On today’s Money Morning, there is a lesson to be learned from the history of whale oil mining in Australia, which explains why the current push for renewable energy is illogical, at least for now. It’s not a popular opinion, but history shows that governments making investment decisions based on arbitrary goals is a recipe for disaster. Read on to find out why…
‘A good part of the capital that had [been] so liberally employed in the import trade, they are gradually diverted into this safer and infinitely more productive channel — oil fisheries … whalers are public benefactors entitled to the gratitude of the whole community. They stop the entrances to Australian poverty and open the entrances to Australian wealth.‘
Sydney GazetteMarch 18, 1830
The second fleet, a convoy of six ships carrying convicts, settlers and supplies, landed at Sydney in 1789. It was an infamous journey. 25% of the convicts on board died en route and 40% died within six months of their arrival.
Private contractors who organized transport and provisions were blamed. Apparently they were not instructed by the authorities to deliver their human cargo to Sydney in one piece. A reminder — when it’s needed — that the economy is just incentives.
This disaster, which put the fledgling settlement on the brink of starvation, provided an opportunity for an enterprising whaling captain named Samuel Enderby.
Enderby was heavily involved in the British-American whaling trade through his fleet of ships. However, after the American Revolution, exports to Britain were embargoed. This included whale oil.
Before the discovery of oil in the 1850s, whale blubber was the primary engine lubricant and preferred lamp oil in Europe and North America.
Enderby, in search of new markets, demanded that the British government allow whalers to transport convicts to Sydney and then continue whaling in the Southern Ocean.
So he could make money on both voyages – human cargo on the way out and whale blubber on the way back.
In 1791, the Third Fleet left England for Sydney. Of the 11 ships that landed, five continued to hunt in the Southern Ocean, creating Australia’s whale oil industry.
According to the National Museum of Australia:
‘Whaling became an important part of the economy and culture of New South Wales. Whalers were the colony’s most frequent visitors in its first decade.
‘Whaling was Australia’s first major industry, a trade that over time involved thousands of people and hundreds of ships.
‘The peak of whaling in Australia was between 1820 and 1855, when up to 1,300 people worked in the industry annually. However, after the discovery of gold in Australia in 1851, sailors left their ships en masse to go to the gold fields. In the 1850s, oil increasingly replaced whale blubber, and the industry declined.
‘The industry, which provided New South Wales with 52 percent of its exports in 1832, by 1855 provided less than one percent.‘
As emphasized Sydney Gazette quote above. Whaling traders were “benefactors”, preventing poverty and increasing wealth.
How times have changed.
Australia’s exports of liquefied natural gas, coal and oil are expected to reach $225 billion in 2022-23. This is 50% of our total resource exports (the same as whale oil at its peak).
Yet the industry is shamed and shunned. Wealthy activists and college-educated morons want to shut down these industries.
They only see the world through the lens of emissions. They do not see the other side of the balance sheet. These exports help provide food, shelter and heating for millions of people. And they pay for schools, hospitals and a bloated public service for Australians.
We are far from the gratitude shown to our vital industries in the early years of settlement. At the time, before the welfare state saw the government become a “benefactor”, there was a much greater understanding of what the process of wealth creation was.
To the modern mind, killing whales for oil is abhorrent. But then it was perfectly acceptable.
Fortunately, technology led to the rapid decline of the whaling industry due to the large-scale discovery of oil and its refining into petroleum products. Moreover, this discovery made energy much cheaper.
Cheap energy (along with free markets and the rule of law) is vital to raising living standards. The more a nation’s wealth is devoted to energy expenditure, the less wealth is available for other endeavors.
That’s why this transition to renewable energy is so controversial. Politicians see this as a vote winner and go ahead regardless of the cost. But the more we make it happen in an unnaturally short time frame, the higher the costs will be.
The unifying factor for zero-carbon advocates is that renewable energy is free. Nevertheless, the more we invest in it, the higher the energy prices become. Why is this?
Building millions of non-renewable solar panels and wind turbines isn’t free…
Building extensive transmission lines to connect these far-flung new energy sources to the existing system is not free…
Creating a back-up resource to support and guarantee intermittent renewable energy generation is not free…
Those who invest in this new infrastructure will want to recoup their substantial investment. And you will pay for it.
At the same time, traditional forms of energy suffer from a chronic lack of investment.
Technology has driven all previous energy transitions. As a result, the cost of energy has fallen and contributed to a broad rise in global living standards over the years.
This energy transition is different. While technology plays a role, it is not the driving force. There is a policy. As a result, this energy transition will — for the first time in history — lead to an increase in the cost of energy and a corresponding decrease in the standard of living.
It doesn’t have to be this way for Australia, but I don’t fancy our chances.
Australia is a net energy exporter. In 2020–21, we exported 15,420 petajoules and imported only 2,115 petajoules (see below).
We may benefit significantly from structural increases in energy prices in the coming years. At the same time, net energy importers such as the UK, Europe and Asia will have to spend more on their energy needs.
Although beyond the scope of this report, these dynamics will have enormous implications for international capital flows and trade balances.
As just one small example, let’s look at Germany. Long known as a high-value-added exporter, it has accumulated a significant positive trade balance, especially since unification in 1989/90. But as you can see below, thanks to the energy crisis, the trade surplus has fallen.
It now uses almost all of its export wealth to pay for its energy needs. If this continues (not only for Germany, but for others like it), it will have huge consequences.
Either way, the point is that Australia is very well placed to benefit from this energy-driven power shift. But as I said, I don’t expect us to invest the dividend wisely.
To confirm this, you just need to look at Queensland, one of the most nature-rich Australian states.
In late September, the QLD Government announced a $62 billion Energy and Jobs Plan. This includes a new target of 70% renewable energy by 2032 and 80% by 2035.
Renewables currently provide around 20% of Queensland’s electricity needs. Coal provides 60% and gas 10%, with biomass accounting for the remaining 10%.
Under the new plan, all state-owned coal plants would be shut down by 2035.
What will replace this important and cheap source of energy?
Now, to be clear, I am not criticizing adding hydropower to the mix. But trying to REPLACE cheap and reliable power with hydro is a big risk to energy security.
The hydraulic system works with two tanks, an upper and a lower one. It generates electricity by passing water from an upper reservoir through turbines (a process that generates electricity) into a lower reservoir.
One of the problems with the proposed hydro dams is that they will only have a 24-hour storage capacity. This means they will be able to produce reliable power for just 24 hours before the overhead tank needs to be topped up. (This compares to the Snowy Hydro 2.0 product, which will be able to produce energy for seven days.)
This requires a lot of energy to pump the water from the lower reservoir, energy that must come from wind and sun (and presumably be supported by gas plants).
In 10-15 years time, Queensland risks having some of the highest electricity prices in the world, while remaining one of the largest exporters of fossil fuels, helping to drive down the cost of electricity in other countries.
I know this is not a popular option. You may or may not agree. But historical evidence shows that governments making investment decisions based on arbitrary goals is a recipe for disaster.
Economic growth and improved living standards for our children are due in part to technological advances that REDUCE the cost of energy.
This time our brain dead politicians seem to be spending our energy export windfall on technologies and projects that are almost guaranteed to increase energy costs and lower our standard of living.
But it’s for your benefit…
And there’s really not much you can do about it. Despite a matter of plenty out of Europe, something from renewables will come along to make it happen.
The odds against…
For Money morning