Double, double, oil and trouble

(Photo: An explorer at work in Hoima, from

Epic quest for oil in Uganda, by Francis Mugerwa, no photo credit)

Let's face it, short term predictions about oil prices, supply, and demand are one of two things: simple because you presume a straight line, or bullshit either because something in the world changed that you didn't/couldn't account for or because the short term is too short to be useful. And long term, they're easy -- eventually prices get high and both supply and demand drop. Of course, exactly when "eventually" is does remain a question.

With the exception of the Saudis and a few dead-enders, everyone accepts that an extraction peak is coming. Whether that peak is recently past, coming soon, or a decade or two out is still a legitimate subject for debate (although that last is most unlikely, I think). Similarly, almost everyone expects a continuing worldwide increase in demand, especially from India and China.

But right now, we are riding a delicate balance between reduced demand (caused largely by the economic downturn) and at-best-stable supply. Prices are a far cry from the $147 we saw or the historical $20, but have been reasonably stable between $70 and $80 for some time. I've said before that I don't see long-term $40 oil again, and I don't see any reason to change that. Unless we make substantial changes, economic recovery will drive demand for oil, which will drive prices, which will reduce recovery, and the cycle will continue. Our ways out are limited: reduce demand (through conservation, efficiency, and alternatives) or discover a new way to increase supply (through exploration and improved extraction technology). The first is under our control, the second less so. Unfortunately, we seem determined to avoid conservation and alternatives on a large scale. If we fail to address the fundamentally unstable close match between oil supply and demand* we will continue to follow this sort of cycle.

* Economics says that supply and demand curves cross and that cross is a stable market price for a good. But classical economics doesn't say a lot about the dynamics of that process. We know it's not instantaneous. We also know that the assumptions behind classic supply/demand curves are not necessarily valid in the real world (the whole concept of peak oil denies the assumption that rising prices will continuously raise supply).

Signs of Declining Extraction Rates

ExxonMobil Extends Life of Texas Field (2010.01.14):

ExxonMobil announced it will recover an additional 40 million barrels of oil at the Hawkins Field in northeast Texas, equal to the annual energy needs of more than one million Texas households.

The project will extend the life of the field, discovered by the oil giant in 1940, for an additional 25 years. Though a small part of ExxonMobil's reserves the extension of life for such a mature oil feed is at least some evidence that new technologies can help push back the reckoning of the world's "peak oil" moment.

This is a 70 year old field, so it's no surprise that extraction rates are low. What's interesting is that ExxonMobil is willing to spend a lot of money to extract another relatively paltry 40 million barrels (a bit over two months US demand) over 25 years when they could spend that money elsewhere.

Maybe there's no where else for them to spend it?

Aramco to inject CO2 into biggest oilfield by 2012 (2010.02.15):

State oil giant Saudi Aramco plans to inject carbon dioxide into the world's biggest oilfield by 2010, a year ahead of previous plans, a government official said on Monday.

The giant field Ghawar pumped 5 million barrels per day (bpd) in 2008, more than half of top oil exporter Saudi Arabia's output. The kingdom announced plans last year for a pilot project to pump the climate-warming gas into the field to both improve production and reduce emissions.
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The kingdom plans to inject 40 million standard cubic feet per day (cfd) of CO2 into the field, and has said this is part of the global push to trap emissions rather than because it needs to enhance oil recovery from the field.

Saudi Arabia is famous for being close-mouthed about their level of reserves, and is widely suspected (as are most OPEC members) of inflating their reserves, because OPEC allocates extraction quotas partly based upon reserves. Although Saudi Aramco claims that injecting CO2 is "part of the global push to trap emissions rather than ... to enhance oil recovery", there's no question that gas injection will increase extraction. Gas injection is considered a "secondary recovery" technology.

Sign of declining discovery

One of the Largest Oil Discoveries in 20 Years (2010.02.08):

One tally pegged the Giraffe field -- anyone want to guess how they came up with that name? -- at some 400 million barrels. Heritage's CFO, however, suggested that the wider "Giraffe-Buffalo" field, which encompasses some 3,420 square miles, could contain several billion gallons of crude.

The find is the largest in Sub-Saharan Africa in at least the past 20 years. Previously, the largest onshore fields discovered in sub-Saharan Africa were at Rabi-Kounga in Gabon, where 900 million barrels were found in 1985, and at Kome in Chad, where 485 million barrels were found in 1977.

Four hundred million barrels of oil is about 22 months of US demand and less than 5 days of worldwide demand. The suggestion that the Giraffe-Buffalo field might contain several billion gallons has no real basis -- it's essentially a marketing claim and it does not suggest reserves (which depend upon recovery rate) but total oil in place.

Peaking? Duck!

World Oil Capacity to Peak in 2010 Says Petrobras CEO (2010.02.04):

Gabrielli states in his presentation that the world needs oil volumes the equivalent of one Saudi Arabia every two years to offset future world oil decline rates.

Gabrielli shows world oil capacity peaking in 2010 as shown in the translated version of his chart below. He shows historical world oil production to 2008. Next, he applies a decline rate of 5% per year to existing production represented by the lower light blue area. He then forecasts capacity additions from sanctioned projects estimated from Wood MacKenzie's Global Oil Supply Tool. These oil capacity additions are in four categories: OPEC new projects, OPEC expansion projects, non-OPEC new projects and non-OPEC expansion projects. In 2010 the biggest contributor is OPEC expansion projects which includes about 1.3 mbd from Khurais and 0.8 mbd from Khursaniyah. These additions include both crude oil and natural gas liquids and are sourced from Saudi Arabia's official statements which lack independent verification.

Have we reached peak oil? (2010.01.18):

2009 was a banner year for oil discoveries, with a lot of headlines being generated by finds in Brazil and the deep waters of the Gulf of Mexico. In fact, we saw discoveries on the order of 10 billion barrels of reserves, the highest rate since 2000 when the giant Kashagan field in Kazakhstan was discovered. However, the world is consuming around 83 million barrels a day, which equates to 31 billion barrels a year. So even in this banner year, we are barely replacing one third of the oil we consume.

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When you look back at the East Texas oil boom early last century, oil wells were being drilled a few hundred feet deep. In the deserts of Saudi Arabia and Iraq, giant oil fields are so close to the surface that you could practically stick a straw in the ground and strike oil. These big, easy finds were relatively inexpensive to develop.

But check out where we're looking now: The latest Gulf of Mexico discovery, Tiber, is a well drilled to a depth of 35,000 feet and lies beneath 4,000 feet of water. Think about that; the well is a mile deeper than Mount Everest is tall. It will likely take 7–10 years before this discovery produces anything. While this is a significant discovery, it certainly isn't cheap oil.

