The Transforming World of Energy Systems

Mankind has been using geothermal energy sources for several millennia. Ancient tribes congregated near hot springs and geysers on every inhabited continent. The Romans built baths near thermal springs from Scotland to Turkey. And now it’s back. Byron King explains…

I just returned from a trip to California, where I attended a conference called the Geothermal Finance & Investment Summit. The conference was in San Jose, at the south end of the San Francisco Bay. Why San Jose? San Jose is in the heart of Silicon Valley. And Silicon Valley is, as you know, ground zero for modern high-tech entrepreneurship in the United States. The highways of the South Bay region are lined with office buildings bearing the names of many astonishing business success stories of the modern era, from Intel and Cisco Systems to Yahoo, Sun Microsystems, Adobe and many more.

Over the past 30 years or so, a lot of investors laid a lot of money on a lot of tables. Those investors took a lot of risk on long-shot ideas. And when some of those long-shot ideas worked, they worked big. Microchips and mega-code have changed the world, bringing modernity to literally billions of people. And literally bringing billions of people to modernity. So what does high-tech have to do with geothermal energy? Well, it goes to show that when some ideas and industries come along at just the right time, there is almost no stopping them.

And so it may be with the application of geothermal energy, an idea whose time is upon us. Geothermal is not, of course, software and data routing. It is not "high-tech" as the computer geeks like to define it. In fact, mankind has been using geothermal energy sources for several millennia. Ancient tribes congregated near hot springs and geysers on every inhabited continent. The Romans built baths near thermal springs from Scotland to Turkey. Italy has been producing electricity from geothermal sources since 1904, and Iceland is today entirely electrified with geothermal power after a 25-year national effort. So geothermal is an old idea and a well-established means of mining heat from the deep earth. But the modern idea – the idea whose time has come – is to extract energy from the heat of the Earth’s interior on a massive scale and use it to obtain steam to turn a turbine and generate electricity. When people realize the potential, they will, in all likelihood, demand access to geothermal energy for many reasons. Let’s think through some of the industrial implications of this.

Most electricity generated in the world today comes from burning coal, natural gas or uranium in one form or another. Each of these forms of electric generation has been around for a while, so each has its historical advantages, legacies and problem sets. Briefly, this is what I mean:

Coal generation requires a large power plant, replete with handling systems, burners and boilers. Coal plants require a tall stack that emits quite a bit of carbon dioxide (CO2), plus nitrogen- and sulfur-based chemicals and various other particulates and air pollution. Coal plants usually require one or more rail lines, and thus we see trains hauling carloads of coal from the mine to the plant and returning the empties on backhaul. And coal plants create a market for strip mines and deep mines, which create their own environmental and legacy issues (depleted aquifers, surface subsidence, etc.) Geothermal, on the other hand, emits almost no CO2, nitrogen, sulfur compounds or particulates and requires no rail line, trains or strip mines or deep mines. There is no acid rain or mine subsidence. Geothermal just needs a number of wells in the ground with which to cycle the hot water or steam and to reinject it after use. And geothermal is a reliable source of base-load electric power – 24/7/365 – with well over 90% historical reliability.

Natural gas generation requires turbine plants, and even the most modern turbine plants emit relatively large amounts of CO2. In addition, gas burners require a pipeline back to one or more gas fields somewhere, onshore or offshore. And this necessitates a constant program of gas exploration, drilling, discovery and development. This kind of constant well-drilling program is becoming more and more problematic in the post-Peak Oil world that we are encountering. (Of note, on Nov. 19, 2007, The Wall Street Journal ran a Page 1 article discussing the Peak Oil issue. We thank The Wall Street Journal, but you read it here first.) Geothermal, in comparison, requires production of geothermal fluids from a relatively small number of production and reinjection wells. Geothermal does not impact the landscape at anything approaching the scale of drilling that is necessary to fulfill a natural gas requirement over many years. And geothermal fields can last for many decades. By comparison with natural gas, geothermal fuel — heat from the Earth — is essentially free.

Nuclear power has its own requirements for massive infrastructure. A typical nuke plant covers a square mile or more, with associated security systems and gigantic containment structures that can withstand a direct hit from a crashing airliner, if not an exploding cruise missile. Nuke plants are staffed with small armies of highly trained security and technical personnel and require a continuing supply of uranium fuel. The uranium fuel requires a mine for the ore, plus upgrading and processing facilities and other stages of high-security fuel handling and treatment through the end of the cycle, when radioactive waste must be contained for hundreds of thousands of years. By comparison, geothermal is a relatively simple level of proven technology. And this is a good thing, not a drawback. We know how to drill wells, how to extract steam or hot water, and we know how to reinject water after using its heat to spin a turbine. We know how to plug and abandon old wells.

So for a lot of reasons, the advantages of geothermal are obvious. Hands down, geothermal can beat coal, natural gas and uranium. Geothermal is more than competitive when it comes to price, such as cost per kilowatt-hour. There are no massive burner systems, no tall stacks, no rail lines or pipelines, no gigantic mines and processing facilities, essentially no air pollution, no toxic waste piles and long-term repositories.

