The Hot War  

Posted by Big Gav

John Laumer at Triple Pundit has a perceptive post called "The Hot War: In Business At The Front Line" on the subject of the business response to resource scarcity and global warming.

The “Cold War” pitted developed nations against each other for a half-century, sustained by a small number of corporate surrogates who designed and supplied defenses. The "Hot War" era now emerging is driven by serious and immediate resource shortages and climate change at a global scale: things indivdual governments are very poorly positioned to control. The “Hot War” era will pit large corporations and small businesses against each other with great intensity of competition. As in recent times, occasionally corporations will band together to use national governments as surrogates in this struggle, advocating policies scripted by a Cold War era progeny called the “Think Tank”.

Note: since the Red Scare passed, several Think Tanks have been reincarnated as “anti-Greens.” Lately, the term “green baiting” even entered our lexicon (try Google if you doubt it). But this ideological push back is mere noise compared to the economically more significant struggles to come between corporations.

Enterprises that have particularly energy intensive business models like shippers, utilities, chlorine makers, and aluminum smelters, will struggle especially hard to access low priced raw materials, fuel, and electricity. Some will demand government guarantee of access below market price "in the interest of national security". Some will outsource their way out of high energy or raw material costs: an unsustainable tactic in a global economy. Others will innovate around more efficient technologies and will seek collaboration with others in their supply chain to be less resource intensive. The conflicting approaches send a mixed message to governments. And it will worsen as shortages happen more frequently. Pragmatic solutions will be few and far between until back room advocacy is no longer available to the highest bidder, and greener business models are allowed to be tested in the free market.

Let’s assume this happens within a decade or two. Once more efficient business models are identified and Wall Street sees the value of a stock can correlate with life cycle resource efficiency, there will ensue a flurry of press releases and astroturf blogging, debating whom is better positioned for ‘Hot War era growth’. Stock prices will vacillate wildly on perceptions of who will be vulnerable to energy price volatility and who will not. Buy gold. Buy oil. solar. It seems we've already entered this phase at the most gradual end of the curve.

Part of the evolution of the business environment will be changes to the flow of subsidies and taxes, particularly those directed at the energy sector. Regular readers are probably tired of hearing of my enthusaism for carbon taxes as a big part of the solution to the world's ills - however I'd still like to point out that these, plus a reduction to the massive subsidies (direct and indirect) paid to fossil fuel industries, are the key to moving in the right direction when dealing with oil depletion and global warming.

Jerome a Paris seems to be thinking in at least a slightly similar vein, urging the US Democratic party to own the idea of increases in petrol taxes (via Energy Bulletin). I can't say that I see this as an obvious vote winner - most people will feel the pain of increased fuel prices much more keenly than they'll appreciate moves towards energy independence (and cleaner energy) - whereas carbon taxes act across all carbon based fuels, and still have the same effect as a "gas tax" (while being less obvious to the average punter).
I'd like to argue that Dems must, today, argue for a gas tax, and own it ... to show that we recognise the problem, and actually have a realistic solution. Otherwise, the "solution" will be fewer restrictions on drilling, more pollution by coal, more subsidies for big oil, nuclear and other utilities, and more wars in the Middle East.

As you know, Energize America (a new draft will come out next week) has proposed a regularly increasing gas tax as part of its package, as a way both to get gas consumption down and to finance the rest of the package. If, as we intend to, we push this with Democrat politicians, it can only be done with the gas tax acknowledged and promoted. We will sell it only if we are not ashamed of the message it conveys.

Taxes are not evil, they pay for vital services to the population, and for vital functions of the government. Energy is the biggest issue of out times (what do you think Iraq and Iran are about?), and the US government has to act in ways that actually work, and has to have the means to do so. Piling on debt for future generations to pay is NOT RESPONSIBLE.

As you will see from the models we'll present within Energize America, Americans will actually benefit from the gas tax rapidly, thanks to lower energy consumption.

Rising oil and petrol prices here are getting lots of attention in the press. The ABC's Lateline notes that fears of inflation are rising and raises the possibility that oil prices will hit US$100 a barrel.
MAXINE McKEW: Welcome to the program. Well if you thought petrol prices were high over Easter, experts say, "Get used to it." Tension over Iran's nuclear program, together with soaring levels of demand, have pushed the price of oil to US$70 a barrel. And it's likely to go still higher, with some analysts predicting $100 a barrel is inevitable within a few years. Treasurer Peter Costello, as we've heard, is comparing the price spike to the sharp rises of the '70s, calling it "our third oil shock". Well back in the '70s, soaring fuel prices let the inflation genie out of the bottle. So are we set for a repeat performance? Ros Childs reports.

