This month we talk about stranded assets, the Rust Belt, and transition periods.
We also discuss mines, fracking, and military-driven expedience.
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Transcript
In economics, a stranded asset is a type of asset—usually but not exclusively one that is infrastructural in nature—that has been converted into a liability, usually but not exclusively because of some type of paradigm shift beyond the control of the business entity that owns it.
A car company that is bought up by another car company, which then moves the acquired car company's manufacturing resources to a central location for efficiency purposes may find that, although it gains some economies of scale from producing a lot more units and types of vehicle from a centralized hub, it also suffers downsides from having a new portfolio of stranded assets to maintain; all that land, the machines, the workers even, in those locations that are no longer producing cars—those are stranded assets that will require upkeep of both the financial and attention variety, until and unless they can be unloaded, probably at a steep discount, to someone else.
Across the US rust belt, in the Great Lakes region of the country, roughly from Pennsylvania over to Minnesota, there are towns that were previously bustling manufacturing hubs but which, at some point over the past handful of decades, became ghost towns, their factories shut down, their people emigrating for other areas with more job opportunities, and the land and infrastructure owned by the automobile or other manufacturers just sitting there, doing nothing but slowly rusting, or being sold off to the government or another business that may use it at some point in the future, possibly for an entirely different purpose, possibly just for tax-write-offs.
Stranded assets tend to be hot potatoes that no one wants to be the last one holding because of this dynamic: they were once valuable, but, again, usually because of tweaks to variables beyond the owner's control, are now just costly weights around the neck of anyone who acquires them.
Sometimes they can be converted, possibly at great expense, into other type of assets—a manufacturing hub torn down and converted into housing or agricultural land, perhaps—or sometimes the existing buildings and machines repurposed by a different company operating in the same field, as is the case with some Michigan-based car-making infrastructure, and local employees that were previously laid off, that're being repurposed for making electric vehicles and their batteries.
In most instances, though, this assets just become liabilities, and either sit there wilting on their owner's balance sheet, or are handed off to some other entity that either likewise ignores them, or holds onto them in the off chance they might become valuable against at some point in the future.
In some cases, assets become stranded not because they've ceased to be useful for their intended purpose, because all the jobs and manufacturing has been moved to another location, for instance, but because something about the world, or the regulatory or social environment in which they operate, has changed.
A factory that makes chemicals might still be functional and profitable in the usual, businessy-way, but could, despite that, become the target of legal action because, it turns out, the byproducts of their production have been poisoning a local stream, and that leads to lawsuit after lawsuit.
They're still making money and producing the products they've always produced, but they're losing more than they're making because of those outside liabilities.
A shift in priorities and trends might also convert a valuable asset into a millstone-like weight.
A region that's popular for tourism, because of a widely reported terrorist attack or because of toxic algae that washes up on local, tourist-attracting beaches, might become far less so. That, in turn, could diminish all the local rentable beachside bungalows and restaurants from desirable assets into burdensome, stranded investments.
One of the more prominent shifts in this space, especially since the early 2000s, has been the advent of both new science demonstrating the existing and impending impacts of climate change, and increased social awareness of issues related to climate change.
Movement in this space hasn't been as rapid as many people, including the scientists doing the actual research, and policy experts who understand that research, would prefer, but it's still been fairly quick in terms of infrastructural development and depreciation, all things considered.
What that means in practice is that it has triggered the demotion of entire industries and categories of infrastructure from asset into liability, essentially overnight—in relative terms, at least.
What I'd like to talk about today is a contemporary trend of some companies and governments investing in new assets that are seemingly destined to become stranded in the very near-future, and why such investments are both worrisome and, from some perspectives at least, a very logical thing to do.
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The article I'd like to start with today comes from The Guardian, and it's entitled:
Revealed: the ‘carbon bombs’ set to trigger catastrophic climate breakdown
In the energy and policy world, the term "carbon bomb" refers to an uncomfortable reality about how modern society works, and how the phase-out of fossil fuels will likely progress, because of our social and economic needs and limitations.
