Review of Fossil Future: Why Global Human Flourishing Requires More Oil, Coal, and Natural Gas--Not Less

Mark Mills (previously) recommended that we read Alex Epstein's new book Fossil Future. The subtitle mentions human "flourishing," an adjective that is funny because it reminds our set of Bronze Age Pervert's Twitter meme about "needing to live a certain way" in order to "flourish". (Examples: 1, 2. Enjoy them before the authors are banned.)

Epstein calls the combination of big media, universities, nonprofits, the government, and Bill Gates "our knowledge system," a clunky phrase that I will replace with "regime" below. (His phrase is perfectly unnecessary, just like Curtis Yarvin's ridiculous term "Cathedral.") Some highlights from the book:

• Fossil fuels are still the dominant source of energy around the world, providing four times more energy than all alternatives combined. And fossil fuel use is still growing. "Renewable" solar and wind are just 3 percent of the world's energy, a 3 percent that is dependent on mandates, subsidies, and reliable fossil fuel power plants - a 3 percent that is leading to increasing costs and/or major reliability problems everywhere solar and wind are used in nontrivial quantities.
• Whereas in 2014 the policy of rapid elimination of fossil fuels was a rather extreme position, now it is almost ubiquitously viewed as the mainstream, "expert" view, with institutions from every part of the culture declaring their support for fossil fuel elimination by pledging to be "net zero" or "carbon neutral" by 2050 at the latest.
• Given that I regard continuing, expanding fossil fuel use as essential to global human flourishing, I regard "net-zero" proposals as apocalyptically as others regard fossil-fueled climate change. Net-zero policy, if actually implemented, would certainly be the most significant act of mass murder since the killings of one hundred million people by communist regimes in the twentieth century - and it would likely be far greater. Because net-zero policies are so apocalyptic, I believe they will never be implemented consistently. In particular, China, Russia, and India have given every indication that they will not adopt such policies.
• As Daniel Yergin documented in The Prize, war requires mobility, and wars are often won by those with the best mobile energy - above all, oil. A world in which free countries are killing their economies and, by extension, their militaries, while China leverages low-cost, reliable fossil fuel energy to become the largest economy with the most formidable military is not a world I want to live in.
• One cause for suspicion is the insistence not just on rapidly eliminating fossil fuels but on replacing them with exclusively "green" or "renewable" energy. These two terms refer primarily to intermittent solar and wind energy, always excluding nuclear energy and usually excluding large-scale hydroelectric energy - even though nuclear and hydro are the world's largest sources of non-carbon energy. A pro-human approach to reducing or eliminating CO2 emissions would eagerly embrace all forms of cost-effective non-carbon energy so as to produce as much non-carbon energy as possible - not limit itself to "green" or "renewable" energy...
• A second cause for suspicion that an anti-human standard is at work in "expert" calls for fossil fuel elimination is the use of the term "climate change," meaning "man-made climate change" as an unequivocal negative. From a human flourishing perspective, climate change is not inherently bad - and climate change that involves more warming and more CO2 (plant food) in the atmosphere will surely have many positives even if they are significantly outweighed by negatives. On a human flourishing standard, we want to avoid not "climate change" but "climate danger" - and we want to increase "climate livability" by adapting to and mastering climate, not simply refrain from impacting climate.
• The fact that [the regime] also supports policies to eliminate non-CO2 emitting, cost-effective nuclear and hydro energy, while ignoring their massive benefits, and is unconcerned about widespread opposition to solar and wind energy, reflects a systemic hostility towards cost-effective energy as such.
• Our [regime] definitely has some kind of hostility to cost-effective energy as such: nothing else can explain the consistency with which it (a) supports energy elimination policies while ignoring the massive benefits of cost-effective energy and (b) catastrophizes the side-effects of cost-effective energy. Our [regime's] capacity to catastrophize is so egregious that it is capable of catastrophizing the safest energy technology ever invented... What does this mean for our [regime's] current predictions of climate catastrophe? It does not mean that they are totally false; just because we have [catastrophizing regime propaganda] doesn't mean that rising CO2 levels are not catastrophic. What our [regime's] consistent, anti-science catastrophizing of cost-effective energy does mean, though, is that its current predictions of climate catastrophe could be totally false.
• The greater the value we can produce in a given amount of time, the greater our ability to survive and flourish on this naturally deficient and dangerous planet. For example, modern farmers who can produce hundreds or thousands of times their family's food needs are in a position to trade their surplus food production for abundant food, water, shelter, heating, and other life-enhancing values. To such people the world is abundant - not because it is naturally so but because their productive ability, along with the productive ability of countless others, makes it unnaturally abundant. 
• Clearly there is something special about fossil fuels' conduciveness to cost-effective energy production that makes them the dominant source of energy - and particularly dominant in the realms of mobility and industrial hear. Our [regime] expresses zero interest in explaining fossil fuels' "secret sauce," preferring instead to deny the reality of fossil fuels' current dominance. On the rare occasions our [regime] does acknowledge fossil fuels' dominance, it offers two hollow refrains to dismiss any possibility that there is something special about fossil fuel: inertia and political favoritism.
• Sunlight and wind struggle with low energy density. Because they come to us, not only as intermittent flows, but dilute flows, they require enormous amounts of land as well as materials to harness the same amount of energy as fossil fuels (or nuclear) can provide using a small amount of land.
• We're told that [wind and solar] prices will keep falling, leaving conventional electricity sources in the dust. Such claims often involve impressive-sounding terminology such as "grid parity" and "lower levelized cost of electricity". But they fly in the face of two hard facts. One is that solar and wind exist in large quantities exclusively in places where they are given massive government preferences. When you look at where solar and wind are used, you will invariably find subsidies... This is suspicious. Why do solar and wind always seem to need subsidies and mandates if the costs are so low? This leads us to the second fact: contrary to claims of lower costs, the places that use the most solar and wind on their grid tend to have the highest electricity costs.
• One popular form of "partial cost accounting" is to just focus on the declining prices of solar panels, ignoring the massive [costs] of making the intermittent electricity from solar panels part of a reliable, on-demand electricity system. Additionally, claims involving the declining cost of solar panels engage in extremely dubious projections that these costs will rapidly decline indefinitely - projections that are already starting to come false as it is revealed that much of declining solar panel prices involved the use of Chinese slave labor and destructive environmental practices, and strategic "dumping" of solar panels at a loss...
  

