Wednesday, February 01, 2006

Peak Oil—Nature’s Own WMD? Part III

If you enter the phrase “Peak Oil” in Google, you will discover that there are 14,300,000 links available. Yes! You read that correctly, 14 million three hundred thousand. If there is such an overwhelming amount of information ready to be downloaded on the Internet, why is the American public so ignorant of an event that could easily disarrange the world’s economic and social order, and why have our political leaders been so slow to react? Recently, at last, that latter factor seems to be improving.

“When you think about our reliance on oil, we are just one well orchestrated terrorist attack or political upheaval away from $100 a barrel oil overnight that would send the global economy tumbling and the industrialized world, including its new giant members, China and India, scrambling to secure supplies from the remaining and limited number of supply sites.”

The above is not my writing. It is part of a presentation given by Senator Joseph Lieberman on November 16th, 2005, at a news conference introducing a legislative bill titled the “Vehicle and Fuel Choices for America Security Act.” Lieberman then said, “And history tells us—and this is another element of national security that will be enhanced if we diversify our energy supply—history tells us that wars have started over such competition for limited natural resources.” Could this be why China has dramatically escalated its military spending budget? [My question].

Lieberman’s bill, that outlines actions that could reduce our dependence on imported oil by encouraging the use of domestic renewable energy sources is the work of a group of eight senators, four Democrats and four Republicans (surprise, surprise, bi-partisanship for a change) calling themselves “the energy independence eight.” Despite my complaints in Part I of this series that our political leaders seemed to be asleep at the Peak Oil switch, since that first article was submitted for publication, both recognition of the Peak Oil dangers and momentum for action seems to be building (coincidence only). Unfortunately however, in the opinions of several experts, even if these efforts were brought to fruition relatively quickly (and there is no assurance that any will be implemented) they may prove to be too little too late.

On December 7th, 2005, Kjell Aleklett, President of the Association for Peak Oil (ASPO) testified before the Committee on Energy and Commerce (the same hearing mentioned in Part I of this series). ASPO’s prediction for the occurrence of peak oil is the year 2010, although Aleklett stated, “The exact year for peak oil depends very much on future demand and we will not know when we have peaked until we have crossed the threshold. It will certainly be before 2020.”

Mr. Aleklett cited some numbers that are not too difficult to comprehend. Based on Exxon Mobil’s estimate that the average production decline rate for existing global oil fields is between 4 and 6 percent a year, and current global production is 84 million barrels per day (mpbd), he stated, “If we extend the decline in existing fields through 2030 and accept the 2004 scenario by the Energy Information Administration (namely, an increase of global demand by the year 2030 to 122 mbpd) then we need new production that is of the order of 10 new Saudi Arabias[My emphasis]. He cited this as a “doomsday scenario.”

Exacerbating the problem is the fact that “excluding deepwater oilfields, output from 54 of the 65 largest oil producing countries of the world is already in decline.” (In other words Peak Oil has already occurred in those countries.) Aleklett points out that within the next five years five more countries will peak. “That will leave only a few countries, Saudi Arabia, Iraq, Kuwait, United Arab Emirates, Kazakhstan, and Bolivia with the potential to increase oil production.” Since Saudi Arabia (supposedly) has, by far, the largest oil reserves in the world (more on that later), we will continue to be beholden (primarily) to the mid-east for whatever increase in world demand develops; and develop it will, at an ever increasing pace, based on a steadily growing world population, and with China and India fast becoming major oil consuming nations.

Another interesting statistic is the fact that there are 1,730,000 links on Google related to “President Bush + Peak Oil.” However, not a single link can be found where Mr. Bush even utters the phrase Peak Oil. Evidently, at no time has the leader of the free world publicly mentioned, acknowledged, or expressed concern over a topic that some consider a destructive force eminently more dangerous than Iraq’s weapons of mass destruction ever were.

Plug “Dick Cheney + Peak Oil” in to Google and there are a mere 375,000 links listed. In only one set of these links does Mr. Cheney refer to the consequences of Peak Oil, without ever using that term. Remember, he was Chairman of Halliburton, the huge oil services company, so it is not reasonable to believe he is unaware of the concept and the potentially calamitous consequences of Peak Oil.

Although no record exists of him referring directly to Peak Oil, in a speech in London in 1999, while still Chairman of Halliburton, he said: “Producing oil is obviously a self deflating activity.” He proceeded to explain, “For the world as a whole, oil companies are expected to keep finding and developing enough oil to offset our 71 million plus barrels a day of oil depletion [that number has now risen to some 84 million barrels], but also to meet new demand.” While that certainly mimics the fundamentals of the Peak Oil concept, he then does the arithmetic. “By some estimates, there will be an average of two percent annual growth in global oil demand over the years ahead along with conservatively, a three percent natural decline in production from existing reserves. That means by 2010 we would need on the order of an additional fifty million barrels a day.” [My emphasis].