SHANE OLIVER, CHIEF ECONOMIST, AMP CAPITAL: The bottom line is we have to get used to the high oil prices.

DeWAYNE TRAVELSTEAD, PETROLEUM ENGINEER: I see a crisis looming. But there's not a whole lot we can do about it.

MICHAEL O'CONNELL, ALTERNATIVE TECHNOLOGY ASSOCIATION: Think $1.50 is going to be the next price point where people start seriously looking around for alternatives.

ROS CHILDS: Motorists may have braced themselves for an expensive Easter at the bowser, but it looks as though petrol prices are set to head higher still. Overnight, the price of crude oil skyrocketed back over US$70 a barrel. Analysts expect that to feed through to petrol pumps over the next one-two weeks, pushing up prices by about five cents a litre.

MAN AT PETROL BOWSER: 60 cents when I first got my licence. It's just gone up so much.

WOMAN AT PETROL BOWSER: I can't afford any more than I pay for. So when the petrol gets low, I just stay home.

PETER COSTELLO, TREASURER: We're living...we're living through our third oil shock and the last two ended really badly for the world and for Australia. So let's be vigilant to make sure the same thing doesn't happen here.

ROS CHILDS: Treasurer Peter Costello has already drawn a comparison with the two oil crises of the '70s. In 1973, the price of oil went from $2.50 to $12 US a barrel in just a few months. That was down to the Organisation of Petroleum of Exporting Countries. OPEC cut back production in response to the Western world's support of Israel during the Yom Kippur war. Again in 1979, the oil price more than doubled to around US$40 a barrel. The Iranian revolution, compounded by the outbreak of the Iran-Iraq War, saw world oil production drop by more than 10 per cent.

SHANE OLIVER: We're certainly living through another oil shock. I think the big difference is that what happened in the 1970s was a supply shock. OPEC withheld production for various reasons and that meant, whether you wanted to get the stuff or not, it became very difficult. And that led to a recession and ultimately a flow-on to inflation. This time around, we're see ago demand shock.

ROS CHILDS: Shane Oliver at AMP Capital believes strong demand from India and China is putting pressure on prices this time round. And it's this thirst for energy which he thinks will see oil prices pushed beyond US $100 a barrel within a few years.

SHANE OLIVER: That's where we are ultimately headed and that as with what I refer to as a 'super spike'. The main reason I think we need to see that is, and are likely to see that is that as the oil price has gone up, it hasn't crimped global demand. So you've still got this situation where the demand is very strong, supply is constrained.


ROS CHILDS: But some economists think that only a rising oil price will drive demand for a workable alternative.

SHANE OLIVER: Oil is not an infinite resource. We are using it up. It's going to run out at some point in time. The process by which we adjust to alternatives, using other sources of energy, for example, unfortunately means that we will see higher oil prices until that occurs.

Obviously one of those economists that think a workable alternative will soon emerge is "The Economist", which has once again attempted to debunk the idea of peak oil - in their case the workable alternative is - more oil...
Now comes what appears to be the most powerful threat to oil's supremacy in a century: growing fears that the black gold is running dry. For years a small group of geologists has been claiming that the world has started to grow short of oil, that alternatives cannot possibly replace it and that an imminent peak in production will lead to economic disaster. In recent months this view has gained wider acceptance on Wall Street and in the media. Recent books on oil have bewailed the threat. Every few weeks, it seems, “Out of Gas”, “The Empty Tank” and “The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel”, are joined by yet more gloomy titles. Oil companies, which once dismissed the depletion argument out of hand, are now part of the debate. ...

Of course, it wasn't that many years ago that The Economist famously predicted (on their cover page, no less) that oil was headed for US$5 a barrel and an era of permanently low prices because the world was "drowning in oil". With oil prices rising about 800% or so in the intervening 6 years that could be considered one of the worst predictions of all time.

Jerome a Paris has a rebuttal of their arguments.

