Tag Archives: oil

debt, oil and renewables [by Maximilian Staedtler]

download U.S. debt chart: http://www.whatmattersweblog.com/wp-content/uploads/2009/10/us-gross-debt-1910-2010.pdf

In recent years, the U.S. turned to cash-rich China to finance its enormous budget deficit. Few believe that China made a good investment. And yet, China keeps lending money to America for one simple reason: if it refused to do so, the U.S. dollar would nosedive and wipe out the value of Chinese currency reserves. Moreover, the U.S. consumer is vital to China’s economic growth. Therefore, China will continue to lend America billions of dollars until the Chinese consumer is ready to step in and drive domestic consumption. But that will take quite some time. The Chinese have the world’s highest personal savings rate and this won’t change unless the Chinese government manages to establish a reliable social security and insurance system.

The obvious reason why the U.S. will never pay back its debt to China is that it’d be impossible for a U.S. president to explain to Americans why he wouldn’t use the money to invest in the American education system, rebuild the ailing infrastructure or prop up the broken health care system.
As I said before, reducing the total amount of debt is illusory, but that doesn’t mean that debt as percentage of GDP can’t be reduced. As you can see on the chart above, gross national debt accounted for roughly 94% of gross domestic product in 1950, but while the total amount of debt more than tripled from $257.4 billion in 1950 to $909 billion in 1980, the percentage of GDP went down to 33.3%. How come this is possible?
Well, GDP was growing  faster than debt.
Rather than worrying about how to pay back mounting debt, we should think about how to grow the U.S. economy.
To achieve the growth rates we need to get the debt level under control again, we need a new key industry, something similar to the IT revolution.
 
Fortunately there is an industry which has the potential of becoming the driver of a new period of high growth rates: clean energy technologies.
Energy is the biggest business in the world. According to Fortune magazine, America’s five largest corporations are ExxonMobil (1), Wal Mart (2), Chevron (3), Conoco Phillips (4) and General Electric (5). 
Have you noticed something? Yes, 3 of the top 5 largest corporations in the U.S. are oil companies. Probably that doesn’t come as a surprise for you.
Since global oil production is close to its peak, western oil companies are falling behind state-run oil giants from the Middle East and South America and because of the harmful effects on the environment, the U.S. will be forced to shift to alternative sources of energy. This should be reason enough for Big Oil to invest in alternatives, even if just to remain a big player in the energy business.
Gradually we’re becoming more sensitive to the true cost of oil. America’s addiction to oil is not only harmful for Mother Earth but also for our security and the well-being of our economy. Domestically produced energy from both conventional and new sources of energy are keeping money locally and creating jobs instead of funding petro dictators and global jihad.
Too often I hear concerns about whether renewable energies can be scaled up fast enough to replace ever more expensive and dirty fossil fuels. The point is that once the development and production of clean energy and energy-efficient cars, homes, etc.. is getting kicked off, the American market will take charge of growing that business to a scale we need and at the same time bringing down costs.
The great thing about a green energy revolution is that it will help the U.S. economy regain strength (and solve our problem number one) and at the same time counteract climate change which is our second major problem. 
In addition, once the U.S. and much of the developed and developing world can effectively reduce oil consumption, this will reduce the threat of terrorism and radical religious groups which depend primarily on Saudi and Iranian oil income. As oil revenues go down, populist leaders from Venezuela to Iran will be forced to become more humble and reform their countries rather than distribute oil wealth.
Contrary to James Quinn’s predictions, I am convinced that there are reasons to be optimistic. As bleak as the outlook may be, one may not underestimate the innovative potential of the American market. Since there are enormous opportunities for profit, it won’t take long until creative entrepreneurs come up with countless ideas of how to generate energy more sustainably and how to use it more efficiently and earn a fortune along the way. The next Google or Microsoft will likely come from the energy tech sector. Let’s do everything we can to make sure that this  industry takes off and sparks a revolution that puts America back on track.
The profit potential in that market will be unprecedented. A strong energy tech sector is bound to drive up exports as global demand will be mind-boggling. Especially energy-thirsty China which is struggling with its spoiled environment will import whatever technologies it can get to satisfy its economy’s energy demand while keeping the impact on its environment as small as possible. Remember, this is not about CO2 emissions, it is about meeting future energy demand at a reasonable price without jeopardizing security and the environment.
Last but not least, alternative energies will not just be needed to replace fossil fuels but also to make up for unavoidable oil supply shortages. The availability and the cost of renewable energies will be increasing forever while at the same time the availability of crude oil is falling and the cost will be sky-rocketing.
Energy tech is America’s and the world’s best bet for the future. It is America’s turn to take action for two reasons:
#1: the U.S. consumes one quarter of the world’s oil though it just has 4% of the world’s population.
#2: America is the only country that can invent the technologies needed and bring them to the market quickly enough with its unequaled network of research universities, venture capitalist industry and millions of creative entrepreneurs willing to take on these challenges.
This article was originally published on www.whatmattersweblog.com on October 22nd 2009.
 
