Saturday, October 1, 2011

The Cause of the 2007/2008 Recession: Our Decreasing Return on Work Invested and How to Fix the Problem

I still hear everyday that the cause of the recession was a housing bubble, or even that the cause of the recession was all of the money that the Federal Reserve printed.

The real cause of the US recession in 2007/2008 was high oil prices. Or put another way, the cause of the recession has been the slow decrease over time in the return on work invested for getting oil out of the ground and into a chemical form whereby it could be used in our transportation vehicles. While the Federal Reserve didn't help matters, i.e. some of the increase in the price of gasoline was due to the Federal Reserve's inflationary monetary policy in the last decade, the overall problem we face has been the increase in the average amount of work required to get gasoline into your car. (This is the amount of kWh of work required to get the gasoline into a form that your car can use...including the 'work' transferred to the government in the form of taxes...and should be compared with the amount of kWh's of work that can be generated from the combustion of the gasoline in your car. The last term divided by the first term is the total return on work invested.)

The costs (and hence the work consumed) have been increasing for the following main reasons, which I will expand upon in a later post. The easy to access, low sulfur, low viscosity petroleum liquids have largely been already tapped. What remains requires some combination of:

1) Drilling to greater depths
2) Horizontal drilling
3) Fracturing with explosives and sand
4) Forced flow with steam or carbon dioxide
5) Drilling off-shore
6) Increased removal of sulfur
7) Increased chemical conversion (such as using high viscous oil sands as input products)
The other main causes of the increasing price of gasoline have been:
8) US government spending/debt problems affecting interest rates
9) Inflationary monetary policy of our banks (i.e. the Federal Reserve prints money and gives it to bankers and the US government)

We don't face an energy crisis or an exergy crisis. We face a return on investment crisis.

We've are facing the possibility of a world in which we globably have a decreasing return on work invested. This doesn't mean that we are running out of energy/exergy sources, or even that we are facing a shrinking global economy. What this means is that we will face a stagnating or slow growing global economy until we figure out how to either a) become more productive, b) find a large source of easy to access fuels, c) decrease consumption of luxuries, or d) have a dramatic (i.e. almost five fold) decrease in the capital costs for wind or solar electricity (and the associated electricity storage required for them to provide electricity on demand.)

There's plenty of sunlight. There's also plenty of exergy sources in the ground (from oil to coal to natural gas.) It's not a problem of quanitity we face, but a problem of lower quality, and hence lower return on work invested. This means that there is less ability to tap into this less positive return on investment to pay for the luxuries that we cherish so much. This means that more of us need to be working on generating electricity and transportation fuels, and less of us will have the time to provide luxuries to those people who generate electricity and transportation fuels. If you like applied science and engineering, then this is not problem. You will be able to find plenty of jobs in the future. If you work in the area of hotel management or vacation planning, then you will face more and more competition for fewer jobs (and by fewer jobs, I mean fewer as a percentage of the global economy. Our global economy will still grow because we still have plenty of exergy sources that can yield positive return on work invested. It's just that the rate of return on work invested appears to be getting less positive with time because we have naturally drilled the easy wells first before attempting to drill the difficult ones.)

But let's focus on the positive. We have technologies out there that can generate very large rates of return on investment (even when you include having to pay taxes on the capital and on the profits.) One example today is natural gas combined cycle power plants. While the cost of producing natural gas might go up in the future, we always have the option of decreasing our consumption of luxuries. This would allow us to have the same growth rate as in the case of today's level of consumption of luxuries and today's cost for natural gas.

I hope that there are new technologies that can rival the rate of return on investment of a natural gas combined cycle power plant. I design power plants for a living, but unfortunately, none of the power plants I've designed have rates of return on investment that can match a natural gas combined cycle power plant with today's prices of natural gas. The plants I design only look competitive only when there's a price of CO2 of at least ~ $15/ton and a natural gas price increase of at least 50%. (This probably means that I need to find a new decision to turn down a job offer to work for a company that builds natural gas combined cycle power plants looks kinda stupid...but to be honest, I got that job offer just after I had already accepted a job for a Waste-to-Energy company. I'm still hoping that one of my power plants designs will yield a rate of return on investment that can match the IRR of today's NGCC power plants.)

Since the cause of the recession in the US was the high price of gasoline, we need to figure out how to lower the amount of work [kWh] to required to get fuels into the form that they can do work in your car (i.e. ways of lowering the levelized cost of driving our cars and trucks.) By levelized cost I mean the amount of money required to drive per mile, when taking into account the cost of the car, the cost of fuel, the cost of maintenance, and the cost of insurance.  Note: this is why buying an expensive electric vehicle is not necessarily good for the environment, your wallet or 'energy independence.'

To solve our economic problems, we need to either reduce our consumption of luxury items or we need to figure out how to lower the levelized cost of our power plants and transportation vehicles. Wind turbines, solar panels, and electric cars sound good, but right now, they are a drag on the economy because there are cheaper alternatives that do less environmental damage. For example, when you purchase an electric car, think about all of the oil and coal that was consumed at the factories that built the car and the batteries. Over the lifespan of the car, more oil and coal are consumed than if you would have just bought the 'dirty' piston engine vehicle.

Use your head wisely. Remember that the cost of an item (like a car) reflects both the amount of fuels used to create the item, and the amount of fuels that can be used in the future by the people who manufactured the car. An electric car is not "gasoline-free" if the factory producing the car consumes gasoline and if the people who work at the factory consume gasoline on their way to work or in their spare time with the money from their pay checks.

This post is not intended to anti-electric cars or anti-gasoline. I just want to remind people that the cheapest option is normally the most environmentally friendly (unless the company is dumping crap into our rivers), and that the two main ways to get out of our economic slump are either: a) cut back on the consumption of luxuries, or b) figure out how to lower the levelized cost of driving vehicles and generating electricity.

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