Warning, social media anecdote ahead that may or may not be true. I normally don’t put much faith in Twitter circumstantial evidence but this one came from a farmer and I know they don’t lie except about crop yields and hail the size of cantaloupes.
The particular claim in question is from a US dairy farmer, who commented that he had been approached by about 25 firms looking rights his cow sh*t, in order to capture the methane. I believe him because one’s cow sh*t has never in history been something people boast about.
Even if Farmer Brown inflated his claim, the fact remains that there is a massive demand for access to this material, a circumstance that will surely to go down in history with a head-scratching emoji beside it. Having been noodling around with renewable natural gas for the past year, I can confirm that cow-sh*t-methane is indeed in high demand because the captured gas is eligible for the highest level of US carbon credits. If you have access to cow sh*t, you are now the popular kid on the block. Go figure.
What makes this interesting, beyond the obvious, is how this aesthetically-challenged product is indicative of the wide scope of current inflationary pressures. To put it another way: is everything from IKEA furniture to housing to cow poop in short supply, leading to price increases? And what is the link to energy, which at this point of this weird discussion must seem fairly tenuous?
Actually, the link to energy, particularly hydrocarbons, is quite real and quite interesting. But first, it is necessary to put some bounds around the topic of inflation. Inflation is a complex beast driven by many factors – money supply growth, forward price expectations, government policy, etc. Fortunately, we don’t need to wade into that to find some interesting parts.
This topic was recently described in a brilliant manner by Lyn Alden Schwarzer, whom I encourage you to follow because if you don’t you will be dumber than you need to be. Some people have a knack for distilling challenging concepts correctly and eloquently and digestibly, and she is among the very best.
In a recent article, she gave an example of the aspect under consideration here: price signals. Price signals are not necessarily synonymous with inflation, and in some ways are what we should be worried about far more than the disfigured abomination that is the official government calculated inflation number (what you see as in inflation is not what the government publishes; their numbers are massaged and manipulated a hundred ways).
Ms. Schwarzer gives a great example of price signalling. Say there is a pipeline break, and that pipeline is the key fuel supply conduit to a specific region. If a particular fuel goes into short supply, prices spike – those that need it most will bid the price up rapidly. Some people will not need the fuel immediately (say, they can get away with driving less or not at all) and will cut back consumption due to the scarcity or escalated price.
On the supply side, profit-seekers in the region will step in to help regain balance. If the localized price spike is high enough, supplies will come flooding in from other areas to capture the profit. In this way, the market will rebalance itself at a new price and/or demand level until the pipeline can be repaired.
This mechanism is one of the beauties of an open-market system. It solves resource allocation in an efficient and effective way. It’s so beautiful it almost makes me want to cry.
How does that get us to cow sh*t then? Well, the hunt for south-end-of-cow methane is an example of the sort of crazy price signal being created by governments, a price signal that has nothing to do with efficient or effective distribution of resources.
That point is quite important. In the world of fuel/energy, governments are creating price signals for some dubious things, while smothering price signals for certain other key fundamentals.
As any serf, peasant, or agrarian – rich or destitute – throughout history would tell you, excessive demand for access to crap is not a normal phenomenon. It is sending a price signal that the market could respond to on the supply side in various ways I suppose, but I don’t want to hear about them. Since the supply is effectively (hopefully) limited, the price will rise to the price of the carbon credit. The problem is, the value of carbon credits keeps rising due to the entirely artificial nature of the market. So the demand grows.
At the same time, as Europe is demonstrating in a master class, the market is sending some deafening price signals with respect to fuel – oil, natural gas, coal, firewood – pretty much anything that burns. There are shortages for all, and, like the broken pipeline example, supplies are rushing from wherever they can to fill the voids (for example, many US LNG ships have recently been heading to Europe instead of the “normal” destination of Asia, including one ship that turned around in the middle of the ocean and rerouted).
Here’s where it gets interesting from an inflation perspective. Recall, inflation can be caused by all sorts of things, but physical shortages are a different matter entirely than crappy monetary policy – they signal an instantaneous physical shortage, as opposed to a meandering upward pressure on, say, house prices. Physical shortages of critical commodities is a serious issue. For example, the super-high price of LNG, all over the world, is causing some fertilizer plants to halt production. That will have second-order consequences next year when farmers are unable to acquire reasonably priced fertilizer.
The same thing goes for aluminum and magnesium and other critical industrial metals. Many facilities that process these metals are trimming production, and that will show up as a second-order consequence when you go try to buy one of the million products that depend on these substances. The shortages will hit businesses like auto, appliance and various parts manufacturers, and there will be physical shortages of these also. A shortage of magnesium in Alabama can mean empty car dealership lots near you.
In ordinary times, the price signal for basic inputs like hydrocarbons is a reliable motivator to producers to get on with it and produce more. In the past producers have responded too enthusiastically to these price signals, and flooded the market.
But these aren’t normal times. Producers are licking their wounds from recent price collapses. They are showing a newfound discipline and swearing not to add production; perhaps they are tired of being perpetual internet jokes (there is a whole sub-industry in over-fracking memes in social media).
As basic economics will tell you, the price signal is an irresistible force to produce more, because the equation is quite simple: high prices times more volume = fun profits.
But what if various strong forces are conspiring against industry to increase production? What if new pipelines are blockaded? What if federal regulators use kangaroo courts to reject new development applications?
What if the taken-for-granted ‘rest of the world’ cannot increase production either? What if OPEC is actually nearly tapped out, and not able to bring forth all the volumes they always tell us they can (“it was driven by a little old lady and only to church, trust us”)?
What if industrial price signals are not working anymore? Or, more accurately, not allowed to work? Consider this from Ms. Schwarzer: “Price is the single most important signal in markets, and allows for an unexpectedly large amount of coordination, even without direct communication between those who are unknowingly coordinating with each other.”
When governments set price signals, we will see things like excess demand for cow sh*t. At the same time, when governments signal antagonism towards an industry, like the endless drivel about how we must “abandon fossil fuels rapidly” (or as the IEA said in their Net-zero 2050 roadmap, there cannot be any more investment in hydrocarbon production, which would, of course, be a death sentence for the industry (and humanity)), we see price signals that are not working. $85 oil and $30/mmbtu LNG are about as strong price signals as you can get, and yet the world is not racing to add production of either. At some point, at least some producers will succumb to the temptation and begin drilling again, but the extent of this is not clear, nor is the timing, and running out of fuel is not a good thing, ever.
We know what happens when governments override price signals as part of central planning – you get the wonders of the Soviet Union. We are halfway there. We are seeing shortages of many things because cheap energy underpins everything. We are seeing inefficient allocation of resources on a mass scale – it is far easier to raise money for an NFT or cryptocurrency than an oil exploration program. We are seeing mass disinformation campaigns stating that crippling LNG prices are signals that the world needs to adopt intermittent renewable energy even faster. If that isn’t Soviet-logic I don’t know what is.
If you’re reading this site and presumably related somehow to the hydrocarbon industry, despite what has been bludgeoned into your skull for the past few years, be very glad that you are. The world needs you in the most profound way. A lot more than it needs cow sh*t.
How did we get in such an energy quagmire? Find out how, and how to get out – pick up “The End of Fossil Fuel Insanity” at Amazon.ca, Indigo.ca, or Amazon.com. Thanks for the support.
Read more insightful analysis from Terry Etam here, or email Terry here. PS: Dear email correspondents, the email flow is wonderful and welcome, but am having trouble keeping up. Apologies if comments/questions go unanswered; they are not ignored.