Epstein is a philosopher, and this book devotes great length to making developing a moral framework that puts human interests - "human flourishing" - ahead of what we might call "Patagonia catalog environmentalism." Most CBS readers do not care about that philosophical argument. 

As investors what we care about is: are there are more cost-effective ways to provide the energy that humanity needs - about 100 quadrillion BTUs annually in the U.S. - than the fossil fuels we own? Are alternative energy technologies capable of displacing (and leaving "stranded") our fossil fuels in the near term? Are battery electric vehicles going to be more economical than ICE powered vehicles? Are wind and solar going to be more economical than coal and natural gas? These are technological questions that depend on physics and chemistry, and they are better addressed by writers like Tom Murphy and Vaclav Smil.

Another concern about Epstein is that he is a "cornucopian" - he buys the shale myth. So he is focused on making the argument that even if CO2 ("plant food") is causing warming or climate change, we can use human ingenuity - powered by limitless fossil fuels - to overcome the negative effects of the change.

I agree with that, but I am not interested in arguing with communists about whether we should be allowed to use energy. I am interested in the fine details of which energy sources are the most economical, and whether we have enough of them.

Notice that Goodrich Petroleum was losing money and had sharply negative free cash flow, funded by debt and equity issuance, each year from 2012 through 2014. Oil was in the $90 to $100 per barrel range for most of that time period.

Biden's sales from the SPR are obviously unsustainable. Oil producers are working through a backlog of previously drilled but uncompleted wells (DUCs), which is also unsustainable. Once the SPR releases and DUC wells are exhausted, oil producers will need an incentive to invest in new production to replace this very low marginal cost supply. This will need to take the form of a higher oil price and also higher valuation multiples for producers, who would otherwise continue share buybacks instead of making capital expenditures on production.

3/5.

Goehring & Rozencwajg: "The Distortions of Cheap Energy"

We have posted excerpts from Goehring & Rozencwajg in the Links. Here are some excerpts from their Q4 letter, "The Distortions of Cheap Energy":

 

We estimate the US E&P companies will only spend $45 bn in 2022 – up from the COVID low of $30 but far below even 2019’s depressed level. The last time oil averaged $90 was 2014, a year in which E&P capital spending totaled $140 bn – nearly four times higher than we expect this year. The market needs more supply, but the normal clearing mechanism is being blocked by ESG pressures. Engine No. 1 secured three Exxon board seats in May 2021, despite owning a mere 0.02% of the shares outstanding. The fund waged a public campaign urging Exxon to slash upstream capital investment. Fearing similar shareholder activism, most energy companies have diverted spending away from production and focused instead either on returning capital to shareholders or on funding renewable projects.

These activist investors believe traditional energy will soon be eclipsed by renewables, both in terms of economic returns and carbon emissions. They talk relentlessly about renewable power’s declining costs and how someday renewables will compete with hydrocarbons in energy efficiency. They argue that this time really is different because of electric vehicles and that oil demand, after 160 years of relentless advances, will decline. They warn about the risk of hydrocarbon assets being “stranded as demand falters and investments made in long lived hydrocarbon asset such as oil sands will never be recovered. These activists argue that energy companies must stop spending on their upstream immediately or risk impairing their capital and instead must spend on renewable energy investments that will ultimately yield higher returns. They believe they are acting rationally in the face of changing technology, but what they really are doing is preventing the carefully choreographed energy capital spending cycle from taking place.

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It is no coincidence that the proliferation of renewable energy occurred during a decade of abundant cheap energy and abundant cheap capital. As both resources become scarcer and more expensive, the inherent limitation of renewable energy (i.e., its significantly worse EROEI) will come to the fore. Our view is extremely out-of-consensus. In fact, most investors believe low energy prices have severely discouraged the adoption of renewable energy. When we ask what impact rising energy prices will have on renewables, the vast majority argue that higher energy prices will help renewables by making them more cost competitive. Most investors are under the impression that much higher energy prices will push renewables “into the money”--- that is renewables will become competitive for the first time versus higher priced hydrocarbons. This completely ignores the fact that energy itself makes up the single largest cost component for both wind and solar. Instead of making renewable energy more cost competitive, higher energy prices will simply drive up the costs. Renewables today remain “out of the money” and higher energy prices will never be able to push renewables “into the money.”

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EROEI is not some abstract academic concept; it has huge impacts on a country’s economy and its ability to grow. Germany, after the Fukushima nuclear accident, decided to close all of its nuclear power plants. Nuclear power plants have the highest EROEI of any energy source (100 : 1) and nuclear power supplied almost 25% of Germany’s electricity. Much of the nuclear generated power was replace with renewables with EROEI’s of only 3 : 1. To any observer, there should be no mystery about why German electricity prices have surged by over four-fold in the last two years and why Germany is at the center of Europe’s energy crisis—it’s what happens when you replace an energy source with incredibly high efficiency with an energy source embedded with low efficiency.

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Whether you look at absolute prices, the backwardation, producer stock prices or inventory levels, all the normal market signals are screaming for more oil. This in turn requires more upstream capital spending. Unfortunately, ESG pressures are serving as a block, preventing capital from entering the oil market and preventing it from balancing. There is little relief in sight. Capital spending at the 100 largest energy companies in the S&P 500 topped out at $228 bn in 2014 and had already fallen by a third to $155 bn in 2019. The COVID-19 pandemic drove capital spending budgets lower by another 40% in a single year to $91 bn in 2020. With oil prices nearing $100 per barrel, energy capital spending is only expected to reach $98 bn in 2022 and $110 bn in 2023 – half the levels in 2014 the last time oil was above $90 per barrel.

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Many of our clients want to know about oil demand destruction. They want to know what oil price will impair global economic activity. This is a very difficult question to answer, but both history and theory can point us in the right direction. We have done a lot of work on the history of energy. Throughout most of human history, energy was provided by biomass with an EROEI of 10:1. This relatively low energy efficiency did not leave any surplus energy for growth. Neither GDP nor population grew until commercial coal deposits were developed in the seventeenth century (please see our video here to learn more). If an EROEI of 10:1 resulted in de minimis economic growth, what can we use this 10:1 number to infer about how high oil prices can go today? An EROEI of 10:1 means that 10% of all energy goes to sustain the energy supply. If energy is a good proxy for general economic activity, then an economy should stagnate once 10% of its GDP goes towards producing (and by extension consuming) energy. Evidence backs this up. Many academic studies suggest an economy will fall into recession once energy takes up 10% of total GDP – an empirical result that agrees with our theory.

