Cost of oil could change the world's balance of power

[DTM]

I didn't know where to post this. Its from today's Age and seems relevant to oil and the USD as well.



The pricey well-oiled military superpower
By Kenneth Davidson
August 11, 2005


The cost of oil could change the balance of power in the world, writes Kenneth Davidson.

Apart from the irritation felt by motorists when they fill up their fuel tanks and find they have to pay $1.20 a litre (a result of world oil prices rising 45 per cent to a record $US64 a barrel) there is no sense of crisis about the fact that the price spike is a harbinger of inflation, rising interest rates and depression.

This is what occurred in the wake of the two oil "shocks" in 1973 and 1979, which arguably were major factors in the destruction of the Whitlam government in 1975 and the Fraser government in 1983.

For various reasons connected to the narrow focus of financial markets, relative indifference to the implications is understandable. But there is one big difference: in the '70s oil prices peaked because the oil producers' cartel, OPEC, was setting prices by restricting production, whereas today oil producers are endeavouring to maximise production. The price of oil is increasing because the major existing fields are entering the depletion stage, demand from China and India is growing at an explosive rate and worldwide discovery of new oil is not expected to keep pace with world demand.

We are now living in a world in which it is realistic to foresee a future in which energy-intensive economic growth is switched to conservation-intensive development, which will involve the transformation of our cities and the way we live.

If we attempt to maintain our existing growth trajectory it will mean every country will be trying to increase its share of oil. It will be a zero-sum game in which the major powers' prime preoccupation will be with resource security, which history shows often leads to war ”” such as World War II in the Pacific.

Certainly oil, and more importantly how the US was going to pay for it, is a far better explanation for the invasion of Iraq than the threat of WMD or the wish to bring democracy to the Iraqis. Likewise the US threat to Iran and Venezuela.

Latest US intelligence estimates suggest that Iran is up to 10 years away from developing nuclear weapons and while the US did not like the result, the election of President Mahmud Ahmadinejad was a reasonable reflection of Iranian public opinion.

There is no doubt about the democratic bona fides of Venezuela's Hugo Chavez and his popularity has been enhanced by the three failed US-backed attempts to force him out of office via a coup in 2002, the oil strike in 2003 and a recall referendum in 2004.

Apart from oil, the common factor in US hostility to all three governments was their plans to change the currency in which they wanted to be paid (euros not US dollars) for their oil exports.

Why is this of crucial importance? Briefly, it means that if payments are required in euros, the US has to do the same as every other oil importer ”” it must first earn foreign exchange from exports in order to pay for the oil, instead of simply getting the Federal Reserve to print more US dollars or "greenbacks". US dollars were given this nickname by Union troops in the Civil War, who were paid with this coloured paper which was backed by nothing except itself.

According to US banker Henry C. K. Liu, writing in the Asia Times: "The dollar is not backed by gold, not backed by US productivity, not backed by US export prowess, but backed by US military power. The US trade deficit is about 6 per cent of GDP, while its military budget is about 4 per cent of GDP. In other words, the trading partners are paying for 1 ½ times the cost of a military that can be used against any one of them for any number of reasons including trade disputes."

In September 2000 Iraq said that it would no longer accept US dollars for oil sold under the UN Oil-for-Food program. After Saddam's defeat in 2003, the US occupying power announced payment for oil would be switched back to dollars, even though the cost to Iraq was probably far greater than the UN corruption associated with the program which the US has been assiduous in pursuing.

Iran has announced that from March 2006 it will be using a Euro-based international oil trading mechanism in competition with the New York and London oil markets, which trade in US dollars.

The US has shown it was prepared to go to war in 1991 and 2003 in order to maintain its control over Middle East oil. The Iranian initiative is potentially more threatening to US oil hegemony than that posed by Saddam.

Iran is surrounded by US military bases on three sides ”” Afghanistan, Iraq and Azerbaijan (under notice of eviction) ”” but Iran's military has not been debilitated by more than a decade of sanctions and bombing and it has sophisticated missiles which give it control of the Strait of Hormuz. Iran would have the support of Russia and China in the Security Council of the UN. Even if the US was initially successful in a blitzkrieg, it would risk setting the whole of the Middle East against the US and the collapse of US dollar hegemony ”” on which US superpower status depends ”” unless America's biggest creditors ”” Japan and China plus the EU ”” came to the rescue.

