In this episode of Plugged In With Jed Dorsheimer, Jed sits down with Nate Hagens, executive director of The Institute for the Study of Energy & Our Future (ISEOF), for a discussion on “energy blindness” and its repercussions on our understanding of energy’s foundational role in economics and daily life. Nate also introduces the concept of “energy primacy” and details how society’s rapid reliance on fossil fuels during the carbon pulse has led to undervaluing energy’s true worth.

Podcast Transcript

[00:00:10] Jed Dorsheimer: Welcome. My name is Jed Dorsheimer, and I will be your host of Plugged In, brought to you by William Blair. Today I have with me Nate Hagens. Nate's a good friend and somebody that has a background in science, but also practical experience in the real world. Nate's done a great job providing videos to help people better understand what energy is, as well as how it describes the economy. Those can be found on his YouTube channel. We'll discuss a few basic concepts that are quite important. How energy describes the economy much better than money. How we're also somewhat blind to the energy around us during this carbon pulse. And then we failed to understand the miracle really, of this carbon pulse and like all things that are in our pulse, that it's a period or moment in time. We'll also discuss Jevons paradox. This is the idea that as energy efficiency increases, we will use more of the product or more energy, in this case, of that more efficient service, gaining more social utility, but never curbing the dependence. This is why solving energy issues need to be dual sided, both on the efficiency as well as the generation. With no further ado, let me introduce Nate Hagens.

[00:01:38] Jed: Hey Nate. Thanks for joining me today. I'm pleased to have you on the Plugged In podcast. I was just querying on Google. I found it pretty interesting that one of the top five questions, I think number one, is what is energy? And you talk a lot about energy blindness. So I thought maybe that's a good place to start in this discussion and how you think about energy? And then after that, let's jump into why you think we might be blind to what one of the most important questions is.

[00:02:17] Nate Hagens: Thanks Jed. Good to be here. What is energy? To be honest, we don't know. We don't know what energy is. It has many immutable properties. I think what's more helpful for your listeners to think about is what energy does and what it can do for us. And so energy or available energy, is the ability to do work. That's a physics definition. A human and some innovation and some technology with some amount of useful energy allows us to do something, to move something, to lift something, to transform something.

[00:03:02] Nate: One of the core tenets of my work is energy primacy. Which is that in nature, energy is the currency of life. Animals were the first investors really, because they had to invest some of their own, metabolic energy in order to pursue and acquire and chase a prey, which had a larger amount of energy payoff. So energy primacy in human systems, just like in nature, is the available energy surplus, available to individual humans, to societies, to cultures. It enables what we're able to do and the amount of energy that's needed to invent and manufacture and deliver and distribute and maintain and repair and run and fix and dispose of every single good and service in the global economy. It dictates the health and viability of a society.

So to me, energy is the single most important variable in our global culture. We think about politics and technology and money, and all of that is a pyramid that sits on top of an invisible energy surplus. And, let's be clear, all of that sits on a much larger invisible column of ecosystem services and the oxygen, the water, and the biogeochemical processes of Earth. So that's how I see energy.

[00:04:38] Jed: So that's a great place to start. Now I came up with the thesis that I've built around energy and tying that to the economy, largely something we share in common. I own a farm and was watching nature and wondering why a tree naturally drops a branch that's dead. And then started thinking deeply about some of these things that I observe every day on our farm, wondering why humans aren't adhering to the same things that the rest of nature is adhering to. I think we share some of those things, so I'm curious, but that wasn't always the case, right? If we go back to the French Physiocrats and sort of class, a simpler society, there seemed to be a greater understanding, a greater respect, if you will, to the role of energy being central and somewhere along that path. And I mean path in terms of evolution. We've somehow lost that. You articulate this as your thesis on energy blindness. Could you maybe unpack that a little bit and whether or not you agree? Please feel free to disagree with anything that I've laid out too.

