Government, energy & environment

Peak water

We drink two litres of water per day but use around 3,000 litres, on average. This is because virtually every activity on earth depends on clean water in some form. Water has been talked about as the new oil for years and is a critical lubricant for industry. It is also a source of conflict. Wars may well be fought over clean water in the twenty-first century much as oil was fought over in the twentieth. Moreover, we are running out of the stuff. According to Goldman Sachs, water consumption is doubling every two decades due to global growth in population and use has reached “unsustainable” levels. Overall, 20% of the world’s population lives in areas that are short of water. Like oil, water use is not discretionary.

According to JP Morgan, Nestle, Unilever, Coca-Cola and Anheuser-Busch as a group consume 575 billion litres of water annually. The March Centre for Risk Insights found 40% of Fortune 500 companies said water restrictions would severely impact their businesses and some firms used the word “catastrophic” (but only 17% of them said they had plans in place should this occur). Pollution is another concern. Around 90% of rivers near urban areas in China are seriously polluted, according to a World Bank study. Hence, while food and oil shortages grab the headlines, we should be worrying about water. So what can we expect in the future? I’d expect water restrictions to increase. People will pay for water according to the amount they use, what they use it for, time of use, and water quality. Water recycling (or purifying waste water) will increase substantially and water infrastructure will be upgraded, especially to prevent leakage. Some countries will start to import water, much as they currently import oil, and some water-poor countries may start trading commodities, such as oil, for clean water.

 

A crisis of globalisation

Was globalisation responsible for the global financial crisis? In a word, yes. Prosperity and low inflation (and low interest rates) created two major forces. The first force was cheap credit and the second was vast new flows of capital. This was especially true in regions such as Asia. For example, cash created by over-saving in China (some of it forced) was exported to the over-consuming West (where saving was almost non-existent). In short, China and a few other nations bought US and Western debt. Add a mix of greed, stupidity, financial innovation and government legislation (especially Clinton’s moves to force banks to lend to low income families) and there was an unsustainable situation culminating in the sub-prime fiasco. This spread, due to globalisation, to almost every corner of the world.

So what’s next? First, the recession will end; they always do. Between 1854 and 1919 the average recession lasted 22 months. But over the last twenty years, recessions have lasted about eight months. Does this mean a short, sharp recession? I’d predict yes. Certainly, banks and other financial institutions (and organisations in general) will face much tighter regulation in the near future. However, this is not a crisis of capitalism and the problem is not localised. To sort this out (and most serious problems), governments need to act in unison because problems and solutions are now globalised - and capital is probably more globalised than anything. The danger, of course, is that governments will try to act by themselves and will do too little, too late. Moreover, many unilateral institutions, such as the UN, seem to be powerless to act in these situations because of disagreements among member states. We need global cooperation, global rules and global compliance. Achieving that would be miracle on the scale of world peace.

 

Is the future gas?

The problem with oil is not the price per se but price volatility. Between Christmas 2008 and 8 January 2009, the oil price increased by 40%. It fell almost as quickly in a few days. In one week during 2009, the price declined by 12%. Overall, during 2008, the price swung between $US150 in July to $US35 in December. This volatility sent shockwaves through the energy industry because it is difficult to plan major investments and infrastructure projects when the future price is so uncertain. Airlines also are uncertain how to hedge against future price rises and the automobile industry faces difficulties in planning future strategies and product ranges. The price of oil is relatively low now but, as soon as the economy picks up in Eastern Europe, Central and South America and Asia, the oil price is certain to lift again. Eventually, oil will be back at $US150 a barrel and will keep rising.

Expensive projects, such as mining Canadian oil sands, will start to make sense again but pricey oil will be a catalyst for investment in new ideas. For example, America needs the equivalent of 21 million barrels of oil per day and currently imports around 70% of its energy (a potential security threat). But right under the feet of North Americans is a local power source that is cheap, clean and abundantly available. Natural gas is about third to half the price of oil. It is much cleaner than oil (and coal), safer than nuclear energy, and it’s a 100% domestic energy source - providing more energy security. While US infrastructure is built to run on oil, there is no reason (apart from entrenched interests) why this could not be changed. The US government could lead with use of gas in all federal buildings and federal vehicles.

Electricity shortages

Electricity will be short supply in the future, not oil, according to Richard Smalley, A Nobel Laureate and Professor of Chemistry at Rice University (US). One reason is that electricity is difficult to store. There are some interesting giant battery innovations but the problem persists. A second reason is ageing transmission systems. Bluntly, current infrastructure wasn’t built to cope with surging global demand caused by rising global populations and new electronic lifestyles. Computers, iPods, mobile phones – they all require electricity. Even a simple Google search uses the same amount of electricity as boiling a kettle.

One solution is to build more power plants but the problem of transmitting the energy remains. Moreover, supply has to be exactly balanced with demand, otherwise you get surges and even blackouts. One solution is the development of smart appliances and gadgets that can work out when to switch themselves on or recharge. This could level out some of the spikes. Another solution is domestic energy dashboards. These already exist in large office blocks but could be copied in smaller offices, public buildings and homes. Essentially, these devices show real-time energy consumption and allow users to see where energy is being used. They can also help people to decide where and when to switch things on and they link dynamic pricing and micro-generation into the system.

The future of rubbish

The world faces a triple whammy when it comes to rubbish. We are creating more waste than ever, there are fewer places to put it, and we face increased materials shortages. The average Londoner creates a 500kg pile of rubbish, the average American, 700kg per person, and the citizen of Nairobi, 220kg, every 12-months. Despite environmental concerns, government policy towards waste remains relatively incoherent. The idea that waste needs to be managed is relatively new. Traditionally rubbish was buried, burnt or recycled but all these activities have heavy environmental or financial implications. For example, burnt rubbish creates around 4% of global carbon emissions and all existing US landfills will be full by around 2030. Politicians talk about zero waste (through recycling) but this is almost impossible to achieve. So what does the future of rubbish look like?

Countries will crack down on hazardous waste and pollution caused by waste and will start to tax individuals for the volume and type of waste they produce. Manufacturing companies will be taxed according to the type and volume of raw materials used, although some credit or trading system could be developed so waste in one area is offset against actions in others. However, pricing will probably sort the system out. In India, rubbish has a value; people can sell their rubbish to traders. Indians are also experts in materials reduction, re-use and recycling. Once raw materials become scarce and expensive, we will start to wake up to how we use them and find alternative ways for discarded materials.