In 2008, energy prices were approximately 10% of GDP right before the global financial crisis. If oil represents about half of all energy consumed, this means an economy will stall when oil represent about 5% of GDP. In 2008, the US consumed 18.8 m b/d. At $120 per barrel that equated to $823 bn or 5.6% of the $14.7 tr US GDP. The economy fell into recession shortly thereafter. In 2012-14, oil consumption never exceeded 3.5% of US GDP and prices stayed between $90 and $100 per barrel with no impact on either demand or economic activity. Today, oil represents less than 3.3% of US GDP and would have to rise to $140 per barrel before approaching the critical 5% threshold.

We have mentioned in the past that we have settled on long-life Canadian oil majors and royalty trusts for our energy investments. Some key concerns that informed this:

• Avoiding (or benefiting) from escalating production costs, which other E&Ps will have.
  
• Avoiding reinvestment risk / principal agent conflict with managements, which seems to be the key reason that the E&P sector fails to build value over time.
  

Oil sands are almost royalty-like, in the sense that (a) the capital costs are front loaded, unlike drilling wells, so they should benefit more from inflation than an E&P and (b) they have decades of sands to mine, so you avoid the forced reinvestment at inopportune times.

"The Hard Math of Minerals" - Why the "Energy Transition" Won't Happen

Fantastic new essay ("The Hard Math of Minerals") by Mark P. Mills that captures why we own pipelines and hydrocarbons.

It has long been known that building solar and wind systems requires roughly a tenfold increase in the total tonnage of common materials—concrete, steel, glass, etc.—to deliver the same quantity of energy compared to building a natural gas or other hydrocarbon-fueled power plant. Beyond that, supplying the same quantity of energy as conventional sources with solar and wind equipment, along with other aspects of the energy transition such as using electric vehicles (EVs), entails an enormous increase in the use of specialty minerals and metals like copper, nickel, chromium, zinc, cobalt: in many instances, it’s far more than a tenfold increase. As one World Bank study noted, the “technologies assumed to populate the clean energy shift … are in fact significantly MORE material intensive in their composition than current traditional fossil-fuel-based energy supply systems.”

Today, the material intensity of solar and wind systems and EVs is still of minimal consequence because those technologies account for only a few percentage points of the global energy system. But the material demands will become hard to ignore if the world’s economies all simultaneously pursue similarly ambitious policies to displace the fossil fuels that currently supply over 80% of all energy. [...]

Replacing the energy output from a single 100 megawatt (MW) natural gas-fired turbine (producing enough electricity for 75,000 homes) requires at least 20 wind turbines, each about 500 feet tall and collectively requiring some 30,000 tons of iron ore and 50,000 tons of concrete, as well as 900 tons of nonrecyclable plastics for the turbine blades. The gas turbine, by contrast, requires only about 300 tons of iron ore and some 2,000 tons of concrete. The 20 wind turbines also require 1,000 tons of specialty metals and minerals such as copper, chromium, zinc, etc., versus about 100 tons embodied in the gas turbine. Moreover, the gas turbine is about the size of a residential house, while those 20 wind turbines require 10 square miles of land. And although a solar installation would require one-third as much land as wind, the aggregate tonnage of cement, steel, and glass used is about 150% greater than wind. [...]

In a recent report from the Geological Survey of Finland, researchers considered the minerals implications for achieving a so-called full transition; that is, using solar and wind to electrify all ground transport as well as to produce hydrogen for both aviation and chemical processes. They found the resulting demand for nearly every necessary mineral, including common ones such as copper, nickel, graphite, and lithium, would exceed not just existing and planned global production capabilities, but also known global reserves of those minerals.

A recent analysis by the Wood Mackenzie consultancy found that if EVs are to account for two-thirds of all new car purchases by 2030, dozens of new mines must be opened just to meet automotive demands—each mine the size of the world’s biggest in each category today. But 2030 is only eight years away and, as the IEA has reported, opening a new mine takes 16 years on average. [...]

Consider batteries, which underpin hopes to displace fossil fuels both in transportation and in enabling solar- and wind-dominated grids. Numerous estimates (exact data are proprietary) suggest that commodity materials comprise 60 to 70% of the cost to produce a battery. Thus, modest increases in commodity prices can wipe out gains in the smaller share of costs associated with assembly, electronics, and labor, leading to overall higher costs. The IEA’s analysis in early 2021 of “energy transition minerals” noted as much, concluding that future mineral price escalations could “eat up the anticipated” reductions in manufacturing costs expected from the “learning effects” in further scaling up battery production. [...]

Commodity inflation has begun to escalate the cost to build wind and solar systems as well, slowing or reversing long-run cost declines. As with batteries, progress in manufacturing efficacy has reduced solar module production costs so much that commodity inputs now make up about 70% of the overall price of modules. These inputs include not only copper, silver, and aluminum but also, in no small irony, coal. The energy-intensive fabrication of polysilicon, a key raw material in solar modules, takes place mainly in China (with its two-thirds share of all polysilicon supply) on its low-cost, coal-dominated grid. The combination of mineral commodity inflation and the jump in coal prices pushed solar module prices up nearly 50% over 2020. [...]

Many analysts claim that materials demand can be greatly alleviated with recycling. The ideal is described as a circular economy achieving nearly complete reuse of materials from discarded hardware. Although a worthy aspiration, myriad practical and economic factors impede getting close to that goal in general, not just with solar, wind, and batteries. And, as one United Nations study observed: “Less than one-third of some 60 metals studied have an end-of-life recycling rate above 50% and 34 elements are below 1% recycling, yet many of them are crucial to clean technologies.” Even if far greater levels of recycling were mandated, the vast quantity of solar and wind equipment required for the energy transition will for decades overwhelm any marginal additions to materials supply that could come from recycling the far smaller quantity from worn-out hardware.

Some proponents of the transition pin their hopes on innovation to reduce materials intensity through improvements to the underlying operating efficiency of the systems: higher photovoltaic conversion efficacy and battery chemistries with higher energy density, for example. But in these realms, gains of 10% or so are hard won. To have a meaningful impact on materials demands would require, rather than 10% efficiency gains, leaps of tenfold over existing solar, wind, and battery technologies—gains that aren’t even theoretically feasible. [...]

Based on today’s physics and technology, the only path to an energy system with a material intensity lower than hydrocarbons would be one focused on nuclear fission. In the pantheon of energy-producing machines, none is more remarkable than the nuclear reactor. Nuclear fission offers a potential hundredfold reduction in material intensity over combustion, and a thousandfold reduction over solar and wind.

