Episode 143 - The Problem(s) with Replacing Fossil Fuels

Don’t miss 2023’s most-watched episode of SAE Tomorrow Today!

From geopolitical pressures to the shunning of fossil fuels, there is no question the current state of energy in the US and globally is a mess. One possible answer? An “all of the above” approach.

For candid insight into this topic, we sat down with Mark P. Mills, senior fellow at the Manhattan Institute and a faculty fellow at Northwestern University’s McCormick School of Engineering and Applied Science. Mark served in the White House Science Office under President Reagan and subsequently provided science and technology policy counsel to a variety of private-sector firms, the Department of Energy, and U.S. research laboratories. He began his career as an experimental physicist and development engineer in microprocessors and fiber optics.

As part of this wide-ranging discussion, Mark shares his views on the need for hydrocarbon, the instability of the grid, energy’s relationship to inflation, the US dependance on China, and why there should be a holistic approach to the world’s energy needs.

Mark is author of the book The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and a Roaring 2020s and host of the new podcast The Last Optimist. He is also author of Digital Cathedrals (2020), and Work in the Age of Robots (2018). His articles have been published widely, including in the Wall Street Journal, Forbes, USA Today, and Real Clear. Mills has appeared as a guest on CNN, Fox, NBC, PBS, and The Daily Show with Jon Stewart. He has testified before Congress numerous times, and briefed state public-service commissions and legislators.

Meet Our Guest

MARK P. MILLS
Senior Fellow, Manhattan Institute

Mark P. Mills is a senior fellow at the Manhattan Institute and a faculty fellow at Northwestern University’s McCormick School of Engineering and Applied Science. He is also a strategic partner with Montrose Lane (an energy-tech venture fund). Previously, Mills cofounded Digital Power Capital, a boutique venture fund, and was chairman and CTO of ICx Technologies, helping take it public in 2007.

Mills is author of the book The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and a Roaring 2020s and host of the new podcast The Last Optimist. He is also author of Digital Cathedrals (2020), and Work in the Age of Robots (2018). His articles have been published widely, including in the Wall Street Journal, Forbes, USA Today, and Real Clear. Mills has appeared as a guest on CNN, Fox, NBC, PBS, and The Daily Show with Jon Stewart. He has testified before Congress numerous times, and briefed state public-service commissions and legislators.

Mills served in the White House Science Office under President Reagan and subsequently provided science and technology policy counsel to a variety of private-sector firms, the Department of Energy, and U.S. research laboratories, and prior to that began his career as an experimental physicist and development engineer in microprocessors and fiber optics.

Early in his career, Mills was an experimental physicist and development engineer at Bell Northern Research (Canada’s Bell Labs) and at the RCA David Sarnoff Research Center on microprocessors, fiber optics, missile guidance, earning several patents for his work. He holds a degree in physics from Queen’s University, Ontario, Canada.

Transcript:

Grayson Brulte:

Hello, I'm your host, Grayson Brulte. Welcome to another episode of SAE Tomorrow Today, a show about emerging technology and trends and mobility with leaders, innovators, and strategists who make it all happen. On today's episode, we're absolutely honored to be joined by Mark P. Mills, author, entrepreneur, and faculty fellow at the Manhattan Institute. On today's episode, Mark will share his unique perspective on the energy transition in the mobility. We hope you enjoy this episode.  Mark, welcome to the podcast. It's great to have you here because energy's a hot topic that's not truly understood in great detail to say the least. Mark, you're a physicist by training. In your opinion, what is the current state of energy globally? 

Mark P. Mills:

Can we say it's kind of a mess? Yes. Um, a self-inflicted. Which is sort of what we do, uh, geopolitically. Look, the reality is that the, a lot of the western nations, not the Asian nations and not the emerging markets, have embraced a myth, uh, a fiction that's not true. And as a consequence, they've implemented policies and spent money in ways that are causing problems today, will cause problems tomorrow. But the good news is it's all relatively easy to fix and relatively quick to fix. And by that, I mean policies that imagine that we can quote, transition away from using lots of hydrocarbons, oil, gas, and coal to quickly stop using them in significant quantities and replace it with in the main wind and solar. That's not happening. It's not in the data. It's not going to happen, which is easy to demonstrate just given the velocities of the magnitude of economies and it's actually economically and geopolitically dangerous to try to push a energy transition faster than is, we'll call it technologically and economically feasible. We have a lot of history for two centuries of the velocities of big infrastructures, and there's nothing new here. Um, in the, in the energy world, we don't have any new physics. We know a lot about what it takes to make energy work for society. And when I say we, I mean the intellectual knowledge exists. It's not clear however, that enough people understand the realities. 

Grayson Brulte:

It seems that it's being politically driven. United States, our inflation rates down to 7.7%. It's gonna take trillions of dollars. Bloomberg, new energy finance estimates over the next three decades, 119 trillion, I mean, 119 trillion. We're going into a global recession. Interest rates are high. There's no money left to do this. 

