A free-market energy blog

The market order encompasses the concept of sustainability, which has been defined (Brundtland Report) as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”[1]

In a sustainable energy market, the quantity, quality, and utility of energy improve over time. Sustainable energy becomes more available, affordable, usable, and reliable. Energy consumers do not borrow from the future; they subsidize their progeny by enabling the expansion of technology and upgraded infrastructure.

The catchphrase sustainable energy encompasses the goals of security and reliability, energy availability, and environmental progress. Critics of industrial modernism censure fossil fuels, beginning with coal and continuing with oil. Relatively cleaner-burning natural gas is preferred of the three, but sometimes only as the transition fuel to an envisioned post-hydrocarbon economy.

Market failure is alleged where private benefits from producing and using carbon-based energies create net social costs (more costs than benefits). It is the invisible hand in reverse, whereby self-interested action creates a so-called negative externality. But is this the case?

Statistics support the conclusion of increasing energy sustainability, not its opposite, whether measured in terms of air emissions or resource development.[2] Regarding the latter, the natural science concept of mineral fixity—and thus depletion with every extraction—is contradicted by the business and social science reality of replenished supply and net reserve additions from entrepreneurship, or in this case, resourceship. [Read more →]

“Without these subsidies … ‘On-grid PV,’ would be virtually non-existent. It only exists because the solar industry lobbied government officials to compel citizens to purchase this otherwise non-economic energy source.”

“Included in the list of failed solar companies is Solon of Germany whose corporate slogan was ‘Don’t Leave the Planet to the Stupid.’ Fortunately for taxpayers, it appears Solon will be leaving the planet.”

A recent Wall Street Journal article, Dark Times Fall on Solar Sector(December 27, 2011), surveyed the latest solar industry fallout, as well as overviewed the financial condition of the surviving companies.

But the article seems to mistakenly equate the fallout to viability as if better profits would mean sustainability. The industry is not viable, but this is unrelated to the recent fall-out. The industry was growing and profitable in the recent past and was equally non-viable then. The difference is that with profit-enabling government subsidies intact, many established U.S. and European manufacturers are now competing with China. And they cannot compete.

Risky Business

There is a measure of justice in this recent turn of events. The old adage “he who lives by the sword dies by the sword,” comes to mind. In this case, one might say, “the industry that lives by government intervention dies by government intervention.” [Read more →]

This [new report on advances in wind integration] will make uncomfortable reading for those on this list who appear to be religiously opposed to wind energy, i.e. irrespective of the objectively verifiable facts. Wake up people, wind energy is growing world wide at 22% with 194 GW installed already, and “grid operators are increasingly positive about integrating wind power….”

- Wind advocate email, January 4, 2012

The communication concerned a new report sponsored by the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy: Strategies and Decision Support Systems for Integrating Variable Energy Resources in Control Centers for Reliable Grid Operations.

Subtitled Global Best Practices, Examples of Excellence and Lessons Learned,” the report admits that “there is no ‘silver bullet’ solution to successful wind integration that applies to all power systems.” But that is about all that can be said about, as John Droz puts it below, trying to pound a square peg into a round hole. Another analogy: integrating agriculture on ocean liners. (Any more analogies welcomed in the comments.)

Two Responses

The advocates’ email drew this response from Thomas Marks, Executive Director of Great Lakes Wind Truth; New York Director,  Great Lakes Sport Fishing Council and North American Platform Against Windpower: [Read more →]

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. [Read more →]

Enron’s revolution-always approach to energy in its latter years was Schumpeter on steroids. Adding to the company tumult was another complicating factor: Enron’s business model was dependent on political, not free-market, capitalism.

In early 2001, Enron founder and chairman Ken Lay proclaimed a new corporate vision: to become the world’s leading company. But this goal was not about beating oil majors like ExxonMobil or Chevron at their game. It was about mandatory open-access with gas and electricity transmission to trade the commodities; reducing tax bills with solar and wind investments (what GE does today with what was once Enron Wind); developing infrastructure in risky countries with government-guaranteed financing; and more.

Enron’s Business Guru

Lay’s super-Schumpeterian view of business strategy drew upon Peter Drucker’s The Age of Discontinuity, which Professor Lay taught to his graduate economics students at George Washington University in the early 1970s. But it was a quarter-century later, as head of Enron, when Lay discovered Gary Hamel, the leading business guru of the high-flying 1990s.