Canadian oil majors, royalty owners, and hydrocarbon pipelines are all priced as though disruption - actual replacement by wind and solar and electric vehicles - is going to happen in the next five years or so. But simple back of envelope economic calculations based on physics and energy density tell us that replacing fossil fuels (again, 80% of current world energy consumption) with those energy sources, the so-called "energy transition," is impossible. That means that the world is seriously under-investing in hydrocarbon production and traditional energy infrastructure, and over-investing in electric vehicles (TSLA) and in wind and solar boondoggles that will collapse the way the previous iteration (e.g. Suntech Power, Evergreen Solar, A123 Systems) did a decade ago.

Sector Rotation Value Strategy

I've been thinking about how our value vs growth trade has led us to own tobacco, hydrocarbons, pipelines (among other things) and how we might be able to make this a repeatable strategy. I think we are looking for two things:

• Capital expenditures in the sector are low (at a local minimum, nadir), while at the same time
• Cash being generated, and returned to investors (dividends, debt reduction, share buybacks) are high relative to enterprise value and market capitalization.
  

The reason that the first point is important is because investment (or dis-investment) from capacity has predictable effects on profits:

• Over-investment -> low profits and bad times
• Low profits and bad times -> under-investment
• Under-investment -> high profits and good times
• High profits and good times -> over-investment
  

Take a look at recent capital expenditure levels in the oil and gas industry. The first chart below is capex in Canadian oil and gas. The second chart shows the combined quarterly capex of four oil majors (XOM, CVX, COP, and EOG) with the individual companies in green and the combined totals in pink.

The combined capital expenditure at the four largest integrated oil companies dropped 80% from peak levels. The last oil price shock (high prices and good times) led to undisciplined capital allocation in the energy industry. That in turn led to low profits, bad times, and bankruptcies. Over the past couple years we have had under-investment. Since the marginal production comes from fast-declining wells, it falls off fast when there is under-investment.

 

Meanwhile, demand is growing. Even if you doubt it will grow in the U.S., it will grow in the rest of the world.

The stage is set for high profits and good times. Not for nothing, valuations are low in energy. This is important because scarce capital is consistent with under-investment, and low valuations are the second point that we are looking for in this two prong investing approach.

Let's look at a contrasting example. We all know that Costco is a fantastic company. Earnings have been steadily rising the past decade.

The concern is that they may be over-earning - so much of their revenue is from yuppie impulse purchases that are cyclical - and the cycle high earnings are being capitalized at a record high PE multiple. Once you start looking for the double-counting pattern, you see it everywhere.

The industries with the worst trailing 10 year returns (all negative) are: metals and mining, oil, gas & consumable fuels, and energy equipment & services. If this theory is right, there should be mean reversion for them. The rising profits will attract people who will pay higher multiples - double counting.

Meanwhile, the sectors that have been enjoying high profits and good times will have been over-investing. The NASDAQ earnings peak is already in the rear view mirror. As Lyall points out,

Interestingly, earnings have been falling since 2018 and are actually (1) down about 25% from their 2018 peak; and (2) currently slightly below 2016 levels. This is actually not atypical late in a boom/bubble. The flood of capital into an industry usually drives down returns.  Often that's ignored because people are focusing on the growth narrative/top line instead of earnings & returns on capital. Eventually earnings matter though. It goes without saying that the consensus earnings estimates shown in light shade are likely to prove fairly delusional. I think we are most likely to see a continuing downward trend in earnings from here until we have a 2000-style bust & resultant industry capital rationing. If earnings stabilize out at about 150 and the P/E falls to 20x the NASDAQ will fall about 75%. I suspect earnings will probably fare quite a bit worse than that in a legit downturn though. Earnings have already fallen 25% even with extremely favourable top-line conditions. People will argue "but you need to exclude stock comp". The unfortunate reality is that the amount of stock dilution actually significantly increases as share prices fall. You have to issue twice as many shares if the price is 50% lower to give people the same comp package.

Remember that Chipotle spends 60% of revenue on labor and food. Their operating profit margin is just under 5%. As Chipotle's food and ingredient costs rise, they can try to pass it on through higher prices but at a certain point this is limited by hurting sales volumes. Then the margins will just be reduced.

Falling margins at constant revenue will mean falling profits. At that point, the stock could re-rate from 114 times earnings to one-tenth of that multiple. Profound overvaluation can result in some cost inflation causing a 95% share decline in a decent business.

Hydrocarbon Royalties and Pipelines

I'm interested in mineral landowners (energy royalties, previously 1, 2) and pipelines as being possibly the best part of the hydrocarbon value chain.

They generate cash and distribute it to shareholders, which removes the reinvestment risk. The explorers and producers have trouble creating as much long term value for shareholders because management's incentives are bad. They get paid to grow asset size, and they only have the money to do that at the top of the cycle when properties are expensive.

Refiners have huge operating leverage and volatile capacity utilization. (Valero, for example, has single digit operating margins.) It is hard for them to make money unless their fragmented industry is at capacity. 

Like tobacco, there is the mistaken perception that the oil business is dying. And some fraction of investors even think it is morally questionable to invest in producing the energy that our civilization runs on.

Notice how much more consistent the net income of a pipeline company (MMP) or a royalty company (DMLP) is than an E&P company (DVN) or a refiner (VLO).

Pipelines and royalties seem like the superior part of the hydrocarbon value chain. They are more consistently profitable over time, have less reinvestment requirement, and so more consistently send cash to shareholders.

Review of SuperFuel: Thorium, the Green Energy Source for the Future by Richard Martin

Nuclear reactors for power generation don't have to use uranium for fuel and water for coolant, the way that the 99 power reactors in the U.S., and the ones in the rest of the world, currently do. In fact, it's somewhat of a historical accident that reactors don't use a completely different fuel - thorium - and a completely different coolant, like molten salt or metal.

Wired reporter Richard Martin wrote SuperFuel in 2012 to advocate for a switch to liquid fluoride thorium reactors. Generating power with thorium is a hot topic, with advocates like Kirk Sorensen, and startups like Terra Power (which is backed by Myhrvold) all trying to push for a nuclear renaissance with a new fuel.

The advantages of thorium for power generation involve the fuel and the reactor design. A thorium reactor makes more efficient use of a fuel that is more abundant than uranium and generates less waste. The design has also better inherent safety: the negative temperature coefficient of reactivity provides negative feedback against meltdowns, the coolant is stable (does not react with water like sodium coolant, or break down to hydrogen at high temperature like water), and the reactor operates at close to atmospheric pressure because of the high boiling points of the coolant salts.

