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Friday, February 18, 2011

With oil and food costs rising, it looks like 2008 all over again

History repeats itself: food riots are breaking out across the poorer nations, the Middle East is in turmoil and Brent crude has passed the $100 mark – 2011 is opening just like 2008 did.

It was a significant year in terms of the global economy: social unrest around the world over a spike in the cost of staple foods, and the runaway price of oil that eventually triggered the worst global economic crash since the Great Depression. While there were undoubtedly other factors behind the downturn, 2008 stands as a benchmark in terms of oil and economics – a shorthand for high oil prices and economic turmoil. We don’t want another 2008, especially with the faltering recovery that has yet to turn substantive cash injections into jobs.

Now, it may be just coincidence, but it looks suspiciously like the issues that shaped the first half of 2008 are back: oil demand is surging, its price is rising, and people in the poorer nations are consequently finding the cost of staple foods out of reach. There is a direct link between the cost of oil and food – which I’ll return to in a subsequent post – and so the first to suffer from a rise in oil prices are people in developing countries living on a couple of dollars a day who cannot absorb rising costs.

If the cost of oil goes on rising – and all indicators suggest it will – then we will see a growing humanitarian disaster around the globe. Neither are our industrial economies immune: based on the assumption that $150-per-barrel oil breaks the machine, how much space do we have before we see oil prices triggering another global recession?

First, a flashback to 2008 is in order. The year opened with food riots which gathered momentum in the first half of the year. There were riots in India, Burkina Faso, Cameroon, Senegal, Mauritania, Cote d’Ivoire, Egypt, Yemen, Morocco, Haiti, Senegal and Somalia. Varying levels of unrest were also reported in Mexico, Bolivia, Uzbekistan, Bangladesh, Pakistan, Sri Lanka and South Africa.

The International Energy Agency (IEA) website archives monthly oil market reports, so we can see that oil began the year on a high, crossing the psychological $100 barrier, and projected global demand for oil rising:

NYMEX light sweet crude futures breached $100/bbl in early January and remain near record highs, lifted by falling stocks, cold weather and tight fundamentals. Tensions in Nigeria and the Middle East and fund positioning remain important supportive factors.

2007 world oil demand is revised up by 150 kb/d to 85.8 mb/d on stronger-than-expected deliveries in Asia and the Middle East and cold OECD weather.
You can follow the surging prices through the first half of 2008, each month setting a new record: $105 per barrel by early March, $110 in April, $126 in May, around $140 in June (“following comments by an Israeli official that an attack on Iranian nuclear facilities was ‘inevitable’ and. . . against a tight supply background with no clear sign of the usual second-quarter crude oil stockbuild”) to an early July peak just above $145 per barrel. Then came the recessionary fall from $147 a barrel in July to $32 in December. (It was back up to $85 within five months, despite the global economic collapse.)

Now, jump forward to 2011. The year opened with the UN announcing that food prices“surged to a new historic peak in January, for the seventh consecutive month,” and further price increases could trigger upheaval and riots in developing countries. We have already seen protests over food prices in Niger, Guinea, Burkina Faso, Mexico, Tunisia and Yemen this year. Protests linked to prices of staple foods are currently sweeping across the Middle East: Bahrain, Libya, Yemen, Iran, Iraq and Egypt are aflame.

Now, oil: the IEA’s Oil Market Report for January 2011, published February 10, shows Brent crude reaching the psychological $100 barrier and demand increasing:

Crude prices were propelled higher at end-January by political unrest in Egypt, with Brent crude reaching $100/bbl on fears that the turmoil might disrupt Suez canal and SUMED pipeline flows or spread in the region. Although prices have since eased, Brent futures remain around $100.50/bbl and WTI [West Texas Intermediate] at $87.20/bbl at writing.

Global oil product demand for 2010 and 2011 is revised up by 120 kb/d on average on higher-than-expected submissions in non OECD Asia and improved economic prospects for OECD North America. At 87.8 mb/d in 2010, global oil demand rose by 2.8 mb/d year-on-year, and should reach 89.3 mb/d in 2011 (+1.5 mb/d year on-year).
World oil supply rose 0.5 mb/d in January, to 88.5 mb/d, on higher OPEC crude and NGL output.
(Canadian oilsands output is already flooding parts of the US market, driving down West Texas Intermediate crude oil prices, while Brent is now more of a bellwether for international price trends.)

