Raise the Hammer
Facing the double reality of resource depletion and climate change - needing a global response in which the energy exporter countries must play a leading role - makes global cooperation for Energy Transition a new obligation.
By Andrew McKillop
Published May 27, 2009
Only about ten years ago, New Economists could still proclaim oil and gold as Sunset Commodities. Resource depletion, let alone climate change never featured in the stock of Adam Smith slogans from about 1760 - reworked as wildly intelligent one-liners by leading edge New Economic "intellectuals" for a decade or two.
As they claimed (and a few survivors still claim), if we run out of something someplace, and maybe ruin the environment doing so, we can move somewhere else and practice exactly the same slash and burn - the Earth is big.
All you need is market freedom, a few Ponzi schemes, public and political tolerance of this anarchic way of running the economy, and rejuvenated capitalism will deliver, especially those old-time commodities like oil, metals or even food, which we hardly need any more, even if the Chinese and Indians haven't yet found this out.
Periodically, this eccentric and fact-free belief in 'permanent abundance' of all primary products surfaces in official print, for example the December 10, 2008 report of the World Bank: Global Economic Prospects 2009. This report not only claims that mineral resources like oil, gas, and the metals will remain 'abundant', but so also will food commodities.
Making sure not to join up the dots by explaining the thermodynamic reality that only cheap energy can beat resource depletion, the World Bank likes to imagine windmills and solar collectors (last year it was biofuels) can get us out of any problem. To be sure, the Bank adds, we might perhaps have a temporary crisis or two like the present!
Taking gold, no underground industrial-scale gold mine on earth now operates at less than 3.5 kilometres depth, on orebodies with a clarke (richness) of better than a few grams per ton. World gold production is almost each and every year behind demand and consumption. If there is a sudden upsurge in demand because the US dollar is given Obama-style benign neglect, after eight years of Bush-style benign neglect, gold prices can only go north in a very serious way.
As for the cheap oil that has returned, briefly, to signal that all asset classes are in deflationary rout at this moment the ASPO 7 conference in Barcelona, Spain (Oct 2008) provided sobering and very coherent, convergent data on probable future supply trends.
By 2010 it is likely the 'Peak Oil plateau' of around 89 Mbd (including about 1.4 Mbd "well-to-wheel" losses in production, transport, storage) will break. Usual press estimates of world total oil production (ranging around 87 - 88 Mbd) do not include the loss factor - some of which is counted, and some not.
The impacts of this annual 'injection' of around 70 million tons of crude and products into the world's oceans and land ecosytems of course does not concern excited oil price forecasters, but current oil demand of about 87.5 Mbd leads to production needs likely exceeding 88.5 Mbd. ASPO estimates, and a few oil industry heavyweights like the CEO of Total Oil SA, place the short-term sustainable maximum for total production at no more than about 90 Mbd.
After the Peak Oil plateau, from 2010, we will move into the post-plateau downslope in world oil availability. Average annual long-term loss will likely run at about four percent by volume, and about six percent annual for export volumes, specially due to the immoderate appetites of oil producer countries - who actually use the stuff themselves!
According to the IBRD's Global Economic Prospects 2009, world oil reserves are (I cite) 'incredibly stable' at approximately 40 years-equivalent of current demand. Confusing this with 'abundance', by design or ignorance, will in no way ensure adequate world oil supply. The World Bank, to be sure, likes to maintain the folksy notion that present production will stay rock solid for exactly 40 years, then fall to zero in an instant.
In fact the Consumer Herd will soon face, and must adapt to, ever-declining annual export supply because there is no alternative.
Through 2007, with oil prices regularly flirting near $100/bbl the global economy achieved at least five percent growth. Today, with $60 oil we are likely in a trend of global economic stagnation, and in outright recession for the OECD countries. Cheap oil favors growth?
Today we have about 12 months - maybe more if the recession is deep and long, and maybe less if OPEC seriously cuts exports - before oil prices have to explode again simply because of supply shortage. From 2010 we face an annual average decline of world oil export supply, currently around 51 Mbd, that will quickly move up to more than 2.5 Mbd lost, each year. This is about the total present oil import need of Germany. Less than six years of this decline will wipe out almost all current US oil import volume from the oil-dominated energy markets, while they still exist.