The disadvantage at this point is that it is starting to seem like we really don't have the energy crisis that it looked like we did from 2008-2011. In fact, the mentions of energy scarcity and global warming now seem really dated.

Some of the complex aspects of the LFTR reactor are a bit hand-wavy, vaporware type stuff. For example, the design of the reactor calls for a continuous reprocessing loop of the molten salt (to remove undesired decay products like xenon). Of course, this has never been tried at plant-sized scale; the testing has been limited to the laboratory.

But the more important question given the past two years' developments is: can it compete with the cost of utility scale solar? Checking some recent updates, we see utilities buying solar for around 5 cents per kwh. Another example is an Xcel energy exec saying that solar project was chosen on a strictly economic basis, without considering carbon emissions or renewable energy standards. Here's further examples of an unsubsidized solar price close to 5 cents per kwh.

Five cents (and falling) is dirt cheap, and it makes it hard to justify the enormous research and development cost that it would take to commercialize an entirely new reactor design and fuel cycle.

The book functions best as an example of path dependence. It was the desire to produce material for nuclear weapons that led to reactors initially using uranium, and it was the desire to use water to cool naval reactors (for obvious reasons) that prevented any other design besides light water reactors.

Last time we mentioned path dependence was in reference to the paper  "Portage: Path Dependence and Increasing Returns in U.S. History". Path dependence is a good concept that explains why many things are the way they are.

By the way, thorium also ties into the distress of rare earth producer Molycorp. Thorium is almost always found in the ores (like monazite) that contain rare earth metals. Thus, rare earth ore is slightly radioactive and a refining operation both has to separate the rare earths from the thorium and dispose properly of concentrated radioactive waste product.

3/5

Energy Return on Energy Invested: Peak Oil, Liquid Fuels, and the Possibility of Sustained Economic Decline

I have been away doing some serious research into energy and oil supplies. The failure of GMX Resources - which was close enough to the core of the Bakken that they did produce oil and plausibly claimed to have economic acreage - was something of an alarm bell that tight oil supplies may not be the panacea we thought.

There's an excellent blog by a physics professor named Tom Murphy at UCSD called Do the Math.  I recommend reading the archive of posts (he no longer writes) as they are thought provoking and contain some unique insights into our energy situation.

He writes a good, rational summary of the peak oil debate. The peak oil skeptics are now crowing because some of the peak oil proponents claims were overstated, or were early, or haven't happened yet. However, the understated peak oil case has some arguments that simply cannot be rebutted.

First, unless you believe in continual abiogenic synthesis of oil deep within the earth, then it is a fact that the supply of oil is finite and therefore the rate of production will someday peak. Second, there are some reasons to believe that this peak is in the process of happening now. Starting in the early 1980′s, the world began to find less new oil every year than it used. Also, you may have noticed that the recent 3x increase in the price of oil was not able to increase world production by more than a few percent.

Another important post to read is about his concept of "the energy trap." He points out that as petroleum prices rise (assuming peak oil is true), it will not be easy to divert resources into developing alternative energy sources. The alternative energy sources now under consideration offer lower energy return on energy invested (EROEI) than fossil fuels do. Lower EROEI means a longer payback period on the investment in the new energy source. We will be faced with significant upfront energy requirements in order to replace existing sources.

My latest thinking is that our biggest problem is going to be liquid fuels. The math on biofuels is just brutal. Human power consumption is ~13 TW and the total photosynthetic activity on land is only ~4 times that. He points out that replacing the U.S. liquid fuel consumption with corn ethanol would require 1400 square kilometers of land devoted to growing corn. Even in the U.S. there is not enough room, and the rest of the world with less arable land per capita would be in worse shape.

Murphy quotes a researcher at Caltech who argues that "because no other renewables come close to solar in terms of total energy availability, together with the fact that liquid fuels are by far the most energy-dense means of storage (short of nuclear), some day we will have a way to convert sunlight to liquid fuels directly". We will certainly want to sell our oil interests if someone develops a competitive solar to liquids process.

The alternative to liquid fuels of course is electric vehicles. The problem so far is that batteries just are not up to the job. As he points out, "the specific energy of gasoline—measured in kWh per kg, for instance—is about 400 times higher than that of a lead-acid battery, and about 200 times better than the Lithium-ion battery in the Chevrolet Volt."

Now, obviously there are working electric vehicles. They are just expensive (because of the batteries) and have limited range. The other problem is that, even if EV prices fall, we cannot just clap our hands and have an electric vehicle fleet. There are 200 million passenger vehicles in the U.S. alone. If you assume half of them are used regularly, replacing just those at a cost of $30,000 each would cost $3 trillion. The oil consumed by the U.S. annually is worth $700 billion.

From an investment perspective, I think it is clear that even with a compelling EV alternative (which we don't have yet), the installed base of gasoline engine vehicles is going to be with us for some time.

One thing Murphy does not really address but that I find captivating is the effect of increasing populations and development in the exporting countries: the Export Land Model. We see this right now with Nigeria, for example. Nigeria exports ~2MM bbl/d and is the 4th most important source of U.S. imports. Nigeria has a very young population and a total fertility rate of close to 6, with the result that their population is doubling roughly every 20 years. Combine that with increasing development (only 30 cars per 1000; even Cuba and Iraq have more) and you will see a ferocious increase in oil consumption. During our lifetimes, Nigeria will transition from oil exporter to oil importer.

Back to energy return on energy invested (EROEI). When EROEI falls from 100:1 to 10:1, as the energy requirements of oil production roughly have over the past century, it means that producing 100 barrels requires 10 times as much capital expenditure. Deeper wells, more days spent drilling, more materials. A comment on The Oil Drum sheds light on this:

"Bakken oil has low EROEI, perhaps only 7 or 8 IMO, but still better than tar sands. I just returned from eastern ND. My customer in Fargo is shipping diesel fuel to Bismark to relieve shortage there. The oil operations, along with agriculture demand, is sucking up all the production of Tesoro's local refinery. Read that about 20,000 trucks are consuming about 2 million gallons of diesel fuel per day keeping Bakken oil E/P operating. That's 50,000 barrels a day fuel consumed (more if you include trains hauling supplies in and oil out, plus personal trucks hauling work crews) versus about 600,000 barrels of oil production."