So, according to the IEA, global demand for oil is set to reach 89.3 million barrels per day in 2011; supply is stated at 88.5 million barrels per day, with Opec effective spare capacity – its ability to open the spigots and produce more at a moment’s notice – offering an additional 4.7 million barrels per day.

The assumption, then is for another year of tight oil supply, with Opec’s spare capacity dwindling – possibly as low as 3 mb/d.

Looking back over the IEA reports for 2008 we see some interesting price-related snippets, from “falling stocks, cold weather and tight fundamentals” in January to the fear of an imminent attack on Iran and observation of low Opec spare capacity (“Higher output and field commissioning delays push [Opec’s] effective spare capacity below 2 mb/d”) in June’s report.

So, we are starting 2011 with high demand after a particularly cold winter in Europe, turmoil and revolution across the Middle East including agitation from Iran which might or might not be sending two warships through the Suez Canal, and speculation of Opec spare capacity dropping low despite their subsequent investment.

Back in 2008 Opec – and many Western commentators – pinned the blame for runaway prices squarely on the shoulders of commodity speculators. Speculators are in the news at the moment, being blamed by both the UN and the European Union for pushing up food prices and setting the stage for a humanitarian disaster across the developing world. It leads to the question: do speculators have that much influence over the market for oil, or are they a handy scapegoat?

When interviewed in June 2008, billionaire investor Warren Buffet said supply and demand, not speculation, was driving oil to record heights. As reported by USA Today:

Buffett said he disagrees with the idea that speculation was driving oil prices higher. At least nine bills proposing limits on that oil speculation have been introduced in Congress in recent weeks.

"In my adult lifetime, up until the last year or two, there's been a huge amount of excess supply available," Buffett said. "We don't have excess capacity in the world anymore, and that's why you're seeing these oil prices."
A Wall Street Journal item from July that year, Restricting Speculators Will Not Reduce Oil Prices, considered “wild assertions” of commodity price manipulation that were “completely unsupported by reliable evidence.” It states:

For the most part, speculators do not demand physical oil the way thirsty Chinese refiners do. There is no evidence that speculators are accumulating large and rising inventories of physical oil. But to cause prices to be above their competitive level, speculators would have to take physical oil off the market -- the way that governments have done in the past with agricultural products, amassing mountains of grain and cheese to prop up their prices.
The role of the futures market in oil is explained in an item, Oil Politics and Commodities Speculation: Myth and Fact, again from July 2008, which explains the nature of speculation:

Oil refineries like Exxon-Mobil or Shell or British Petroleum must ensure that they have a supply of crude oil for their refineries, not just for today, but for next month, next quarter, next year. Similarly, an auto manufacturer or a farm both depend upon fuel oil and other commodities and also have the choice of buying them on the spot market or the futures market.

Think now of supply and demand. The commercial business entities which truly need the commodities represent one portion of the market and make up a good deal of the demand. Another part of the demand is made up of people who need to make profit for themselves and their investors. They see an opportunity in rising oil prices and decide to guess that the upward trend in price will continue. They bought 100,000 barrels of oil two months ago at $120.00 per bbl. and can sell it today for $135.00 per bbl. These speculators make up another portion of the "demand" segment. The unusual thing about oil or any other commodity is that most speculators never take delivery on the commodity; they merely trade and cash in on the paper contract backing the commodity. Yet, they have become a large part of the demand market.
This concludes that investors are drawn to a market with rising prices – “speculation is fueled by market fundamentals” – and may in turn push the price higher – “the farmer and the manufacturer must compete with these speculators to buy fuel, accounting for higher prices” – but the oil “profit bubble” has more to do with demand from India and China, government policy and the claims of peak oil hyping everything up.

(Of course, many media outlets took a different route, squarely blaming Chicago and New York mercantile exchanges – NYMEX pictured, left.)

Blame who you want, but the price of oil relates to supply and demand. Speculators may push the price upwards - and last year a Reuters industry poll suggested they were raising the price by $10 to $30 a barrel - but clearly are not drawn to a buyer’s market. When hedge funds ride in to place their money in oil, it can only mean that the oil market is superheating. They are adding extra dollars to the cost of a barrel, but are not wholly to blame.