 

[tech/a]

Re: Regarding Reichstag911's political threads

One very large factor is missing in the arguement---ALL ARGUEMENTS---with regard to oil.

ALTERNATIVES.
In particular hydrogen.

Watch oil drop like a stone when an alternative is introduced--commercially

The distribution of hydrogen and hybid fueling is being implemented as all this goes on.
The Arab countries face a worse crisis within 50 years I feel.

The world will DEMAND alternatives that dont destroy the Ozone.

Oil will have a place but wont be dictatorial as a fuel scource.
HONDA and TOYOTA along with US manufacturers have many joint ventures going.

HYDROGEN WILL HAPPEN.

 

[Knobby22]

Re: Regarding Reichstag911's political threads

The alternatives are expensive.

Hydrogen for instance needs to be made using electricity to break the strong oxygen, hydrogen bond.

The only sensible way to produce the gas in the volumes required without greatly increasing greenhouse emmissions is nucleur energy. The good thing about hydrogen is that it can be produced where it is required, reducing transport problems. The new infrastructure for Hydrogen will be expensive.
As fuel increasingly runs out around 2020 this alternative will nevertheless be considered if we are going to pursue the Los Angeles car dream. There is still a lot of ways the cars can be made more efficient without giving up on oil if the public wants it enough.

I personally cannot see the fuel price dropping below $50 a gallon in the future, and this is reflected in my large holding of Woodside. I would love to own a pure uranium play but can't see one at present that I am willing to buy.

Their is a company in the US mostly owned by Mercedes Benz and Ford that has a hydrogen fuel cell ready to go.
I'm sure Honda/Toyota must also having something as you said TechA. Do you know any details?

 

[tech/a]

Re: Regarding Reichstag911's political threads

Knobby as I owned a Honda I recieve their color glossy---there was a large article in there.
Their slant didnt seem to indicate a problem or sever cost in producing---only in setting up the distribution and dispensation of it.
I then saw a piece on FOX.
They went as far as to suggest that we would be filling up from our own home refuelling---years in the future ofcourse.

WOW
$50 gallon!!--mean barrel Im sure.

 

[Smurf1976]

Re: Regarding Reichstag911's political threads

The key point regarding liquid fuels in my opinion is that it is already too late to facilitate a seamless transition from conventional crude oil to an alternative.

Yes you can build coal liquefaction plants, develop gas-to-liquids (GTL), use CNG/LNG directly in vehicles, develop oil shale, produce hydrogen from truly massive wind farms or nuclear energy, upgrade Venezuelan bitumen into light crude oil etc.

BUT there is simply not enough time to get these things done. Even if public opposition to the alternatives could be swept aside today (difficult especially concerning things like drilling in the Antarctic, major scale wind farms, oil shale (it's very greenhouse intensive) and nuclear energy) there still isn't enough time.

Realistically, it needs an economic downturn globally or an exceptionally mild winter in the northern hemisphere to meet demand over the next 6 or so months. Not enough crude and there aren't enough refineries even if there was enough crude. And much the same next year and the year after that. We know now what production is likely, it's simply a function of what is already operating and actively under construction. It's too late to change that now but it doesn't meet all but the lowest (assuming global recession) demand forecasts.

Medium term all of these things can be done. GTL is a particularly attractive one as are tar sands and to a lesser extent coal liquefaction. But these are NOT long term solutions.

Long term there are certainly solutions once the public accepts them. In Australia, either we make hot dry rocks work on a very large scale (quite possible) or get ready for literally thousands of new wind turbines, numerous solar towers and, yes, new large scale hydro development in some locations. As I said, a massive attitude shift is required as none of this stuff is in any way low impact and already attracts opposition.

There is a need to understand the scale we are talking about here. If we replace oil with hydrogen then that's going to take a huge amount of electricity to produce once extraction of hydrogen from natural gas ceases to be an option (gas discovery peaked in the 1970's and is going the same way as oil in due course).

