This short video shows what modern construction technology is capable of - think huge productivity gains. This video shows a skyscraper being built over 19 days, using pre-fabricated sections that contained all the utilities etc., thus "plugging" everything together as the build progressed. This is a far more efficient method of building (productivity!), as urban living becomes more common (70% by 2050?), will reap huge gains:
This chap is not a Keynesian by any stretch, yet he recognises that "capital depreciation" - allowing the stock of essentials to run down, with re-investment too low to even maintain it - is not a recipe for success. Essentially we are consuming the resources needed to build up our infrastructure - that is, the government is spending tax revenue and borrowed money on other things (healthcare, pensions etc.) This is about the US, but applies readily to the UK and other countries.
The points you should carry away from this are:
Infrastructure spending is necessary
The government (US or UK) can get the best interest rates
There should be a way of charging the consumers, so the cost of borrowing is paid for by the beneficiaries, not the taxpayer (an interesting point)
It could create jobs AND long term benefits
Not all spending is good, therefore an overseeing body is needed (highlighted below - this is critical, and is important analysis/evaluation)
Infrastructure. Most people think of roads and bridges when they hear the term. But we really should think of infrastructure as the things that allow us to move food, energy, water, products, people, and information.
It’s our rail and trucking systems. It’s our electric grid. It’s our telephone system, Internet, and other information systems. To some degree, it’s our school systems. It’s the things that make it possible for businesses and governments to provide the services and goods we all expect.
You might respond that the roads and bridges are just fine and we don’t need more boondoggle spending. That may well be true wherever you live. But it is certainly not true for the nation as a whole.
Infrastructure Report Card Highlights Major Problems
The American Society of Civil Engineers (ASCE) publishes a national Infrastructure Report Card every four years. The last one was in 2013, so it’s a bit dated. While I’m sure that a few of the problems have resolved, there are probably enough new ones to replace them.
So, here is your report card, America. Brace yourself, it’s not good.
We all assume that when we flip the switch, the light will go on; and when we set the thermostat, the heat or air-conditioning will turn on. We assume these things are automatic—but they have to be maintained, and we are not maintaining them well.
Serious Problems Require Serious Money
According to the Federal Highway Administration’s Bridge Inventory, 146,633 out of 604,474 bridges in the US are structurally deficient or functionally obsolete. That’s 24.3% of all bridges. Bridges are built to last about 50 years, and today’s average bridge is 45 years old. See the problem?
Let’s look at dams. In Texas, 1,046 non-federal dams are rated “high hazard.” That means their failure would bring a probable loss of life. Will they fail? No one knows because most of them have no regular inspections or maintenance. There’s about one inspector for every 1,400 dams in Texas. Alabama has none. The average dam has a life of about 50 years, and many are much older than that.
Let’s look at water. The Center for American Progress reports that there are 240,000 water main breaks every year, and as much as 25% of the treated water that enters the distribution system is lost through leakage. There are 75,000 overflows every year from our sewage system, and they dump something like 900 billion gallons of untreated sewage into our lakes, rivers, streams, and bays.
The American Water Works Association estimates it will take $1 trillion to repair and replace the drinking water system over the next 25 years. It takes $3 billion a year just for emergency repairs.
Then there’s the outdated electrical grid. One estimate is that we lose about $49 billion a year to power outages. The solution is something called a Smart Grid, but that’ll cost tens of billions of dollars.
That’s just the tip of the iceberg.
The ASCE estimated it would take $3.6 trillion to repair our infrastructure back in 2013. Do you care to bet that the figure will top $4 trillion the next time they do an estimate? And that’s just to repair and rework what we have right now. That is not what will be needed to actually propel us into the 21st century.
The total could be a multiple of that over the next 10 to 15 years. But if we pay our dues and do that work, then the next generation will get something worthwhile for their tax money rather than the close to $20 trillion worth of debt that we have now, which has produced damn little.
My Infrastructure Plan
First, I would propose that Congress authorize something along the lines of a Ginnie Mae bond for infrastructure spending. Ginnie Mae bonds have the full faith and credit of the US government behind them but are paid for by the homeowners who pay their mortgages. The bonds allow them to get cheaper mortgages [i.e the bond would be backed by the government, but interest payments would come from the users of the resource paying to use it - JBo].
The bonds would fund projects pursued by cities, counties, and states that have a tax base or other resource to pay for the bonds. (I do not want to go into this in detail here, but there are some legal prohibitions on certain types of government infrastructure spending.)
