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Banking on Energy (Rather than Currency or Gold)

Apr. 05, 2009 6:24 AM ETXLE, USO, OIL-OLD, DBO15 Comments
Chris Cook profile picture
Chris Cook

In the approach to the G20 meeting we saw two distinct threads of global policy emerging: one by the global debtor nations, led by the US, and another by global creditor nations, led by China.

In the US, we have seen Treasury Secretary Geithner's trillion dollar quantitative easing of the rich, which cannot work for two reasons.

Firstly, the problem is not a shortage of credit, but a shortage of the creditworthy. As asset prices and incomes continue to collapse, only the top few % are now in a position to borrow, based upon the wealth which has become increasingly concentrated in their hands in the last 20 years of debt-disguised recession. The only solutions for the US are therefore fiscal.

Secondly, this initiative is based upon the premise that the creditors of the US will support these measures by continuing to buy assets denominated in an increasingly debased currency.

China's increasing impatience with the dollar as a global reserve currency is now quite overt and specific. Zhou Xiaochuan – the Chinese Central Bank governor – has published a thoughtful essay proposing that the IMF should take on the role envisaged by Keynes at Bretton Woods in 1944 as the issuer of a global reserve currency, Keynes' “Bancor”.

Russia's proposal for the G20 meeting is set out on the President's website and says, among other things

....Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a "supra-reserve" currency by the whole world community.

Alongside these proposals for multilateral solutions, energy market observers like myself noted with interest in mid February that China and Russia have already taken

This article was written by

Chris Cook profile picture
Chris Cook's background is in UK market regulation, latterly as a Director of the International Petroleum Exchange. In recent years, he has been a strategic market consultant and commentator, and has also been actively developing new partnership-based legal and financial structures or "enterprise models". Since 2011 Chris has been a Senior Research Fellow at the Institute for Strategy, Resilience & Security at University College London.

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Comments (15)

I made an observation about the cost of production.

We calculate production cost in how much money we spend to make
something and if we can sell it for more money than we spent you have
a profit. Thats basic and everyone know it is so.

But as you know money is a virtual commodity without any value except
what people believes its worth so what is the real cost? What is used
and spent?

If we brake it down to the components if we make something simple like
a chair. You have normally some metal, wood, cloth and paint invested
in the object. To make it you also use tools, machines and manual
labor. If you think about it there are 2 different things used. What
is invested in the object and what is consumed and gone forever. The
time in manual labor is most obvious something that never comes back.
Also the were down in tools will never come back. You will also use
some energy to run the tools.

When you think about it a person uses a steady flow of energy. 10381
KW per year in the US for 2003 that means we spent 1,2 KW if he spent
an hour making it. If you look at the objects in the chair they also
used up energy to extract. The tools are also objects that used the
same concept to make as the chair. When we brake it down you will
always end up with energy in one form or another being consumed. The
rest is invested in the chair and can if you want be reused if you
have the ENERGY to do it. It will also mean that the person working in
fact uses up a lot more than the 10381 KW per year if you take into
account how much energy the objects he uses cost to make or repair.

Even energy uses energy to make when you pump it up or run a nuclear
plant. Energy in and energy out. You also should take into account the
energy the working force and tools use to calculate your energy

People in some countries use a lot less energy and you notice that
production cost in money is a lot lower there because of lower salary.
As workers use less energy making the energy there also cost less (if
you use the same production method).
An energy-backed currency using scientific units would be the most rational course in monetary reform since using unambiguous units will give true value to all commodities, services and economic transactions.

Fourth Draft

Proposal: Several of us started out two years ago thinking about how to create a Renewable Energy Generation Output currency, ‘REGO’ for short. We were looking for a type of currency that would stabilize value and present less opportunity for inflation, deflation and manipulation corruption. Using renewable energy as the basis for value instead of fossil energy was an important choice because renewable energy can become an infinite, decentralized resource that everyone can produce with real free market potential, unlike fossil energy, which is a finite, controlled commodity that only a handful can produce. Shortly it became clear that something was missing from our calculations, when we simply link currency value to renewable energy, because the idea stagnated. Recently, we think we figured out why. We hadn’t gone to the most basic form of renewable energy, human labor/energy, or another way to think about it would be, human ‘born value’ potential. The next step was to have an equation that equates human energy to BTU’s. This would be the universally accepted measure the REGO currency could be pegged to, similar to the way measures of time, horse power, distance, etc are pegged to universally accepted quantities or equations. When currency is linked in this way to something with the capacity to expand with the growth of economies and is accessible to every human on earth, we have made a very powerful democratic shift and moved toward an economy that more fairly distributes wealth.
We want to call this new peg a Human Energy Renewable Measure or ‘HERM’ for short. This measure is based on an equation (where the human is an estimated average worker). The equation is: 6,000 human labor hours = 1,000,000 BTU’s. (to give an idea what this amount of BTU’s can do, it can boil away 1/2 gallon of water). An individuals’ one hour of labor is equivalent to 166 BTU’s. Now the REGO ( which is currency) can be pegged to the HERM (which is a stable measure). So, if one HERM = 30 hours of labor or 5,000 BTU’s, one REGO can be assigned a value of 1/2 HERM which breaks down to 15 hours of labor and can be the equivalent of 100 of whatever currency you choose. Now that we are in the decimal system, any currency can base itself on the REGO.
The elegance of an economic system based on human labor, that has been assigned a fixed base value, is revealed when you realize that all modern civilization springs from the same source, human labor, either physical or mental. It is a basic renewable energy, like solar energy is basic to life. Before there were loaves of bread at the market, people had to understand the advantages of agriculture and then plant seeds, care for crops and harvest them. All this was originally done by hand and even today when modern productive effort is stripped of it’s amplifiers such as, liquid fuel, electricity, machinery, etc., human hands and brains are the beginning. The HERM is the least that human effort can be valued and no one can be denied this whether they are able to work or not. It is guaranteed to each individual in an amount that gives basic dignity and comfort of lifestyle. From that point the amplifying effects of education, energy and individual potential can act as factors that increase individual value. One important aspect of this, though, would be when an individual (like Bill Gates) comes up with an idea that proves to be worth billions (like Micro Soft), the debt owed to the collective human intelligence (based on hundreds of thousands of years of human development), must be taken into account when this phenomenon occurs.
Another important factor when we enhance human labor with fossil fuel or renewable energy, the use of fossil energy must have an added equation that takes into account that it is a finite resource and the externalities that are results of its’ production such as, wars to control oil fields, nuclear contamination, coal mine accidents, natural gas explosions, oil spills, etc. All these contribute to the amount of HERMs needed, which contributes to the cost (although not generally recognized). The negative externalities of renewable energy would be far less than fossil energy. But fossil energy is essential for achieving the high heat necessary to create most renewable energy technologies, so could be used for that purpose.
The HERM measurement helps balance the symbiotic relationship between human civilization and the earth.

