When Energy Transition Meets Reality & Is the Money Printer Back?
Getting the energy transition right will take time and will not be painless. Meanwhile, Asia is firing up its money printers, causing the price of Bitcoin to explode.
The United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default.
Alan Greenspan (Former Chairman of the US Federal Reserve)
Decarbonizing the world. This objective is everywhere. But how do we get there? If you want advice on what to do when it comes to energy policy and energy transition, the last place you should look for ideas and recommendations is Europe.
In 2022, following the invasion of Ukraine and the energy crisis that followed, European governments spent like there is no tomorrow on energy subsidies. The total cost: EUR 672 billion (more than $700 billion).
Imagine what Europe could have built with this much money. Instead of enriching oil & gas producers, Europe could have financed 80GW of new nuclear reactors. Instead, Germany reopened its coal-fired power stations, the worst type of power generation technology when it comes to carbon emissions.
The world’s largest international oil company, ExxonMobil, released its results for 2022. Its profit for the year was $56 billion. It’s $153 million per day, $6.4 million per hour, or $106,000 per minute! All this was made possible by Western governments that have made it ridiculously hard for oil companies to drill new wells and finance new projects.
By curtailing the supply of oil while doing little to reduce demand, Western governments are making oil & gas companies rich. It was never the right strategy to curtail supply when no credible alternative was ready. Hopefully, at some point, political leaders will get educated on supply and demand, and how markets work.
Why is it so important to get the world’s energy policy right? Because energy consumption is going to continue to grow… a lot! There is no such thing as a rich country with low energy consumption. The wealth of a country can be measured by how much energy it consumes.
Look at the chart below that shows the direct relationship between electricity consumption per capita and GDP per capita. As countries get richer, they consume more energy.
One problem is that to electrify the world and move away from fossil fuels, we need a lot of raw materials, starting with copper. To this day, it is still unclear where all the copper needed to meet the net zero targets will come from. Especially since getting new mining permits is difficult in Western countries.
I am not sure what President Biden was hoping to achieve by posting this picture, but one thing is for sure, despite being electric vehicles, electric hummers are not how we are going to make any progress on the climate front.
While I don’t dispute the fact that this must be a very cool car to drive, from an environmental standpoint it’s an abomination. The battery alone weighs 2,923 pounds (1,325kg), and it consumes so much electricity to run that it has a worse carbon footprint than most regular cars. Remember that electricity must be generated before being consumed, and it’s usually done by burning coal, natural gas, or oil.
Given the horrendous conditions in which raw materials necessary to make electric vehicles are mined, we better be smarter in how we use them. Watch the short clip below on where one of the critical elements in all batteries, cobalt, comes from.
News From the Fiat World
Since the beginning of the year, financial markets have skyrocketed, with one asset leading the pack: Bitcoin. It’s up close to 50 percent this year and almost back to a market capitalization of $500 billion, making it the 11th largest asset globally by market capitalization. The first bank by market capitalization is JP Morgan with $417 billion. Just saying…
So, what is going on? Even though Bitcoin didn’t turn out to be such a great inflation hedge due to its high volatility, it is still where many investors seem to flock to protect themselves against currency debasement, i.e., money printing. But isn’t the Fed still hiking rates and burning $95 billion per month? Yes. But you have to look East to understand what is happening.
In Japan, the central bank is printing so much money to buy the government’s debt that if it continues at this pace, it will own all of Japan’s public debt in nine months! What happens when the central bank of Japan runs out of debt to buy? We may find out sooner than we thought.
In China, the central bank is also printing hard to make sure the financial system has enough liquidity. Could something be wrong there?
Now compare the unlimited amount of fiat currency being printed to the 21 million hard cap on the number of bitcoins, and the fact that most of these bitcoins are held by long-term holders, and you have a recipe for an explosive rally.
Because anyone can look at all transactions and addresses on the Bitcoin blockchain, it’s easy to observe how many bitcoins haven’t moved in a long time.
