Thursday, November 18, 2004

Prechter on Oil

Published by Elliott Wave International
Conviction as "Broad and Deep" as He's Seen in 30 Years...
The annual New Orleans Investment Conference was this past weekend, and, as in other years, Bob Prechter was there to give a talk. The November Elliott Wave Theorist (published today) gives Bob's impressions of what he heard -- several of his thoughts are well worth repeating here.

"If there was one theme of the conference, it was the inevitability of soaring oil prices.... People were clamoring to sign up for oil and gas deals, drilling operations, etc....
"The consensus that oil prices can only go upward for the rest of human existence is as broad and deep a conviction as I have ever witnessed toward any market in 30 years in the financial analysis profession. When oil was selling for $12 a barrel a few years ago, no one was interested. There were no booths at conferences touting higher oil. But isn't that exactly when investors should have been buying it?... The point is this: If almost everyone is betting on higher oil prices, then all bets are in."

What got my attention is the comment about conviction being as "broad and deep" as he has ever seen in 30 years -- that covers lots of ground and lots of conviction.
The key issue is clear: If all bets are in, where does the market go from here?

Thursday, November 11, 2004

Puplava's Prediction at The Inflection Point

We are now at an historic inflection point in history—with no turning back the clocks. Had our political leaders from Reagan and Clinton to Bush I and II been more fiscally responsible, we wouldn’t be facing the largest monetary storm in history. That monetary storm lies directly in front of us. Bernanke and Greenspan may summarily dismiss high oil prices, but for most of us who live in the real world, higher energy costs are going to be inflationary. Investors need to start preparing for $100 oil. Higher oil prices will eventually permeate all aspects of economic life, driving the costs of basic necessities higher. In the future you may be able to buy a flat screen TV, DVD player or personal computer at a cheaper price, but the cost of everything else will be rising. The things that you need in everyday life will all be going up: your grocery bill, your utilities, the gasoline that powers your car, visits to your doctor or dentists, tuition, and lastly, taxes.

The economy will vacillate between periods of deflation and inflation, with each recession bringing forth a temporary reprieve from what will be an inexorable rise in the general rate of inflation. Eventually wars, deficit spending, a rising mountain of debt, and peak oil will lead towards hyperinflation in the United States.

Already, the U.S. is exhibiting many of the pre-hyperinflationary conditions that are so prevalent in many South American and Eurasian economies. Evidence points to several factors that will lead us there:
Large budget deficits
Deteriorating international trade balances
An eroding international currency
Eroding financial confidence
Growing protectionism
An expanding war on terrorism and the need for security
Growing entitlements

Whether the U.S. experiences hyperinflation or simply higher inflation rates will be dependent on the political will of its leaders to rein in spending and bring its fiscal imbalances into order. At this point, it appears hopeless with over $51 trillion in unfunded Social Security, Medicare, and pension liabilities now growing at over $2 trillion a year. History teaches us that debt imbalances of this magnitude are always inflated away.

An expanding money supply, abundant credit, and negative interest rates are inherently inflationary. When investors realize that they can borrow money at next to nothing rates and invest that money in hard assets and get an immediate return, the demand for such assets rises. This leads to higher prices, asset bubbles or inflation. This is what is going on now in the financial markets, the real estate market, and in the commodity markets. A flood of money and credit throughout the world is driving asset bubbles and inflation. Central banks can create money and credit, but they are unable to direct where that money flows. One of the chief characteristics of inflationary cycles is asset bubbles. First, it was stocks in the 1990s. Then, it was real estate and mortgages in this new century. It is now working its way through to the commodity markets. The new bull market in commodities will dominate the financial markets the balance of this decade and the next.

As debt levels rise in the U.S. at unprecedented levels, the Fed will increasingly become impotent. Unlike Volcker in 1979, today’s U.S. economy is far more debt laden. Because of this huge debt overhang and the huge asset bubbles that support it, the Fed’s options are limited. The Fed simply can’t afford to raise rates in the same decisive and single-minded way that Volcker did during 1979-1982. The Fed’s new mantra is "measured." This means that real interest rates will remain negative for a long period of time.

No matter how high inflation finally gets, it is abundantly clear that the financial markets are undergoing a paradigm shift from a bull market in paper to a bull market in commodities or "things" as I like to call them. Investors will need to focus on a different class of assets. Real assets are going to be the big winners in this new emerging bull market. Commodities are becoming "The Next Big Thing." Precious metals, base metals, energy, water, and food are where the next fortunes are going to be made. Precious metals have, will, and are going to lead this new bull market. It is in regard to precious metals that I devote the remainder of this essay.

Friday, October 22, 2004

Oil Price Prediction With The Elliott Wave Theory - #1

I'm embarking on an analytical exercise to test the Elliott Wave Theory as applied to oil price prediction. The chart patterns since 2000 appear to align well with this theory. The price patterns in the late 70's oil boom and the associated "rig count" provided patterns very typical of Elliott Waves. I present my first prediction of a potential future pattern or trend. The 5th wave appears to be near completion with an A-B-C correction to follow with a price correction to the $30-35/barrel range.

Click on the image for a larger version.

