Monday, October 13, 2008

Four Miracles required for Business as Usual

We have always been keen to have Business as Usual included as one of our energy scenarios, but it is becoming increasingly difficult to think up a plausible story to explain how life can carry on unchanged. A number of miracles would be required and we think that, despite our best efforts, many people will find the following scenario unconvincing...!

Miracle 1. Credit Liquidity

Heroic efforts by countries world wide to shore up the banking system works and credit starts to flow between banks making it possible for them to offer credit to businesses and individuals. But it is not banking as before. Governments restrict the range of financial products to those which can be readily understood. Credit default swaps and many other derivatioves are banned. This leads to widespread unemployment in the financial sector but many of those who lose their jobs are re-employed to police the new system.
Miracle 2. Wages increase rapidly without inflation

While Ireland boasts about its low national debt compared to its European neighbours, its level of household debt is the highest in the developed world at 190% of household income. The British figure is 159% and America's 135%. Once the banks are again able to offer credit, people in Ireland need to be in a position to borrow in order to spend and put that newly created money into circulation thereby growing the economy. Borrowing power is based on earnings capacity and asset value so in order to borrow more Irish people must increase their earnings and the value of their collateral - most often property such as a house - must rise too. There are only two ways to achieve this. One is to restart the housing boom on the basis of rapidly increasing wages, or inflation to decrease the relative size of the debt against the property. As this is a Business as Usual scenario, inflation is out of the question, so we have to assume that Ireland develops a type of business in which it can outperform other countries and where its services are in in high demand. This is

Mircacle 3. Business found to replace Construction

Ireland is identified as world data hub and pulls off a deal with Google, Microsoft and many other cloud computing providers to host their data centres. Ireland's mild climate makes the energy costs of maintaining servers at a stable temperature low, and on the basis of these contracts to host 10% of the worlds servers, two 4GW nuclear power station are built. The construction of the new data centres and power stations creates a new boom for the economy, at least in the short term.

Data for sizing the power required:
3871 GW world electricity capacity
72 GW = 2% is used by servers
7.2 = 10% of that
6 GW = Ireland current capacity

Miracle 4. Stable and low energy prices

In order for the economy to recover in a Business as Usual scenario, stable and low energy prices are required. The building of two nuclear power stations to service the data centre business stablises the energy price in Ireland, although the costs of building the nuclear power stations are high and energy prices are significantly above what they were prior to 2007.