It’s clear that you could put a small surcharge on a local water bill to pay for rebuilding and modernizing the local water system. Ditto for the electric grid.
Roads are trickier as there has to be a tax base willing to carry the load. But an infrastructure bond guaranteed by the US government would carry a much lower interest rate. And there are ways to make that rate even lower.
US 30-year bonds are now at 2.3%. If you allowed local and state governments to borrow only for new infrastructure at 2.3% and created willing markets for their bonds, we’d see a lot of infrastructure being built.
The next chart shows that an investment of $415 billion could create more than 10 million jobs.
My guess is that the spending would not really create 10 million jobs. But even half that number would change the nature of employment for many Americans who’ve lost manufacturing and other jobs and who have the skills to build what we need.
The point here is that such an infrastructure program would create a large number of jobs and boost an economy struggling through a recession. If the program were started early enough in the next administration, it might even keep us out of one.
Checks and Balances
To keep this from becoming a huge boondoggle, I would create an independent commission of 10 to 12 business-people who have not been elected politicians for at least 10 years. Their role is to sift through the proposed projects and make sure they’re real-world projects with long-term benefits and not just somebody’s pet project.
The commission members would have to recuse themselves from any vote on a project in their home state. Their mandate would be to make sure that each proposed project makes sense and that there is at least a 95% probability that the local or regional tax base could pay for the project.
I would require that every entity that borrows money (a local jurisdiction, county, or state) actually hold a vote to approve the bond, with language clearly indicating that taxpayers or users of the service will be responsible for paying for it. If the funding to repay the bond is determined by independent auditors to be suspect, then local taxpayers would have to agree to a special tax to pay for the bonds. Toll highways move to the front of the line.
My preference would be that the low bid wins and no requirement for union labor, at least in states that are right-to-work states. If taxpayers want to pay extra for union labor, that’s their choice.
Government Should Subsidize Infrastructure Bonds
Now, let me get really controversial. The US has spent hundreds of billions of dollars trying to fix Iraq and Afghanistan and on other projects around the world. What if we renewed the focus on our own needs?
If the US government subsidized these infrastructure bonds by 2%, then local governments would pay (at today’s rate) about 0.3% in total interest. Tack on an extra 10 or 20 basis points for servicing and the cost of the commission and losses, and a local government could borrow at about 0.5%. If the cost ends up higher, then the servicing cost goes up by 10 basis points.
The point is to make local governments pay for their projects, less the subsidy from the government for interest rates. Essentially, that subsidy is a rounding error in the total cost, and it would allow governments to start projects today and have 30 years to pay them back.
I’d provide the subsidy for a limited time (say four years) to encourage infrastructure projects to get off the ground now and kick-start employment. That would help reduce income inequality more than any ridiculous transfer system that takes money from the rich and tries to give it to the poor. (Nice bit of micro - JBo)
Let’s say we could actually deploy $3–4 trillion in infrastructure spending over the next 10 years. If we assume a subsidy cost of 2% for the bonds, then 2% of $2 trillion is $40 billion a year. That’s about 1% of our total federal expenditures. It is only about 7% of our defense budget.
Rebuilding our water systems would save up to 20% of the water we use and eliminate the massive costs for emergency repairs. It would actually pay for itself.
What Happens if We Do Not?
If we do not do something like this when we go into recession—especially if Hillary Clinton wins—the same central bankers who are running the system today will give us the same tired monetary programs with the same lack of results. Except this time, unemployment will be higher and the recovery will leave us looking more like Europe and Japan.
Get a Bird’s-Eye View of the Economy with John Mauldin’s Thoughts from the Frontline
This wildly popular newsletter by celebrated economic commentator, John Mauldin, is a must-read for informed investors who want to go beyond the mainstream media hype and find out about the trends and traps to watch out for. Join hundreds of thousands of fans worldwide, as John uncovers macroeconomic truths in Thoughts from the Frontline. Get it free in your inbox every Monday.
While we are all watching the pound, wondering what's next, there is a far bigger story unfolding on the other side of the world. The key point is that China is happy to let the yuan fall to try and boost its economy, because it dare not tackle other issues building up internally (property bubble). There are more and more warnings about the bubble, and in the meantime China is exporting deflation:
Albert Edwards: China’s Yuan Could Fall To 9.1 As Growth Slows
While the world has been watching Brexit and the British pound’s meltdown, China’s currency devaluation has gone relatively unnoticed, although Société Générale’s Albert Edwards has been keeping a watchful eye on developments within China. China’s yuan devaluation and the further slowdown in the country’s economy is the topic of Edwards’ weekly Global Strategy research note this week, specifically about the yuan and has some potential good news for hedge funds.