Really, what is not to love about geothermal? Come to think about it, why is the world not running on geothermal? Well, we can only speculate as to why some things happened in history and some things did not. But in our view, for reasons of historical legacy, coal, natural gas and nuclear systems were outgrowths of the developmental trend lines of the Industrial Revolution. Britain is an island built on beds of coal, so the early British Industrial Revolution burned coal. And the early industrial development of the U.S. occurred in the East, near the coal measures of the Appalachians, so again, people burned coal, and then oil and natural gas. Fossil fuels were so cheap for so long that people just adopted fossil fuel solutions and stuck with them. As for nuclear systems, after World War II, these novel atomic methods received immense government subsidies for decades. This was for reasons of national policy in the U.S., the former Soviet Union, France and elsewhere. So nuclear also came to be a significant player in the production of electricity.

But things are changing in the world of energy, and they are changing quickly and dramatically. It may be too ambitious to say that geothermal will soon be replacing large segments of the coal, natural gas or uranium components as the main source of electric power for the growing demands of the world economy. Coal, gas and uranium have been around for a long time in a big way. There is a vast installed base of coal, gas and nuclear systems. These systems are what people know. And thus coal, gas and nuclear will be around many decades from now. (China alone is commissioning a new coal-burning plant every four or five days. China has 565 coal plants scheduled to open in the next five years, about 113 per year.) But it is also reasonable to say that geothermal will be taking up much of the slack for new electricity generation, certainly where the geologic conditions permit. In fact, the geothermal industry today is about where the oil industry was back in the 1940s. There is immense growth ahead.

And where is geothermal going? Nowhere but up, dear readers, for many years. In California, for example, Pacific Gas and Electric obtains about 17% of its current base-load supply of electricity from renewable sources. About one-third of that is from geothermal, and PG&E is looking for as much new geothermal power as it can sign up. Under California law, it is illegal for PGE to buy electricity generated from coal or natural gas. And it is just about impossible to construct a new nuclear plant in California. So PGE has almost no alternative but to support geothermal development (along, of course, with solar and wind development). And PGE is not alone. Many other U.S. utilities are finding themselves in similar straits. Thus, on all sides of the load equation, it is fair to say that utilities are seeking a future supply of reliable base-load electricity. And geothermal energy can and will meet much of that need. If not, then much of the modern high-tech economy will become untenable.

When you think about it, San Jose was just the right kind of locale for a geothermal conference. The next explosive high-growth industry – one that will change the world – was coming together to plan for its future.

Regards,

Byron King
for The Daily Reckoning
December 4, 2007

Well, Henry Paulson spoke yesterday. He said Americans could expect some relief from the subprime mortgage problem very soon.

What could he have in mind? The ‘teaser freezer’ program we discussed yesterday. Isn’t it wonderful how government can make things better by decree? By edict! By passing a law! Got trouble with your contracts? We’ll just change ’em. Can’t pay your bills? We won’t let the Constitution’s right to contract stand in the way…we’ll alter the terms…or impose a moratorium on collections. Lickety split, no problem. Spend too much money? Running a little short? Don’t worry about it; we’ll print up some more.

Who says government can’t be a positive force?

"World War II was the last government program that really worked," George Will used to say. And we’re not even sure about that one. In Europe, we defeated one monster…but saved one that was just as bad, or worse.

Well, now we have another chance. This time, we’re going to rescue Americans from the evils of predatory financing. That’s right. The evil predators hunted for poor people. These people had no money, and often, no jobs either. And then, the predators got ahold of them – duping these people into accepting a check for $100,000…$200,000…maybe even more.

The poor people moved into a brand spanking new house. They enjoyed their new digs – they spilled beer on the carpets…broke the handles on the cabinet doors…left hand prints on the walls…

…and now, wouldn’t you know it; those evil predators want their money.

Of course, the poor people can’t pay what they don’t have…so they’re being forced to pack up and move out. How’s that for a national tragedy? Surely, something can be done!

Ah yes…the teaser rates can be frozen…so the poor people can stay a little longer without having to pay for what they get.

And while we’re at it, say the feds, we’ll lower interest rates, and maybe print up a few more $20 bills…that ought to help, too.

That’s the trouble with government tricks: they don’t really work. You can’t really make people richer…or erase their mistakes…by edict. You can’t even make them richer by giving them more money.

Think of people who are on welfare. Are they richer simply because they get a check from the government? Not the ones we knew in Baltimore. They would have been better off without the checks; they would have been forced to get jobs…to straighten up…to acquire the habits, skills and discipline of successful people.

Think of the people who win the lottery. They get a big dose of cash. For a while, they’re able to enjoy it. But then, usually after a couple of years, they’re broke.

Or take Spain in the 16th century. It was the richest nation in the world. But the wealth came from larceny, not industry. It stole the gold from the Incas and Aztecs. Scarcely two or three generations later – Spain was broke. It lived in poverty for the next 300 years – until low interest rates from the European Union brought a boom.

