The Unexpected Perspective
The Implications of Darwin and the Big Bang for Christians ... and Everyone Else

Perspectives

Worrying About the Right Things

Lots of people have been worrying about rolling back environmental regulations. We may have been worrying about the wrong things.

            The things that keep me awake and worrying at night usually don't come to pass.  In the end, it's more needless worrying.  Instead, things that I never thought about, much less ever thought of worrying about, become my real life nightmares. 

            I know I'm not alone.  Unquestionably, sometimes truth is stranger than fiction.

            While it has nothing to do with me, a great example of this principle has been making headlines.  When Donald Trump was elected US President, then promised to roll back environmental regulations in order to bring back coal as a preeminent power source, lots of people besides me became very scared. 

            Surprisingly, and thankfully, we now know that much of that was needless worrying.  That's because of reports that more coal-fired power plants were de-commissioned during the first two years of Donald Trump's presidency than during the entire first term of President Barack Obama, an unabashed supporter of both greenhouse gas reduction and a cleaner environment.

            How could that have possibly happened?  How could President Trump have successfully rolled back a bunch of regulations on coal, and yet more coal capacity went offline?

            The short answer: in the big picture, it's not regulations that matter, it's technology!  Let me explain.

            The biggest single reason coal power is dying is the fracking revolution.  Fracking is the process of injecting water and chemicals into the ground in order to enhance the recovery of oil and gas previously unrecovered.  It has totally transformed the oil and gas business, not only in the USA but worldwide.  On a positive note, it has turned the USA once again into one of the top hydrocarbon producers in the world.  Besides this, it has resulted in two other very important things:

            Result #1: because of increased supply of oil and natural gas, the price of oil and gas worldwide has gone down dramatically from where it would have been otherwise;

            Result #2: the USA imports substantially less hydrocarbons than before, greatly improving the country's balance of payments.

            Result #2 is certainly important, but let's focus on result #1.  Greater hydrocarbon supply has reduced worldwide prices, making natural gas far more competitive than coal as a power source.  The key reason coal power plants are being retired, and very few new ones are being built, is the competitiveness of natural gas.

            Fracking, of course, is not without its problems.  Many environmentalists are concerned that it is damaging local environments in serious ways, and many environmental advocates have come to hate frackingIronically, the very thing many environmentalists have come to hate is also the very thing that is causing another hated thing – coal power plants – to be retired.

            It's a completely unexpected outcome.  However, let's not get too comfortable because some other unexpected outcomes may be on the horizon.  We probably should be worried, just not for the expected reasons.  Instead, we should actually be worried about fracking.  Not so much because of potential environmental concerns, rather because in the long run, fracking may just be un-economic.

            So why might fracking be un-economic?  It's because most fracking companies still haven't figured out a way to make real money.  Oh, they generate a lot of revenue from fracking, but upon closer examination, they haven't figured out a way to generate free cash flow from the practice.  Free cash flow equals operating cash minus operating expenses minus capital expenditures.  What it means is that fracking companies actually may be fooling themselves - and everyone else - about the real economics of the business. 

            So long as free cash flow is negative, fracking concerns need to borrow money.  They can get away with that if interest rates are low, as they have been for the past decade, but what happens when interest rates start going up, as they have been recently?  What happens when companies borrow too much and the debt load becomes unsustainable?  What happens when that becomes an industry-wide problem?

            In the long run, absent some big change, absent the typically fracking company generating free cash flow, the industry will be unsustainable.  If fracking is unsustainable, total oil and gas production will decline, the prices of oil and natural gas will go up, and other things being equal, coal will not be at such a disadvantage.  Bottom line, coal could again become competitive as a power generation source, at least compared to natural gas.

            When you and I are sleepless at night, worrying about things that could happen, we'll again be worrying about the wrong things. Rather, the things you never expected to happen could end up happening!

            But before you start worrying about coal making a resurgence, consider something else.  That "something else" is the declining cost of generating power from alternatives like wind and solar.  The other reason coal plants are being retired, and not replaced, is because wind and solar have become truly cost competitive. 

            Thus, even if fracking turns out to be uneconomic on a large scale, the declining cost of wind and solar will very likely keep utility companies retiring old coal plants.  Unlike fracking, wind and solar don't have a free cash flow problem.  Not only that, because of ever improving technology, the cost of industrial scale wind and solar keeps going down, making them ever more cost competitive with coal.

            The bottom line is that wind and solar will likely continue to displace coal plants.  They may even displace natural gas plants, too, if the price of natural gas increases, especially due to any future decline in fracking.

            Ironically, improvements in technology could also ultimately make both fracking and coal powered utility plants environmentally friendly, or at least friendlier. Technology to capture carbon emissions is under development.  If it could be perfected, and if carbon emissions could truly be captured – a very big if – coal might resume its place as a preeminent power source – and we probably wouldn't care.  Likewise, technology might eventually address the two big problems of fracking – environmental damage, and the problem of negative free cash flow – making it a truly good alternative to coal.

            At the end of the day, the key is technology, not politics or regulation.  Deregulation isn't making coal more competitive, and it won't in the future.  Instead, it's technology.  Likewise, what is making wind and solar realistic alternatives is improved technology.

            Bottom line, the key to solving the problem is technology.  The things that keep us awake at night so often don't come to pass, so we'd best not worry about them.  Instead, we need to worry about the things we haven't thought of, as that's what could really create problems for us.  Then we need to look for technological solutions that will help us deal with lots of those unexpected things that we never imagined could create problems.

            I probably will still periodically lay awake at night, worrying about something that could happen.  You probably will, too.  Again, what we'll worry about probably won't come to pass.  It will be the thing we failed to consider.  Alas, human nature probably won't change, but maybe some improved technology will help make it a little less painful.        

           

 

 

 

 


 

 

 

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Carl Treleaven is an entrepreneur, author, strong supporter of various non-profits, and committed Christian. He is CEO of Westlake Ventures, Inc., a company with diversified investments in printing and software.

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