Oilfield Daily News

I was an invited speaker at the “7th Biennial International Workshop ‘Advances in Energy Studies,’” in Barcelona, Spain in October 2010. Afterward, I wrote a peer-reviewed academic paper related to my talk called, “Oil Supply Limits and the Continuing Financial Crisis.” It now has been published in the January issue of Energy. It is available free at this link (probably temporarily).  The rest of the articles are also available free. A complete listing of articles in the January issue can be found here.

My article abstract is as follows:

Since 2005, (1) world oil supply has not increased, and (2) the world has undergone its most severe economic crisis since the Depression. In this paper, logical arguments and direct evidence are presented suggesting that a reduction in oil supply can be expected to reduce the ability of economies to use debt for leverage. The expected impact of reduced oil supply combined with this reduced leverage is similar to the actual impact of the 2008–2009 recession in OECD countries. If world oil supply should continue to remain generally flat, there appears to be a significant possibility that oil consumption in OECD countries will continue to decline, as emerging markets consume a greater share of the total oil that is available. If this should happen, based on these findings we can expect a continuing financial crisis similar to the 2008–2009 recession including significant debt defaults. The financial crisis may eventually worsen, to resemble a collapse situation as described by Joseph Tainter in The Collapse of Complex Societies (1990) or an adverse decline situation similar to adverse scenarios foreseen by Donella Meadows in Limits to Growth (1972).

Dinner with a group of attendees and speakers at the Barcelona conference. I am wearing the red jacket.

I was in Barcelona for an entire week, for the conference and for a related meeting with high school students. The meeting with high school students was in a large auditorium. Students were asked to submit questions in advance relating to oil limits and possible ways to deal with them. There was also time for some impromptu questions.

Gail Tverberg, Charles Hall, Mario Giampietro, and Joseph Tainter in auditorium in Barcelona, Spain. They would later answer questions from students from 11 high schools in the area. Translation from Catalan to English was provided by headphone.

Our Finite World

The Report of the High-level Panel on Global Sustainability, entitled Resilient People, Resilient Planet: A Future Worth Choosing, contains six sections in its entirety:

Section I – The Panel’s vision
Section II – Progress towards sustainable development
Section III – Empowering people to make sustainable choices
Section IV – Working towards a sustainable economy
Section V – Strengthening institutions
Section VI – Conclusion: A call for action.

This overview reproduces Section I from the Panel’s report. The Summary of Sections and the Call for Action are taken from the report’s Executive Summary. The Panel’s recommendations are reproduced in full.

[For the complete Overview, see here. The complete report is available online. ]

1. Today our planet and our world are experiencing the best of times, and the worst of times. The world is experiencing unprecedented prosperity, while the planet is under unprecedented stress. Inequality between the world’s rich and poor is growing, and more than a billion people still live in poverty. In many countries, there are rising waves of protest reflecting universal aspirations for a more prosperous, just and sustainable world.

2. Every day, millions of choices are made by individuals, businesses and governments. Our common future lies in all those choices. Because of the array of overlapping challenges the world faces, it is more urgent than ever that we take action to embrace the principles of the sustainable development agenda. It is time that genuine global action is taken to enable people, markets and governments to make sustainable choices.

3. The need to integrate the economic, social and environmental dimensions of development so as to achieve sustainability was clearly defined a quarter of a century ago. It is time to make it happen. The opportunities for change are vast. We are not passive, helpless victims of the impersonal, determinist forces of history. And the exciting thing is that we can choose our future.

4. The challenges we face are great, but so too are the new possibilities that appear when we look at old problems with new and fresh eyes. These possibilities include technologies capable of pulling us back from the planetary brink; new markets, new growth and new jobs emanating from game-changing products and services; and new approaches to public and private finance that can truly lift people out of the poverty trap.

5. The truth is that sustainable development is fundamentally a question of people’s opportunities to influence their future, claim their rights and voice their concerns. Democratic governance and full respect for human rights are key prerequisites for empowering people to make sustainable choices. The peoples of the world will simply not tolerate continued environmental devastation or the persistent inequality which offends deeply held universal principles of social justice. Citizens will no longer accept governments and corporations breaching their compact with them as custodians of a sustainable future for all. More generally, international, national and local governance across the world must fully embrace the requirements of a sustainable development future, as must civil society and the private sector. At the same time, local communities must be encouraged to participate actively and consistently in conceptualizing, planning and executing sustainability policies. Central to this is including young people in society, in politics and in the economy.

6. Therefore, the long-term vision of the High-level Panel on Global Sustainability is to eradicate poverty, reduce inequality and make growth inclusive, and production and consumption more sustainable, while combating climate change and respecting a range of other planetary boundaries. This reaffirms the landmark 1987 report by the World Commission on Environment and Development, “Our Common Future” (United Nations document A/42/427, annex), known to all as the Brundtland report.

7. But what, then, is to be done if we are to make a real difference for the world’s people and the planet? We must grasp the dimensions of the challenge. We must recognize that the drivers of that challenge include unsustainable lifestyles, production and consumption patterns and the impact of population growth. As the global population grows from 7 billion to almost 9 billion by 2040, and the number of middle-class consumers increases by 3 billion over the next 20 years, the demand for resources will rise exponentially. By 2030, the world will need at least 50 per cent more food, 45 per cent more energy and 30 per cent more water — all at a time when environmental boundaries are throwing up new limits to supply. This is true not least for climate change, which affects all aspects of human and planetary health.