To be sure, the specter of runaway and catastrophic climate change, perhaps in 20 or 30 years, is a nice explanation of why Soft Energy and Cleantech is the newest asset bubble financial trolls and political sherpahs have got their hands on, but oil depletion runs on a totally different timeframe. This isn't 20 or 30 years, but two or three years before oil will have to be taken away from the casino-type, short term focus, rumor-driven and characteristically anarchic free markets, freely shifting prices through plus or minus $100 per barrel in a few months.
In addition, the 'comfort zone' for doing nothing serious about climate change through cutting oil and gas intensity of the OECD economies is probably far less than 20 or 30 years - see Procdgs Nat Acad of Science of the US-PNAS v.105 (6), Feb 12, 2008.
Hit by the pincer of runaway rising oil prices, and runaway declining Arctic ice thickness and climate change, we are going to find that public opinions, economic deciders and even politicians have run out of patience with the antics of 'free market players' able only to deliver insane volatility.
To be sure, OPEC is a more than passably opaque when it concerns 'decisional cohesion'. Certainly since the great oil price crash of 1985-86 (about equal to the 2008 oil price crash, around -70 percent), OPEC acts like a price taker in recession, and a price setter or hawk when the global economy is growing fast - mainly through deciding nothing.
In theory at least, the present 1929-31 style ultra classic finance-triggered crash of the world economy, with its trail of bank collapses and Ponzi frauds, followed by the world steel industry cutting its output by 30 percent, should not be germane for OPEC 'cohesion' and decision to radically cut export supply. However we can be sure of one thing: depletion is soon going to powerfully aid OPEC discipline and cohesion.
Again in theory we could imagine that announced possible OPEC cuts of perhaps 1.5 Mbd, if applied, would be enough to bounce oil prices and help trigger what I call Petro Keynesian growth in the global economy. According to the IEA, global economic recession by December 2008 had cut world oil demand by a not-so-massive 50,000 barrels/day (0.05 Mbd) relative to one year previous.
Bigger falls in world demand are sure to come, so OPEC might have to talk about trimming exports by more than 2 Mbd, and actually apply cuts of more than 1.5 Mbd, to get oil traders moving from long puts, through straddles, to naked calls. The rebound in oil prices has to be dramatic and fast, both to stick and to trigger Petro Keynesian growth. Current financial press talk places the needed 'sticking price' at around $75/bbl, but if OPEC claimed it intends cutting 2.5 Mbd, and actually shrank export supply or 'offer' by 2 Mbd, we can talk about $100bbl easily being possible.
Neither of these price levels will crater the global economy, and both will trigger Petro Keynesian growth - based on real resources, real trade growth, and real wealth transfer to, and wealth creation inside lower income commodity exporter countries. This growth is not based on borrowed and printed money, with one finance sector rescue plan or package following the next. In other words: current (non Petro) Keynesian deficit financed playacting, only stacking up OECD, and oil importer emerging countries' national debt levels to new, incredible highs.
The problem with Petro Keynesian growth is that it has no feedback - exactly like, but more violent than, the New Economics model. As we found in 2008, oil prices were able to get close to $150/bbl, and the metals, minerals and agro commodities attained related, often all-time high prices. For achieving Petro Keynesian recovery of the global economy we need to avoid these extreme highs, but achieve intermediate values.
To be sure, OPEC tends not to open the taps too fast, when oil prices go to exotic highs, and in the future OPEC will have to learn a very difficult balancing act. OPEC has to explain why, quite soon, it will be geologically unable to raise exports, while domestic economy oil demand of member states just keeps on growing.
The easy retort is that if OPEC can cut export supply today in late 2008-mid 2009, it can raise it in, say, 2010 or 2011. This is probably not going to be true, but this new fact will need a lot of communicating, for one reason because both oil importer countries, and OPEC members have a fond belief in OPEC's status of "supplier of last resort".
