What We’re Reading (Week Ending 23 June 2024) - 23 Jun 2024
Reading helps us learn about the world and it is a really important aspect of investing. The late Charlie Munger even went so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 23 June 2024):
1. The C Word – Jonathan Clements
ON SUNDAY MORNING, May 19, I was enjoying croissants and coffee with Elaine at the kitchen table, while watching the neighborhood sparrows, finches, cardinals and squirrels have their way with the bird feeder. All was right in our little world, except I was a little wobbly when walking—the result, I suspected, of balance issues caused by an ear infection.
It was going to be a busy week, and I figured that it would be smart to get some antibiotics inside me, even if visiting the urgent care clinic on Sunday might be more expensive than contacting my primary care physician on Monday and perhaps having to go in for an appointment.
Long story short, I ended the day in the intensive care unit of a local hospital, where the staff discovered lung cancer that’s metastasized to my brain and a few other spots. This, as you might imagine, has meant a few changes in my life, and there will be more to come.
I have no desire for HumbleDollar to become HumbleDeathWatch. But my prognosis is not good. I’ve had three brain radiation treatments and I started chemotherapy yesterday, but these steps are merely deferring death and perhaps not for very long. I’ll spare you the gory medical details. But as best I can gather, I may have just a dozen okay months ahead of me…
…The cliché is true: Something like this makes you truly appreciate life. Despite those bucket-list items, I find my greatest joy comes from small, inexpensive daily pleasures: that first cup of coffee, exercise, friends and family, a good meal, writing and editing, smiles from strangers, the sunshine on my face. If we can keep life’s less admirable emotions at bay, the world is a wonderful place.
We can control risk, but we can’t eliminate it. I’ve spent decades managing both financial risk and potential threats to my health. But despite such precautions, sometimes we get blindsided. There have been few cancer occurrences in my family, and it’s never been something I had reason to fear. Chance is a cruel mistress.
It’s toughest on those left behind. I’ll be gone, but Elaine and my family will remain, and they’ll have to navigate the world without me. I so want them to be okay, financially and emotionally, and that’s driving many of the steps I’m now taking…
…Life’s priorities become crystal clear. Even at this late stage, I believe it’s important to have a sense of purpose, both professionally and personally. I can’t do much about the fewer years, and I have no anger about their loss. But I do want the time ahead to be happy, productive and meaningful.
2. Central Banking from the Bottom Up – Marc Rubinstein
From his office a few blocks from the River Rhine in Dusseldorf, Theo Siegert had been scouring the world for investment opportunities. His research process had thrown up an under-appreciated banking stock headquartered across the border in Switzerland, and he started building a stake. Siegert knew a bit about the banking business – he was already a non-executive director of Deutsche Bank – but this stock was different. In his home country, as in many others, central banks tend not to trade freely on the stock exchange. Not so in Switzerland. Before long, Siegert had become the largest shareholder of the Schweizerische Nationalbank, the Swiss National Bank…
…It would be difficult for the Swiss National Bank to pursue its mandate – ensuring that money preserves its value and the economy develops favorably – if it also had to pander to the demands of private shareholders. So it limits private shareholders to voting just 100 of their shares – equivalent to a 0.1% position – leaving Siegert with 4,910 shares on which he is ineligible to vote. And it caps the dividend at 15 Swiss Francs a share, equivalent to a 0.4% yield at today’s price of 3,850 Swiss Francs. Of the remaining distributable net profit, a third accrues to the central government and two-thirds to regional cantonal governments.
As a result, the 10.4 kilograms of gold per share the bank carries and its 1.2 million Swiss Francs of overall net assets per share (at March valuations) remain out of grasp for private shareholders. At best, the stock is a safe haven, providing a preferred return in a strong currency, with no counterparty risk…
…The trouble was, 2022 wasn’t a good year for asset prices, leaving the Swiss National Bank highly exposed…
…Having earned 174 billion Swiss Francs cumulatively over the prior thirteen years, the Swiss National Bank lost 133 billion Swiss Francs in a single year in 2022, equivalent to 17% of GDP. It canceled its dividend for only the second time in over 30 years, signaling that there is risk in a 0.40% dividend after all.