The problem lies in our expectation that a finite resource can be extracted at an exponential rate.
The IEA’s World Energy Outlook 2010, published late last year, included the suggestion that oil demand, excluding biofuels, will continue to “grow steadily, reaching about 99 million barrels per day (mb/d) by 2035 — 15 mb/d higher than in 2009.” (The document hedges its bets by talking in terms of various scenarios; one suggests demand for oil could fall away a little ahead of 2020.)

Over the past five years, China has spent more than US $713 billion on a 46,000-mile road expressway system that’s just a little short of the US interstate system. It’s hard to imagine these roads not in use over the coming years.

China, the most populous country in the world, has the world’s fastest growing major economy, becoming the world’s largest exporter, second largest economy and largest energy consumer in 2010. The US still has the world’s largest economy and one of the world’s highest GDP per capita, but it’s China that is driving global markets, maintaining high global prices for raw materials and energy imports through the level of its demand, and rewriting the geopolitical order in its attempts to guarantee future oil and gas supplies. China is leading the charge for more and more oil.

There are a couple of differences between now and 2008 – essentially the output of Iraq (expected to reach 2.75 million barrels a day) and Canada, which is set to show an increase of between two and seven per cent and is already pushing down West Texas Intermediate crude oil prices - but not Brent. But when all is said and done, the same big picture factors are in place – voracious demand, market jitters about the ability of the oil producers in a strife-torn region to deliver and a price feedback loop due to commodity trading.

Believing that prices will rise is a matter of market fundamentals, and does not require one to believe in peak oil, the notion that the world will reach a time of maximum output for geological reasons – although many suggest that the world is at or around its production limits, with oil producers regularly lying about reserves. I happen to believe the world cannot go on increasing oil output year after year, and that we will very soon see peak oil hypothesis become an accepted scientific fact. Even if doesn't happen this year, I think we’re still in for a bumpy ride.

Tuesday, February 15, 2011

Peak oil, climate change, political turmoil: the lesson from Egypt

Were the Egyptian people that bravely took to the streets to overthrow a tyrannical regime taking part in the world’s first peak oil revolution?

It seems like out and out hyperbole at first. Hosni Mubarek ran the country in a permanent state of emergency in which he blocked free speech, intimidated anyone perceived as a threat, and operated a blatantly corrupt system that left millions of Egyptians impoverished. Tyrants get overthrown in the end, and the protesters on the streets of Egypt were clearly exercising their right to make a political choice – to remove Mubarak. After all, it’s such a romantic story that we want to buy into it: the disenfranchised youth who outsmarted the government’s spies by tweeting on Facebook to organize a brief, remarkably peaceful rebellion.

Right now, with the country securely in the hands of the military, who have pledged elections in six months’ time, media commentators are talking of happy endings - depending on how happy you are about martial law, that is. But what if there is more to it than that? And what if Egypt’s problems go much deeper? Without wanting to spoil the party, some additional statistics put events in a different light:
* Egypt’s oil peaked in 1996, and with output diminishing 26 per cent since then, the nation is now a net oil importer
* The nation’s debt is around 89.5 per cent of GDP
* Its population – 27.8 million in 1960 and currently estimated at 79.94 million – is set to double each 35 years
* Self-sufficient in food in 1960, the nation is dependent of food imports, which are currently at a record high price
* Prices in Egypt have surged 17 per cent following this worldwide leap in commodity prices (while around 40 per cent of Egypt's citizens live off less than $2 a day).

Friday, February 11, 2011

Oil ‘demand has met supply’ – Saudi Arabia (via Wikileaks)

Wikileaks may have told us what we already knew – that Saudi oil reserves are greatly inflated – but the reports also portray leaders of the highly secretive petro-state feeling “under the gun” as they strive to move their economy away from dependence on oil.

Four diplomatic cables made public earlier this week, reporting meetings between Saudi oil officials and representatives of the US between 2007 and 2009, have generated headlines that reserves have been overestimated by as much as 40 per cent. But taken as a whole, the documents are particularly interesting because they show leaders of both nations know “sufficient challenges” lie ahead. The Saudis appear increasingly fearful of the future – in turn, unsure of their ability to produce enough oil to maintain the price system, concerned about a runaway market for oil that does not follow the economics of supply and demand, and then worried about their own lack of diversification into other areas. Between the lines you can sense the growing dilemma: having to deal with the increasing costs of flushing oil out of mature fields just to keep in the game and the expenses of a ballooning, energy-hungry population, while all the while they would rather be investing in new industries – not to mention agriculture – that can take the kingdom into a sustainable future.

