Jan 072012
Guest post by Gail Tverberg of Our Finite World
In the United States, we have been working on scaling up wind energy but not getting very far. In 2010, wind energy supplied only 2.3% of electricity purchased.
Figure 1. Wind energy (dark green) is barely visible in a graph of US energy consumption by source. Based on EIA data.
Such slow progress seems strange for a product that seems to have such great promise. It can reduce CO2 emissions. It doesn’t require fuel. It is at least partly US made. The popular view is that it could eventually replace gasoline, but that view is very optimistic because electricity is very different from gasoline, and because of the scalability issue.
In this post, I discuss a few of the obstacles facing wind energy in the United States, and their implications for the expansion of wind energy.
Obstacle 1: Wind energy is dependent on large subsidies.
According to the EIA’s report, Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010, wind energy received subsidies of $4.986 billion from the federal government for Fiscal Year 2010. This amount is equal to approximately half the cost of new wind power installed during that period. State and local subsidies would be in addition. (The US Wind Energy Association shows that 6034 megawatts of new capacity was installed between October 1, 2009 and September 30, 2010, so the subsidy per megawatt was $826,318. This compares to an average cost per megawatt of about $1.4 million, excluding construction and connection costs.)
The wind energy’s largest subsidy, the Production Tax Credit, is set to expire on December 31, 2012, unless Congress acts to extend it, so there is now a big rush to get orders filled before that date. A study by Navigant Consulting forecasts a large drop in wind investment, if the Production Tax Credit is not extended (Figure 2).
Figure 2. Annual Investment in Wind Energy in $ Billion, according to Navigant Consulting.
Needless to say, the US Federal Government is not flush with money for subsidies, so there is the possibility that subsidies will not be renewed or will be cut back.
Obstacle 2: Wind energy is of a lower quality than electricity produced by fossil fuels and by nuclear energy.
Wind blows when it chooses, which is often not when it is needed most. In theory, this problem could be resolved with robust long-distance transmission of electricity and with adequate electrical storage, but in the US, these are not available. This means that even in locations where wind energy makes up a relatively large share of the fuel mix, other types of generations must be available to supply almost the full level of demand, if the wind is not blowing.
As a result, the role of wind energy is fairly limited. What wind energy does is permit electricity generating plants, particularly those fueled by natural gas, to use less fuel. Consequently, the price of wind energy tends to compete with the price of fuel, rather than with the wholesale price of electricity.
Figure 3. Comparison of prices of wind generated electricity with electricity generated by other means, showing that wind energy prices tend to be considerably lower, because of its lower quality. From US Department of Energy report, “Annual Report on U. S. Wind Power Installation, Cost, and Performance Trends: 2007.”
Consequently, without mandated feed-in tariffs, the sales price of wind-generated electricity tends to fall below the wholesale price of other types of electricity (Figure 3). This lower price for wind generated electricity helps explain some of the need for subsidies.
A related issue is the confusion caused by a comparison of the “levelized cost of wind” with the levelized cost of other types of generation, such as is shown in Figure 4 by the US Energy Information Administration.
Figure 4. EIA’s exhibit showing Estimated Levelized Cost of New Electricity Generation Resources, from Annual Energy Outlook 2011.
Because of the lower quality of wind, Figure 4 represents an “apples to oranges” comparison, if one makes the standard comparison of amounts in the last column. Instead, since wind energy only replaces fuel, what needs to be compared is
- “Total System Levelized Cost” for wind relative to
- “Variable O&M (including fuel)” for other sources of production
In Figure 4, the Total System Levelized Cost of Wind is 97.0, and of Wind-Offshore is 243.2. These might be compared with the Variable O&M (including fuel) of coal (Advanced coal is 25.7) or of natural gas (Conventional Combined Cycle is 45.6), for example. On this basis, wind energy comes out badly, and is one reason it requires such high subsides.
Another related issue is that differences in fuel quality can lead to misleading EROEI indications. At least some petroleum is used in manufacturing, transporting, installing, and maintaining wind turbines, but the energy that is provided as an output is mostly replacing natural gas, and perhaps some coal. Coal and natural gas are much cheaper (and more abundant) than oil, so even a small input/output substitution in this direction can quickly hurt the economics of the process.
Obstacle 3: Natural gas is now very cheap in the US, and there is a huge amount of natural gas generating capacity already built.
Since wind energy tends to compete with the cost of fossil fuels used to produce electricity (mostly natural gas and coal in the US), a low price of natural gas is a problem because even greater subsidies will be required for wind energy to be competitive.
Furthermore, natural gas generating capacity is no issue. The current natural gas average gas capacity factor is 28%, suggesting that US natural gas generation could be tripled, without requiring an increase in generating capacity. This excess generating capacity was built partly because natural gas is good for load balancing (and electricity prices tend to be high to meet temporary demand spikes), and partly to meet an expected rise in electricity demand that never materialized because of recession in recent years.
Obstacle 4: In the US, we do not have an electrical grid that can provide very much long distance transport of electricity, and there are several reasons why changing this situation is very difficult.
Growth in wind energy requires very good long distance transmission capability, partly because wind resources are often located a long way from prospective users, and partly because the variable nature of wind can be “evened out” if wind energy is shared over a large area. Unfortunately, the US electrical system has grown up under a system where each locality has been expected to generate its own electricity. Under such a system, electrical transmission from city to city was originally designed to handle only occasional emergencies, and thus is very limited.
The way the US electric transmission system was set up produces many anomalies. Electrical rates vary greatly from state to state. We needlessly burn large amounts of oil transporting coal to where it will be burned for electricity, rather than burning it near where the coal is mined, and then transporting the electric power over transmission lines. Nuclear-fueled power plants are sometimes located near large cities.
The problem is very difficult to fix for many reasons. Any improvement in electric transmission would tend to even out electricity rates, but this would be to the detriment of customers who currently have low electric rates. To the extent that new transmission costs more, and these higher costs are charged back in electric rates, such a change could result in higher electricity costs for more than half of the population–something most politicians would find unacceptable.
If better transmission were readily available and free, no one would want to build a power plant in their back yard, making it even harder to site new power plants than it is now.
Another issue is that a good mechanism for paying for the installation and maintenance of new long distance transmission lines has not been established. Under current procedures, a determination must be made as to which electric generating companies will benefit from new transmission lines, and the costs allocated among the beneficiaries. The government in the past has not funded long distance electrical transmission. No one really “owns” the long distance lines.
The only partial fix I can see would be to create a separate organization to build and maintain a few new long-distance transmission lines. Wind energy and other users seeking to use these lines would be charged for the use of these lines, similar to a toll road. The likely result would be more coal fired-power plants being built near these lines, because wind usage by itself could not support these lines. Even this arrangement would likely require a change to current laws. The net effect might be more CO2, rather than less.
The cost of long distance electric transmission is likely to be fairly high–at least several cents per kWh, for wind energy transported over long distances. Over time, the price can be expected to rise as the price of oil rises. Some maintenance may become very difficult, such as that currently done by helicopters in remote locations.
Obstacle 5: A high proportion of funding for wind energy is up front.
Oil, coal, and gas all started out as fairly high EROEI investments, and much of the investment took place as the fuel was extracted. In such a situation, the investments threw off a high level of profit which could be used to fund further investment.