Monday, October 11, 2004

Hugging Sheiks

A former colleague of mine who is the editor of the Houston Geological Society published an informative article on the history of the U.S. and Saudi Arabian oil dependence. I thought that you might find it interesting. After watching Fahrenheit 9/11 last night, I think everyone needs to realize that we've been hugging sheiks through many administrations.....

Election Issues in the Context of Petroleum and History
Art Berman, Editor, Houston Geological Society, October 2004

Key topics for the upcoming presidential debate and election directly relate to petroleum: the war in Iraq and the economy. As the situation in Iraq becomes increasingly complex and uncertain, the issues and the debate become more diffuse. I do not mean to diminish the importance or urgency of the current civil war in that country or differing views of our conduct there. As earth scientists, however, we surely must understand that petroleum
supply is and has always been the basis for everything we do in the Middle East since at least the end of World War II. The economy, likewise, is a complicated subject that consists of a tangle of important and inter-dependent issues that can obscure or over-shadow what cannot be disputed: American dependence on imported oil is an unavoidable aspect of the economy in this country and that is nothing new either. The fact that the price of oil is presently at its highest sustained level in decades is not disputed nor is its affect on the cost of doing business in America. As earth scientists we
understand that the need to import oil is unavoidably related to well-established and painfully clear statistical tendencies about basin and province maturity, and is not something that can be fixed by some change in domestic energy policy. This month I will focus on the first of these subjects, namely the war in Iraq and Afghanistan though not from a political but, rather, a geological and historical perspective. To fully understand current events in Iraq and the Middle East it is first necessary to view the roots of the conflict in a broader context than simply as part of the aftermath of the September 11,
2001 attacks on New York and Washington. As World War II drew to a close President Franklin Roosevelt recognized that the United States would play the major role in the Middle East as a warweakened and empire-weary United Kingdom, France and
Germany abdicated positions they had held for nearly 150 years in foreign affairs. Roosevelt appointed State Department economic advisor Herbert Feis to head a study on American strategic policy in a post-war world. Feis’s study concluded that U.S. access to oil was the primary reason for victory over German and Japanese forces in World War
II. Oil had powered the vast network of tanks, ships, aircraft and personnel carriers that gave allied forces the competitive edge over their adversaries who lacked sufficient access to petroleum. Germany and Japan had, quite simply, run out of enough oil to continue the war effectively. It had been, ironically, access to petroleum that lead to Japan’s attack on Pearl Harbor in December 1941. By the late 1930s the Japanese Empire had largely accomplished its territorial objectives but wanted to take Indonesia for its oil and rubber, both critical parts of a military empire that ran on petroleum-powered ships, planes and land vehicles. Indonesia was a Dutch colony and Japan’s leaders worried
that the United States’ treaties with the Netherlands might bring the United States into a war against Japan if Indonesia were attacked. In an odd quirk of logic, Japan decided to make a pre-emptive strike on U.S. forces at Pearl Harbor to prevent war with the United States. Feis and his colleagues recognized that the Kingdom of Saudi Arabia held the world’s most plentiful source of petroleum. They also recognized the political instability of the Kingdom and concluded that the United States must assume responsibility for
the support and defense of Saudi Arabia in return for a guarantee of oil supplies. On his return from the Yalta Conference in February 1945 Roosevelt met with King Abd al-Aziz Ibn Saud, the founder of the modern Saudi regime, on a U.S. warship in the Suez Canal. Roosevelt gave the King a promise of U.S. protection in return for privileged American
access to Saudi oil, an arrangement that remains in full effect today and constitutes the core of the U.S.-Saudi relationship and American policy in the Middle East. Fast-forward to 1979 when a series of events raised the U.S.-Saudi relationship to a new level of strategic importance. In 1979 the Soviet Union invaded Afghanistan, the Shah of Iran was overthrown by anti-government forces, and Islamic militants staged a short-lived rebellion in Mecca in Saudi Arabia. President Carter stated that the United States would view any action that threatened supplies of oil from the Middle East, and especially from
the Persian Gulf, as a threat to U.S. strategic interests with military force as a possible consequence. Carter established the Rapid Deployment Force that later evolved
into the U.S. Central Command in order to provide combat forces to the Persian Gulf Region if necessary. Carter authorized covert U.S. actions to undermine the Soviet presence in Afghanistan. The Saudi government was deeply involved in both of these initiatives and was responsible for providing both funds and manpower for the anti-Soviet effort. It was during this period that Osama bin Laden went to Afghanistan to fight with
the mujahedin rebels against the Soviet occupying forces. The United States and Saudi Arabia spent more than $3 billion under Carter and Reagan in arms and support to the anti-Soviet insurgents in Afghanistan (Klare, 2001). The main aim of the first Persian Gulf War under George H.W. Bush was to protect Saudi Arabia from threats of attack by
Saddam Hussein. Kuwait was the catalyst but really a secondary cause for the invasion of Iraq. In fact, there are tape recordings of an interview on July 25, 1991, between U.S. ambassador April Glaspie and Saddam Hussein in which she gave him diplomatic
permission to invade Kuwait. "We have no opinion on your Arab-Arab conflicts," the recorded transcript reports Glaspie saying, "such as your dispute with Kuwait. Secretary [of State James] Baker has directed me to emphasize the instruction … that Kuwait is not associated with America" (Cole, 1999). Some argue that Hussein was baited into attacking Kuwait to justify armed action against Iraq for the protection of Saudi Arabia.
Hussein invaded Kuwait on August 2, 1999. On August 4, 1991, Bush convened his top advisors at Camp David and decided to take military action to defend the Saudi kingdom against possible Iraqi attack. Secretary of Defense Dick Cheney went to Riyadh, Saudi Arabia, and got permission to place U.S. ground forces in that country and to use Saudi bases for air strikes against Iraq.
Following the Persian Gulf War Osama bin Laden focused his efforts on two stated objectives: expulsion of U.S. military forces from Saudi Arabia and overthrow of the Saudi regime. "Both of these goals put bin Laden in direct conflict with the United
States. It is this reality, more than any other, that explains the terrorist strikes on U.S. military personnel and facilities in the Middle East, and key symbols of American power in New York and Washington" (Klare, 2001). The current "War on Terror" did not begin with the September 2001 attacks on the United States. The first attack on the World
Trade Center in 1993 marks the beginning of the current struggle. Subsequent attacks in Saudi Arabia, Kenya, Tanzania and Yemen in the period 1995–1998 were part of a plan by bin Laden to destroy the U.S.-Saudi alliance begun in 1945. Neither President
George W. Bush nor Osama bin Laden will directly reference the present conflict to this decade-long dynamic. Make no mistake, however, that current events in Afghanistan and Iraq have far more to do with maintaining American supplies of oil from the Middle East and protecting the Saudi regime from overthrow than they do with the events of September, 2001. Consider the devastating economic effects of the four-day hiatus
in petroleum usage following the September 11 attacks. Imagine the far greater impact of an extended interruption in petroleum supply on the U.S. economy. Every American president knows this: if petroleum supply is interrupted, the American economy
will crater; whatever other issues may seem important in a given election, they will all disappear if there is not enough petroleum to keep the economy running at the break-neck level that we all assume is normal.
The U.S. occupation of Iraq and Afghanistan is part of a 60-year old policy to ensure oil supplies from the Middle East and to protect the Saudi regime from overthrow or civil war that might interrupt that supply. The war that our enemy is fighting is to make the West go away; it is, in effect, a fantasy ideology (Harris, 2004). Somewhere, however, embedded in the Al-Qaeda strategy is overthrow of the current regime in Saudi Arabia and disruption of the U.S.-Saudi alliance; that is the point of convergence that we must recognize if we want to understand this war. As geoscientists we should understand better than most the geo-politics of oil. e know that in the United States we cannot
begin to supply ourselves with enough oil to fuel our needs even if we open ANWR and find a Prudhoe Bay-sized accumulation (more on that next month!).
We are irrevocably dependent on the Middle East for oil and there is no way that is going to change. Whether we agree with the specifics of decisions taken on Iraq, Afghanistan, Israel or any other topic in the Middle East we must view them in terms of a long-term strategy and policy that center on maintaining oil supply to the United States. We must also realize that, whatever our political leanings, an interruption in oil supply would make all of us wish we had done something more deliberate and forceful to prevent it. In the hindsight of a U.S. economy without adequate petroleum supply the niceties of international law and the United Nations, self-determination of sovereign nations, human rights and weapons of mass destruction would seem weak excuses for allowing ourselves to miss the point of what has always been the focus in the Middle East since at least 1945: petroleum. ?