(C) 2009 by Maximilian Staedtler – WHAT MATTERS WEBLOG
(C) 2009 by Maximilian Städtler – www.whatmattersweblog.com
 
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WORLD ENERGY OUTLOOK 2008 – “What we need is nothing short of an energy revolution”

world-energy-outlook-2008

Energy is the topic of our times. Energy issues have an effect on every part of this planet and on every person inhabiting it. We need energy to run our cars, heat and cool our homes, use our computers, illuminate houses and streets and to do lots of other things we either cannot forgo or do not want to. We depend on energy. Consequently, rising energy prices hurt us. Most of the energy we use derives from fossil fuels. When we burn fossil fuels, we emit carbon dioxide gas into the atmosphere. This drives global warming. Climate change will have a devastating effect on many regions of the world. We are already seeing extreme weather events. Sea levels are rising and therefore threaten entire countries. The Maldives are at risk of being inundated in this century. Therefore, the new president of the island nations seeks new homeland for his people. He plans to set up a fund to buy new land on the shores of the Indian ocean.

On Wednesday, the International Energy Agency (IEA), an intergovernmental organization founded by the OECD (Organisation for Economic Co-operation and Development, its 30 members are almost only developed countries) in the aftermath of the 1973 oil crisis, released its World Energy Outlook 2008, an annual report containing energy analysis and projections for the medium and long term. The IEA which has a reputation for being rather optimistic and understating the scarcity of oil reserves sounded the alarm bells that oil’s days are numbered. Between the lines, they acknowledge that Peak Oil is not so far anymore, though they prefer to refer to Peak Oil as “plateau”.

Here’s the opening paragraph: (from the executive summary on http://www.worldenergyoutlook.org/docs/weo2008/WEO2008_es_english.pdf)

The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable – environmentally, economically, socially. But that can – and must – be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution. This World Energy Outlook demonstrates  how that might be achieved through decisive policy action and at what cost. It also describes the consequences of failure. 

Their figures from an analysis of more than 800 oil fields around the world shows that demand will severely outstrip supply in the future. The report highlights the urgency to take action as the growth outlook for global oil production was reduced compared with earlier WEOs.

The IEA projects that even if demand for oil remained the same as today, we would need 4 new Saudi Arabias by 2030 to meet demand.

Though the report says “global oil production is not expected to peak before 2030, production of conventional oil […] is projected to level off towards the end of the projection period”, this means that we are extremely likely to see an oil-supply crunch by 2030 or even earlier unless we discover a few gigantic new oil fields and/or reduce our consumption decisively.  The IEA expects that $26 trillion need to be invested by 2030, and most of that money is needed just to maintain the current production capacity. The aging energy infrastructure is extremely vulnerable. If nothing is done about that, it will keep rusting away. Besides, the IEA anticipates a massive contribution to future oil output from Canada’s tar sands and Venezuela’s huge reserves of extra heavy oil which cannot yet be processed economically. Sure, Canada’s reserves are gigantic, but to get high quality crude oil out of these sands, it takes lots of energy first what makes oil from Canada quite expensive. Another point is that with oil prices having plunged to below $60 a barrel for delivery in December, reduced investments in these tar sands will delay the grand-scale availability of new oil resources. The oil output estimates in the WEO are also based on the widespread use of enhanced oil recovery (EOR) techniques. This means that either gas or chemicals are injected into the ground in order to get more oil out of the wells. Finally, a considerable share of future oil production should come from yet undiscovered fields. In other words, if anything does not work out perfectly, the crunch will happen much earlier than 2030. The IEA’s assessment of the future development of global oil supplies is not as honest as it should be. With the reliance on sky-high investments, sensational discoveries and expensive new drilling techniques, the IEA estimate is a best case scenario.