Mark P. Mills:

Well first, governments can print money, which is which they do, and which is, which is an inflationary behavior, uh, governments can increase taxes to collect money, whether it's fees as tax, as a form of tax, and they're doing that all over the world, certainly in the United States and Europe. So, but I, but the bottom line is, you're right, there isn't, there is not enough money to replace the low cost hydrocarbon systems that exist with higher carb, higher cost, non hydrocarbon systems. It's not that we can't build lots of them, and we'll, we will, uh, doubtless spend trillions of dollars. In the coming decade on non hydrocarbon energy sources. And frankly, we should, by the way, it's not like we shouldn't be, uh, pursuing every possible way to, uh, provide options for energy for society. What I object to and, and what I think a lot of people who study this object to is what you'd have to call monomaniacal, focus on wind and solar is some magical replacement for hydrocarbons, and when I say monomaniacal focus, let's be clear that the forecasts for an energy transition almost entirely an are anchored in more wind and solar and batteries to moderate it. It's like 75% of the growth and energy in the sort of transition model that the International Energy Agency has some 75% of the energy that they imagine of net new energy will come from wind and solar. Uh, I, I just don't think that's gonna happen. Uh, I think the evidence is clear that we can't actually make that happen. 

Grayson Brulte:

I don't see how we can make it happen. Then, yet the geopolitical issues in China, the parts for the wind turbines come from China. The solar parts come from China. We're on the verge of a potential, another Tiananmen Square massacre over there with, with the crackdowns. We're already dependent on them. For EVs, we're seeing what's happening with Apple supply chain. It just seems like we're getting ourselves into a mess with, without clearly understanding geopolitics.

Mark P. Mills:

I think the geopolitics are becoming easier to understand more quickly than the physics of energy, frankly, uh, that's, and, and that's probably is the way it should be. I mean, I got a bias towards physics, but, uh, in the re in the real world, um, Physics gets the win in the end, but money in politics matter an awful lot, and they actually take precedence. Good governments can try to violate laws of physics or do workarounds. It's, but, but your point is, is an important one. Uh, the world is what is awakened to the realities that something like 80 or 90% of all solar modules are manufactured in China. Uh, something on the order of 60 to 70% of all the critical battery chemicals and materials, the refined materials for lithium batteries, for electric cars are produced or refined in China.Uh, this is not an accident, it was a deliberate policy on the Chinese part, but, and I, and I'm all in for trade by the way. I think we should trade with people. I think global trade's a good thing. Uh, the challenge with trade is, is always one with respect to, we'll call it transparency and some semblance of equality in how we treat industries in terms of regulations and taxation subsidies. It's not easy, uh, but there's a huge asymmetry in what's going on. But, but the bottom line is we are dependent on China for the energy transition materials and machines. China is dependent on the rest of the world for hydrocarbons, and of course, China, like the rest of the world, it's primary sources of energy more than 80% for the world and more than 85% for China come from hydrocarbons. So their dependency in, in effect on the west is equal to or higher than our dependency on them. So we have a, we have a bilateral dependencies. The difference is the Chinese have more options on where to get oil, let's say than we have options on where to get solar modules. They dominate solar modules. We're the, we're one of the biggest players in oil, but there's lots of places to get oil. 

Grayson Brulte: 

There's lots of places. We just look at what Mark Rich did with Iran, the oil it's going to flow to China. I started studying some of the policy of President Xi and his Silk Road speeches, the maritime road speeches and President Xi of China would show up in Indonesia or show up in the Congo and he'd give a speech. All of a sudden, that's followed by a very large investment. There was a great line from an analyst I read, says, Chinese money comes without lectures. That's why we're taking their money. And suddenly, all the cobalt from the Congo, all of the nickel from Indonesia are going to China. Was this a deliberate strategy by the CCP to corner this market? 

Mark P. Mills:

Well sure, but it was a clearly publicly articulated strategy. It wasn't a secret strategy. So in the last two, five year plans or, or 10 year plans, I think I apologize, but I forget whether were the five year or 10 year plans. But certainly for the last 20 years, Chinese government has made it very clear that they, uh, have a strategy of foreign investment in minerals, basic metals, a strategy to, uh, do the same in their own country as well as more importantly, a strategy to provide incentives for. Uh, and remove barriers for the construction of refinery. So metals, whether it's copper or nickel, or more exotic metals like cobalt--all these metals after their mined have to be refined. Just like oil has to be refined at a gasoline, you have to produce a refined version and then convert the refined version of the metal or mineral into the specific chemical formulation needed to build whatever the thing is you're building. Uh, so you don't just take lithium outta the ground and import to a battery, that's not how it works. It comes in a specific chemical form. It has to be converted into another chemical form. All this takes energy, money, capital. But none of this, this is the irony here that whole array of technology, which the Chinese now dominate. It's not because they know something we don't know about the engineering. They didn't make any magical discovery about refining. They didn't advance the technology in some profoundly efficient and remarkable way. They're using technologies that are well known to everybody, that many cases we pioneered in America, or they were pioneered in Europe. And uh, they've just chosen to, to do it. They've made it easy for businesses to build. Uh, so the velocity of construction of a big refinery that costs billions of dollars, uh, matters. You put that much money at risk. If it takes five years to get a permit and five years to build it, where are you gonna build it? Where it takes five months to get a permit and, you know, another six months to build it, which would be China. In America where you do the five and five in years, if you're lucky, uh, or you end up having the permits drag on for more than a decade, which happens all the time. Given our, our regulatory environment and the manner in which we administer the regulations, not that we shouldn't have regulations for clean air, clean water, those kinds of things. It's how we go about administering it and making it possible for sort of what you have to call malicious interference and delays, uh, on the part of organizations and people who just don't want to have them in America at all, or don't want to have them anywhere, but they have no mechanism to oppose it in China. So in the end, so you get what you get is what we got, which is we don't, we don't build those kinds of refineries here. Chinese do. We provide incentives to, uh, buy electric vehicles with batteries made chem with chemicals refined in China, in minerals minded in Africa. I, I think that's a bad trade. Economically, geopolitically. I think it's probably a bad trade morally, and it's clearly a bad trade environmentally.