The Chinese have accelerated the renminbi devaluation, taking it to six-year lows versus the US dollar this week, which is a much more important story for the global economy than the troubles of the UK. As Edwards notes, even though Chinese policy makers have accelerated the yuan’s depreciation, they have taken no action to curb borrowing levels in the country.
The IMF recently became the latest organization to warn that China is edging towards “financial calamity” and must wean itself off its debt addiction.
Edwards believes Chinese authorities will continue to let the yuan fall. The currency had already breached the psychological 6.7 yuan to the dollar level earlier this week before Chinese trade data showed exports falling 10% year-on-year in September. The weak trade data just accelerated the decline.
As the yuan ticks lower, the authorities are, at the same time, facing the prospect of another Chinese property bubble.
As I reported a few weeks ago, it’s clear a property bubble has been inflating within China over the past six months. A report from Deutsche Bank published at the end of September showed that in a group of 19 large and medium-sized Chinese cities, property price rose almost 20% on average during the past 12 months. In some key cities, property prices are up 30% year-to-date in some districts property prices are up over 50%. Price-affordability ratios in a few big cities have risen to record levels of nearly 20 years of annual income.
Authorities have brought in measures to cool the housing market recently and Edwards’ colleague, Wei Yao believes that from past experience, these measurers could successfully drive a contraction, “to the tune of 15-20% in housing sales nationwide at some point during the next six months.” He continues, “Since early 2000, the Chinese economy has never been able to avoid a slowdown when real estate investment decelerates. We do not expect this time to be an exception.”
How might the Chinese authorities seek to counter this a property driven economic slowdown? Edwards has the answer, “devaluation.”
He believes that the yuan could fall much further in value against the dollar as authorities grapple with an economic slowdown and re-ignite export growth. Société Générale Asian currency strategist Jason Daw believes the USD-CNY rate could fall to 7.1 by the third quarter of next year, but Edwards believes it could fall to 8.1 or 9.1, which would help a lot of hedge funds.
With this dismal forecast in place, Edwards ends his weekly note with the following signoff:
“Investors are underestimating the magnitude and deflationary impact of renminbi devaluation. Sterling, bah!”
A good bit of analysis pointing out there is no economic action without a quid pro quo consequence somewhere else. We will include this commentary in our work on monetary policy.
It could take a generation for central bank balance sheets to normalize
It could take a generation for central bank balance sheets to normalize
Unless you’ve been living under a rock for the past ten years, you will know that one of the biggest unknowns hanging over financial markets today is central banks’ balance sheets. In an attempt to stimulate economic growth following the crisis, central banks around the world have gobbled up bonds in a bid to push down interest rates, lowering finance costs for companies around the world.
Now banks find themselves in a catch-22 situation. The markets are addicted to QE, and there’s no telling what will happen to interest rates without monetary stimulus. However, central banks can’t begin to sell down their bond holdings because they are own such a large proportion of the market. Any significant sales would inevitably drive up interest rates.
These challenges are forcing policymakers to rethink the roles of central banks. Some analysts have speculated that the economy is now reliant on unconventional monetary policy. Central bank rhetoric appears to support this view. Federal Reserve policymakers have acknowledged that their $4 trillion balance sheet will not shrink any time soon, Bank of England officials talk of crisis-fighting tools as now semi-permanent fixtures and the Bank of Japan has developed a new monetary policy framework.
Interestingly, this isn’t the first time central banks have found themselves in such a position. Analysts at Source, the multi-asset research platform, point out that after the financial crisis the balance sheet/GDP ratios for the BoE and Fed peaked at around 25%. This has only happened once before in the history of the Federal Reserve but the Bank of England has grappled with this anomaly several times before.
It could take a generation for central bank balance sheets to normalize
The Fed’s balance sheet ratio previously reached 23% in 1940, while that of the BoE approached 20% in the 1730s (South Sea Bubble), 1816/17 (the Great Re-coinage), 1830s/40s (mounting cost of wars) and in the immediate aftermath of WW2. In every scenario above, the central banks managed to unwind their balance sheets (before the financial crisis balance sheet/GDP ratios started at around 5%). The bad news is that this great unwinding took decades, up to 60 years in some cases, which is almost certainly more than a generation for some of the earlier examples.
