“While the civil society is often relegated to the back tier of social life … it is the primary arena in which civilization unfolds. There are no examples that I know of in history where a people first set up markets and governments, and then later created a culture. Rather, markets and governments are extensions of culture … The civil society is where human beings create social capital, and which is really accumulated trust–that is invested in markets and governance. If markets or governments destroy the social trust vested in them, people will eventually withdraw their support or force a reorganization of the other two sectors.” — Jeremy Rifkin, author of “The Third Industrial Revolution” and “The Hydrogen Economy.”
40 years ago this Wednesday, OPEC instituted its first embargo on countries (the U.S. and Netherlands) that supported Israel during the Yom Kippur war. WTI crude prices shot up by 400%. The 1973 OPEC Embargo represented a watershed in the global energy regime in two important ways: 1) It made clear to the world that America’s hegemony on oil policy and prices has ended. The “oil weapon” was successful in that it heralded an irreversible shift of oil policy and price setting power from the Texas Railroad Commission to OPEC (at its peak, the TRC controlled over 40% of U.S. crude oil production; ironically, the TRC’s prorationing model served as a blueprint for that of OPEC); 2) It made clear to the Nixon Administration that a coherent national energy policy is needed–made all the more urgent as U.S. crude oil production peaked in 1970 (although we won’t know that for some time).
Ever since the 1973 and the 1979 OPEC oil embargoes, the U.S. leadership has sustained the country’s energy needs through a combination of drilling more wells, better drilling and extraction technologies (e.g. horizontal drilling and shale fracking), importing more oil, and–at various times–experimenting with alternative sources such as wind, solar, biofuels, and even geothermal energy (California is the leading source of geothermal energy). In other words, there has been no national, coherent policy (aside from massive fuel-switching from oil to natural gas by U.S. utilities during the 1980s) other than continuing the old oil-based energy regime. The forays into what we called “alternative energy” have been half-hearted–in many ways, a gimmick to satisfy the growing chorus of Americans demanding cleaner energy and self-sufficiency. The fact that many of these technologies were not economically efficient did not help either.
This chorus grew louder as U.S. oil imports and crude oil prices continued to rise–peaking at over 10 million barrels/day in 2005 for the former, and nearly $150 a barrel in summer 2008 for the latter. The constant calls for a new energy regime is more than just a yearning or a tactical business decision for more efficient energy production. Yes, as financiers, we need to be cognizant of economic returns and protecting our investors. And, for the first time ever, CB Capital is seeing sound investment opportunities in various “clean technologies” areas that are already or soon-to-be economical (more in latter blog posts and research reports). Rather, this ever-louder chorus–which began with a group of highly-committed “green” minority in the wake of the OPEC crisis and environmental movement–has turned into a broader social movement occurring in significant parts of U.S. civil society (in particular, the best-educated and most collaborative, the Gen-Ys). To paraphrase Jeremy Rifkin, the civil society–which is the foundation of our present form of government and dictates how our market functions–is setting the stage for the complete transformation of how Americans think about energy, and consequently, how we produce and consume energy in the future.
We contend that the 1st Energy Regime lasted from the beginning of recorded human history to the beginning of the First Industrial Revolution (1760 to 1780). Humans derived much of our energy sources from the sun–whether it is directly or indirectly (photosynthesis) through the consumption of plants or the burning of wood. Humans were more or less harmonized with nature on a daily basis. Societies that did not respect nature or who consumed resources in a non-sustainable manner simply disappeared (e.g. the Rapa Nui people on Easter Island). The 2nd Energy Regime–which began with the adoption of the steam engine and the replacement of wood by coal as a primary energy source–transformed how societies thought about and produced/consumed energy. Humans and societies became more disassociated and de-harmonized with nature. We no longer witness on a daily basis how our energy was produced (or how our cattle is slaughtered). We know that the production of fossil fuels has brought with it an environmental price–but as they say, out of sight is out of mind. We also became de-sensitized to wars and conflicts fought in the name of energy and oil security. It is also sheer madness that the U.S. is still deriving much of our crude oil imports from oppressive regimes and areas whose collective consciousness are still stuck in the pre-Enlightenment Middle Ages.
The U.S. is now ready for a 3rd Energy Regime–driven by both American civil society and sound economic principles. This 3rd Energy Regime has been 40 years in the making. By its 50th anniversary, we expect the U.S. energy infrastructure to have been completely transformed. We have in the past discussed the ongoing U.S. Energy Renaissance driven by horizontal drilling, fracking, and Lower Tertiary drilling; as well as more efficient energy consumption through the commercialization of additive manufacturing, self-driving cars, better battery storage technologies, and the eventual commercialization of the quantum computer. In ten years time, I expect a much-higher adoption of renewables (California is on its way to sourcing 33% of our energy through alternative sources), which would include solar, wind, and perhaps the re-introduction of hydrogen fuel cell vehicles into our auto fleet. While companies such as Google are continuing to make substantial investments in solar (over the last three years, Google has invested over $1 billion in solar generation), the largest clean tech investors are companies such as GE (which is known for only investing in high ROE projects), and interestingly, traditional fossil fuel companies. According to the Cleantech Group, three of the top ten largest corporate investors in clean tech are traditional fossil companies (see below table).
More importantly, commercializing technologies such as rooftop solar, more efficient battery storage, and smart grids would transform the U.S. power grid from a centralized to a decentralized one (see below diagram). In other words, power would literally flow back to individual family households. The Jeffersonian ideal and myth of the American self-sufficient yeoman farmer will thus come closer to realization. We have argued that part of the 21st century narrative is a diffusion and democratization of power from governments, institutions, and corporations back to the individual–as long as said individual utilizes the tools and global networks available to him. The diffusion and democratization of power began with the Internet Revolution in the late 1990s. The commercialization and adoption of alternative energy in the second decade of the 21st century–what we call the New Energy Regime–will not only provide a more sustainable source of power and lifestyle to Americans, but will further empower the individual. We believe the concept of U.S. energy independence is not a pipe dream. In fact, U.S. energy independence is not good enough. We believe we could achieve energy independence down to the individual community or even household level as the energy grid is decentralized–as long as the American civil society continue to embrace renewable energy sources.