Grayson Brulte:

It's bad morally. If you study the Congo. The child labor, the deaths, the injuries are appalling. They, they fall into these holes in the ground with the colbalt comes and, and they suffocate to death. That's not a good way to go. And you, you look at the torture that that's happened in China then from a carbon aspect to keep, move, put it on a ship right. To move it to China to refine ship to America. That's creating carbon. But China did this in the open Americas clearly said, we're going to an all electric future, but never built the infrastructure to do this. Why did we not put the infrastructure in place before we started transitioning to an electric future? 

Mark P. Mills:

 Well, we have the infrastructure. We just don't have as much as we needed to to meet the imaginations of an all electric future. The, the world has been electrifying for a hundred years, so we went from zero share of energy in electrical form, a little over a century ago. Well, 120 years, but let's just, you can round it off to a hundred years. The world wasn't very electrified in 1920, and we now have about 20% of the world's energy delivered in the form of electricity and in, in the west, in, in America and Europe. It's. More like a third to some cases, 40%. So it's a, it's a long one century rise, and that is gonna continue, we'll continue to electrify things that can be electrified, including a lot of transportation and a lot of electric vehicles. But to your point, uh, if you're going to increase electrification, uh, you become more dependent on the electric grid. Then the two things that matter are building a grid that's adequate to the task, which we're not in building one that's reliable. Uh, because the more dependent you are on electricity, whether it's to, to zoom, uh, or to use Google, Google maps or social media, uh, or more seriously, uh, the migration to cloud-based computing for all manner businesses. Which I've written a lot about on my new book. This is extremely important economic social progress, but it takes extraordinarily reliable electric grids to make an economy become more dependent on electricity and electric grids. You know, frankly, they're hard to make reliable utilities not, don't have a hell of a good job in the last century, but it's very difficult to make them because, uh, you know, electricity's hard to store first of all, and then you have added to that two other features. Nature keeps trying to break your stuff. Uh, you know, nature's been trying to kill humans and thinks humans built forever. So nature attacks you. And then human nature is a problem because humans operate cyclically, like this should be obvious. We sleep. It's not just that we sleep, we operate, our economies are sort of cyclical. They peak and they, they don't, they're not, they don't run flat out. But that means electric demand is cyclical and, and it can vary by, you know, two threefold, fourfold, you know, from peak to valley. And that's really hard to, to manage. You have to have grids that can handle the peaks without a lot of storage because storing is hard even. We're infatuated with lithium batteries now. For good reason. Lithium batteries are pretty amazing. It's still very hard to store electricity at scale society uses. So you basically have to build grids that can do all three things with, you know, withstand nature's insults with 10 human, human nature, right? And, and also, uh, just fundamentally delivered as sheer quantities of energy needed by society. So now you add electric cars, for example, great, but a single electric, you know, car charger has a peak power demand equal to your entire house for typical house. And if you make it a supercharger, then it's peak power. Demand is equal to the, a whole neighborhood of houses. So the upgrades required to electric grids are epic and frankly unprecedented in the timeframes that are imagined. So you, so why did we do it? Well, I guess , no, no one, uh, you could say the government, this government in America today is trying to do that. That's part of the subsidies in this new, uh, Orwellian named Inflation Reduction Act. But we haven't done it because there hasn't been demand. I mean, markets are pretty good at building things when there's real demand. Now we're trying to create artificial demand, you know, convince people to buy electric cars more quickly than they might otherwise buy them. Okay. That will have, that'll have a consequence. We'll probably see it, but we already saw it. I mean, you saw the irony when, uh, California, you know, Newsom's Governor Newsom signed the law to ban conventional cars, allowing only by an electric car by 2030 in California was only days later that he had to issue another announcement. For those who have an electric car today, please don't charge your cars. We're grid short. Okay. That'll happen a lot more often. And, and I think people won't like it. Probably we'll fix it by maybe changing who we vote for. I, uh, maybe. And if we don't, we'll have, you know, unreliable electricity in blackouts that, I mean, that'll be -- you're gonna get one of the two. Because we can't build, we can't build the grids at the velocity. People imagine. 

Grayson Brulte:

Look at California. I was speaking to a gentleman the other day. The port of San Pedro, Los Angeles, Long Beach. They're getting ready. They're building on infrastructure for class eight chargers. Let's call 'em as Elon, calls 'em mega chargers. Yeah. If you're gonna run electric class eight out of the port, where's the energy gonna come? The, the strain on the grid's gonna be even larger than you have the Marino Valley project that they're trying to do it as well. How it can't come from hydro dams with the water Lake Mead and the Colorado rivers going down. It reminds me of the saying you worked in the Reagan administration. Pre President Reagan had the great saying, trust, but verify . We're trusting but we're not verifying. Where's the disconnect here? 