It may be different this time around. As the chart below shows, central bank balance sheets tend not shrink to any meaningful degree after bank balance sheet expansion stops. Instead, normalisation occurs via GDP growth rather than balance sheet shrinkage. If that continues to be the case, normalisation will depend upon the rate of nominal GDP growth. Assuming history repeat itself in central banks don’t unwind balance sheet holdings, according to Source’s calculations it will take 28 years for a central bank’s balance sheet/GDP ratio to fall from 25% to 5% if GDP grows by 6% year. It will take 42 years if GDP growth is 4% and the 82 years if growth is 2% per annum.
Given that annualised nominal GDP growth has been around 3% for the past decade for both the UK and the US, and most analysts expect economic growth to be below trend for the next few decades (demographic forces, debt and a prolonged crisis recovery) it is not unreasonable to suggest that it could be nearly a century before the Fed and BoE’s balance sheet/GDP ratio has returned to a more normal 5%.
It could take a generation for central bank balance sheets to normalize
British Prime Minister Theresa May last Sunday stressed immigration over economic issues as the driving factor behind Brexit at a Conservative Party meeting, where she said negotiations on leaving the EU must get underway by March 2017. Experts predict that Britain will have a tough time at the bargaining table, and advise the EU to play hardball, if only to deter others among its member-states from considering similar exits.
How Brexit can be achieved with minimum damage to either side depends on how exactly it is negotiated and how the transition is managed, says Mauro Guillen, Wharton professor of management and director of The Lauder Institute. “The U.K. is a large economy and to take it out of the EU of course disrupts years of assumptions that investors, companies and consumers have been making.”
For sure, the U.K. will attempt the least painful way out while trying to protect trade, capital and labor flows with the EU. Indeed, French Prime Minister Francois Hollande’s latest statement calling for tough exit negotiations increases the pressure on the pound. “The pound continues to lose value because markets are anticipating that this is going to be messy,” says Guillen. “Today’s fall is a reflection of the fears over how this is going to be negotiated.”
Uncertainty is the dominant sentiment. “The steep fall of the pound is very much softening the blow, but it is also showing that there is clear lack of confidence in the long-term impact of Brexit,” says Olivier Chatain, professor of strategy and business policy at the HEC Paris business school and a senior fellow at Wharton’s Mack Institute of Innovation Management.
Wharton finance professor Joao Gomes thinks May is making “a grave mistake by rushing to the negotiation table.” For one, he expects the EU to take a tough stance on Brexit ahead of the French and German elections next year. The French presidential elections will be held in April and May 2017, while the German federal elections are set for between August and October 2017. “Afterwards, it is very likely that realism and a fair dose of euro-skepticism will creep into the views of those two key governments,” he says. He advises against the haste he sees in May also because “time would allow every party to take a more objective stand on what is simply the negotiation of an international treaty by sovereign parties.”
“I’d recommend the EU, the EC and member states to play hardball,” says Michelle Egan, a professor at American University’s School of International Service and a fellow at the Wilson Center’s Global Europe Program. She notes that Article 50 of the Treaty on European Union, the legal mechanism for an EU member state to break away, has never been used before. “If they make it easy and give too many concessions to Britain, then the risk is other states will want an a la carte Europe as well,” adds Egan.
Guillen feels the EU should not take a tough stance on Brexit but find some middle path. “It is not in the best interests of the EU to be tough on the U.K.,” he says. “The problem of course is that they also need to signal that there is a cost to leaving the EU because otherwise other countries may also say they want to get out. They have to find a balance.” He expects “some form of a soft Brexit,” adding that a hard Brexit would be difficult to implement.
“It is going to be very difficult for them to negotiate a soft Brexit in financial services.”–Mauro Guillen
Impact on Businesses
In gauging the business impact of Brexit, Guillen makes a distinction between the financial services and the non-financial industries such as manufacturing and tourism in the U.K. He says the non-financial industries would prefer some type of deal that allows them to remain in some way in the European single market.
The situation is much different with the financial services sector because of the fallout from the 2008 crisis, notes Guillen. “The uncertainty of the financial sector in Europe is because there is a lot of concern about the state of its banks,” he says. Banks in Italy, France, Spain and even Germany — with Deutsche Bank’s latest troubles — are in difficult straits, he explains.