And although asset markets recovered in 2023, strength in the Swiss Franc during the year – partly driven by the bank selling down some of its foreign assets – led to a record foreign exchange hit, triggering another overall loss (of 3 billion Swiss Francs) and another canceled dividend. Fortunately, 2024 has so far been better and, as of the first quarter, over 40% of the two-year loss has been recovered…
…In some cases, such large losses have eaten into capital, leaving many central banks operating on negative equity. As a private sector analyst, this looks frightening, but explicit government support makes it moot. Even before the current spate of losses, some central banks, including those in Chile, the Czech Republic, Israel and Mexico, carried on their business for years with negative capital. A study from the Bank for International Settlements concludes that none of them compromised on their ability to fulfill their mandate.
Because it maintains both a distribution reserve to carry forward some profit and a currency reserve that is not distributable, the Swiss National Bank did not slip into negative equity despite its large loss. At the end of 2023, its equity to asset ratio stood at 7.9% and by the end of March, it was up to 14.3%. That contrasts with the Federal Reserve, which has $43 billion of capital supporting $7.3 trillion of assets, not including almost a trillion dollars of unrealized losses.
But going forward, the business of central banking will grow more challenging. Not only do higher rates expose central banks to losses related to assets purchased in the past, they also make it difficult to generate net interest income on the current balance sheet. Seigniorage income still persists but the falling use of cash may erode it in future years. Meanwhile, commercial bank deposits – which form the bulk of a central bank’s liabilities (449 billion Swiss Francs in the case of the Swiss National Bank, compared with 76.3 billion Swiss Francs of banknotes) – are typically remunerated at market rates, which are higher than yields on legacy securities. Central banks are paying a floating rate while locked into a (lower) fixed rate on their assets.
The challenge is evident in a closer look at the Swiss National Bank. In the era of negative interest rates, it earned income on sight deposits it held on behalf of commercial banks. In 2021, the last full year of negative rates, that income was 1.2 billion Swiss Francs. Having raised rates to 1.50%, the relationship flipped and the central bank began paying interest to commercial banks, which in 2023 amounted to 10.2 billion Swiss Francs. With the yield on Swiss Franc-denominated securities still low, net interest income on the book came to a negative 8.7 billion Swiss Francs…
…From its most recent high of 7,900 Swiss Francs at the beginning of 2022, the Swiss National Bank stock price has halved. Against its muted profit outlook, this is no surprise: The golden era of central bank profitability is likely over…
…For others, though, it’s fine. As the general manager of the Bank for International Settlements noted last year, “Unlike businesses, central banks are designed to make money only in the most literal sense.” Viewing central banks as stocks is instructive, but fortunately for the economy at large, there is more to them than that.
3. Reports of the petrodollar system’s demise are ‘fake news’ – here’s why – Joseph Adinolfi
Earlier this week, reports circulating widely on social-media platforms like X offered up a shocking proclamation: A 50-year-old agreement between the U.S. and Saudi Arabia requiring that the latter price its crude-oil exports in U.S. dollars had expired on Sunday.
The collapse of the accord would inevitably deal a fatal blow to the U.S. dollar’s status as the de facto global reserve currency, various commentators on X opined. Surely, financial upheaval lay ahead…
…But as speculation about an imminent end to the U.S. dollar’s global dominance intensified, several Wall Street and foreign-policy experts emerged to point out a fatal flaw in this logic: The agreement itself never existed…
…The agreement referred to by Donovan is the United States-Saudi Arabian Joint Commission on Economic Cooperation. It was formally established on June 8, 1974, by a joint statement issued and signed by Henry Kissinger, the U.S. secretary of state at the time, and Prince Fahd, the second deputy prime minister (and later king and prime minister) of Saudi Arabia, according to a report found on the Government Accountability Office’s website.
The agreement, as initially envisioned, was intended to last five years, although it was repeatedly extended. The rational for such a deal was pretty straightforward: Coming on the heels of the 1973 OPEC oil embargo, both the U.S. and Saudi Arabia were eager to flesh out a more formal arrangement that would ensure each side got more of what it wanted from the other.