Also a Drucker disciple, Hamel brought the discontinuity-revolution theme to new heights. Hamel’s Competing for the Future (1994, 1996) and Leading the Revolution (2000) fueled Enron’s vision, values, and corporate culture. The admiration was mutual. “As much as any company in the world,” Hamel reported in 2000, “Enron has institutionalized a capacity for perpetual innovation.” [Read more →]

Ed. Note: Occasional posts at MasterResource include big-picture entries on key social science thinkers that are relevant to understand dynamic market capitalism versus its opposite, political capitalism. This entry examines a leading twentieth-century thinker whose work continues to frame many debates in applied economics and political economy.

Brilliant, blithe, eclectic, and obsessive, the immaculately attired, aristocratic scholar [Joseph Schumpeter] captured the essence of entrepreneurial capitalism and introduced the terms “creative destruction” and “business strategy.”

- Robert Bradley, Capitalism at Work: Business, Government, and Energy, p. 100.

“I set out to become the greatest lover in Vienna, the greatest horseman in Austria, and the greatest economist in the world. Alas, for the illusions of youth: as a horseman, I was never really first-rate.”

- Joseph Schumpeter, as recalled by student M. A. Adelman (Quoted in Ibid.)

Joseph Schumpeter (1883–1950) was the conscience of his profession, questioning the relevancy of an equilibrium-only approach for understanding business competition and economic growth. (Remember how static just about everything was that you learned in Micro 1.0 and 2.0?) Schumpeter was a methodological realist interested in the actual workings of capitalism, what he called capitalist reality.[1]

He also had a contrarian streak. He claimed allegiance to no school of thought and even feared becoming the orthodoxy himself. “When I see those who espouse my cause,” he averred, “I begin to wonder about the validity of my position.”

Entrepreneur as Revolutionary

Schumpeter’s theory of capitalist development centered upon the entrepreneur, a “swashbuckling … quasi-heroic” figure who disrupted routines and forged a new menu for consumers. Innovation was less about economizing within a known framework than about creating wholly new vistas.

The Schumpeterian entrepreneur did not say, “If it ain’t broke, don’t fix it.” He said, in effect, “Break it and make it better!” Incremental improvement was about routines and managers; by contrast, “the function of entrepreneurs,” Schumpeter stated, “is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on.”

Equilibrium Not

Such thinking led to a profound conclusion from the Austrian-born-and-trained economist: “The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.”

In the energy field, dense fossil fuels ‘creatively destructed’ renewables in the 19th century and continue to do so today.

No equilibrium box could hold the Schumpeterian entrepreneur. Automatons populate equilibrium; human innovators preclude it. Many economists abandoned the study of entrepreneurship because it was not amenable to mathematical and diagrammatic portrayal. They were right, but the wrong thing was discarded. The open-ended world of disequilibrium was the reality that had to be comprehended, even if mathematical economics had to be demoted. [Read more →]

“If resources are not fixed but created, then the nature of the scarcity problem changes dramatically. For the technological means involved in the use of resources determines their creation and therefore the extent of their scarcity. The nature of the scarcity is not outside the process (that is natural), but a condition of it.”

- Tom DeGregori (1987). “Resources Are Not; They Become: An Institutional Theory.” Journal of Economic Issues, p. 1258.

The confounding of physics with economics has plagued a real-world understanding of mineral resource development. The phenomenon of entropy and the laws of thermodynamics rule in their domain. But there is no economic law analogous to the physical conservation of matter. There is no law of conservation of value; value is continually, routinely created by the market process. And this value creation does not deplete–just the opposite.

This insight reorients the peak-oil debate from pessimism about hypothetical future physical resources to here-and-now concerns over incentives and institutions–or the ability of a free market to create a robust energy future.

Market Entrepreneurship … Mineral ‘Resourceship’

Israel Kirzner in the Austrian-School tradition has emphasized the open-endedness of market entrepreneurship. “Entrepreneurial alertness [is] in principle inexhaustible,” Kirzner has stated, wholly rejecting the notion of a “potential stock of entrepreneurial alertness in a society as some quantity ‘available to be used by society’.” In the vernacular of the oil industry, there are no reservoirs of proved, probable, or speculative quantities for entrepreneurship.