How much electricity? Well, the Snowy Hydro scheme took about 30 years to build. If we built something that size every two MONTHS and kept doing that for 30 years then with ZERO GROWTH in demand we would have enough to replace oil. Not that we have enough rivers to use hydro, but you get the point. It's a huge amount of power. As for the cost - about $250 BILLION for the power generation if we use the overall cheapest renewable option (wind) plus tens (hundreds?) of billions for the hydrogen production. Then a few more tens of billions for the infrastructure to distribute it etc.

So I hope that hot dry rocks can be made to work since it's an awful lot cheaper and it's a stable power source unlike wind. Either that or geosequestration of emissions from coal-fired plants (though that's only a relatively short term option due to resource constraints).

All doable of course. As long as you consider a billion dollars to be a rounding error because it's a trivial amount and the idea of 150,000 wind turbines (or an equivalent alternative source of power) doesn't bother you.

So, I see a shock on the way in which a lot of thinking gets turned on its' head. Solutions there are, but they're not in operation right now and they aren't going to come easily. So expect a bumpy ride when reality hits... (Be honest, most would have said I was crazy at the beginning of 2004 for predicting $50 oil and even I didn't foresee $64. It's easy to underestimate the scale of the issues here - all resolvable, but BIG).

And of course there's an opportunity for smart investors in all of this...

 

[Joe Blow]

Re: Cost of oil could change the balance of power in the world

Thought this deserved its own thread.

 

[Knobby22]

I agree with you Smurf.
People just can't get it into their heads the magnitude of change involved.
We are in for a very rough ride sometime over the next ten years.
Oil price long term can only go up and the US is scared as we all should be.

 

[tech/a]

Well there is LPG thats already in place----vehicles are being built dedicated to LPG. Around 1/3rd price and there is plenty.

 

[Knobby22]

Yea, I agree, the direction vehicles will go in the medium term is highly efficient diesel engines, LPG and new engine technologies.
Maybe Orbital Engine Co. day might come?
All their technology is used now is for motor boat motors and bajas (the three wheeled vehicles) in India and Indonesia.

 

[waratah]

Those interested in this subject would enjoy this book:

The End Of Oil by Paul Roberts (2004).

 

[Hanrahan]

Hydrogen technology is NOT an energy source. We cannot sink a hole in the ground and pipe off H.

It IS a means of storing energy as is a battery. I don't see it working for aircraft or broad acre farming. Modern farming is, in reality, a means to convert oil into food so we motorists will be rationed so the farmers can continue to produce.

I believe the peak oil story, even to the extent that LAWKI will be lost. The chances my nephew, born y'day, will live out a long and happy life are slim indeed

Now you know why I chose "Hanrahan" for my nic.

 

[Smurf1976]

Hydrogen technology is NOT an energy source...

It IS a means of storing energy as is a battery. I don't see it working for aircraft or broad acre farming...

I believe the peak oil story...

1. Agreed that hydrogen is not an energy source. Hence we're going to need an awful lot of electricity (several times more electricity than we now use) to produce a quantity of hydrogen with an energy content comparable to that of the oil presently consumed.

We could get it from gas in the short term, but if we're going to do that then it would make more sense to just burn the gas directly, especially when it comes to converting existing oil-fuelled equipment.

2. Can't really see the problem using hydrogen for farming but agreed about problems with aircraft. If we run everything else now using oil on hydrogen though it ought to be possible to maintain adequate liquid fuel supplies for aviation (but likely at a relatively higher price that is presently anticipated by the industry).

It IS possible to produce ammonium fertilizers without using natural gas (the present major source). In fact it's already been done - the then EZ Co (now Zinifex) used to operate a plant in Hobart from the mid-1950's to the mid-80's doing exactly that. Turning electricity into fertilizer. But as with all these things it used massive amounts of electricity and was no longer viable in the face of competition from gas-produced product. The electrical process is simply more expensive and that's without using renewable energy which only increases the cost even more.

3. Peak oil as a theory has actually occurred in more than half of all major oil producing countries, most famously the USA in 1970. It occurres in individual oil wells, fields, groups of fields and countries. It stands to reason that it would also occur worldwide if given the chance. For that matter, actual worldwide production is already following the classic trajectory whilst discoveries have been declining for more than 4 decades.

