The Energy Transition That Never Happened

This is a repost of an article by Mark Mills in The City Journal July 16 ‘24. I’ve copied the entire article, I’m so impressed by this writer.

Starting this month, everyday citizens, not just hedge fund managers and traders, will be able to make direct bets on “big” issues ranging from basic economic indicators to the weather. Based in Greenwich, Connecticut, the global trading firm Interactive Brokers has won U.S. federal approval to run a “prediction market” platform allowing users to make bets on everything from consumer sentiment to the national debt to “atmospheric carbon dioxide.” As the Wall Street Journal reported, “Interactive Brokers said it believes that it ‘can help establish a collective view’ on ‘controversial issues.’”

Let’s hope for an opportunity to bet on whether the energy transition, the linchpin of the ruling energy orthodoxy, will in fact happen. The orthodox view, of course, is that it’s already underway, and the world will radically reduce, if not eliminate, the use of oil, natural gas, and coal. This narrative is firmly embedded in plans, policies, and rhetoric on both sides of the partisan divide. Conferences, studies, and consultancies are framed around the transition. Even “Big Oil,” from Exxon to Chevron, genuflects to the narrative. The only substantive debate about the energy transition concerns how fast it’s happening and what should or shouldn’t be subsidized to hasten the inevitable.

Meantime, hydrocarbons still supply over 80 percent of America’s and the world’s primary energy needs, roughly the same proportion as two decades ago. But that fact understates reality. Hydrocarbons are used, in one way or another, in everything we build and use to sustain civilization.

The goal of the energy transition is not only to eliminate the ubiquity of hydrocarbons but also to do it fast. That is the central objective of the misnamed Inflation Reduction Act (IRA). This is a government enterprise arguably unprecedented in American history, and certainly in the history of industrial programs.

A proper accounting of the IRA reveals that its real costs—$2 trillion to $3 trillion—will be far greater than the costs its advocates claim. For context, in inflation-adjusted terms, the U.S. spent about $4 trillion to prosecute World War II. This level of spending, complemented by similar pursuits in about two dozen states, makes the IRA one of the defining issues of our time. It is no exaggeration to say that the realities of energy systems—the physics, the engineering, and the economics—are now central to the future of the U.S. economy, and thus central to our policy and political debates.

Society as we know it would not exist if not for vast supplies of energy. Energy is consumed by every invention, product, and service that makes life safe, interesting, convenient, enjoyable, and even beautiful. Energy policies are bets on whether there’s enough energy to meet people’s demands both now and in the future. But underlying that observation is a foundational truth relevant to forecasters and policymakers: throughout history, innovators have invented far more ways to consume energy than to produce it.

One of humanity’s remarkable capabilities is to invent future wants—that is, to invent new energy demands. There was no energy demand for air conditioning before its invention. We used no energy for flying until the airplane. The same is true for the car, pharmaceuticals, and computing. The global computing ecosystem now uses more energy than global aviation, and it is growing far faster. And now comes artificial intelligence: in energy terms, AI is to computers what jet engines are to aircraft.

Energy policies are thus also bets on what it is possible to build to supply those needs. Supply follows demand, but a lack of supply can also kill demand. The past and present offer ample evidence that the latent energy demands of billions of people across the globe remain underserved.

An ironclad hierarchy pertains when it comes to supplying energy. Call it a triumvirate of needs. First, you need enough energy. You can’t consume what you don’t produce. Energy abundance is key. Energy shortfalls stifle economic growth; severe shortfalls are lethal.

Second, abundant energy needs to be cheap. Affordability matters. The visible political touchstone for that reality is the price of a gallon of gasoline. More hidden is the industrial touchstone, which is the combined price of hydrocarbons and electricity. Ignoring this hidden reality has led the U.K. and Germany to sink into economically destructive deindustrialization.

Third, energy needs to be reliable at all scales and timeframes. Reliability is about meeting the energy demands of people, machines, and systems not only minute-by-minute but also over days, weeks, months, and years. The absence of energy when it is needed can crash both machines and economies.

