Parts to Wholes: the Socionomic Systems Nexus: In Search of a Nat'l Energy Policy: Check the Mirror Pogo

The last post (Hidden Issues and Government Reform: the Politics of Special Interests) talked about how the combination of special interests and representative government tended to lead to policy that more served the benefits of the narrow interests rather than those of the broader republic. We ought to pursure that some more because reforming the MECHANISMS of government are as central a policy problem as we face. Not a bad one, contrary to any impression being created - like over-eating and obesity it's a problem of success. But if there's any single place where the cumulative impact of politico- bureaucratic organosclerosis has resulted in deadly damage to the national interest it's energy. Yet here's the rub - there's nothing going on with regard to energy policy that the primary responsible party isn't us. For decades we've chose low oil and gas prices, avoided off-shore exploration, prevented nuclear power development, made sure that no new US refineries were built in 30 years and then only in the path of hurricanes and curtailed substituting coal, which could be clean with R&D investment, for oil. Driven bigger and bigger cars with more and more H.P. and failed to implement easy energy conservation. Look in the mirror indeed Pogo, the cartoon has it exactly right.

The great irony of the cartoon, well one among several, is that it's only a few weeks old as I've been plotting this post for a while now. And wouldn't we love $3.49 gas ? Given that the week closed out with a surge in oil to almost $140/barrel ! Just to put a little perspective on it consider this rather busy little composite chart - handcrafted just for you :). The bottom is my own estimate of real oil prices and the top shows the growth rates in world oil supply and demand as well as the yoy% change in the difference, the balance.

Now we have a few things to say about a short summary of a national energy policy, triggered by a friend's question but before we get to it we'd like to "pause" for you to watch a great interview on Charlie Rose with John Hofmeister of Shell Oil. Which has been famous for decades for long-term scenario planning. And before you dismiss it because he's a big-oil executive it's, IOHO, a very balanced, reasonable and honest discussion. That tells some hard truths plainly and straight-forwardly. But the bottom-line point is encapsulate in this chart:

A conversation with John Hofmeister,President of Houston based Shell Oil Company.

That'll take you about an hour to watch some time but if you're concerned about the issue it's the best compression we've found that's also the most honest and balanced. Quite unlike, for example, the recent Congressional war-drumming about windfall profits for Big Oil. Jeff Jacoby wrote an interesting little editorial but didn't go nearly far enough with regard to diagnosing the problem.

The reason Jacoby doesn't begin to go far enough at all is that the counter-argument isn't the nature of business and profit cycles in the oil industry, though again he is technically correct. The primary problems are structural on multiple fronts.

1. World demand exceeds and is growing faster than world supply.

2. In the short-run the base necessary to capture long-run requirements, including a premium for exhaustible resources, is probably in the $80-100/barrel range. On top of which there is most likely a 20% factor for geo-political risk AND speculation. Which would put the fair market price in the $120-140/barrel range. Surprise.

3. There is plenty of oil available for the next fifty years if it were readily and affordably available. Which it is not.

4. Approx. 90% of the world's known total reserves are relatively inaccessible to the major western oil companies because they are controlled by national oil companies and/or the nation-states themselves.

5. The primary l.t. drivers of oil prices are exploration and production costs. With the reserve access problems much of the terrain for both is behind political barriers which means they cannot reliably be developed and exploited. In other words investment is very limited, highly risky and increasingly liable to expropriation.

6. Of the oil in front of the barriers much of it still comes from producing countries where aging oil fields and gross (malfeasant ?!) under-investment is leading to severe declines in production. Mexico's major fields are dying, Indonesia just announced it will become an importer and leave OPEC, Russian output is declining and new major reserves aren't being developed for political reasons. US and European fields are dying (AK. and North Sea). Much of Venezuelan and Iranian oil is "heavy" and not suitable for low-cost refining. The net result is that accessible oil is in rapid decline.

And oh, btw, yes there are a lot of reserves in oil sands etc. But it’s very expensive, environmentally damaging to the point of unsustainability, uses water that’s not available and takes a long time. All of which becomes moot if/when we let oil go to $200-300/barrel !

7. We need to develop new oil sources and new alternate energy sources. Politics has prevented that and those politics largely reflect implicit choices made by the voters...thereby shooting off their own feet.