In referring to "peak oil" we are talking about conventional crude oil. IF the alternatives such as tar sands, natural bitumen, shale (not that shale contains oil as such, but it can be made to work if the environmental consequences are ignored) can be brought online extraordinarily quickly then there doesn't necessarily need to be a fall in total liquids production immediately after the conventional crude oil peak.

That said, we're not actually doing much to develop these alternatives with the necessary haste which is the problem. Medium term (which in the energy planning business means, in practice, a timeframe of a few decades) we can survive using the known, proven alternatives. Long term science ought to get us there with large scale renewables and hydrogen. But what are we going to do in the short term (20 years or so) and for that matter the immediate future (end of this year)? That's the problem.

We can see the other side of the energy river, we know where we're going, but we haven't even committed to actually building the bridge. For that matter, we don't even know where we're going to build it but we're almost to the water's edge where it's time to start crossing.

 

[Hanrahan]

Trouble with tar sands is that they need to burn gas to get the oil, abt 30:100 I think and gas is a finite resource too. This would put an intollerable CO2 load on an already stressed atmosphere. It can't be a real alternative till they build an atomic reactor or ten (edit) to replace the gas.

Oil shale has bigger problems, one of which is that the waste has a higher volume than the product mined. Sounds a bit like popping corn. If you think of just one super-tanker of oil shipped, what do you do two tanker loads of waste? And to be a force in oil production you would need to load a number of tankers every day.

The beauty of "easy" oil is that of each barrel pumped, some 80% gets to the end user. No other technology comes close to that efficiency.

And forget ethinol: I have read a study which suggests that it uses more energy to produce than it returns.
This link refers to it; http://slate.com/id/2122961/.
Found the link; http://www.msnbc.msn.com/id/8607389/

It helps explain why U miner/prospectors have had such a good year. IMHO it is the ONLY technology, already developed, which can do more than provide niche energy. It is proven and safe. France already generates more than half (60%?) of it's electricity that way. It is the only viable primary energy source for a society hooked on cheap energy,

If you think about them, alternative energy sources are massively polluting. eg A wind farm on Wilson's Prom which could produce 25% of Vic's energy needs would be so vast the noise would make it uninhabitable for humans and whole bird populations would be destroyed by the blades. That's assuming we had the funds to build it.

Sorry, but for me, the light at the end of the tunnel is but a flickering candle.

 

[DTM]

Another article that could be reason why we'll be hitting $70 very soon.

08-17-05 12:02 AM

CARACAS (AFP) - Venezuela's energy minister, Rafael Ramirez, said that Caracas is "ready and willing" to cut off its oil supply to the United States, if there are any signs of aggression from the superpower toward his country.

"We are prepared to do that, and we stand ready to defend our rights," Ramirez told the official news agency ABN.

On Sunday, Venezuelan President Hugo Chavez threatened to end oil exports to the United States if Washington did not stop its "aggressions."

"We do not want to break relations with the US government; it is not in our plans," Chavez said. "But if the aggressions continue, ... this could put diplomatic relations between Venezuela and the United States at risk."

Washington's attacks could provoke "something more serious: These two daily boats full of Venezuelan oil could head another way instead of going to the United States," warned Chavez, whose country is the fourth-largest provider of oil to the United States, supplying some 1.5 million barrels a day.

"The US market is not indispensable to us," he told thousands of young people taking part in a youth festival at a Caracas arena.

Ramirez made a similar statement on Tuesday, declaring that Caracas, the only Latin American member of the Organization of the Petroleum Exporting Countries, had other clients to court, including China.

He admitted that cutting off Venezuela's oil supply to the United States would affect his country's economy, but he added: "That is just the price we will have to pay to maintain sovereignty."

Chavez has become an increasingly outspoken critic of the United States, and accuses Washington of planning attacks against Venezuela, while the United States has accused Venezuela of funding efforts to destabilize Latin American neighbors and allowing weapons to cross into Colombia, whose government is battling a leftist insurgency.

The latest rhetoric from Caracas came about a week after the Venezuelan government announced that it had cut its anti-drug cooperation with the United States, accusing the US Drug Enforcement Administration of breaking local drug laws.