For British banks, it would be important to negotiate a deal where they and their dealers could continue to do Europe-wide business, says Guillen. “But it is contentious because the Europeans don’t want to give the British the best possible deal without paying a cost for all this,” he adds.
Guillen notes that the City of London is critical for the U.K. because it is a major source of jobs and income. “Remember, the people in London voted to remain in the EU,” he says. All things considered, his projection is: “I think it is going to be very difficult for them to negotiate a soft Brexit in financial services.”
Economic Impact Thus Far
According to Gomes, the projections on the economic impact of Brexit have been “too pessimistic.” He says that is partly because he believes that “the Brexit vote will not amount to a significant change to business as usual.”
Gomes’s views are supported by the data for the months after the Brexit vote in June. “The economic indicators are strong after the Brexit vote, surprisingly,” says Egan. She notes that in July, unemployment stayed at about 4.9%, and company output, sales and orders have also been buoyant.
However, longer term pressures loom over the economy. In August, the Bank of England cut the interest rate to 0.25% and introduced monetary stimulus measures, stating that “the outlook for growth in the short to medium term has weakened markedly.” Egan points also to announcements by Philip Hammond, the U.K.’s Chancellor of the Exchequer, on higher infrastructure spending, housing growth, a focus on regional economic development and dropping an earlier plan to eliminate the budget deficit by 2020. Hammond on October 3 warned of a period of “turbulence” following Brexit, as The Telegraph newspaper reports. “He is focusing jobs, economy and living standards,” says Egan.
“The steep fall of the pound is … showing that there is clear lack of confidence in the long-term impact of Brexit.”–Olivier Chatain
Businesses will face changes in customs procedures, tariffs, their relationship with the EU single market, dealings with global supply chains and integrated production, says Egan. Brexit also brings new complexities for free trade agreements, especially CETA (Comprehensive Economic and Trade Agreement) that has been agreed between Canada and the EU; and the Transatlantic Trade and Investment Partnership between the U.S. and the E.U. “The U.S. has to evaluate what it means for its negotiating position if Britain leaves the EU,” says Egan.
Chatain notes that businesses clearly were not for Brexit, and the recent controversy over British home secretary Amber Rudd’s proposals to require businesses to hire more locals sharpens the battle lines. “[Businesses] are making it clear that they want as much flexibility on immigration and visas as they can have, but this contradicts the mandate given by the Brexit vote [to limit immigration],” he says. Businesses also fear that Rudd’s proposals may force them to disclose how many foreigners they employ. “Business groups reacted warily to the proposals, warning they would limit their members’ ability to recruit people with the right skills for the job,” says an October 5 BBC report.
Brexit will also affect the daily lives of people. The pressures of Brexit will be felt everywhere, from travel to health care, according to Egan. She notes that 44 million trips were made last year from Britain to the rest of Europe for pleasure and business. She says the benefits of being part of the EU shouldn’t be forgotten: “We’ve benefitted from travel without visas and passports. Airline liberalization has led to cheap flights. People don’t realize that if you are an EU citizen, if you are in another country and you fall sick, you can use your Europe-wide health card. All of those things are up in the air.”
With respect to Brexit, there are clearly “two Britains,” says Gomes. “The internationally mobile, mostly urban population will clearly find the costs very high,” he adds. “But for a large fraction of the population, the only perceived contact with the EU is either by watching TV, interacting with immigrants or buying European goods at various shops. They voted for Brexit and are unlikely to feel many of the direct costs of an exit — at least in the near term.”
The Immigration Factor
The overriding theme in the Brexit mandate is immigration, and May has lost no opportunity to reiterate that. The Guardian newspaper reported May as saying at last Sunday’s party meet: “We have voted to leave the European Union and become a fully independent, sovereign country. We will do what independent, sovereign countries do. We will decide for ourselves how we control immigration. And we will be free to pass our own laws.”
“If they make it easy and give too many concessions to Britain, then the risk is other states will want an a la carte Europe as well.”–Michelle Egan
However, Egan notes that the immigration debate is different in England as opposed to the rest of Europe. “A lot of the concern in rest of Europe has been with refugees and migrants coming from outside the EU,” she says. “In Britain, the debate has focused on EU nationals coming into Britain.”
Egan notes that the U.K. will face hard questions on this front. “What will they do with the three million existing EU nationals already in the U.K.? When will they start putting up any borders and visa requirements? What will they do with the almost one million British citizens who are in other EU member states?”