The surge in oil prices following the OPEC embargo was leaving Saudi Arabia with a surplus of dollars, and the Kingdom’s leadership was eager to harness this wealth to further industrialize its economy beyond the oil sector. At the same time, the U.S. wanted to strengthen its then-nascent diplomatic relationship with Saudi Arabia, while encouraging the country to recycle its dollars back into the U.S. economy…
…According to Donovan and others who emerged on social-media to debunk the conspiracy theories, a formal agreement demanding that Saudi Arabia price its crude oil in dollars never existed. Rather, Saudi Arabia continued accepting other currencies – most notably the British pound (GBPUSD) – for its oil even after the 1974 agreement on joint economic cooperation was struck. It wasn’t until later that year that the Kingdom stopped accepting the pound as payment.
Perhaps the closest thing to a petrodollar deal was a secret agreement between the U.S. and Saudi Arabia reached in late 1974, which promised military aid and equipment in exchange for the Kingdom investing billions of dollars of its oil-sales proceeds in U.S. Treasurys, Donovan said. The existence of this agreement wasn’t revealed until 2016, when Bloomberg News filed a Freedom of Information Act request with the National Archives…
…Still, the notion that the petrodollar system largely grew organically from a place of mutual benefit – rather than some shadowy agreement established by a secret cabal of diplomats – remains a matter of indisputable fact, according to Gregory Brew, an analyst at Eurasia Group…
…Even more importantly as far as the dollar’s reserve status is concerned, the currency or currencies used to make payments for oil (BRN00) (CL00) are of secondary importance. What matters most when it comes to the dollar maintaining its role as the world’s main reserve currency is where oil exporters like Saudi Arabia decide to park their reserves, Donovan said.
4. On the Special Relativity of Investment Horizons – Discerene Group
We believe that it is hard for corporate executives to think long-term if they are overwhelmingly rewarded for short-term results. In their paper, “Duration of Executive Compensation,”2 Radhakrishnan Gopalan, Todd Milbourn, Fenghua Song, and Anjan Thakor developed a metric for “pay duration.” It quantifies the average duration of compensation plans of all the executives covered by an executive intelligence firm’s survey of 2006-2009 proxy statements. The average pay duration for all executives across the 48 industries in their sample was just 1.22 years. We think that such performance-based compensation duration borders on the absurd for leaders of ostensibly multi-decade institutions buffeted by so many factors beyond their short-term control.
Perhaps unsurprisingly, incentives drive behavior.3 Executive-pay duration was longer in firms that spent more on R&D, firms with a higher proportion of independent board directors, and firms with better stock-price performance. Conversely, firms that offered shorter pay duration to their CEOs were more likely to boost short-term earnings with abnormal accruals of operating expenses.
In a survey4 of 401 US CFOs conducted by John Graham, Campbell Harvey, and Shiva Rajgopal, 80% of survey participants reported that they would decrease discretionary spending on R&D, advertising, and maintenance to meet earnings targets. 55.3% said that they would delay starting a new project to meet an earnings target, even if such a delay entailed a sacrifice of value. 96.7% prefer smooth to bumpy earnings paths, keeping total cash flows constant. One CFO said that “businesses are much more volatile than what their earnings numbers would suggest.” 78% of survey participants would sacrifice real economic value to meet an earnings target.
Likewise, Daniel Bergstresser and Thomas Philippon have found5 that the more a CEO’s overall compensation is tied to the value of his/her stock, the more aggressively he/she tends to use discretionary “accruals” to affect his/her firm’s reported performance…
…According to the World Economic Forum and International Monetary Fund, the average holding period of public equities in the US has fallen from >5 years in 1975 to ~10 months in 2022…
…Another effect of short-termism has been to encourage firms to shed or outsource functions formerly considered to be critical to businesses, including R&D, manufacturing, sales, and distribution, thus creating atomized and fragile slivers of businesses that nevertheless often command illogically lofty valuations. For example, in recent times, aerospace, pharmaceuticals, and software companies that do not attempt to sustain going-concern investments and instead seek to continually acquire other companies in order to hollow out such companies’ engineering, R&D, and/or sales/distribution teams — thereby eliminating all possible sources of competitive advantage — have been feted as “asset-light” and “high-ROIC” poster children of their respective industries.