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Let's put oil-field declines in context. World oil production is roughly 83 million barrels per day. Various estimates place the underlying global decline rate somewhere between 4% and 8% per year. That means that each year we have to add about five million barrels of new production to keep production flat. Step five years out, and we have to replace 25 mb/d of production, or about three times Saudi Arabia's current production. That's a lot of new wells that need to be started just to offset declines.

Plus, this does not account for any growth in oil consumption. Absent global recessions, underlying oil demand is increasing by about 1% per year. This means that five years out we'd need another 5 million barrels of oil per day just to keep the current equilibrium. Frankly, we're not certain that we'll be able to reach that level of production.

Saudi Arabia preparing for oil demand to peak (2010.02.15):

A top Saudi energy official expressed serious concern Monday that world oil demand could peak in the next decade and said his country was preparing for that eventuality by diversifying its economic base.

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Al-Sabban said the potential that world oil demand had peaked, or would peak soon, was an "alarm that we need to take more seriously" as Saudi charts a course for greater economic diversification.

"We cannot stay put and say 'well, this is something that will happen anyway," al-Sabban said at the Jeddah Economic Forum. The "world cannot wait for us before we are forced to adapt to the reality of lower and lower oil revenues," he added later.

Some experts have argued that demand for oil, the chief export for Saudi Arabia and the vast majority of other Gulf Arab nations, has already peaked. Others say consumption will plateau soon, particularly in developed nations that are pushing for greater reliance on renewable energy sources.

Saudis say don't worry about peak oil (2010.01.28):

There is still plenty of oil in the ground and the world should put aside fears about "peak oil", the head of the Saudi state oil firm Saudi Aramco said on Thursday.

Of course, the Saudis could have no possible reason for encouraging the world to continue to guzzle oil like there's no tomorrow. In all seriousness, as noted above, the Saudis have incentive to inflate their reserves, and no incentive at all to encourage the world to switch from petroleum to alternative energy sources.

Peak Production vs. Oil Price (2010.02.05):

Let me begin with the narrative that all of my energy economics students must know perfectly after my second lecture. The Russian oil output is probably close to peaking, and in any event the director of one of the largest Russian firms says that his country will never produce more than 10 million barrels per day (= 10mb/d). This number may be slightly wrong, but it happens to be one-tenth of the amount (= 100 mb/d) that the present CEO of Total (the French oil major) says is the absolute maximum for world production. (Another Total executive recently suggested 95 mb/d).

If this is not sufficient, consider the following. The discovery of what we think of as conventional oil peaked in 1965. In the early 1980s the annual consumption of oil became larger than the annual discovery, and at the present time only about 1 barrel of (conventional or near-conventional) oil is discovered for every 3 consumed. According to a BP (BP) document, of 54 producing nations only 14 still show increasing production. 30 are past peak output, while output rates are declining in 10.

Non-OPEC countries produce 60% of world oil, and that output has peaked. It is also my opinion that while Russia may not join OPEC – or be allowed to join – it will go along with OPEC’s production agenda. OPEC is the arbiter of the world oil economy today and in the future, although that topic is too complex to be taken up in this note. Output in the U.S. peaked in 1970 at 9.5 mb/d, and production turned up when the giant Prudhoe field in Alaska came on line, but the previous peak was never attained. Instead the new peak was 7.5 mb/d. Today it is less than 6 mb/d, and steadily falling. North Sea oil (Norway + UK) peaked just before the end of the 20th century, and the super-giant Cantarell Field in Mexico – the third largest in the world – peaked slightly before that. Its decline is steeper than students of Mexican oil could possibly have expected.

Roughly two years ago the Saudi oil minister stated that his country would soon be producing 15 mb/d of oil in the not too distant future, and that output could be held for 50 years, but Saudi production has almost certainly peaked at less than 10 mb/d, despite what appears to be exceptional efforts to raise it to 10 mb/d after about 2005. Of course, as far as I am concerned, it does not make any difference what an oil minister or foreign oil expert says about Saudi intentions. Thirty years ago or so it was decided that (sustainable) Saudi production would never exceed 10 mb/d, although a surge output of 2 mb/d might be made available.

Whither Prices?

Gasoline Prices Revisited (2010.01.13):

It has been 18 months since we all worried very much about high oil prices. Starting in July 2008 gasoline prices took an historic plunge dropping from a U.S. average high of $4.11 a gallon all the way down to $1.70 in January 2009.

In retrospect this price drop was a good thing for it did more to slow the downward spiraling recession than most people realized. In the last 12 months however, the situation has reversed and the average price for gasoline is pushing $2.80 a gallon. An increasing number of commentators are starting to talk of the return of $100 oil and $3+ gasoline.

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There are numerous factors that will affect the balance of forces determining gasoline prices six months from now - the economic situation in the OECD nations, the pace of economic growth in China, India, and several other Asian countries, the stability of the U.S. dollar, the weather, stability of Iran, and perhaps even an OPEC decision to increase oil production if prices get too high.

While it is difficult to foresee clearly the interaction of all these factors, the conventional thinking is that U.S. and OECD oil consumption will remain flat, the Saudis will continue to withhold a couple of million barrels a day (b/d) from the markets, and China will continue to grow rapidly in 2010. Many believe the Chinese are coming up on a massive real estate bubble-burst one of these days, but this still seems to be a couple of years away and is unlikely to have much to do with gas prices next July.

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Perhaps the most important of these are the announced plans of the U.S. Federal Reserve and Treasury to stop supporting the financial industry, the housing industry, low interest rates, and whatever else they are overtly or covertly subsidizing by the 1st of April. The idea would be to let the U.S. economy try to stand on its own feet prior to the November mid-term elections without the help of hundreds of billions in government subsidies. Whether this plan actually comes to pass is problematic, another couple of months worth of bad economic news may lead to a decision to continue the programs.

The greatest danger from hasty removal of government intervention is the likelihood that interest rates will increase substantially and that the U.S. dollar will fall thereby sending dollar-denominated oil prices higher no matter what happens to supply and demand.

At the minute, a substantial drop in oil prices in the next six months seems unlikely without a major untoward development. Shortages from insufficient global oil production are still a few years away, so for the time being the value of the dollar and the demand for oil will be the controlling factors. A Chinese economic meltdown still seems to be some years off. A better bet is the collapse of the U.S. equities markets which have been disconnected from reality for the past nine months.

