The Coming Nuclear Financial Bubble and Asset Boom
The Coming Nuclear Financial Bubble and Asset Boom
Commodities / Energy Resources
The coming nuclear financial disaster in fact has many previous models – stretching back to several speculative investment surges, then panics in the 19thC, and similar recurring “bourse panics” in the 20thC. The most recent financial boom-bust offering a likely or potential scenario for the nuclear financial disaster of the 2011-2020 period, is the US subprime crash, which became inevitable by the years 2005-2006.
It occurred in 2007, with massive financial and then economic “collateral damage” in 2008 and 2009, which continued in 2010. This crisis may go on affecting the integrity of banks, other mortgage lenders, insurers and other financial “players” – including central banks and monetary authorities – in the US, Europe and globally, for several years. Among its “physical impacts”, or impacts on the “real economy”, this crisis triggered a fall in US housebuilding that attained about 65% from peak to trough (2005-2009). Its impact on the bank-finance-insurance sector was very impressive:
The common theme and mechanism is easy to explain: investment in productive assets, such as housing or nuclear power plants, becomes a conservative inflation hedge, as well as a productive asset, before finally “mutating” into a purely speculative gaming chip or token. The time needed for the shift from one category to the next can be limited – only a few years as in the US and European “railroad booms and slumps” of 1873 and 1893, or the “copper panics” of 1893 and 1907 where the borderline between rational investment in productive assets (railroads and copper mines), then as an inflation hedge, and finally an outright speculative play was compressed into an unclear time period of as little as 3 to 5 years.
The mechanism can stay dormant for quite long periods, then break out, when or if other potential-raising factors are in play. The US subprime crisis, about which opinions differ, can probably be traced to two time periods: firstly the “securitization” of financial assets through socalled financial engineering, starting about 1995 and generated by deregulation and “offshoring”, and secondly the massive inflation of house prices in the US and Europe, especially through 2000- 2005. Combined, these two major factors “potentialized” the subprime crisis, which was then “activated” by falling economic growth, rising interest rates, lower disposable incomes due to rising food and oil prices, loss of investor confidence, and of course several other factors, especially the rank overpricing of the “underlying asset”, that is houses.
It might be thought that the strong but no longer exclusive roles of the state in nuclear power decision and being the “traditional” supplier and underwriter or guarantor of nuclear financing, would tend to keep nuclear financing in the first category – solely a productive asset. In fact and directly intensifying the first boom of civil nuclear power that we can place at around 1970-1983
Source: Grida, Norway and WorldWatch (not corrected for average MW size per reactor completion)
OECD governments alarmed at oil price rises sought an inflation hedge in the energy sector, and imagined that nuclear power could supply this. To be sure, simple energy economics show that nuclear power saves very little oil at all, but the political and economic myth that ‘Nuclear Power Saves Oil’ was firmly entrenched in the political reasoning and energy policies of major OECD oil importer governments by 1975 and was reinforced, but only briefly, by the second Oil Shock of 1979-1981. Another proof by the negative of this is how fast reactor orders and completions declined as oil prices fell from their 1980 peak, in the years 1983-1986. The process was then followed by the Chernobyl disaster of 1986, which was a veritable coup de grace for promoting and selling nuclear power !
With cheap oil restored for a long but provisional interval (1986-2000), oil importer governments of the OECD group quickly ceased to see the previously clear “oil inflation hedge” role for nuclear power. With much cheaper oil, and very cheap natural gas and energy coal, alternatives to nuclear power generation and its very high capital costs were abundant in the 1985-2000 period. In commercial terms, this was “the nuclear winter” for atomic power.
THE SHIFT FROM GRASSHOPPER TO LOCUST
In the late 1980s and early 1990s, so-called financial engineering was strictly in its infancy, although growing; also by the end of the 1980s interest in, and debate on climate change and the need to use “low carbon” energy sources was in its infancy, although growing. Oil prices however stayed low. Stripped of any inflation protecting role, or climate protecting role, nuclear energy as a simple productive asset was also depreciated by the New Liberalism and the disengagement of the state from the economy.
