Clueless

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” - Warren Buffett

No one on earth knows how to make a pencil from scratch? Yep, that’s what Leonard E. Read argues in “I Pencil.” Speaking from the perspective of a pencil, Leonard writes:

“I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple. Simple? Yet, not a single person on the face of this earth knows how to make me.”

Leonard breaks down how manufacturing a simple pencil requires so many complex processes from forestry, mining, chemical processing, making erasers, and the metal working for that little crimp that holds the eraser, etc…all of these steps span the globe and all of these parts have to work together. Even for something seemingly as simple as a pencil, Leonard argues, it is impossible for government to centrally plan an economy to effectively make one.

Now if that’s true for a pencil what about a global energy industry?

Ever hear that copper demand will soar over the next few decades because of the energy transition? Yes, it is true that renewables are, to get technical, copper hogs. As we discussed in Compounding Copper Demand:

“A renewables grid is far more ‘copper hungry’ than a fossil fuel/ nuclear grid for two reasons: 1. The ‘greener the grid,’ the more generators you’ll probably need to produce the same amount of electricity (on average)…multiplied by….2.Each renewable generator needs more copper per unit than fossil fuel generators.”

But that compounding copper demand depends on if we go Net Zero. If you pull up an article in the mainstream press detailing the difficulties in critical minerals mining, you’ll probably read something along the lines of: “yes, mining is difficult, but we have to in order to meet (fill in the blank) climate targets.”

Yet, Net Zero is not something spontaneously demanded. It’s not something that the vast majority of the population would ever have dreamed of if it wasn’t for a political push based on our interpretations of certain climate models. And the idea of Net Zero by 2050 depends on humans being willing to intentionally and permanently restrict access to certain energy supplies and instead use only the politically favored choices. For Net Zero to work, fossil fuel use needs to suddenly drop. Here’s a snapshot from the IEAs 2021 roadmap to Net Zero.

It’s easy to draw forecast lines on a chart: but the real world has zero obligation to follow those lines. Over the past few decades, we’ve spent trillions in subsidies and ‘green’ investments, set political mandates and government targets. However, there’s barely anything to show for it: global fossil fuel use continues to climb to all time highs.

And for many voters, Net Zero sounds great… until it starts costing money. If green is cheap, most people get on board. However, according to 2023 poll data from the Energy Policy Institute at the University of Chicago:

Americans are less willing to pay for a carbon fee than they were just a year ago. In fact, nearly two-thirds of Americans are unwilling to pay any mount of money to combat climate change.

Even if we follow this self-imposed energy embargo called Net Zero, there are so many assumptions behind it that it’s impossible to forecast future demand with any level of certainty. We just know that Net Zero needs a lot more copper over the next 10-15 years, but we don’t have a clue how much we’ll need. (It’s the same for the other transition minerals as well).

And in the world of mining, time matters: 10 or 15 years is a blink of the eye. In 2023, the S&P looked at 127 gold, silver, copper, and zinc mines (often, mines produce multiple products). According to their report, it took on average 15.7 years from the discovery of a resource to bring the mine to production. Just over 2/3rds of that time was spent exploring, creating plans and feasibility studies, etc. Just under 1/3rd of that time was actually spent making the decision to build the mine and the time constructing it.

But those were mines that actually started production.

Some proposed mines sink into a perpetual planning phase. Since 2004, Rio Tinto and BHP poured ~$2 billion into the Resolution Copper Project in Arizona. According to BHP, Resolution is “one of the largest undeveloped copper projects in the world.” Yet 20 years into the project, it’s still suck in the permitting, planning, and litigation phases. When (or if) construction starts, it’s estimated to take another 10 years before the mine reaches production, in part because it will be ~ 5000 to 7000 feet underground.

Assumptions Behind Copper Demand Under Net Zero

For starters, we cannot agree on how much copper an ‘average’ EV needs now. The IEA estimates that the average EV uses 53.2 KGs of copper (more than 2x an ICE) but Goldman Sachs estimates EVs need around 73KGs. Of course, this depends on if you need long vs short range EVs, large or small cars, etc. To add another twist, Goldman estimates that EVs will become more copper efficient, with copper per EV dropping to 65Kgs by 2030.

And then there’s the big question: how many cars will be on the road by 2050? Do we assume cars will stay ~ at 1.4 billion globally or do cars increase to 2.2 billion as the population grows and becomes wealthier? Wealthier countries tend to have far more cars per 1000 residents. What happens in places like Africa, India, and China?