We are already getting some numbers showing that the demand for gasoline in the U.S. is slowly dropping - this probably has something to do with the unemployment rate is which is realistically over 20 percent. As gasoline is so important to the average person in the U.S. reductions in automobile use will likely be slow and undertaken reluctantly. The inconveniences of less driving still outweigh the cost of gasoline for most.

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Unless there is a major geopolitical upheaval in the next six months, oil prices are likely to creep up as they have been doing since last May. Gasoline prices will continue their tradition winter/spring climb likely passing the $3 per gallon mark which seems to be psychological point that impedes the sale of large cars.

How much further prices will go is impossible to responsibly forecast for there are simply too many unknowable variables involved.

The only thing we can be sure of is that this increase is going to damage, perhaps fatally, prospects for a U.S. economic recovery. With more and more money being sent away to pay for "essential" gasoline supplies, there is going to be less and less to pay for everything else.

Start preparing for oil at $200 a barrel (2010.02.08):

...the key issue is not whether petrol and diesel prices should reflect today’s oil price of $75/barrel. It is that booming Asia will in a decade push oil to $200/barrel and maybe $300/barrel. India must prepare for a world of scarce, expensive oil instead of pretending that astronomical subsidies can ensure price stability.

Crude prices off, amid rising risk aversion... (2010.02.07):

In its latest economic brief on the oil market and budget developments, NBK noted that, crude oil prices fell sharply in the second half of January, moving closer towards the $70 per barrel (pb) level. After reaching the $80 pb mark on January 11th, the price of Kuwait Export Crude (KEC) fell by $9 to $71 pb by the 26th. Two factors seem to have been catalysts for the fall.

First, rising risk aversion across global markets saw a flight to the US dollar, which traditionally puts a damper on crude prices.

Secondly, the announcement of new measures to stem the growth of credit in China raised concerns of slower oil demand; China has accounted for 40% of the growth in global oil demand in recent years.

Yet despite the latest leg down, more bullish analysts still expect crude prices to remain range bound between $70-80 pb over coming weeks, before pushing higher as tighter crude market fundamentals (including rising demand and shrinking inventories) start to reassert themselves.

...This seems to reflect the view that current price levels – despite some volatility – are essentially well supported, backed by a recovering world economy and commitment from OPEC to keep prices in the $70-80 pb range.

...The Centre for Global Energy Studies (CGES) has revised up its forecast for incremental oil demand in 2010 for the second month in a row, this time to 1.2 million barrels per day (mbpd), at a 1.4% growth rate, from 1.0 mbpd a month earlier. This compares to its forecast of 0.7 mbpd in November. The centre expects year-on-year growth in demand in every quarter this year, although decelerating as the year unfolds as the base effect from weak growth in 2009 recedes. The International Energy Agency (IEA) has retained its bullish forecast for growth in oil demand of around 1.4 mbpd (1.7%). Both institutions (and others) expect practically all of this year’s growth to come from countries outside the OECD. The so-called BRIC countries – Brazil, Russia, India, and China – for example, could account for half of all the increase in global oil demand this year.

There's more...

What Condition Our Condition Is In

(Photoillustration: "Big Red Letters on a Dead End Sign" by Evan Robinson, Group News Blog)

Here We Are

It's been seven months since I lasted addressed our condition. In the meantime we've finished a two-year campaign and election, with historic results. Those of you in America have survived the Thanksgiving Holiday (most of you), although not everyone overseas did, and there is much wailing and gnashing of teeth over Black Friday, even as sales seem to be going better than many feared.

So let's take a look at a few other elements of our condition...

That Devil's Madness -- War

Mumbai is on our minds. Asymmetric warfare is as much about media coverage as it is about inflicting military defeat, and it was genius (twisted, evil genius) to stage the attack during American Thanksgiving when much of the country is already in front of the television for traditional parades, specials, and both college and professional football.

While debate rages about the identity and backers of the Mumbai attacks, the NY Daily News says that as few as 10 attackers were involved:

The 60-hour Mumbai terror spree that killed at least 174 people was the brutal handiwork of just 10 Islamic militants who wanted to create a 9/11-caliber catastrophe, officials said Saturday.

The Guardian reports that the only surviving attacker, Pakistani Azam Amir Kasab, says the militants trained in Kashmir for five months:

Kasab reportedly said the mastermind of the plot briefed the militants to "target whites, preferably Americans and British".

He said the militants, who were highly trained in marine assault, had arrived in the city by boat. They planned to blow up the Taj Mahal Palace hotel after first executing British and American tourists and then taking hostages.

Police sources said Kasab told officers that he and his fellow terrorists trained in Pakistan-occupied Kashmir for five months before taking a month off before the attacks, the Daily Mail reported.

They left an isolated beach in Karachi for Mumbai on November 21 and were each given eight hand grenades, an AK-47 rifle, an automatic pistol and ammunition.

The Sidney Morning Herald reports that the targets were extensively scouted and attackers prepared with CQB training and memorisation of the target layouts. They hoped to kill more people than the 9/11 attacks:

The terrorist gang, thought to number as few as 10 gunmen, had planned to kill 5000 people and destroy the iconic Taj Mahal Palace hotel and the stock exchange. In the end, their murderous toll was closer to 200, and left the Taj Mahal and the Tident-Oberoi hotel badly charred and damaged.

Kasab had months of training before the attack where he was instructed in the use of military weapons and explosives. He and his fellow attackers, aged between 18 and 28, were also drilled in close quarter combat.

An Australian witness, Ray Lacey, who saw the attackers in the foyer of the Taj Mahal, said they were highly disciplined and did not waste bullets.

Kasab told investigators they were instructed to conserve their ammunition so they could sustain their attack for as long as possible. "I have done right. I have no regrets."

Kasab told interrogators that most of the volunteers for the suicide mission spoke Punjabi. They were given false identities and were discouraged from interacting with each other beyond what was barely necessary.

Regardless of the origin and backing of the attackers, Mumbai shows a new sophistication in media use, plotting attacks of a new and different kind apparently specifically to take advantage of American media viewing patterns: the timing of the attack, the sophistication of the targeting and planned duration of the attack, even down to one of the attackers being captured and talking freely to the media afterward.

As with most 4GW, the damage done was hugely disproportionate to the investment required by the attackers. The 9/11 attacks cost less than $500,000 to carry out, and bore a ginormous price tag. Since half of that $500,000 was in-US expenses and these attackers staged and trained in Kashmir, I wouldn't be surprised to find out that hte cost of putting this operation on was less than $100,000 -- and the damage to the Indian economy may already be $20 billion.