When money is printed, the value of assets rises faster than income, which is why it is harder and harder for households to acquire assets and build wealth. Compared to the level of the S&P 500, the US median household income has collapsed since 1980. Raoul Pal tweeted a good thread about what you can do about this.
Last week, I showed the public debt projections prepared by the US Government (if you missed it, the debt is going to the moon!) This week, it’s the level of the US trade deficit. It reached a record high of $948 billion in 2022. How do you think the US is going to pay for its exponentially growing debt and ballooning trade deficit? Tough question, I know…
Stephane’s Corner
This week, Stephane Mellinger is back with an article on what happens when you have a very productive iron ore mine and you must move an entire city. Very timely with so much more mining capacity needed for the energy transition. Fascinating story! Enjoy!
Kiruna, the city on the move… literally!
Imagine the situation: You leave your house for a couple of days and when you come back, your house (and part of your city) has been relocated 4 km away. Sounds like a bad science fiction movie? Not at all, this is (close to being) a real story soon.
Let me introduce you to Kiruna, a city built 125 years ago and located 200 km north of the arctic circle in the region of Lapland, covering the Northern territories of Sweden, Norway, Finland, and Russia. The name of Lapland may ring a bell: This is where Santa Claus lives. In the streets of Kiruna everything is quiet, tidy, and neat… a typical Swedish city, a good place to raise your kids if, just like the 18 000 local inhabitants, you are not afraid of the long and cold winter.
Now, seen from beneath, the city is all but quiet. Machines the size of buildings are digging continuously and relentlessly, while an army of other machines brings the rocks to the top. Yes, you have guessed it: Kiruna is a city of miners, built on top of the biggest underground iron mine on Earth. It can extract daily up to 100,000 tons of iron, enough to build six Eiffel towers, representing 80% of all iron ore extracted in the European Union.
Men and machines have carved 400 km of galleries over more than a century, some of them reaching the height of a cathedral and going up to one mile deep. Having had the chance to visit the mine 15 years ago, I can tell you that, compared to this, the mines of the Moria described in Tolkien’s The Lord of the Ring seem small!
No need to be a geology Nobel prize laureate (wait a minute, you are right, this category does not even exist) to understand what happens to a city built on a gigantic rabbit hole: At some point in time, it will collapse. Especially since a promising vein of rare earth, needed to produce batteries, has been found below the city. To avoid such a scenario, experts alerted the population of the necessity to act.
Public consultations were organized between 2004 and 2009 to find a solution, bringing around the table the municipality, the mining company LKAB (a company wholly owned by the Swedish government), the population of Kiruna, and representatives of the historical local population, the Samis.
To convince the local population, LKAB agreed to pick up the majority of the cost of the endeavor (estimated at around $2 billion - 3.5 billion), offer new land to homeowners, pay a 25% premium for those willing to sell, and to freeze rent for tenants… I don’t know which argument helped to tilt the balance, but it worked! Some resistance came from the Samis. They complained that mining activity continues to reduce the size of the land available for their main activity, reindeer breeding. But in the end, all stakeholders agreed to move the city a couple of miles to the East, a place free of any mining activity.
Of course, contrary to what I indicated earlier, the move will not happen overnight. This is a decade-long project which should be finalized by 2035. By then, 450,000m2 of housing, administration buildings, schools, shops, sports, and leisure equipment will have either been moved by trucks or disassembled and rebuilt. The most sensitive building to move is the old church built in 1912, one of the most beautiful churches in Sweden, and a great source of pride for the city.
If you plan to visit Santa Claus in his hometown, I strongly recommend you make the detour, indulge yourself by booking a suite at the Icehotel (where everything except your mattress, pillow, and pajama is made of ice), enjoy the magical spectacle of the northern lights, and visit the next day Kiruna and the mine’s visitor center 540 meters below ground. Believe me, you are not going to regret it!
By the way, did I mention that Kiruna has recently joined the European Space Agency program? A launch pad for small-sized space rockets (up to 1.2 tons), the Esrange Space Center, has been inaugurated on January 13th, 2023, becoming the second European launching site, after Kourou in French Guiana. No bad for a small town in the middle of nowhere!