Could a new technology power a green revolution overnight? Be careful what you wish for

There are people who lie awake at night worried about the temperature of the earth and who despise fossil fuels with a touchingly hysterical passion, convinced that continual burning of hydrocarbons will doom the planet. Nothing would thrill them more than to hear news that a new type of battery (or cold fusion, or whatever) has been unveiled that actually works and would instantly revolutionize energy usage. Visions of emission-free power sources dance through their heads like images of Olivia Wilde through the mind of a teenage boy. Sort of.

If you long for that day, you really should think twice. If a radical new breakthrough was unveiled, the global disruption of our comfortable lives would be beyond comprehension and the last thing anyone would be worried about would be the temperature of the planet.

Why would a radical breakthrough be a bad thing? Because the world functions as a complex and intertwined system. A sudden shock to one of the major components – like the existing global energy infrastructure – would have massive consequences that are hard to imagine. It would be a bit like eliminating mosquitoes with nuclear weapons. Mission accomplished, but ouch those are some side effects. It’s a bit of a mental exercise, but it’s worth pondering what would happen to the existing world order if a new technology instantly provided either cheap or free energy, or same for energy storage.

It’s not a trivial question, but neither is it an empty and naïve exercise like free-range academics dream up with no bearing on reality. All one has to do is consider the inevitable effects on existing businesses, and trade flows: Pretty much the whole global economic system. The ebb and flow of capital is merciless and quick; when there is uncertainty, things happen quickly and brutally.

For example, assume that a huge breakthrough in battery technology made infinite energy storage readily available, for a reasonable price. Solar and wind would become the only logical energy source, because why pay for expensive “dirty” fossil fuels when we can get all we need right out the door, and store it for when we need it?

A few problems spring to mind were this to happen all of a sudden. Logistically, it would take months (probably years) for those batteries to be designed, put into production, and distributed, also requiring massive amounts of money to build the infrastructure to handle them. And feel free to pick another theoretical break through, the same processes would need to occur.

But markets react instantly to anything that’s even perceived as change, and they react to uncertainty in only one way: Sell everything and do it now. It may not be smart or logical, but it’s what happens. The financial world crapped its pants when Britain voted to leave the European Union, an utterly insignificant event in the global scheme of things; imagine what would happen if one of the largest industries in the world was laid to waste overnight.

So what, you may think, markets go up and down all the time. But this would be different. Shares of traditional energy companies would head for zero in about ten high-frequency trades, or about half a second, whichever comes first. Fossil fuel opponents may smile at the thought, but should first consider what that would do to the financial world alone.  The top 10 energy companies have a combined enterprise value (value of shares plus value of debt, both of which would go to zero as well) of nearly $2 trillion. Other energy companies would conservatively add another trillion, so $3 trillion in value would be wiped out.

That pain would be felt far beyond the wealthy. Everyone is an investor in energy shares, far more than most realize. Pension funds hold trillions in investments including much of the value of energy companies. So those investment losses would come out of the hides of seniors and retirees around the world. Governments would have no hope of making up the deficit, given that most are drowning in debt already.

Speaking of governments, an enormous amount of government funding comes from fossil fuels, either through royalties (producing countries) or fuel taxes (pretty much everywhere on earth). That would be gone instantly as well. How would it be replaced – a tax on sunshine? Fees for letting the wind spin things?

Second-order impacts would be felt quickly as well. Hundreds of thousands of well-paid oil patch workers would be out of work, creating stress in many economies. The 95 million barrels per day the world consumes would no longer be available at our fingertips as it is now, meaning near term shortages that would disrupt even the most basic economies.

That all may sound like a crazy doomsday scenario, and it might be, but there are good odds it would unfold that fast. Consider banks. Many people consider banks to be huge, safe institutions, yet almost any bank can be brought down within days if all depositors chose to withdraw their money at the same time (known as a “run on a bank”). Actually it wouldn’t require withdrawal of all deposits, just a fraction. Banks have to hold a certain amount on deposit, and they lend a multiple of that amount. If the level of deposits falls drastically and quickly, the amount loaned against these deposits will be way out of whack, the bank will be in trouble, and a bank run can result. It’s a bit like a UFC fight, where a fighter can look as strong as an ox for 4 rounds then get one weird kick to the head and that’s that. Major dislocations can indeed happen quickly, however governments take great precautions to avoid bank runs for obvious reasons. News of a new disruptive technology might have the same impact with no way to stop it without artificially slowing the technology. We can imagine how popular that would be.

In total, the global economic system would be in tatters, even if the ultimate free energy source would soon be available. In order to maintain some sense of order, the new technology would have to be announced, developed, and implemented in some controlled fashion. It’s hard to imagine that happening because it would take significant government and industry involvement, and governments don’t often do anything particularly well.

We’ve become accustomed to breakthrough technologies, and usually welcome them because they are “soft” disruptions. A good example is how digital photography changed that industry. It was relatively bloodless; a few companies may have gone under but that downside was swept away by the new industries created.

Not everything is like that. A forest fire is quite different than the little one in your furnace. Dislocating a minor industry like old-school photography is not the same as dislocating an industry central to the entire world’s financial well-being. And it’s not just financial well-being; seven billion people survive because of our well-run energy infrastructure, and to disrupt it significantly, even for the better, might cause more than a little chaos. Hopefully the right people lay awake at night worrying about that too.