A Torrent of Darkness

“THE AIR WAS SO THICK that I thought I was choking,” she said. “The pollution was just unbelievable. All the locals wore surgical masks, and so did almost everyone in our group. I would get back to the hotel room and I had black lines of soot all over my face. I would cough up black phlegm all evening. I grew up in Pittsburgh in the 1950s and 1960s and I never saw anything like it before.” The speaker was a close acquaintance who visited China about two months ago.

Out came the photographs from Shanghai and Beijing. There were the usual scenic shots of boats near the wharves of the Huangpu River and the Bund of Shanghai. There were pictures of the visit to Tiananmen Square in Beijing, and, of course, the obligatory trek to the Great Wall. Above everything in the photos, however, was the haze.

There were more photos. The panoramic shots from the windows of the upper stories of my correspondent’s skyscraping hotels, where she stayed while in China, were like photos from the inside of an airplane flying through a dark cloud. The Earth was a map of fuzzy images, obscured by the gray atmosphere. And this shade of sky was instantly recognizable to anyone who grew up in the U.S. industrial Rust Belt during a certain era.

“Yes,” added my friend, “there was economic growth everywhere. China is booming. People have money. I have never seen such concentrations of construction cranes. There were hundreds of cranes, and it seemed as if everyplace we visited was under construction. The streets were crowded with well-dressed people, and the stores were packed. But what good is it if you can hardly breathe?”

China’s Lesser-Known Export

It may be the case that my acquaintance had the misfortune of traveling to China during a particularly bad spell. On June 11, 2006, The New York Times filed a report from China that amplified the observations of my friend:

“One of China’s lesser-known exports is a dangerous brew of soot, toxic chemicals, and climate-changing gases from the smokestacks of coal-burning power plants.

“In early April, a dense cloud of pollutants over northern China sailed to nearby Seoul, sweeping along dust and desert sand before wafting across the Pacific. A U.S. satellite spotted the cloud as it crossed the West Coast of the United States.

“Researchers in California, Oregon, and Washington noticed specks of sulfur compounds, carbon, and other byproducts of coal combustion coating the silvery surfaces of their mountaintop detectors. These microscopic particles can work their way deep into the lungs, contributing to respiratory damage, heart disease, and cancer.”

The Rock That Burns (and Kills)

China has burned coal since prehistoric times. There are references in ancient Chinese literature to “the rock that burns.” Right now, coal makes up about 65% of China’s primary energy consumption, for both electricity production and as boiler fuel in factories and space heating in housing stock, and China is both the largest consumer and producer of coal in the world. China’s coal consumption in 2003 was more than 1.53 billion short tons, or 28% of the world total. Even this figure may be on the low side, because there is much unlicensed, unregulated coal mining and usage in China that is not reported or reflected in national statistics. Thus, the Chinese government has made continuous upward revisions to its published coal production and consumption figures over the past few years.

According to The New York Times , China today burns more coal than the combined consumption of the United States, the European Union, and Japan. China has increased its coal consumption by about 14% in each of the past two years, and will continue to do so. Every 7-10 days, another coal-fired power plant begins to operate somewhere in China, with generating capacity sufficient to serve all of the households in a city the size of Tampa or Seattle.

At the level of basic production, however, China’s coal mine fatalities exceed 5,000 a year (more than 100 per week, or about 15 fatalities per day), giving that nation the dubious distinction of holding the record as the world’s deadliest coal producer. The national government is attempting to reduce the numbers of mining fatalities by cracking down on small, and often illegal, mines in the country. But it is an unfortunate fact of economic life in that vast nation that local authorities in mining districts often collude with mine operators to cover up unlawful and hazardous operations. Many private and state-owned mines have been documented as flagrantly violating China’s rather lax safety regulations.

If China cannot find a way to clean up its coal plant emissions, to include the tens of thousands of factories and millions of housing units that burn coal, air pollution of every sort will accelerate to the point of causing as yet incalculable damages. For example, Chinese government statistics indicate that just the sulfur dioxide produced from coal combustion poses an immediate threat to the health of China’s people, contributing directly to about 400,000 premature deaths a year. Sulfur dioxide also causes acid rain that poisons lakes, rivers, forests, and crops in a nation that is already chronically short of fresh water and arable land.