[00:05:58] Nate: Yes. Without realizing it, everyone listening to this program is alive during what we might call the carbon pulse, where our culture, our global culture, is drawing down the stored potential energy in carbon and hydrocarbons, coal oil, natural gas, 10 million times faster than it was trickle charge by daily photosynthesis.

[00:06:25] Jed: So, like a battery.

[00:06:25] Nate: Yes, and we can get to that later. The energy properties are, are different. A lot of electricity generating structures create kinetic energy where the electrons have to be used right then, whereas potential energy like that's stored in a barrel of oil or in a natural gas reservoir. Once it's stored, it can be there for a very long time and then flick a switch and it can be burned. But back to your question, yes, for the longest time, 99.9% of human history, our wealth came from the flows of the sun, the rain, the soil, and human and animate muscle labor. Our cows or oxen and our work in the fields. Even today, 80% of the population in India is directly involved in food production. But then in the 18th century and then more in the 19th and 20th century, we figured out how to vertically farm instead of horizontally farm. Meaning, we would drill under the ground and access this bank account of stored sunlight, and this happened so fast, and it boosted the productivity of our culture and our economic wellbeing so quickly that the economist got rid of land and land productivity, or the physiocrats and the early economist, Ricardo, and others, included, all of that got parsed into capital and labor and some productivity function. So, all of a sudden, energy wasn't an explanatory variable into our economic success other than its cost. But consider this, and I know you know this, and any of your listeners can find this out on a quick Google search, one barrel of oil contains 5.7 million BTUs worth of energy potential. If you translate that into work potential, it's around 1,700 kilowatt hours. You or me, working on our farms for a nine-hour day generate around 0.6 kilowatt hours’ worth of energy in one day. So, this oil and coal natural gas. Have the replacement potential of around 11 years’ worth of our labor per barrel. Now we are more efficient at directing our muscle energy into tasks that we want done. So, you have to handicap that down and, my estimate it is, it breaks it down to around four and a half years’ worth of human labor per $70 barrel of oil, and incidentally, it doesn't matter if it's $20 or $200 a barrel of oil, the embodied energy in the oil is worth around four and a half years of my labor.

Here's the punchline. We use 100 billion barrel of oil equivalents of coal, oil, and natural gas every year in the global economy. So that's effectively 500 billion human labor equivalents that are being added to the global labor force. In addition to the five billion or so real humans doing physical work. Now, technology also plays a role in this. But basically, we are being subsidized by this gargantuan one-time subsidy of highly dense, highly potent energy from Earth's past and our cultural stories ignore the impact of this on our economic growth, and worse, they treat it as if it were interest, as if it were ongoing, when it's really the principle, a bank account that we're drawing down. And so all this together manifests in what I call energy blindness. Our culture just treats a thousand dollars’ worth of oil or coal or natural gas, like a thousand dollars’ worth of mineral water or computers or glasses or bike helmets, when what energy does for us is orders of magnitude more impactful to our wellbeing and our standard of living than those other things. Case in point, relative to 500 years ago, the human economy is a thousand times bigger than it was. As measured by the number of people, times the amount of consumption per person than in the year 1,500. And this is not due solely to technology, it's due primarily to us unpacking the carbon pulse.

[00:11:22] Jed: So, I want to come back to that word that you just mentioned, which is ‘pulse,’ which by definition would suggest something being temporary. As we draw down on this battery and as you describe a carbon pulse, coming back to how you see, what is the solution? Is the solution renewables? I know that you and I have talked a lot about this in terms of saying, “hey, solar is great, just not for this society.” I don't know whether you continue, if that’s your current view? I'd like to step more into, we know what the problem is, this is energy blindness, the fact that it's temporary. What is the solution in your opinion, or maybe there's several that we can kind of unpack?