Egan says Britain will have to find ways to keep its labor markets flexible, noting that many in its agricultural workforce are EU nationals. “There will be some knock-on effects if the U.K. starts clamping down on labor mobility,” she adds. “The basic issue will be of people from other countries working in the U.K. and British citizens working in the EU.”
Outlook for Negotiations
Navigating between those political and economic uncertainties would be among May’s toughest challenges in the months ahead. “[May] is looking at the political time-table as well as the economic uncertainty and its implications,” says Egan. She notes that May herself will have to have an election by 2020; the next general elections in the U.K. will be held in May 2020. Further, the European Parliament and the European Commission that will vote on the Brexit deal will change in 2019 when the former has its next elections, she adds.
Chatain points to two obstacles ahead, even as he believes that a common agreement could be found. “On the one end, the ‘leavers’ (those in favor of Britain leaving the EU) run the risk of overestimating the leverage they will have with the EU, and overestimating how good the trade deals [are that] they will get outside of the EU,” he says. “Moreover, the EU will clearly not accept a deal that offers better terms than what is given currently to Norway and Switzerland, because doing so would undermine the value of staying in the EU” (Norway and Switzerland are not part of the EU, but have access to the European single market.)
That scenario of a tough EU stance “creates the conditions for very hard negotiations as there might be no deal that will seem politically acceptable to each party vis-à-vis their own political base,” says Chatain. “The ‘leave’ advocates might prefer a hard Brexit to what the EU is ready to offer. Similarly, the remaining EU members might prefer to let the U.K. go without a deal than any deal that the U.K. government is ready to accept given the composition of its majority in the parliament.”
The Countdown
Once Article 50 is triggered, the U.K. will be under a tight timeframe to complete the legalities around Brexit, says Egan. “They cannot negotiate any other free trade agreement or see themselves in a new position within the WTO (World Trade Organization) until they divorce from the EU,” she adds. “Until they formally leave and repeal all the acts that join the EU, they are still subject to EU laws, regulations and judicial decisions.”
May’s government, meanwhile, seems to be getting ready for life after Brexit. “You are starting to see the British foreign service, the treasury and others getting their act together in terms of what they would like in terms of a trade deal and a negotiating strategy [with the EU],” Egan says.
“Many people in Brussels continue to find it difficult to get over a sense of betrayal and shock.”–Joao Gomes
All those negotiations have to work against a surge of negative sentiment against the Brexit vote, notes Gomes. “Many people in Brussels continue to find it difficult to get over a sense of betrayal and shock,” he says. (Brussels hosts the European Commission and is considered the de facto capital of the EU.) “Their seeming need to exact some sort of punishment on the U.K. is bound to make any negotiations very complicated.”
Another factor that isn’t helping the sentiment in favor of the U.K. lies within the U.K. government, says Guillen. “Apparently, the more radical Brexit people and their strength dominate, and that is a problem. That is also what is causing the uncertainty.”
In fact, Egan notes that Euro-skeptics like Denmark are now more supportive of the EU than they have been in the past. “[The Brexit vote] has had an effect on other states,” she says. “They are saying they don’t want this disarray, so it has had a blowback effect politically.”
Well, application of an old technology in a new way - always a good way to achieve productivity gains:
Move over fracking, there's a new technology in town.
What do
Hot Pockets and oil shale have in common? As it turns out, more than you might
imagine. True, you can’t bake oil shale the way you can Hot Pockets. And you
can’t steam Hot Pockets (unless you like ’em soggy) the way you can oil shale
when you want to siphon off its black gold. But there is one preparation method
that works for both these two improbable sources of abundant energy, and it’s
probably in your kitchen at this very moment: microwaves.
As
strange as it sounds, producers are experimenting with ways to zap previously
unextractable oil resources with microwaves, which has the potential to
kick-start an even bigger energy revolution than fracking — and appease
environmentalists while they’re at it. This is potentially “a whole shift in
the paradigm,” says Peter Kearl, co-founder and CTO of Qmast, a Colorado-based
company pioneering the use of the microwave tech. Some marquee names are
betting on the play: Oil giants BP and ConocoPhillips are pouring resources
into developing similar extraction techniques, which can be far less water- and
energy-intensive than fracking.