World-Class Global Warming

According to The New York Times article, the increase in carbon dioxide and other gases associated with global warming from China’s coal use will probably exceed that for all industrialized countries combined over the next 25 years. This will swamp, by a factor of five, the reduction in emissions that was envisioned in the Kyoto Protocol of the 1990s. While China’s carbon dioxide is chemically no different than that emitted by the industry of the U.S., or Europe or Japan, it is the rate of China’s increase of emissions that is worrisome.

Carbon emissions into the Earth’s atmosphere, from China or from any other industrialized nation, are no minor issue to the future of mankind. A recent article in the Los Angeles Times entitled “Global Warming Threat Is Seen in Siberian Thaw” (and summarizing a study published in the authoritative journal Science) detailed the results of a joint U.S. and Russian study of the permafrost of Siberia.

In an area of more than 400,000 square miles, there is an immense amount of organic carbon matter frozen in and under the Siberian permafrost. This carbon is the frozen legacy of literally millions of years of accumulation of flora and fauna that never decayed in the cold climate of that region. Even a slight increase in the Earth’s average temperature, caused by the effects of carbon dioxide buildup in the atmosphere, could potentially unleash billions of tons of carbon dioxide into the atmosphere.

To illustrate the point, if the permafrost continues to thaw and releases heat-trapping carbon dioxide, it could release as much as 500 billion metric tons of carbon dioxide that is currently locked up in the permafrost. This would be a relatively sudden and dramatic increase over and above the 730 billion metric tons already in the atmosphere. In such a case, we would all live on another planet, certainly not the Earth as we have known it throughout mankind’s recorded history.

Ice, Greenhouse Gas, and Sea Level

NASA climatologist James Hansen has researched ice cores from Antarctica dating back almost 500,000 years, which provide a detailed record of the composition of the Earth’s atmosphere through several glacial and interglacial cycles. According to Hansen, it is possible to make a direct correlation between levels of methane and carbon dioxide in the Earth’s atmosphere and average global temperatures. The average global temperatures, in turn, correlate directly with glacial and interglacial periods. That is, the more “greenhouse gases” are present in the atmosphere, the warmer the Earth. A warm Earth means melting glaciers and rising sea levels. A colder Earth means expansion of glaciers and falling sea levels.

At the present time, according to Hansen, the Earth is within a fraction of one degree centigrade of being as warm as it has been at any point in the past 400,000 years. Whoops.

The implications of the relatively high average temperature are already visible in the abnormally high rates of melting in the Greenland ice sheet and the distinct evidence of accelerated ice melting in Antarctica. According to Hansen, the Earth may be near a “tipping point” at which melting of ice sheets in Greenland and Antarctica could accelerate to a scale that will have almost immediate impact on humanity via rising sea levels.

It is, according to Hansen, theoretically possible for a large amount of the Greenland ice sheet to melt within 50 years, which would steadily raise average world sea levels by about 25 feet, or 6 inches per year if you assume linearity of melting rates. So if you thought that losing New Orleans to Hurricane Katrina was a disaster, wait until the entire coastline of every continent and island on Earth begins to feel the inundation.

And if the Antarctic ice sheet melted over the next century or so, it could raise average world sea levels by as much as 225 feet, or over 2 feet per year on a linear basis of melt rate. By way of comparison, about 3 billion of the world’s population lives within about 200 feet of sea level, including entire island nations and vast swaths of populous nations like China, India, Indonesia, and the U.S.

In the U.S. alone, according to statistics published by the U.S. Census Bureau and summarized in a publication of the National Geographic Society, more than 50% of the nation’s population lives in counties adjacent to the seacoast. So global warming and concomitant rising sea levels have the potential to devastate the U.S. both physically and as a society. Most of the rest of the nations of the world, save the most interior, landlocked of nations, will fare no better. And some nations will simply vanish beneath the waves.

Global Warming Gloom and Doom

So here we go again. Air pollution, global warming, sea levels rising, and much of it within the foreseeable future. Are you depressed yet? First it was Peak Oil, and now it is global warming. Gloom and doom, right?

As I have mentioned before in articles in Whiskey & Gunpowder , gloom and doom is our stock in trade at Agora Financial. But our distinction at Agora Financial is that we like to think we do gloom and doom better than anyone else. That is because not only do we present you with the problem, we offer you some semblance of a solution, even if it is just investment advice. (Hey, don’t knock it just because you can only make money off of it.)