The Australian Financial Review is devoting a lot of space to energy this weekend, with articles (as usual, not online) like "Will oil price kill the market", "Soaring crude oil fires producers' merger drive", "All resources for a wild ride", "Inflation held in check can still cut loose", "Petrol prices power alternative mission", "For tech pioneers, the future is green" (via the Washington Post) and, in the usual weekend tradition of pushing the nuclear bandwagon along, "Push the button on nuclear debate" featuring some sensible comments from BHP Chairman Don Argus as he tries to push uranium mining interspersed with various snippets of ignorance from journalist John Durie. Plus the cartoon slot featuring a puzzled Rodent and his cabinet looking at oil price charts and wondering if there is some sort of oil for food arrangement in place with Iraq still.

The piece on mergers and acquisitions by oil producers was quite an interesting one (if you're a local investor), with the attempted takeover of Nexus Energy by Anzon Australia sparking speculation of other oil companies awash with cash attempting to boost their reserves via takeovers. Possible victims speculated about included ROC Oil, Hardman Resources, Oil Search, Tap Oil and even Woodside. Likely acquirers listed were Santos, Origin, Woodside and BHP (of Woodside) possible buyers.

I was amused to see Barnaby Joyce ruffling the feathers of his fellow coalition members yet again, accusing them of of being "greased up" by big oil companies, in this report in the Brisbane Courier Mail - "Australian MPs in 'back pocket' of giants".
MAVERICK Queensland Nationals Senator Barnaby Joyce has accused Howard Government ministers of being "greased up" by big oil companies.

In an extraordinary attack on his Coalition colleagues, Senator Joyce yesterday said certain MPs were in the "back pocket" of the oil giants, but refused to name who they were.

"Oil companies are very powerful. They run countries, they have no problem running politicians," he said.

...Opposition Leader Kim Beazley said Australia had to reduce its dependency on Middle East oil by developing alternative fuels and investigating gas to liquid conversion.

"There is no substitute for going down the road of long-term effort to render ourselves less dependent on Middle East oil," he said.

"We've got to go down the road now (of developing) ethanol, biodiesel and, and above all, gas to liquid conversion," he said.

Mr Beazley also played down the prospect of a federal Labor Government cutting the federal petrol price to reduce petrol prices.

"If you ask me what are my priorities for taxation reform, it's not in that area of excise," he said.

Australian Greens energy spokeswoman Senator Christine Milne said the Federal Government had left Australia exposed to serious economic shock over the cost of oil.

"The Federal Government has had a decade to prepare Australia for a future based on dwindling oil supplies but it has failed to take seriously the reality that the era of cheap, easily accessible oil is over. Global politics and finite supplies are converging to generate a crisis," she said.

Now, I'm sure the idea of the likes of Jabba "greasing up" the Rodent brings all sorts of awful possibilities to mind for political cartoonists, but given the recent flap caused by various troublemaking cartoonists in the crasser sections of the Indonesian and Australian media I might keep well away from that ugly line of thought.

The Energy Blog has a post on "Sweet and Sour Crude" which explores the issue of declining availability of light sweet crude (while the supply of heavier grades of oil increases).
I'm always trying to come up with an explanation of why oil prices are going so high. It finally dawned on me today that one of the not well advertised factors was decreasing supplies of light sweet crude. It was brought on by a comment to one of my previous posts, I don't know which one or by who, but thanks to whoever it was. It turns out several other articles have been written on the subject, but this is my version.

While we may have fairly large oil reserves remaining, the peak production of "conventional oil", the nomenclature that is used by many to describe the inexpensive light sweet oil that has made up our oil supplies until recently, has passed. While conventional oil still makes up the majority of oil that is processed, the quantity of it is now decreasing and must be made up for by other supplies as well as the amount needed to supply the 1.5% increase in demand that has historically taken place (higher prices eliminated the increase during March and may continue to do so until, if ever, the prices go down). This shortfall is being made up by inexpensive heavy sour oil. Heavy oil is oil that has a higher viscosity (thicker, more gooey) oil than conventional oil. Sour oil is oil that contains more sulfur than conventional oil. Both of these properties make the oil more difficult to process.

This oil cannot be processed by refineries designed to process conventional oil and very expensive (read billions of dollars) "upgrades" have to be made to refineries to enable them to process heavy sour crude. Fortunately, in the US about 75% of refineries can handle heavy sour crude, and this may, in part, be responsible for their high profits. OPEC estimates that 45% of the worlds refineries can handle heavy sour crude and estimates that only 30% of remaining reserves are are conventional oil (I am a little wary of this number as the percentage could easily be reduced by counting the tremendous unproven reserves of heavy oil in Venezuela and Canada). On top of this, environmental regulations have become increasing stringent on the quantity of sulfur that is allowed in diesel and gasoline requiring even more modifications to the refineries.