Note: The Human Labor/BTU equation was developed by Dr David Borton at Rensselear Polytechnic Institute, Troy, NY. Originators and writers of this article are, Susan Caumont, Jeff Beller and John Finnerty.
11 May 2012
agree that basing currency on a physical UOM (unit of meaure) does make sense.
Everyone is equal then.
But it misses a much bigger issue. Robotics.
If i own 10 robots thenthey are able to do 10 humans work. Maybe orders of magnitude more even if they are efficient and doing a taks that is labourious for humans.

How to solve this ?
Sharing. We are in this feedback loop currently in that as large companies automate jobs are shed. This is continuing in the physical ( robots ) and virtual (computers and semiconductors) world. What is needed is a monetary system that is not based on ownership of money itself, but rather resources that are shared.
Then we canautomate much much more and reduce labour and raise the standard of living exponentially.

The other problem with basing money on energy is "free energy".
Zero-pooint, LENR and others moving forward. LENR generators are under development in many companies, including NASA.

So you cant base money on energy because it assumes a certain set of physics laws relating to the conservation of Energy. The physics laws are being broken now.
Google "PesWiKI"

Choose sharing not ownership.
This paper on an energy backed currency may be of interest. papers.ssrn.com/sol3/p...

One problem is that a barrel of oil or therm of natural gas is worth more at the end of the pipeline than at the well head. Also, oil comes in different grades. How do we get away from energy at a specific location, and different grades of currency?

One solution is to use scientific units, instead of commercial ones. Kilowatt-Hours. Or put it in human terms and have the currency be man-labor-years. The idea being that the amount of physical labor an adult human could perform in a year(or some other unit of time) be the currency standard. Of course that would make the wealth gap painfully obvious, by CEOs earning man-labor-years per second, and 3rd world laborers earning only a fraction of a man-labor-year in their lifetime.
robt99: Good question--effects on "global balance of power"! Oil and gas, along with other essential but less-important resources, have been for some time the chief "weapon" in global "warfare".

The dollar gained legal tender status throughout the capitalist world at the beginning of the cold war; and at that time, only France, objected. The focus was fighting the communist's cold-blooded ideology and not on global currency standards. Since that time the dollar became the prime currency for conducting international trade and most of the world’s central bankers have accepted the dollar as legal tender in their country.

Central banks are the black hole for storing excess dollars; they reinvest their dollar holdings in US debt or other debt securities. Some countries have set up wealth funds to invest their excess dollars in wealth producing activities within their own country and other countries.

In a non-digital world, the case could be made for one nation to regulate the distribution of an international currency. Now, the world has changed and the currency system must change with it. As one can see, we have entered into the transition stage, so the question now is: how can investors, companies, and national economy’s thrive in the new era?

As an investor my focus is on wealth making opportunities in North America.
Great info!
Intriguing concept; but will be interesting to watch how it plays out in the "political" world. Your comment about our "baroque" military was thoughtful. A recent GAO report noted that 64 of 96 current arms procurement programs are running a cumulative $296 billion over budget. And all this with a military that in the beginning years of the Iraq debacle, couldn't even provide body armor for soldiers.

We also just launched another giant aircraft carrier designed to fight the Soviet Union on the high seas. Oops, they must not have noticed the departure of the Soviet Union via implosion in 1991.

Mpyre: American policy-makers, especially the current crop, are afflicted not so much by myopia as by self-interest and politics.
This is an interesting proposal, but what would be the implications of an energy-based currency on the global balance of power?
theWayissimple1111 profile picture
excellent idea and timely as well, but far too logical to be accepted by american policy makers who are never able to see the forest for the trees...
john s. gordon profile picture
some years back it was proposed by someone that uranium be set up as the standard of value. seems like that idea never gained traction.
> jack
Dave Wrixon profile picture
An Energy backed monetary system makes much more sense than one based on Gold.
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