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231 comments on Monday Open Thread/Which Battle Plan Would You Draw?

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joule on March 6, 2006 - 1:05pm Permalink | Subthread | Parent | Comments top
The initial fossil fuel investment required for alternative energy and the time period required to recoup that initial energy investment has been something that has concerned me for quite some time.

I think the thing that is not fully appreciated by a lot of people is that going with any alternative energy scheme such as solar, wind, wave, etc) will actually worsen the fossil fuel situation over the short term, even if that time period is only a few years.

This is not to say that we shouldn't be pursuing such alternative energy schemes, it's just that we have to factor in the reality that such schemes will actually increase fossil fuel demand for some time period. If we wait till the supply/demand situation gets really bad, it will become far more expensive and difficult to implement such systems. It's analogous to the starving farmer who can't afford to buy seed for next season's crops.

It's also become almost an article of theology among financial and business types that a unless a certain percent return on investment is guaranteed, there is no justification for going with a project. I think when it comes to trying to develop a whole new energy infrastructure, the insistance on such criteria is highly flawed. What if NOTHING you can do in the way of alternative energy shows an acceptable return on investment?  What do you do then - just wait around until things collapse?

There is also a displacement in what we include as 'investment'. Arguably, a certain fraction of the US military budget of over $400 billion can allocated to maintaining our access to oil and in obtaining new sources of oil (read that as taking control over someone else's). But this huge amount of money doesn't get charged against the current price of imported fossil fuel. Rather, it shows up under another account, euphemistically called, 'national defense'.

So, what if we were to take say 25% (just to pull some number out of the air) of the $400 billion US defense budget, or $100 billion, divide that by the total number of barrels of oil we import per year from the Middle East, and then add that number to the market price of oil?  That sum would more accurately represent the true price of imported oil - the market price plus the price of the 'externiality' (I believe that's the word economists love to use) of maintaining a huge military presence to ensure the continued flow of that oil.

Of course, neither the government nor the oil companies would ever accept such a number as valid, as it would be far too embarrassing. I maintain that the number is valid because if the US were to magically obtain a reserve of oil equal to that of the whole Middle East, it would be possible to reduce our military spending by some huge amount because there would be no need to perpetually meddle in the Middle East.

None of this will ever happen, but it's a way I prefer to look at the situation.

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Jack on March 6, 2006 - 1:22pm Permalink | Subthread | Parent | Comments top
Joule writes: "It's also become almost an article of theology among financial and business types that a unless a certain percent return on investment is guaranteed, there is no justification for going with a project."

Not exactly, projects or investments are evaluated based on a hurdle rate and not judged acceptable unless the expected return is higher than the cost of capital. Your comment about a guarantee is overstated as is calling ot theology. But you are right that the private sector requires that their money earn more in any given investment than they would get in the next best option. If oil is subsidized by military spending, it skews this decsision.

What would you suggest as an alternative?  There are a limited number of possibilities:

  1. Investors agree to lose money - which is highly unlikely

  2. Governments (or other bodies) agree to subsized certain investments - which is difficult and subject to political influence. None-the-less, it is the logical way to include the externalities you mention above ("what if we were to take say 25%...") in allocating investments in alternatives.

So how would you see these subsidies determined? Would this favor coal and nuclear energy - or would you also make adjustments for climate impacts? Who would decide all of this?

I agree with your fundamental point - oil is subsidized by miltary spending, which makes all alternatives more expensive than they should be. I would just be curious to see more details on how we can move to mitigate ths problem.

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TJ on March 6, 2006 - 1:33pm Permalink | Subthread | Parent | Comments top
For a large corporation the cost of capital should only be what, 8-10%?  The floor now for projects is more around 15-20% ROI, AFAIK.  But I see no way on earth for corporate executives to be satisfied with 10% ROI when they've tasted 25%.
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Jack on March 6, 2006 - 2:08pm Permalink | Subthread | Parent | Comments top
The cost of capital depends on the specific project/investment, not the investor/corporation.

However, if a corporation can realize returns of anything above their cost of capital they should be able to raise this from the market. Companies with access to returns above their cost of capital should not be capital constrained and hence can invest not only in the projects that return 25%, but those that return 24%, 23%, 22%, etc.

However, I dispute this statement "The floor now for projects is more around 15-20% ROI". No one in the world has access to a steady stream of projects with an expected return of 15 - 20% unless they are very risky.

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joule on March 6, 2006 - 1:48pm Permalink | Subthread | Parent | Comments top
I was just pointing out what I perceive to be a problem in the way we evaluate alternative energy in relation to fossil fuel energy.  I don't presume to be smart enough to know what the solution is:-)
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ET on March 6, 2006 - 2:57pm Permalink | Subthread | Parent | Comments top
At some point in an individual's thinking on the cost/benefit ratio of alternative energy systems, and, at some point in the whole industry's thinking, the question will change from (for example): what is the cost in $/kwh for on grid electricity vs PV electricity, to: what is the cost of no electricity vs the cost of PV electricity.
Many individuals have reached this point. I think the industry as a whole is pretty far from this point.
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vtpeaknik on March 6, 2006 - 2:32pm Permalink | Subthread | Parent | Comments top
"The cost of capital" is basically defined as the interest you'd pay to borrow it.  I.e., the opportunity cost, since, it is assumed, you can put that money into some other investment and make some percentage gain.

This theology is the heart of our problem: the debt-and-interest financial system that requires endless "growth" to survive.  Without a new paradigm we're doomed.

Those investors that refuse to "lose money" now will lose everything later.  Sort of like the claim that reducing GHG is "bad for the economy".  Tell that to NOLA.

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ryanluke on March 7, 2006 - 2:55pm Permalink | Subthread | Parent | Comments top
This theology is the heart of our problem: the debt-and-interest financial system that requires endless "growth" to survive.  Without a new paradigm we're doomed.

Here's the link to a paper I wrote in an attempt to outline the paradigm of an organic economic system. An organic economy is an economy that does not require perpetual growth (an impossibility on a finite earth) , but balances the forces of growth and decline.

The Organic Economy

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writerman on March 8, 2006 - 4:47am Permalink | Subthread | Parent | Comments top
I agree one could argue that oil already "costs" well over ond hundred dollars a barrel or more, if we factor in the cost of maintaining our forces in the Middle East.
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