Easy come, easy go.

"It works that way on Wall Street, too," said a friend, "The guys I know make a fortune. They get bonuses of more than $1 million per year. But do you think they have any money? Not really. Their expenses rise to meet their income. Pretty soon, they NEED $1 million a year just to come out even."

And think of the poor people of Zimbabwe. If money could make people rich, they’d be the riches race on the planet. The Zimbabwe government is printing up new money so fast the printing presses are melting down. The Economist reports that now "Zimbabwe’s chief statistician said he can no longer work out the country’s inflation rate because there are not enough goods left in the shops to count. In September inflation was reckoned to be almost 8,000%."

Stick with us, dear reader…we’re on our way down to Jo’burg. We’re flying high…and reaching for a bigger point.

True prosperity doesn’t come from money…but from habits, ideas, and attitudes.

As we were speaking to an investment group on Friday, we realized that we had stumbled onto something. The idea first surfaced while watching British television. There is a show in which entrepreneurs try to get funding from a group of rich people. The moneybags act like they know what they are doing – and sometimes they do. But what is interesting is that the supplicants readily accept humiliation; they believe that the route to success lies in getting the big shots to back them.

What are they thinking? They believe that making money is so important…and that the way to do it is to start a business…with some rich SOB as your partner. Most amazing, viewers seem to think so too…or at least are willing to be entertained by the process.

This kind of show would have been impossible a few years ago. Making money was a private matter; you wouldn’t want to put it on display. And in most societies, throughout most of history, grubbing for money was not especially laudable either. Most people…in most eras…have had better things to do. The idea of making money was actually reprehensible to many. "Behind every great fortune lies a great crime," said Balzac. The French still believe it. There is something slightly foul about having a lot of money. And if you do have money in France…the last thing you want to do is to flaunt it; or someone will soon be trying to take it away from you.

Not so in the Anglo-Saxon countries. We believe in money…in getting as much of it as possible…and in spending it too. Just look at the streets of London or Los Angeles; compare them to the streets of Paris or Rome. The English-speaking cities are full of flash – big, expensive cars. The streets of European cities have fewer Hummers plowing through the lanes. The rich tend to hide their wealth, as if they were embarrassed by it.

Even in the English speaking countries, people used to have less faith in money. Most importantly, they weren’t so sure it was so easy to come by.

They didn’t talk about it so much. They didn’t lust after it so avidly.

We live in a New Era, dear reader…without even realizing it. Until the 1980s, people didn’t believe in modern capitalism the way they do now. They didn’t think that our American-style capitalism, entrepreneurship and the free enterprise system were so dynamic that we could deny the lessons of centuries. They didn’t believe that ‘deficits don’t matter,’ in other words. Or that you could buy what you don’t need with money you don’t have and expect to prosper.

Now, at least in the subprime mortgage business, we’re rediscovering ancient truths…that household deficits do matter after all. Watch out, dear reader…more truths are headed our way.

(More on this later in the week.)

*** So far, credit card debt is holding up remarkably well, The Economist tells us. Goldman Sachs (NYSE:GS ) says losses from credit card debt could reach $99 billion – if the problems in subprime leak over to the credit card industry.

No problem so far…customers are still paying…which is a bit surprising, since you’d expect the consumer to be getting a little behind.

From the housing market comes this little note from an Australian reporter:

"The last one out of Cleveland, please turn out the lights," writes Paul Barry. Says Barry of the Ohio city:

"…the streets are lined with empty houses, dead gardens and demolition notices pinned to the front doors. One in 20 homes are now in foreclosure."

*** Turning to the dollar, The Economist quotes an unreliable source, your editor:

"The long term value of all paper currencies is zero. That is the fond saying of Bill Bonner, goldbug and publisher of the Daily Reckoning, a contrarian financial newsletter."

Dear readers take note: we are talking about all paper currencies, not just the dollar. We guessed that the dollar would fall to $1.50 to the euro (EUR). So far, it’s gotten about a penny short of the milestone. But it looks to us as though the dollar may want to correct…meaning, go up. In the long run, it is worthless trash. But so are the others. Which of them becomes trash first…well, we wish we could say. At this point, we don’t have an opinion. Will the dollar go up…or down? We don’t know. But we certainly wouldn’t want to keep our wealth in it.

The dollar’s value comes in some measure from the fact that it is the world’s leading brand. That seems to be changing. The greenback seems to be going out of style. Already, in the film American Gangster hip-hop musician Jay-Z flashes a wad of cash. The cash is 500-euro notes, not dollars. The big euro bills are already a favorite of drug dealers. Soon, they will probably be everyone else’s favorite too.

*** Meanwhile, as predicted here…corporate profits are falling. Bloomberg says there’s a recession in corporate earnings, and "the economy might be next," continues the report.

"The earnings recession has already arrived," says a Merrill economist, "We are going to see an economic recession in ’08."

Until tomorrow,

Bill Bonner
The Daily Reckoning