Venezuela then withdrew diplomatic immunity for US anti-narcotics agents after the United States withdrew visas for several Venezuelan officials in Washington, on suspicion of involvement in drug trafficking.

 

[Smurf1976]

Trouble with tar sands is that they need to burn gas to get the oil, abt 30:100 I think and gas is a finite resource too. This would put an intollerable CO2 load on an already stressed atmosphere. It can't be a real alternative till they build an atomic reactor or ten (edit) to replace the gas.

...
If you think about them, alternative energy sources are massively polluting. eg A wind farm on Wilson's Prom which could produce 25% of Vic's energy needs would be so vast the noise would make it uninhabitable for humans and whole bird populations would be destroyed by the blades. That's assuming we had the funds to build it.

...
Sorry, but for me, the light at the end of the tunnel is but a flickering candle.

1. Myself and presumably a few others reduce by 30% the estimated tar sands resource when considering the overall situation for the reasons you mention. There is some move in the industry towards fuelling the plants with some of the produced product, thus doing away with natural gas which is increasingly scarce in Canada (and the US). Of curse that means you have less product to sell... There are also various technological approaches being explored for alternative production methods etc.

2. I can't see why noise would be a problem. Sure, nobody would live near it but then nobody lives right next to Loy Yang (largest power station in Victoria) either. From my first hand experiences at wind farms most of the noise comes from the surrounding trees, natural features etc. which are incredibly noisy in the wind (trees are an acknowledged noise polluter). But nobody proposes cutting down trees to reduce nouise... Agreed that it's an issue but I think that given a lack of alternatives we could find a way to live with it. Birds could be more of a problem though depending on the actual location. But then a very sound argument against cars could be made on the basis of wildlife protection as I'm sure those who travel in the country a lot will be aware. But we haven't banned cars, not even after dark when most animal incidents occur. There are parts of Australia where the roads are littered with road kill on a constant basis. Indeed there are roads where it's unusual to NOT hit at least one animal on any journey, especially after dusk.

3. Modern candles are made from petroleum so you might need to make that a fairly small flicker...

 

[Hanrahan]

1. Myself and presumably a few others reduce by 30% the estimated tar sands resource when considering the overall situation for the reasons you mention. There is some move in the industry towards fuelling the plants with some of the produced product, thus doing away with natural gas which is increasingly scarce in Canada (and the US). Of curse that means you have less product to sell... There are also various technological approaches being explored for alternative production methods etc.

Burning the tar sands to power the progress is not a progressive step. It is indeed a retrogressive one. This is the way they would have began their exploitation in Alberta and it is definately the way they tried with our oil shales. If you think about it you are increasing the CO2 load by another 30% and the other "noxious" emissions by much more than this. (I have no idea how much, but gas is a clean fuel) The Greens have every right to protest.

Canada has big mobs of gas, it's just that they have sold their souls to the devil and have contractual obligations to the US. They would not dare renegue if push came to shove.

As for renewables I stick by my general statement "If you think about them, alternative energy sources are massively polluting.". Don't take my word for it. Research how many joules /sq mtr/day sunlight gives us. Scale that down with 50% efficiency and tell us how many sq kms of absorbtion cells will be required to power a small town. Remember that your cells intercept 100% of the sun so NOTHING can grow in your "sun farm". What happens when it rains? Does your river fill with mud? If you were to go the way of bio-fuel you would need at least five times (no, more than that, bio is grossly innefficient) the area of otherwise good farming land turned over to soy or sugar. I have nightmares about ethanol.

We are petroleum junkies, as hopelessly lost as any user in Kings Cross.

 

[reichstag911]

For all those people so critical of my 'political' posts regarding the fascist neo-con junta in Washington and Iraq AND now Iran:

All this oil stuff is very connected with my post content and only very ignorant and gullible fools in denial would fail to see the connection.

 

[Hanrahan]

For all those people so critical of my 'political' posts regarding the fascist neo-con junta in Washington and Iraq AND now Iran:

All this oil stuff is very connected with my post content and only very ignorant and gullible fools in denial would fail to see the connection.

Of course it's all interconnected.