More realistic are the figures on output decline. Output from oil fields that already reached their peak decline at an average rate of 6.7% annually. Just imagine what the impact will be when the Ghawar oil field in Saudi Arabia, the world’s largest known oil field reaches its peak! Ghawar is currently producing about 6.25% of the global output.

ghawar-oil-field-google-earth1

The problem is that the output decline at existing fields nullifies the contribution from all new discoveries. Unfortunately, most of the new fields are very small in comparison with the few gigantic fields that have been in production for more than 40 years and small fields tend to be declining much faster than bigger ones, once they reach their peak. Moreover, it takes much more energy to extract oil from fields recently discovered, as they’re often offshore or deeper in the ground. Thus, oil from new fields is inevitably much more costly.

You can take a look at the oil production chart on page six from the press conference: http://www.iea.org/Textbase/speech/2008/Birol_WEO2008_PressConf.pdf 

Obviously, the point in time when currently producing oil fields reach their peak is right about now. To maintain current levels, oil from fields yet in development and non-conventional oil will have to fill the gap.

Massive investment is needed to stabilize supplies at the current level, but given the impact of the financial crisis, many investments could be delayed, with severe consequences:

“In fact, the immediate risk to supply is not one of a lack of global reserves, but rather a lack of investment where it is needed.” As soon as the economy recovers, oil prices could go up to record levels again. Shortages could occur unless the adequate investment of more than $1 trillion per year is made. Another threat is that renewable energy projects are also delayed due to falling energy prices.

Now, let’s take a closer look at the IEA’s “reference scenario”:

They expect a 1.6% per year demand growth between 2006 and 2030. This would mean a 45% increase at the end of the projection period. Half of that increase will come from China and India. The Middle East also is likely to have a strong demand growth. The bottom line is that 87% of the increased demand will come from non-OECD countries. Back in 2005, non-OECD countries overtook OECD countries in terms of oil consumption.

As most emerging nations need any source of energy available, coal’s share in global energy generation will also increase from 26% in 2006 to 29% in 2030. This is exactly how we can help climate change to feel comfortable and stay.

I find it quite surprising that despite the recent renaissance of carbon-free and inexpensive nuclear power, the share of nuclear power of the total global energy consumption will be lower in 2030 than it is today.

To no one’s surprise, renewable energies are anticipated to grow faster than any other source of energy – at an average rate of 7.2% annually until 2030. Solar, wind, geothermal and marine (tide and wave energy) are on the rise. I assume that the IEA experts didn’t consider the enormous progress that is being made in the solar industry and in other alternative energy areas. Thin-film solar panels, more efficient technology and mass-production will result in falling prices and a quicker spread of solar technology. Energy storage systems will also help to drive up solar energy generation much more quickly and cheaper than the energy experts from the IEA probably expect.

In the IEA scenario, most of the oil production increase should come from OPEC countries. as non-OPEC production is “at plateau” – I’d call it peak as it will decline fast, just as reported. By 2030, more than 50% of the global oil output will be controlled by the OPEC cartel. The oil fields which are declining the slowest are also located in the Middle East while those fields whose output is dropping fastest are in the North Sea. This should be a reminder to the Western world to make efforts to get away from oil as soon as possible  – without spending too much attention at how long we could afford lazing and doing nothing. The Middle East and the OPEC are set to become even more influential in the future and will be able to dictate prices. After all, alternative energy means money spent at home and jobs being created at home.

Natural gas is no powerful alternative either – as the reports wants to make us believe – because more than 56% of global gas reserves are in the hands of Russia, Iran and Qatar. They’re already considering to start a gas-OPEC to make sure they’ll be making a killing.

IEA figures suggest that proven oil reserves are between 1.2 and 1.3 trillion barrels (including 0.2 trillion barrels of non-conventional oil). These so-called “proven reserves”  more than doubled since 1980 and in most OPEC countries, oil reserves are a state-secret and some experts say that the official reserves are vastly exaggerated. Based on the numbers they obtained, the energy experts from the International Energy Agency say that the world has “enough [oil] to supply the world […] for over 40 years at current rates of consumption.” Even if this is true, it doesn’t mean that oil will be affordable for so long. The IEA chief economist Fatih Birol expects highly volatile prices and hefty fluctuations. Their price assumption for 2030 is $200 per barrel in nominal terms. They also say that the inevitable price hike will have “serious adverse implications for the economies of consumer countries.” Another adverse trend is that the largest share of oil reserves is in the hands of national government-controlled and inefficient oil companies who lack the skills and equipment necessary.

Sure, but who says that the United States, Japan and Europe will be that dumb and keep consuming expensive, unsustainable oil from a cartel that is looking forward to terrorize the Western economies in conflict situations?

