth.” The iron age was really the age of coal, since “coal alone can command in sufficient abundance either the iron or the steam.” Substitute carbon-based energy for coal—add oil and gas to coal—and Jevons’s conclusion is clear and correct for today.

Coal creatively destroyed renewables as primary energy. The carbon-based energy era introduced creative destruction between coal, manufactured gas (coal gas), manufactured oil (coal oil), crude oil, and natural gas.

Other Creative Energy Destruction

Thomas Edison’s electricity rocked the manufactured-gas industry across an ocean, as witnessed in London by a young Samuel Insull. It was coal versus coal once removed, with gas distilled from coal competing against coal-generated electricity. Later, natural gas would go head to head with coal to generate steam for producing electricity, a rivalry that reached a crescendo in the era of Enron and Ken Lay and continues today. [2]

In transportation, creative destruction encompassed the gasoline-powered internal-combustion engine, which knocked electricity off its perch. Try as they might, Edison, Insull, and even Henry Ford could not make electric vehicles viable against petroleum-powered cars and trucks. Batteries were heavy, costly, and slow to recharge compared to the energy from on-board motors.

Neither could electricity break into the railroad market, despite the entreaties of Samuel Insull. Wood, then coal, then diesel burned on board was simply too economical for rural locomotion, as opposed to urban street locomotion.

Samuel Insull’s standards of excellence made him an agent of creative destruction. The “creative rearranger” improved his industry over multiple decades. Early in his Chicago career, Insull persuaded manufacturers, retailers, traction companies, and farm villages to stop generating their own power and to buy instead his cheaper, more reliable supply. Insull’s new-and-improved electricity reached across the energy market, pressuring both kerosene and coal gas in the illumination market to improve or perish.

But Insull’s best efforts could not make electricity competitive for transportation outside of streetcars, and his battery packs at power plants proved to be a very expensive, limited option to serve peak demand. Electricity had to be consumed the moment it was produced, creating a different set of economics that über-entrepreneur Insull addressed via two-part rates and other strategies.

Natural gas tried to beat electricity at its own game. In the 1960s, for example, Florida Gas Company experimented with gas-powered fuel cells in a joint venture with Walt Disney World. Low-emission electricity was the prize, but sour economics made the venture little more than a photo opportunity. Another experiment in Jack Bowen’s time, natural gas air conditioning, fell short but not for a lack of effort.

Political Interference

Creative destruction results from market verdicts at the intersection of supply and demand. Innovation and expected profit drive supply; price, availability, and quality (including reliability) attract demand.

Outside of the free market, energy hopes and legislative votes have created a political market, a sub-industry whose activity results from special tax favors, government grants, and/or mandates. Uneconomic energies are a form of postmodernism under which market-rejected, politically correct offerings spring to life—liabilities parading as assets. Today, government-dependent alternative energies comprise 6 to 7 percent of total U.S. production. Political energy includes virtually all wind power, biomass, and ethanol, as well as the large majority of solar—or just about all non-hydro renewables. (Off-grid solar has a market niche.)



[1] Also see Robert Bradley, Capitalism at Work: Business, Government, and Energy, pp. 194–98.

[2] Enron’s first (and most successful) business plan centered on natural gas as a superior alternative to coal and fuel oil in stationary markets (electricity, industrial boiler, home heating).

NOTE: Documentation for this section can be found in Bradley, Edison to Enron: Energy Markets and Political Strategy (2011), and at http://politicalcapitalism.org/book2/pdf/Epilogue.pdf.

8 comments

1 Andy Wehrle { 01.04.12 at 12:04 pm }

So what’s your point? Really.

2 rbradley { 01.04.12 at 12:15 pm }

Andy:
Added ‘Fossil Fuels Triumphant’ as a subtitle–does that help?

3 Mark { 01.04.12 at 2:04 pm }

This article gives perspective to the evolution of energy usage. This is a perfect example of a technology curve in action. Taking this perspective a step further, one can see that notions such as sustainability are not based on anything other that Malthusian theory.

Nicely done!