8. The current global development model is unsustainable. We can no longer assume that our collective actions will not trigger tipping points as environmental thresholds are breached, risking irreversible damage to both ecosystems and human communities. At the same time, such thresholds should not be used to impose arbitrary growth ceilings on developing countries seeking to lift their people out of poverty. Indeed, if we fail to resolve the sustainable development dilemma, we run the risk of condemning up to 3 billion members of our human family to a life of endemic poverty. Neither of these outcomes is acceptable, and we must find a new way forward.

9. A quarter of a century ago, the Brundtland report introduced the concept of sustainable development to the international community as a new paradigm for economic growth, social equality and environmental sustainability. The report argued that sustainable development could be achieved by an integrated policy framework embracing all three of those pillars. The Brundtland report was right then, and it remains right today. The problem is that, 25 years later, sustainable development remains a generally agreed concept, rather than a day-to-day, on-the-ground, practical reality. The Panel has asked itself why this is the case, and what can now be done to change that.

10. The Panel has concluded that there are two possible answers. They are both correct, and they are interrelated. Sustainable development has undoubtedly suffered from a failure of political will. It is difficult to argue against the principle of sustainable development, but there are few incentives to put it into practice when our policies, politics and institutions disproportionately reward the short term. In other words, the policy dividend is long-term, often intergenerational, but the political challenge is often immediate.

11. There is another answer to this question of why sustainable development has not been put into practice. It is an answer that we argue with real passion: the concept of sustainable development has not yet been incorporated into the mainstream national and international economic policy debate. Most economic decision makers still regard sustainable development as extraneous to their core responsibilities for macroeconomic management and other branches of economic policy. Yet integrating environmental and social issues into economic decisions is vital to success.

12. For too long, economists, social activists and environmental scientists have simply talked past each other — almost speaking different languages, or at least different dialects. The time has come to unify the disciplines, to develop a common language for sustainable development that transcends the warring camps; in other words, to bring the sustainable development paradigm into mainstream economics. That way, politicians and policymakers will find it much harder to ignore.

13. That is why the Panel argues that the international community needs what some have called “a new political economy” for sustainable development. This means, for example:

radically improving the interface between environmental science and policy;

recognizing that in certain environmental domains, such as climate change, there is “market failure”, which requires both regulation and what the economists would recognize as the pricing of“environmental externalities”, while making explicit the economic, social and environmental costs of action and inaction;

recognizing the importance of innovation, new technologies, international cooperation and investments responding to these problems and generating further prosperity;

recognizing that an approach should be agreed to quantify the economic cost of sustained social exclusion — for example, the cost of excluding women from the workforce;

recognizing that private markets alone may be incapable of generating at the scale necessary to bring about a proper response to the food security crisis;

and requiring international agencies, national Governments and private corporations to report on their annual sustainable development performance against agreed sustainability measures.

We must also recognize that this is a core challenge for politics itself. Unless the political process is equally capable of embracing the sustainable development paradigm, there can be no progress.

14. The scale of investment, innovation, technological development and employment creation required for sustainable development and poverty eradication is beyond the range of the public sector. The Panel therefore argues for using the power of the economy to forge inclusive and sustainable growth and create value beyond narrow concepts of wealth. Markets and entrepreneurship will be a prime driver of decision-making and economic change. And the Panel lays down a challenge for our Governments and international institutions: to work better together in solving common problems and advancing shared interests. Quantum change is possible when willing actors join hands in forward-looking coalitions and take the lead in contributing to sustainable development.

15. The Panel argues that by embracing a new approach to the political economy of sustainable development, we will bring the sustainable development paradigm from the margins to the mainstream of the global economic debate. Thus, both the cost of action and the cost of inaction will become transparent. Only then will the political process be able to summon both the arguments and the political will necessary to act for a sustainable future.

16. The Panel calls for this new approach to the political economy of sustainable development so as to address the sustainable development challenge in a fresh and operational way. That sustainable development is right is self-evident. Our challenge is to demonstrate that it is also rational — and that the cost of inaction far outweighs the cost of action.

17. The Panel’s report makes a range of concrete recommendations to take forward our vision for a sustainable planet, a just society and a growing economy:

a. It is critical that we embrace a new nexus between food, water and energy rather than treating them in different “silos”. All three need to be fully integrated, not treated separately if we are to deal with the global food security crisis. It is time to embrace a second green revolution — an “ever-green revolution” — that doubles yields but builds on sustainability principles;

b. It is time for bold global efforts, including launching a major global scientific initiative, to strengthen the interface between science and policy. We must define, through science, what scientists refer to as “planetary boundaries”, “environmental thresholds” and “tipping points”. Priority should be given to challenges now facing the marine environment and the “blue economy”;

c. Most goods and services sold today fail to bear the full environmental and social cost of production and consumption. Based on the science, we need to reach consensus, over time, on methodologies to price them properly. Costing environmental externalities could open new opportunities for green growth and green jobs;

d. Addressing social exclusion and widening social inequity, too, requires measuring them, costing them and taking responsibility for them. The next step is exploring how we can deal with these critical issues to bring about better outcomes for all;