In essence, we require a certain amount of energy just to keep the lights on, to keep people warm and cool at different points throughout the year, and to keep making the things people like to buy.
That quantity of energy needed for all that is only going to increase as more people are brought into the wealthy-world fold, which is something most people would say they want, as that means fewer people are suffering from extreme poverty, malnutrition, rampant disease-spread, and so on.
We want more people to be middle class, in the global sense, and that means—even if we don't keep increasing the number of people on the planet, and even if our technologies continue becoming more energy-efficient, which they very much have been, we're still going to need more energy each year for the foreseeable future; we can't just produce less energy and expect things to be okay, even if it's very important, by many estimations, to churn out less dirty energy as soon as possible.
That means we have to produce more clean energy—which in this context means energy that doesn't produce greenhouse gas outputs, like carbon dioxide and methane; the sorts of pollution that exacerbate the growing climate change issues we're seeing because they keep more heat, which would otherwise be reflected from clouds and the surface of the planet back out into space, inside the atmosphere, which messes with all our climactic processes in weird and often unpredictable and damaging ways.
But it takes time to built out that kind of renewable energy infrastructure: even if we really wanted and needed to, and everyone agreed to do it, we couldn't replace all the fossil fuel-based energy infrastructure we have operating around the world right now, overnight.
There's just a whole lot of it, it's inextricably entangled with the rest of our economic output and societal structures, and we can only churn out electric cars and buses, replace gas stoves and heaters with electric stoves and heat pumps, and develop the technologies required to produce clean steel and concrete, not to mention batteries big enough to fill in the gaps between energy ebbs and flows in our wind and solar-backed energy grids, so fast. There's a hard cap on the physical reality of our manufacturing, development, and distribution capabilities.
We're at an uncomfortable, interstitial moment, then, because we truly, desperately need to shift to clean energy as quickly and thoroughly as possible, but even if there were no political issues standing in the way—and there are a great many of those almost everywhere, right now—we still couldn't transition fast enough to implement the changes we need to put into place.
At the moment, then, as we're churning along, trying to make as many changes as possible as rapidly as possible, and implementing a million different replacement programs while also building entirely new industries with unfamiliar and unpredictable economies of scale and fundamental economics underpinning them.
At the same time, because of those base-level energy needs, we simultaneously have to keep a bunch of coal power plants online, internal-combustion engine-based cars and trucks and buses on the road, and heavily polluting steel and concrete factories doing their thing; the consequences of not continuing with those components of the status quo would be devastating to the average person's quality of life, and the appetite for sacrificing in that way simply doesn't exist; so there's no real political mechanism for moving faster on this, short of possibly replacing all global governments with renewable energy-focused dictators, and that seems pretty unlikely, fortunately and unfortunately.
In this context, a carbon bomb is a piece of fossil fuel-related infrastructure that's being planned or built or turned on, right now, at a moment in which we're struggling to make this transition quickly, but still require a foundational energetic backbone that can only be provided by fossil fuels.
So the world is shifting toward clean energy, at different speeds and in different ways in different places, and some entities are drilling new oil wells, planning new coal power plants, and generally funneling vast sums of money and other resources into projects that, using the math we've always used for such things, are destined to become stranded assets because, theoretically at least, if we live up to our potential on this, we should be completing our energy transition to greener sources before these new fossil fuel-based mines and wells and power plants live out their expected lifespans.
From the economic perspective, in other words, these things are doomed to become stranded assets before they can fully pay out, which should, in theory at least, make them unprofitable, or under-profitable, undertakings.
The math here raises the possibility, by some estimates the probability, that the business entities behind these efforts know something the rest of us do not, and are planning, via some mechanism, to keep these things online longer than seems feasible under the current climate policy roadmap.
It's also possible that the old economics for such things no longer apply, or won't apply for much longer, and they are assuming they'll be rewarded sufficiently in other ways, via government handouts and/or vastly amplified energy prices, that will make these investments worth their while, making the billions of dollars they're investing payout with the level of profits they require to keep their businesses ticking along as usual.