Fossil fuels are gradually shifting away from this model, with higher up front investment, and lower profit available to fund further investment. Wind turbines represent the extreme end of this continuum with most of the investment up front, and the return trailing many years behind.
As a result of this shift in timing, it is becoming more difficult to fund projects with huge up-front investment. In the “good old days,” we had the low price of fossil fuels which made other investments easier to afford. We also could count on a being always able to add more debt, but we are reaching limits on sustainable debt. I wrote two posts on The Link Between Peak Oil and Peak Debt (Part 1 and Part 2). More recently, I talked about how Net Savings is dropping dramatically in the US, so that non-debt sources of funding are also disappearing.
Figure 5. US Savings and Investment Ratios, based on US Bureau of Economic Analysis Data.
The net of all of this is that if we are reaching limits with respect to finite resources, it is going to be increasingly difficult to fund projects that require large up-front investment and provide a return later. We will likely have to give up some investments we really need (such as replacing worn out roads, pipelines, and school buildings) in order to ramp up investments in projects that require large front-end funding, like wind turbines.
Obstacle 6: Adding wind energy to the electric grid adds complexity which may be difficult to manage with declining resources.
The job of balancing supply with electrical demand and keeping all sources of electricity “in synch” becomes more difficult, as more variable sources of supply come on line. While it is theoretically possible to find technical solutions to these issues, it is not clear that we will in practice.
Furthermore, changes related to the Smart Grid will also add to the stress to the system, since the Smart Grid is designed to operate the grid at closer to its theoretical capacity. These enhancements add efficiency to the system, but reduce resilience.
The grid with the new enhancements will work until at some point it doesn’t work–for example, an unplanned event causes a major failure within the system, or a needed system upgrade is too expensive to afford, or a replacement part from overseas is unavailable. Hopefully, failures of this type will be temporary and local, but if resources are limited, the time may come when the high cost of maintaining the system becomes unsustainable.
Further Thoughts about Wind Energy
I have not been able to touch on move than a few issues in this post.
One of the big issues with wind is that its benefits have been oversold. If we are already having trouble with the electrical grid not being able to accept more wind energy in popular wind-generating areas when wind energy constitutes only 2.3% of total electricity supply, then wind energy is going to be difficult to scale up quickly. The issues I point out in this article suggest that the cost problem is still large, and the fixes needed to add long-distance transmission are likely to make the cost problem even worse.
Many people assume wind can do everything–replace gasoline, run our cars and trucks, and allow us to continue business as usual, without worries about CO2 or about oil depleting. We are a long way from making a dream like this happen. We would need advances in electric vehicles and trillions of dollars of investment to even partially make a dream like this happen.
Some people hope that wind energy can somehow allow business as usual to continue almost indefinitely, after oil and gas deplete, and after we decide to stop using coal. I can’t see this happening. We need fossil fuels to make wind energy, and we need fossil fuels to transport wind turbines to the locations where they are to be installed. We also need fossil fuels to repair wind turbines and to maintain transmission lines.
I expect that at some point grid problems will become overwhelming, so at least the long-distance portion of the grid will be lost. It is possible that adding more wind energy to the grid will make that date come sooner, rather than later, because of the complexity issues I mentioned. Unless the limiting factor on the life of the electric grid is the amount of coal and natural gas available, and wind energy somehow delays running out of these, I have a hard time seeing how wind energy will make the electric grid last longer.
There are so many obstacles for wind to overcome in the US that I am not sure that we should even try to push for higher wind penetration levels. The only exception might be in areas where wind energy is cheap to produce and the grid can readily accept the electricity.
Since the world is finite, there is a good chance that at some point we are going to have to get along with less electricity as well as less oil. Instead of focusing on delaying the inevitable, perhaps we should start thinking about preparing people for simpler lives that use less energy of all types. Such an approach might solve multiple problems at once–too much CO2, too little oil, and too little capital to tackle all the problems that need to be tackled at once.
2 Degrees: Ocean Life in Danger (Note: without contrails from air traffic, the world would already be about 2 degrees warmer)
3 Degrees: Heat Wave Deaths
4 Degrees: Great Cities Wash Away
5 Degrees: Civilization Collapses
6 Degrees: Mass Extinction
Dec 302011
A few regular readers have asked for our list of ‘must read’ books on finance, economics and investing for 2012. The following list includes books I have read (and want to re-read) and books that have been recommended to me by respected colleagues. I intend to read all 12 this year.
If you intend to purchase any of the following, please use the links below. A small fraction of the proceeds will be re-directed to Plan B Economics, helping us keep the analysts well-caffeinated.
1. The End of Growth: Adapting to Our New Economic Reality (Richard Heinberg)
Description:
Economists insist that recovery is at hand, yet unemployment remains high, real estate values continue to sink, and governments stagger under record deficits. The End of Growth proposes a startling diagnosis: humanity has reached a fundamental turning point in its economic history. The expansionary trajectory of industrial civilization is colliding with non-negotiable natural limits.
Richard Heinberg’s latest landmark work goes to the heart of the ongoing financial crisis, explaining how and why it occurred, and what we must do to avert the worst potential outcomes. Written in an engaging, highly readable style, it shows why growth is being blocked by three factors:
- Resource depletion
- Environmental impacts
- Crushing levels of debt
2. Currency Wars: The Making of the Next Global Crisis (Jim Rickards)
Description:
In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.
Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries’ stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.
3. Extreme Money: Masters of the Universe and the Cult of Risk (Satyajit Das)
Description:
The human race created money and finance: then, our inventions recreated us. In Extreme Money, best-selling author and global finance expert Satyajit Das tells how this happened and what it means. Das reveals the spectacular, dangerous money games that are generating increasingly massive bubbles of fake growth, prosperity, and wealth–while endangering the jobs, possessions, and futures of virtually everyone outside finance.
“…virtually in a category of its own — part history, part book of financial quotations, part cautionary tale, part textbook. It contains some of the clearest charts about risk transfer you will find anywhere. …Others have laid out the dire consequences of financialisation (“the conversion of everything into monetary form”, in Das’s phrase), but few have done it with a wider or more entertaining range of references…[Extreme Money] does… reach an important, if worrying, conclusion: financialisation may be too deep-rooted to be torn out. As Das puts it — characteristically borrowing a line from a movie, Inception — “the hardest virus to kill is an idea”.
-Andrew Hill “Eclectic Guide to the Excesses of the Crisis” Financial Times (August 17, 2011)
Extreme Money named to the longlist for the 2011 FT and Goldman Sachs Business Book of the Year award.
4. This Time Is Different: Eight Centuries of Financial Folly (Carmen Reinhart and Kenneth Rogoff)
Description:
Throughout history, rich and poor countries alike have been lending, borrowing, crashing–and recovering–their way through an extraordinary range of financial crises. Each time, the experts have chimed, “this time is different”–claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes–from medieval currency debasements to today’s subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much–or how little–we have learned.
Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts–as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.
An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.
5. When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany (Adam Fergusson)
Description:
When Money Dies is the classic history of what happens when a nation’s currency depreciates beyond recovery. In 1923, with its currency effectively worthless (the exchange rate in December of that year was one dollar to 4,200,000,000,000 marks), the German republic was all but reduced to a barter economy. Expensive cigars, artworks, and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal; and a bottle of paraffin for a silk shirt. People watched helplessly as their life savings disappeared and their loved ones starved. Germany’s finances descended into chaos, with severe social unrest in its wake.