e. Equity needs to be at the forefront. Developing countries need time, as well as financial and technological support, to transition to sustainable development. We must empower all of society — especially women, young people, the unemployed and the most vulnerable and weakest sections of society. Properly reaping the demographic dividend calls on us to include young people in society, in politics, in the labour market and in business development;

f. Any serious shift towards sustainable development requires gender equality. Half of humankind’s collective intelligence and capacity is a resource we must nurture and
develop, for the sake of multiple generations to come. The next increment of global growth could well come from the full economic empowerment of women;

g. Many argue that if it cannot be measured, it cannot be managed. The international community should measure development beyond gross domestic product (GDP) and
develop a new sustainable development index or set of indicators;

h. Financing sustainable development requires vast new sources of capital from both private and public sources. It requires both mobilizing more public funds and using global and national capital to leverage global private capital through the development of incentives. Official development assistance will also remain critical for the sustainable development needs of low-income countries;

i. Governments at all levels must move from a silo mentality to integrated thinking and policymaking. They must bring sustainable development to the forefront of their agendas
and budgets and look at innovative models of international cooperation. Cities and local communities have a major role to play in advancing a real sustainable development agenda on the ground;

j. International institutions have a critical role. International governance for sustainable development must be strengthened by using existing institutions more dynamically and by considering the creation of a global sustainable development council and the adoption
of sustainable development goals;

k. Governments and international organizations should increase the resources allocated to adaptation and disaster risk reduction and integrate resilience planning into their development budgets and strategies;

l. Governments, markets and people need to look beyond short-term transactional agendas and short-term political cycles. Incentives that currently favour short-termism in decisionmaking should be changed. Sustainable choices often have higher up-front costs than business as usual. They need to become more easily available, affordable and attractive to both poor consumers and low-income countries.

18. This Panel believes it is within the wit and will of our common humanity to choose for the future. This Panel therefore is on the side of hope. All great achievements in human history began as a vision before becoming a reality. The vision for global sustainability, producing both a resilient people and a resilient planet, is no different.

19. In 2030, a child born in 2012 — the year our report is published — will turn 18. Will we have done enough in the intervening years to give her the sustainable, fair and resilient future that all of our children deserve? This report is an effort to give her an answer.

[For the complete Overview, see here. The complete report is available online. ]

United Nations

The US dollar is fast losing out its reserve currency status with China aggressively replacing the dollar with the Yuan as a currency for bi-lateral trade. The latest is an agreement signed between the China and the United Arab Emirates (UAE), which will use the Yuan for oil trade.

The deal is worth around $5.5 billion dollars and the Chinese central bank said that the deal aims at “strengthening bilateral financial cooperation, promoting trade and investments and jointly safeguarding regional financial stability”

Earlier, Russia and Iran had decided to use Rubles as a means of currency. With both China and Russia converting their bi-lateral trades into non-US dollar deals, the greenback is now under threat of losing out its status as the world reserve currency. And the impact of such a transition will essentially tip the balance of global power.

Commodity Online

The last ten years have brought a structural change to the world oil market, with changes in demand increasingly playing a role in maintaining the supply/demand balance.  These changes will come at an increasingly onerous cost to our economy unless we take steps to make our demand for oil more flexible.

We’re not running out of oil.  There’s still plenty of oil still in the ground.  Oil which was previously too expensive to exploit becomes economic with a rising oil price.  To the uncritical observer, it might seem as if there is nothing to worry about in the oil market.

Unfortunately, there is something to worry about, at least if we want a healthy economy.  The new oil reserves we’re now exploiting are not only more expensive to develop, but they also take much longer between the time the first well is drilled and the when the first oil is produced.  That means it takes longer for oil supply to respond to changes in price.

In economic terms, the oil supply is becoming less elastic as new oil supplies come increasingly from unconventional oil.  Elasticity is the term economists use to describe how much supply or demand responds to changes in price.  If a small change in price produces a large change in demand, demand is said to be elastic.  If a large change in price produces a small change in supply, then supply is said to be inelastic.

Elasticity of Demand

On the demand side, the elasticity of our demand for oil reflects the options we have to using oil for our daily needs. At a personal level, we can quickly cut our demand for oil a little bit by combining car trips, keeping our tires properly inflated, etc.  But the ability to make such reductions is often limited, and even such simple measures come at a cost of time or convenience, which is why we’re not doing them already.  If we live in an area without good public transport (as most of us do) we can’t stop driving to work without losing our job, so we keep driving to work, and paying more for the gas to get there.

Over the longer term, our personal options to cut oil consumption increase.  We can move closer to work, or to somewhere where we can walk or use public transport to get to our job. This is why the most fuel-efficient vehicle is a moving van.

Replacing a car with a more fuel efficient vehicle is an option for those who have money or credit, but the people who are under the most pressure from high fuel prices are unlikely to be able to afford such options.  If they can’t resort to ride sharing or public transport, they may simply lose their jobs because they can’t afford to get there.

The reduction in fuel use that comes from people losing their jobs and no longer commuting to work also contributes to the elasticity of demand, and I mention it to highlight the point that while reductions in fuel use can be benign (properly inflated tires, for instance), they can also be harmful to the economy.  Reductions in demand due to high prices are often called demand destruction, and it’s just as unpleasant as it sounds.