We need to explore and develop our own offshore potential fields but green concerns have prevented that.
Conservation would reduce US energy and oil use by upto 30% in the short-run.
We need to drive smaller, less h.p.'d cars but instead people prefer 200-300 h.p. cars that get 20mpg at best instead of the feasible 50 with current technology.
We need a concerted national energy plan, which has been developed and blueprinted BtW, to develop clean coal and nuclear.
Green alternatives aren't sufficiently developed for the technologies to be mature enough to justify the multi-$B investments required.
In any case the migration path is 2-3 decades long.
We should have been paying $4-5/gal. in the '90s and re-investing those funds in new R&D and the infrastructure switchover.

8. All of this requires the political will and the runway is getting very short. Last times around this situation was due to the suppliers cutting off supplies. Now it reflects real shortages.

The bottom line of all this is that the oil majors aren't in control of prices being set in world markets, they have been prudent conservators and stewards of their cash and aren't re-investing it in the areas where the oil is because they can't get to it. Nor, in the short-run, have their profits been out of line and the industry is notoriously boom and bust, which means they need huge cash balances to tide them thru lean years AND make capital investments in exploration, production and technology. Like I said Jacoby is technically correct but really only went about 10-20% of the way there for the real argument.

Two final points that get back to my opening argument. The chart on energy demand vs supply ? That comes from OUR National Energy Policy which was put together at Bush's behest circa 2001. It's still a document worth reading as well as the online updates. BUT none of the recommendations has been turned into implemented policy because, Pogo, we chose not too.

And maybe a third point - none of my suggestions for a concerted national energy policy are any different than a consensus from the late '70s and early '80s the last time we almost died over this. The difference lies in the price charts at top - we adjusted because after a surge new supplies came on line. If it's not different this time go back to sleep. If you believe Supply < Demand for real this time let's do something.

Populist Politics

No profits, no oil WITH AMERICANS steaming over $4-a-gallon gasoline and ExxonMobil reporting first-quarter earnings of nearly $10.9 billion, the temptation to grandstand about "obscene" profits and "greedy" oil companies is one too many politicians cannot resist. On Monday, seven Senate Democrats proposed the "Consumer-First Energy Act of 2008," the centerpiece of which is a 25 percent windfall-profits tax on US oil companies. This, the senators declared in a press release, will "address the root causes of high gas prices." Just how it would do that they never quite make clear, perhaps because rattling class-warfare sabers is higher on their priority list. "Oil companies are racking up obscene profits left and right while American families are stretched to the limit by skyrocketing gas prices," growls Senator Charles Schumer of New York. "It's time for Big Oil to pay its fair share so Americans can see a little relief." Also aboard the windfall-profits bandwagon are presidential hopefuls Barack Obama and Hillary Clinton. "We've got to go after the oil companies and look at their price-gouging," proclaims Obama. "We've got to go after windfall profits." Clinton derides oil-company profits as "Dick Cheney's wonderland" and evidence that "there is something seriously wrong with our economy." There is something seriously wrong, all right - the economic shallowness of politicians who believe that when oil companies prosper they should be penalized. Or who imagine that the way to bring gasoline prices down is to jack the oil industry's taxes up. Or who actually think that earnings of 8.1 cents per dollar of sales - Big Oil's profits over the past five years, exactly equivalent to the overall US manufacturing average (excluding autos) - constitute a "windfall."

Real Strategic Outlook

The Big Thirst Oil prices rose above $116 a barrel last week, setting another record for the world’s most indispensable energy commodity. What was striking about this latest milestone was what didn’t happen: there was no shortage of oil, no sudden embargo, no exporter turning off its spigot. The weak dollar, worries about terrorism and speculation on commodity markets certainly played a role. But, of course, so did demand. Producers are struggling to pump as much as they can to quench the thirst not only of the developed world, but fast-growing developing nations like China and India, the two most populous countries. To many experts, the steadily rising price underscored longer-term fears about the future of a system that has supplied cheap oil for more than a century. Today’s tensions are only likely to get worse in coming years. Consider a few numbers: The planet’s population is expected to grow by 50 percent to nine billion by sometime in the middle of the century. The number of cars and trucks is projected to double in 30 years— to more than two billion — as developing nations rapidly modernize. And twice as many passenger jetliners, more than 36,000, will in all likelihood be crisscrossing the skies in 20 years. All of that will require a lot more oil — enough that global oil consumption will jump by some 35 percent by the year 2030, according to the International Energy Agency, a leading global energy forecaster for the United States and other developed nations. For producers it will mean somehow finding and pumping an additional 11 billion barrels of oil every year. And that’s only 22 years away, a heartbeat for the petroleum industry, where the pace of finding and tapping new supplies is measured in decades. The pursuit of oil will be just part of the energy challenge. The world’s total energy demand — including oil, coal, natural gas, nuclear power, as well as renewable energy sources like wind, solar and hydro power — is set to rise by 65 percent over the next two decades, according to the I.E.A. But petroleum, the dominant fuel of the 20th century, will remain the top energy source. It accounts for more than a third of the world’s total energy needs, ahead of coal and natural gas. Refined into gasoline, kerosene or diesel fuel, oil has no viable substitute as a transportation fuel, and that is not likely to change much in the next 30 years.The problem is that no one can say for sure where all this oil is going to come from.