Arr, Matey!

Not too terribly far away, from an American point of view, Somali "pirates" have been very active, hijacking the Saudi-owned VLCC Sirius Star, a Ukranian vessel carrying Russian T-72 tanks and other weapons, a Yemeni steel carrier, and others.

Somalia has lacked a functioning central government since the early 1990s, and hasn't had a remotely democratic government since 1969. It's not much of a stretch to say it's never had a truly western-type democratic government. Regionalism and tribalism have led to breakaways (Somaliland), military rule, civil wars, and more or constant unrest.

One way to regard the Somali pirates is as disaffected and disadvantaged fishermen who can no longer operate in the current environment. With the officially recognized "government" of Somalia in control of less than half the country, the rule of law has disintegrated on a national level and local law is a mix of tribal law, Sharia, and old English common law left over from British Somaliland. Another way is to consider them regional terrorists or criminals. Which they are changes the long-term solution to the problem, but not the short-term one.

Regardless of their origins, Somali pirates (and their counterparts off Nigeria) are tightening the screws on the worldwide movement of goods, raising the risk of shipping and the price of goods, including oil. If they acquire the technology to threaten undersea cables, they could have the capability to dramatically disrupt electronic communication as well.

With American military forces stretched beyond their limits in Iraq and Afghanistan, the US doesn't have the muscle to maintain open sea lanes in the Gulf of Aden and off the Horn of Africa anymore. Many countries have been "free-riding" on the US Navy's ability to suppress piracy since WWII and especially once the US because the world's only hyperpower. As the limits to American power projection become clear, those nations are going to have to start stepping up with naval forces, on-vessel weapons and military personnel (or contractors like Blackwater), and money, which in the current economic environment may be the hardest to come by.

(Chart: Dow Jones Industrial Average, Yahoo Finance)

Melty, Melty Cheese

Anyone who doesn't know about the global financial meltdown of 2008 hasn't been paying attention. As of today, the Dow is down about 33% for the year, but ten days ago the Dow was down more than 43% for the year. From 2007.10.12 to 2008.11.20, the Dow dropped 46% from its high. At 8829, the Dow is now about where it was in March 1998.

Gold has dropped 20% from its historic high of about $1000, and at 813, it's close to the previous peak of January 1980. Many other commodities have dropped to 1/2 or 1/3 of their peak values over the last year, including Aluminum, Appalachian Coal, Cobalt, Copper, Lead, Nickel, Palladium, Platinum, Ruthenium, Silver, Steel, Tin, Uranium, and Zinc. At least some of those commodities have returned to their "normal" values of 5-10 years ago.

While a barrel of oil has dropped to about 1/3 of its peak price (currently $53 compared with a July peak of $147), it is still 2 1/2 times the historic average price of just over $20/bbl.

US electrical power use is dropping.

Dick Kelly, chief executive of Xcel Energy Inc., Minneapolis, says his company, which has utilities in Colorado and Minnesota, saw home-energy use drop 3% in the period from August through September, "the first time in 40 years I've seen a decline in sales" to homes. He doesn't think foreclosures are responsible for the trend.

China's growth rate is slowing. Fast.

Why then is China slowing so sharply? Simple, real estate investment has hit a wall. After growing at 20% y/y for a long time, real estate investment stalled – with a y/y growth rate of around 0% (Figure 5). That means that China is in turn producing more steel and cement than it needs, and producers of steel and cement are cutting back. That in turns hurts iron ore exporters…

This though is very much a result of China’s own policy choices. Rather than allowing the real exchange rate to appreciate back when China was truly booming (05-late 07/ early 08), China’s policy makers opted to rely on administrative curbs on credit growth. That left China more exposed to global slump in demand – as it kept exports up by limiting real appreciation even as it credit curbs limited the amount of froth in the real estate market back when China was booming and real interest rates were negative. China invested a lot in real estate, but it is no Dubai. But China’s policy makers still look to have slammed the brakes on a bit too hard. Rather than slowing gradually, real estate investment fell off a cliff.
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While real exports contributed positive to GDP growth in 2008, they won’t contribute in 09. The World Bank forecasts that for the first time in a long time, 2009 real import growth will exceed real export growth. In 2005, real exports grew about 10% faster than real imports (23.6% v 13.4%). Many economists remain – for reasons that to be honest elude me – reluctant to draw the obvious connection: the most likely explanation for China’s strong real export growth is the large depreciation the RMB in 2003 and 2004. That combined with administrative controls – which limited lending, investment and ultimately imports – to create China’s large current account surplus. Real export growth exceeded real import growth by 5 percentage points in 2006 and 2007 – and by 4 percentage points in 2008.

The positive contribution of net exports to GDP is forecast to end in 2009: real import growth will exceed real export growth by 3 percentage points.

Oh, and the US has been in a recession for just about a year now. U-6 (an alternative measure of unemployment maintained by the BLS since 1994 or so) has hit a seasonally adjusted 11.8%, the highest ever recorded. We've lost about 1.2 million jobs this year, an especially stunning figure when you remember that we need 1.8 million new jobs a year to keep up with population growth. So we're down 3 million employed people in 2008.

In an effort to stop the meltdown, the US government has already committed at least a trillion dollars to the financial sector, and central banks the world over are scrambling to avoid a disaster.

Peak Experience

The good news is that the average US price of a gallon of gas is down to $1.825 as of 2008.12.01, a 56% drop from the record high $4.114 set on 2008.07.17. Even better news is that global petroleum demand is down:

Worldwide demand will decline by 20,000 barrels per day (bpd) in both 2008 and 2009 to 86.03 and 86.01 million bpd respectively, according to a Reuters poll of 11 analysts, banks and industry groups.

The slight fall is a large shift from a Reuters poll of experts in August, which forecast demand would increase by nearly 1 million bpd next year. Demand has not declined since the early 1980s, following the 1979 oil crisis and a severe recession in the United States.

"Global GDP growth is the main driver of oil demand, and with the economic slowdown we see global GDP rising by just 1.2 percent next year," Michael Lewis, head of commodities research at Deutsche Bank, said.

The bad news, of course, is why demand is down. US demand is expected to drop about 1 million bpd, or about 5% (other reports say 6.7%). That drop will be accompanied by a 1.4% drop in GDP in 2009. World GDP growth is expected to drop from 4% to 2.5% this year and under 2% next year.

Some might seem to be overreacting:

Make no bones about it, every past civilisation has decayed into the dry leaves of history - why should this one be different?