Elasticity of Supply

Since our options for reducing oil demand in response to rising prices range from inconvenient to expensive, to downright painful, it’s clear why the media and politicians focus so much attention on the other half of the equation: When supply adapts to changes in demand, voters don’t have to make uncomfortable choices.

But there are also limits to the ability of oil supply to adjust.  Most OPEC nations, including Saudi Arabia, need at least a $100/bbl for oil to keep their budgets in balance, so why would they increase production to reduce the price below that?  In fact, as (subsidized and hence inelastic) OPEC domestic consumption continues to increase faster than supply, OPEC net exports will continue to fall, further raising the price needed to balance exporters’ budgets.

While fiscal issues constrain OPEC’s elasticity of supply, geology and politics constrain oil supply elsewhere.  Brazil’s giant pre-salt fields, like deep water discoveries in the Gulf of Mexico and elsewhere, are much more expensive and slow to develop than were past discoveries.  Canada’s tar sands are large mining operations, and are similarly slow and expensive to develop.

Put simply, if the oil were quick and easy to get at, we’d have gotten it already.  All these factors mean that the elasticity of oil supply is falling, so oil demand has to adjust more in response to changes in price than in the past.

Data

Since there is little reason to assume that the elasticity of oil demand has changed significantly (do we have more options for doing without oil than we did ten or twenty years ago?) while the elasticity of oil supply has fallen, we have to expect that overall oil price elasticity has fallen as well, and these changes should show up in oil market data.

Using oil annual supply, price and consumption data from the EIA and IEA, and making some back-of the envelope adjustments to account for the difference between their different definitions of what constitutes oil, I made some estimates of the price elasticity of oil supply and demand.

Since neither demand nor supply can respond instantly to changes in price, I first had to estimate the average reaction time.  To do this, I looked at the correlation between changes in the oil price and changes in supply and demand with various lags.  I used price and volume changes over a period of three years because three year changes gave me the strongest results, although one and two year changes were similar.

Below you can see the correlations between three year changes US and worldwide supply and demand with three year changes in US oil prices (WTI) and world oil prices (Brent), after various lags:

Note that we’re looking for negative correlation between price and demand (we use less oil when we have to pay more for it), and positive correlation between price and supply (companies produce more oil if they can get more money for it.)

From the chart, we can see that world oil supply has historically taken about one year to respond to changes in world prices (the blue line peaks at 40% correlation with a one year lag), while domestic US oil production (supply) has typically taken about four years to respond to changes in the oil price, but that response is much stronger than the response of world supply.

The difference between the response between US and world oil supply makes sense because domestic oil production operates in a much freer market than world oil supply, where changes are mostly dominated by political decisions in a few OPEC nations.  Political decisions are quicker than drilling new wells (one year as opposed to four), but they are only about half as responsive to changes in price.

On the demand side, we see very little response to changes in price at all.  The correlation between demand and price is always positive, showing that changes in supply have accounted for virtually all of the market response to oil price changes over the period.

Changes Over Time

To test my hypothesis that supply is becoming less elastic, I split my data set into two periods, one from 1987 to 2000, and one from 2001 to 2010.  If the hypothesis is correct, we will see less supply and more demand price response in the later period than in the earlier one.

The graphs which follow show significant changes in how both supply and demand respond to changes in price.  Perhaps the most significant change is that we now see a response in the demand for oil to the oil price.

In the early period, only US demand for oil shows a small response to price, with a slight negative correlation (-30%) between three year changes in US demand and changes in price.  World oil demand still shows no measurable price response.   I take this to indicate that at the end of the last century, Americans responded to changes in the oil price by using the relatively easy options such as eliminating discretionary trips when oil prices rose, but price was not an important factor for determining world oil consumption.

In the later period, the US demand no longer shows a short-term response to rises in the oil price, perhaps because the easy reductions in oil use have already been made, but we now see a relatively strong response to higher oil prices (with a -90% correlation) over a period of four years for both US and world oil demand.  This probably corresponds to such changes as purchasing more efficient vehicles, and minimizing commutes by moving closer to work or working more from home.

Confirmation

World oil demand’s very significant response to changes in the oil price implies that demand is now playing a much bigger role in the adjustments the oil market makes to changes in price than it has in the past.

Because oil supply has become less elastic and less responsive to changes in price, oil prices have become much more volatile in order to force market adjustments.

The chart below shows that while the magnitude (either up or down) of annual changes in supply and consumption have been in the 3% to 7% range for the last quarter of a century, the magnitude of oil price changes has been rising relentlessly.  In the 1990s, oil prices usually changed by an average of 25% or less per year, while they now typically change by three or four times that amount in any given year.

If the price elasticity of the oil market had not been falling over time, the increasing magnitude of changes in oil prices would have produced a similar increase in the magnitude changes in oil supply and demand.

As the Market For Oil Becomes Less Flexible, We Should Make the Market for Transportation Services More Flexible to Compensate

If what we care about are the effects on the economy, it does not matter how much oil is in the ground.  Over the last ten years, we have see a structural change in the oil market which will continue to have far-reaching effects on the economy even if we manage to increase the amount of oil produced.

Before 2000, oil supply did the heavy lifting when it came to balancing supply and demand in the oil market.  That is no longer the case, and the oil price signal has grown significantly stronger in order to elicit a response in demand.