By the way... for TOD to be shutting down is an interesting sentiment indicator. Just to reality check that number of trucks:

"The first thing you notice in North Dakota's oil patch are trucks [...] Drillers inject 1 million to 3.5 million gallons of pressurized water into each well to shatter the rock and free the oil. More of the trucks you see are carrying water than anything else, some 400 to 800 truckloads per well."

The falling EROEI of oil resources is consistent with the peak oil theory. As supplies become tighter, the price rises, and previously uneconomic (lower EROEI) resources become economic... and are exploited. Looking at the photos of oil sands mining (not drilling!), you can certainly see why oil sands have a much lower (~10x) EROEI than good ol' conventional oil. For one thing, the sand is only a few percent oil by weight.

Murphy ends with an decent theory of the 2008 crash:

"As supply [of petroleum] failed to meet demand and prices rose (amplified by speculation, yes), the transportation, airline, tourism, automotive, and other directly related industries began to suffer and fold under pressure. The resulting economic slowdown deprived the sub-prime racket of oxygen, forcing the house of cards to collapse on itself. The racket worked as long as growth continued and housing prices did not falter. So we may have seen our first peak-oil economic disruption."

My only problem with this is that subprime crashed long before the 2008 price spike. However, isn't it interesting that our 13 years of economic malaise (booms and busts) began the same time as oil prices started climbing?

Puzzling

I've started to see these "TrailerTails" on the back of tractor-trailers on the interstates. A NYT article suggests that the devices, which cost about $2k each, have a 100% IRR when installed.

I also see the "TrailerBlade" side skirts along the sides of the trailers.

Why haven't these gained wider adoption yet? Trucking is a commodity business so you need to cut costs to earn economic profits. Besides better logistics (and someday driverless vehicles!), increasing fuel efficiency is an obvious lever to pull.

Is it the same reason no gas-to-liquids plants are being built, despite the massive $/BTU spread between oil and gas?

Energy Thoughts from Blake Masters' Peter Thiel’s CS183: Startup Class Notes

From the Class 14 Notes, on energy.

"If you want to start a company, you should have some important secret. The secret doesn’t need to be that big if you’re doing a classic Internet company, since those generally take less time to build and you can scale them pretty quickly. But if you have something that takes 10-15 years to do, having a small or esoteric secret is not enough to build a decisive lead. [...] Thorium power would be something in the zone of an order of magnitude better than what’s currently possible. [...] The big secret is that thorium has been underexplored for political reasons."

We've done a couple of posts on thorium power before [1,2]. Something to watch. It's really odd that this idea and the gas-to-liquids idea can't seem to get any traction. One of the thorium sources, is this Civilian Nuclear Power report from 1969. How did we go from this to Instagram? Why do kids want to be emo instead of engineers?

EIA: "U.S. rail carloads of coal in first quarter of 2012 lowest since 1994"

"Total U.S. carloads of coal by rail during the first quarter of 2012 fell to 1.55 million carloads, the lowest level for any quarter since the beginning of 1994, as demand for coal by the U.S. electricity sector decreased."

New Energy Blog: "Do the Math"

Here is a physicist writing in an interesting way about energy conservation. His attitude is "BTUs are precious".

"[I]n the end, the motivation as to why we go without heat is itself sustaining: we simultaneously have a smaller impact on the world—living more within our collective means, and we are conditioning ourselves to be tougher so that we will more easily adapt to potentially harsher situations in the future."

I like where he is coming from. Not an unscientific or treehugger place. Rather, we have very limited information about what the world's energy resources will be like in 20 years. Seriously - what would the confidence interval for a $/BTU (in 2012 dollars even) be in 2030?

Low Recoveries in Green Energy Liquidations

There was an article today about power storage company Beacon Power, which agreed to sell its only plant to Rockland Capital for $30.5 million, which will allow a roughly 70 cent recovery on the federal government's loan guarantee.

The recovery on Solyndra is going to be much worse: Obama's energy secretary won't even estimate the recovery, except to say that he is "anticipating that not very much".

One particular reason that recoveries are so low, besides the generalized statement that the assets are really specialized, is that the rate of technological advance is so rapid that the old manufacturing equipment quickly becomes obsolete and useless.

Efficiency in photovoltaic solar keeps increasing: "performance records are occurring across the board in every photovoltaic materials system, from CdTe (Abound) to CIGS (MiaSolé) to GaAs (Alta Devices) to triple-junction CPV cells (Solar Junction and Semprius) to crystalline silicon (SunPower)." (GTM)

So.. if you have plant and equipment that is locked in to early generation PV, it is basically worthless. Especially given the huge overhang of excess capacity in PV solar right now.

Scalability in Living Systems

[L]iving systems such as individual organisms show a shocking consistency of scalability. Animals, for example, range in size over ten orders of magnitude from a shrew to a blue whale. If you plot their metabolic rate against their mass on a log-log graph, you get an absolutely straight line. From mouse to human to elephant, each increase in size requires a proportional increase in energy to maintain it.

But the proportion is not linear. Quadrupling in size does not require a quadrupling in energy use. Only a tripling in energy use is needed. It’s sublinear; the ratio is 3/4 instead of 4/4. Humans enjoy an economy of scale over mice, as elephants do over us.

The End of Cheap Uranium (USU)

Working on this paper...

The USU bond is back down to 70, yielding 14%.

"Yesterday was Thursday, Thursday" Links

Credit Bubble Stocks is still catching up on reading. Here is a big block of stuff for the weekend:

China Bubble

• Excellent article on Sino Forest: "In the bear case the size of the fake forest estate grows over time just because the fake profits need to be deployed somewhere. Ultimately - in the bear case - Sino Forest becomes a fake giant and someone (in this case Muddy Waters) asks if you own so much timber how come we can't see it? It becomes 'See No Forest'."
• ZH: "[Chanos] laid out his case for believing that China is in the midst of a bubble of enormous proportions, and answered questions. He often gets criticized for never having been to China. His response is that you did not need to live in Miami to know there was a bubble in Miami real estate."
• AR: Paulson explains Sino Forest loss.

The Next Leg Down

• Why Greek default is inevitable: the cuts needed are too big.
• Commitment of traders once again favors the long bond. Commercials have gotten long and specs short. Also, TLT has exceeded the Jun 1 intraday high.
• "Lipper reported that high yield saw its largest weekly outflow EVER, with $3.4 billion leaving high yield funds on the week."

Energy

• Wired: "Five Ethanol Myths"
• Nevada Passes Law Authorizing Driverless Cars
• Norwegian Electric Vehicle company files BK.

