Living On The Edge Of Energy Chaos

Niall Ferguson, the Scottish economic historian, often talks about people who see economies as balanced ecosystems ignoring the fact that these ecosystems are always teetering on the edge of chaos.

The thing that takes the system out of balance and into chaos is often something that has been ignored or discounted as impossible – like Fanny Mae and Freddy Mac in the US not factoring into their models the possibility that real estate prices could go down. Once hedge fund managers realized that the risk was not in the model they could bet on the risk by shorting the stock, and create their own self fulfilling prophesy. That's how we got the GFC.

In the last few weeks we have had several quite different and unplannable shocks to the global economy. First there is the Libyan revolution, which is pushing oil prices up. Second is the earthquake in Japan. Terrible human tragedy in both cases, but the combined effect of these two quite unrelated events is going to have huge impact on the global economy and on Australia.

The Japanese authorities are obviously grappling first with the human tragedy and the incredible social upheaval that goes with it. There are millions of households without power and/or water. Thousands are homeless and no one knows yet what the extent of loss of life is likely to be.

But the economic issues for Japan are staggering. A huge area of rice production has been inundated with sea water at the point at which planting was about to commence. The rice paddies that have been contaminated with salt are not going to be remediated any time soon. That means that Japan is going to have to import a lot of rice and for quite a while.

A nuclear power plant is looking pretty dicey, and it may possibly go into melt down. Now it probably won't do that, but this puts safety and risk associated with nuclear right back on the front burner. I have been told that the nuclear lobby has been spending a lot of time and money working the corridors of power to get nuclear onto the table as the green energy solution for Australia. After Japan you would have to think that nuclear is now back in its box for at least five years.

At the same time Japan – one of the truly great manufacturing economies in the world – now doesn't have enough electrical power in the grid to support demand – and certainly not enough to support growth in output which they sorely need.

So that has to mean that China and Korea are going to be taking advantage of the fact that Japan is going to have to focus its economy on manufacturing goods that will be used in rebuilding its domestic infrastructure and not on exports.

But it needs to continue to export in order to generate the foreign trade to pay for its domestic rebuilding. What a dilemma! And you would have to think that in Japan, once the shock wears off, the public are going to be very very leery of rebuilding nuclear power stations. The nuclear issue is always just underneath the surface there for obvious reasons.

What I see though is this: The increase in the price of oil and the issues of nuclear are going to have to mean that all other energy generation technologies that have the potential to provide long term solutions are going to become much more investible in the next few months than they have been in the past.

Public concern about risk is going to be very much at the forefront of government thinking about energy now (not that it has not been there in the past). However, I think that governments will want to be seed to be doing something about it. So we should expect there to be expert groups formed, white papers issued, and a lot of government seed funding invested.

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