Mark P. Mills:

Well, people, people are verifying they're doing, uh, energy planning by powerpoint. Instead of with engineers. So they put up graphs of, you know, we're gonna need this much more electricity, and, and you fill the gap with lots of windmills and solar arrays. So, okay. You can draw a graph like that, and then they'll then, if I say, well, what if, when the, you know, the sunsets, obviously the wind's not blowing, what do we do? Well, they, they draw a graph with lots of batteries. Okay. You can, you can say those things. So they are doing their form of verification, but to your point, The verification sort of has an upstream requirement as you sort of follow that tail. It's, I, as you know, I've done a lot of what I write about, and I'm not alone in this. No, you have to ask the question, well, how much will all, all that stuff cost? Where will we get it from? China mostly. Uh, and, and are we, and this is the critical thing, I mean the, the single biggest sort of bridge out, you know, this bridge to the future language everybody uses as an analogy that we have to have this bridge to the future without hydrocarbons. The bridge is built from metals and minerals, just like real bridges are. By that I mean everything that we build. Has to start with a mine somewhere where we get iron or to make steel where we get copper to make electrical things where we get lithium, make lithium batteries, where we get manganese for the batteries that use manganese or cobalt. So it all begins with mining. We know a lot about this. We know, we know how much, uh, uh, material is needed to build a machine to deliver a given amount of energy. And this is what we know. And this is International Energy Agency data, not Mark Mill's data. We know that it takes an increase in mining, uh, somewhere between 1000% and 7000% to deliver the same unit of energy to society. If we go the solar wind battery route instead of the hydrocarbon route. This is a, this is an unprecedented increase in demand for metals, uh, in all of human history. And I'd take the bet because we have a lot of history on how long it takes to open minds. It won't happen. , it's just not gonna happen in the timeframes people are talking about, which is a decade or two, we're not gonna increase the supply of these metals by 1000 to 7000% in the next decade or so. We know, we know that no one's, because we have data on this, we know that the mining industries globally are not now investing in or announcing investments in minds of that, opening new mines of that scale. Uh, there are new investments, but. They're very modest. They're, they're literally one 10th of what will be required to meet these demands. You could ask why they're not doing it. That's a whole different discussion, but the, it's still a fact that they are not doing it, and it's a fact that we need, just take copper's the oldest mined metal in all of civilization. We began mining copper before written history. We know lots about copper. We know where it is. We know how to mine it. We can make mines better. But we also know, given what we can do today with the technologies that exist today, cuz you're gonna have to use what exists today. You can't use what you're gonna invent in the future to build something today. This is that all these sort of infantile will make it better, okay? Yes, we'll make it better. So we'll wait till it's better to use it. But you can't, you can't use future technology today. So using what we know today with mines, you know, the IHS markets put out a study six months ago, a very good study just on copper. The energy transition plans will have the world short copper by 250%. There's the demand. 250% higher in a very few years for copper than the world is planning to produce. You don't open copper mines the way you open up a Starbucks. It's not the same thing. Google up picture pictures of copper mines and see how big they are, how big the holes in the earth are, and, and nevermind the environmental issues aside with associated with that. Just think in terms of the scale of physical machinery that have to be built and, and it deployed to do this plus here's the, the irony that machinery all burns oil. I mean, the global mining industry uses roughly as much oil as the global aviation industry, and we wanna increase the mining industry by two or three x. Okay? , where's the oil gonna come to run the mining industry if we're gonna ban oil. 

Grayson Brulte:

You can't ban oil. I repeat, you cannot ban oil. Oil, oil is only down 0.57% and some markets, the segment, it's actually increasing. And then you have BlackRock and UBS tell Texas, no, we're not gonna work with you. And Texas goes, oh yeah, we're gonna ban you for your fossil fuel stance. Yeah, it just doesn't, there's isn't any rationale. Hydrocarbons play a very important role in the, in the economy today. They play a very important role in energy. Why are we not taking a hybrid process? Okay, we want to transition to more renewable energy, but hydrocarbons play a very important role. Don't demonize 'em as you demonize them. Coal is going through the roof. Is at a 50 year high in terms of usage right now? 

Mark P. Mills:

Well, China's increased consumption to coal Asia in general at the moment is it's, your point, is epic at peak use China is, is at the moment announced plans and is already under construction building coalfire power plants. The new plants that they plan to build will use more coal than the United States does today for all purposes. So they, in fact, let's use, since this is all about carbon dioxide, let's put another little factoid out there. China's increased use of coal over the last decade and they're not slowing down, has emitted more CO2 than Britain has since the industrial Revolution. So the, the velocity of coal increase is now epic and being pursued for obvious reasons. Low cost electricity matters. By the way, the reason that China produces. Uh, 80% of the word solar modules is that making solar powered silicon, solar silicon, the silicon, the poly silicon to make solar modules is incredibly energy intensive. It takes a thousand times more energy to make a pound of silicon than a pound of steel. And so it's done with electric machines, electric furnaces and effect, and you do that with coal-fired electricity in China. So in a very ironic and real way, uh, solar modules are solidified coal. It's what they really, it's what they've done. They've taken coal, burned it, make electricity, and then converted, uh, you know, sand and quartz into, you know, uh, semi conducted grade silicone. So we, we have this, um, you know, you, you phrase this hybrid. Hybrid is to use the phrase that a former president, uh, used, and I would, let's just give him credit. President Biden, not Biden, sorry. President Obama is using it non cynically. Remember when he famously said he believed that we should have an energy policy of all of the above? Okay. I, let's just take it face value. It's, he is right. So let's, your, yours is a hybrid word. Through all of human history, new energy sources when we've found them or developed them or invented them, have been additive. They've not replaced. In fact, the quintessential example of that is wood, the oldest energy source. full stop, right? There's not , there's not, you know, the dawn of fire, we burned wood. We didn't burn dung first. We burned wood cuz wood, you know, wood is wood. You know, dry wood is just a nice fuel. Still is. So the world today in absolute quantity terms, uses uh, about the same amount of wood it did a century or two ago. We still burn a lot of wood. In fact, energy supply from burning wood globally is still triple the energy supply from wind and solar combined globally. So wood hasn't gone away. Uh, it hasn't increased. It's certainly not our primary source of energy for the world, but it's still around as we've added other sources of energy on top of it, notably first coal, and then of course the oil and gas, and then, you know, hydro and nuclear power. Now wind and solar. All, all good stuff, right? Uh, we'll have lots more of all the above. If you want to, if you wanna provide more incentives for one or the other, for some geopolitical, social, economic, or emotional reason or environmental reason. Okay. That, that, I mean, that's what governments do. It's hard. You can argue against that when it's excessive. I don't find it very productive to argue against win production tax credits. Okay. Well, you know, we have tax credits for other stuff. I think they're excessive. There wouldn't be as many wind farms if we didn't have the tax credits, but okay if we're gonna make that decision, but just leave the oil and gas guys alone. I just, if you leave 'em alone, they'll make sure the windmills will be able to operate economically and productively on grids because we'll have cheap gas to do the arbitrage, the hybridization, if you like. I mean, our economy, uh, just like our cars, a hybrid is better than. In, in a technical sense in either either of the two. A gasoline powered car can be made more efficient by hybridizing it, and it's actually a better vehicle than an all electric car. That's actually true of electric grid broadly, or the energy system of our society broadly. Hybrid architectures can be extremely efficient and flexible give you a lot of optionality, which is what you'd want. Again, because nature's mean to humans and humans can be stupid. We break stuff. So you want to have, you wanna have options. You want to be able to have very flexible systems. 

Grayson Brulte: 

You want options. Give you an example. You live in a storm area, power goes out, the generator runs on gas. Mm-hmm. , you can make dinner that evening. That's an example of hybrid. Well, gas, you could say it's relatively cheap. Now, JP Morgan's predicting it's gonna rise to $90 a barrel in 2023, $98 a barrel in 2024 due to supply and balance. And meanwhile, you have a statement from the Department of Energy. They're not gonna refill a strategic patrol reserve until it gets to $70. JP Morgan says, we're, we're not getting there anytime soon. What's gonna happen with our, with the oil energy policy? 

Mark P. Mills:

Well, you know, you were talking earlier about people demonizing hydrocarbons and the, the two people that aren't demonizing hydrocarbons are, uh, JP Morgan's, CEO, Jamie Diamond, and ironically Elon Musk. I mean, maybe you could kind of expect Jamie Diamond to say what he said before Congress, you know, a month or so ago when he was asked directly point blank whether or not they should not, they, the bank should stop funding oil and gas industries and try to abandon oil and gas. And he said the quote was something that, that would be a road to hell. Uh, and, uh, but that he meant social and economic hell because, look, what you said earlier, let's just re reemphasize it globally, about 82% of world's energy comes from hydrocarbons. 82%. Uh, that number was 84% 20 years ago, so it's down two percentage points in 20 years after trillions of dollars of spending on non hydrocarbons. But that's the vast majority of the society's energy is hydrocarbons. When Elon Musk, and he said this several times in, in the, in the recent months, he, he, uh, and I'm paraphrasing, but I we can, you can find this on the magic Dr. Google machine, but he said something like, I'm not, I'm not one to demonize fossil fuels. And he also said, we should be drilling more. And he didn't say, we should stop making electric cars. Of course not. Again, to your point about hybridization or all the above, you need both. You need all the above. You want cheap energy. So JP Morgan's forecast and energy is based on looking at the demand side. You know what the world is doing. Even in a recessionary environment, we still use oil in a recessionary environment. If you get a full-on depression, you can reduce oil demand, but in recessions, oil demand growth just slows, doesn't go away. It's, it's never super fast and it's never super slow, it just chugs along. So they're looking at the demand side and they're looking at the supply side and what the, the, what JP Morgan knows is clear in the data, that global investment in new production, by that, I mean, mainly the European and US companies is at an epic low level. Uh, so investing in new production, which began to decline in 2015, by the way under either ESG pressures in Europe first and then increasing pressures in America. So the businesses and politicians that have been pressuring oil and gas companies to invest less in the future got their wish. They got their wish, they have invested. And that will have a consequence, which is higher prices because demand is not going away. It's sustaining or going up slowly. Supply is declining faster than demand's growing, and that always leads to higher prices. How long those prices stay high is always a function of how long it takes markets to respond and start drilling more. Uh, that's sort of obvious when you state it, but if you create impediments to the industry that's doing the drilling, Or ban them outright or defund them outright, then you're just guaranteeing high prices. You're not guaranteeing people are gonna, quote, transition, you're guaranteeing high oil prices for the essential roles that it's, uh, undertaking. And they also guaranteeing a shift on who's producing the oil. So, you know, we're still the largest producer of oil in the world, the United States. Despite the rhetoric about, you know, what this administration's done, they've thrown up lots of roadblocks to expansion. Let's be clear the US is still the world's biggest producer of oil and natural gas. we're, but roughly speaking, the three big dogs are us, OPEC and Russia. Russia's shrunk a little bit, but not a lot. Uh, we shrunk a tiny amount, not a lot. OPEC's increasing production, and they've announced massive increases in investments for new, new production because they know it's true what I just said. The world's gonna need more, and if we decide to produce less, we meaning the Western oil and gas companies, well, what a gift to OPEC because they'll get to fill the gap. It's not just they'll get to fill the gap at yesterday's prices. They'll get to fill a gap at tomorrow's prices, which by virtue of our action, we're ensuring will be higher. So put very simply and simplistically what these policies do is ensure a greater wealth transfer from us to them, and not small numbers, trillions of dollars, uh, over a period of a decade of wealth will transfer from the middle class cuz it's middle class who pay the stuff from the middle class of America and Europe to the, uh, oil oligarchs of the Middle East. It's, uh, I, I think that's a bad trade. Uh, and it's the trade we're engineering and I guess we could be grateful that they're gonna go ahead and take our money and make sure we can keep our economy running. 