Over this period the Saudi officials go from worrying about other people’s demand destruction to asking for US help moving their industry away from oil dependence. That’s quite the turnaround.

Thursday, February 10, 2011

Oil be back!

It started with a glut of freelance work, followed by a bout of soul-searching about the blog that could have been confused with acute laziness. . . essentially I’ve taken a four-month vacation from writing here.

Yeah, paid work comes before Peak Generation every time. I owe that to my wife and children. (And right now I’m about to launch my own communications business, while working full-time and pulling in whatever freelance work I can get.) But I just can’t walk away from this blog, although I’ll freely admit that I did try, and that for a time I never wanted to see it ever again.

I questioned why I was blogging in the first place. To be honest, the only way I can really understand a given topic is to write about it. While it might be painful watching me struggle with basic concepts – writing garbage like demand exceeding supply – at least I don’t believe I can save the world or blog my way to riches, fame and drinking after hours.

But the more I come to understand, the more I believe that the availability of natural resources is going to be the key issue of this century. I can’t walk away from the concept of peak everything.

But there’s nothing in the media to suggest we face any resource issues. Stepping away from the blog brought this home to me. If you aren’t typing the term peak oil into Google news every day, then you would believe that nothing more than the occasional democratic change of government would solve everything.

Friday, October 1, 2010

Military reports leading the charge in peak oil debate

Another military report is targeting future oil supply concerns.

Fueling the Future Force: Preparing the Department of Defense for a Post-Petroleum Environment, published September 27, is the third military consideration of a future of scarce oil published so far this year. It states that 77 per cent of the US Department of Defense’s “massive energy needs” are met by petroleum – but “given projected supply and demand, we cannot assume that oil will remain affordable or that supplies will be available to the United States reliably three decades hence.” To remain as an effective fighting force, the entire US military must transition from oil over the coming 30 years.

It’s a notable publication for a couple of reasons – being co-authored by lieutenant colonel (Ret.) John Nagl (left), who literally wrote the book on US counterinsurgency operations, and for being the second report produced for the American military this year to consider the strategic importance of oil. It also follows on neatly from a German military report that squarely addresses the issue of peak oil.

As such, it’s hard not to compare all three military documents.

Back in February, the United States Joint Forces Command published The Joint Operating Environment 2010. Written by the military for the military, this was seemingly intended as a discussion document to guide “future force development.” As such, it was concerned with probable “future trends and disruptions” – a variety of geopolitical issues: demographics, globalization, US debt, the global recession, water shortages, food supply, climate change and dwindling oil supply.

Wednesday, September 29, 2010

Oil analyst tells Forbes: Peak oil by 2017

Respected oil analyst Charles Maxwell has told Forbes – and with it the North American business establishment – to brace itself for peak oil by “2017 or 2018.”

Maxwell (left)  is rapidly becoming the new Matthew Simmons, an establishment peak oil whistleblower. Simmons, present when the term peak oil was coined, went on to obtain a degree of mainstream respect for the concept, based on the pioneering work of M King Hubbert. In the Forbes interview, Maxwell suggests “around 2015, we will hit a near-plateau of production around the world,” with peak oil experienced within two to three years of this.

Much of the reaction to this isn’t over what was said – Maxwell has voiced similar peak oil warnings previously – so much as where it was said. Forbes is not noted as a friend of the peak oil hypothesis, which states geological restrictions mean there will be a time of maximum oil output and that, despite investment and innovation, production will subsequently diminish. Unconventional oil supplies such as Canadian oilsands will not be able to prevent this, despite the hype. Canada’s Prime Minister may claim “Alberta's tar sands are second only to Saudi Arabia as the world’s largest oil reserve,” but these are “energy- and capital- and time-intensive” and have lousy flow rates – output cannot be scaled up to meet the ravenous global demand for oil.

An item in Oil Price, with the clear headline Respected Oil Analyst Forecasts Peak Oil by 2017, notes with surprise that:

Tuesday, September 28, 2010

UK government's oil shock warning

A UK government minister is preparing for a coming global oil shock – a possible doubling of the price of oil.