• Cole, Carleton, 1999, The home forum: Christian Science Publishing
• Klare, Michael T., 2001,The geopolitics of war (United States petroleum
interests in Saudi Arabia and Osama bin Laden): The Nation, Nov. 5, 2001, v. 273, no. 14, p. 11.
• Harris, Lee, 2004, Civilization and its enemies: the next stage of history:
Free Press, New York, 232 p.

Monday, July 19, 2004

The Heartland of Iraq

'Heartland' strategy in Iraq: Right idea, if done the right way
By William Hamilton

Some critics like to say American foreign policy is discernible only in retrospect. Even so, such opinion could be taken as a left-handed compliment for a nation that has done rather well in defending itself and its allies in the previous century, and now, at the beginning of the 21st century. Though it might be too early to put a name to the Grand Strategy we are employing with regard to Iraq, just "being there" suggests that our strategy aligns quite nicely with the Heartland Theory put forth in 1904 by Sir Halford John Mackinder, one of the great military strategists of the 20th century. Here's how the Heartland Theory would apply to Iraq: Get a globe and put your finger on Iraq. Notice how your finger is resting right in the middle, the "heartland," of the Middle East, halfway between Egypt and Pakistan.

In 1904, British geographer Mackinder placed his finger on Eastern Europe and declared that to be the "pivot area" or "heartland" of Europe. He declared: "Who commands Eastern Europe commands the heartland; who rules the heartland commands the world island; and who rules the world-island commands the world." (By world-island, he meant the Euro-Asian-African landmass.)