Commenting on Mr. Cheney’s statement, Kjell Aleklett, President of the Association for the Study of Peak Oil (ASPO) writes, “To understand the magnitude of the problem Dick Cheney is addressing, we can compare 50 million barrels a day with the total production coming from the six countries bordering the Persian Gulf (Saudi Arabia, Iran, Iraq, United Arab Emirates, Kuwait, and Qatar), that in 2001 produced [only] 22.4 million barrels a day.” More than doubling oil production in this area is a feat that the Almighty could possibly accomplish, but it is way beyond the capabilities of the Arab oil states.

As further evidence that our political leaders are not ignorant of Peak Oil, a six-page article in the December 26th issue of Fortune focused on the legendary multi-billionaire investor, Richard Rainwater. The article concentrated on his strongly held belief that Peak Oil is a catastrophe in the making. As Fortune describes, “An economic tsunami is about to hit the global economy as the world runs out of oil.” Rainwater’s belief and concern is so intense that his wife has taken to calling him “Dr. Doom.” As a result he has embarked on a crusade to publicize his anxieties. How does that relate to Bush and Cheney’s knowledge of Peak Oil?

Rainwater gained his initial fame and reputation in the 70’s and 80’s when he managed the Bass family money in Ft. Worth. He helped turn the family’s modest $50 million fortune into one worth upward of $5 billion. He proceeded to open his own investment firm in 1986 and Fortune describes how “George W. Bush kept his office within Rainwater’s when he and Rainwater were putting together the Texas Ranger stadium deal.” Rainwater is so obsessively vocal about Peak oil, it is unlikely that he has not expressed his concern to his friend, the President.

As an aside, Fortune cites Rainwater’s hints as to how to make money from the Peak Oil crisis; Rainwater says, “…now, there’s the opportunity to do something based on a shortage of natural resources. Can you make money? Well, Yeah! One easy way is just stay long domestic oil [stocks].” However, he then returns to his obsession and says, “But there’s something more important that just making money. This is the first scenario I’ve seen where I question the survival of mankind[My emphasis].

There is one more compelling reason to believe both President Bush and Dick Cheney are fully aware of Peak Oil and its potentially catastrophic consequences. The original incentive that led to this series of articles on Peak Oil was the recent publication of the book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy by Matt Simmons. There are those in the industry, and unfortunately in the Oval Office in the White House as well, who are termed “oil optimists,” convinced that petroleum will remain an abundant fuel source for decades. They are satisfied that there is a two-word solution that completely offsets the dangers of Peak Oil—those words are, Saudi Arabia.

They believe that there are enough oil reserves in the Saudi sands to more than satisfy current and future demand, and when those supplies diminish, new oil fields will be discovered and exploited thereby servicing global requirements. They have accepted the assurances of Saudi officials at the highest government and industry levels that Saudi Arabian oil fields can keep the world spinning in oil for at least the next 50 years, thus providing adequate time for the consuming nations to prepare for a post petroleum economy. But what if these oil optimists are wrong? What if the claims relating to Saudi oil reserves are wrong or intentionally exaggerated?

Matt Simmons’ new book raises the specter that the oil reserves cited by the Saudis are an illusion, perhaps a deliberate illusion, one that if believed, as voiced by Richard Rainwater, threaten the future existence of mankind. It is not that Mr. Simmons is some far-left liberal kook trying to make a name for himself. In fact, Matt Simmons is a Harvard Business School graduate who, for the past 30 years has been a well-known, highly respected Chairman of an investment bank specializing in the energy industry. More to the point, he has served in consultative positions at the behest of both President Bush and Dick Cheney. And indeed, he may have found, inopportunely for both of them, a “weapon of mass destruction” significantly more threatening than those they originally sought in Iraq.

While some might question my motives in attributing a lack of leadership on the parts of the President and Vice-President, my concern is based, not on politics but on economics. In fact, here is a quote from a mid-January, 2006 op-ed piece in the New York Times by the two-time Pulitzer Prize winner, Tom Friedman: “What’s so disturbing about President Bush and Dick Cheney is that they talk tough about the necessity of invading Iraq, torturing terror suspects and engaging in domestic spying—all to defend our way of life and promote democracy around the globe. But when it comes to what is actually the most important issue in U.S. foreign policy today—making ourselves energy efficient and independent, and environmentally green, they ridicule it as something only liberals, tree huggers and sissies believe is possible or necessary.” Is that why they have chosen to ignore, or at least refuse to acknowledge Peak Oil?

In its January 2nd, 2006 edition, Barron’s, hardly a bastion of Liberal thought, ran a two part series consisting of an interview with Matt Simmons. Next month’s article will describe that, the intensely disturbing discoveries made by Mr. Simmons in his quest for the true nature of oil reserves in Saudi Arabia, and the dramatic consequences of those findings.


At 9:47 AM, Anonymous Anonymous said...

Gold will go way up, maybe to $1,500 an ounce or higher because the dollar will fall for years. The dollar will keep falling and here is why:
The U.S. cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade imbalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still, we cannot sustain a trade deficit of this magnitude. People must understand that when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on those dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) continue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess. Bottom line: Lower, much lower dollar will equal higher inflation and higher GOLD prices. Much higher!


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