All those past efforts outgrew their carrying capacity, be it the Mayans with corn, the Sumerians with irrigation, or the colonist economies with dwindling extractables.

Anthropologist Jared Diamond catalogues them in his insightful book Collapse.

Those partial to more easily-digested literary offerings should try The Lorax, by Dr Seuss.

The message is identical: the collapse is usually a decline over decades or centuries, and that zero growth does not signal zero activity, just its peak.

Meaning we have to plan for a long, permanent recession.

Our society has been able to do so much more that previous ones, thanks only to the one-off use of fossil fuels.

The International Energy Agency has now signalled that we are past the peak of global oil supply, citing a cumulative depletion rate of 6.8% per annum.

7% Depletion Annually!!!!!!!

Ouch. Especially when you consider that a 1% drop in supply of oil can cause as much as a 20% rise in price.

Where Do We Go From Here?

Forecasting is fraught with peril. So rather than promoting a future, let us talk about several futures.

1) Whoopsie!

It's possible that the central banks and government intervention to save the financial sector will fail. This is a dire scenario, because a free fall (or "hard landing") of the US dollar, the Japanese yen, and the euro could leave the world without a reliable reserve currency. While the Chinese yuan might seem like an option, a tightly controlled currency (one that does not float in value according to market forces) will be unacceptable to many.

Without a stable reserve currency, the current credit crisis is going to seem like a mild spring compared to the depths of winter. Global trade will slow dramatically. Investment may halt except for government programs. The Great Depression could be a fond memory. We could be mired in slow or negative growth for a generation.

On the other hand, even this dread scenario could be considerably shorter-lived than the Depression of the 30s. Modern Keynesians believe they have a better handle on the events of the 30s and that they understand the necessary monetary moves to avoid another Depression. If they're right, our present slowdown, even with a hard dollar landing, might be largely over in 18 - 36 months.

A likely ending of this unpleasant scenario includes the world ending up with a non-dollar reserve currency. Maybe the euro, maybe the yuan is allowed to float, maybe the Indian rupee, but most likely some combination of currencies replaces the dollar.

During the downturn, no matter how long or short, economic unrest and lack of opportunity will fuel bigotry, prejudice, and terrorism. The fragility of the economic system will make it an attractive target for non-state actors, and we can expect a significant upsurge in worldwide violence and terrorism.

2) Whew!

If the Keynesians get control quickly and prove that they know what they're doing, the Great Recession of 2008 could prove to be the catalyst for the Great Green Growth of 2010 on. Monetary stimulus packages will encourage research and infrastructure spending aimed directly at the middle class and climate change. New industries will spring up and the US auto industry (now owned by a mix of union and government money) will lead the development and production of lower-carbon transportation options. Energy efficiency and lower-carbon energy generation will be fast-growth industries, leading eventually to a "green bubble" and correction.

Widespread economic improvement (not limited to the global elites) will begin to lift the "bottom billion". Jeffrey Sachs will be confirmed US Secretary of Global Equity and by 2020 the 2.5 billion people living on $2 or less a day will be living on $5 or less a day. The resulting prosperity will start a sharp decline in birth rates. Economically driven violence will decline.

Using a law-enforcement paradigm for anti-terrorism will not be entirely successful, but a combination of successful intelligence gathering and the rising economic fortunes of the global underclass will reduce worldwide terror and violence.

3) Whatever...

a) Peak Oil remains a concern. Even as the global downturn reduces demand for almost all non-food commodities, it also prevents private investment in commodity production/extraction. We will stumble along at 85-95 billion bbl for a while and between 2020 and 2030 we'll begin to see a serious decline in petroleum availability. The resulting spikes in price will revive energy investment. Who wins the race (declining petroleum supplies or alternative energy sources) is up for grabs (and government backing).

b) Global Terrorism and Violence are driven by economic factors as well as political ones. As the global economy declines and we reduce the carrying capacity of the environment, violent responses are the only options left for some. As globalism brings competing values into insular communities, clashes are almost inevitable. Fear of cultural annhilation drives the political use of violence. Getting off this treadmill requires re-visioning globalism and global aid. Large portions of the developing world are running out of easy (cheap or free) fuel sources. Aiding the bottom billion requires local knowledge, not just global money. Jeffrey Sachs has laid out a plan (pre-meltdown) which could reduce global poverty by spending roughly the US defense budget annually. We ought to be listening. The ultimate fix for global terrorism isn't military or even law-enforcement, it's economic and cultural.

c) From a bipolar superpower world we've gone to a unipolar hyperpower, and now that hyperpower has shown feet, knees, and even thighs of clay. The BRIC (Brazil, Russia, India, China) nations have the potential to re-alter the nature of world power politics. China and India are modernizing at a fearful rate, but neither is going to become a carbon copy of the US or Europe. China's interesting mix of totalitarian politics and unbridled economic capitalism has expressed itself in 8-10% growth but is now slipping. How they respond and what their political system looks like in a decade will tell us much about the world in 2100. India and Pakistan are looking at each other over Kashmir and considering what it would take to use nuclear weapons. Mumbai provides an excuse for the Indians to berate Pakistan. The Afghani conflict spills into Pakistan, provding conflict between Pakistan and the US (technically NATO, but....). A major regional conflict, possible with nukes, can't be ruled out, and would shape future politics in ways that we can't yet guess. We might go all "one world" or we might go all "every nuke for itself". Convincing Pakistan to rein in the ISI in a very public way would help a lot, but it's going to take more than that to decide about Kashmir in a way that leaves everyone involved willing to try for peace.

China's economic imperialism, especially in Africa, suggests that resource conflict over declining commodities, is inevitable. Proxy conflict over resources isn't impossible, and may even be likely. Keeping the conflict economic may slow recovery, but it will make for a more peaceful world so long as the conflict remains between more developed nations and doesn't spill over to the bottom billion. We could see a return to the proxy wars of the 70s and 80s in sub Saharan Africa but between the Chinese and everyone else instead of Soviet/US conflict.


What Condition Our Condition Is In

(Video: "Gutterballs" from the Coen Brothers' 1998 The Big Lebowski, starring Jeff Bridges, Julianne Moore, and John Goodman)

Well, I'm sorry to say it isn't exactly rosy. But it's not all black. Downturns provide the opportunity to change course, like layoffs can promote entrepreneurship. We still have choices that can improve our situation, although the combination of delay on climate change and the acceleration of the process leaves us with little time to react on that front.