[00:12:08] Nate: Well, first of all, the word solution implies that there's a problem. I think what we face is a predicament, which is manyfold in integrated issues that are complex. We have, as a culture consumed beyond our means for at least 50 years, and we're papering that over with financial guarantees and things like that. So, it's not just when oil starts to decline, that we will have a little bit less of this substance that's so powerful. It's effectively magic on human timescales. That's not the issue. The issue is that our society is predicated on growth and all of our institutions and expectations expect growth to continue. So once growth stops, there's this wily coyote cultural moment that we're going to have to deal with. I call it the great simplification, but there are lots of responses to this. We're going to, over time, have to go back to renewable energy. And I agree with what you said earlier, though I would use different words. I think in, in tandem with our declining oil, coal, and natural gas, we do have robust, mature, relatively affordable…I call it rebuildable technology. It's not renewable per se, because the sun and the wind are renewable, but the solar photovoltaics and the wind turbines using neodymium magnets and all those things have to be rebuilt every 25 years, so they're really no renewable than a pickup truck. So, I call it rebuildable technology. But, in tandem with that we can, in theory, build some relatively sustainable system that uses our precious fossil hydrocarbons paired with technology. But we can't just focus on the supply side, Jed, because our entire system is geared for growth, and if we continue to focus on growth, we'll eventually run into limits, whether it's oil or water or ecosystems or CO2 or other things.

[00:14:35] So the real issue is conservation and using less energy.[Number] One, use less, consume less. After basic needs are met, most of the best experiences you and I have had in our lives, are mostly free. They don't require a lot of money and energy. Number two is protecting the ecosystems where you live, because we've also taken those for granted. And number three is live more as a holistic human being that that marries the spiritual, the intellectual, the emotional, and the physical aspects of our world. And we're connected to everything. But that's a little esoteric advice for our financial podcast. I think we're going to need to continue to innovate, but we're going to need new governance, new prices, and new aspirations.

[00:15:25] I'm sure you're familiar with something called Jevons Paradox, which is one of the reasons that humans continue to innovate. We've gotten 1% to 1.5% more efficient in how we've used energy every year, which means that energy and GDP are 99% correlated, but we get more efficient in how we use the energy over time because we're clever and we make new inventions. But what ends up happening is we use that savings and funnel it back into a growth-based economy. Since 1990, we have increased our energy by 36%. We've become more energy efficient. But our energy consumption has increased 63%. So, this is an example of the rebound effect or Jevons paradox.

Now, that actually will work in reverse on the down slope. After we stop growing, efficiency will be massively important because it will slow whatever decline there is. So, in a 30-or-40 minute podcast, it's hard to lay out the grand synthesis. But for instance, if we had a tax, not only on carbon, but on all non-renewable inputs to our economy, like copper or aluminum or lithium or fossil water aquifers, and we remove the tax on corporations and on humans, that would do at least two things simultaneously. One is it would send the right price signal to innovators that this stuff is declining. If the United States stopped drilling oil today, our oil production would drop 40% in the first year and another 25% in the second year. So, we are having to run faster and faster just to maintain current production and eventually we're going to step off that treadmill and have to use less and a smaller scale than the 19 terawatts, which is 190 billion light bulbs turned on 24/7 powering the global economy. If we were able to tax this, remove taxes on humans and corporations, we would innovate, because we would have the right prices, and we would conserve. So, my cell phone here would maybe be $3,000 and it would be maybe made to be more recyclable, instead of a lot of the things that are once and done and get lost in the trash heap. And we would probably appreciate energy more than we do. That's another aspect of energy blindness. We're living in this period of energy abundance, and we just take it for granted.

[00:18:22] Yesterday, I flew back from North Carolina and the air conditioner didn't work on the plane, and people were just so upset and complaining, and I was just sitting there thinking to myself, “we are flying across the sky. This is the equivalent of one hundred thousand invisible horses pulling this jet from North Carolina to Minnesota. And we're just so upset that we don't have a little air conditioning.” So, I think energy gratitude plays into energy blindness as well.