5. An Interview with Terraform Industries CEO Casey Handmer About the Solar Energy Revolution – Ben Thompson and Casey Handmer
But let’s dig into this solar thing. What is driving the cost curve decrease that was forecasted in 2011 that attracted you? And that has absolutely manifested over the last 10 years, famously exceeding every official projections for future costs. It always ends up being cheaper, faster than people realize. What is the driver of that?
CH: Well, so actually even Ramez Naam’s predictions were too conservative. No one, back then, predicted that solar would get as cheap as it has now. If you look at the DOE’s predictions in 2012 for how long it would take for us to get to current solar costs, their best guesses were 2150, and I don’t know if I’ll live that long.
So of course their entire roadmap for decarbonization didn’t include this, but now we have it. Can we use it? Yes, we sure as hell can and we sure as hell should, because it’s a massive gift that enables us to — we don’t have to de-growth in order to stop emitting pollution into the atmosphere. We can build our way out of the climate crisis by just increasing energy consumption and making energy cheaper for everyone.
In terms of how it gets cheaper, well, essentially, as I say, once the technology is inside the tent of capitalism, it’s generating value for people. It tends to attract wealth, it tends to attract capital, and that capital can be used to do things like hire manufacturing process engineers, and they’re very, very clever and they work very hard, particularly probably hundreds of thousands of engineers working at various solar factories in China right now. And sooner or later, they will find every possible configuration of matter necessary to force the price down. So same as with Moore’s law, essentially, we’ve just seen steady improvements.
Yeah, I was going to ask, is this an analogy to Moore’s law or is it actually the same sort of thing? Moore’s law is not a physical law, it is a choice by companies and individuals to keep pushing down that curve. Number one, what I get from you is that’s the same sort of concept here, but number two, are the actual discoveries actually similar to what’s going on?
CH: Yeah, actually to a large extent because it’s a silicon-based technology.
Right, exactly.
CH: There’s a lot of commonality there, but I think Moore’s law is not a law of nature, it’s what we call a phenomenological law, an emergent law. But basically all it says is there’s a positive feedback loop between cost reductions, increases in demand, increase in production, and cost reductions. So provided that the increase in demand, the induced demand as a result of the cost reduction, exceeds the cost reduction for the next generation of technology, you have a positive feedback loop. Otherwise, it’ll converge at some point, right? You’ll achieve maybe a 10x cost reduction and then it’ll stop, and we start to hit diminishing returns on all these technologies. But if you look at Moore’s law, it’s actually a series of maybe 20 or 30 different overlapping technology curves that kind of form this boundary of technology throughout time, and you see the same thing in solar technology if you really look under the hood and see what’s going on.
But yeah, the fundamental thing is there’s just enormous demand for solar at lower and lower prices and so manufacturers are justified in investing the capital they need in order to hit those prices and then the feedback mechanism keeps going. Solar manufacturing itself is a brutally competitive business which is both good and bad, it means like if you decide that you want to compete in solar, you don’t have to be at it for 50 years in order to compete. If you can capitalize, you can build a solar factory and if you’re smart enough and you work hard enough, in five years you can be in the top 20 manufacturers globally which is huge. Talking about billions of dollars of revenue every year just because everyone’s existing capital stock gets depreciated really quickly.
Right. But to your point, it’s also commodity then, right? So how do you actually build a sustainable business?
CH: Well, picks and shovels essentially. So actually one of the things that we like to say at Terraform, and I’m jumping the gun slightly here, but Terraform’s product essentially is a machine that converts solar power into oil and gas, so it bridges these two technology spans. It allows you to arbitrage essentially economically unproductive land that would otherwise just be getting hot in the sun. You throw some solar panels on there, that’s your computing hardware, but that’s not very useful, right? I could hand you an H100 but doesn’t do anything for you until you’ve got software to run on it and the software allows the raw computing power of that H100 to become useful for an end consumer…
…Actually let’s run through some of the objections to solar power and then I think that will inherently get to some of these things. So we talked about the nuclear bit, what happens when the sun doesn’t shine?