Money may no longer be physically printed and distributed in the voluminous quantities of 1923. However, “quantitative easing,” that modern euphemism for surreptitious deficit financing in an electronic era, can no less become an assault on monetary discipline. Whatever the reason for a country’s deficit—necessity or profligacy, unwillingness to tax or blindness to expenditure—it is beguiling to suppose that if the day of reckoning is postponed economic recovery will come in time to prevent higher unemployment or deeper recession. What if it does not? Germany in 1923 provides a vivid, compelling, sobering moral tale.
6. The Modern Survival Manual: Surviving the Economic Collapse (Fernando Ferfal Aguirre)
Description:
My book is a Modern Survival Manual based on first hand experience of the 2001 Economic Collapse in Argentina. In it you will find a variety of subjects that I consider essential if a person wants to be prepared for tougher times: -How to prepare your family, yourself, your home and your vehicle -How to prepare your finances so that you don’t suffer what millions in my country went through -How to prepare your supplies for food shortages and power failures -How to correctly fight with a chair, gun, knife, pen or choke with your bare hands if required -Most important, how to reach a good awareness level so that you can avoid having to do all that These are just a few examples of what you will find in this book. It’s about Attitude, and being a more capable person and get the politically correct wimp out of your system completely.
7. The Age of Deleveraging, Updated Edition: Investment Strategies for a Decade of Slow Growth and Deflation (Gary Shilling)
Description:
Top economist Gary Shilling shows you how to prosper in the slow-growing and deflationary times that lie ahead
While many investors fear a rapid rise in inflation, author Gary Shilling, an award-winning economic forecaster, argues that the global economy is going through a long period of de-leveraging and weak growth, which makes deflation far more likely and a far greater threat to investors than inflation. Shilling explains in clear language and compelling logic why the world economy will struggle for several more years and what investors can do to protect and grow their wealth in the difficult times ahead. The investment strategies that worked for last 25 years will not work in the next 10 years. Shilling advises readers to avoid broad exposure to stocks, real estate, and commodities and to focus on high-quality bonds, high-dividend stocks, and consumer staple and food stocks.
- Written by one of today’s best forecasters of economic trends-twice voted by Institutional Investor as Wall Street’s top economist
- Clearly explains what to invest in, what to avoid, and how to cope with a deflationary, slow-growth economy
- Demonstrates how Shilling has been consistently right about major economic trends since he began forecasting in the early 1980s
8. The Crash Course: The Unsustainable Future Of Our Economy, Energy, And Environment (Chris Martenson)
Description:
The next twenty years will be completely unlike the last twenty years.
The world is in economic crisis, and there are no easy fixes to our predicament. Unsustainable trends in the economy, energy, and the environment have finally caught up with us and are converging on a very narrow window of time—the “Twenty-Teens.” The Crash Course presents our predicament and illuminates the path ahead, so you can face the coming disruptions and thrive–without fearing the future or retreating into denial. In this book you will find solid facts and grounded reasoning presented in a calm, positive, non-partisan manner.
Our money system places impossible demands upon a finite world. Exponentially rising levels of debt, based on assumptions of future economic growth to fund repayment, will shudder to a halt and then reverse. Unfortunately, our financial system does not operate in reverse. The consequences of massive deleveraging will be severe.
Oil is essential for economic growth. The reality of dwindling oil supplies is now internationally recognized, yet virtually no developed nations have a Plan B. The economic risks to individuals, companies, and countries are varied and enormous. Best-case, living standards will drop steadily worldwide. Worst-case, systemic financial crises will toss the world into jarring chaos.
This book is written for those who are motivated to learn about the root causes of our predicaments, protect themselves and their families, mitigate risks as much as possible, and control what effects they can. With challenge comes opportunity, and The Crash Course offers a positive vision for how to reshape our lives to be more balanced, resilient, and sustainable.
9. Endgame: The End of the Debt Supercycle and How It Changes Everything (John Mauldin)
Description:
Greece isn’t the only country drowning in debt. The Debt Supercycle—when the easily managed, decades-long growth of debt results in a massive sovereign debt and credit crisis—is affecting developed countries around the world, including the United States. For these countries, there are only two options, and neither is good—restructure the debt or reduce it through austerity measures. Endgame details the Debt Supercycle and the sovereign debt crisis, and shows that, while there are no good choices, the worst choice would be to ignore the deleveraging resulting from the credit crisis. The book:
- Reveals why the world economy is in for an extended period of sluggish growth, high unemployment, and volatile markets punctuated by persistent recessions
- Reviews global markets, trends in population, government policies, and currencies
Around the world, countries are faced with difficult choices. Endgame provides a framework for making those choices.
10. Unexpected Returns: Understanding Secular Stock Market Cycles (Ed Easterling)
Description:
Why is the stock market acting differently in the 2000s than in the 1980s and 1990s?
Before you read any how-to investment books or seek financial advice, read Unexpected Returns, the essential resource for investors and investment professionals who want to understand how and why the financial markets are not the same now as they were in the 1980s and 1990s. In addition to explaining the fundamentals, this book takes you on a graphic journey through the seasons of the market, tying together economics and finance to explain the stock market’s cycles. Using comprehensive full-color charts and graphs, it offers an in-depth exploration of what has changed over the past five years – and what you can do about it to avoid disappointment with your investments. This unique combination of investment science and investment art will enable you to differentiate between irrational hope and a rational view of the current financial markets. Based on years of meticulous research, it provides the sensible conclusions that will drive your future investment choices and give you the confidence to rely on your investment outlook, whatever your financial strategy.
11. Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned? (Steve Keen)
Description:
Debunking Economics – Revised and Expanded Edition, now including a downloadable supplement for courses, exposes what many non-economists may have suspected and a minority of economists have long known: that economic theory is not only unpalatable, but also plain wrong. When the original Debunking Economics was published back in 2001, the market economy seemed invincible, and conventional “neoclassical” economic theory basked in the limelight. Steve Keen argued that economists deserved none of the credit for the economy’s performance, and “The false confidence it has engendered in the stability of the market economy has encouraged policy-makers to dismantle some of the institutions which initially evolved to try to keep its instability within limits.” That instability exploded with the devastating financial crisis of 2007, and now haunts the global economy with the prospect of another Depression. In this expanded and updated new edition, Keen builds on his scathing critique of conventional economic theory while explaining what mainstream economists cannot: why the crisis occurred, why it is proving to be intractable, and what needs to be done to end it. Essential for anyone who has ever doubted the advice or reasoning of economists, Debunking Economics – Revised and Expanded Edition provides a signpost to a better future.
12. Debt: The First 5,000 Years (David Graeber)
Description:
Before there was money, there was debt
Every economics textbook says the same thing: Money was invented to replace onerous and complicated barter systems—to relieve ancient people from having to haul their goods to market. The problem with this version of history? There’s not a shred of evidence to support it.
Here anthropologist David Graeber presents a stunning reversal of conventional wisdom. He shows that for more than 5,000 years, since the beginnings of the first agrarian empires, humans have used elaborate credit systems to buy and sell goods—that is, long before the invention of coins or cash. It is in this era, Graeber argues, that we also first encounter a society divided into debtors and creditors.
Graeber shows that arguments about debt and debt forgiveness have been at the center of political debates from Italy to China, as well as sparking innumerable insurrections. He also brilliantly demonstrates that the language of the ancient works of law and religion (words like “guilt,” “sin,” and “redemption”) derive in large part from ancient debates about debt, and shape even our most basic ideas of right and wrong. We are still fighting these battles today without knowing it.