If we want to prosper, investment on infrastructure is the key in the US. The trillion-plus we've spent on Iraq isn't doing nearly the economic good that it would do if invested in the US. The trillion-plus we're spending on the financial sector isn't doing nearly the good that it would do if invested in actual building and repair in the US. Sooner or later the small government people have to be thrown under the bus so the adults can get back to fixing the problem. If the US pulls out of free fall, other nations have both a safe haven reserve currency and a consumer of last resort (hopefully not quite as enthusiastic a consumer as the last few years). Recovery will exacerbate our Peak Oil problem, but some of that investment should be going to lower-carbon transportation, power, and agriculture.

We Are All In This Together....

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Bush Administration Destroys $5.9 Quadrillion in Value of American Lives

Video: Zaproot 47, July 2008

EPA Devalues Average American Life
In May, the US EPA re-calculated the 'value of a statistical life' as $6.9 million (US). This is a $900,000 (US) change in value since the last EPA calculation ($7.8 million) done in 2003. This -11% change in the value of an average American life is calculated by seeing the differences companies pay workers for jobs which have varying degrees of danger. It is used to determine whether projects which mitigate danger are worthwhile -- if the cost per statistical life saved is more than the value of a statistical life, the project is not economically viable, and contrariwise.

-11% for 5 years of George W. Bush doesn't really seem too bad, I supposed. That's only about -2%/year. 2%/year growth requires 36 years to double, so I figured -2% will require 36 years to halve. That's not so bad, because surely in the next 28 years we'll get at least one progressive President to fix the problems.

Then I took another look at the numbers.

You're probably aware that the US dollar has lost some value in the last few years. As a resident of Canada, I assure you that I'm aware of it. How does that effect this -11% number?

Badly, very badly

Let's view this 'value of a statistical life' in terms that relate to real-world quantities. We'll calculate the value of all American lives and then see the differences between the 2003 value and the 2008 value.

Population
On July 1, 2003, there were 290,447,644 Americans. On July 1, 2007 (the latest date the US Census Bureau has easily available, so we'll use that and ignore any change in population since then), there were 301,621,157 Americans.

Ounces of Gold
In 2003, the price of gold peaked at about $425/oz. In 2008, the lower end of the range gold has traded at is about $900/oz.

Barrels of Oil
In 2003, a barrel of oil traded for an average of $28. In the first half of 2008, about $98.

The Differences
At $7.8 million per, the value of American lives in 2003 was $2,265,492 billion, or 5331 billion ounces of gold, or 81,816 billion barrels of oil.

At $6.9 million per, the value of American lives in 2008 is $2,081,186 billion, or 2312 billion ounces of gold, or 21,241 billion barrels of oil.

Those are changes of -$184,306 billion, -3018 billion ounces of gold, or -60,575 billion barrels of oil. Alternately, that's a change of -8%, -57%, or -74% in value of American lives in US dollars, ounces of gold, or barrels of oil.

Value Destroyed by the Bush Administration in 5 Years?
Not quite priceless, but close enough. The value of 60,575 billion barrels of oil at the average price of oil over the first half of 2008?

$5,935,168,991,100,000 or $5.9 quadrillion

That is 1900 times the 2009 US Federal Budget.

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Oil: Less Speculation, $200/bbl, Risk Premium, and Sources.

In my previous entry "Drill Here. Drill Now. Pay Less." More Conservative Bullshit., I discussed some of the basic memes that are out there about our current relationship with petrochemicals, including the idea that speculation was at the root of the current price shock, whether the price shock is directly related to "liberal politicians" (as Newt Gingrich has suggested), oil and food, oil supply and demand, and alternatives.

Because I have a family history in the 'awl bidness' and a couple of groups I'm involved with, and because any rational person wants to understand why the world is the way it is, I try to keep up with current ideas and trends in the petrochemical world and how they effect the rest of the world.

Here are a few of the sources I read. If you are interested in what's happening, you should read them too:

Dedicated Oil Sources
The Oil Drum: Discussions about Energy and Our Future
Royal Dutch Shell plc.com
Vancouver Peak Oil Executive

Generalized Economics Sources
Paul Krugman
Brad Delong
Marginal Revolution
Paul Kedrosky

What's Changed Recently?
One thing that has changed is that the generalized economics blogosphere appears to be coming down even harder against the idea that oil is a bubble or that speculation is responsible for much of the price shock. Part of that is because "a bubble" is very poorly defined (and usually after the fact) and that "speculation" is so incredibly vague as to be almost meaningless. Technically, anyone who buys a stock or currency or any commodity in order to make money selling it later is a speculator.

Another thing that has changed is that the meme of $200/bbl oil seems to be gaining traction. A quick Google turns up more than 12 million hits. Goldman Sachs suggested the idea in March, but there were other* mentions before that. Now the conversations are happening everywhere. Deutsche Bank is warning that $200 oil would "break the back of the global economy". Call options on oil at $200 (December) are up almost 40% since the end of April.

Risk Premium
And a third thing is the risk premium. Risk premium is the amount of the price of oil attributable to various risks around the world. For our purposes, the risk premium is the rise in oil price attributable to the possibility of disruption in oil supply.

We know from previous experience that world events can have significant impacts upon oil prices. The first Gulf War was associated with nearly a doubling of oil prices. The Iranian revolution and accompanying OPEC price increase raised oil prices 20%. The 1973 embargo raised prices 187%, according to the EIA.

Several major possibilities are in the front of people's minds: Nigeria, Iran, Russia.

In Nigeria, MEND has successfully attacked (for the first time) one of the distant offshore platforms. They've also cut pipelines onshore, cutting off 120K bpd. Nigeria supplies about 2400K bpd, so that is only .5%, but the capability begins to worry one.

Iran supplies about 4100K bpd. If the US military becomes more active there, everyone expects at least part of that supply to be cut off (as a significant amount of Iraq's oil extraction capacity has been off the market since the US invasion).

Russia is the second largest extracter of oil after Saudi Arabia at almost 9700K bpd. Their extraction is declining and they are showing signs of resource nationalism, especially in natural gas.

The way risk premiums work is that each oil buyer (consciously or unconsciously) calculates an expected value (EV) for oil in the future. They incorporate their beliefs about the likelihood of a disruption event and the resulting price into that EV, and that informs the price they are willing to pay for an oil futures contract. Various sources suggest that the risk premium right now is between $20 and $50 per barrel, or between 14% and 35% of the price.