CH: Yeah, so we’re actually seeing this in California right now. It creates a time arbitrage, right? If you have the ability to store power during the day and then release it during the night, you can make an incredible amount of money and that’s why we’ve seen battery deployments in California, for example, increased by I think a factor of 10x in the last four years, and the effect of that is it’s basically allowing people to transport power, or transport energy, through time in much the same way that power lines, transmission lines, allow people to transport electricity through space.
So what is happening with the battery cost curve? Because if that’s sort of an essential component to make this happen-
CH: Same thing, same story.
For the same reasons?
CH: Exactly the same reasons, same story. Battery manufacturing is probably a little bit more complex and not quite as well-developed as silicon solar panel manufacturing, but we’re seeing year-on-year growth of battery manufacturing. It’s like well over 100%, so it’s actually growing faster than solar, and then the cost improvement’s not quite as steep, but it’s easily like 5% or 10% per year depending on which technology you’re looking at.
In 2021, for example, it was extremely confidently predicted that lithium ion batteries would never get under $100 per kilowatt hour at the cell level and the pack level, and of course Tesla was widely mocked for claiming that they would be able to get ultimately below $100 bucks per kilowatt hour at the pack level. But then again, I think January this year or December last year, a Chinese manufacturer came out with a sodium ion battery cell, which is at $56 per kilowatt hour, so it’s like a 2x reduction in cost on top of what is already considered cutting edge, and we just go down from there.
Now, sodium ion batteries might not be perfectly suited for all kinds of applications, but they’re probably cheaper to produce than the lithium ion batteries. We know they’re cheaper to produce in lithium batteries and they’re more than capable of doing the sort of load shifting required to essentially store power during the day and then use it in the evening.
Are we in a situation already, or do we still have a bit to go, where the sort of combined weighted cost of solar, which is much cheaper than nuclear as you talked about, plus batteries, which sounds like it’s still more expensive now, but when you combine the two is it already lower?
CH: Yeah, so again just look at the data, right — the market reveals its preference. CleanTechnica ran an article almost five years ago now showing that in Texas they were developing battery plants 10:1 compared to gas peaker plants. Texas runs its own its own grid under slightly different rules where you can basically just build and connect and then the grid can force you to curtail if they’ve got overproduction, but that typically means it’s a more liquid market. And even in Texas, which is certainly not ideologically committed to solar, and actually incidentally this year deployed more solar than California did.
Yeah, I was going to say.
CH: Also Texas has the cheapest natural gas in the history of the universe, but they’re deploying more battery packs than they are gas peaker plants 10:1…
…CH: But I just want to say there’s a conception that, oh, solar and batteries only are on the grid because they’re massively subsidized and they’re actually screwing everything up. That’s actually, that’s not true. Solar and batteries is what’s keeping the grid working right now, it’s the only thing that’s providing expanded capacity.
The major challenge with additional solar development, particularly here in the States, is we now have this ten-year backlog or kind of development queue before you can connect your solar array to the grid, and the reason for that is the grid is old and it’s kind of overwhelmed, and it’s not able to transport all that power effectively to market.
Of course, one solution to this is just to build more grid. Another solution is to put some batteries on the grid. And, you know, the third solution is basically just build batteries and solar wherever you can, it’s actually working really well.
Then obviously what Terraform is doing is taking this otherwise un-utilized capacity for solar development and then pouring it into another aspect of our civilization’s absolutely unquenchable thirst for energy. Just to give you some hard numbers here, roughly a third of U.S. energy is consumed in the form of electricity and about two-thirds in the form of oil and gas. So even if we successfully electrified huge amounts of ground transportation and also moved all of the electricity grid to say wind, solar and a bit of nuclear and some batteries and maybe some geothermal or something like that, so completely decarbonize the grid, that would only deal with about a third of the economy. Two-thirds of the economy still runs on oil and gas and so that’s what Terraform is here to try and deal with.