With 2% of the world’s oil reserves, changes in the US supply of oil will remain insignificant in the world oil supply demand picture, developments in the Bakken shale and cheer leading from political leaders notwithstanding.  On the other hand, as the consumer of a quarter of the world’s oil supply, we can have a significant effect on the world oil market by making sure that our economy can adjust quickly and easily to changes in the oil price.

What measures can we take to increase the elasticity of oil demand, and reduce the pain of demand destruction?  Measures which increase our citizen’s options for reducing oil use.

• Increased investment in alternative modes of transport, such as mass transit (both buses and rail), bike lanes, bike and car sharing, and walking improvements to allow many more workers the option of getting to their jobs without the use of a personal car.
• Improvements in our nation’s rail system to allow more freight to be shifted from truck to rail.
• Increasing gas taxes slowly and predictably over time to both fund the above improvements, and to signal to consumers that they need to prepare for long term higher prices by purchasing more efficient vehicles and changing where they live so that they have the ability to reduce their driving.
• The use of road congestion pricing, pay as you drive insurance, and other price signals that give people the right market signals and enhance the most efficient use of our nation’s roadways.
• Encouraging the electrification of transport (including the alternative transport options mentioned above) to provide transport options which are not dependent on oil.

In short, we need to make the market for transportation services more efficient by encouraging new entrants (mass transit, bikes, trains) and competition with the incumbent car/internal combustion engine infrastructure.  Competition within the car infrastructure should also be encouraged by sending price signals such as the slowly and predictably increasing gas tax mentioned above to better reflect the dangers to our economy posed by the new oil market regime.

Forbes

Since 2005, European oil consumption has fallen by 1.5 million barrels a day. And, in the same period, US oil consumption has fallen by 2 million barrels a day. If oil was priced at $60 a barrel, rather than $100 a barrel, then a fair portion of that lost demand might return. Instead, since 2005, global crude oil production has been bumping up against a ceiling around 74 million barrels a day. Thus, the tremendous growth in oil demand which emanates from the developing world, in Asia primarily, has been supplied by the reduction of demand in Europe and the United States. Why doesn’t the world simply increase the production of oil to 77, or 78 million barrels a day? After all, that is precisely the history of global oil production: a continual increase in supply to capture the advantage of rising prices.

Today, in 2012, I observe that many analysts of global oil production—and the interaction between oil prices and the global economy—continue to engage in a guessing game about the future. But, frankly, the future has already arrived. And it is not a random future, but a future that was held to be improbable, if not impossible. For each extra barrel of oil produced over the past seven years from Russia, and Canada, there has been a loss of production from the North Sea, from Mexico, from Indonesia and elsewhere. And in the case of OPEC, there has been a stubborn flatlining of production growth, which, in the true spirit of argumentum ad ignorantium, has been taken as proof of OPEC’s hidden and secret supply. Thus, we are led to the newest and strangest meme of all: the failure of global oil production to grow over seven years, in the face of a phase transition in oil prices, is not even suggestive of peak oil. But rather, proof of oil’s imminent supply resurrection.

Growth. It’s what every economist and politician wants. If we get ‘back to growth’, servicing debts both private and sovereign become much easier. And life will return to normal (for a few more years).

There is growing evidence that a major US policy shift is underway to boost growth. Growth that will create millions of new jobs and raise real GDP.

While that’s welcome news to just about everyone, the story is much less appealing when one understands the cost at which such growth comes. Are we better off if a near-term recovery comes at the expense of our future security? The prudent among us would disagree.

Resurrecting American Export Strength

It’s easy to be skeptical that America could once again be a titan of global exports.

For a very long time, that role has mostly been relegated to countries in the developing world. America as an export economy? Somewhere along the 50-year transition from industrial manufacturer to voracious consumer, Americans have lost touch with such a remote possibility. Indeed, this phase of America’s economic history is now quite settled.

A multi-decade outsourcing wave has left US workers to concentrate in the financial sector — an over-weighting of talent we would come to regret after the crisis year, 2008.

Since 2009, though not well advertised, Washington has been pursuing a quiet policy to boost exports in nearly every sector, throwing investment capital at port and rail infrastructure, and getting the message out to regulators and state government. Now, after some very notable gains in which exports have advanced to nearly 14% of GDP, the President in his State of the Union Speech made it clear: The US would no longer cede a labor and manufacturing advantage to the rest of the world.

With that declaration, notice was served. It was perhaps not a coincidence when, the following day, the Federal Reserve articulated a zero-interest-rate policy that would be sustained for years. The US dollar reacted immediately and promptly returned to its downtrend. Has a new industrial policy now been unveiled?

(Painting: Alfred Bierstadt, 19th Century: Mt St Helens and Columbia River)

Rivers of Coal

The small city of St. Helens, Oregon sits astride the Columbia River, 25 miles closer to the Pacific Ocean than Portland. Over the past two years, a consortium of coal shippers and coal producers has been searching along the Pacific Northwest coast for a place to construct new export terminals. Coal, which is mined in the Powder River Basin of Wyoming and which often travels long distances to power stations in the American South, would also find easy rail routes to Asian markets through the ports of the West Coast. Rebuffed already by Bellingham, WA, north of Seattle, and then rebuffed again by Longview, WA, north of Portland, the industry is trying once more — this time at St. Helens.