As can be seen on the “fact sheet”, three quarters of the demand growth will come from the transport sector. Despite an improving fuel economy, more and more gasoline is consumed in cars since the global car fleet is rising from 650 million vehicles in 2005 to about 1400 million vehicles in 2030. The IEA says that they do not expect a shift away from conventionally -fuelled vehicles before 2030. That’s bullshit! A fundamentally wrong estimate. Gasoline prices will inevitably rise globally soon. Drivers in emerging countries are struggling to afford driving anyway. Without hefty government subsidies, the number of drivers in these countries were much lower.

In 2007, Iran and Russia both subsidized energy with more than $50 billion to artificially keep domestic energy prices down. China, Saudi Arabia, India and Venezuela also subsidize gasoline with enormous amounts of money for the same reasons. Altogether, more than $310 billion were spent in the 20 largest non-OECD countries in 2007. These subsidies must be removed to prevent artificially high oil demand and emissions. (take a look at China, India and other countries subsidizing gasoline to keep domestic prices down are forced to embrace electric cars)

The World Energy Outlook 2008 also calls for urgent action to combat climate change. The IEA projects a 45% rise in CO2 emissions given the global climate policy of inaction. Co-ordinated action is urgently needed. At the Copenhagen conference in 2009 where a post-Kyoto framework is to be established, emerging nations must be included as 97% of the increase in carbon dioxide emissions will come from non-OECD countries. That’s also the reason why the 2007 G8 summit in Heiligendamm, Germany, remained effectless. The G8 nations cannot bring about major changes anymore unless they’re pushing in the same direction with China and India.

The IEA suggests a “decarbonisation of the world energy sources” in order to prevent a catastrophe and irreversible damage to the global climate. “Governments have to put in place financial incentives and regulatory frameworks that support both energy security and climate-policy goals in an integrated way.”

As a conclusion, the last paragraph of the executive summary:

“The energy future will be very different.

For all the uncertainties highlighted in this report, we can be certain that the energy world will look a lot different in 2030 than it does today. The world energy system will be transformed, but not necessarily in the way we would like to see…[W]hile market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over…It is within the power of all governments, of producing and consuming countries alike, acting alone or together, to steer the world towards a cleaner, cleverer and more competitive energy system. Time is running out and the time to act is now.”

IEA WEO 2008 fact sheet  IEA WEO 2008 executive summary  IEA WEO 2008 press conference

Check out the following posts for more information:

OPEC’s plan to cut oil output to keep prices from falling emphasizes the urgency for the western world to get independent from the cartel

Our prosperity hangs by a thread as it is based on a limited resource – oil

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Capitalism will survive: Why America will remain the #1 global superpower

growth-graphic

[take a look at the updated version of this article on http://www.whatmattersweblog.com/2009/02/27/capitalism-will-survive-why-america-will-remain-the-1-global-superpower/]

Who’s to blame for the current economic crisis and anything else which is in a mess right now?

Exactly! Corrupt bank managers, investment bankers and generally all the people who are involved in finance. That’s a growing sentiment supported by politicians who prefer calling greedy CEOs responsible for all the mess to working out solutions in order to solve the problems.

Though some Wall Street executives acted irresponsibly and took too much risk, it’s primarily the politicians’ fault who didn’t counteract the looming disaster. In fact, many politicians welcomed excessive private and public debt. Debt fueled economic growth for decades as it supported excessive consumption. People have gotten used to living beyond their means. Low interest rates usually create bubbles in the medium term. Now, we face the challenge of how to turn off the debt spigot and stabilize the financial system without sending the economy in a deep recession.

Politicians around the world are calling for more regulation and government-control. The point is that simply more regulation – as could be seen after the burst of the dot-com bubble – won’t help much and could make things even worse. Besides, nationalizations are no good choice either, as government officials tend to manage businesses even worse than the dumbest managers. In Germany, e.g. it was the partly state-owned banks that burned the most money and fell victim to the crisis earliest. Generally, we should beware of overly eager politicians who want to save the world, like the French president Nicolas Sarkozy who called for a European “economic government” and obviously aims at getting control of the (still) independent European Central Bank.

Capitalism and globalization have lifted hundreds of millions of people out of poverty around the word in the last decades. Reversing it would send millions back into poverty again, reduce wealth in the West and create social instability in emerging nations. Consequently, politicians should not support anti-capitalist sentiment, but come up with thought-through solutions.