One more question on the batteries.
CH: Yeah.
There’s always been, or the common refrain has been, we need a battery breakthrough, we need something completely new. Is the take, and you mentioned the sort of sodium ion, but even with terms of lithium ion, is the actual expectation or is the actual realization in your expectation going forward that actually the technology we have — sure, it’d be great to get a breakthrough, but there’s actually way more improvements and in what we have that will carry us a long way?
CH: Lithium ion batteries are already amazing. I mean, they’ve been around for about 35 years now, I think they were first commercialized for Panasonic camcorders or something and even then they were extremely compelling. They pushed NiCAD [nickel-cadmium] out of the market almost instantaneously, which is the previous battery chemistry and numerous applications. They’re more than good enough.
You say, “Well, I’d like a battery breakthrough”. Why? “Because I want to run my supersonic electric jet off batteries.” Well, good luck with that. But for all ground transportation purposes, for static backups, for all these kinds of applications, not only is the technology already great, it’s got a 30 year history of manufacturing at scale. We know how to make it safe, we know how to make it cheap, it’s extremely compelling and the numbers speak for themselves.
Battery manufacturing capacity expansion is not just happening for no reason, there’s enormous untapped demand for batteries. The way I like to think of it is what’s your per capita lithium ion allocation? Maybe in 1995, you might have a Nokia 3210 with — actually that would be after 1995 — but with a small lithium ion battery in it. So you’ve got 10 grams per person of lithium ion battery and nowadays my family has two electric cars, and that’s probably most of our batteries.
Yeah, now we have laptops, we have computers.
CH: But in terms of the bulk mass, like 400 kilograms per person or something for people to have electric cars and then if you have a static backup battery in your house and then maybe a share of your per capita part of the grid scale batteries and so on. I think it could easily scale to a couple of tons per lithium ion battery per person, particularly in like the more energy intensive parts of the United States.
Is that a large number? No, not really. I easily have a couple of tons per person in terms of steel just in my cars. I easily have probably 50 tons of concrete per person in terms of my built environment. I don’t actually think this is a particularly large number, I just think it’s unusual to see in such a short span of time some product go from the size of your thumb to the size of a large swimming pool, a large hot tub or something like that, in terms of your per capita allocation.
Where are we at as far as availability of say lithium or of all the various rare minerals or rare earths, whether that go into both solar and batteries?
CH: Yeah, I mean, again, I’m not a super expert on batteries, but the cure for high prices is high prices. Lithium is the third most common element in the universe, there’s no shortage of it. You could argue there’s a shortage of lithium refining capacity in the United States, particularly if you’re concerned about strategic vulnerability.
It’s like the rare earth thing, right? Rare earths are not actually rare. It’s just the actual ability to refine them.
CH: They’re super common, and actually solar solves that. It turns out that you can electrically catalytically separate rare earth elements using cheap solar power, more significantly lower environmental impact and much lower cost than traditional refining, and I have some friends working on that.
It is certainly true that batteries, people are concerned about cobalt. Actually, I have some cobalt here, here’s a cube of cobalt on my desk. Cobalt is a fabulous metal, but there’s not a huge amount of it necessarily. It’s not scarce like gold, but the mining situation is not quite sorted out. But at the same time, like almost all the major battery manufacturers use almost no cobalt right now because they’re able to adapt their processes to basically optimize their costs towards the cheaper materials.
Capitalism solves this, we don’t have to worry too much about it, there’s literally hundreds of thousands of chemists out there right now who are solving this problem right now, you don’t have to lose sleep over it, it is a completely commoditized production system…
…What happens with old solar panels and old batteries? Obviously this is an objection to nuclear which is nuclear waste, and the good thing with nuclear waste is it’s really not that much. We’re talking about this deployment of massive amounts of solar panels, all these batteries. Where are we at in 10, 20 years if this build out happens? Is that a potential issue?
CH: I’m not too worried about it. And again, you need to look at your waste stream on a per capita basis. If we deployed as many solar panels as I want to, how many solar panels will you end up disposing of? I think if you ground them up it’d be one garbage bag per year. For a suburban family, we probably have 1,000 garbage bags of trash every year that gets landfilled.