The institutionalist conception of knowledge as the ultimate resource powerfully complements an Austrian theory of resources. Thomas DeGregori has defined resources as “a set of capabilities” and “finite but unbounded.” He restated and embellished the “resources are not, they become” thesis of his mentor Erich Zimmermann as follows: [Read more →]

“Running out of resources” has been a common refrain among the intellectual class and policymakers since the beginning of the oil industry. L. C. Gray (1913) and Harold Hotelling (1931) cemented the fixity-depletion view of minerals that swept the economics profession; so did the presidency of Jimmy Carter, in the (regulatory-induced) troubled 1970s.

Remember the lament of James Schlesinger, the  first energy secretary for Carter’s new Department of Energy: “We have a classic Malthusian case of exponential growth against a finite source.” And the confident conclusion of Amory Lovins:

All oil and gas resources should be carefully husbanded—i.e. extracted as late and as slowly as possible. Our descendents will be grateful. We, too, shall need a long bridge to the future.

But when surplus conditions with oil and gas returned in the 1980s, the lost voices of Erich Zimmermann and M. A. Adelman, and the new voice of Julian Simon, found an audience.

Planned Conservation (Conservationism)

The depletionist worldview raised the question of what was the ‘right’ consumption profile, which inevitably involved government intervention to correct the alleged ‘market failure’ of overproduction/overconsumption. Enter F. A. Hayek (1899–1992), one of the century’s leading critics of government planning.

In The Constitution of Liberty (1960), Hayek evaluated “the necessity of central direction of the conservation of natural resources,” a view that was “particularly strong in the United States, where the ‘conservation movement’ has to a great extent been the source of the agitation for economic planning and has contributed much to the indigenous ideology of the radical economic reformers.” [1] [Read more →]

The free-market energy blog MasterResource turns three years old today. On December 26, 2008, the blog started on the strength of several noted free market scholars buying into a ‘movement’ blog instead of an institution-specific one. A thank you at this reflective time goes to Ken Green (AEI), Marlo Lewis (CEI), and Jerry Taylor (Cato), in particular.

MasterResource views stand at 1.1 million. While not a megablog, ours is a high-quality contribution to the current energy debate–and a resource for the historical record (our extensive index categories number 380).

We have published approximately 914 posts from approximately 115 authors. Some are widely published; others are talented amateurs who have chosen to do what the ‘experts’ choose not to do: uncover the problems of politically correct energies. Comments from our loyal, sophisticated readership add substance to many of the in-depth posts.

And we have achieved critical mass; Google an energy-policy-related term with ‘MasterResource,’ and there we usually are! [Read more →]

The European Energy Review has published a comprehensive article on the EU energy policy, entitled “Europe’s green energy chaos” by Andrew MacKillop (sometimes appearing as McKillop), an independent energy analyst and project advisor who has written on energy topics for over 35 years, and who worked for the European Commission’s Directorate-General of Energy as a policy expert in the 1980s.

EU policy can be summarized as 20-20-20 by 2020. Catchy isn’t it? It means 20% improvement in energy efficiency, 20% reduction in emissions, and 20% use of new renewable energy sources – all by 2020.

When publicized, the EU plan was (properly) criticized by the Economist and Dieter Helm, the chairman of the ad-hoc committee established by the EU to provide expert advice. MacKillop’s critical analysis of the current problems of government-heavy energy policy is spot on.

Government Planning in the Name of Markets

The EU energy plan inverts free markets and industrial government planning as discussed by MacKillop:

The climate and energy package makes heavy use of the notion that by preventing pipelines, power transmission lines and electric power stations being controlled by one company or entity, even if this entity is publicly owned and accountable to all democratic procedures for its control, will enable a “free market” that will create an upsurge in activity by small businesses who will gain entrance to the market. The usual way this notion is sold to voters and to the public is the claim this will automatically produce cheaper energy and more jobs, with additional climate and environment protection frills thrown in as needed.

In reality, the climate and energy package favours large industrial conglomerates in the energy sector and, as we know, Europe’s energy market liberalisation since 1996 has coincided with some of the largest energy price rises for final consumers in recent history. [Read more →]