Did anyone buy the Heartland Theory?
Yes. Napoleon understood it even before Mackinder was born. That is why he attacked czarist Russia. Moreover, Kaiser Wilhelm II, Adolf Hitler, Josef Stalin and three generations of the world's foremost military strategists embraced it as gospel and acted upon it. Even now, the United States is steering NATO's drive into Mackinder's Heartland with the addition to its ranks of Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

Just being there is enough.
The essential element in the Heartland Theory is simply "being there." Properly applied, being there means Iraqi oil revenue cannot go to al-Qaeda. Being there means the Iraqis can choose whatever government they want, as long as it does not support terrorism. Being there means interdicting the radical Islamists' lines of communication that run across the Middle East from Cairo to Islamabad, Pakistan.

But being there need not include the imposition of a Pax Americana on Iraq's cities.
The inevitable collateral damage of urban warfare creates a no-win situation for U.S. troops in a news-media world dominated by the hostile Al-Jazeera TV network and by a Western media that daily prove the dictum: Bad news will travel around the world before good news can tie its shoelaces. George Friedman, who runs a private intelligence service, suggests that the U.S.-led coalition can still be there while, at the same time, withdrawing its troops from Iraqi cities. By occupying a series of desert outposts, we retain the strategic advantage of being in the heartland of the Middle East. If al-Qaeda or the Iraqi insurgents want to fight our troops, they must expose themselves in the open desert, where their rusting, bomb-laden pickups are no match for our Abrams tanks and Bradley Fighting Vehicles. Our casualties would plummet. Theirs would skyrocket.

Bush administration's opportunity
But even as it becomes increasingly clear that our troops are being withdrawn from Iraq's troubled cities — especially now that governing power has been transferred to the Iraqis — the debate as to the wisdom of being there in the first place rages.

One way for the administration to answer its critics would be to explain the invasion of Iraq and our continued presence there in terms of the Heartland Theory. While that explanation might make a great deal of sense to armchair strategists and war-college graduates, it could be a difficult sell to a pop culture that cast more votes during the latest American Idol season than it cast in the most recent presidential election.

Meanwhile, the inescapable geographic truth is that we are occupying the heartland of the Middle East. If Mackinder's theory is correct, our mere presence there will have a major impact on how we fight, and whether we succeed, in the ongoing war on terrorism. But maintaining public support for our continued presence will require military tactics that reduce our casualties to more acceptable and sustainable levels.

If that can be achieved, the armchair strategists and the soccer moms may create the common ground of broad public support that will be essential to our successful occupation of a strategic base in the region's heartland.

William Hamilton is a syndicated columnist, retired Army officer and co-author of The Grand Conspiracy and The Panama Conspiracy —two novels about terrorists targeting the United States. He lives in Colorado.