To understand this persistence, one has to appreciate the current juncture in world coal markets. Global oil supply has been coming up against a ceiling for seven years now, since 2005. As a result, much of the world is trying to access increasingly more BTUs through natural gas and coal. Asia, which has built tremendous coal capacity, is a relentless user of coal. And US coal mines, older and with much higher extraction costs, are able to take advantage of rising world coal prices.

Moreover, as the US has been transitioning to natural gas for over 30 years to create electricity, that trend is only accelerating as its own coal plants age and retire. (see Regulation and the Decline of Coal, Smart Planet, January 2012, by Chris Nelder). The combined effect has caused a reversal in the long decline of US coal exports, which began to turn higher in 2002:

From a low of 40 million short tons at the start of the last decade, US coal exports have recovered and doubled to 80 million short tons as of 2010. One of the fastest growing subsets of our coal exports has been metallurgical coal, which has soared since 2008, climbing 60% alone in 2011, over the prior year.

More broadly, the US is already in position to become an exporter, not only of refined oil products, but of other energy products, too. For example, much of the additional refining capacity that was added to existing infrastructure last decade now serves as spare industrial capacity to export US oil products, such as gasoline, diesel, and other fuel oil.

The deep and sustained cut that Americans have made to their own oil product consumption is thus being converted to exports. And with such high levels of structural unemployment, it does not appear Americans will account for any new call on their own energy resources anytime soon.

Unless of course, we use those energy resources — not for idle consumption, but for production.

New Energy Equations

As many are aware, the most gaping, yawning price discount found in the world today is in the comically cheap BTU found in North American natural gas. At less than $3.00 per million BTU, the energy content in natural gas can be purchased now at an 85% discount to the BTU content of oil. That is a value proposition and a pricing vacuum that — save for the typically long time frame of energy transitions — simply cannot stand.

Even if it takes 20 years to wean automobile-dependent economies off oil and back to electrified transport, someone, somehow, will find a way to perform physical tasks with natural gas that were previously completed using oil. As we know from history, it took Europe quite some time to transition from the Age of Wood to the Age of Coal, but the first country out of the gate was Britain, and the results were transformative. Something “like” this transition is happening today in the United States, because US demand for electrical power, produced from natural gas, coal, wind, and solar, is rising on a relative basis to our previous oil consumption.

For now, let’s leave aside some of the problems we will eventually run into as we hit the natural gas resource base harder. There will be environmental pressures, and constraints on water usage and water safety. And though it seems unlikely today, with natural gas trading at decade lows of $2.75/million BTU, there will eventually be a move higher in price. After all, North America is also gearing up to export natural gas, with proposed terminals in British Columbia and the US Gulf Coast.

The question is: should the US use this incredibly cheap BTU for export, to catch the much higher world price for LNG — or should the US use this cheap energy as a competitive advantage, to make cheap electricity as a manufacturing input?

It appears the US is going to do both.

Already a certain virtuous circle is developing. Increased natural gas extraction is driving the need for more drilling equipment and energy infrastructure. This has induced global companies to revive metalcraft and steel operations in the depressed American Midwest. An intriguing story in this regard is the investment Vallourec of France is making in Youngstown, Ohio, which will produce specialized steel tubing for the oil and gas industry. Surely the fact that the US has some of the lowest electricity rates in the developed world is part of the attraction.

Getting the Government on Board

Boosting the extraction of natural resources will not be without deleterious effects.

As I explained in the January 3, 2012 report A Punch to the Mouth: Food Volatility Hits the World, the massive increase in US exports of food is wonderful economic news for the US farmer. But it also means a greatly expanded use of fertilizers, and smooths the delivery of a world price for food — which American consumers must begin to pay. In food prices, and now in oil prices and coal prices, Americans must now bid for their own natural resources in a booming world market for commodities. Equally, many communities are discovering that natural gas extraction, oil and coal shipments, and the prospect of new export infrastructure are either dangerous to the environment or simply not an industry wanted by local communities.

Despite public perception, Washington is hardly antagonistic towards increased energy production, except in the most superficial, rhetorical way. Meanwhile, many of the agencies in Washington have directed their attention towards a re-industrialization of the US, and exports in particular.

The Department of Transportation (DOT) has directed a lot of its spending towards rail and port infrastructure in the past several years. A review of the DOT’s Tiger Grants since 2009 reveals wave after wave of targeted investments in the national ports of Miami, Los Angeles, Providence, Vancouver/Portland, and many others, with special attention to rail connectivity. The upsurge in port infrastructure investment is not lost on the shipping industry either, which began in early 2010 to note the rapid growth from the first round of TIGER grants from the previous year.

When President Obama originally announced the administration’s goal to double exports by 2015, it was not taken very seriously. In a New York Times piece in January 2010, a former head of the Council on Foreign Relations was quoted as saying, “How will he perform this miracle? It really is a mystery.” Indeed, if you attended university anytime since 1980, and studied economics while there, you learned that America’s industrial era was mostly over. The 1990s put a fine point on that lesson: The US would create products conceptually at home, and have the products manufactured abroad, pocketing the arbitrage of cheap labor. That equation only accelerated in the past decade as cheap coal powered foreign manufacturing centers, primarily in Shenzhen China, while oil costs rose.