Debt: The First 5,000 Years is a fascinating chronicle of this little known history—as well as how it has defined human history, and what it means for the credit crisis of the present day and the future of our economy.
Iran has started war games to show the world it holds all the cards. The ace up its sleeve: a rehearsed mock closure of Strait of Hormuz, the only way in and out of the Persian Gulf.
At its narrowest point, the Strait is 34 miles wide. Every day about 13 tankers travel through the strait carrying 15.5 million barrels of oil. This represents about 33% of seaborne oil shipments and 17% of all global shipments. Because the Strait concentrates a huge portion of global oil trade in a very narrow area, it is critical that the shipping lanes remain open. According to Stratfor: “The importance of this waterway to both American military and economic interests is difficult to overstate.” For this reason, the Strait is routinely patrolled by the US Navy’s 5th Fleet. By displaying its ability to close these lanes under the nose of the US Navy, Iran is telling the world it possesses a disproportionate amount of power.
For decades, the West has maintained an antagonistic view of Iran, especially as it pursues its own nuclear programs. And Iran has repeatedly warned that acting on this view would be foolish. An attack on Iran would undoubtedly provoke it to hit the world economy’s Achilles Heel – the Strait of Hormuz. According to some, this would quickly send oil prices soaring. “One bomb on Iran and oil prices could shoot up to $300 or even $500 a barrel,” according to UPI correspondent Arnaud de Borchgrave.
How willing is Iran to block the Strait? “It would almost certainly lose far more than it gained from such a ‘war,’ but nations often fail to act as rational bargainers in a crisis, particularly if attacked or if their regimes are threatened,” Anthony Cordesman of the Center for Strategic & International Studies in Washington.
Frankly, I don’t have much faith in Iran’s rationality. Iran’s view on the exercise sounds like a teenage boy talking smack about his teachers behind their back:
“Soon we will hold military maneuvers on how to close the Strait of Hormuz. If the world wants to make the region insecure, we will make the world insecure.”
In contrast, I believe those leading the American military are quite deliberate in their actions. Their purpose might be clouded by political rhetoric, but most signs suggest economic and military hegemony is the goal.
Hegemony isn’t free. While the security premium added to oil during the Iraq crusade may be long-forgotten, war in the Middle East would cause the average American to suffer. Gas prices could triple, but that’s just the start. The general rise in systemic risk and risk aversion could compound effects from rising energy prices. Moreover, the cost of such a war could tip America, with a debt-to-GDP ratio of >100%, into fiscal oblivion – especially if China and Russia got involved. Iranian support from China or Russia would mark the beginning of WWIII.
Some argue that this cost is less than the cost of a nuclear Iran. And perhaps the gains from an American-friendly regime change would provide dividends in perpetuity. After-all, that’s why we went to Iraq, isn’t it?
Let’s look at the numbers: According to the Congressional Budget Office, the cost of the Iraq and Afghanistan wars will total $2.4 trillion, or $6300 per US citizen. Joseph Stiglitz, former chief economist of the World Bank and winner of the Nobel Prize in Economics argued “the figure we arrive at is more than $3 trillion. Our calculations are based on conservative assumptions…Needless to say, this number represents the cost only to the United States. It does not reflect the enormous cost to the rest of the world, or to Iraq.” Other estimates provided by Browns University suggest the cost of the Iraq/Afghanistan war could reach $4 trillion.
Was Iraq a long-term investment made by men with the foresight to see the benefits of free-flowing Iraqi resources? Or was Iraq a desperate attempt to by a dying empire to maintain access to its economic heroin – oil? Yes and yes. But I still question whether the gains outweigh the costs.
Needless to say, a war with Iran is a terrible idea. Unfortunately, as war games staging the potential start of WWIII (i.e. Iranian closure of the Strait of Hormuz) play out within miles of the US 5th Fleet, a simple miscalculation could explode into the very confrontation for which Iran is preparing.
Guest post by Kurt Cobb of Resource Insights
Those who are incompetent require our correction. The incompetent need to know how to succeed. Maybe this takes education. Maybe it takes better judgement. Maybe it takes a thoroughgoing review of their errors. While the incompetent may elicit our scorn, they do not merit our moral indignation.
That is reserved for the unscrupulous. The unscrupulous are sometimes incompetent. But often they are quite competent at taking our money under false pretenses.
What the recent MF Global bankruptcy–the eighth largest in U.S. history–tells us is that the world’s financial system may be moving headlong into a collision of incompetence with unscrupulousness. (Full disclosure: I had a small account with MF Global and so have had a ringside seat, so to speak, in the bankruptcy proceedings.) I do not mean to say that before now there was no unscrupulous behavior in the financial system. What I mean to say is that it does not matter how competent someone believes a firm is at investing or handling money; if the firm is perceived as dishonest, that’s it!
So far the revival of stock and commodity markets around the globe via enormously stimulative budget and monetary policy has assured most people with invested money that the authorities are, in fact, competent to manage downturns, even severe ones. Markets may not be back to their previous highs, but they are a far cry from the devastation of late 2008 and early 2009.
Now the competence of those authorities is being questioned as Europe appears mired in a long battle to save the euro as the currency of its 17-country Eurozone. The question is: Should the average investor–the buy-and-hold investor–stick it out once more and trust in the authorities to make things all better? That is a monumental question.
But soon that question will be competing with an even uglier one? Can I count on the institutions which hold my money and investments–primarily brokerages and banks–to deal honestly and fairly with me? Can I count of them not to steal my money?
As the questions of competence and trust converge, the financial system seems increasingly imperilled. If authorities do everything right, but investors believe they can no longer trust their brokers and banks not to steal their assets, the competence of the authorities in monetary and fiscal policy will simply not matter. And, if investors should simultaneously lose faith in the ability of authorities to handle the roiling financial crisis in Europe and lose trust in their brokers and banks to safeguard their money, we should be prepared for a wipeout that will make 2008 look like a day in the park.
This is the scenario lurking behind the MF Global collapse. Clearly, MF Global was incompetent at managing its risks including the risk that its lenders such as banks and hedge funds would withdraw funding for its positions. (Firms such as MF Global borrow money short-term to buy long-term assets and profit from the difference between the interest payments on short-term funding and the stream of revenues from long-term assets. The short-term funding must be periodically renewed. If this seems risky, it is.) The lenders stopped lending not necessarily because they believed MF Global to be unscrupulous, but because they believed the firm was no longer competent to manage the risks associated with its portfolio of highly leveraged investments. Fearing losses on their loans, they didn’t roll over their financing.
Then came act two. MF Global misappropriated protected customer funds to support its precarious positions, especially those in European government bonds which seemed increasingly dicey this fall. Perhaps the firm felt it would be able to pay customers back once the fuss died down, and no one would be the wiser. But the fact that MF Global managers carefully covered their tracks in making the transfers tells us what we need to know. They believed what they were doing was illegal.
Here is the problem that regulators face. Prior to the MF Global collapse they had been able to say that no holder of a regulated futures account had ever suffered a loss of deposits (collateral or cash). Naturally, people lose money on futures positions every day. But that’s a far cry from having money which has been deposited to support those positions simply stolen. That makes it impossible to collect money even if you win your bets, since the money that is supposed to be transferred to you from the people on the losing side of the trade just isn’t there.