Monday, July 12, 2004

The Coming Energy Crunch and Hubberts Peak

By Aaron Naparstek - 01-06-04
The election-year mudslinging over gas prices officially began on March 29, when Dick Cheney accused John Kerry of flip-flopping on his support for increased gas taxes.
"After voting three times to increase the gas tax and once proposing to increase it by 50 cents a gallon," Cheney charged, "he now says he doesn't support it."
With gas prices rising to record levels, Kerry was only too happy the vice president brought up the topic. That evening, Kerry told the crowd at a San Francisco fundraiser that if the cost of a gallon kept creeping toward $ 3, "Dick Cheney and President Bush are going to have to carpool to work together. Those aren't Exxon prices, ladies and gentleman, those are Halliburton prices!"
That zinger elicited a huge roar and zipped around the world as the sound bite du jour. It was such a hit, Kerry added it to his stump speech.
The Bush campaign struck back with a new television ad, entitled "Wacky."
"Some people have wacky ideas," says a mildly sarcastic male voice. "Like taxing gasoline more so people drive less. That's John Kerry." A vaudevillian image of 12 guys in business suits riding a gigantic, clownish bicycle jitterbugs across the screen.
You can't squeeze a whole lot of policy detail into a 30-second ad or an evening-news sound bite. But after sifting through the rhetorical chaff on gas prices, the parameters of the current national debate on energy policy become clear.
For the Bush campaign, gas taxes are out of the question. There will be no discussion of, say, the wide-ranging benefits that Europeans have derived from their $ 5 per gallon, or the fact that we pay a gas tax to the Saudis rather than our own public coffers. Gas taxes are simply "wacky." You'd have to be even more "wacky" to talk about people driving less.
The message coming from the Democrats is equally demagogic. Though the Kerry campaign has issued policy papers focused on reducing American dependence on foreign oil (buried deep within the Kerry web site), in public he has tended to steer clear of discussing these ideas. Rather, he uses his airtime to criticize the president.
While crowds love Kerry's line about Bush and Cheney riding to work together, there is something disappointing about the Democratic nominee ridiculing the idea of carpooling. In addition to reducing traffic, car-sharing happens to be one of the fastest, cheapest, most high-impact ways that Americans can make real reductions in daily oil consumption. Car-sharing should be part of the Democratic platform, not a laugh line.
Kerry and the Democrats' other gasoline talking points are equally ill-advised. Telling the president to do a better job of "jaw-boning" the Saudis does not address the need to make America less beholden to foreign energy suppliers. Nor does the call to release oil from the Strategic Reserve. The strategy for both campaigns so far has been pretty simple: Gas prices are rising rapidly. Blame it on the other guy. Present yourself as the guy who will make gas cheaper.
In the age of the 30-second campaign ad, we've come to expect this sort of approach to complex issues. It's the norm. But America is on the cusp of an energy crisis that is going to redefine the way we live -- whether our leaders prepare us for it or not.
In 1956, a Shell Oil geologist named M. King Hubbert stood up before a meeting of the American Petroleum Institute and, much to the chagrin of his bosses, predicted that oil production in the continental United States would peak and begin to decline starting in the early 1970s. According to his colleague and author of the book, Hubbert's Peak, Ken Deffeyes, "Almost everyone inside and outside the oil industry rejected Hubbert's analysis."
They simply didn't want to hear it. The 1960s was the greatest decade of global oil discovery ever. Vast new reserves were found all over the world. Soon all but a faithful few simply forgot about Hubbert's forecast.
Hubbert arrived at his prediction through an analysis of oil-field discoveries. By 1956, after drilling tens of thousands of holes across the continental United States, some oilmen had a pretty solid idea of what was in the ground. The discovery of new reserves in the lower 48 had peaked in the 1930s and had been in decline ever since. Hubbert noted that, when plotted over time, the rate of discovery formed a nearly perfect bell-curve. He theorized that the annual rate of oil production would form a similar bell curve, more than a few decades later. The highest point of this second curve would be the year that the US produced more oil than it ever had before and ever would again. That would be the "oil peak."
As Deffeyes is quick to tell you, "Old Hubbert was right." America never again produced as much as it did in 1970, despite a drilling boom that produced four times more oil wells each year. Since then, oil production has been in steady, rapid decline-the downhill side of Hubbert's bell curve. Today, we extract about 3.4 mm bpd from the lower 48, about one-third of what we were getting at peak.
In recent years, scientists have built on Hubbert's techniques in an effort to discover how close we are to global oil peak. Though the estimates vary, everyone agrees that the question of global peak is not "if" it will occur, but "when." Based on 65 studies published over the last 50 years, the UK-based Oil Depletion Analysis Centre estimates the world's original endowment of sweet, crude "conventional" oil to be somewhere between 2000- and 2400 bn barrels. As of today, humanity has consumed close to half that total.
The consequences of this are hard to overstate. Oil fuels 95 % of all transportation and a significant portion of global food production. Industrial societies are dependent on a vast, steady flow of inexpensive petroleum for just about everything we make and do. Disrupt this flow, and modern society as we know it is inconceivable.
Global demand for oil has increased sevenfold over the past 50 years. In 1986 human beings consumed about 54 mm bpd of oil. Today we use about 82 mm. Though Americans make up only 5 % of the world's total population, we consume more than one-quarter of this energy-about three gallons per person each day. US oil demand sets a new record every few months.
The developing world, led by China, is catching up to us. In the last decade, Chinese oil consumption has doubled, while Chinese car ownership has jumped from 700,000 to 7 mm.
"There are basically six and a half billion people on earth today and 5 bn of them barely use energy. They all aspire to," says Matt Simmons, CEO of Simmons & Company, the world's biggest energy-industry investment bank.
Yet new sources of oil are becoming increasingly difficult to find and more expensive to develop. Global discovery peaked in 1964 and has declined ever since. In 2000, there were 16 discoveries of oil "mega-fields." In 2001, we found eight, and in 2002 only three such discoveries were made. Today, we consume about six barrels of oil for every one new barrel discovered.
The US Dept. of Energy estimates that the world will require 120 mm bpd by 2025. To meet that demand we must find the equivalent of 10 new North Sea oil fields within a decade. These fields, before peaking at the end of the 90s, were producing close to 6 mm bpd of oil. Today, we are hard-pressed to discover one new mega-field, let alone ten reserves equalling the size of the North Sea, which is now in serious decline. This year, eleven new mega-projects came online; next year, eighteen will start producing. But by 2008 only three big new fields are scheduled to start flowing, with no new projects on track for 2009 or 2010.