Grayson Brulte:

There seems that there's a, a lack of understanding history. We'll go back before OPEC, it was the seven sisters. Some people refer them as a cartel. Yeah. It seems to me we're making the same mistake. We're we're demonizing the wrong company. When I, when my same mistake in 1999 states was the world number one producer of minerals. Today it's China. Okay. We were energy independent at one point and then we had minerals at one point, and then we outsource them. It just seems like we're completely misaligned and then right in the middle is somebody on a fixed income that's depending on the dividends from the oil companies to sustain the retirement for not relying on the government. It just seems like the policy is a lose lose across the board economically. 

Mark P. Mills:

Well, it is a lose-lose policy because it does two things. It increases the direct cost of energy for people and the middle class are hurt the most. We engineer subsidies for the poorest and tax middle class for that because most of the money comes from the middle class, just arithmetically. You don't have to, it has nothing to do with political philosophy. It's just a fact. Right? That's where tax taxes come from. So we, we increase direct costs, but we also fueled inflation. I mean, energy fueled inflation is usually evanescent, right? We get a, you get a high price oil, $140 a barrel, if you look at history, it doesn't last very long, high prices tend to cause a reaction and they tend to collapse, not just cuz a lot more production comes online, but people react to those prices, they change their behaviors, they fly less, they take fewer vacations, all the rest of that stuff. But if you create an environment where you make it difficult to produce an adequate quantity energy and oil specifically and natural gas, the prices will stay high. So you'll get two things. You, you'll get high cost, direct cost to heat your home, drive your car. But if you sustain high prices for the inputs of energy to make stuff. Everything is made with energy. Then you get systemic inflation to your point, uh, earlier, uh, you know, ships and trucks and airplanes carry goods. Well, sure. Uh, for air, for aircraft, which is an easy one, about a third of the cost of running a an aircraft is its fuel purchases. Uh, so you could do the math, increase fuel cost 10%, it increases by three percentage points, the cost of your ticket, let's say. But if I double the cost of oil and I leave it high, again, do the math, and I've increased the ticket by 30%. People are, you know, they, they spent hours on Kayak and other websites, you know, Priceline searching for five and 10% discounts, and we're, we're putting ourselves in a path. We're increasing the cost of things that energy is used to do, including food, especially food, but also all kinds of manufactured goods, we're fueling that with inflation and we're adding to that mineral inflation. This is perhaps the most poorly appreciated and least analyzed feature of the energy policies that are being implemented, which is that by increasing our demand for copper and nickel in particular, but all other suite of metals and minerals, to build these energy machines and including exotic minerals like neodymium, which you have to use to make the motors and wind turbines. Almost a half a ton of neodymium in each wind turbine and the wind plans for the world will demand, uh, something on the order of as much neodymium every week as we now produce annually. So we're, we're not increasing neodymium production by 50 fold anywhere in the world. So let's make neodymium become more expensive. Wind turbines have become more expensive because of mineral costs. It's already happened. Batteries have already become more expensive the last two years because of mineral costs of copper, lithium, cobalt, copper's up 200%. Uh, nickels up about 300%. Lithium is up 800% in the last three years, uh, because of demands outrunning supply. But that spills over, not just into making the green machines more expensive, it spills over into everything else that's made from those metals, which is all, all appliances are made from copper. They have to have copper and electrical systems. Plumbing is copper. You can switch to plastic plumbing, which is a hydrocarbon by the way. 
So you, it's so, you can't, we are, we're fueling systemic inflation in a way that's sort of unprecedented. And meanwhile, the Fed is trying to fight inflation by raising interest rates . What the Fed can't do is a great line. Uh, I think, I think one of the presidents, one of the federal reserves said the Fed can print money, but it can't print oil. They can't print copper either. So by making money more expensive, they make it more expensive for the next oil well or the next copper mine. Cuz you have to borrow money to put the capital equipment in place. So you've, you systemically increase costs, which is, which is what, you know, you started out asking the state of the world, it's a mess. It's a mess because we are implementing policies that won't work, but it's worse than that they won't work, it's that it's systemically increasing cost for people and it's systemically fueling inflation. And I, I think that's gonna get reversed cuz people really hate inflation. And when they finally figure out what's causing inflation and they will, it becomes sort of obvious energy is the first thing people think about. But then when you think about the mineral side, as the more they learn about this, I think the more unhappy people will become and politicians and most democracies eventually tend to react when the electorate gets really unhappy. I mean, it takes time. It's not like I'm being cynical about it taking time. You could argue it's reasonable. It takes time because many of these inflationary pressures are evanescent and if you overreact to a short-term inflation by making big policy changes, that's probably not a good idea. So, you know, people are, I think, reasonably patient to wait to see how it's gonna work. And so that's, that's sort of my feeling. What's going on is that the electorate is sort of being somewhat patient, I mean, sort of philosophical here instead of about seeing how it's gonna work out. And it's becoming increasing clear, it's not working out so well. And I think what'll happen increasingly is policy makers will say, wow, I, I gotta do something else. They're not gonna capitulate and say, oh my, my bad solar, we don't need solar anymore and I'm not gonna do, uh, electric vehicle subsidies. That's not gonna happen in my opinion. What will happen is we'll do both to your point, they'll finally capitulate to the logical strategy, which is to, uh, make it possible for the markets that produce the energy the world needs, including hydrocarbons. 