BW Online | February 24, 2003 | Taming the Oil Beast A sensible, step-by-step energy policy is within our reach. Here's what to do

Preparing for the age of peak oil Russia has much to gain by exploiting western expertise. But if it drives out western compnaies it will be unable to revitalise its decayed supply network. Russia’s vast oil and gas reserves were seen not so long ago as the best hope of meeting growing world energy demand. No more. This week a top Russian oil executive echoed earlier official warnings that oil production could fall for the first time in a decade. An output slump would hit consuming nations hard by sending international oil prices even higher. Russia would lose out too by forgoing tax revenues. But Moscow can prevent this – and create the conditions for a recovery in production. In Russia, the problem is not so much a lack of oil but an investment drought. This has been caused by high taxes and hostile treatment of foreign and some domestic companies by a government reasserting control over its energy sector. Russia will have to act quickly if it is to avoid a long-term decline in oil output. Bringing on stream untapped reserves in the Arctic and eastern Siberia will take years. (WRFest 16Mar08(Middle East):Diversity, Complexity & Confusions)

IEA: $45 Trillion Needed for 'Energy Revolution'- The world needs to invest $45 trillion in energy in coming decades, build some 1,400 nuclear power plants and vastly expand wind power in order to halve greenhouse gas emissions by 2050, according to an energy study released Friday. The report by the Paris-based International Energy Agency envisions a "energy revolution" that would greatly reduce the world's dependence on fossil fuels while maintaining steady economic growth. The IEA report mapped out two main scenarios: one in which emissions are reduced to 2005 levels by 2050, and a second that would bring them to half of 2005 levels by mid-century. The scenario for deeper cuts would require massive investment in energy technology development and deployment, a wide-ranging campaign to dramatically increase energy efficiency, and a wholesale shift to renewable sources of energy. Assuming an average 3.3 percent global economic growth over the 2010-2050 period, governments and the private sector would have to make additional investments of $45 trillion in energy, or 1.1 percent of the world's gross domestic product, the report said. That would be an investment more than three times the current size of the entire U.S. economy. The second scenario also calls for an accelerated ramping up of development of so-called "carbon capture and storage" technology allowing coal-powered power plants to catch emissions and inject them underground. The study said that an average of 35 coal-powered plants and 20 gas-powered power plants would have to be fitted with carbon capture and storage equipment each year between 2010 and 2050. In addition, the world would have to construct 32 new nuclear power plants each year, and wind-power turbines would have to be increased by 17,000 units annually. Nations would have to achieve an eight-fold reduction in carbon intensity -- the amount of carbon needed to produce a unit of energy -- in the transport sector. Such action would drastically reduce oil demand to 27 percent of 2005 demand. Failure to act would lead to a doubling of energy demand and a 130 percent increase in carbon dioxide emissions by 2050, IEA officials said. "This development is clearly not sustainable," said Dolf Gielen, an IEA energy analyst and leader for the project. Gielen said most of the $45 trillion forecast investment -- about $27 trillion -- would be borne by developing countries, which will be responsible for two-thirds of greenhouse gas emissions by 2050. Most of the money would be in the commercialization of energy technologies developed by governments and the private sector.