Reliability is the inverse of fragility in energy supply chains. It is the sine qua non that lets low-cost abundance be taken for granted. High reliability allows the energy issue seemingly to disappear from our daily concerns, but behind the scenes it is a Sisyphean struggle. A society must always be designing and building energy supply chains to combat the realities of relentless, often malevolent, interference from nature, accidents, or human choices.

It takes a complex and delicate dance to build systems that can simultaneously balance the triumvirate of needs: abundance, affordability, and reliability. The rules to that dance are dictated by the physics of energy and how it is manifested in the machinery we can build and afford. You could call it the physics of money.

You may have noticed that I’ve made no mention of the environment in the ironclad energy hierarchy. Abundant, affordable, and reliable energy creates the conditions for wealth that in turn make possible the time and capital required for everything beyond mere survival— from health care to entertainment to the modern luxury of environmental protection. Break the triumvirate of needs, and we know what happens. Throughout history and across the world, we see the correlation between environmental degradation and poverty.

When it comes to energy forecasts, the elephant in the room is the climate debate—the ultimate motivation for energy transition goals. But it doesn’t matter what one thinks about climate science when it comes to analyzing the physics and economics of the energy systems that we know how to build. They are entirely separate magisteria.

Thus, it was predictable that energy pundits would rediscover the ironclad hierarchy with the rapid expansion of the most recently invented energy-using infrastructure. I’m referring of course to artificial intelligence. It’s a pure example of the invention of energy demands. Electric utilities around the country are now reporting epic jumps in forecasts for near-term power demand. The end of the interregnum of flat growth in electric usage comes not because of enthusiasm for electric vehicles (EVs), or because of the repatriation of semiconductor factories, though both are significant new demand vectors. It comes because the so-called virtual world of software can exist only within the physical world of energy-hungry hardware.

The cloud, whether measured in terms of the size of the network, the capital deployed, or the energy used, is on track to become the biggest infrastructure ever built by humanity. Global capital spending on energy-using hardware to build the cloud and its networks now exceeds global capital spending by all electric utilities on energy-producing power plants and those networks. For context, today’s global cloud already consumes ten times more electricity than all the world’s EVs combined. Even if EV adoption expands at the rate that enthusiasts assume, the cloud will still significantly outpace that new demand for electricity, especially with the rush to buy AI hardware.

And we are still in the early days of AI adoption. To continue the AI and jet-engine analogy, the aviation industry had been booming for three decades before the 1958 introduction of the first viable commercial passenger jet, the Boeing 707. After that transformative event, flying, measured in passenger air-miles, grew more than tenfold in under a decade and kept soaring. Of course, energy use followed.

Marc Andreessen, Silicon Valley pioneer and venture capital potentate, said more than a decade ago that he expected “software would eat the world.” He meant that software would disrupt “large swathes of the economy.” He was right, but he may not have imagined that the hardware that makes the software possible would eat the grid.

And do you think AI is the last energy-using innovation that will ever emerge? The question answers itself—and that says nothing about the energy implications of billions of people who seek basic economic growth, to rise out of poverty and come to enjoy the benefits of yesterday’s inventions, from air conditioning to cars to airplanes. In timeframes that matter, new demands for energy are practically unlimited. And if we employ common sense, so, too, are new supplies.

To return to Andreessen: he has more recently issued a long, impassioned Techno-Optimist Manifesto which includes a specific exploration of energy. “We believe energy should be in an upward spiral,” he observes. “Energy is the foundational engine of our civilization. The more energy we have, the more people we can have, and the better everyone’s lives can be.” Amen.

Back to betting markets. I’d take the bets—and I hope Interactive Brokers will offer them—that in the near future we’ll see: global energy use rise, not shrink; global production and use of hydrocarbons expand, not contract, in parallel with rising alternative energy production; the abandonment of the idea of an “energy transition.”

These bets all derive from the iron law of the energy hierarchy. Policymakers who bet against reality will face unpleasant consequences.

Mark P. Mills is a contributing editor of City Journal, executive director of the National Center on Energy Analytics, a strategic partner in the energy fund Montrose Lane, and author of The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and a Roaring 2020s.

This essay is based on the author’s opening remarks at the RealClear Energy Future Forum.