According to Dr Colin Campbell, a former exploration geologist and oil company executive who is generally considered to be the dean of global oil depletion experts, "there is no way on Earth" that level of demand predicted by the US government and many oil industry analysts "can be fulfilled." Just as Hubbert predicted for the US, a decline in discovery presages a decline in production. Says Campbell: "If you add it all together, you get a peak of what I call ordinary oil in 2005 and a peak of unconventional oil in around 2007. By 2010 volatility comes to an end. Then, terminal decline."
Campbell's oil peak prediction is right in line with no fewer than 12 recent studies, using a variety of different assumptions and demand projections. They all foresee accelerating decline in global oil production within the coming decade. Even the most conservative studies, using highly optimistic estimates of future oil discoveries and low estimates of future demand, predict a global oil peak by 2020. No matter how you slice it, global oil supply will soon begin a steep, permanent, irreversible decline.
As we approach the global oil peak, the world will grow increasingly dependent on Middle Eastern oil supplies. Already, 50 oil-producing countries have passed their peak, including the United States, which now imports 60 % of its oil. The only excess production capacity in the world-that is, the only countries thatare able to meet increasing daily demand-resides in the handful of oil-rich Persian Gulf states.
The Middle East accounts for nearly one-third of the world's total daily oil supply, and as other oil provinces reach their peak and begin to decline, that share is growing. Saudi Arabia alone controls one-quarter of these reserves. But despite Saudi assurances about the size of their future reserves, analysts are increasingly worried about the steady flow of Saudi oil that the world so depends upon.
First is the problem of security. A coordinated strategy has emerged among militants in the Middle East to sabotage oil infrastructure and target Western oil workers. In recent weeks, explosives-laden boats exploded alongside oil tankers in the Persian Gulf; gunmen burst into the offices of an ExxonMobil oil refinery in Saudi Arabia and killed seven workers; and Iraqi oil pipelines were sabotaged three times, disrupting the flow of 1.7 mm bpd of oil.
The spectre of increasing chaos in the region makes it difficult for Western oil companies to provide Saudi Arabia and other Gulf countries with the technological and financial support required to develop the reserves that would be necessary to increase its daily production.
"Even if the oil is there, is any American firm going to be anxious to go into Saudi Arabia and develop it at this point?" asks money manager Stephen Leeb and author of The Oil Factor. "You'd have to have rocks in your head." The Oil Depletion Analysis Centre estimates "the military costs of protecting pipelines and tanker routes, borne mainly by US taxpayers, at around $ 15 to $ 20 per barrel."
A second major problem is the fact that the Saudis will not allow any independent third-party observer to examine their reserves, operations and books. It's off-limits and "totally opaque," according to Simmons. Analysts can't even know for sure exactly how much oil the Saudis produce each day. Often, the only way they can begin to divine these numbers is by measuring tanker traffic.
In general, OPEC numbers are extremely shifty, or as Colin Campbell less charitably describes them, "complete rubbish." Each OPEC member's daily production quota is based on their total reserves. Since each country tends to want to pump more and generate greater revenue, they have a history of overstating the estimates of how much oil they actually have in the ground. During the 80s, estimates of OPEC's total reserves magically jumped from 353 to 643 bn barrels, despite the lack of new oil fields or significant improvements in drilling technologies. The Saudis themselves jacked up their stated reserves from 170 to 257 bn barrels.
Matt Simmons has personally pored over 40 years' worth of Saudi petroleum reservoir engineering reports. A participant in Dick Cheney's secret energy taskforce meetings of 2001, he is lobbying for a totally new system of corporate disclosure in oil and gas data.
"I do data analysis," Simmons says. "And the data analysis is getting increasingly scary. We have clearly grossly overstated proved reserves."
Many believe the Saudis no longer have the excess production capacity necessary to calm global markets. "The good news," says Deffeyes, "is that OPEC is no longer in charge of the price of oil. The bad news is that nobody is in charge of the price of oil."
Simmons and others say that the recent Shell scandal is just the tip of the iceberg. Shell stunned the financial world four months ago by revealing that it had overstated its proven reserves by a full 20 %. Since then, Shell has cut its reserves four times, wiping 4.9 bn barrels off of their balance sheet.
"Most of us can't believe Shell is the only one," says Deffeyes. "Traditionally, they've been very good and conservative in their accounting practices. A bunch of us suspect they are probably just the first to come clean."
Colin Campbell agrees, and sees the Shell case as a watershed event. "This really is the moment of truth, because all these games and foolery have finally reached their end," he says. "You can't paper over it anymore. I'm quite sure that all the major companies will come out with similar announcements."
Campbell points to mergers of companies like ExxonMobil and BP-Amoco as more evidence of impending decline. The mergers create growth on the companies' balance sheets despite the fact that actual oil discoveries are in rapid decline, production is tapering off and reserves are probably overstated. The bottom line is that analysts don't have enough data to know what the suppliers of the world's most vital economic resource can or cannot provide in the coming years. But they know enough to be very worried.
As Simmons recently said in an interview with Julian Darley, founder of the Post Carbon Institute, "If this were corn flakes, it actually doesn't matter because if we ever ran short of corn flakes, then we have ample granola. But this isn't corn flakes."
His final assessment of the Saudis is chilling. "We could be on the verge of seeing a collapse of 30 or 40 % of their production in the imminent future, and imminent means sometime in the next three to five years-but it could even be tomorrow. If we need a plan B, it would sure be nice to know that with a little bit of advance warning."
The implications of the global oil peak could not be more profound. As increasing demand exceeds supplies, oil prices will rise substantially and international competition for reserves will grow ever more rancorous. The impact will be felt throughout the global economy and in every American's wallet.
Today, Americans are panicky over the impact of a $ 40 barrel of oil. In his new book, Stephen Leeb predicts, "Oil prices are likely to rise to triple-digit territory-$ 100 a barrel at a minimum, and probably higher-by the end of the decade and possibly sooner." He sees the high, unstable price of energy wreaking havoc. "Inflation and deflation will seesaw back and forth in chaotic fashion, with inflation generally ascendant but not always."
Economic growth, as we have come to know it, is entirely dependent on a vast, continuous flow of remarkably cheap oil. As Simmons says, "Peak does not mean oil has run dry, it does mean that growth is over. Who would like to get on the plane and go tell India and China, sorry guys, your spurt is over. We used your energy."