Political Factors

State Oil Industry’s Future Sets Off Tussle in Mexico A bitter debate over what to do about Mexico’s ailing state oil monopoly has dominated national politics here in recent weeks, tapping strong emotions on both sides and resurrecting the political fortunes of the leftist leader who narrowly lost the 2006 presidential election. Revamping the oil company, Petróleos Mexicanos, or Pemex, is perhaps the greatest challenge facing the administration of President Felipe Calderón, a conservative economist who won the disputed 2006 election by a hairbreadth. At stake in the debate is not only the future of the Mexican economy but also the supply of oil to the United States. Last year, Mexico was the third largest supplier of crude imports to the American market, after Canada and Saudi Arabia. The government has neglected the public company for 20 years, siphoning off its profits. Now production is dropping, reserves are dwindling, and Pemex lacks the technology to go after undersea oil, the administration says.But his rival, Andrés Manuel López Obrador, the former Mexico City mayor and presidential candidate, has called any private investment in Pemex a threat to national security and has accused Mr. Calderón of secretly seeking to sell off the industry to private investors, a charge the president denies.The leftist leader has skillfully used the issue to catapult himself back onto center stage in national politics after a year of remaining on the fringes. At mass rallies, he has threatened blockades of roads, airports and oil wells by his followers if the president even introduces a bill to Congress. With leftists promising unrest, President Calderón warned last week that ignoring the company’s problems would cause a catastrophe.

Futures

Oil Has Two Potential Futures, Shell Strategist Says Morning Edition, April 22, 2008 · As oil prices hit $117 a barrel this month, a forecast from Shell Oil outlines two very different possibilities for the future of the world's energy supply. Looking out to the year 2050, Shell strategist Jeremy Bentham says demand will go up, while oil supplies will be harder to find. But how nations and companies react is harder to predict. "We anticipate that you'll begin to see a plateauing of easily accessible conventional oil and gas around about the 2015, 2020 type of period," Bentham tells Steve Inskeep. Bentham outlines two outcomes — one a "scramble" and the other a "blueprint" scenario — for addressing energy needs. In the scramble scenario, he says, "a focus on supply security drives a lot of decision-making." For example, China is worried about its future supply of oil, so it decides that it needs to be friendly with Iran. Or the U.S., worried about its supply of oil, holds intensive talks with Saudi Arabia. "That can kick off a dynamic where the tensions are perceived to be a fight between nations and hence a scramble for supply. The demand side is postponed, in terms of being managed, in that scramble outlook," Bentham says. So, a fear of shortage of supply builds up, and the steps to manage the whole energy system holistically aren't taken, Bentham says. Instead of considering conservation or alternatives, people just grab for oil and other forms of energy. The "blueprint" scenario, on the other hand, recognizes that forces can combine to affect change. "You see emerging coalitions coming together at the state level but also cross-border" to find solutions, Bentham says.He points to climate-related legislation in California as an example. "A set of interests were recognized among technology entrepreneurs and farmers and shrewd politicians which led, in this country in 2006, to the climate-related legislation in California," he says. That legislation influenced thinking in other states, which in turn influenced thinking at the federal level. "So you get this spreading awareness and spreading regulatory activity; you get a set of actors who influence the national agendas," Bentham says, and a patchwork of standards and regulations begins to emerge. "You don't get global agreements," Bentham says, "but you get a critical mass of sectors and countries having, for instance, some kind of carbon dioxide pricing in the blueprint scenario." And that approach would grow over time as people recognize the benefits, because it promotes energy efficiency and new technology developments, he says. Shell has a preference for blueprint-type outcomes that address demand, supply and environmental issues together, Bentham says, because "it's better for society at large, but also it's better for business and investment."

Shell Energy Scenarios to 2050: Shell uses scenarios to explore the future. Our scenarios are not mechanical forecasts. They recognise that people hold beliefs and make choices that can lead down different paths. They reveal different possible futures that are plausible and challenging. Our latest energy scenarios look at the world in the next half century, linking the the uncertainties we hold about the future to the decisions we must make today. Video – Scramble and Blueprints

Soros Says Commodity `Bubble' Still in `Growth Phase' Billionaire George Soros said the boom in commodities is still in a ``growth phase'' after prices for oil, wheat and gold rose to records. ``You have a generalized commodity bubble due to commodities having become an asset class that institutions use to an increasing extent,'' Soros said today at an event sponsored by the Centre for European Policy Studies in Brussels. ``On top of that you have specific factors that create the relative shortage of oil and, now, also food.'' Commodities are in their seventh year of gains, with oil rising to a record $115.54 a barrel today as the dollar plunged to an all-time low against the euro. Rice has more than doubled in a year, while corn has advanced 68 percent and wheat 92 percent. Investments in commodities rose by more than a fifth in the first quarter to $400 billion, Citigroup Inc. said April 7. Commodities have outpaced stocks and bonds this year, spurring pension funds and other investors to increase holdings in wheat, gold, copper and tin, which climbed to a record.