But to talk about specifics, batteries I think are prime targets for recycling because the materials in them are essentially, as Elon Musk once said, super concentrated for the raw materials you need to make batteries. There’s multiple companies out there, including Redwood Materials, that are doing exclusively battery recycling, or battery component recycling, which is super obvious. That said, as battery production increases, even if you recycle all the old batteries, it will only be 1% of the input stream or something, but I just don’t see a future where we have giant piles of batteries lying around.
Then as far as solar panels go, they’re like a layer of silicon dioxide, which is glass, a layer of silicon, which used to be glass, and then a layer of silicon dioxide and maybe some aluminum around the edges. Well, you can strip off the aluminum and recycle that trivially, we’ve been recycling aluminum for 100 years, and the glass is glass. You can grind it up and landfill it, it’s basically sand.
People will say, “Oh, what about cadmium or something?” — well first, solar uses a cadmium telluride process to make their solar panels. But again, the amounts involved are trivial, they’re inert, they’re solid, they can’t run or leach or anything like that, I’m not too worried about it. As far as the sort of trash that humans routinely landfill, solar panels would actually significantly increase the purity of our dumps because they’re so inert compared to everything else…
…CH: One of the things I like to say is that oil and gas is so common in our civilization, it’s invisible because every single thing that you see with your eyes is a surface that’s reflecting light, it’s usually pigmented or made of plastic, and that pigment or plastic is made of oil or it’s made of natural gas. So unless you go outside and look at a tree, which is ultimately made of a kind of plastic also derived from sunlight and air, it’s extremely difficult to lay your eyes on anything that’s not made of hydrocarbons and obviously, so we’re extremely bullish about growth.
Now it could be the case that there’s zero growth. It could be the case that the oil and gas industry just motors along at about $8 trillion of revenue per year, which is about $1 billion per hour. So just in the time we’ve been talking, it’s $1 billion, which is just insane. But I actually think that once we unlock these cheaper forms of hydrocarbons that it will promote substantial growth, particularly in the energy-intensive industries.
So just to underscore the vision here, I get really, really fired up about this, because when I think of aviation and how amazing it is, and how we’ve only had it as a species for about a hundred years, and it’s only really been something that we can enjoy in jet transport for maybe 50 years. But actually the people who routinely fly on aircraft, and I know that you’re one of them because you’re an expert obviously, and myself, it’s probably only 50 million people on earth who’ve ever had that experience of flying in a jet, I don’t know more than 10 times in their life. Wouldn’t it be incredible if that number was 500 million or 5 billion, but to get there from here in terms of fossil fuel consumption, emits a lot of CO₂, but it also requires a huge amount of fuel. Aviation currently consumes about 2% of the world’s oil and gas just to fly less than 1% of the world’s population around, and so obviously we need to bring on a new source of fuel.
So when you think, well, what is a nice climate-positive version of aviation? Is it like the European model where we force airlines to make customers pay for carbon sequestration or carbon credits or something like that, which is either extremely expensive or extremely fraudulent or both, but in any case makes aviation more expensive and less accessible to people, just makes it more exclusive? Or do we say, “Why don’t we solve both these problems at once, and just bring online enormous new supply of high quality, cheap gas and natural gas for the future liquefied natural gas powered supersonic aircraft?”
At the same time it just happens to be carbon-neutral, so you don’t have to worry about CO₂ emissions, it’s not polluting the atmosphere with new CO₂ from the crust, and at the same time, instead of Boeing producing 500 aircraft a year, Boeing and maybe a few more startups can be producing 10,000 aircraft per year to service this kind of massive explosion in demand driven by economic expansion. That is a sick vision, that is so cool, we should absolutely do this as quickly as we can.
I think whether or not Terraform plays a huge role in this process or not, and I’m certainly intending for it to be — currently we’re leading this process — the economics is inevitable that we’re going to switch over to synthetic fuel sooner or later, and when we do, it’s going to get really, really cheap because we’re running it off solar power and when it gets really, really cheap, we’re going to do amazing aviation and other energy applications, and increase manufacturing and maybe some little bit of geo-engineering on the side to keep things in check, increase water supply in dry areas and so on. Why wait until 2060? We could have this done in 2040 if we just apply ourselves the right way and find the right business model…
…How does it work? Give the non-physicist overview of how Terraform works.