Critics of the peak oil theory point out that we have heard these Malthusian doomsday predictions before. Ever since Col. Edwin Drake drilled the first oil well in Titusville, PA, in 1859, pessimists have been predicting the imminent end of oil. But this isn't 1973. We simply aren't discovering big new oil fields anymore. The oil crises of the 70s were about politics and the holding back of existing supplies. The coming crisis is about geology and the unchecked growth of demand.
"I have studied the depletion issue intensely for too long now to have any remaining doubts about the severity of the issue," Simmons says. "Not a soul has been able to produce evidence that the depletion issue is not real, nor have I had anyone at any time lay outa credible way that the world could actually add so much supply within such a short period of time. Sadly, there is no factual data to support the 'sense' that the world will be awash in cheap oil and gas forever."
Likewise, the US economy has in the past been protected from the impact of energy price increases because energy costs have been so low and such a small percentage of total economic activity. According to Stephen Leeb, those days are coming to an end. "If the price of energy is only 5 % of the total economy then increases aren't so important. When energy costs become 10 % of the economy, that's significant. We're at about 8 % right now. That's very close to the tipping point."
When the tipping point comes, Americans will be compelled to live very differently than they do today. One leading American social critic, James Howard Kunstler, sees serious political and cultural turmoil up ahead as the way of life Americans have built over the last 60 years begins to break down.
With decreasing access to cheap oil, Kunstler sees the fundamentals of industrial agriculture, manufacturing and retail trade changing significantly.
"The whole Archer Daniels Midland model of turning oil into corn into Taco Bell-that whole complex, that system, is really going to be over," says Kunstler. "We're going to be forced to grow more of our food locally and return to a kind of agriculture that really hasn't been practiced here in a long time. A lot of the land that has only had value as suburban development in the past 30 or 40 years is going to have to be reassigned."
Likewise, Kunstler foresees "the demise of Wal-Mart style, big box, national chains." Companies whose profit margins depend on "merchandise made by factories 12,000 miles away" simply won't function in a world of $ 100-plus barrels of oil. "We're going to have to seriously reorganize our whole system of retail trade and economy."
Along with many scientists, Kunstler believes George Bush's "hydrogen economy" rhetoric is a "fantasy" and a stall tactic to avoid making immediate changes. "It's kind of a cruel hoax as far as the public is concerned because it raises expectations that we're going to be able to continue living this way, and we're not."
As the changes come down upon us, Americans may have a difficult time understanding what is happening and why. As we're already seeing in this year's simplistic and demagogic presidential- campaign discussion of gas prices, political leaders may find it easier to focus more on whom to blame rather than how to come together to address the fundamental problem.
"Many Americans will draw the conclusion that they're being somehow cheated by the oil companies or that there's some kind of corporate conspiracy that's causing all this trouble and they're going to militate to do something about it and, of course, that won't really be the problem. The problem is geological-about what's in the ground and where it's at and how much of it there is. I think that we'll elect maniacs to try to turn back the clock and bring back the 1990s," Kunstler says. "It's going to be very painful and there are going to be a lot of losers created in this process. They're going to be angry."
Matt Simmons is not prone to hyperbole. That's why you sit up when he says Americans should be taking the peak oil crisis "as seriously as we took the threat of thermonuclear war." He thinks there should be hysteria over rising gas prices, but the hysteria should be there for a different reason. "America got so spoiled with energy costs being free. We need to do a better job of explaining how cheap a $ 2 gallon of gas actually is."
There is ample evidence that Americans would respond favourably to a presidential candidate who stepped up and talked about energy issues in an honest, straightforward way and began preparing Americans for the bumpy ride ahead. According to one participant in a recent series of yet-to-be-published campaign research studies by Republican pollster Frank Luntz, Americans are responding "favourably to any messaging that includes corporate accountability-and even more favourably to industry efforts to utilize alternative energy sources such as wind and solar."
Oil giant BP-Amoco's successful recent corporate makeover suggests the same thing. BP's public image, by any metric you choose, went through the roof after they changed their brand to mean "Beyond Petroleum" and began projecting an image of caring about the environment. If you want to buy a super-efficient Toyota Prius these days, there's an eight-month waiting list. Toyota can't make them fast enough to keep up with demand. The American people may be more ready to have a serious discussion about energy than their political leaders give them credit for.
Running as the Anti-Bush, Kerry has so far failed to craft a compelling theme for his campaign. Yet it is not at all difficult to imagine the Democrats building an inspiring message around energy. Americans' relationship to energy underlies and ties together most of today's headlines-gas prices, Middle Eastern terrorism and war, the environment, suburban sprawl, traffic-clogged roadways, the obesity epidemic. Talking about changing the way that we think about and use energy would give Kerry an entry point into discussing just about every hot-button issue in American life today.
Kerry could use rising gasoline prices and spiralling violence in the Middle East as a way to create a sense of urgency around energy issues. He could propose a Manhattan Project for energy independence. Such a project would include converting our blackout-prone electrical grid to wind power, incentives for high-fuel-efficiency automobiles, rebuilding the nation's passenger rail system and re-designing American communities for less automobile dependency.
Like the creation of the federal highway system in the 50s-also predicated on urgent national defence needs-a massive investment in a sustainable energy economy would create new industries, research, jobs and benefits that we probably can't even imagine. It would also give the nation a sense of mission.
Unlike President Bush, who after the crisis of Sept. 11 asked the American people to go shopping, Kerry should ask something meaningful of the American people. He should ask every American to change at least one thing in their homes, workplaces and communities to make the nation a bit more independent of foreign energy. Americans would respond. We love self-help and personal transformation. It's our national religion.
In fact, only in the last few days, the Kerry campaign has started to head in this very direction, including more substantial discussion of energy in his campaign speeches.
"A strong America begins at home," he said, "with energy independence from the Middle East... Our dependence on foreign oil is a problem we must solve together the only way we can: by inventing our way out of it. Let's ensure that no young American soldier has to fight and die because of our dependence on foreign oil."
Energy. Power. Change. These are the campaign themes of a presidential candidate worth electing this year.