Philosophy of Success

• In 2010, for example, Americans spent an average two hours and 31 minutes watching television on weekdays, up 5.4 minutes from 2007.
• "In fact, the world is more and more aligned in favor of those who find motivation inside, who would do what they do even if it wasn't their job."
• Falky on Keynesian Macro "Logic": "To think that one can, top down, spend $50B and create value anywhere near $50B highlights a total indifference to incentives and a reliance on macro aggregates (C, I, G, M, v etc) that have proven as useful as Marxist conceptions of capital and labor: fun to talk about, but ultimately meaningless."

Slope of Hope Posts

• "This Isn't 1995 : As most of you know, my home is in the heart of the Silicon Valley, and I am thus in the center of the current lunacy (last enjoyed back in 1999)."
• "Just two days ago, everyone was convinced - absolutely convinced - the S&P was heading toward 1400 or 1450. Nonsense. The bull run ended in April, and the bears are back in control."

Misc

• Via PK, A Brief History of the Corporation: 1600 to 2100, which mentions The Influence of Sea Power Upon History, 1660-1783 and The Lever of Riches: Technological Creativity and Economic Progress.
• "Wendy’s/Arby’s franchiser said on Thursday that it would now open 192 restaurants in Russia over the next 10 years, or 12 more than originally planned."
• Google Offers Holding Its Own Against Groupon in Portland

Thursday Links

Trade Ideas

• "The case for Vodafone has been valid for a long time but what has changed is that there now is a catalyst for the shares to go higher. Vodadfone announced the details of their greater than $6 billion share repurchase plan. They have structured it similarly to an accelerated repurchase plan in that they cannot back out, and will complete the plan by the end of the year."
• ZH: China Hard Landing Bets Rise As It Now Costs More To Bet On Renminbi Strength Than Weakness
• An examination of the “Profit and Value” strategy

Technology

• Excellent new blog about cleantech VC, this post about the history of semiconductor fabrication.
• Price Trends in Storage vs Bandwidth
• It Is Never, Ever Boring for ATP Oil and Gas Shareholders
• Danish firm plans to implement "vehicle to grid" for electric vehicles.

Unsustainable

• Via Falky, the NYTimes puts "property rights" in sarcastic quotes. What jerks.
• Stumbling, Bumbling, Wee Benny Bernanke Transcript
• Businessweek: "Myspace's fate may not be an anomaly. It turns out that fast-moving technology, fickle user behavior, and swirling public perception are an extremely volatile mix. Add in the sense of arrogance that comes when hundreds of millions of people around the world are living on your platform, and social networks appear to be a very peculiar business—one in which companies might serially rise, fall, and disappear."
• Iceland is once again selling debt at a 5% yield. This is why troubled sovereigns should just jam their creditors and default.
• Icahn: "Many U.S. companies are very poorly run and non-competitive because corporate governance in the United States is, to a large extent, dysfunctional."
  

Academic

• Study: "We find that prices of stocks with high hedge fund ownership exhibit abnormal positive returns in the last minutes of trading on the last day of the quarter and that they rebound the following morning. [...] Further, these patterns are strongest when hedge fund owners have incentives to manipulate: less diversified funds (for which manipulating is less costly), funds experiencing a poor month in terms of absolute returns..."
• The Creative Advantage: relationships between creativity and psychopathologies.

Important Credit Bubble Stocks Posts

• More Cheap Energy: The Thorium Fuel Cycle
• Peculiar Market Inefficiency: Worthless Stocks That Refuse to Go to Zero
• "Broadband Electricity and the Free-Market Path to Electric Cars"
• The Wind Boondoggle

More Cheap Energy: The Thorium Fuel Cycle

The thorium fuel cycle is a nuclear fuel cycle that uses the naturally abundant isotope of thorium, Th 232, as the fertile material, instead of the U 235 used in the uranium fuel cycle. The advantages of the thorium fuel cycle are that thorium is naturally more abundant than uranium, and mined thorium consists of a single isotope that does not require separation - unlike uranium, which requires enrichment.

Wired did a profile of Kirk Sorensen and the thorium fuel cycle. Arguably, the uranium fuel cycle is just a cold war relic that was chosen to produce plutonium for nuclear weapons. Sorensen writes the Energy From Thorium blog. Here is how he explains the advantages of liquid thorium fluoride reactors (LFTRs):

Almost every aspect of how LFTRs are cheaper and more expedient to produce is directly related to them having fundamental safety features which make them not require the massive overengineering of conventional nuclear reactors. While the fuel cost advantages of a LFTR over a conventional reactor appear overwhelming at first ($100,000 instead of $50,000,000) when you dig into the numbers it turns out that fuel costs aren’t a big driver of nuclear plant cost, because Uranium contains extraordinary amounts of energy itself. The extreme lengths you have to go to in order to overcome a conventional solid fueled plant needing to have excess fuel in the reactor and operate at greater than atmospheric pressure are what account for most of the price of conventional plants.

You should watch this video of Sorenson at a TEDx event this year giving a talk on LFTRs.

Regarding the investment potential of thorium, friend of the blog Alexander Rubalcava puts it thusly:

I looked into [thorium] a year ago and concluded that the industry structure and technology doesn't lend itself to good equity investments.

The mineral itself will never be very valuable. First, there are huge amounts of it in the Earth's crust, and it's created as a byproduct of Rare Earth Element mining. Second, the LFTR reactor design uses 99% of the potential energy in the fuel, as opposed to 1% for uranium reactors, so you could supply the whole electricity demand of the US on a few thousand tons a year. Third, unlike uranium which must be separated into high value U-235 and low value U-238, you just use all the thorium, so there's no refining play either.

Regarding reactor designs and engineering, someone's going to do this. LightBridge Corp. (LTBR) is trying to commercialize a design called seed-and-blanket, which can be used to upgrade existing nuclear reactors to run on thorium fuel. It is, and always has been, a science project stock, sort of like REFR or ENER or PLUG, except with even less revenue. At some point, someone in the world will build one of these things, but whether they use LTBR's technology and they get paid anything is another story. The company has been public for over a decade and has been loss-making the entire time.

My take is that knowledge about the thorium fuel cycle should inform our views about the cost and availability of energy. E.g. this is one more reason to think that an oil shortage will not cause a complete collapse of civilization.

