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The Energy Revolution Will Transform How We Live and Work

2015 February 18

Revolutions in commerce used to be few and far between. James Watt’s steam engine, developed in 1781, set the stage for the first industrial revolution.  But it wasn’t until a century later that the widespread adoption of electricity and the internal combustion engine brought about the second industrial revolution.

The information age didn’t really get going until the 1970’s and that’s led to what to what many are now calling the new industrial revolution, which incorporates computer aided design and advanced fabrication techniques like 3D printing.  However, the next revolution, in energy, is already underway.

While the drop in price for fossil fuels has grabbed most of the headlines lately, Citibank predicts that the shale boom will merely serve as a bridge to get us to a new era of renewable energy.  This revolution, if anything, will be more far reaching than the others.  While the earlier revolutions empowered large enterprises, this one might very well undo them.

When The Sun Never Set On The British Empire

Great Britain was an unlikely empire.  A relatively diminutive island, with a small population and few natural resources, it somehow came to rule over one fifth of the world’s population and a quarter of its land area.  As it used to said, “the sun never sets over the British empire”

And Britain wasn’t alone.  Colonization at the time was seriously profitable.  Wages were a pittance compared to the bounty to be had by conquering new lands.  Cotton and tobacco from America.  Tea and spices from Asia.  Virtually every major nation in Europe ventured out to stake their claim for resources that were unavailable back home.

The industrial revolution only accelerated this trend.  As Max Boot explains in War Made New, steamships and railroads shortened travel times exponentially, making it possible to both conquer more voraciously and administer more effectively.  He writes, “In 1876 Europeans ruled over 10 percent of Africa; by 1914 they had more than 90 percent.”

These changes not only affected the people in the colonies, however.  They also transformed life in the industrialized European countries.

The Rise of Bureaucracy

In the early 20th century, the great sociologist Max Weber noted that the rise of mechanization would lead to a change in organization.  As cottage industries were replaced by large enterprises, leadership would be less traditional and charismatic and more bureaucratic and rational.

Some time after, a young economist named Ronald Coase published his groundbreaking paper, The Nature of the Firm, in which he argued that the function of the enterprise was to reduce transaction costs, especially information costs.  His analysis implied that firms would grow until increased organizational costs nullified the decrease in transaction costs.

The last century was in large part driven by scale advantages.  The bigger you were, the more efficient you would become.  Those efficiencies would enable enterprises to own and control more resources, which would increase bargaining power and enhance the dominance of the firm.

Initially, information technology bolstered these trends.  Only large organizations were able to afford computer systems that could help them administer resources by tracking accounting, maintenance and human resources.  However, with the rise of personal computing and the Internet, that began to change.

The New Age Of Platforms

While the first two industrial revolutions led to greater centralization, the information revolution has brought about massive decentralization.  As computer systems became cheap and plentiful, even small firms could afford them.  The Internet and mobile devices furthered this shift, driving down transaction costs for everyone, not just the big guys.

The impact of this change is hard to overstate.  Today, anyone can wake up in the morning with an idea, design it on CAD software, create a prototype with a 3D printer, acquire financing through crowdfunding and market it on Google and Facebook.  We’ve entered a new age of platforms, where what you own isn’t as important as what you can access.

And that’s created a profound change in how we need to compete.  As former Citibank Chairman Walter Wriston explained in Bits, Bytes, and Balance Sheets, “The competition for the best information has replaced the competition for the best farmland and coal fields.”

Clearly, the end of the scale economy has had a profound impact on every aspect of life.  In contrast to colonial times, wars today are more likely to be fought over ideology than territory and they are increasingly between states and non-state actors, rather than between rival nations.

The Last Domino

The transformation, however, is incomplete.  There is still one resource that remains supremely important: energy.  We still rely on digging fossil fuels out of the ground and competition for those resources remains contentious.  To fuel the distributed information economy, we still depend on electricity from centralized power companies.

Yet that too is beginning to change, because technology is transforming energy as well.  A recent report by McKinsey shows that, in many places, solar energy is already outperforming more traditional sources.  Moreover, as we increasingly derive energy from algorithms rather than from fossil fuels, accelerating returns will continue to decrease costs exponentially.

We’re now seeing a shift from the distribution of centralized capabilities and resources to distributed capabilities and resources that are produced and accessed locally.  The impact will be especially great in developing (and formerly colonized) countries like India where patchy electricity networks have been a serious impediment to investment and modernization.