Wednesday, March 24, 2004

Natural Gas and The Energy Supply

"We now believe as much as 55 trillion cubic feet of natural gas exists in the deep shelf area of the Gulf of Mexico."
"If converted into electricity, 55 trillion cubic feet of natural gas could provide nearly a three year energy supply for every home in America."
Interior Secretary Gale Norton

Friday, February 20, 2004

War Cycles

Mike Alexander's War Cycle

War Cycles: Generational Cycles in Conflict and World Leadership
The American political scientist Quincy Wright was the first to describe the phenomenon of regular cycles in warfare. Although wars themselves are scattered more or less randomly throughout history the incidence of major wars is not. Wright identified clusters of major wars spaced about 50 years apart. A good way to see these cycles is by looking at total fatalities in great power wars over time. Today the great powers are the United States, Britain, France, Germany, Italy, Russia, Japan, China and maybe India. These eight nations possess the largest economies or largest populations, and six of them have nuclear capability. Prior to the Gulf War we would delete India. Before World War I we would delete China and Japan and add the Austrian (Hapsburg) empire. Prior to the mid nineteenth century, we would delete Italy and the United States and replace Germany with Prussia. Prior to the nineteenth century we would add Spain, and before 1715 we would delete Russia and add the Ottoman Empire, Sweden and the Netherlands.

Figure 1. Generational average war deaths per 100,000 population

Wright also advanced the idea that cycles in warfare were related to Kondratiev cycles. Specifically, Kondratiev upwaves show more intense warfare than downwaves. Figure 2 shows that war cycles do indeed line up very well with Kondratiev cycles, peaks in war intensity are associated with Kondratiev peaks. The placement of World War II just 27 years after World War I breaks this neat pattern. Instead of occurring at a K-peak like all the other cycles, World War II occurred at a K-trough.

Wright also identified a second pattern of unusually big wars that occurred every other cycle. These big wars were associated with the rise and fall of great powers. The historian Arnold Toynbee also discussed the existence of one hundred year cycles of war and peace. The leading proponents of this cyclic view of war today are the political scientists George Modelski and William Thompson. Modelski and Thompson stress naval power (and its modern extension, carrier-based airpower) as the key military underpinning of world political leadership. Their choice of successive world leaders: Portugal, the Netherlands, Britain and the United States reflects this bias. All four of these nations projected military power over a world-girdling trading empire through a first rank navy.

The other major determinant of power is economic, specifically the pioneering of new leading sectors of the world economy. Modelski and Thompson argue that the pioneering fifteenth century voyages down the African coast, begun under Portugal's Prince Henry the Navigator, set the stage for Portugal's world leadership period early in the sixteenth century. Similarly, the maritime and financial innovations made by the Dutch in the sixteenth century set the stage for Dutch leadership in the seventeenth century. The pioneering of tobacco cultivation in Virginia and the coming of "Dutch finance" to Britain during the Glorious Revolution set the stage for British leadership in the eighteenth century. Britain won another round of leadership in the nineteenth century by their pioneering of the industrial revolution late in eighteenth century. Finally the spread to America of British ideas of liberal democracy in the eighteenth century and the practice of industrial capitalism on a continental scale in the nineteenth led to American leadership in the twentieth century, which continues to this day.

This idea of a nation's pioneering of a new leading sector (what we have called "new economies") leading directly to subsequent world leadership fits in very well with the correspondence between war cycles and Kondratiev cycles. We have already seen that the development of new economies is closely aligned with the Kondratiev cycle. What is not so clear is why leadership cycles should occur every two Kondratiev cycles (~100 years) when development of new economies and outbursts of great power war occur every Kondratiev cycle (~50 years).

The role of challenger typically is played by a continental power, whose major strength is land-based. Ludwig Dehio has developed a view on war cycles that focuses on these land-based powers. He notes a tendency for peaks in land-based power to occur around the time of low points in sea-based power, and vice versa.