Sunday, May 25, 2008

Has Peak Oil Arrived? (II)

Could there not be other salient factors that are driving the price of oil up? Factors separate from a fundamental supply shortage? This appears to be the problem now, as these other factors are operating and – if anything – clouding the extent of the supply problems.

One factor is the dollar’s fall, and in particular Fed policy (in cutting interest rates) as it pertains to dollar debasement. As noted in a recent Wall Street Journal Editorial (‘Oil and the Fed’, May 23, p. A14):

“When the value of the greenback falls, and especially when speculators anticipate that it will fall further, oil sellers demand more dollars for their product. This was the experience of the 1970s, the last time the Fed lost its monetary moorings”.

The editorial notes also, in reference to another article on the Op-Ed page, that had the Fed merely kept the dollar stable against the euro, the price of oil would be closer to $80 a barrel. Thus, the Fed driving the dollar value downwards by it interest rate cuts (and cheap money infusion) are making the matter much worse. Indeed, their policy – as I noted in a previous blog entry- is ratcheting up inflation severely.

In the last year the wholesale inflation is up 6.5%, and the Fed’s contrived “core inflation” has rendered a negative real interest rate. Meanwhile, Univ. of Michigan Economist Michael Darda highlights a 5.2% rate in its year-ahead survey (cf. WSJ, ibid.)

All in all, one can surely assign much blame to the central bankers who are delivering pre-Peak Oil conditions before it has possibly even commenced.

Not mentioned yet, however, is the artificial demand (and hence price increases) contributed by commodities trading and speculation by the likes of pension funds, hedge funds etc. A disturbing report last week on CBS News noted that, in fact, the purchases by pension funds and their cohort are now nearly nine-tenths of the total purchases of oil by China and India combined.

From this vantage point, it makes sense that the regulatory bodies controlling commodities brokerages need to step in and put their foot down: NO more speculating by non-national entities, private traders or funds. If the stock market’s performance isn’t good enough for you right now, tough! Wait it out! But don’t try to wrest private gains while millions of others have to suffer for your folly! (Since spiking oil prices are also driving up the cost of food in the developing world)

Another reason offered, as per the Financial Times article cited in the earlier entry, is that oil companies are pulling back on production. They no longer wish to make the enormous investments in exploration, and this is creating an artificially low supply.

More likely, there exists an extraordinarily low “spare capacity” in all the oil-producing nations, as observed by Martin Wolf in a recent Financial Times article (‘The Market Sets High Oil Prices to Tell us What to Do’, May 24) This translates into ever increasing difficulty to enhance supply by the needed 1.4 m barrels a day to meet demand. As Wolf points out: “This means an extra Saudi Arabia ever seven years”.

Thus, we return again to the supply problem and the fact that even if many new fields and found and opened up, there will not be sufficient oil so long as the supply isn’t mitigated or controlled. A ‘Saudi Arabia’ every 7 years is indeed preposterous, and highlights why humanity got itself into such a predicament to begin with.

That is, an inability to control and curb its insatiable energy greed.

The U.S. is certainly one major culprit in this piece, retreating from enlightened fuel-efficiency standards imposed during the 70s, to a ‘devil may care’, greedaholic response by the 90s. By that time, SUVs were again in vogue, and in fact tax breaks were being given for certain models. This was pure, unadulterated lunacy. That and talk of opening up the ANWR while not aspiring to a single action on the conservation front.

The Senate and Congress critters themselves were obdurate about change. In a 2002 letter to my Senator, Wayne Allard, I implored him to get going on reinstating fuel efficiency standards – rather than trying to drill the ANWR. As I pointed out:

The bottom line is that – when the spin and hyperbole are removed- the ANWR is simply not worth the cost-benefit for the few months (to maybe a year’s) worth of petroleum it will produce. Indeed, the costs of transshipment to the lower 48 may well negate any ‘strategic benefits’ such as you portray in your letter. More than likely, this supply would have been traded to other countries on the open markets and never used at all in the U.S.

The fact is that an excellent opportunity recently presented itself in congress to consolidate the concept of foreign oil-independence (at least to make a good start) but you in congress dropped the ball. That is, the chance to mandate higher fuel efficiency with gas guzzling monstrosities such as SUVs. This was voted down, and then you all the nerve to shamelessly argue for ANWR!!?

There are an abundance of things which can be done to wean Americans from their foreign oil addiction, but I don’t see you in congress doing squat to address anything substantial. All you want is the ‘easy’ or expedient path – to wit, drilling in a protected preserve. That doesn’t convince me one single iota.

I would not seriously consider it until and unless the following measures are seriously considered and the requisite legislation passed:

i) Serious conservation. The fact is that in the last fifteen years fuel efficiency has plummeted an astounding 28% - primarily because of the idiotic marketing of SUVs and similar anachronistic gas guzzlers. We can in fact save more than five times what’s (maximally) projected in the ANWR by the simple act of legislating (mandating) higher fuel efficiency in SUVs – comparable to what is being obtained in much smaller cars. Yes, the auto-makers will belly-ache, but they did with legislation mandating clean air standards more than three decades ago. They’ll get over it.

ii) The serious development of alternative fuel-energy sources: solar, geothermal, and hydrogen fuel – as well as electric –solar combinations of fuel cells for motor vehicles. Whole nations – such as Israel- have largely converted to solar, reducing their oil dependence more than 50%. There’s no reason similar systems can’t be developed in the U.S. (particularly the southwest).

As I said, the Senate having dropped the ball on mandating higher fuel standards for gas-guzzlers, I cannot take seriously the desperate pleas for ANWR drilling. The chance was there to make a difference, but you all bungled it on Capitol Hill. Now, please try again – and do it this next time.

While I didn’t expect a whole lot to come of the letter (I never do when writing any of Washington’s minions, which is why I seldom do it anymore), Allard’s response to my letter was less than gratifying. He basically said that as Americans who live in a “free society” we have the right to purchase the products – including vehicles- we wish.\

Yep, just terrific, torch the planet to preserve our sovereign American right to squander finite resources at will and buy what we want!

Will today’s oil prices, however they are caused, help us to prepare for the real Peak Oil? That will be addressed in the conclusion.

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