Scientists to UN: Count Your Losses

Yet another contribution of a recent scientific report to the United Nations [See Scientists to UN: Brace for Impact] is to highlight a massive blind spot in modern thinking about how economies work. Economies cannot be understood, says the report, nor can their behavior be predicted, when no one takes into account their real costs. In the words of the report: “the economic models which inform political decision-making in rich countries almost completely disregard the energetic and material dimensions of the economy.”

I have already written about the energetic dimensions — the little recognized fact that the Industrial Revolution and all its benefits depend for their existence on the abundance of cheap energy, primarily from fossil fuels. With breathtaking speed, the world is shifting to dependence on scarce, expensive energy from a dwindling remainder of fossil fuels.

But the other dimension, the material dimension of the economy, is equally important and equally invisible to modern policy makers. To the extent that no one can remember a time when energy was not cheap and abundant (except historians, and who listens to them?) no one envisions, let alone plans for, a time when it will be expensive and scarce. Similarly, the material underpinnings of industrialism — not only coal and gas and oil, but now such things as sand, water, lithium, cobalt and the like — have always been easily at hand, so no one had to account for them, and hardly anyone plans for their exhaustion.

Then there are what the report calls the sink costs of industry — the costs of pollution, of waste disposal, of income inequality and increasing economic stagnation. Those costs almost never appear on the books of the companies that inflict them, and are seldom attributed by the people and the governments that have to bear them.

If industrial companies had to be responsible for the replacement costs of the natural materials they consumer, and for the effects of their industrial processes on others, there would not be in the history of the Industrial Revolution a company that ever made a profit.

The best present example of this blindness (“blind spot” doesn’t quite get the dimensions of this travesty) is the oil bidness, especially in its latest form, the fracking oil business. This enterprise has been presented as a new American oil revolution, one that will lead to energy independence, restore America’s dominance of the oil industry around the world and presumably extend the age of cheap, plentiful energy indefinitely.

In order to buy that proposition, here’s what you have to ignore — or to put it another way, be ignorant of:

  • Fracking is a way of wringing from oily rock the last remaining drops of consumable petroleum. As such, it does not have a future;
  • Fracking can be considered profitable only when the capital costs of replacing fracking wells every three years or so are ignored. The depletion rate of fracking wells is up to ten times the rate of conventional wells. Profit and loss statements ignore capital expense, so they can show terrific artificial profits;
  • Fracking can be considered profitable only when you ignore the sink costs — exhaustion of water and sand supplies, profusion of permanently contaminated, even radioactive wastewater, artificially triggered earthquakes, and of course the eventual pollution caused by burning the end products.

Taking into account only the actual operating and capital costs of well replacement — without regard for the sink costs — no fracking company has made any money since this bogus revolution began. I’ve been harping on that point here for ten years, and now the New York Times chimes in with this:

The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses. In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.

Yet the companies continue to gorge on junk-bond debt, subprime loans and deluded stockholders, whose blind spots cover not only the missing numbers of accountability, but the edge of the cliff toward which they — and we — are hurtling.

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8 Responses to Scientists to UN: Count Your Losses

  1. Ken Barrows says:

    I remember that Investors’ Business Daily recently opined that the fracking companies will now have positive free cash flow. Call me dubious

  2. Brutus says:

    Well done. Hadn’t heard the term sink costs before, but it bears resemblance to the bland euphemisms externalities and collateral costs that account weakly for the complete cycle of consumption rather than just the profit-making early phases. It’s also characteristic of a style of vulture capitalism where companies set up shop, operate briefly, and get out before sink costs appear. That how Standard Oil (and others) gifted U.S. taxpayers with superfund sites. It’s also the way consultancies like Bain Capital and Trump’s various bankrupt companies (notably, construction projects) manage to get financing and exist for long enough to extract handsome profits before fleeing the scene and/or dissolving into bankruptcy. Writ large (precisely your point), this is what the entire project of industrial civilization has become, though the timeline is more protracted. We enjoy now the last years of the bounteous early phase before sink costs catch up with us, leaving whoever follows collapse a damaged ecosystem in far worse shape than when the age of oil commenced.

  3. wm says:

    Mr. Lewis thank you for your stalwart preserverance in sounding the clarion call of our position on our home.

    Also sink costs have been recognized as “cost shifting”. The entire era of Qauntitative Easing has been an era of criminal cost shifting. MAGA fer sure.

  4. Darrell Dullnig says:

    “…but the edge of the cliff toward which they — and we — are hurtling.”

    Yes, indeed, and what we must also understand is there is no available remedy. Corporations are simply collections of individuals. The irresponsible behavior of these entities is merely a reflection of the irresponsible behavior of each of us. If we were not self centered, aquisitive and aggressive, we might be able to adjust, but that is not the case.

  5. Michael Fretchel says:

    Thank you all for being out there, I know so few people who get the concept of you can’t keep using and by using polluting continuously and not have to pay for it sooner or later now being later, you all at this site keep me relatively sane, so thanks again.