Thus while the total supply of oil that we have is not decreasing, a premium price is now commanded for conventional oil. Conventional oil now receives a price premium of $10-$16 over heavy sour oil. We also still have a shortage of refinery capacity due to the damage done to refineries due to Katrina and a longer than usual shutdown of refineries for repairs and upgrading to allow more refineries to be able to process heavy sour oil.

Its not just refinery damage from Katrina that hasn't been fully repaired yet - there are still plenty of repairs to go on damaged production platforms - and hurricane season starts again in 6 weeks time.
Six weeks before this year's hurricane season begins in the Gulf of Mexico, the oil and gas industry is far from finished repairing the damage done by last year's storms.

Divers have yet to inspect half of the platforms hit by Hurricanes Katrina, Rita and Dennis. Some crews that are usually available to fix platforms and oil rigs are permanently shutting smaller wells that aren't worth restoring.

"Repair and assessment operations are going on as we speak and the hurricane season is just around the corner now," said Eugene Kim, a senior energy analyst at Wood Mackenzie in Houston. "Resources are already stretched to the limit."

About 22 percent of Gulf oil production and 13 percent of gas production is still out of service, according to a government report Wednesday. Concern that the storm season, running from June to November, may bring further disruption helped push oil prices to records this week.

Military strategist Martin van Creveld has an interesting article in the journal "Forward" on Iran called "Knowing Why Not To Bomb Iran Is Half the Battle".
One of my teachers, a former chief of Israeli military intelligence, used to say that going to war is not like asking a girl out on a date. It is a very serious decision, to be made on the basis of carefully crafted answers to even more carefully crafted questions.

Some serious questions, then, about whether the United States should bomb Iran's nuclear installations.

The first and most obvious question is whether it is worth doing in the first place. Starting right after Hiroshima, each time a country was about to go nuclear Washington went out of its way to sound the alarm, warning of the dire consequences that would surely follow. From 1945 to 1949 it was the Soviet Union which, once it had succeeded in building nuclear weapons, was supposed to make an attempt at world conquest.

In the 1950s it was America's own clients, Britain and France, who were regarded as the offenders and put under pressure. Between 1960 and 1993, first China, then Israel (albeit to a limited extent) and finally India and Pakistan were presented as the black sheep, lectured, put under pressure and occasionally subjected to sanctions. Since then, the main victim of America's peculiar belief that it alone is sufficiently good and sufficiently responsible to possess nuclear weapons has been North Korea.

As the record shows, in none of these cases did the pessimists' visions come true. Neither Stalin, Mao nor any of the rest set out to conquer the world. It is true that, as one country after another joined the nuclear club, Washington's ability to threaten them or coerce them declined.

However, nuclear proliferation did not make the world into a noticeably worse place than it had always been — and if anything, to the contrary. As Europe, the Middle East and South Asia demonstrate quite well, in one region after another the introduction of nuclear weapons led, if not to brotherhood and peace, then at any rate to the demise of large-scale warfare between states.

Given the balance of forces, it cannot be argued that a nuclear Iran will threaten the United States. Iranian President Mahmoud Ahmadinejad's fulminations to the contrary, the Islamic Republic will not even be a threat to Israel. The latter has long had what it needs to deter an Iranian attack.

And to close with a tinfoil decoration, I remember getting castigated last year by a couple of commenters after linking to an ABC (the american one) story on lax security at some nuclear power plants - it seems security is quite good at some plants though, with some on the ball guards attempting to search a truck on its way into a power plant in Pennsylvania. The drivers didn't take to this idea and instead turned tail. When caught by the police shortly afterwards they turned out to have half a million dollars in small bills on them which they claimed to know nothing about. The conclusion to this strange little tale is that the drivers were released, the police kept the money and the journalists on the scene got arrested. Presumably the drivers weren't of middle eastern appearance...


Anonymous   says 12:01 AM

I have an original copy of that archetypal "curse of the front cover" March 6th 1999 "The Economist", emblazoned with its "Drowning in Oil" headline. Reckon it would be worth anything? I can imagine a smug oil trader parting with a few hundred just to have that on their coffee table ...

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