Energy Malthusianism in the Sweep of History (and Rockefeller, Insull, and Lay)

By Robert Bradley Jr. -- September 12, 2009

[This excerpt from Capitalism at Work: Business, Government, and Energy prefaces a five-chapter review of energy Malthusianism from the time of Thomas Robert Malthus in the late 18th century through the Julian Simon/Paul Ehrlich debate of the late 20th century.]

“Here is a planet, whirling in sunlit space,” reads the opening of Rose Wilder Lane’s The Discovery of Freedom: Man’s Struggle against Authority, penned during the dark days of World War II. “The planet is energy,” she continues. “Every apparent substance composing it is energy. The envelope of gases surrounding it is energy. Energy pours forth from the sun upon this air and earth.”

Energy is pervasive and liberating. It moves people, makes things, and provides incalculable services. It vanquishes darkness, literally and figuratively. “Since early men ignited the first fires in caves,” it has been noted, “the unleashing of energy for light, heat, cooking, and every human need has been the essence and symbol of what it is to be human.” 

In economic terms, energy is the resource of resources, the master resource. Energy transforms mineral and natural resources from their raw form into consumable goods. Energy must be expended to create more energy and to refine energy into more usable forms. Thus, energy can be considered the fourth factor of production, in addition to the textbook triad of land, labor, and capital.

In business terms, energy has been and will likely always be the world’s biggest enterprise. The energy sector has spawned some of history’s great entrepreneurs. John D. Rockefeller shaped the American and world oil industry more than a century ago. Mr. Petroleum was one of the greatest business doers in U.S. and world history, if not the greatest.

Second to Rockefeller in the history of the U.S. energy industry is Mr. Electricity: Samuel Insull. An émigré who teamed with Thomas Edison to build the company that emerged as General Electric, Insull ventured on his own and built America’s largest gas and electricity entity. But his fortunes spectacularly reversed in the early 1930s. The dramatic rise and fall of the father of the modern electricity industry, “the Babe Ruth, the Jack Dempsey, the Red Grange of the business world,” is still the subject of contemporary books and articles.

In the 1980s and 1990s, another figure cut a unique path in the energy sector: Mr. Natural Gas, Kenneth L. Lay. He made a case for methane as the economic and environmental answer to America’s energy challenges and positioned Enron as the world’s first natural gas major. Lay’s star power put him in a league with the biggest names of the industry at the time, such as Lee Raymond of ExxonMobil and John Browne of BP. In early 2001, Paul Portney, president of Resources for the Future, declared, “In his role as chairman of Enron Corp., Ken Lay has almost singlehandedly made the world rethink what it means to be a modern energy company.”

But Ken Lay was a shooting star. He was no Samuel Insull, much less a John D. Rockefeller. Still, he was an industry driver and energy changer, as evidenced by Enron’s role in restructuring the natural gas and electricity markets in the U.S. and Europe. History should also note that Enron helped resuscitate the ailing domestic windpower industry, however unproductive this may turn out to be in the sweep of history.

The energy world is different today because of Ken Lay.

For Rockefeller, Insull, and (for the most part) Lay, energy was a far different commodity from that utilized during all of mankind’s previous history. The energy of old was renewable—falling water, burning wood and plants, harnessed wind and sunlight. The new energy, which powered the machines of the Industrial Revolution, and which today has an 85 percent share of the global energy market, is fossil fuel, which in its different varieties is vastly more concentrated, powerful, reliable, and transportable than what it replaced.

The carbon-based energy era began with coal and its derivatives, coal gas and coal oil. Petroleum and natural gas joined in. These energies came from the sun’s ageless work, creating a mineral stock far superior to the irregular, dilute energy of the sun’s flow. Little wonder that the new energy overwhelmed what came before to power the machines of industrialization and accelerate the capitalist-led transformation to modern society.

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Free minds and free markets created an energy boom that is now in its third century.

It began in England in the eighteenth century, and it continues today worldwide with ever greater quantities of carbon-based energy produced and consumed. But therein lies a peculiarity. In a physical sense, oil, gas, and coal are nonrenewable, with each extraction from a “known” supply leaving less for the future. As nature’s hydrocarbon glass is emptied, the thinking goes, extraction costs and selling prices must increase.

History tells a different story. As more oil, gas, and coal have been produced, more has been found. New substitutes within the carbon-based fuel family have emerged. So-called depleting resources have been replenished—and more. This paradox of plenty is a fact that few people, even economists, have been able to understand, much less explain.

In fact, the experts have told us time and again that energy demand will outrace supply, pushing prices up and stalling modern society. More often than not, such alarmism has been the conventional wisdom. Times of energy plenty are just temporary, it is warned. Optimists are like the man who jumps off of a tall building and gives a good report on the way down.