Of these, I consider the Iran scenario to be the most worrisome because of volume, but the Nigeria scenario most likely and overall, scariest. In fact, I fear that MEND is showing others how to make significant strikes against the developed nations by disrupting oil supplies. The map at the top of the post links to a dynamic map at NewScientist. Click around. Look at the "Oil pinch points" portion and the Straits of Hormuz and Malacca. It's easy to see Iran disrupting travel through Hormuz, which is only 21 miles wide. Malacca is perhaps of more concern. At 500 miles long, Malacca narrows to only 1.5 nautical miles wide and portions are only 82 feet deep -- shallow enough that some supertankers must use other passages. Despite that, roughly 1/4 of world oil travels through Malacca. In 2003, 1/3 of global piracy attacks were in the strait of Malacca (I note that Wikipedia is not the greatest source).

I can easily see effective disruption of oil transport happening in either Hormuz or Malacca. If 1/4 of world extraction were to be destroyed, embargoed, or even just threatened for a few days, there could be a price spike the likes of which the world has never seen. Sam Bodman, US energy secretary, has indicated that every 1% rise in oil demand means a 20% rise in price. Taking 25% of supply out of the equation would (by his numbers) raise the price of a barrel of oil 500%, or to about $700. I don't see it being quite that bad, but I can easily see a doubling to $280 or even $300. And I have no doubt that re-routing would happen quickly to drop prices back, and that the US Navy would be patrolling the Strait as soon as possible.

But for a few days, we'd find out what Peak Oil really means.

So that's the news. Nothing** suggests that prices are going to drop anytime soon. Conventional wisdom is against it, which may be the only argument for lower prices :-). If political worries smooth over (which seems unlikely while Bush is in office or if McCain is elected), we could see the risk premium drop. That might get us back to $100 oil, but I doubt any better than that. IMO, the most effective weapon we have against high oil prices right now is diplomacy, and I mean that in the archaic sense of talking, not the neocon sense of preparing to attack.


* Yes, I consider that link a joke.

** Actually, I just read one thing. Gasoline usage is dropping in the US, and as a result, oil stocks are rising (that is, the amount of oil stored). We had a bit of a dip in prices last week as a result before they shot back up again. We've seen the basic scenario before: oil price shock lowers economic output, which lowers oil demand, which reduces oil price. But with multiple growing economies in the world demanding oil, it's going to be harder to make this scenario work this time.

Disclosure: I am passively invested in the extraction side of petrochemicals. I do not own stock in or have any active (decision-making) relationship with any company mentioned in the post.

[Updated: 2008.07.01 14:03 PDT to add final ** paragraph about reduced demand in the US possibly lowering prices.]

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"Drill Here. Drill Now. Pay Less." More Conservative Bullshit.

Newt Gingrich, primary beneficiary of the 1994 "Contract with on America", has started a "Drill Here. Drill Now. Pay Less." ad campaign in conjunction with last year's book, A Contract with the Earth. In classic Newtian fashion, DHDNPL breaks down into a small set of bullet points:

• We have problems:
• Dictators controlling US energy supplies
• Billions of US dollars going overseas
• Airline industry in trouble
• Trucking industry in trouble
• Food prices up
• This is "a politician's energy crisis":
• Liberal politicians deny us:
• nuclear power
• clean coal
• shale oil
• offshore drilling
• We need to get the price of gasoline down in the short term
• We need to increase alternative sources of fuel in the long term:
• Hydrogen
• Nuclear Power
• Solar Energy
• Wind Power

Let's look at them one by one and then overall, shall we?

We Have Problems
Absolutely, we do. No one paying $4 or more for a gallon of gas can deny that. And every one of Newt's bullet points is at least arguably true, even if his explanations for them are sometimes not so.

The US imported between 12.75 and 14 million barrels per day (Mbpd) during the month of May 2008 against a monthly average usage during Q1 2008 of between 19.75 and 20.8 Mbpd. That translates to importing about 2/3 of our petrochemical usage at a daily cost of $1.7 billion (assume 13.33 Mbpd @ $130) or about $630 trillion annually.

The Top Ten countries of origin for US petrochemical imports are (in kbpd, March 2008): Canada (2542), Saudi Arabia (1542), Mexico (1358), Nigeria (1174), Venezuela (1033), Iraq (772), Algeria (441), Russia (402), Angola (388), Virgin Islands (290). I think it's reasonable to consider that Canada, Mexico, Venezuela, and the Virgin Islands (about 5.2 Mpbd between them) are not ruled by dictators (although reasonable people can disagree) vs. 4.7 Mbpd that are. That still leaves 2.8 to 4 Mpbd unaccounted for, and countries like Libya and Azerbaijan on that list are certainly dictatorships, but I just can't put the Bahamas, Belgium, France, and Germany on that list.

Not All Problems are Energy Related
The Airline industry is certainly in trouble. But that's nothing new. In the 30 years since US deregulation of the airline industry, losses top gains by $13 billion, largely caused by overcapacity and the resulting downward price pressure. Energy prices don't help, but the industry wasn't making money when oil was cheap, either.

The Trucking industry is also suffering, but for different reasons. The average long-haul truck gets about 6 mpg in the US (other sources say 4.5 to 7.5), whereas Canada averaged 7.15 mpg in 1999. I read an article (can't find a source) suggesting that 10 mpg was within reach. In 2003, it was suggested that $1.40 diesel would drive truckers to improve their aerodynamics, tires, and transmissions. High speed raises fuel usage, and up to 50% of engine hours are spent idling. There are huge gains to be made by simple procedural efficiencies.

There is a lot of press about worldwide food prices. Some suggest that biofuels are causing the rise. But world coarse grain production peaked in 1996-1997 at 907 million tons and declined to 860 million tons in 2000-2001. Inconsistency in crop yields has reduced grain inventories worldwide. The cost of petrochemicals has unquestionably transferred some grain from food use to fuel use, but the essential problem of grain supply was with us before the current oil price rise. We have relied upon the "Green Revolution" to increase global food production and in doing so have outstripped our available carrying capacity.

Liberal Politicians Have Nothing to do With These Problems
In Newt's reality, we don't have infinite nuclear power, clean coal, oil shale derived petrochemicals, and energy independence because of offshore drilling because of "liberal politicians".

Aside from the fact that conservatives controlled the entire executive and legislative branches of government for several years there, Newt's blamefest for liberal boogiemen lacks foundation in other ways.

Both Congress and President George H. W. Bush have prevented offshore drilling: the 97th US Congress (House controlled by the Democratic Party 244 - 191, Senate by the Republican Party 53 - 46 - 1) banned offshore oil drilling in 1981; the first President Bush's executive order banned coastal oil exploration in 1990. It's hard to see how a split Congress and Bush 41 can be considered "liberal politicians".