By just looking at a couple of factors (car ownership, copper per EV), we end up with radically different estimates of future copper demand. If car ownership stays steady and uses the IEA’s estimates of copper per EV, we’ll need 75 million tonnes of copper. But if we use Goldman Sach’s higher copper numbers, we’ll need around 160 million tonnes if vehicle ownership climbs (Smil).

For reference, the world only mines ~22 million tonnes a year. And we’re talking anywhere between ~3 to 8 years worth of mining to just electrify all cars & light vehicles.

And we didn’t even consider heavy machinery, wind turbines, solar, heat pumps, transmission lines, data centers, industrial uses, and ‘regular’ uses for copper such as construction, etc. Each can have wildly different estimates depending on how much faith the (wannabe central) planners have in future technology and adoption rates.

Energy Use Under Net Zero

How much energy does the world need by 2040 or 2050?

In theory, (so the greens say) as we switch to unreliable and intermittent renewables, somehow we’ll become hyper energy efficient, and the globe will use less energy in the future than we do now. This efficiency hope banks on a smaller global energy footprint, perhaps radically low-balling how many wind turbines and solar panels we’d actually need.

In 2021, the IEA’s Roadmap to Net Zero forecasts that the global population will grow by 2-3 billion people. But at the same time, due to the wonderful world of renewables and electrification, global energy production declines - not per person but in absolute terms - by ~7%. According to the IEA:

“This is achieved through a combination of electrification, a push to pursue all energy and materials efficiency opportunities, behavioural changes that reduce demand for energy services, and a major, shift away from the traditional use of bioenergy.” (emphasis added.)

Those ‘behavioral changes’ include shifting regional flights to high-speed rail transport, ‘moderating’ your cooling and heating needs, and introducing fuel saving max highway speeds of 100KM/h (~62MPH), and restricting international flights to stay at 2019 levels. To keep international flights flat, despite the population growth, the IEA envisions imposing price premiums and frequent flyer price hikes.

If the IEA’s vision comes true, by 2050, the global energy supply will shrink ~25-33% per person, despite the global economic growth.

But the wind doesn’t always blow and the sun doesn’t always shine. So, if we want a renewables based grid, we have to ‘overbuild’ wind and solar. At times, wind and solar will barely produce enough power. At other times, it’s a deluge of power that floods the system, meaning that we quite literally have to throw electricity away.

This undercuts the supposed efficiency gains from electrifying everything. If we try to build lots of batteries to capture those ‘floods’ of electricity, those batteries won’t get used at full capacity every day, driving up the costs. If we want a ‘cheaper’ renewables system, then we don’t need as many batteries but we’d need more wind turbines and solar panels.

And historically, increased energy efficiency in one place is offset by more consumption somewhere else. In the US, energy use per person declined because of things like efficient appliances and offshoring manufacturing. However, those ‘gains’ were offset by places like China which rapidly built out its manufacturing capacity and from the increased demand as millions moved from poverty to the middle class. Historically, world energy demand has slowly moved upwards, per person.

In a world where billions of people have only a fraction of the luxuries we in the west routinely enjoy, it is the height of hypocrisy for us to discourage them from reaching a similar standard of living. And there is a strong link between energy use and wealth, at least to a certain point. As

Doomberg

says “energy is life.” Lack of access to energy is a deal breaker if poor nations want to escape poverty.

As we wrap this article up, there are so many different assumptions behind Net Zero that can lead to wildly different forecasts of copper demand. For instance, the EIA thinks that annual copper demand will go up by only ~50% by 2040 under certain scenarios (they do offer other scenarios, with different assumptions). But the S&P studied copper demand and estimates it will nearly double…by 2035. One estimate expects a gradual increase by ~50% in 16 years; the other expects ~ a doubling in just 11 years.

Now put yourself in the shoes of a copper miner trying to figure out how much copper we’re going to need. Do you spend billions now on a 10-15 year project hoping you’re right? Or do you just slow play this and wait for copper prices to stay high enough long enough? That uncertainty highlights the sheer complexity and inability to accurately plan the global energy business to comply with a politically set, centrally planned target.

If all politicians and bureaucrats were required to read Leonard’s “I, Pencil” maybe they’d realize they’re clueless and can’t even make a simple pencil from scratch, let alone run something as complex as the global energy business. But hush… right now, they’re too busy saving us from ourselves to be bothered with reality!

As always, thanks for reading!