Up until lately, it has been easy for a large segment of the political and intellectual leadership in the developed world to look down their collective noses and to dismiss the “global warming crowd” as a bunch of fringe kooks. For example, for many years, it has been possible for some segment of the respectable scientific community to say that increased levels of carbon dioxide were not a major threat because the world’s oceans would absorb most of the excess CO2 molecules. But on this subject, the scientific jury has in recent times been walking back into the courtroom, and those jurors do not look happy. Pretty soon, the accepted scientific verdict will be that global warming is real and that carbon dioxide buildup is among the guiltiest of guilty parties.

Thus, I believe that in the not-too-distant future, the big leadership of the world is going to awaken to the seriousness of what I have just told you about global warming in the previous few paragraphs. What do I mean when I say “big leadership”? I mean all of it, the top honchos, whether U.S. or Chinese or Russian or European, or whomever. The government of Sweden is already there, with its active commitment to eliminate Sweden’s dependence on oil within 20 years. The other side of that eliminate-oil-dependence coin is an overt Swedish commitment to mitigate global warming.

When this new consciousness dawns, almost overnight, the collective national policies of reducing, mitigating, and controlling carbon emissions are going to cause some sectors of global manufacturing to become the leading growth industries in the history of mankind. Why? Because it will have to be this way. Not controlling carbon dioxide emissions will be tantamount to endorsing the inundation of large swaths of the Earth’s dry land, and the destruction of large segments of mankind. Like I said before, gloom and doom.

Can You Spot the Trend?

So if you are an investor, can you spot the trend? Very simply, within the next few years, we will see distinct movements in world energy markets. There will be less investment opportunity in the growth of energy supplies from sources that emit carbon dioxide and other greenhouse gases. And there will be more investment opportunity in the growth of energy supplies from sources that do not emit greenhouse gases. As one particular example, the production and installation of windmills in the not very distant future will simply explode.

The current worldwide production of electricity from windmills breaks down along lines that over 86% of world generation capacity is split between Europe (72%) and the United States (14%). But wind power still generates only 0.7% of the world’s electricity. This will have to change, and change dramatically, as it dawns on leadership cadres and entire populations that global warming is a reality.

Already, nations as diverse in traditional energy sources as Iran and Costa Rica are investing in wind power. A nation such as Jamaica, favored by year-round trade winds, could reduce its use of imported oil by as much as 80% or more if it made an aggressive effort to install a base of wind power for electricity generation. And as another example, and according to figures in the recently published 2006 edition of the BP Statistical Review of World Energy , in China, wind power generates less than 1% of electricity, but use of wind power has increased by over 28% a year since 1995.

The overall targets in Europe for wind power growth are substantial, even without taking into account Sweden’s ambitious program to move away from fossil fuels. By 2010, wind power is projected to deliver 33% of all new electricity generation capacity and provide electricity for over 86 million people.

The offshore wind turbines currently on the market can operate at a higher efficiency than their land-based counterparts. With blade rotors that sweep an area as large as a football field and an overall reach as tall as a 30-story building, these offshore wind turbines can be developed in large-scale ” wind farms.” These wind farms can provide power for large coastal population centers, where available land area is limited. A 100-megawatt wind farm over the course of 20 years will displace the need for nearly 1 million tons of coal or nearly 600 million cubic meters of natural gas.

Using the installed windmill base of one manufacturer alone as a basis for comparison, using wind turbines, versus traditional fuel generation, provides the benefit of keeping more than 11 million tons of greenhouse gases from being emitted each year. This company’s installed base of wind turbines provides the same amount of electricity annually needed to power about 1.5 million U.S. households. These turbines can generate an amount of electricity comparable to the energy produced by 9.5 million barrels of oil.

Thus, there is no question but that wind power, with its ability to reduce the need to emit carbon dioxide into the atmosphere, is an investment opportunity for the future. We will be discussing this in greater detail in future articles in Whiskey & Gunpowder , and in other Agora Financial publications.

Until we meet again…in Vancouver, best regards,
Byron W. King
June 22, 2006

P.S.: The title of this article comes from the first line of the classic romantic poem by Alfred Noyes, “The Highwayman,” published in 1906. “The wind was a torrent of darkness among the gusty trees,” wrote Noyes, in telling the tale of a mounted man who robbed people on the roads of England. The poem has nothing to do with burning coal or harnessing wind power, but I liked the ring and flow of the words in the context of this topic.

The Daily Reckoning