[00:18:56] Jed: But if we think about efficiency, the system. Let's just take the U.S., just because I know the numbers off the top of my head, but we're consuming or we're producing 97 quadrillion BTUs…actually consuming 97 quadrillion BTUs in 2019, I think it was. But the output of the actual work in the energy or converted to power that we were using for work, was only 37 quadrillion BTUs. So, our system, which we've optimized around thermal production, was only one third efficient. Because Jevons Paradox and the rebound effect says that while we'll never get the savings that we hope to achieve, our social utility will increase as a function of greater use. Now we can certainly debate whether or not taking more selfies is actually getting greater social utility or that there's a rebound effect associated with a peak in decline associated with that. But if we just take the basis for this, we seem to be optimized around a rather inefficient system. What are your thoughts in terms of how efficiency will play in increasing the system efficiency? What are your thoughts on that?

[00:20:25] Nate: Well, at the core of what you're talking about is a vast majority of oil, via gasoline, is wasted as heat when we ride in a single passenger car. And coal and natural gas producing electricity are nowhere near as efficient as solar electrons directed to an engine.

But more broadly, energy and GDP are 99% linked and evolutionarily, there's, there's something called the maximum power principle, which is organisms and ecosystems self-organize to better degrade an energy resource. There's something also called Kleiber's law, which is the energy use, or the metabolism of, all kinds of organisms from a mouse to a blue whale, is its mass to the three-quarter size. And if you look at all the global human economies added together, our energy use is around that same size to the three-quarter power. So, there’s a biological scaling dynamic going on here, and one could argue from an evolutionary biology vantage that waste is evolutionary selected for. And a peacock doesn't need that flashy, huge tail that requires a lot more energy to make the display and makes it less likely to get away from a predator or fly. And yet the sexual selection chose for that. So, I think you're right. But it first requires new governance, new cultural aspirations. I mean, right now we, as a global culture, self-organized as families, as small businesses, as corporations, as nation states around profits. Profits are tightly linked to energy, which is tightly linked, ~80 percent to fossil energy. And so right now we've outsourced the decision making of our culture, not to billionaires and political people, but to the market. And the market is way more powerful than anything else in the world right now. When we had the great financial crisis and COVID, it was like a bazooka to try to support the market because a market failure would've been in disaster. So, some of the things that we talk about in the world that we care about, like what is the carbon footprint of quantitative easing, no one ever asked that question.

[00:23:08] So I think technology and innovation must continue. There’s a difference between a technology being viable and cool and being scalable and sustainable. I know you're an electric car aficionado and analyst, but only a fraction of human history did we have vehicles and cars, and I do think electric cars use less carbon than internal combustion engines, but I don't think they're an answer to this global human predicament that we face. Maybe at the margin, they're helpful, but what's afoot now is we are consuming beyond our means. We are shoveling fuel into a runaway train without a plan, which is why I'm so thrilled that you on Wall Street are aware of and articulating biophysical economics.

When I got my master's at University of Chicago, the word energy was never mentioned in the two years I was there. So, I think Wall Street especially treats energy as a flow and not a stock and we've made decisions and discounted cash flows and net present value calculations, assuming that our energy and resource picture will always be the way it was the last 50 years. And I think that's a mistake.

[00:24:38] Jed: I tried to ask for a refund for my undergrad in economics, but my college said no. Anyways, I think we're about out of time. You've left so many things that I need to have you come back. Anything that you want to leave the audience with?

[00:25:00] Nate: We are alive at a very special, amazing, and perilous time. And everyone listening to this is wearing three hats. One is you're an investor, you work at a company, you're trying to maximize shareholder value or profits or innovate. Two is you are part of a family and a community, and you want to do what's right for your family and your little corner of the world. And three is you're a human, you're a citizen of the world that hopefully wants to participate in something for the greater good. And right now, it's difficult for the signals that we receive, the incentives for those three hats to align. So, I encourage people to become more literate in ecology and energy issues and how the system fits together and invite you to play a role in our collective future.

[00:25:52] Jed: This has been great. Thanks Nate.

[00:25:54 Nate: You’re welcome, Jed.