That latter assumption is predicated on the possibility that many companies in fossil fuel-dependent spaces plan to hold on longer than the current geopolitical environment seems prepared to allow, because they assume, probably correctly, that there will be a long-tail to fossil fuels and their use, and they want to become the producers and distributors of choice for that long-tail.
In this context, that means even after most fossil fuel emitting infrastructure has been phased out, mid-century, around 2050, if all goes according to plan, there'll be another fifty years or so before almost every major government on the planet will be carbon neutral or close to it.
These new oil wells and coal mines and greenhouse gas-emitting power plants could be meant to serve the needs of customers through that period, as well, to basically keep old-school fossil fuel energy flowing to nations that either fail to meet their renewable energy commitments, or which haven't made such commitments to begin with; and there are quite a few of those, especially in the still-economically-growing, not-yet-wealthy-but-might-be-soon, world.
As uncomfortable a reality as this is for many of us, it's almost certain that some quantity of fossil fuels will continue to be produced and burned throughout society, by governments for their militaries, by businesses for their manufacturing infrastructure, and by normal everyday people for the gas-guzzling car they haven't wanted or been able to replace with something more efficient or electric yet, and that'll be true in different places around the world to varying degrees, but almost certainly to at least some small degree everywhere.
And that's an issue we face, again, because there's an interstitial space between full renewable, electrification deployment, which we're meant to reach at the end of the century, with some important milestones along the way, including a big one around 2050 at which point most big governments should be most of the way to swapping out the big stuff, bare-minimum, but throughout this period, for the next 80-years or so, there'll be a wobbly balancing act between the old stuff and the new stuff. And that means it'll be a fits-and-starts process in most places, where we'll have whizbang new solar panels and electric buses, but also steel plants that run on oil and long-haul airlines that run on heavy petroleum products.
One country will shift almost entirely to renewables, while the country next door will continue to produce most of their heat in the winter using coal power plants.
This is the nature of any transition, but because of the ticking clock on this particular issue, it's a bit disturbing to think that even as we're making great strides, a lot of the problems we're trying to solve and components of our social, economic, and technological realities we're trying to replace will continue all the way up to the 11th hour, unless something fundamental changes in the tools we're using and methods of organization we rely upon.
One big problem with these carbon bomb projects, the ones that are being envisioned and built and started up now, though, is that even if we might need what they are offering us, a whole lot of this new infrastructure and its output isn't being accounted for in today's climate science data.
Our phase-out plans and replacement technologies are being invented and built with our existing array of gas-spewing infrastructure and cars and devices in mind. Our timelines have been predicated largely on the idea that once the phase-out has begun, we won't be introducing any significant new sources of fossil fuel emissions into the mix.
As documented in that Guardian article, though, there are at least 195 massive oil and gas projects at various stages of planning and approval, at the moment, each of which would result in at least a billion tonnes of CO2 churned into the atmosphere of the course of their lives—which in aggregate adds up to about 18-years-world of today's total global climate emissions; and about 60% of these projects have already been spun up and are pumping out CO2 already, though most not at their full capacity, yet. So this is not a near-future problem, it's a problem that's already beginning to mess with our figures and expectations.
Over the course of their lives, these projects are expected to generate about 646 gigatons of CO2 emissions, which goes beyond the entire planet's carbon budget, moving forward—the budget we need to stick to is about 500 gigatons if we're going to hit our climate-related goals and avoid the worst-case scenarios that've been predicted.
And for scale, the entire planet produced about 37 gigatons of CO2 in 2019; so the 646 gigatons these projects will produce is not quite 20-times that; it's a whole lot. These are not normal-sized projects, they're big, big projects.
A report from the International Energy Agency in mid-2021 said there could be no new oil or gas fields, or coalmines built or invested in from this point forward if the world is going to be able to reach net-zero emissions, as planned by the wealthy world, by 2050.