In effect, energy is the last domino of the information age.  While it’s hard to predict exactly what the energy revolution will bring, one thing is already abundantly clear:  Over the next generation, power and influence will decouple from the ownership of resources (and associated rent seeking activity) and increasingly be tied to information and imagination.

– Greg

13 Responses leave one →
  1. Nathan Schor permalink
    February 18, 2015

    I’ve been reading your posts for years now and this is surely one of your best.

  2. February 18, 2015

    Thanks Nathan. That’s great to hear!

    – Greg

  3. Nathan Schor permalink
    February 18, 2015

    Speaking of your better posts, have you thought of collecting the popular ones into an ebook collection? Almost all are good, some stood out, like this one.
    Also, are you planning to be near San Francisco in near future? I work with startup and media folks here who’d very much appreciate your historical take on technology and its long term social impact. Likewise, the innovation events held regularly in the bay area would find that theme attractive. All the more, given the sizable audience you’d draw.

  4. February 18, 2015

    I did consider doing e-books awhile back, but when I looked into it, it didn’t seem to make much sense. It’s hard enough getting two posts a week out!

    Unfortunately, I very rarely get to SF. Which is a shame, because I’d really like to get out there more. I was even considering moving there.

    – Greg

  5. February 19, 2015

    Great post Greg and very thought provoking. I wonder if there is a a further revolution beyond energy. As the world population grows, we need to think about transforming the way we feed ourselves and more importantly use water resources. What do you think?

  6. February 19, 2015

    Yes, I think so, but not to the same extent and the need is not quite so immediate (at least in developed countries). There are some interesting developments, such as vertical farming, which I wrote about here.

    – Greg

  7. Edward Munoko permalink
    February 22, 2015

    Greg, thanks for this important post. Your posts are great. I have been following your weekly blog for along time now.

    When you look at the economies of Africa and Europe, and as the effects of colonisation approach the back stage and the energy effects you discussed takes to the center, how long would you estimate it will take African economy to overtake the European?

  8. February 22, 2015

    I think it will be a very long time. However, what’s interesting is that Africa already leapfrog’s the West in some areas. Mobile payments is one, 4th generation nuclear power might very well be another.

    Thanks for your support Edward!

    – Greg

  9. February 22, 2015

    Now there is a great question. You mention food and water, but consider if today you suddenly had a limitless power source. You could produce all the water, fertilizer and food you wanted. You could extract most materials from seawater and as this article points out many resources that used to be scarce, just aren’t because of information. So the first question is what if you had a ll the resources you could dream of. What problems would that leave?
    Since my last attempt at humor apparently wasn’t appreciated (or posted), I’ll put it her in a brief version, because ti relates and might give a clue to the first question. In another post Greg talked about robots, how so many of the most brilliant people on Earth are rapidly developing robot technology. It is not if robots can replace humans at most jobs, it is when. So I’ll ask the same question I asked then. Are any brilliant people thinking of how to solve the problems that come from the robots? It’s not just economics that will be disrupted. Status is a foundation of society and reproductive instinct. Status currently comes primarily from occupation. So the second question is what happens when no one has occupation or status?
    What is important is to understand that both questions are related and so are the answers.
    Lets see. Should I add any more parts? There are more… If religion suddenly did not exist…. same question, same answer. I wrote a book about it, but I don’t know if I can mention it here.

  10. February 24, 2015

    The analogy of IT to energy is fraught with risk and inconsistencies. There is a huge difference between chemical engineering and electrical engineering–anyone who has majored in either field understands this. Moreover it always surprises me how the tech media loves to focus on solar panels and windmills but completely missed the advances in hydraulic fracturing, which were considered too mundane to warrant attention. Also, the real game changer, Nuclear Power, is also overlooked -which is a shame since there have been major engineering advances made but government regulation and the “green movement” keep fighting it.

  11. February 24, 2015

    I see what you’re saying Trevor. However, the comparison of energy to IT is far from arbitrary. Instead, it is a recognition that some areas of energy (solar, for the most part) have been exhibiting accelerating returns similar to that of IT (the same goes for genetics btw.) and for many of the same reasons.

    I also see your point about fracking. However, here again, solar and other aspects of energy, such as storage, are a better fit with IT, because the improvement is continuous and accelerating, rather than punctuated.

    – Greg

  12. May 17, 2015

    This is well written. You are correct. The losses in our grid are unacceptable at 63%. The latest “energy from algorithms” technology is the VectorQ2 and is exactly the foundation technology that will begin this energy revolution. I am glad that you see this are are so good at at describing what is coming. Thank you.

  13. May 17, 2015

    Thanks Chris. Good luck with it.

    – Greg

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