Futures accounts are not insured for such losses for the simple reason that the regulators wisely decreed that customer money and firm money have to be separated, and customer money simply cannot be used for the firm’s own trading without customer consent. There was no consent, and there would have had to have been collateral posted or contractual obligations agreed to had there been any consent.
Worse still, the CME Group, owner of many U.S. futures exchanges, was the auditor for MF Global and thereby responsible for making sure customer money was properly segregated and actually in the right accounts every day. One would think that the owner of the exchanges would have a special interest in making sure one of the world’s largest futures brokerages–with which the exchanges do business every day in huge volume–is handling customer money properly.
The result of the CME’s poor supervision was a huge seize-up in futures trading as a significant portion of the world’s largest players in the futures markets found their money frozen, waiting for someone to sort out the mess. Nearly six weeks after the collapse customers are only now getting a portion of their cash back, around two-thirds of it. The rest will have to wait for a claims process, and there is currently no guarantee that the remaining third will be paid back.
Now, if you are a futures trader and especially if you trade on behalf of clients, would you want to continue to trust the current U.S. regulatory system to safeguard your money? Why not go to say, Canada, where regulators appear to take their jobs more seriously and trade there? After all, Canadian customers of MF Global didn’t lose a penny.
That’s what the domestic futures exchanges and brokerage firms are facing. A gradual and perhaps persistent loss of business to someplace where traders feel assured about the safety of their funds. And, many small traders are simply giving up trading futures at all, believing the regulatory authorities are incompetent and the brokerages too crooked to deal with.
Now, I’m imagining such an outlook migrating to people holding stocks, bonds, and mutual funds at brokerages and mutual fund companies. I’m even imagining that outlook infecting regular checking and savings account holders at banks. It may already be happening in Europe in countries such as Italy and Greece where wealthy people seem to be shifting their money to safer banks in Germany or even outside of the Eurozone altogether.
These types of fears have a way of taking on a life of their own and spreading all of a sudden across the globe. I’ve mentioned before that Nicole Foss, writer for the financial commentary site The Automatic Earth, has said that liquidity and confidence are the same thing. If I lose confidence that my investments and cash in brokerage accounts and bank accounts are safe for whatever reason, then I will sell my holdings and withdraw my funds moving them to where I think they will be safe. If enough people do this, liquidity dries up as everyone heads for the exits at the same time. There are not nearly enough buyers to handle the sell orders in various markets. And, if people withdraw money from banks, the banks must quickly find some other source of liquidity than customer deposits. Such liquidity problems are already appearing at banks in Europe. And through it all, it will not matter whether investor fears are actually justified.
As the prosecutions of financial malfeasance rise, as the revelations of double dealing and outright theft abound, as the ability of European, American and Asian authorities to calm markets is eroded, the intersection of incompetence and unscrupulousness is poised to fling the global financial system into the dark unknown. These kinds of complete meltdowns have occurred in individual countries with disastrous results; Argentina comes to mind. But a grand failure of this sort on a global scale was only really hinted at in 2008. That’s how bad it could be next time.
Kurt Cobb is the author of the peak-oil-themed thriller, Prelude, and a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.
Dec 242011
Guest post by Gail Tverberg of Our Finite World
The world has many ideas for solving our energy shortfall, but they all seem to involve investment:
- Drill for more oil and gas;
- Develop alternative energy sources;
- Build more efficient gas-powered cars or electric cars;
- Fix homes and offices so they are more energy efficient.
I thought I would check through government data to see if we really have a chance of being able to invest enough money to solve our problems.
What I found was more than a little disturbing. United States’ “Net Savings,” as a percentage of Gross National Income has dropped greatly and is now below zero. This is a situation one website described as implying an “unsustainable path”.
Figure 1. US Net Savings as a Percentage of Gross National Income, based on Bureau of Economic Analysis Data (Table 5.1)
Back in the 1950s and 1960s, when the Interstate Expressway System was built and the electric grid that we are still using today was built, Net Savings averaged close to 10% of Gross National Income. It has dropped since then, and is now negative.
Let me explain “Net Savings” by showing a second graph.
Figure 2. US Savings and Investment Ratios, based on US Bureau of Economic Analysis Data.
In the United States, investment is made in many kinds of long-lasting goods, including everything from buildings, to roads, to oil and gas drilling, to pipelines, to wind turbines, to equipment for factories. Gross Domestic Investment (blue) is the total of such investment made in a given year, shown as a percentage of Gross National Income.
Some of this Gross Domestic Investment comes from an increase in debt; some of it comes from savings. Gross Savings (red) is the portion that comes from savings (foregone consumption), rather than an increase in debt.
Each year, some long-term assets wear out or are destroyed. Net Savings (green) is what is left, after subtracting the portion that relates to these assets which are lost (“Consumption of Fixed Assets”). So basically Net Savings is the amount of investment during a given year in long-lasting goods that was not financed by an increase in debt, and is not simply a replacement for something that has worn out. If Net Savings is negative (as it is today), we are not even replacing things that wear out, except through the use of more borrowed money.
Quarterly data shows that Net Savings is still negative in 2011.
Figure 3. US Net Savings as a Percentage of Gross National Income on a Quarterly Basis, based on BEA Data.
When Does High Net Savings Occur?
High Net Savings occurs when companies in general are quite profitable–in other words, when invested capital can be expected to yield a high rate of return. In such an environment, most companies will be earning enough profit that they can invest in additional plant and equipment, if desired. In such an environment, real wages are likely to rise. Governments will have little difficulty obtaining enough taxes for schools and roads, and other governmental investment.
The term “bankable project” is sometimes used to describe a project with an expected high rate of return, since this is something that a bank might be willing to lend money on, if asked. An economy with high Net Savings will have many bankable projects.
Why would Net Savings Decline?
I can think of four reasons for the decline:
1. Declining EROI. Much of the infrastructure of the United States was built in the day when oil was cheap because the Energy Return on Energy Invested (EROI) was very high. Over time, EROI has dropped, and as a result, the price of oil has risen. When the price of oil was inexpensive, new infrastructure could be added cheaply. Oil and gas companies made good returns, even with low oil prices. Now oil costs have risen but wages have not risen correspondingly, creating a mis-match. With the relatively lower wages now, it is harder for workers to afford oil-based products and goods manufacturers make.
2. Human Labor Has Been Mostly Replaced. At one point, it was possible to create substantial efficiency gains simply by replacing human labor by fossil fuel labor. For example, a ditch digger could be replaced by a machine that dug ditches, and the cost of digging ditches would go down quickly, creating a profit for the entrepreneur buying the machines and the company making the ditch digging machines. The biggest opportunities for efficiency gains have already been taken.
3. Decline in Protectionism / Rise of World Market. In the early days, domestic industries were protected with tariffs. As tariffs were lifted and world trade increased, there was increased competition from areas with lower wages. Capital was attracted to parts of the world where returns on capital appeared to be better, leading to a loss of investment in the US.
4. Limits to Growth. As we reach Limits to Growth (of the type described in the 1972 book by that name), completing claims for limited resources can be expected to raise costs for basic materials relative to wages. As a result, bankable investment projects can be expected to become less numerous. Herman Daly talks about a lack of bankable projects, not only in the US, but around the world, in this recent post. In his view, the low returns on projects today may be related to ecological limits to growth.