The “coal panic” of the 1860s is the “peak oil” debate of today—nearly a century and a half later. Samuel Insull feared coal depletion during his reign as “The Chief” of the U.S. electricity industry in the first third of the twentieth century. Coming out of the 1970s energy crisis, Robert Herring, chairman of Houston Natural Gas Corporation—a predecessor company to Enron—sought a “versatile substitute” for natural gas. At Transco Energy Company, Jack Bowen and his protégé, Ken Lay, looked to coal gas as the future for methane.

But when natural gas shortages turned to surpluses in the 1980s (the so-called “gas bubble”), the outlook shifted. Lay, now CEO of Enron, brandishing his Ph.D. in economics, became a national voice for resource optimism. Countering skepticism about the long-term gas supply was a key part of Enron’s natural gas strategy.

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The following five chapters revisit the perennial issue of energy pessimism versus optimism. The fixity-depletion view of fossil fuels was popularized by William Stanley Jevons in the 1860s, mathematically explicated by Harold Hotelling in 1931, and geologically quantified by M. King Hubbert in the 1950s and 1960s. The budding environmental movement gladly seized upon Hubbert’s analysis to warn of an impending crisis and urge a government restructured ecological society. “What will we do when the [gasoline] pumps run dry?” asked Paul and Anne Ehrlich back in 1971.

But some hearty souls championed a quite different view. To them, energy was a growing, not depleting, resource. The concept of resource expansionism was conceived by Erich Zimmermann in the 1930s, documented by resource economists beginning in the 1950s and 1960s, and codified into a general view by Julian Simon thereafter. Simon, originally a Malthusian, changed his mind after being contradicted by the statistical record. Simon put a theory to the data, concluding that human creativity had kept and would keep the cupboard full, given free minds and free markets. Human ingenuity—what he called the ultimate resource—was not a depletable resource but an expanding one, with each invention setting the stage for new breakthroughs. “I’m not an optimist, I’m a realist,” he would plead to the neo-Malthusian holdouts.

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Resource adequacy is part of the wider environmental issue of sustainable development, defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” A sustainable energy market is one in which the quantity, quality, and utility of energy improve over time. Sustainable energy becomes more available, more affordable, more usable and reliable, and cleaner. Energy consumers do not borrow from the future; they subsidize the future by continually improving today’s energy economy, which the future inherits.

The energy sustainability debate relates to Enron is several important ways.

The depletionist mindset that became a political force during the 1970s energy crisis created a movement to husband “dwindling” fossil fuels, over and above the behavior engendered by the price signals of the marketplace. Conservationism, or conservation for its own sake, became a mantra of environmentalists, and it continued unabated despite energy surpluses in the 1980s and 1990s. Government at all levels enacted mandates and subsidies to reduce energy usage. Nowhere was this done more than in California, a pivotal energy market in Enron’s history.

Riding the conservationism wave, Enron became the nation’s largest provider of energy-efficiency services—to great applause. This was part of a new genre of capitalism—natural capitalism—environmentalists thought. But energy outsourcing, whereby large commercial and industrial businesses turned over their energy operations to Enron Energy Services (EES), turned out to be a billion-dollar bust. EES’s advertised energy savings of 10 percent (or more) savings—making firms “Kyoto compliant” under one EES marketing scheme—was fiction. Driven by the profit motive, its corporate customers had already achieved most of the potential energy savings themselves. Most – if not all – of EES’s contracts (as those of other so-called energy service companies, or ESCOs) were unprofitable.

This case study in entrepreneurial error and public-relations overreaching in the name of environmental correctness was a cost of the creed of conservationism, which in turn came from the mindset of depletionism.

Enron was an energy company at heart. Ken Lay declared victory on three successive visions, which were to become

· the leading integrated natural gas company in North America;

· the world’s first natural gas major;[1] and

· the world’s leading energy company.

Enron focused on natural gas throughout, touting the fuel’s environmental and economic advantages over coal, in particular. But under its third mission, Enron set a vision within a vision—to become the world’s leading renewable energy company. Enron’s positioning as a “green” energy company, however, was at odds with other company priorities and would result in financial losses and even criminality.

Enron was at the pinnacle of the energy sustainability debate, with its Ph.D. economists and MBAs preparing energy outlooks, organizing conferences, and writing articles and books on resource availability, climate change, and national energy policy. Dr. Kenneth L. Lay actively participated in energy debates as a board member of Resources for the Future and the American Enterprise Institute; a keynote speaker at major conferences worldwide; a member of the Clinton administration’s President’s Council on Sustainable Development (1993–99); and a popular panelist at the World Economic Forum in Davos, Switzerland. Enron representatives set the agenda within various industry trade associations and pushed legislation at all levels of government in the United States and Europe. Thus, the big picture of energy thought and policy is fundamental to the Enron story in many and varied ways, as it will be to the other industry case studies in Book 2 and Book 3.

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[1] Natural gas major was an analog to the oil major, or the global integrated oil company.