But this past week, President Obama laid bare the country’s new intentions:

We can’t bring every job back that’s left our shore. But right now, it’s getting more expensive to do business in places like China. Meanwhile, America is more productive. A few weeks ago, the CEO of Master Lock told me that it now makes business sense for him to bring jobs back home. Today, for the first time in 15 years, Master Lock’s unionized plant in Milwaukee is running at full capacity. So we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed. So my message is simple. It is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America. Send me these tax reforms, and I will sign them right away. We’re also making it easier for American businesses to sell products all over the world. Two years ago, I set a goal of doubling U.S. exports over five years. With the bipartisan trade agreements we signed into law, we’re on track to meet that goal ahead of schedule. And soon, there will be millions of new customers for American goods in Panama, Colombia, and South Korea. Soon, there will be new cars on the streets of Seoul imported from Detroit, and Toledo, and Chicago. I will go anywhere in the world to open new markets for American products.

No doubt a good portion of this rhetoric is election-year posturing. That said, the data shows us that exports as a percentage of GDP have soared since Obama came to office. And while part of that ratio is due to punk GDP growth, the US is stepping up its export of industrial machines, medical equipment, telecommunications and transportation equipment, civilian aircraft, and engines.

However, from its current hollowed out position, the US is still seeing its greatest growth in commodity exports. That is, in everything from grains such as corn and wheat, to cotton, and even gold. For example, by value, the petroleum products discussed earlier are now America’s largest export.

This points to a constraint: If the US is going to export mainly commodities during its long road back to the export of finished goods, then it will be even more important to cap any rise in the US dollar.

In Part II: Prepare for the Collapse of the Dollar, we discuss the growing clarity around the big changes that are afoot to create an exports-driving jobs ‘recovery’.

But it comes at the cost of drastically weakening our currency and sending increasingly strategic and depleting domestic resources overseas. Essentially, inflation and scarcity will increasingly become the themes of the future.

We address the key questions concerned readers should be asking: is this a price worth paying? What does this future look like and how should I be positioning for it?

ZeroHedge

Buzz words sprout from controversies of the day. From the impeachment trial of Chief Justice Renato Corona, “subpoena” and “alpha  lists” spilled into chatter at barbershops and even diplomatic receptions.

Emerging issues mint new buzz words. “Peak timber” is one of them.

“Tropical countries should consider implications of ‘peak timber’… [even as] it has become common to speak of ‘peak oil,’” the journal Biological Conservation suggests. Today’s  30- to 40-year logging cycles do not provide sufficient time for forests to recover.

This rule of thumb stems from a 1950s preliminary research on fertile Basilan Island with its abundant rainfall. Other provinces are less favored. Basilan’s 30-40 year yardsticks were applied nationwide. They are proving unsustainable.

“Peak timber” shoves against forest limits. The trajectory clones the “Hubbert Curve” in tracking oil, note Australian National University’s Phil Shearman and Jane Bryan with William Laurance of James Cook University. Harvests first surge, peter out on a peak, then plunge into free fall.

“Been there, done that,” Filipinos would shrug. In 1595, forests blanketed 27.5 million hectares here. Today, 7.7 million hectares are left, official data claims. That’s probably an overestimate.

Factor in unrecorded killer logs, unleashed  by Tropical Storm “Sendong.” Most tumbled from the mountains of Lanao del Sur. Kaingin-scarred slopes, converted into pastures or corn fields, have patchy vegetative cover. They cannot stem soil erosion. Neither do they hold rain runoff. They result in massive soil erosion.

Thus, mud, rock and logs cascaded from plantations into vulnerable hillsides in the Bukidnon towns of Manolo Fortich, Libona, Talakag and Baungon. In Cagayan de Oro and Iligan, people were smothered by waves of mud.

The first Asian country to liquidate its forest wealth after World War II, the Philippines slammed into “peak timber” early. From less than 500,000 cubic meters in the late 1950s, log exports crested at 11.1 million cubic meters in 1974. Exports slumped to a mere 841,000 cubic meters a decade later.

It still has to recover. Forest cover dwindled, meanwhile, to 18 percent, far below the 30 percent safety benchmark. Loss of habitats threatens 89 species of wildlife. Most are endemic to the Philippines. “A prima donna of log exporters in the 1970s, we became a wood pauper in the 1980s,” observed Viewpoint. (Inquirer, 1/10/08)

“Leaks” are all over, notes former United Nations forester Napoleon Vergara. Penury and hunger drive kaingineros to slash  and burn trees for a harvest or two. Rapid population growth spurs upland migration. Confronting illicit loggers, who bankroll politicians, can be lethal.

“Green” priest Neri Satur was shotgunned  to death in 1991 for confiscating truckloads of “hot logs” in Bukidnon. Catholic radio journalist Dr. Gerry Ortega campaigned to protect indigenous communities and Palawan forests. He was gunned down last Jan. 24.

Botanist Leonard Co was shot while doing research in Leyte in 2011. Co was “probably the last of classically trained botanists in plant taxonomy and systematics.” Lt. Gen. Jessie Dellosa, the 43rd Armed Forces chief of staff, should resolve the glib claim that Co was “caught in a crossfire with communist guerrillas.”

“Peak timber” is spurred by slow growth rate of commercially viable species, the scientists note. “Logging in the tropics tends to focus on a small fraction of the trees.” Abandoned tree stumps symbolize extensive “collateral damage.”