Nuclear power has been stalled in the US since the Three Mile Island accident in 1979. No new plants have been built since 1973, although there are now multiple applications for nuclear plants before the NRC (pdf). Environmental concerns undoubtedly played a part in the unofficial moratorium, but low petroleum prices and an institutional switch to natural gas were almost certainly more important factors.

Clean coal has been a priority of the DoE during the present Bush administration. And isn't it funny how lack of action by energy companies becomes "liberal politicians locking us out of clean coal" while the Chinese work on it? Free marketeers like Newt always say that government incentives are distorting the market until they want incentives for their pet projects, and then the lack of those incentives is suddenly the fault of "liberal politicians". Clean coal is a wonderful idea if it can be done, but the fact that it's not happening is not about liberal politicians blocking it, it's about technical difficulty.

Oil shale? Like the Canadian tar sands, oil shale is tremendously dirty and difficult to extract economically. In Alberta, two-thirds of the extracted energy goes into the extraction process, along with huge volumes of water. It's not clear yet that the tar sands are energy positive and the ecological impact is enormous and obvious. Oil shale will be the same way in the US. We are not ready yet to safely and economically extract that energy, and we may never be ready. Liberal policies have nothing to do with it.

Gas Prices in the Short Term
The price of gas in the short term is driven by supply and demand, with additional complicating factors. Oil production* worldwide is about 86 Mbpd and closely matches demand. However, excess extraction capacity in the OPEC nations has dropped precipitously in the last few years. According to J. L. Williams at wtrg.com, OPEC spare capacity has dropped from 6 million bpd to under 2 million:

In mid 2002, there was over 6 million barrels per day of excess production capacity and by mid-2003 the excess was below 2 million. During much of 2004 and 2005 the spare capacity to produce oil was under a million barrels per day. A million barrels per day is not enough spare capacity to cover an interruption of supply from most OPEC producers.
In a world that consumes over 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and is largely responsible for prices in excess of $40-$50 per barrel

Without significant spare capacity, we lack extraction buffers against short-term supply interruptions like those happening in Nigeria or the 2006 pipeline shutdown in Alaska. Instead, we must rely upon post-extraction storage buffers like the US Strategic Petroleum Reserve.

*Oil "production" is more properly termed "extraction" because the process does not "produce" anything but merely "extracts" existing petrochemicals from one reservoir (presumably a natural one) into another (presumably an artificial one). I prefer the more correct term "extraction" not only because it properly explains the process, but because it reminds us that we are dealing with a fixed existing supply of material instead of the expandable output of a production line.

In the short term, supply and demand fundamentals explain a great deal about oil and gas prices. Concerns about future supply include militarism, nationalism, activism, accidents, weather, and resource nationalism. Some believe that these non-supply factors may account for $50/bbl of cost. Others believe that fundamentals adequately explain oil at $150 or even more. Others think we have plenty of oil and this is all some sort of speculator-driven conspiracy.

Alternatives in the Long Term

The best way to encourage alternative energy development is a combination of high energy prices and public policy. If public policy says that government will subsidize or prefer clean or renewable energy, then the market should respond relatively quickly. It is the very cheapness of petrochemicals (and the widespread externalization of pollution and other negatives) which has prevented the development of alternatives to this point. If we are in favor of non-petrochemical energy sources, we should be pleased about high petrochemical prices. I know it's hard, but that's why they call economics "the dismal science."

As for specific alternatives Newt likes, hydrogen isn't an energy source, it's just a storage medium. One of the major problems facing us is that petrochemicals are very energy dense. We can't build batteries that store energy nearly as well as gasoline does. Hydrogen (possibly in some kind of aerogel frame) is pretty promising in that regard.

Nuclear power has a definite place in our future, especially if pebble-bed reactors pan out. If so, we add 85 years of uranium (at current usage levels) to our energy supplies. Nuclear fission power is thus a bridging technology, which is exactly what we need while we finish developing long-term sustainable systems.

Solar, hydro, and wind power are true renewable technologies, and the high price of petrochemicals is encouraging development and deployment around the world. Subsidies would speed up deployment, but the market is taking care of that so long as the cost of oil remains high.

Typical Conservative Bullshit Posturing

"Drill Here. Drill Now. Pay Less." is a typical piece of bullshit Conservative posturing. Most of Newt's supporting points aren't, but that's not the worst of it. The solution won't solve any of the problems. Studies of ANWR show that drilling there will yield maybe $.01/gallon improvement in gas prices. In 2025. ANWR would deliver 875 Kbpd at peak and a total of about 10.4 billion barrels. Bush's plan for offshore drilling alleges 18 billion barrels, so we might suggest that the offshore flow would be double ANWR or about 1.7 Mbpd and so we might get another 3 - 5 cents off each gallon of gas.

In return for that 4 - 6 cents off a gallon of gas, this is what we get:

Oil spills. This is the 1979 Ixtoc I spill -- the largest accidental oil spill in history (only the deliberate release of oil during Gulf War 1 was larger) -- 140 million gallons spilled over at least six months. Despite Newt's lie that Hurricane Katrina couldn't knock out modern oil platforms, Katrina destroyed at least 46 platforms. And let me remind you that Exxon has still not paid their fine for the 1989 Exxon Valdez spill in Prince William Sound.

What DHDNPL will do is enrich American oil companies. As resource nationalism denies them access to major fields in Russia, Venezuela, and the Middle East, the non-national oil companies like ExxonMobil, RoyalDutchShell, and Chevron are trying to ensure their access to other sources. I'm sure that if politicians were to arrange for offshore drilling to be allowed in the US, they'd be richly rewarded.

Oh. I guess they already are.

Disclosure: I am passively invested in the extraction side of petrochemicals. I do not own stock in or have any active (decision-making) relationship with any company mentioned in the post.

[Updated 2008.06.19 0825 to remove reference to Argentina as a dictatorship. Guess I'm still living in the past :-)]

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ANWR, Again

The government publishes yet another report on the effects of drilling for oil in the Arctic National Wildlife Refuge:

Relative to the AEO2008 reference case, ANWR oil production is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light (LSL) crude oil2 prices of $0.41 per barrel (2006 dollars) in 2026 in the low oil resource case, $0.75 per barrel in 2025 in the mean oil resource case, and $1.44 per barrel in 2027 in the high oil resource case. Assuming that world oil markets continue to work as they do today, the Organization of Petroleum Exporting Countries (OPEC) could neutralize any potential price impact of ANWR oil production by reducing its oil exports by an equal amount.

Again, we learn that ANWR will not save us at the gas pump.

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