If
producers can find a way to microwave oil shales in the Green River Formation,
which sprawls across Colorado, Utah and Wyoming, the nation’s recoverable
reserves could soar and energy
independence could become more than an election slogan. Even with
existing methods — strip-mining the shale and then cooking it, or injecting
steam to cook the rock underground (hydraulic fracturing is useless here) — the
formation contains enough oil to last the U.S. 165 years at current rates of consumption.
Microwave extraction could goose those numbers even higher. After all, there
are more than 4 trillion (with a “t”) barrels of oil in the Green River
Formation. And yet this microwave extraction technology comes at a time when the world is
awash in oil, and prices are so low that domestic producers are
having a hard time pumping at a profit.
We don’t need water for our process, and
we don’t have wastewater to dispose of afterward.
PETER KEARL, CO-FOUNDER OF MICROWAVE
TECHNOLOGY COMPANY QMAST
Time for
a quick geology lesson. Don’t worry, if “painless” and “geology lesson” ever
belonged in the same sentence, it’s this one. The most important takeaway:
Don’t confuse shale oil with the not-at-all-confusingly-named oil shale. Shale
oil is essentially liquid oil locked up in rock that’s found in deep formations
and requires hydraulic fracturing, or fracking, for it to flow freely to the
wellbore for extraction. Oil shale, on the other hand, isn’t really oil yet.
Instead, it is found in more shallow formations that contain solid organic
materials called kerogen. “You can get oil out of it,” says Dr. Seth Shonkoff,
executive director of the energy science and policy institute PSE Healthy
Energy, but it “usually involves subjecting the oil shale to high heat.” High
heat from, say, microwaves. OK, class dismissed.
In
Kearl’s playbook, you’d leave the kerogen in the ground and bring its oil to
the surface. Producers would microwave oil shale formations with a beam as
powerful as 500 household microwave ovens, cooking the kerogen and releasing
the oil. It also would turn the water found naturally in the deposits to steam,
which would help push the oil to the wellbore. “Once you remove the oil and
water,” Kearl continues, “the rock basically becomes transparent” to the microwave
beam, which can then penetrate outward farther and farther, up to about 80 feet
from the wellbore. It doesn’t sound like much, but a single
microwave-stimulated well, which would be drilled in formations on average
nearly 1,000 feet thick, could pump about 800,000 barrels. Qmast plans to have
its first systems deployed in the field in 2017 and start producing by the end
of that year.
Potential
extraction for three types of U.S. oil reserves (from top to bottom): zapping,
tapping and fracking. These figures from the USGS show “technically recoverable”
deposits. Scale: 1:4.2 trillion.
Kearl
claims there are multiple environmental advantages to this technique. Fracking
can slurp up to 10 million gallons of water per operation — not good,
especially in the arid West. “We don’t need water for our process,” Kearl says,
“and we don’t have wastewater to dispose of afterward.” In fact, microwave
extraction might produce water — one barrel of water for every three barrels of
oil. In situ recovery using microwaves also avoids the massive environmental
impact of mining and then processing the kerogen. What’s more, natural gas that
often is flared off in conventional oil-well production could be used to power
the generator that creates the microwaves.
Kearl and
company may overcome technical challenges and stand ready to bring microwaved
wells on line, but there’s nothing they can do about their highest hurdle: the price of oil.
Kearl estimates his pumping costs will be about $9 per barrel, which is only
about $2 more than conventional wells. However, a recent report
claims the price of oil needs to be $65 per barrel in order for new oil-patch
investments to break even. The current price is about $47. So, unless the price
of oil soars, all that microwavable oil shale may remain untapped.
Strip
mining in Canada’s oil sands, an environmentally devastating process, is
similar to the practice currently used to exploit oil shales in the Green River
Formation.
Waiting
for crude to cost a Benjamin a barrel may buy the time some experts think the
technology needs to mature. “[It] isn’t there yet,” says James W. Rector,
professor of geoengineering at the UC Berkeley Department of Civil and
Environmental Engineering. “Maybe in another 15 to 20 years it’ll be there.” He
emphasizes that the massive capital expenditures required and the culture of
the oil and gas industry translate into a long gestation period for any new
technology.
In the
meantime, Kearl and others think that the best use of the technique might be to
clean conventional oil wells, which can clog with paraffin and other gunk, and
to steam-clean fracked formations where water is blocking the flow of oil to
the wellbore. “In the end,” says Shonkoff, “these microwave technologies may
just enhance the ability of oil operators to squeeze a little bit more oil out
of the ground.
