In today’s Money Morning, a lesson must be learned from Australia’s whale oil story that explains why the current push towards renewable energy is illogical, at least for now. It’s not a popular opinion, but history shows that governments that make investment decisions based on arbitrary targets are a recipe for disaster. Read on to see why…
‘Much of the capital which had [been] so lavishly employed in the import trade, they are gradually turning away towards this safer and infinitely more productive channel. — oil fisheries… whalers are public benefactors, entitled to the gratitude of the whole community. They block the entrances to Australian poverty and open those to Australian wealth.‘
Sydney GazetteMarch 18, 1830
The Second Fleet, a six-ship convoy containing convicts, settlers and supplies, landed in Sydney in 1789. It was a notorious voyage. 25% of convicts on board died en route and 40% died within six months of arrival.
Private contractors who organized transport and provisions were blamed. The authorities obviously did not order them to deliver their human cargo to Sydney in one piece. A reminder – if needed – that the economy is about incentives.
This debacle, which brought the fledgling colony to the brink of starvation, provided an opportunity for an enterprising whaler captain named Samuel Enderby.
Enderby was heavily involved in the Anglo-American whale trade through his fleet of ships. However, following the American Revolution, an embargo was imposed on exports to Britain. This included whale oil.
Before the discovery of oil in the 1850s, whale oil was the main lubricant for machinery and the preferred lamp oil in Europe and North America.
Enderby, seeking new markets, lobbied the British government to allow whalers to transport convicts to Sydney and then continue to hunt whales in the Southern Ocean.
That way he could make money on both trips – the human cargo there and the whale oil cargo back.
In 1791, the Third Fleet left England for Sydney. Of the 11 ships that landed, five continued to hunt in the Southern Ocean, establishing Australia’s whale oil industry.
According to the National Museum of Australia:
‘Whaling has become an essential part of the economy and culture of New South Wales. Whalers were the colony’s most frequent visitors during its first decade.
‘Whaling was Australia’s first major industry with thousands of men and hundreds of ships eventually involved in the trade.
‘The peak of Australian whaling activity occurred between 1820 and 1855, with up to 1,300 men working in the industry each year. However, with the discovery of gold in Australia in 1851, sailors deserted their ships en masse for the gold fields. As petroleum increasingly replaced whale oil throughout the 1850s, the industry declined.
‘An industry that had supplied New South Wales with 52% of its exports in 1832 supplied less than 1% in 1855.‘
The prosperity that the whale oil trade brought to the colony of New South Wales has not escaped the public eye, as the Sydney Gazette quote above. Whaling merchants were “benefactors”, preventing poverty and increasing wealth.
How times have changed.
In 2022-23, Australian liquid natural gas, coal and oil exports are expected to total $225 billion. That’s 50% of our total resource exports (the same as whale oil at its peak).
Yet the industry is reviled and dismissed. Wealthy activists and ignorant college graduates want to shut down these industries.
They only see the world through the prism of broadcasts. They don’t see the other side of the balance sheet. These exports help provide food, shelter and heat to millions of people. And they pay for schools, hospitals and a bloated public service for Australians.
We are a far cry from the gratitude shown to our vital industries in the early years of colonization. Back then, before the welfare state saw government becoming the “benefactor” of all, there was a much greater awareness of what the process of wealth creation was.
To the modern mind, killing whales to harvest oil is abhorrent. But at the time, it was completely acceptable.
Fortunately, technology has seen the whaling industry decline rapidly due to the large-scale discovery of oil and its refinement into petroleum products. In addition, 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 it is available for other activities.
This is why this transition to renewable energy is so controversial. Politicians see him as a vote winner and move forward regardless of the cost. But the more we force it to happen in an abnormally short period of time, the higher the costs will be.
The rallying cry of zero-carbon proponents is that renewables are free. Yet the more we invest in it, the more our energy prices rise. Why is that?
Manufacturing millions of non-renewable solar panels and wind turbines is not free…
Building vast transmission lines to connect these new, distant energy sources to the existing system is not free…
Building backup power to support and guarantee intermittent renewable generation is not free…
Those who invest in this new infrastructure will want a substantial return on their investment. And you will pay for it.
At the same time, traditional forms of energy have suffered from chronic underinvestment.
Technology has been the driving force behind all previous energy transitions. As a result, the cost of energy has come down and has contributed to the general rise in the global standard of living over the years.
This energy transition is different. Although technology plays a role, it is not the driving force. Politics is. Consequently, this energy transition, for the first time in history, will result in an increase in the cost of energy and a proportional reduction in the standard of living.
It doesn’t have to be that way for Australia, but I don’t like our chances.
Australia is a net exporter of energy. In 2020-2021, we exported 15,420 petajoules and imported only 2,115 petajoules (see below).
We will benefit massively from the structural rise in energy prices in the years to come. Meanwhile, 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, this dynamic will have enormous implications for international capital flows and trade balances.
As just a small example, look at Germany. Long known as a high value-added exporter, it accumulated considerable trade surpluses, particularly after reunification in 1989/90. But as you can see below, thanks to the energy crisis, its trade surpluses have collapsed.
It now uses almost all of its export wealth to pay for its energy needs. If this continues (not just for Germany, but for others like it), it will have huge implications.
Either way, the fact is that Australia is very well placed to benefit from this energy-induced power shift. But as I said, I don’t expect us to invest the dividends wisely.
For proof of this, just look to Queensland, one of Australia’s most naturally endowed states.
At the end of September, the Queensland state government announced a $62 billion “energy and jobs plan”. This includes a new renewable energy target of 70% by 2032 and 80% by 2035.
Currently, renewable energy generates around 20% of Queensland’s electricity needs. Coal provides 60% and gas 10%, with biomass accounting for the remaining 10%.
Under this new plan, all state-owned coal plants will be closed by 2035.
What will replace this critical and cheap source of energy?
New hydroelectric dams.
Now, just to be clear, I’m not criticizing adding hydroelectric power to the mix. But trying to REPLACE cheap, reliable power with hydropower is a big risk to energy security.
Hydro works by having two reservoirs, an upper and a lower. It generates electricity by letting water from the upper reservoir flow through turbines (a process that generates electricity) into the lower reservoir.
One of the problems with the proposed hydroelectric dams is that they will only have 24-hour storage capacity. This means they will be able to produce reliable power for just 24 hours before the top tank needs refilling. (This compares to the Snowy Hydro 2.0 product, which will be able to produce power for seven days.)
This requires a lot of energy to pump water from the lower reservoir, energy that will need to come from wind and solar power (and probably backed up by gas-fired power stations).
In 10 to 15 years, Queensland stands to have some of the highest electricity costs in the world while remaining one of the largest exporters of fossil fuels, which will help reduce electricity costs for other countries. .
I know that’s not a popular take. You can agree or disagree. But history shows that governments that make investment decisions based on arbitrary targets are a recipe for disaster.
Economic growth and higher living standards for our children come, in part, from advances in technology that REDUCE energy costs.
This time around, our brain-dead politicians seem to be spending our energy export windfall on technologies and projects that are almost guaranteed to raise energy costs and lower our standard of living.
But it’s for your good…
And you really can’t do much about it. Despite ample evidence from Europe that renewables are far from capable of powering the economy, Australia continues to panic towards net zero targets with Mr Micawber’s hope that something will happen to succeed.
The odds are against…
As I explain in this exclusive reportyour best hedge against political madness in energy policy is to have an overweight allocation to quality energy stocks. Read it here.
For silver morning