Politics of energy and cost of carbon past and present

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Politics of energy and cost of carbon past and present

  1. 1. Politics of Energy and Cost of Carbon Sheffield University e-futures Chris Cook 28 September 2010
  2. 2. Politics of energy – securing supply and securing price
  3. 3. Cost of carbon – how is it measured, and what underpins it?
  4. 4. Energy politics and the market economy
  5. 5. Market 1.0 – past architecture - decentralised but disconnected
  6. 6. Market 2.0 - current architecture centralised but connected
  7. 7. Market 3.0 - future architecture decentralised but connected
  8. 8. Market 2.0 – the rise of the Middleman
  9. 9. Profit and Loss
  10. 10. Transaction Intermediaries – or “Middlemen” 'For Profit' Intermediary Seller Buyer £ £
  11. 11. Joint Stock Companies
  12. 12. Operate for Shareholder Profit
  13. 13. Cutting Costs to maximise profits
  14. 14. Motivation – producers aim to maximise price
  15. 15. Motivation – consumers aim to minimise price
  16. 16. Motivation – middlemen aim for transaction profit and don't care about price
  17. 17. Markets - Credit, Capital, and Carbon
  18. 18. Credit intermediation - and 'Peak Credit'
  19. 19. A Bank is a Credit Intermediary – or “Middleman” BankBorrower Depositor £ £
  20. 20. But it does not lend pre-existing money….
  21. 21. Banks create and lend new credit as interest–bearing loans
  22. 22. Or spend new credit on staff, suppliers & dividends and on buying assets eg T-Bills
  23. 23. This new credit is instantaneously deposited back into the system
  24. 24. Now, if you think about it, a bank’s true economic function….
  25. 25. …is to guarantee – backed by shareholder capital - that the borrowers’ credit is good BankBorrower Depositor £ £
  26. 26. Interest is charged for the use of the guarantee Bank Interest Borrowers
  27. 27. ..from which Interest is paid to Depositors.. Bank Interest Borrowers Depositors Interest
  28. 28. ..Default and Operating costs deducted... Bank Interest Borrowers Depositors Interest Costs
  29. 29. ..and a profit to Investors normally results Bank Interest Borrowers Depositors Interest Costs InvestorsInvestors Dividend
  30. 30. Banks create a pyramid of Credit, on a base of Equity Bank Credit Bank Equity
  31. 31. Demand for Credit was so high…
  32. 32. ….that Banks began to outsource their guarantee to rid themselves of risk.
  33. 33. …and thus recycle their own Equity to support more credit creation
  34. 34. Banks outsourced risk totally – through securitising debt and sale to investor
  35. 35. Temporarily – with Credit Derivatives (CDS - a time-limited guarantee)
  36. 36. Partially – using credit insurance from insurers such as AIG…
  37. 37. …and radioactive cocktails of all three, like CDOs, structured finance and so on
  38. 38. The Result was a bigger Credit Pyramid than Banks alone could sustain… Investor Equity Credit Bank Equity
  39. 39. …and an opaque “shadow banking system” of Investors holding sliced and diced risk… Investor Equity Credit Bank Equity
  40. 40. This pyramid of Credit funded the Mother of all Bubbles in US property prices….
  41. 41. …and servicing this credit finally exceeded the financial capacity of the US population.
  42. 42. About August 2007 – the point of Peak Credit – the Bubble started to deflate
  43. 43. ..but by now no-one knew where the Risk was Investor Equity Credit Bank Equity
  44. 44. Banks started to think, “if this is what our balance sheet looks like…..”
  45. 45. “…what does everyone else’s look like?”
  46. 46. The problem is not shortage of money - liquidity
  47. 47. ….it is shortage of Equity - a solvency problem
  48. 48. Bank Equity is eaten away by defaults
  49. 49. Investors are licking their wounds…
  50. 50. …and will not buy financial toxic waste any more
  51. 51. The Result? Equity Credit
  52. 52. Defaults drain money out of the system...
  53. 53. …threatening a “deflationary spiral”
  54. 54. Outcome – compound interest and the profit motive mandated economic growth
  55. 55. Outcome – cost minimisation and short- termism eg 'Dash for Gas'
  56. 56. Outcome – opaque and volatile markets
  57. 57. Outcome – unsustainable concentration of wealth
  58. 58. Outcome – inability to finance the transition from a carbon fuelled economy
  59. 59. Carbon – Oil and the Dollar
  60. 60. The End of Cheap Oil
  61. 61. Producer power
  62. 62. Dawn of the Exchanges
  63. 63. Financialisation
  64. 64. Market Price Boundaries Oil Price (bbl) Time2010 $40$40 $80 Buyers' Market - over-supplied (production destruction) Sellers' Market - under-supplied (demand destruction)
  65. 65. Oil price currently in unstable equilibrium
  66. 66. An accident waiting to happen
  67. 67. Historic Oil/Gas relationship has broken down
  68. 68. Outcome: a completely dysfunctional market needs to be completely reconfigured
  69. 69. But 'speculators' are wrongly blamed for high prices
  70. 70. Misconceived regulation will lead to further centralisation and concentration of risk
  71. 71. Carbon markets in CO2
  72. 72. Introduced by the 'smartest kids in the room'....Enron
  73. 73. Overheard at a traders’ conference.....
  74. 74. “If you want to keep a cow healthy, you don’t regulate what comes out of it……”
  75. 75. “……you regulate what goes in….”
  76. 76. The requirement is for a Carbon currency based upon the intrinsic value of energy…
  77. 77. ..rather than a market in value-less Units of CO2 emissions, imposed by governments
  78. 78. Energy security is the primary consideration of the foreign policy of major powers
  79. 79. In my analysis the 'Peak Oil' thesis (ie peak production level) was accepted by US in 2001
  80. 80. The resulting US strategy was to take control of Mid East oil commencing with Iraq
  81. 81. ....and then Iran...'Real Men Go to Tehran'
  82. 82. But in 2007 I believe that the Chinese exercised an economic veto over US policy
  83. 83. A 'Suez Moment' analogous to the US veto over British adventurism at Suez in 1956
  84. 84. So global energy politics once again became 'bipolar'
  85. 85. So how do we get there from here?
  86. 86. Shell identified two scenarios Scramble and Blueprints
  87. 87. Scramble envisages inadequate government action: Blueprints timely government action
  88. 88. In both scenarios government is a middleman
  89. 89. Maybe the answer lies in re-inventing government?

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