Asia’s Energy Security and the Middle East - page 5
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Nonequilibrium Thermodynamics (NET)

Adjustments of the sort we have been describing are typically thought of as taking place smoothly and gradually. That may have made sense when resource redeployments principally took place as international trade in final goods. After all, the potential resource transfers can be very large relative to the capacity of the channel linking the systems—the hole in the wall is small. It takes about two weeks to load goods on a ship in Shanghai, sail to Long Beach, and unload the cargo, and the number of containers a ship can carry is strictly limited by its designed capacity, currently less that 14,000 standard 20 foot containers.

Through most of its history, thermodynamics assumed that adjustments toward thermal equilibrium were smooth and gradual, known as reversible thermodynamic change. Reversible change assumes that the distance from equilibrium is very small and that the adjustment takes place at infinitesimal speed. Attempts by researchers to examine the behavior of systems far from equilibrium, according to Ilya Prigogine (1997), including those of his Professor at the Free University of Brussels, the brilliant Belgian chemist Theophile de Donder, were actively discouraged within the physics and chemistry professions during the formative early decades of the 20th century. This is unfortunate, because far from equilibrium is where all the interesting behavior of thermodynamic takes place far, as Prigogine was later to prove in the work for which he was awarded the Nobel Prize in chemistry in 1977.

The work of Prigogine and his colleagues, known as the Brussels School, showed that distance from equilibrium is a fundamental parameter of systems. As the distance from equilibrium, along with the size of the accompanying temperature, pressure, or energy gradient, increases beyond a certain point, known as the bifurcation point, qualitative changes in system behavior appear that give rise to abrupt, unpredictable, and discontinuous changes, and in the formation of completely new coherent structures, which Prigogine referred to as dissipative systems. Today, this dynamic new field of study is variously called chaos theory, complexity, complex adaptive systems, network theory, self-organizing systems, nonequilibrium thermodynamics, or simply NET (11). It is especially valuable for thinking through questions of stability and system failure.

Today’s networked global economy is certainly far from equilibrium, as measured by price, wage, or return differentials, making nonequilibrium thermodynamics extremely relevant for current policy analysis. And nations today are not only connected by slow-moving ships of limited capacity. They are connected by communications networks that can transport vast amounts of resources across fiber-optic networks at the speed of light, as illustrated in Figure 14. These links dramatically increase the adjustment speed of the global economy to price and return differentials. The resulting capital flows, outsourcing, cross-border M&A, supply-chain, and restructuring activities have also generated political backlash, the social equivalent of turbulence, in many countries, raising important questions of economic and political stability.

Figure 14
Global Eenrgy -- Mobile Capital

NET has particularly interesting things to say about recessions, asset price bubbles, and other temporary market failures. All are system, or network properties that, in general, cannot be understood by reductionist analysis the behavior of sub-groups of market participants. In other words, Y=C+I+G may be true as an accounting identity, but it is likely to be useless for forecasting recessions that can be better understood as temporary network “blackouts”. Recessions occur when the information network we call a market economy temporarily stops processing information—usually the result of an intervention by a policy maker, such as credit rationing, fuel rationing, or the imposition of quotas, which result in a situation of temporary non-price rationing.

NET also has important things to say about innovation and entrepreneurial behavior. Although economists write about the animal spirits of the entrepreneur, I suspect that entrepreneurship is a system property, rather an example of Darwinian natural selection. A recently discovered paper by Joseph Schumpeter (2005), written in 1932 but first published in the American Economic Review in March 2005, shows that he ultimately came to a similar view.

Implications for Energy Security Policies

The thermodynamic framework presented in this paper suggests fruitful areas for future discussion and research and has important applications regarding the question of energy security. In particular, it suggests that energy security should be analyzed in light of the full economic, financial, political, and social situation in a country, not just by counting up barrels of oil or cubic meters of gas.

I will take as a definition of energy security the situation where a national government has command over sufficient controllable stores of energy to maintain, with a high level of confidence, stable and rising living standards for its people over time, the prerequisites for maintaining social and political order.

The critical words in the above definition are “command” and “controllable.” For example, a nation may have a long-term supply contract or even legal ownership rights over energy resources located in another nation but may not control them because supply contracts and legal rights may not be enforceable in times of crisis when they are most needed. In this case, a seller continues to hold a real option to “call” for delivery of the resources in specific situations. Energy reserves are bulky and difficult to transport and store. Aside from modest strategic reserves, you can buy them, but you can’t bring them home.

Resources located within a country’s national borders are likely to be more controllable, but even then may be subject to intervention from foreign governments—witness the recent activities in the Gulf Region. Secure energy resources must be both controllable and defendable.

A nation’s most controllable resources are its endowments of natural resources, the physical capital within its borders, and the energies and knowledge of its people.

Governments today are pursuing various strategies to move toward energy security, including building strategic petroleum reserves, acquiring reserves in foreign countries, undertaking long-term supply contracts, exploring for additional reserves both inside their borders and offshore, forging alliances with countries rich in oil and gas, investing in pipelines, LNG ports and other distribution infrastructure, and implementing policies to encourage investment in solar, wind, water, and bio-fuels, policies to make more effective use of coal deposits, and policies to encourage conservation. I would suggest that, with few exceptions, such policies have too narrow a focus on fossil fuels only, and place excessive reliance on collecting current flux, as opposed to mining alternative sources of stored energy.

The thermodynamic framework suggests that we define energy broadly and that we use our human energies to find ways to improve the efficiency with which we capture, mine, store, attract, and deploy solar energy to produce economic activity. Fortunately, as outlined in previous sections, there are ample opportunities to improve efficiencies in all these areas.

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