Another thing that stands out is that most of the people who lost their money due to the market melt-down, lost their money primarily due to a lack of basic economic knowledge. For sure, many financial advisers didn’t explain all the risk involved to their customers and issued credit to those, who could never afford to pay back. But this wouldn’t have been possible, if the average citizen had more economic basic knowledge.

With the crisis having its roots in America, a whole bunch of populist politicians hoped to see the U.S. lose its influence and power. However, now disappointed leaders in Russia, Iran and Venezuela are seeing that America’s power is not diminishing. Quite the opposite is the case. We didn’t see a shift of power to Arabia or China. In contrast, especially oil -exporters Russia, Iran and Venezuela struggle with lower oil prices. China still has robust growth rates, although they dipped decisively due to falling demand from America. Now, China has to turn to its gigantic domestic market for growth. Actually, capital is flowing into the United States and the value of the USD is rising. People around the world are buying dollars as the value of their currency is plunging. This is happening in South America as well as in Eastern Europe. Obviously, people rather rely on America’s recovery than on politicians who want to save the world by tightening their grip on the economy and society.

The bottom line is that capitalism will always recover as it is based on the joined effort of the people in a free society.

Undoubtedly, the U.S. has to reduce its trade deficit and better balance its imports and exports by becoming more competitive. This can only be achieved in new branches of business. The car industry as we know it today, is far from becoming a contributor to new growth. Quite in contrast, the American car industry is in a life threatening crisis at the moment. The computer and Internet business has been creating jobs and revenue for a long time and the U.S. is still dominant in these areas of business, represented by global corporate giants like Microsoft and innovative service providers like Google and many other creative Silicon Valley corporations. But America cannot only rely on the IT industry for future growth. It is the energy technology sector that is most likely to become the #1 job and revenue generator of the future. The energy tech sector could quickly become the next key industry in the Western World. The drop in oil prices in recent months does not change the long-term energy outlook. Peak Oil is on the horizon. Global energy consumption is rising steadily. The sources of energy we have relied on for so long are first, inefficient, second, becoming more expensive, third, harmful to the environment and finally, mostly in the hands of unstable and hostile governments. Now is the time to come up with alternatives which will not only be more sustainable, but also cheaper in the medium-term. Electric cars are just one example. Electric cars are much more efficient than cars running on gasoline. Their driving range will inevitably be competitive in the matter of years. Alternative ways to generate electricity are essential to future prosperity and sustainability. For the Western world and the United States in particular, energy technology is a promising new industry that will generate tremendous amounts of money by meeting demand in the U.S. and especially in emerging nations. There will be a gigantic global market for sophisticated energy technology products and the technology leaders will be cashing in on that development.

Other articles on this or on similar topics:

on the global crisis

OPEC’s plan to cut oil output to keep prices from falling emphasizes the urgency for the western world to get independent from the cartel

Our prosperity hangs by a thread as it is based on a limited resource – oil

Electric vehicles are competitive with gasoline-diven vehicles

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on the global crisis

Right now, you can find extremely changeable conditions wherever you look. Lots of volatility on global stock markets. Oil prices having fallen more than $35 this month. The U.S. GDP has fallen 0.3% in the third quarter after consumer spending declined. Net incomes are declining. No one doubts that there’ll be at least two consecutive quarters with negative growths, thus officially making this downturn a recession. Many European countries are in recession, too. Trillions of dollars have been promised by governments around the world in guarantees and bailouts. Central banks have trimmed their interest rates. Recently, the FED reduced interest rates in the U.S. to as low as 1.00%. Next to the economic crisis, sparked by the housing crunch, there are still numerous issues to be dealt with. The financial crisis and the resulting credit freeze curbs small and medium businesses. Consequently, business investment fell. People are layed off and unemployment is rising. Especially credit card  debt is becoming a more and more serious problem as consumers fail to pay their credit card bills. Thus, it is no surprise that American Express, a major credit card company, appears to be in trouble. The company announced to cut 7,000 jobs which is 10% of its global workforce. The fact that credit card debt has gotten out of hand poses another threat to the stability of the financial system.