As Monday’s UK Daily Telegraph newspaper reported, "Energy Secretary, Chris Huhne, told the Liberal Democrat conference last week that in a world facing economic "shocks" it was possible that the price of oil would double from its current level of about $75 a barrel and that he had ordered his officials to look at the impact of a Seventies-style oil price spike on the British economy."

According to Huhne (right), the UK government is creating an internal report on "what the impact. . . might be in terms of British business, businesses that have nothing to do with energy." This evaluation of the likely economic fallout of oil price volatility follows on from reports that the UK government has been "canvassing views from industry and the scientific community about peak oil," stated an August 2010 item in the Guardian newspaper. This stated that the Department of Energy and Climate Change was refusing to comply with a Freedom of Information request for peak oil "policy documents," possibly relating to a 2009 secret "peak oil workshop" involving government, Bank of England and Ministry of Defence officials.

Thursday, September 23, 2010

Book review: Peak of the Devil

It has the greatest title of any peak oil publication I’ve yet come across – but does Peak of the Devil live up to the promise?

The 232-page book will be published by Satya House Publications in October 2010, retailing at $14.95. Chip Haynes, longtime online peak oil writer, has taken the unusual step of creating a beginner’s guide, broken down into 101 chapters of between 400 and 500 words. With at least one cheesy gag in each chapter.

But then, as the book states: “Never lose your sense of humour.”

From the outset, I have to say that “artist, writer, juggler and cyclist” Haynes has produced a decidedly eccentric publication, even in a field so acquainted with the aluminum foil hat brigade. But I must make it clear that there are no wacky ideas in Peak of the Devil. It’s exceptionally well thought-out and balanced: while observing that the world is “over-populated” for an immediate future of less available oil – and consequently less food – it reassures us that life and indeed culture will go on. “Every symphony Beethoven ever wrote can be played without using a drop of oil. . . people really did have lives, full happy lives, before oil.” Evaluating cornucopian claims of energy alternatives and the doomer Mad Max outlook, Haynes suggests “. . .read all you can and don’t forget, the truth is probably somewhere in the middle.”

Friday, September 10, 2010

Battle of the think tanks in peak oil reports

Two think tanks, on different sides of the world, published peak oil reports earlier this month – generating very different levels of media and web coverage.

A draft study prepared for the German military was leaked at the same time Australia’s “most influential progressive think tank” published its own findings. Needless to say, when words like leaked, military and peak oil are put into a headlines, you can guarantee a degree of interest – meanwhile, the Australian report came out shortly after the nation’s August 21 federal election, too late to shape the debate.

Both were published on September 1, but it’s only the German report that seems to have received global attention (it actually came out in German-language media the on August 31, but translation apparently took a day). It would be a pity if the Australian version is overlooked, as it provides a remarkably balanced overview of the whole peak oil debate.

The German report comes from the Future Analysis department of the Bundeswehr Transformation Center, a “think tank tasked with fixing a direction for the German military,” according to the account in Der Speigel. This continues:

Friday, September 3, 2010

Exponentially on purpose: a century-and-a-half of ignored warnings

The peak oil debate is a case of history repeating itself: people have been ignoring warnings about exponential use of finite resources for a century and a half.

The concept of peak oil, based on the pioneering work of geologist M. King Hubbert (right), states that world oil production will one day reach a natural limit due to geological factors. As he observed, “although production rates tend initially to increase exponentially, physical limits prevent their continuing to do so.” In other words, oil is a finite resource, and regardless of technology and investment, output cannot go on increasing year after year. Geology trumps economics, although the latter explains what will happen to oil prices once output begins to decline.

But no-one wants to hear the argument. Even International Energy Agency forecasts of record world oil demand, and warnings that the “era of cheap oil is over” made barely a ripple in the media. (In fairness, they are not talking about peak oil so much as the lack of investment in the oil industry causing spare capacity to slump – but it still means economy-busting oil prices are just around the corner.)

It would seem to be wholly sensible, conservative even, to suggest that exponential growth cannot go on forever. But whenever anyone does say this out loud, they find themselves routinely disparaged and outright misrepresented in the media. But then, the naysayers are well practiced. The arguments go back to the Victorian era.