"Broadband Electricity and the Free-Market Path to Electric Cars"

Peter W. Huber is a senior fellow at the Manhattan Institute and the author of The Bottomless Well: The Twilight of Fuel, The Virtue of Waste, and Why We Will Never Run Out of Energy which is what you would call a cornucopian energy book. He wrote an interesting article called Broadband Electricity and the Free-Market Path to Electric Cars. He argues that

"more capital investment in the relatively low-voltage lines, transformers, and terminal equipment that distribute power to city blocks, high-rises, and suburban neighborhoods is a direct substitute for much of the additional capital investment that must otherwise be funneled into the electric car."

I am starting to feel optimistic about electric vehicles. Electric motors have already eliminated the mechanical connection between the engine and the wheels in locomotives and mining trucks. They have diesel generators that power electric motors for traction. There is no mechanical connection between the engine and the wheels.
The electric drivetrain is smaller, lighter, and simpler because of the mechanical elements (shafts, belts, etc) that are eliminated.

I think this will happen in automobiles as well, except that cars can carry a battery and charge at charging stations instead of generating power onboard. This will eliminate lots of complicated mechanicals, increase efficiency, and save weight.

Also, neat things can happen when we have a huge number of batteries in electric vehicles connected to the grid. As Huber writes,

Batteries are the customers that are eager to buy the power that nobody else currently wants to buy. They offer the existing owners of an enormously valuable capital asset an opportunity to use it profitably when it would otherwise be standing idle.

Because they already have so much invested in assets that are so often idle, and because batteries offer a perfect demand-size fit to that supply-side opportunity, these companies also have a much bigger incentive than anyone else, car companies included, to get electric miles rolling. They alone are in a position to earn potentially enormous profits by making productive use of otherwise idle assets already paid for in full by others who need always-on power. They also have a strong incentive to deliver this kind of power as fast as they can, whenever it's available, because idle capacity in the grid, like an empty seat on a jumbo jet, is a perishable good—use it or lose it.

The electric vehicle batteries will also be able to sell power back to the grid. I read a paper about the economics of this called Vehicle-to-Grid Power: Battery, Hybrid, and Fuel Cell Vehicles as Resources for Distributed Electric Power in California [pdf].Their conclusion was that

The economic value of some forms of V2G appear high, more than enough to offset the initially higher costs of electric-drive vehicles, thus having the potential to accelerate their introduction.

The cost of electricity from the EDVs noted above is too high to be competitive with baseload power, which typically has a range from $0.03–0.05/kWh. EDV power is competitive in three other markets: "peak power" (during peak demand periods), spinning reserves, and regulation services.

Commercial and industrial customers, unlike residential customers, have rates that typically include a demand charge in $/kW, added to their energy charge in $/kWh. These demand charges are often the largest component of a C&I customer’s monthly electric bills. We find that such customers, if they have infrequent or short demand peaks, could realize economic benefits from V2G power.

This creates many interesting business model possibilities. I can foresee that vehicles will be able to charge opportunistically when power is cheap, and also make money through energy storage. All of this will drive down the cost of electricity, because it allows more efficient use of electrical generation assets, and the cost of transportation.

This makes me think that the peak oil fanatics and collapseitarians like Kunstler are wrong. Their view assumes an end to "easy motoring" brought about by an oil shortage. But it looks like electric cars are workable, and we will have no problem generating cheap electricity, whether nuclear or natural gas fueled.

Here's another possible consequence. Rising diesel fuel prices have tipped the balance in favor of railroads. Railroad engines are electric vehicles, powered by onboard diesel generators. Once semi tractors become electric, the economics could shift back in favor of over the road trucking. Maybe Buffett top ticked the railroad market?

"It's Friday, Friday" Links

Internet Bubble

• P, LNKD: "Both stocks are below what traders (I don’t think many investors got involved here) could buy them for on the open market. Both are also still massively overpriced and have much further to fall."
• Ballsy Pandora Analyst Has Guts To Say "SELL"
• Falky: "whenever there are options available on stocks that are hard to borrow you have a large number of investors behaving suboptimally"

Trade Ideas

• The USG Corp 6.3%s of 2016 have fallen from 97.5 to 92 since the beginning of June - losing almost a year's worth of interest. Meanwhile, the stock is flat. One of these things is not like the other...
• Great long/short energy idea: "A practical trading application of this strategy would be to long a cost leading solar pv company and short a cost lagging solar pv company."

Other Reads

• Great KK article: "The Clock in the Mountain"
• For a New Liberty: The Libertarian Manifesto - Murray N. Rothbard

Incipient Crash

• "My personal history in Chess is only here to describe when one should give up. My view is that the EU should give up on the Euro, and plan now for its demise, going back to individual currencies for each nation. The experiment has failed. Topple the King."
• Art Cashin Compares This Week's Action To The Days Before Black Friday.
• Angry bull: "It must feel good to know that your cynicism and just-prudence is now paying dividends. Just know that betting against the market and the men with guns only works for so long. The game is rigged against the rational, the libertarian, the Austrian." Hmmm.. I guess the game may be "rigged against" me, but it hasn't stopped me from making money...

The Wind Boondoggle

I used to think that wind turbines could be a promising way of generating electricity, but lately I have been questioning this view. I read an analysis of windfarm output in Scotland over a 26-month period between November 2008 to December 2010. Some of the findings:

1. Average output from wind was 27.18% of metered capacity in 2009, 21.14% in 2010, and 24.08% between November 2008 and December 2010 inclusive. [This is less than the 30% of nameplate capacity that is usually predicted.]
2. There were 124 separate occasions from November 2008 till December 2010 when total generation from the windfarms metered by National Grid was less than 20MW. (Average capacity over the period was in excess of 1600MW).
3. The average frequency and duration of a low wind event of 20MW or less between November 2008 and December 2010 was once every 6.38 days for a period of 4.93 hours.
4. At each of the four highest peak demands of 2010 wind output was low being respectively 4.72%, 5.51%, 2.59% and 2.51% of capacity at peak demand.

Looking at a map of global mean wind speeds at hub height (80m), you can see that Scotland is as windy as the windiest parts of the United States. So the implications for wind power are not good if wind can't even make a useful contribution there.
 
In 2007, Jim Detmers, VP of the California ISO gave a talk at Stanford in which he said,

"Wind is not produced on peak. This last summer, when we went across the summer peak, I had 3,000 megawatts of capacity of wind. How much did I have on the summer peak, back in August? No, no, no, I didn't have zero. I had a total of 63 out of 3,000. And we're investing all of this money in wind..."

At this point, I'm more interested in thorium than wind. Even solar is rapidly becoming cheaper and more efficient. It will be hard for wind to surmount its liability of unpredictability and blowing at the wrong time.