Yet, there are some positive developments amid the crisis. Oil prices nosedived despite OPEC’s 1.5 million barrels a day production cut. Oil prices have slipped below $65 per barrel last week and right now, no one can rule out that oil might approach the $60 mark in the short term. Nevertheless, we cannot be far from the floor. Some oil exporters might produce at a loss in the meantime. If oil dips below $60, this would mean that exploring Canada’s oil sands were uneconomical. Of course, the sharp price decline of the recent months was more about emotions than about fundamentals. In addition, the strengthening US-Dollar helped to drive commodity prices down. The price of oil is tied to the USD as most of the global oil trade is priced in dollar. In the first half of this year, oil prices skyrocketed partly because the dollar losing in value; and oil prices were rising to preserve the value of oil. Another undeniable inflater is the fact that oil is scarce. However, the current development proves that we have definitely not yet reached Peak Oil, otherwise, prices couldn’t have fallen that much despite a still growing global consumption, most notably from China. But the long-term outlook is rather bleak. First, it’s to be seen whether the dollar can maintain its newly gained strength. In fact, the dollar gained against the euro, although the Fed cut its interest rates. Actually, money is quite cheap at the moment. Second, oil consumption will recover inevitably. Third, oil production is close to its limits and the credit crunch has already an impact on the development of future oil supplies. According to Bloomberg, the financial crisis delays 20% of deepwater oil rigs: “As many as 20 of the 100 deepwater oil rigs on order worldwide may be delayed or canceled as loan availability erodes, possibly slowing developments including the biggest petroleum discovery in the Americas in three decades. ” (http://www.bloomberg.com/apps/news?pid=20601086&refer=news&sid=aookyGgmOAts) The Brazilian oil company Petrobras is facing credit-related difficulties in preparing the exploitation of the Tupi oil field, which is the biggest oil field discovered in the Americas for a long time, just off the coast of Brazil.

All the uncertainty around the world can be felt especially on stock markets. In Germany, for instance, the shares of Volkswagen, Europe’s largest car maker, gained more than 200% on a single day due to the step-by-step takeover by  Porsche, the much smaller manufacturer of luxury cars. In Japan, the shares of Sony lost in value as the company (as well as many other Japanese exporters) face harder times with the Yen having gained against other currencies.

Gradually, excitement about the approaching U.S. presidential election is spreading globally. The whole world will be waiting on the eve of November 4th to hear who will be the next president of the United States of America. This election is definitely the most important in decades, as we are likely standing at a turning point in history. The  next U.S. president can bring about a change for the better. And this is the moment, when such a fundamental change can be started. As you might already know if you have read some of my previous posts, I am convinced that the upcoming transition will be all about energy. And, under the condition that the right action is taken, it is likely that within a couple of years, the energy tech industry will have become a major generator of wealth and jobs. Besides, energy independence could be within reach let’s 5-8 years.

To sum things up, there’s plenty of reason to be optimistic! History shows that each technological revolution in the past has brought more wealth. Why should it be different this time?

OPEC’s plan to cut oil output to keep prices from falling emphasizes the urgency for the western world to get independent from the cartel

This car is hot! – Tesla Motors’ electric sportscar

Our prosperity hangs by a thread as it is based on a limited resource – oil

http://www.marketwatch.com/news/story/gdp-falls-03-third-quarter/story.aspx?guid=%7B73AA79F1-D096-44A4-B380-E02AC20AE6B9%7D&dist=msr_58

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OPEC’s plan to cut oil output to keep prices from falling emphasizes the urgency for the western world to get independent from the cartel

Crude oil price chart

Crude oil price chart

PDF:what-matters-crude-oil-price-chart

A global economic cooldown is more and more likely with the United States and many countries of the European Union already in or close to a recession. The global financial crisis sparked by the burst of the housing bubble in America spreads hysteria, fear and confusion around the world. Stock markets around the world have gone crazy. We saw tremendous losses and short-term record gains on stock markets in recent weeks. Many large financial institutions have collapsed or needed to be bailed out by governments with tax payer money. Fears that the deeply routed problems in the financial as well as in the private sector could bring down the whole system, prompted governments around the globe to take action. In the meantime, trillions of dollars are used to stabilize the financial system. This unprecedented government intervention has, however, not yet restored confidence. Shares plummeted, trillions of dollars in share value have been lost. Markets almost imploded during the last few weeks. Unemployment in the U.S. has risen to a relatively high level. The situation is bad and its widely expected that we haven’t seen the bottom yet.