CH: Yeah, sure. So from a customer’s perspective on the outside, essentially what a Terraformer does is it allows you to build your own oil and gas well in your backyard, regardless of the fact that you don’t own a drill rig, and in fact you don’t live anywhere near where oil and gas occurs naturally, which is again pretty cool. But how does it work under the hood? Well, it consumes electricity and most of that electricity gets used locally.
Actually I should state the Terraformer itself sits in the solar array, and that’s to reduce the cost of transmission of electricity, which would be absolutely prohibitive in this case, and the electricity gets used to capture CO₂ from the air and to split water into hydrogen and oxygen. We throw the oxygen away like trees do, we take the hydrogen and we react that in a classical old school chemical reactor with the CO₂ to produce methane and water. Then we can separate the water out because it condenses at a much higher temperature from the methane and we’re just left over with methane plus a little bit of leftover CO₂ and hydrogen and a tiny bit of water vapor. That’s natural gas, right?
Actually, when you get natural gas out of the ground, if you did have a drill rig and you did live in a place where natural gas occurs and you drill a hole in the ground, gas comes out. Well now you’ve got to build a well top and a bunch of other stuff that’s actually really complicated, and you might have a blowout and then what comes out of the ground is like between 10 and 80% natural gas and a bunch of other contaminants on top of that which have to be removed before you can sell it.
We don’t have that problem. What we produce is the pure product. It’s really compellingly elegant the way we do this. There’s no geology risk, plug-and-play once you plug it in it just generates a predictable amount of gas every day for however long the system lasts, which is most likely measured in decades.
In this case, you don’t have a battery capital cost, I presume it only runs when then suns out, right?
CH: Yeah, that’s absolutely correct. And I’ll say for anyone who’s considering doing a hardware tech startup, well, there is basically a recipe that we’ve stumbled upon for taking any existing industry and then applying it to solar power and getting the benefit of that extremely cheap power.
The first is you have to get the CapEx way, way down because your utilization is low, you’re only using your plant maybe 25% of the time, so you have to get the cost down by at least a factor of four. Then on top of that, you also have to make it compatible with the sun coming up and going down. So time variability, which is difficult, but not impossible. We have many processes that we can routinely throttle up and down in our everyday lives so you understand this intuitively, but if you can do that, and it sounds impossible, of course, “I just want a chemical reactor that’s 1/10 the size and 1/4 the cost and I can ramp it up and down”.
Well, the way you make this work is you just use more power. So you say, “Well, I don’t care about efficiency quite as much because my power is so cheap”, and that’s what makes it easy. But if you can do this, then you have —
You have to change that core assumption. Whereas almost every invention today is all about increasing the efficient use of power, and the whole point of solar is, “What if we assume power is basically infinite, but it’s bounded by time, then what would we do?”.
CH: It’s like cycles in your computer are basically free or on your cell phone or something…
…Desalination seems like a potentially massive win here and very pertinent to the American West for example. But this idea that if you assume energy is infinite, we’re not short of water on earth, we’re short of water without salt.
CH: That’s right, yeah. I mean there are some places where it’d be relatively difficult to transport even fresh water from the ocean, but in California that’s not the case. California is at the end of the Colorado River, which is declining, and California of course has senior water rights, we take about 5 million acre feet of water per year.
So unlike Terraform, which is definitely developing new proprietary technology in-house, it’s quite exciting, but with solar desalination, you don’t need any new technology. You just go and build a plant essentially with stuff you can buy off the shelf. How much would it cost to build a plant that is able to substitute 100% of California’s water extraction from the Colorado River, essentially doubling Southern California’s water supply, and at the same time allowing you to fix the Salton Sea and also set up a massive light metals industry and a bunch of other things?
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Apple, Tencent, and Tesla. Holdings are subject to change at any time.