4 Tony Fleming { 01.04.12 at 6:17 pm }

A nice distillation of the fundamental physical basis of energy innovation. Jevons clearly had an intuitive grasp of energy systems, but one thing he was ultimately mistaken about was geothermal energy: “…but, being manifested only in the hot-spring, the volcano, or the warm mine, it is evidently not available”. Of course, he probably could not have imagined today’s heat pump technology, which allows a building to extract more than 5 times the amount of energy from the shallow subsurface for every one unit of energy input. Geothermal HVAC is so economical that it has become the default climate control system in new homes and many businesses here in the southern Great Lakes over the past decade or two.

You still need a reliable supply of grid electricity, i.e., conventional fuels, to provide that one unit, but the economics work out with or without the current incentives in place. We’ve had our system since 1995 (way before the current incentives were offered), and it costs about $30-35/month to operate in the dead of winter. Up-front system costs are comparable to installing the highest-efficiency gas furnace on the market plus a central AC (geothermal systems serve both functions and produce some hot water)

Its unfortunate the same “no volcano in my neighborhood” misconceptions persist today, particularly among renewable energy zealots. Because if there’s one renewable technology that actually can economically “reduce our dependence on ‘foreign’ oil” (here, I’m emulating the misleading, emotional claim frequently made by industrial wind promoters), geothermal is it, at least in places where home heating oil is still widely used.

5 rbradley { 01.04.12 at 6:44 pm }

Thank you Tony. How geographically dependent is geothermal? Is it like wind and solar–some places prime, relatively speaking?

6 Tony Fleming { 01.04.12 at 9:03 pm }

Good question, Rob. Geothermal energy is readily available via heat pump technology virtually anywhere (well, maybe not quite so easily in Antarctica or other polar latitudes with really deep permafrost…) It taps the constant heat flux from inside the earth, which is also called the “geothermal gradient”. The strength of the gradient varies among regions depending on the underlying geology, but generally averages about 1 degree celcius per 100 feet of depth. This is why ground water and soil below a depth of 10 feet or so (below the influence of the frostline) remain at a constant temperature. The geothermal gradient also is responsible for creating the “petroleum window”, which I’m sure many readers have heard about. In fact, much of our data describing the geothermal gradient comes from the petroleum industry.

Keep in mind that geothermal HVAC is a fundamentally different technology than either: 1) the “hot rock geothermal” used to generate electricity in areas of very high heat flux, which may explain why there is confusion about the words “geothermal energy”; or 2) most other renewables, in that it is both constantly available and energy dense.

Here’s a map of the geothermal gradient in North America: http://smu.edu/geothermal/2004NAMap/2004NAmap.htm
Note that geothermal heat flux is measured in MEGAWATTS per square meter (as compared to something like wind, measured in watts per square meter). I think Jevons appreciated this distinction, based on his characterization of geothermal as representing “an immense store of force”.

7 Joel Riddle { 01.06.12 at 11:29 am }

Jevons was incredibly astute.

I find the omission of nuclear energy from this discussion to be a significant omission. Had the “political market” mentioned at the end of this article not been successful in accomplishing the break-up of the AEC into the NRC and ERDA (now the DOE), which subsequently resulted in the cost of nuclear construction sky-rocketing (with inflation of that day also being partially to blame), and had India not developed a nuclear weapons program (which killed re-processing in the U.S. and thus took away the feedstock for the then-favored breeder reactor program), the present status of this discussion could have been more about nuclear being the dominant primary energy source, maybe with coal-to-liquid fuels (powered by nuclear heat) already being abundantly available in a net energy exporting United States.

Apologies for the length of that run-on sentence. Here’s a link to a video that might be more clear than my run-on sentence.
http://atomicinsights.com/2011/12/kirk-sorensen-why-didnt-molten-salt-thorium-reactors-succeed-the-first-time.html

8 Joel Riddle { 01.06.12 at 11:36 am }

To add, as I read this posting, I couldn’t help but be reminded of a posting I had read last March on the same topic which is worthy of some thoughtful consideration.

http://colinmcinnes.blogspot.com/2011/03/dimming-light-of-human-ingenuity.html

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