One consequence is that energy demand from industrialized nations has fallen which reduces demand for oil decisively. Consequently, we watched the price of oil falling by more than 50% since July’s record high at $147 a barrel. Crude oil is trading close to $70 per barrel right now. Though oil is still expensive in comparison with oil prices below $16 a barrel like in the late 1990s. But the plunge in oil prices is apparently causing fear in many oil exporting countries. Especially OPEC countries have become used to extremely high revenues from oil exports and populist leaders like in Iran and Venezuela increased government spending exorbitantly. Hugo Chavez of Venezuela uses most of the country’s oil revenues to build up socialism in Venezuela. This is how he managed to be an elected and legitimatized leader. But the annoying thing for these countries is that they depend on oil prices above $80 a barrel to balance their budget. If oil prices don’t recover, Iran, Venezuela as well as Iraq could see a budget deficit. Even Saudi Arabia has an interest in keeping oil prices high, as it needs $65 a barrel to pay its bills. Some countries like Iraq already revised budget projections downward and cut spending, but other countries, especially those who are lead by populists, are afraid that less generous public spending wouldn’t go down well with the people and threaten their power. That’s why OPEC will hold an emergency meeting on Friday at its headquarters in Vienna. They’re expected to decide on considerable output cuts in order to “stabilize prices”. In other words, they can’t get enough money and they don’t care about whether their customers actually could bear the burden at the moment. In the late 1990s, the situation was similar when oil-exporting countries saw urgent need for higher prices during the price slump caused by the Asian crisis. At that point in time, oil prices were approaching the $10 line. Now, the cut in oil production should shore up prices at a level that is much higher than back in the 90s. Nevertheless, it’s not certain whether an output cut can reverse the trend in oil prices immediately. However, there can be no doubt that oil prices will soar even above $150 a gallon in the medium-term, as oil production will peak inevitably within  the next decade. Global oil reserves are limited, and most of the oil that is easily accessible has already been pumped out of the wells. Fortunately, the current crisis gives us some extra time to prepare for a transition away from oil. The more time we have to come up with alternatives, the less brutal this transition will be. But we obviously have to hurry, though, as we do not anymore want to rely on OPEC’s good will beside from the enormous amount of money that is daily transferred to the Middle East. Energy independence is vital for national security, economic stability and growth. When we start to tap into energy sources that are accessible at home using technologies that are developed at home, millions of new jobs will be created and tax revenues will remain within the borders. In addition, we can reduce our carbon dioxide emissions and combat global warming.

As reducing the power of the oil cartel and shifting to alternatives is in our and the planet’s best interest, there’s no reason to hesitate!

http://www.usatoday.com/money/industries/energy/2008-10-19-oil-opec-pressure_N.htm

What we can do:

This car is hot! – Tesla Motors’ electric sportscar

The electric car revolution is about to happen

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“There is no oil shortage.” , Michael O’Leary, CEO of Ryanair

Ryanair is Europe’s largest low-cost carrier and the airline’s chief executive Michael O’Leary, who is always good for a surprise, is about to conclude the company’s biggest deal ever – an order of 400 new aircraft with deliveries starting in 2013. Ryanair is known for ordering new planes at times when the aviation industry is in a crisis because of the stronger position in negotiations with the planemakers. In the aftermath of the 9/11 terrorist attacks, Ryanair ordered most of the planes that are now in service. They got an extremely competitive price and now benefit from the high efficiency of the very young fleet.

Now, the aviation industry is in an even deeper crisis than in 2001 and this crisis cannot be compared with any other that preceded because the major threat to the survival of many airlines is the skyrocketed price of oil. Expenses for jet fuel make up the largest share of the total spending of a low-cost airline. They have already reduced all other services to a minimum in order to be able to offer extremely competitive fares, but with soaring jet fuel costs, especially low-cost carriers struggle.

The announcement that Ryanair were in talks with both, Airbus and Boeing, planning to order 400 planes, was kind of a sensation as first, the Irish airline has until now a fleet of 166 planes which are solely from Boeing, second,  Ryanair could face its first loss since 1989, after a profit of nearly half a billion euros in 2007. In part, Mr. O’Leary himself is responsible for the profit slump as he considered fuel hedging unnecessary until last year. Starting in January, Ryanair will use fuel hedging to protect itself from oil price fluctuations. Besides, Ryanair feels the pain of more reluctance on the side of the travelers. Ryanair’s fares are up considerably and unless the price of oil goes down, Ryanair will have to hike up prices by up to 40%. But Michael O’Leary seems to be pretty optimistic about the future development of the aviation market and the development of the oil price. He expects oil prices to fall below $100 a barrel as he thinks that demand is declining. Moreover, ordering planes today is cheap because of the weak U.S. dollar. Mr. O’Leary said that planes are “about half as expensive as a few years ago.” This time, however, Mr. O’Leary might err. He already mentioned that if oil prices remain high, only 3 to 5 European carriers will survive, amongst Ryanair, of course, which he expects to draw businessmen traveling on a budget from the big flag carriers. The 400 planes would be used to replace numerous older ones and to be part of O’Leary’s massive expansion plan. Nevertheless, Ryanair already had to give up some airports in Central and Eastern Europe and lay down some jets to increase profitability and avoid overcapacities in the winter season. In addition to the worsening conditions of the aviation sector due to soaring operating costs and the economic downturn, the EU’s stupid cap-and-trade emissions trading scheme which will unfortunately include the aviation industry, will be yet another challenge.