The companies behind these new, big projects have already made commitments to deliver 116 billion barrels of oil via these projects, and a third of shorter-term expansion projects involve ultra-deep offshore drilling and fracking: two of the most ecologically damaging methods of extracting oil and gas.
So these projects are being called carbon bombs because, first, they're pulling from the ground fossil fuels that need to stay in place and never be burned if we're going to avoid the worst-case climate change scenarios our models are showing.
Lacking new technologies that would draw massive amounts of CO2 from the atmosphere—and this is theoretically possible, but it's not something most serious policy experts are relying on in their figures, because such technologies don't exist yet, and because the cost and time required to implement such projects would also be massive and ponderous and thus, not immediately useable—lacking such technologies, these planned and just-beginning-to-operate projects will push us over the edge no matter what else we do, even if we manage to phase-out and replace all the other currently operating fossil fuel based infrastructure within the currently planned period, these things will still push us way beyond that limit, at which point things get really bad, climate-wise.
So while there are some justifications for these sorts of projects, because of our ongoing and escalating energy needs, the sheer bulk of the ones in the works go well beyond our predicted needs.
The question then is why are they being built, and who's responsible for building them?
The US, Canada, and Australia are among the biggest investors in and controllers of these new projects.
In total, these planned projects will result in the global oil industry alone spending about $103 million each day for the rest of the decade, leading up to 2030. That's money that could be invested in clean energy infrastructure, and money that's being churned into exactly the sorts of projects that IEA report says cannot be built if we want to reach our goals.
And that's, again, money that these companies ostensibly believe they can earn back, with a tidy profit, because otherwise they wouldn't be making said investments—they literally exist only to make a profit, so unless the folks behind these business entities have suddenly become economically irrational, there's something else going on here that's leading them to believe they will be well-rewarded for their efforts.
Alongside the long-tail need for fossil fuels, one of the most pressing concerns in this space is that of energy security; a sort of euphemistic term that's become more popular over the past several years to refer to a nation's need for energy, and their reliance on various raw materials and processing capabilities if they want to keep their economy ticking along, and military capable of defending their interests locally and internationally.
Tensions related to energy security have been amplified in the wake of Russia's invasion of Ukraine, as Russia is one of the largest energy resource producers in the world, and their government shown how such resources can be leveraged as a weapon in military conflicts: they've been turning off the gas and oil tap to punish countries that don't support their invasion efforts, and they've been leveraging the same to achieve support and bring in financial resources to counter international sanctions on the rest of their economy.
That's pushed some nations, like EU member states, to speed up their transition to a full renewable energy economy, but it's caused others, like the US and China, to refocus a good deal of their influence and attention toward achieving and maintaining energy security, which often means more digging more mines, building more facilities that allow them to control their own current and future energy destiny, no matter what's happening in the geopolitical world, and overall trying to capture more of these finite resources so they'll have them throughout the transition toward what will hopefully be a cleaner and more energy-abundant future.
Thinking in these terms—of trying to capture and lock down these energy resources—can lead to a lot of waste and overproduction, and can lock governments and their associated industries into investments and behaviors that aren't conducive to the type of energy transition we're all supposedly pushing for.
Ultimately, then, there's a good chance many of these projects will go ahead, no matter how much attention they attract as a result of this and similar investigations.
There's also a good chance that alongside all the renewable-focused posturing we see on the global stage, a whole lot of investment will continue to be funneled into fossil fuel-related projects because keeping those sorts of projects maintained and expanding can be geopolitically and militarily prudent, and because the companies involved are heavily incentivized to keep doing what they've always done, both because they'll be rewarded by governments for doing so, and because it allows them to keep their existing assets from becoming stranded assets as long as possible.
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Show Notes
https://en.wikipedia.org/wiki/Stranded_asset
https://www.lloyds.com/strandedassets
https://carbontracker.org/terms/stranded-assets/
https://www.greenbiz.com/article/growing-concern-over-stranded-assets