Will There be Enough Funds for the Investments that will be Required to Solve our Energy Shortfall?
It is difficult to see that there will be enough funds available for such investment.
At this point, we need increasing debt just to stay even in terms of replacing infrastructure. We cannot expect ever rising debt to continue, however. Instead, we should expect reduced debt, as I described in my post The Link Between Peak Oil and Peak Debt – Part 1. Private debt is already declining and is under further pressure, because of European banking problems and Basel III rules reducing the amounts European banks are able to lend. The US Government keeps increasing its debt level, but this continued growth in debt is unsustainable, and is the reason behind threatened governmental shut-downs.
With reduced debt levels in the future, Gross Domestic Investment will drop below Gross Savings in Figure 2, above, leaving even a smaller amount of funds available for investment than we have today. We may very well, in the aggregate, reach the point where we are not able to maintain current infrastructure with the funds that are available for investment. This means that will need to make choices on which things we maintain–schools or roads or oil distribution pipelines or electric grid or our housing stock. If we suddenly want to spend a lot more on new oil and gas drilling, or on an upgraded electrical grid and more wind turbines, this would seem to reduce funds available for investment in other things, which are also quite necessary.
If we think of investment as requiring the use of resources such as oil, steel, copper, and fresh water, it would stand to reason that there is an upper limit on how much we can invest each year. If we are in fact reaching “Limits to Growth,” or even “Peak Oil,” the total amount of these resources available in world markets will be declining. Even if the amount of resources extracted each year does not decline, but stays close to flat, the share of these resources that the US is able to obtain and use for infrastructure building is likely to decline, because of more-rapid growth of emerging market nations.
The Way Forward
The only way around this difficulty that I can see is adding high EROI, quick payback, energy projects such as oil wells from the 1930s. Unfortunately, there aren’t any of these left (and of course, they have environmental issues as well).
We have deluded ourselves into thinking that projects that require government subsidies and that theoretically will produce an adequate return over a long period (20 to 60 years) are an acceptable way of replacing high EROI, fast payback projects. This might be true, if we still lived in a world in which fossil fuels would provide enough of a subsidy to the system that we could live without favorable cash flow returns from other investments.
The problem is that now, even fossil fuel investments require a lot of up front funding (think oil sands extraction in Canada, and fracking of oil and gas wells in the US), and don’t necessarily have all that good a long-term return, regardless. This is especially the case if the government needs to take an increasingly large share of this return, in order to fund its infrastructure requirements.
And increased debt is less and less of a solution.
Somehow, we need to be looking at the overall picture. How can we get enough profitable cash flow to get the cash we need to buy the resources needed to maintain essential parts of infrastructure? If we are looking at energy-related investments, what do they really provide in terms of cash flow? They may supposedly have a high EROI, if viewed over a long enough period, but this in itself is not all that helpful, if cash flow is not positive in a fairly short time-period–probably seven years or less.
My expectation is that the majority of energy investments will be terrible in terms of cash flow, and thus make our “Net Savings” (and Gross Domestic Investment) even lower over time. Installation of wind turbines and solar panels is likely to fail in terms of providing quick cash returns.
In fact, anything that requires a subsidy is likely to have serious cash flow issues. But even new nuclear power plants and new coal-fired power plants will have such issues. Adding scrubbers to coal-fired power plants without them is a great idea from an environmental point of view, but further adds to the need for additional infrastructure investment, without ever generating additional cash.
Perhaps we need to be figuring out which infrastructure investments we can eliminate, that won’t bring down the whole system. Which roads do we turn from asphalt to gravel? Can we eliminate purchase of military jets? Do we stop building and upgrading schools and universities? Do we stop building new homes and office parks?
I will admit I do not fully understand this whole issue. If we could suddenly convince the world that US has more opportunities for profitable investments than anywhere else in the world, theoretically our problem could be solved. But I don’t see this happening. Some have claimed that the recent improvements in oil and gas drilling make the US a more attractive place for investment, but I am doubtful that this is a true solution. Many of the assessments seem to be based on very optimistic estimates of future oil and gas production from “fracked” wells. And the amount of the effect is likely small.
I am afraid that the lack of cash flow funding for investment in infrastructure is what will eventually bring the system down. This is not an issue that researchers have looked at much, to my knowledge. This connection has the potential to pull the whole system down quite quickly–I would guess in 20 years or less.
Perhaps we need to be thinking more about what infrastructure investments can truly last beyond the system itself. The names “Renewables” were given to our current high-tech wind turbines and solar PV to give us the impression that they can last beyond the system themselves, but I am doubtful that this is really the case, since they depend on the availability of the electric grid and other support systems. Perhaps we need to be focusing more on lower tech applications that can be repaired with local materials and will truly provide lasting benefit.
2012. Super Rich keep spending billions to control Washington
2012. Super Rich solidifies absolute power over our political system
2013. Global population bubble exploding, rapidly wasting resources
2014. Pentagon’s global commodity wars accelerate toward 2020 peak
2015. Gilded Age globalization explodes America’s Global Empire
2016. Reaganomics capitalism self-destructs, crashes, bank bankruptcies
2017. Class war and revolution: Rich class loses big, surrenders
2018. The Fed and Wall Street banks collapse, Glass-Steagall reinstated
2019. Global commodity wars spread, killing millions, wasting trillions
2020. America’s first woman president, patriarchal dominance is dead
Dec 182011
This is a must read essay by Guy McPherson from Nature Bats Last:
Is terminating the industrial economy a moral act?
People often accuse me of inappropriate behavior because I think terminating the industrial economy is a good idea. Interestingly, few of these people seem concerned about the morality of the big banks as they devise ways to profit from contraction of the industrial economy. Indeed, politicians routinely try to distance themselves from the few informed individuals who have a clue where we’re headed.
But back to me — my favorite subject, after all — and the accusations of inappropriate behavior I attract, like snakes to the eggs of ground-nesting birds.
“People will die,” they cry, while purposely and studiously ignoring the millions of people and other animals killed every day by the industrial economy. They act as if the industrial economy is propped up by a solid foundation of love and world peace. It’s all rainbows and butterflies, that good old industrial economy.
And, as should be obvious to every adult, nobody gets out alive: birth is lethal.
Dec 182011
Dr. Robert Hirsch – the Father (?) of peak oil (Colin Campbell is probably the Grandfather and M. King Hubbert the Godfather) provides a sobering look at the future:
Guest post by Gail Tverberg of Our Finite World:
The results of OPEC’s latest meeting to set oil production quotas were announced this morning. Instead of production targets for individual countries, a group production ceiling of 30 million barrels a day was set. This amount is a bit less than OPEC produced in November 2011 (actual 30.367 mbd), according to its reckoning, and less than it would have produced most of 2011, if Libyan production had stayed on line, based on the amounts shown in its November Oil Market Report.
A recent history of oil production from the November Oil Market Report, both for OPEC and in total, is shown in Figure 1.
Figure 1. Recent oil production for World and for OPEC, according to OPEC November Oil Market Report.
According to a Platts report of the meeting, Venezuelan Oil Minister Rafael Ramirez told reporters, “We are going to reduce the level of production of each country to make space for Libya.” That is not what people want to hear–Brent oil price is still over $100 barrel, even with what seems to be record production for both the world and OPEC, based on Figure 1.