Grayson Brulte: 

There's an area of inflation that I've been studying a lot in great detail that the public really hasn't tuned into yet, but I started looking into it. Hotel inflation, AAR, Average Available Room rate. Yeah, there's a lot of inflation that's starting to creep there. It's not just the United States. I'm looking at it globally, and you look at some of these tourism numbers are starting to go down. So as you mentioned, the fuel costs for the aircraft are going up astronomically. The hotel prices are going up -- the inflation's there, but is being mostly driven by the shortage in labor. Now consumers don't spend, the economic dollars aren't traveling. We're coming full circle on this inflation picture. It's not pretty. 

Mark P. Mills:

No. Uh, the hotel one is fascinating. Um, I've looked at a lot of this too. I've got a piece coming out early in the year on technology and inflation because I'm being very simplistic. But inflation is fueled by the obvious, right? If you print too much money, which governments tend to do, you have too much money chasing too few goods, yada yada, inflation. But the other part is if you want to tamp down inflation, right? You increase the supply. If you increase supply, if you provide incentives to increase supply, whatever it is, oil, labor, uh, you, you get the controlled inflation. So we have a labor shortage, uh, and the labor shortage---if you're the worker, this is a good thing. You have pricing power. It means that you can ask more for your, your salary. So what is the solution to that? I mean, the solution to that feels immoral. Even though this is what you could say business would want, or the Fed might want, is you wanna pay people less. You want, you want the, you want the power on the other side of the equation to say, I'm just not gonna pay you what you thought and I'm gonna fire you cause I can hire somebody else. Okay. Uh, I don't like that solution. The solution I like, and this is a different subject. it may be a subject for another episode. It's, it's sort of the core thesis of my book, you know, The Cloud Revolution, which is, uh, I have a large section of it on robotics and automation. Both virtual robots, you know, AI in the cloud, and physical robots. The way you get more labor is you let robots, both physical and virtual, assist humans. So I, let's be simplistic, if I can double the labor pool, if I can make each employee twice as productive, equal to two people, but I only have to pay half as much for the machine, whether it's a virtual machine or real machine. As a human, I can pay the human more, and it's now deflationary in a sense, it's anti inflationary cuz I have doubled the product ---the labor--- at only a 50% increase in cost, roughly speaking. And a, a big share of that has gone to the human, not just to the robot. This is great. This is, this is not just, uh, productive, it's a very definition of productivity. It's productive and wealth creating. It's morally and socially what we've been doing, big picture, a hundred years where we could, people get, can get paid more, but we get more product for less net money on the other side of it. That's where I think the world's gonna go, but it will be harder to get it there if we make capital expensive, cuz robots are capital intensive. It'll make it harder to get there if we make energy expensive because, You know, robots take fuel. It takes energy to make the robots, it takes energy to run the robots. It takes energy to heat those buildings because there's people in them, not just robots. They, they be heated and cold. So if you make an electric grid, expensive, the operating costs of the hotels one of the biggest costs in a hotel other than people. Is there electric bill? Right. Hotels are very electric intensive buildings. Much more so than an office building because you know, an office building has computers and lights in it. That's it. Hotels have all kinds of toys and gadgets and hot tubs and pools and, you know, and, and they're usually, the hotels are where it's hot, so they have lots of air conditioning cuz people typically don't go on vacation to my homeland in the summer, which is Canada, they go the other direction.

Grayson Brulte:

Energy makes the world go round. What is the best path forward? In terms of the mix of energy to meet all these demands. So when you go into the hotel, you can have the air conditioning. When you want to get in your EV, you can do it. Or if you want to get in your hybrid car, you can do it. What's the best mix of energy?

Mark P. Mills:

So it's even more than the energy makes the world go around. Nothing. Nothing exists without energy. I mean, I can be, I can be, uh, a little philosophical, uh, in the physics domain. I mean, energy is the foundational reality of the universe. Matter doesn't exist, but for the, what we can do with energy to convince atoms to combine in unusual ways, that's what manufacturing is, and it requires energy. Humans don't exist but for energy, the energetics of the ATP molecule is the magic thing that makes humanity possible. It's an en, it's an energy machine. Anyway, I digress. Energy is so fundamental, it's breathtakingly silly to have policies that lead to more expensive, less reliable energy. So the answer to the question is, policy should be driven to increase availability and lower costs. Availability in terms of getting it when I need it in reliability sense and getting it when I need it in growth sense, more growth is more energy, more electrification. It needs more reliability, which costs energy because you have to build bigger systems which take energy. So how do you supply the primary energy sources? Well, you do the all the above, but the question usually in people's heads, is what's the new thing I can do different? I mean, if I'm really wrapped up with the idea that I shouldn't be using so many hydrocarbons, what can I do different other than wind and solar? And I'll stipulate again. We should do more wind and solar. And if I were guessing today how, what the net growth will be in the wind and solar contribution of the world's energy, it's gonna to double or triple for sure. For sure. On a global scale, that's a lot of windmills and solar arrays. But if it doubles or triples it's contribution to the world's energy. It'll get all the way up to 10 or 12 or 15% of world energy where it's at three and a half percent today. Where's the other 80% come from? 90%. Well, okay. Some hydrogen dams burning wood still, by the way, lots of oil and gas and coal still, but the only, the only magical energy source that's underutilized, that's truly phenomenologically magical, of course, is nuclear fission, and often is a question in people's heads. What about nuclear power? Well, what about it? We know, we know a lot about nuclear energy. We've got a lot of decades of experience. We've really haven't figured out until very recently, how build the kind of reactors that we really need at scale. And I, but I don't mean just the bigger reactors. We need those, the really big power plants are important to big grids, but we know that there's lots of solutions that are not, don't require magic or an imagination or basic research. So the future is gonna be anchored in two things. if we really were serious about it, other than more of everything else we already used, including hydrocarbons and including wind and solar. In the nearer term, the only thing that we could really push a lever, it's nuclear. And that's really a fundamentally a regulatory problem. In the West, we make it very hard to build nuclear plants. We have to fix that system cuz there's 70 different designs. I mean, the IAEA, International Atomic Energy Agency, has identified 70 dozen new designs for nuclear reactors. I dare say every one of them will work. Technically we know how to build these things and they're not all big reactors. Some of them are, are small enough to be, I'll call house size, not the size of your house. The amount of power that a house needs, these are kilowatt class reactors. NASA's already built these for the moon base and the Mars base. We, we are technically capable of building reactors that are a megawatt scale size of a container on the back of a truck that could power a whole neighborhood. You bury the reactor with an on-off switch. It has only one fail mode, which is off. It would run for 30 or 40 years, uh, with no fuel, no refueling. What sounds magical. These things are all technically feasible. We could accelerate all that. That's, that would be the single biggest transformation. But, but again, let's assume half of all electricity came from nuclear power. 30 years from now, if we get the world to where America is, a third of all energies is in electric, goes to electricity, that's only taking 15 percentage points off the table. Right. Uh, the whole world's energy needs, so it's not, it's, it's not going to eliminate hydrocarbons, but it'll certainly tamp down the growth demand for coal and gas significantly. Then you're left with, well, what about really transformational stuff like fusion or satellite solar power, which is actually more practical than fusion, by the way. There's no limit to energy. The thing about the physics of energy is it's unlimited, fundamentally unlimited. Building supply energy for society is dictated by our capacities to build machines that are affordable and useful. And that requires kind of innovation that is anchored in discoveries for new materials that don't now exist. So could they ever exist? Sure. That's what called basic research called, right. Uh, we'll find things that will feel magical to us today. I mean, one of the great science fiction writers, Arthur C. Clarke, famously had his three laws, but one of his most famous laws was any sufficiently advanced technology is indistinguishable from magic. Well, so as you say it, it's obvious, right? Well, the trick is, what is the technology and Bill Gates to quote somebody else who's obviously smart, cuz he's a what rich guy. Rich guys are of course always smart, but I'm being unfairly facetious. He's a smart guy and when he, when he talks about the future of energy, uh, I'll end my, my rant with quoting Bill Gates cuz I agree with him on this. He has said many, many times recently and over the last decade that the technologies that we need to transform society away from hydrocarbons---his words---don't exist today. They don't exist. He said that, I've said it. He said it. We, we know that's a fact. So then he says, but there doesn't mean there. There aren't gonna ever be technologies. That's where you need basic research. But he said very correctly that there is in his line is a good line is for those there's no predictor function now, which is sort of a geeky way of saying, you know, nerds speak. We don't, we can't predict the future. like, okay, we knew that, but, but he didn't mean that we can't predict the future in a sense that we can't predict that they'll be new technologies we can predict that there will be new technologies. We can, we don't have a predictor function. We don't have the capacity to break when they will appear. And that's really annoying. The policymakers, they hate that. They wanna, they wanna order up the future today. And what they're doing is they're subsidizing yesterday's technology so, If there were a grand scheme, it would be unleash the hydrocarbons. Don't abandon wind solar batteries, just don't over subsidize them. That's silly. And subsidize more basic research. That's the, that's the trifecta. Do that and we'll have a really, a really great, exciting, profitable, productive future for humanity. 

Grayson Brulte:

And we always have to keep innovating because nothing exists without energy as you said, Mark, because today is tomorrow, tomorrow is today, and the future is an all above energy policy. Mark, thank you so much for coming on SAE Tomorrow Today. 

Mark P. Mills:

Thanks for having me on. Appreciate it.

Grayson Brulte:

Thank you for listening to SAE Tomorrow Today. If you've enjoyed this episode and would like to hear more, please kindly rate, review, and let us know what topics you'd like for us to explore next. Be sure to join us next week as we speak with Mark Gottfredson, partner at Bain & Company. On this episode, he'll discuss market consolidation, the mobility industry, and the economic impacts of downturns. SAE International makes no representations as to the accuracy of the information presented in this podcast. The information and opinions are for general information only. S. SAE International does not endorse, approve, recommend or certify any information, product, process, service, or organization presented or mentioned in this podcast.

 

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