The “second wave clearance” problem, cited by Biological Conservation, is a major glitch in Mindanao, Vergara adds. Roads bulldozed by loggers open once remote areas to a flood of  land-hungry settlers, shifting cultivators—and yet more illegal loggers.

The impact of bulldozers and yarders dragging logs through fragile tropical soils is severe. “In retrospect, it would probably have been better from an environmental perspective to rely on the carabao power that small-scale illegal loggers depend upon.”

Asia and the Pacific are starting to reverse forest loss, asserts the UN’s Food and Agriculture Organization in its 2011 “Forest Beneath the Grass.”

“Asia gained 2.2 million hectares,” the report says. “Primary forests nonetheless continue to be chain-sawed.” The last virgin forests in Samar are being chopped down.

Government reforestation efforts have been erratic. And tree survival rates are low. Under the Arroyo administration, more than 72 centavos out of every peso was spent on salaries in the Department of Environment and Natural Resources .

“We’ve long gone over the peak,” says agro forestry specialist Patrick Dugan, co-author of “Forest Faces.” We must “now focus on options for turning around the situation.”

The first step to climb back up the peak is to adopt—then enforce—“policies that create incentives for people to plant, harvest and sell trees.” This would tamp down pressure to harvest from the natural forests.

Second is to address the lack of tangible and sustained support to help millions of small-scale farmers, living on steep slopes, apply improved land use methods. Only then will they jettison the unsustainable but the only farming systems they have. That would crib “the prevailing attitude that any cutting of trees is ipso facto a criminal act.”

Hopes for the future rest with people given a stake in planting and thereafter protecting forests, writes BBC’s Mark Kinver. The alternative is an old buzz word: disaster.

Inquirer.net

BlottR

* Oil minister says can respond to shortages due to investment

* Growing domestic demand won’t crimp ability to export

* To rely more heavily on gas for rising domestic demand

Saudi Arabia can meet any future world oil shortages thanks to massive investment, and its rising gas output will mean crude exports will not be affected by booming domestic energy demand, Oil Minister Ali al-Naimi said on Monday.

Growing tension between Iran and the West over the Islamic Republic’s nuclear programme has led to fears of a disruption in oil supplies from the Middle East Gulf.

The United States and European Union have raised pressure on Iran with sanctions and a ban on Iranian oil, while Tehran has said it may cut off supplies to some unspecified countries.

Saudi Arabia is best placed to make up for any shortfall in oil supply.

“I would like to state for the record, here in London, that the kingdom will continue to be a reliable, steady and dependable supplier of energy to the world,” Naimi told an oil conference.

He dismissed concerns that demand from within Saudi Arabia would limit the amount of oil available for export.

“Saudi Arabia’s domestic growth will not impact on exports now or in the future – of this I am very confident,” he said.

The world’s top crude exporter is already burning more than 10 percent of its output in power plants on hot summer days, and fuel subsidies are exacerbating a demand boom that is increasing consumption of the world’s largest oil reserves.

Official data shows Saudi oil consumption rose by more than 5 percent a year between 2003 and 2010 to an average of 2.4 million barrels per day (bpd) in 2010. That’s a significant chunk of total Saudi oil output, which averaged around 9.7 million bpd in December, a Reuters’ survey showed.

“Warnings last year about what would happen to Saudi oil exports if current levels of domestic usage were left unchecked were taken as fact,” Naimi said “But we are not leaving domestic energy consumption unchecked.”

“NUMBER ONE SUPPLIER”

Naimi said the kingdom would be able to meet any future oil market shortages because of its high levels of investment to maintain oil production capacity.

“It is because of our ongoing investment that Saudi Arabia is able to respond to shortages around the world – take issues with Libyan production last year for example,” Naimi said.

“And it’s because of our investment that any future shortages will be handled.”

Naimi said earlier this month Saudi Arabia could increase oil output by about 2 million bpd “almost immediately” from its current levels just under 10 million bpd. He said the kingdom could add a further 700,000 bpd, with about 90 days to reach full capacity of 12.5 million bpd.

“In 2009 the kingdom completed a massive programme to increase oil production capacity,” Naimi said. “This investment and effort is aimed at retaining our position as number one supplier of oil to the world, and the investment continues.”

Naimi said OPEC’s top oil producer would rely more heavily on gas for rising domestic energy demand.

Saudi Arabian gas production rose to 10.7 billion cubic feet per day (bcf) in 2011 from just 1.65 bcf in 1981 and aimed to reach overall capacity 16 bcf per day by 2020.

He said the kingdom had proven gas reserves of 286 trillion cubic feet, the fourth largest in the world.

“Saudi Arabia is going through a period of rapid and extraordinary economic growth,” Naimi said.

“It has a young and fast growing population and a GDP growth rate currently around 7 percent. Industrialisation is increasing and we are witnessing an unprecedented expansion in the country’s infrastructure – so it is true that the kingdom’s domestic energy demands are rising to keep pace.”

Saudi Arabia is developing four major gas fields and has identified potential reserves of unconventional, or shale, gas.

“It is not supply that will be a problem in the near future, it is demand,” Naimi said. He said Europe faced “a difficult time” and it was clear its economic readjustment would result in falling demand for goods and services. This, in turn, would impact on oil demand and imports.

“But the world does not begin and end in Europe,” Naimi said. “Going forward, I see the potential for real prosperity and growth throughout the Middle East, in Asia, South America and Africa.”

Reuters