We can be certain the burst of Petro Keynesian economic growth in 2005-2007 was the bad kind of CO2-rich growth, stacking up massive climate change for the not-so-remote future, as even Barack Obama, John McCain, and the Chinese or Indian political leaderships like to say, before acting to bolster their car and airline industries, raising coal production and applying the type of (non Petro) Keynesian deficit spending that New Economists react to the same way vampires react to garlic.
Sources like the UN's IPCC place the period still left before climate change becomes uncontrollable, with atmosphere concentration of CO2 up to 500 ppm or worse, as perhaps 20 to 30 years.
Until then, business as usual?
Peak Oil, and Peak Gas soon after that, both for LNG and pipeline supplies, set a very different agenda, right outside the Kyoto Treaty framework. We are not on a 20 or 30 year countdown, but two or three years. OPEC, NOPEC and the gas exporters, coal exporters and uranium exporters are all faced with the same basic countdown, driven by resource depletion and almost unlimited demand potential.
Facing the double reality of resource depletion and climate change - needing a global response in which the energy exporter countries must play a leading role - makes global cooperation for Energy Transition a new obligation.
How do energy resource producers and exporters handle the 'exuberance' of free markets which shift prices up and down 75 percent in one year? Importer countries and exporter countries have more and more simple evidence that leaving the free market to set prices is suicide for long-term investment and even short-term visibility.
For the future, the message is beginning to emerge that casino-type pricing of vital and basic energy supplies only produces permanent confusion on how we transit from near total fossil energy dependence, to nearly the opposite, perhaps in less than 50 years.
Petro Keynesian growth, as we know, generated huge trade deficits and surpluses, themselves feeding the world's sovereign national wealth funds, now also including some me-toos in the OECD group. Most of these sov nat wealth funds give plenty of space on their recycled paper prospectuses to Cleantech and Energy Transition investing, but very soon these fine words will need to be followed with serious and real, global change.
In the same way much higher - and stable - oil prices will drive a Petro Keynesian growth surge and increased world liquidity (and put a brake on the US dollar's structural decline in value), they can also provide a base to financing non-oil energy development, worldwide. If we take world traded fossil fuels, that is oil, gas, coal and uranium, a 10% levy on their trade at a price equivalent base of 100 USD/bbl will yield over 200 Bn US dollars per year.
To be sure, this is small change relative to (non Petro) Keynesian plans and programs to throw borrowed money at the banks, finance sector and naturally declining industries like car making. However, an Energy Levy on multilaterally controlled oil (and gas, and perhaps the other fossil fuels) can come in very useful to finance a UN-level program to force faster oil and gas saving in the OECD countries, and renewable energy development worldwide.
We can note the now threateningly 'mature' Alternate and Renewable Energy (ARE) asset bubble is likely already running at about $125-150 Bn per year, of which well over 50 percent is LBOs, asset refinancing, M&As and other financial engineering - producing nothing on the ground. At any time, investor confidence can collapse - as well proven by the brief and chaotic biofuels boom and bust in 2005 - 2007.
Running a multilateral plan and program alongside the private market's ARE bubble will not only provide real world proof that non-market systems and structures can respond to major challenges, but also channel, focus and dampen the private market's chaotic switches in humor. The recent example of biofuels boom and bust, which even led Silicon Valley billionaires and Warren Buffet to lose big money, without having to visit to Bernie Madoff, is soon to be joined by windfarm bubbles, and solar PV electricity bubbles.
Apart from denting the kudos of 'never fail' ikon investors, that is speculators, this trial-and-error primitive capitalist way of inching forward takes too much time, and wastes too many resources for handling the grave, near-term, and real challenge of Energy Transition.
Putting major oil importer, and major oil exporter countries together, in a newly enlarged and restructured UN-level energy agency, with its own fund we can call the International Energy Fund can calm market swings in energy prices and investment flows that send only the wrong signals to the critical area of ARE investment. Further, this effort must become worldwide, again suggesting we need special, new multilateral agencies and frameworks.
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