The mutation process suggested above is simple: a purely productive asset becomes an inflation hedge, and terminates as a gambling chip or token before there is an implosion of the asset bubble. Even the first stage of the mutation process requires very different outlooks and values to play, with a large, or even massive change in what is technically called the NPV or Net Present Value of the underlying asset, itself starting to mutate into the category of “underlying security”. Calculations of NPV are part and parcel of asset management, and both increasing the NPV and “securitizing” or guaranteeing the asset firstly against erosion of value, and then against loss are the basic goals of financial engineering.
All these jargon terms have a “newspeak” hidden side. What is called securitization is now a cornerstone of the global economy and a massive financial industry, where “players” bet on the likelihood or not of a borrower defaulting on all kinds and classes of debt, from national debt to house mortgages or car and life insurance subscriptions. Currencies are also brought in, due to different loans being subscribed in one currency and reinsured in another, but repaid in yet another. Because currencies are in play, interest rates will also be brought into supposedly sophisticated, supposedly very safe or secure loan arrangements.
In fact however, the risk is quickly offloaded, or distributed from the initial lender and initial borrower, to many other actors. The initial lender can then generate more loans with other partners, and the borrowers can do exactly the same. In the subprime crisis, this process acted very fast with a very high multiplier of new loans against “securitized” loans offloaded to other players. Enhancing or accelerating the process, the inflation hedge role can be given major emphasis wherever this is possible – for example in syndicated loan arrangements with linked credit default swaps and structured investment vehicles, with a nominal value easily able to exceed 250 times the loan amount actually needed for buying the “underlying asset”. Where this asset has a supposed or claimed “inflation proof” quality or performance, the very complex loan arrangements will target the highest possible overall amounts, with the asset quickly shifting towards its final status of “underlying security”.
Unsurprisingly this has “positive feedback” in the shape of inflation affecting, or being sucked into, the production and the supply of the underlying asset, this inflation becoming ever stronger as the asset becomes simply a betting chip “security” against gambling losses, but still sold to unaware financial players as a security against inflation or “asset erosion”. Supposedly inflation proof assets will always attract many new actors into the game, each actor seeking to produce and supply these assets. So doing, this generates cost inflation for all needed inputs: for example building material prices in the US and Europe, which closely tracked the inflation boom, then crash of prices for finished offices, houses and apartments. This process of asset inflation can grow fast, with little or nothing to hinder it. House prices in the US and Europe through 2000- 2005, or house prices in Chinese and Indian cities since 2005, are two very clear examples. This quickly destroys the “inflation hedge” role of the asset because it becomes, itself, an agent of inflation. Affecting the costs of its own physical bases (for example concrete, timber, building land) by driving up their prices, the grasshopper, become locust, destroys its own support system.
THE NUCLEAR ASSET BULGE
Exactly the same is now occurring with nuclear power: reactor construction costs are rising at high rates in many countries, certainly at “double digit” rates, as high as 15 percent per year since 2008, in the USA, Europe, China, India, and the Middle East. The explanation offered for this by the nuclear industry is “rising raw material costs”, and in some cases “more sophisticated designs”, for example safety features, ability to resist wide-body airplane crashes (in the case of French EPRs), more efficient utilisation of uranium, reduced cooling water needs, and so on. This can be compared with industry marketing claims of falling unit costs due to bigger reactors,, so-called modular design, industry standardized components – and investor enthusiasm.
Average per-kiloWatt construction costs are now moving above US$ 4 500 in most countries, and have attained more than US$ 5 500 per kiloWatt in some countries, as of late 2010. Adding the sure and certain rise of uranium prices, fuel fabrication costs, fuel reprocessing and waste handling costs, the “nuclear value chain” is now suffering rapid inflation, as it shifts towards its final role as a financial casino betting chip. Taking a likely or possible total of more than 200 new reactors being built through 2010-2020, with 56 under construction as of October 2010, with a unit value around US$ 5 billion each the total “underlying asset value”, for project financing only, may exceed US$ 1 trillion enabling a total “financing space” probably far exceeding US $ 100 trillion to be levered.
Both governments and the financial industry will play a major role in accelerating the trend towards asset inflation for both convergent, and divergent reasons that we examine in another article