The same Platts report also says, “OPEC on Tuesday said it expected demand for OPEC crude next year to average 30.09 million b/d.” Thus, the new production cap is slightly less than what OPEC sees as demand going forward.
It should be noted that the new limit includes Iraq in addition to the “regular” OPEC countries. Thus, the agreement says that if Iraq increases its production, other OPEC countries will reduce their production to keep total production to 30 million barrels a day.
All of this comes shortly after Saudi Arabia announced that it has halted plans to increase capacity to 15 million barrels a day by 2020. I wrote about this in a recent post. Saudi Arabia claims to have 12 million barrels a day in capacity now, but there is little evidence that it can actually produce this amount of oil. Saudi Arabia recently boasted that it would increase oil production above 10 million barrels a day, to help offset the drop in Libyan oil production, but amounts reported by the OPEC Oil Market Report and the EIA report of monthly oil production are still under this amount. The highest Saudi oil production reported by the EIA is 9.94 million barrels a day in August 2011.
There would seem to be several reasons for applying an overall cap to OPEC production:
1. OPEC needs/wants high oil prices. They certainly don’t want the price of oil to fall by very much, if they are to have enough funds to pay for all their social programs. So holding production down is in their best interests. An overall cap provides as direct a way as possible of keeping overall production down.
2. It is not clear that most OPEC members have any spare capacity. Saudi Arabia may, in fact, need to “rest” its wells after pushing production to its recent high of 9.94 million barrels a day in oil production. Writing the agreement as an overall cap gives Saudi Arabia “cover” for resting its wells, as needed.
3. This approach is at least theoretically easier to administer. One or two or three countries can make a change in production, if desired, to bring total oil production down to the desired level, if others raise their production.
4. This approach gives a framework for future agreements that can be helpful if Iraq’s oil production should actually increase by very much. Iraq’s production is in effect pulled back in under the agreement.
5. This approach provides great “cover” if one or more OPEC countries experiences a decline in oil production. There is no need for embarrassment if an individual country should experience declining production, since a country can simply blame the result on a need to keep overall production within the selected limit, and thus “save face”. A country with very high stated reserves might be especially embarrassed by an unexplained decline in production, since this might also suggest that the stated reserves were inaccurate.
Why the Market Discounts the New Cap
I am aware that the price of oil dropped after the announcement of the new 30 million barrel a day cap. The view underlying this decline is that the new cap is similar to the individual country caps, and likely to be exceeded if circumstances are right. Furthermore, the 30 million barrel a day cap is similar to what OPEC has recently been producing, so there is no expectation of a cut in production at this time.
It seems to me, though, that OPEC is gradually changing from an association whose primary purpose is to hold down production, to an association of mostly aging oil countries who need to cover up the fact that their oil production may not be able to keep up much longer. The new methodology works much better, if part of the purpose is to cover up the reason for declining production of a few countries.
Figure 2 is a graph I showed in a recent post. It shows Middle Eastern and North African (MENA) oil production as a percentage of world oil production.
Figure 2. Middle East and North Africa oil production as percentage of world total, plus oil price in 2010 dollars. Amounts from BP Statistical Report. Oil includes NGL. Oil price comparable to Brent.
The countries included in MENA are not the same as OPEC, but there is a large overlap with the older OPEC members. Figure 2 shows that this group has not raised production relative to world production by very much, even when oil prices were high, suggesting that they have little capacity to do so.
As the very old wells in MENA countries age further, declining production can be expected to be an increasing problem, adding to the need for countries to “save face” as production declines, as mentioned in Point 5 above.
Conclusion
It will take a while to see how the new cap works out in practice. The important effect may not be in the next three months, but over the longer term, especially if Iraq’s production increases.
Both EIA and IEA are expecting that OPEC will provide the majority of future increases in world oil production. If my interpretation is right, OPEC is suggesting that they will decide how much, if any, increase in production will be allowed through to the rest of the world–that is, assuming that the increase in OPEC production is really there in the first place, and not offset by other OPEC declines.
My expectation is that oil price will really depend on how well the world economy is doing. The world economy is threatening to slip into recession now. If it does, prices may go down. If it does not, and OPEC indeed keeps its production capped at 30 million barrels a day, we should expect higher oil prices ahead.
In any new agreement, the real question is how the agreement is administered in practice. I have suggested one way the new agreement may be used. It will be interesting to see what actually happens.
Chris Skrebowski, a London-based expert on the global oil supply and founder of the Global Oil Megaprojects Database sees oil depletion overriding new oil supply, leading to higher prices in 2012 and beyond.
Listen to the interview by Jim Puplava
Dec 132011
Chris Martenson and Alasdair Macleod of the GoldMoney Foundation talk about Martenson’s book The Crash Course, the US dollar and gold.
Guest post by Gail Tverberg of Our Finite World
Saudi Arabia recently announced that it had halted a $100 billion oil production expansion plan to raise capacity to 15 million barrels a day by 2020. At this point, the country claims to have capacity of 12 million barrels a day. What does this mean for its future? Let’s take a look behind the figures.
Figure 1. Saudi Arabian oil production and exports, from Energy Export Data Browser. Note that oil production is in grey, oil exports are in green, and the black line represents consumption.
The figure shows that Saudi Arabia has not been increasing its production for many years. At the same time, the country’s own oil consumption has been rising rapidly. The combination means that oil exports have already started declining.
Saudi Arabia tells us that its crude oil capacity is 12 million barrels a day. In fact, its crude oil production has not exceeded 10 million barrels a day in recent years, according to EIA data. Perhaps it can produce a bit over the 9.9 million barrels a day it produced in August 2011, but this has not yet been proven.
If we look at recent additions to crude oil capacity, we find this list, according to Jadwa Investments.
While Saudi Arabia claims that these additions have added to total capacity, I think we should question whether this is really true. The amount of the additions on this list would seem to more or less offset a decline rate of 5% or 6% per year, and such a decline should be at least considered as an alternate explanation. It is possible, too, that the explanation is somewhere in between–a small capacity increase, but some of the new production is offsetting decline.
Between now and 2020, we know of relatively little additional crude oil capacity to be brought on line. The only big project that has been announced relates to the Manifa heavy oil field. It is planned to reach a capacity of 900,000 barrels a day in 2014.
In addition, there is a substantial amount of natural gas capacity planned in the 2012 – 2013 timeframe. Jadwa Investments estimates that the new capacity will increase natural gas production by over 70%, relative to 2010 levels. This increase in natural gas production should help hold down the growth in domestic oil consumption.
But the question becomes: What will happen to oil production between now and 2020? Production from most wells declines with age. Wells that have been producing for a long time, including Ghawar, will at some point start producing less. (In fact, we don’t know if Ghawar is already producing less, and the new production that has been brought on line is covering up the decline.) It seems as though we should start seeing a decline in production in the next few years, if no more production than this is brought on line.
Given these considerations, there would seem to be a fairly high probability that Saudi oil exports will decline more rapidly in the next few years. If this happens, Saudi Arabia will encounter financial problems unless the price of the oil rises very substantially, because of the need to fund its social programs.
Deutche Bank analyst Paul Sankey estimates that Saudi Arabia now needs $92 a barrel to break even fiscally because of greater social spending, up from $60 barrel in 2008. If exports decline in future years as production falls and consumption rises, further escalation in the break-even price can be expected. Once new programs are put in place, it is difficult for a government to remove them.
