The Bursting of Energy Bubbles

Irrational exuberance: describes a heightened state of speculative fervor.

What is odd is I keep coming back to the topic of overestimating the impact of energy technologies and under estimating the challenge that the energy sector faces in going low-carb(on). Shale gas in Europe has been a recent theme, but this is only the most recent exuberant expression of energy optimism.  Sexy shale looses out to the oily potbelly worker.

The spectacular recent revision down of shale gas deposits in Poland (by a fifth) and the new projection for China to go big in shale gas, means China may just be entering its bubble like period. These bubbles in shale gas can impact wrong-headed US policy, as I argued last summer in regards to a study from researchers from the James A. Baker III Institute for Public Policy at Rice University – shale gas was meant to alter the geopolitical energy landscape in Europe. However, like exuberant bubbles before, this bubble is being popped in each European country.

History of energy bubbles

The energy sector is littered with the corpses of energy technologies that were based on rosy projections, technologies that were surpassed by newer technologies unleashed by altered regulatory landscapes. The demise of the US nuclear industry in the 1980s resulted in stranded construction sites. Questions arose over the technology, but also energy demand dropped. The rise of gas turbines and the unleashing of these into the stale world of US monopolistic energy generators in the late 1980s and 1990s, helped fuel deregulation by demonstrating low cost generation technology. Large coal power plants, taking years to build and lock rate-payers into debt, versus smaller agile gas turbines where investors take financial risks, these have emerged as the disrupter technology.

The massive drop in solar panel prices – with China acting as a disruptor, demonstrates what are high technology prices one day, can dramatically drop leaving heavy bills, wrecked companies and public mistrust in the wake.

Sides of a bubble

There are two dimensions to energy bubbles. The first is irrational exuberance. Alan Greenspan used the term to describe the ferver in financial markets just before a crash.  This can be seen occurring in the shale gas industry – it is hot, sexy and here today – but not really, it is only an air-brushed picture. Or worse, the realty is a greasy oil field worker that slogs in the hot sun extracting black gold. It is on-the-ground realities that must be taken into account for understanding the viability of energy technologies.

The second is the controlling regulatory regime, or the energy regime that is in place. The solidification of the monopolistic energy regime in the US that was in place from the 1930s to the early 1990s began to crumble as new technologies began to leak out to the market (proving their worth) and prices of the older technologies were strongly impacting the competitiveness of manufacturers. The marginal costs in manufacturing, were no longer marginal, and the politicians began to bail from their half-century agreement with utilities, as jobs were lost and voters became upset.

There are multiple risks of these bubbles.

  • They result in flawed foreign policy: As is the case with the US as seeing shale gas a serious disruptor to Russian gas dominance in Europe. No doubt, diversification with shale gas helps, but with the US pushing US fracking technologies, makes their support to the sector self-serving and naturally results in over-hyping – and hanging on to misplaced optimism.
  • Wasted money: Pursing technologies or energy strategies in a monopolistic sector, buffers it for a time of unexpectedly being surpassed. However, monopolies only prolong the wasting death of older technologies. Maybe it isn’t possible to dump stranded technologies overnight, but a significant push to shift to newer technologies – or ways of doing business – will result in less wasted money. Effective regulatory environments can play an important role here. While extra money will always being expended defending and trying to retain older technologies, due to their sunk costs, diversification offers balance in an energy technology portfolio.
  • A flawed energy system: An unbalanced energy system with heavy reliance on one or two generation sources leaves little room for diversification in an emergency. Examples can be seen from the Fukushima nuclear accident, and also how Poland is having trouble weening itself off of coal to reduce CO2 emissions.

Bursting bubbles

The bursting of an energy bubble can be as dramatic as ending nuclear power in Germany and Japan. Or more, likely it can be the slow diffusion of air – almost unnoticeable, in a slow regulatory review process. Nonetheless, bubbles are also time markers, 2012 may be the year the air went out of shale gas, but it also can mark the year that sustained development of renewable energy and energy efficiency measures can be seen as the only option that truly increases security of supply. Reliance on gas as a gateway drug fuel to a sustainable energy system, for a carbon hungry world, only prolongs the tremendous revamping of Euruope’s energy infrastructure. It is those Polish window and solar hot water heater installers that should be airbrushed. Maybe if we begin to redefine the image of what sexy energy is, then we’ll eat less carbs.