Sunday, June 1, 2014

The phase changes of high-cost energy

Are these two rocks the same or different?


The answer depends -- they are simultaneously the same and different.  The upper image is of a shale.  It is fine-grained and quite uniform.  The lower image is of a gneiss.  It is coarser grained with visible differences in color from point to point -- different minerals.  But the overall, bulk chemical composition is the same; it is only the arrangement of atoms into minerals and the size of the minerals that is different.

So while a chemist can say that these two rocks are the same, a geologist can say they are quite different.  The geologist might go on to explain how the molecules that make up the shale rearrange themselves into different minerals, different solid phases, when buried to sufficient depth (pressure and temperature) for a sufficiently long time.  The shale becomes a gneiss. 

There are some similarities with economic systems.  Our economic system, currently dependent on inexpensive fossil fuels, is changing.  Fossil fuels, of which there is no shortage in the lithosphere, have become significantly more expensive.  Despite vast amounts of reduced carbon in the lithosphere which theoretically can be oxidized for energy, the cost of exploiting this resource has risen dramatically over the past decade.  The higher cost is seen directly in much higher market prices, but more significantly in the detailed financial statements of most oil and gas companies.  These financial issues call attention to more fundamental economic issues such as return on investment (be it a financial return or energy return), relative efficiencies, and the role of energy in the economic process.

One can think of the higher energy prices and costs as analogous to the higher temperature and pressure.  And just as higher temperature and pressure cause atoms in a rock to rearrange themselves, so higher prices and costs are causing the economy to arrange itself differently.  As geologists say, the higher temperature and pressure leads to phase changes; with the elements of the system rearranging themselves into different solid phases.  Similarly, there is an economic phase change occurring in the economic system.

But such changes take time, in the case of the shale to gneiss transition, geologic time.   The economic changes will occur much more quickly, and this difference in the time scale is a major difference between the natural earth system and the economic system.  The difference is between the equilibrium of a static system, essentially time independent, and that of a dynamic system which is time dependent.  But in both types of system, the phase changes are related to rates of entropy production.
My point here is simply that the economic prices and costs of various energy sources determine the way the pieces of the economy work together.  Higher energy costs will therefore change, in some aspects significantly, the organization of the resulting economy; the economy will reorganize into different phases. Unless energy costs go back down, which doesn't seem likely, tomorrow's economy is going to be as different from today's as a shale is from a gneiss.  Or at least as different in all dimensions as the late 18th century solar-based economy was from the late 20th century oil-based economy.  Note that while technologic change was a necessary component of the differences between the 18th and 20th century economies, a more basic difference has been the relative prices and costs of energy in the economic process.   Postulating that technologic change has been the driving mechanism for the economic changes is similar to saying that the tail wags the dog.

The far more fundamental change from the late 18th century until the end of the 20th century has been the reorganization of the economic environment due to decreasing energy prices and costs.  We are now at the beginning of a new period of increasing prices and costs.  So an economic reordering has begun.  It will take decades (at a minimum) to have any sense about how the multi-dimensional reorganization will work out or what the new economic 'mineral assemblage' will look like.  But it won't look like the present.