I have just never been a preacher. I will only discuss this with others who have an interest. I have been made very unwelcome on a property forum where nobody has an interest in macro economics. Why should I care? Energy shares are still value.

 

[DTM]

And the future outlook from Goldman Sach...., oil to stay above $60 per barrell for years.

08-19-05 05:20 AM

Goldman Raises 2006 Oil Forecast to $68, Sees $60 Long Term

Aug. 18 (Bloomberg) -- Goldman Sachs Group Inc., the third- biggest U.S. securities firm by market value, raised its oil price forecasts for next year to $68 a barrel and said crude will stay at around $60 a barrel for years to come.

Goldman's projection for New York crude prices for 2006 was boosted from $55 a barrel. The forecast for oil to stay at $60 after that was raised from $45 a barrel because cost uncertainties have delayed investment in new oil projects, according to the Aug. 17 report from the firm's Commodity Research group, headed by Steve Strongin.

Goldman Sachs earlier this year was criticized after an equity analyst there, Arjun N. Murti, said oil prices could experience a ``super spike'' to $105 a barrel should supplies be disrupted from the Middle East. Goldman is one of Wall Street's two largest commodity traders, along with Morgan Stanley.

Goldman and Morgan Stanley each get more than $1 billion a year in revenue in the $60 billion-a-day energy-trading market, according to estimates by Sanford C. Bernstein & Co. analyst Brad Hintz in New York.

Oil for September delivery on the New York Mercantile Exchange was trading at $63.32 a barrel at 9:45 a.m. London time, having dropped from a record $67.10 last week, a record for a contract nearest to expiration. Oil futures for delivery in December 2007 were traded at $61.34 today.



To contact the reporter on this story:
Stephen Voss in London at sev@bloomberg.net

 

[Smurf1976]

Canada has big mobs of gas, it's just that they have sold their souls to the devil and have contractual obligations to the US. They would not dare renegue if push came to shove.

Us and Canada have falling gas production as their resources become depleted. Likewise the UK.

Gas discovery worldwide has been falling for 3 decades and we have come to the point of using it worldwide faster than we are finding it. Exactly the same as oil only a few years behind.

Gas is part of the problem. It is no solution indeed the fact that so much gas is being used now for electricity generation, boiler fuel etc is ultimately committing us all to a future of very much higher emissions via the use of coal, tar sands, shale etc to produce liquid fuels.

If we are serious about fixing the energy problems then from the supply side there is an urgent need to reserve the remaining oil and gas for transport fuels, petrochemicals etc. The alternative fossil fuel conversion options are simply far too inefficient and polluting. But we will be forced to use them if the conventional oil and gas is wasted firing boilers and power plants.

This means shifting electricity especially towards renewables with the non-renewable portion having to rely on nuclear and/or coal. Oil isn't an option already, it's simply too expensive and gas is rapidly headed the same way. Indeed gas has already gone that way in some of the major markets. To try and continue with a future relying on gas for low grade uses is dangerous at best IMO.

I must also add that the primary resource that Iran has in terms of international share is gas, not oil. In fact they dominate Middle East gas reserves. The USA is running out of gas (as is Canada). Europe has problems too, especially the UK. You be the judge as to the significance or otherwise of this.

And of course if we hadn't squandered oil and gas for low grade uses, like power generation and industrial boilers, then we wouldn't need tar sands in the first place. We're already seeing the impacts of short term thinking and they're not pleasant. The inevitable construction of coal liquefaction plants (already proposed in Aust) and use of oil shale will be other consequences of the over reliance on oil and gas where alternatives are available.

In other words, we save a bit of pollution today in exchange for a whole lot more tomorrow. And tomorrow is almost here. If oil and gas had never been squandered then we wouldn't be at this point now. But at the very least it makes sense to not make it worse than it already is.

Much as I would like to see something done, I don't believe for a minute that greenhouse emissions will fall unless as an incidental consequence of something else such as recession. When you contemplate that even the USA and the EU are small fish in terms of future emissions it's hard to see how they will not greatly increase.

I do agree though with your point that burning tar sands to power the process is not a progressive step. It is, however, a consequence of persistent over-reliance on oil and gas over many decades. If only we could change past decisions and not have two thirds reliance on these fuels...