News releases from Saudi Arabia emphasize the supposedly rosy world oil situation: Saudi production can still rise to 12 million barrels a day, and there will be plenty of oil from other sources, such as Iraq or a shale oil revolution. Furthermore, the world economy may need less, because of recession.
All of these statements are far from proven. They appear to be crafted to make peak oil look like it is not a problem, and to keep people from asking, “Why would a country whose entire economy revolves around oil, and that supposedly has the world’s largest oil reserves, announce that it is cutting back its plans for expansion? How can it possibly maintain its programs, if it doesn’t keep expanding?”
One thing that strikes me about Saudi Arabia is how extremely oil (or oil and natural gas) dependent it is. According to the CIA World Factbook:
The petroleum sector accounts for roughly 80% of budget revenues, 45% of GDP, and 90% of export earnings. Saudi Arabia is encouraging the growth of the private sector in order to diversify its economy and to employ more Saudi nationals. Diversification efforts are focusing on power generation, telecommunications, natural gas exploration, and petrochemical sectors.
Even the diversification efforts don’t sound all that diversified, with the mention of power generation, natural gas exploration and petrochemicals. Saudi Arabia is the world’s largest producer of desalinated water (24 million cubic meters per day), and until recently 90% of the desalination plants ran on oil or natural gas. Saudi Arabia has subsidized agriculture in the past, but plans to rely entirely on food imports by 2016. Whether a desert country like Saudi Arabia attempts to grow its own food, or depends in imports, it takes a lot of oil to provide food for 26 million people.
The very high level of oil consumption in Saudi Arabia can be seen from this chart comparing Saudi per capita oil production with that of the United States, France, and the World in total. (France is shown as being typical of the European countries.)
Figure 3. Per capita oil consumption for selected countries. Oil consumption is by BP, and includes biofuels and natural gas liquids. Population data used in calculation is from EIA.
As oil production reaches its limits, countries everywhere will have to scale back on consumption, and Saudi Arabia is no exception. It is not clear how soon this drop in consumption will come for Saudi Arabia–at some point there will be a clash between falling oil exports and the revenue available to keep up current government programs, and oil consumption will have to fall. Saudi Arabia is better set than most countries in terms of reserve funds, but at some point these too will run short, and Saudi Arabia will have to economize.
I expect that the downward transition will be more difficult for Saudi Arabia than for many other countries. There aren’t easy options for backyard gardens or transitioning to a “service economy”. Solar PV and natural gas can help somewhat, but the transportation portion of the economy is still very oil dependent. Interesting times are ahead, unless the Saudi Arabian government can somehow figure out ways around these issues.
Dec 032011
Guest post by Guy McPherson of Nature Bats Last
American essayist Norman Cousins wrote: “Death is not the greatest loss in life. The greatest loss is what dies inside us while we live.”
Personally, I’ve never been content sitting still, surviving for survival’s sake. Evidence is found in the roller coaster of my academic career, which was marked by significant change every few years. My scholarship, teaching, and service were characterized by unpredictable, nonlinear, seemingly chaotic swings from one topic to another. The adventure of new experiences always trumped the security of the bricks-on-a-pile approach revered in the ivory tower. A primary point I made in every course I taught: It’s always more difficult to do the right thing than to do the wrong thing. In fact, you can usually tell the right direction simply by the difficulty of the choices you face.
For working outside the mainstream in a dysfunctional system, I paid in expected ways, including financial. But I benefited in ways I could not expect and cannot fully describe. A rich life comes from taking risks, and the risks range from physical to emotional. I’ve had a rich life.
Most recently, I’ve thrown my heart, soul, and every last dime into the mud hut. I suspect it’s the consummate lifeboat, and it illustrates how improperly talented but thoughtful people, working together, can develop a durable set of living arrangements. And in the desert, no less. If we can make it work here, I suspect it can work just about any habitable place on this blue dot.
The response from the masses: I’m insane. I suppose this should have been expected from a culture characterized by sheer insanity. As with nearly everybody in this culture, I was born into captivity (hat tip to my friend Tim Bennett for the perfect descriptor). I spent most of my life in the zoo that is contemporary culture, drinking and feeding at the troughs of indulgence and denial and playing with toys that substitute for reality (albeit poorly). To a great extent, I’m still in the zoo, still immersed in the culture of make believe.
I’m attempting to pursue, and encourage, agrarian anarchy in this small valley. We’re at the edge of empire, but we’re still part of the American Empire. David Graeber explains the general idea in his analysis of the Occupy movement:
The easiest way to explain anarchism is to say that it is a political movement that aims to bring about a genuinely free society — that is, one where humans only enter those kinds of relations with one another that would not have to be enforced by the constant threat of violence. History has shown that vast inequalities of wealth, institutions like slavery, debt peonage or wage labour, can only exist if backed up by armies, prisons, and police. Anarchists wish to see human relations that would not have to be backed up by armies, prisons and police. Anarchism envisions a society based on equality and solidarity, which could exist solely on the free consent of participants.
Graeber’s description offers a worthy ideal for civil society. Serious pursuit of this ideal would go a long way toward allowing us to regain our humanity. Whether is goes far enough depends on the human. I’m wondering if living on the edge is good enough for me, whether instead I should leap from the edge into the abyss.
There is another challenge, perhaps as great and certainly as important as the one I’ve undertaken here at the mud hut: making it work on the road, thus engendering full expression of the human animal. Imagine a minimalist approach to the road and to the wilds surrounding the road. Imagine the exhilaration of abandoning a lifeboat to swim in frigid, shark-filled waters. Imagine the wonder of full immersion into the world, surrounded by every element of the human condition and every element of nature.
Ultimately, barring our own near-term extinction, full immersion into the world is exactly where we’re headed. I could show the way, as I’ve shown the way by exiting empire. And although I suspect the number of followers would be similarly disappointing, I would be taking this step for myself, not for others, as is the case now.
Nature calls. She calls all of us, though most of us have managed to plug our ears to her siren song. For a few, though, the temptation is supreme from the ultimate temptress. She’s kind, playful, passionate, courageous, strong, and whimsical. Can I pursue her? Can I capture her spirit, as she has captured my heart? Can I find the human animal within me before I breathe my last breath? Nature, as always, is amorally indifferent to my (therefore unrequited) love. But touching her and, more importantly, having her touch me, seems a one-way street: Once ensconced in her embrace, there’s no going back.
At this point in the age of industry, perhaps any attempt to venture into the wild is pure fantasy. Culture certainly suggests as much, while indicating that a step away from my current living arrangements is one large step on the short path to a bygone era. Bygone for a reason, says culture: There’s no going back to nature. That’s just crazy talk.
Last month, commenting on my new love, I wrote, “Nature provides all I need, and all I’ve ever needed.” If I believe myself, shouldn’t I attempt to prove it? Or, to put the scientific spin on it, shouldn’t I attempt to disprove it?
Can I find my way into a world that is brave and new and as old as humanity? More importantly, should I?
Taking this step will almost certainly shorten my life. As I’ve pointed out many times in this space, (1) birth is lethal and (2) some things are worth dying for. Whereas I’ve no intention of becoming yet another starry-eyed Messiah destined for a violent farewell, neither am I interested in a sedate, risk-free life. Like most people, I’m trying to find the line Cousins inferred, the line between living outside — in the world — and dying inside. And, of course, doing the right thing, regardless of the inherent risks and challenges.
