Investing in a Fossil Future

https://youtu.be/qR5cNyehO88

Before fossil fuels and the Industrial Revolution, the average person in Britain was no better off than in the days of Julius Caesar. Energy was provided by what today we call “renewables”: wood, charcoal, straw, dried dung and weather dependent rudimentary wind and water mills. Most work was done by human, horses, and oxen. Travel was by sail, horse, or foot. It was called The Dark Ages for a reason: there wasn’t a lot of cheap and reliable energy. It was a miserable existence.

Then in the time of Shakespeare, something remarkable happened, which changed the world forever: Britain started burning coal, saving Britain’s remaining forests. Because coal had a much higher energy density than wood, it meant that heat generation could be done on a more intense scale for manufacturing. In 1840, the steam engine was invented: coal’s reliable chemical energy could be converted into mechanical energy for factories, railways, and steam ships.

Human and animal labour was over 50% of Britain’s energy consumption in 1600, but only 7% by 1850. Between 1600 and 1850, the British population rose 4 ½ times to 18 million, but unlike in pre-industrial times, real incomes rose from just over £1,000 in 1600 to just under £3,000 by 1850. The economist William Jevons proclaimed in 1865: “With coal almost any feat is possible or easy; without it we are thrown back into the laborious poverty of early times.”

By the 20^th century, coal and British power had been superseded by oil and America. Crude oil is an incredibly flexible source of energy. Its different properties can be isolated by refining and used for a variety of different purposes: lubricants, asphalt, synthetic fibres, paints, coatings, detergents, pesticides, resins, adhesives. Today, fossil fuels still represent over 80% of our primary energy consumption and are essential in the production of plastics, steel, cement, nitrogen fertiliser and silicon, the material basis for our civilisation.

Today we use 20 times more energy per capita than in 1650. The real costs of energy have fallen by 90% over the same period. This is the main cause of our living standards – defined by GDP per capita – rising by 30 times. In terms of physical labour, our embrace of fossil fuels means that the average person in the UK has the equivalent of 250 people working for them non-stop day and night without complaint. This drastic improvement in living standards was achieved by replacing renewable wood and medieval windmills and waterwheels with more sophisticated and useful fossil fuels.

Many people have understandably become alarmed by claims that the side-effects of fossil fuels, namely their greenhouse gas emissions, are solely responsible for apparently unprecedented climate change, which we are told will make the world uninhabitable, and for which the only solution is the end of the fossil fuel industry. It is not a subject on which any debate around the scientific merits of such claims is currently permitted. Most people have been happy to go along with the “energy transition” on the basis that it is technically feasible, won’t be financially ruinous or lead to lower standards of living.

Over the last decade, there has been nearly $4trillion of investment in wind and solar projects, yet fossil fuel consumption dropped from 82% of primary energy use to just 81%. The fundamental problem with wind and solar is still the same as in medieval times: they are weather dependent so will always be unreliable and produce low bang for buck output relative to the energy input costs of manufacture. You cannot run an electricity grid based on intermittent power or unrealistic hopes for battery storage: factories, schools and hospitals would only open when the weather permitted.

Only nuclear energy offers a genuinely scalable path for the progress of human civilisation, with immense energy density and greenhouse gas free generation, but this is still strangely rejected by most environmentalists, who seem to long for the days of Malthusian poverty. It is worth remembering that electricity is currently only 20% of our primary energy use so the path to “net zero” requires not just a renewable electricity grid, which is currently impossible, but also the electrification or hydrolysis of all energy use, which is just absurd.

If the cheap and reliable energy brought by fossil fuels cannot be adequately replaced by returning to those energy resources our ancestors gave up on as inferior, then it logically follows that we risk returning to pre-industrial standards of living, through rampant inflation, food and energy poverty and increased geopolitical conflict. We do not believe this is a desirable outcome for society or our investors. Therefore, we will continue to proudly invest in a fossil fuel future.

Barry Norris 
Argonaut Capital 
December 2022