But the point is that oil prices will remain high, due to the OPEC cartel, fundamentals of supply and demand as well as the fact that oil resources are finite.

Has the bubble popped?

The EU decided to include airlines operating in Europe into emissions trading overburdening an industry already struggling

Dull ambience at IATA’s general annual meeting in Istanbul: the airline industry faces a severe crisis

http://www.irishtimes.com/newspaper/breaking/2008/0806/breaking25.htm

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Has the bubble popped?

The long standing oil price surge has caused pain at the gas pump for drivers around the world. As you can see on the U.S. gasoline price chart from the Energy Information Administration (Gasoline prices in the U.S….), gasoline prices in America have almost doubled since January ’07. In January 1999, crude oil was as cheap as $16 per barrel. Since then, prices have been increasing rapidly, topped $100 per barrel on January 2nd, and headed to a new record of $147.27 on July 11th 2008.  This extraordinary development prompted many analysts to talk about a bubble. Generally, speculators are blamed for driving up the price of petroleum unsupported by the fundamentals of supply and demand. Politicians would like to use this feeling to tighten their grip on the financial markets.

However, the price of crude oil is now down by more than 18%, trading at $119.85 today. Not even one month passed since the record high and oil prices have lost more than 27 dollars per barrel. Now, the question arises: Has the bubble popped? Should we expect a crash in oil prices? Is crude oil overvalued?

Many analysts predicted that the oil bubble was set to burst as early as 2005 when oil was traded below $60. Of course, there was a tremendous influx of money into oil futures in recent years. But those who were betting on rising prices are increasingly moving from oil futures and oilcontracts. Some experts expect even a kind of commodities sell-off. The significant decline we experienced in the matter of weeks is likely to be the result of emotional behavior rather than rational decisions. However, there are some facts that support the recent development: Demand for oil dropped in almost all industrialized countries, people are cutting back on their driving and shift away from gas-guzzlers to more efficient cars and cars using alternatives to gasoline for power (see Drivers are ready for electric cars and all other posts on that topic), Housespeaker Nancy Pelosi proposed to release some oil from the strategic oil reserves in order to lower prices at the pump, Hurricane Edoward is not threatening any major supply depots, offshore drilling is under consideration and many major economies are heading into recession or stagflation.

Nonetheless, we are at the beginning of an era of scarce and costly oil. Even if oil prices might dip below $100 a barrel for a while, this will be just a pause on the path to new records. First, there’s the OPEC cartel which will inevitably reduce oil production to maintain prices if they should fall too much. Second, oil is not abundant as many think, there’s no excess supply with growing demand from emerging economies in Asia and oil production will hardly manage to cope with demand.

(Experts from the Energy Watch Group say that oil production has already peaked in 2006 and will decline steadily: Oil will become even more expensive, a coming up fundamental transition – scary news) Third, lax monetary policy around the globe fueled inflation and the rise in global commodity prices. Excess money in circulation contributed decisively to the oil price spike. To maintain the value of their petroleum exports, oil-exporting nations were happy to see the price of oil going up every time when the dollar lost in value against other currencies such as the euro. And it is the fundamentals of supply and demand that justify the high price of oil. Unless the global economy heads into recession, we won’t see any lasting price decreases. There’s no speculative oil bubble, global oil reserves are at low levels, demand is close to exceeding supply and any international crisis or natural disaster will drive up the price of oil to new record levels. Iran’s OPEC governor Mohammad Ali Khatibi said: “In case the dollar continues to depreciate, and the political tensions continue to deepen, the oil price may even reach $500 per barrel.” In the event that e.g. the Strait of Hormuz, which is a strategically extremely important waterway between the Persian Gulf andthe Gulf of Oman with close to 40% of the global oil supply passing through it, were sealed off, 500 dollars a barrel could become a real scenario as global oil supplies would be affected decisively. Iran threatens to disrupt sea traffic in the case of an attack by Israel or the United States.

http://blogs.wsj.com/marketbeat/2008/07/23/has-the-commodity-bubble-popped/

http://www.presstv.ir/detail.aspx?id=64986&sectionid=3510213

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