World ASPO Conference, Friday Oct. 27

World ASPO Friday Morning

Again, these are rough notes from the conference. Don’t expect well formed prose.

Robert Kaufmann, Director CEES Department at Boston University
“It’s the economy, stupid.”

There are information externalities in the oil market. Investors want to get into alternative market after peak. To be before the curve means that the investor has to wait for return. The peak is unpredictable, so investors hold back. Markets won’t work for transforming the energy economy because they will be too late.

Will OPEC increase production for us? NO. A 3% increase in output resulted in a 10% drop in price. OPEC won’t accept reduced revenues.

The total quantity of oil reserves doesn’t affect the date of peak all that much. A wide variation in total quantity gives a range between 2012 and 2032.

A new Saudi Arabia of capacity will be needed in the next decade to make up for depletion.

William Clark, author, “Petrodollar Warfare”
The Geopolitics of Peak Oil and the Macroeconomics of Multiple Petrocurrencies

Warfare has traditionally been for access to resources. During the 20th century there have been a half dozen wars involving oil resources.

The US dollar had world supremacy from 1945 to 1971. The dollar was backed by gold at $35/ounce and became the world reserve currency. Debt from the Viet Nam war weakened the dollar around 1968-1971. We transferred from the gold standard to the oil standard. Essentially, we horse traded with Saudi Arabia – they sell oil for dollars and we get them more votes with the International Monetary Fund. The petrodollar remained dominant till recently.

Our trade imbalance ($805 billion in 2005) puts petrodollar dominance in jeopardy. International banks, Asian currencies, and commodities may soon move away from dollars. So far we have used coercion and horse trading to keep dollars as the oil currency.

We can export inflation with petrodollars. Middle Eastern nations buy goods from Japan, China, and other Asian countries with dollars. These countries then recycle these dollars by buying U.S. treasury bonds. 45% of our $1 billion a day deficit is funded by petrodollars.

Iraq was proposing to sell oil for Euros – one of the reasons for invading.

The European Central Bank is pushing President Putin of Russia to sell oil for Euros. The EU has a trade surplus with OPEC.

Iran’s President Ahmedinejad points out that the political war is obvious but the economic war is almost undetected.

Sidebar: Iran’s oil production peaked in 1974 at 6.1 mbpd. At that point the Shah of Iran wanted to develop nuclear power – oil was “too precious to burn.” This was approved by the Ford Administration, including his staffers Dick Cheney and Don Rumsfeld.

Iran is starting a non-dollar oil bourse (trading operation) on the island of Kish. It would trade upwards of 25 mbpd (out of 84 mbpd worldwide) for a mixture of dollars, Euros, and Iranian Rials. One of the stated purposes is to insulate Iran from U.S. financial problems.

The U.S., having failed on UN financial sanctions, is asking Japan to bar financing transactions with Iran.

China is also opening an oil bourse using a basket of currencies.
These multiple currency oil trading markets have serious implications for the value of the U.S. dollar.

Roger Bezdek, Management Information Services, Inc.
Economic Impacts of Liquid Fuel Mitigation Options

The exact date of peak oil is arguable, but the impact would be significant: inflation, unemployment, recession, stagflation, high interest rates.

He notes that Energy Information Agency forecasts on natural gas production are downgraded every year, ending up dramatically lower in 2006 than in 2001. He doubts theiroptimism about long term world oil production.

His firm produced a report in 2006 on liquid fuel mitigation – time required to get conservation and production on line, costs, and economic impacts. It assumed a crash program with as much money as required. It included:

Vehicle efficiency ramp up by 50% in 8 years
3 new coal to liquid fuel plants per year, each producing 100,000 bpd. 4 year delay for construction.
Enhanced oil recovery amounting to 175000 bpd more each year, with a 4 year delay
Oil shale development with an 8-10 year delay

All these options, if fully implemented, would still leave a 5 mbpd gap (25%) in 2025. There would be a decade delay from implementation before initial impact, and two decades for significant impact.

All of this will be costly - $120 up to ??? capital investment per bpd offset. $4-6 trillion capital costs over 20 years. Something like our present military budget every year just for this.

Another problem is labor shortage. The average coal miner is 56 years old. Petroleum industry workers average 45 years old, but there would be an increase of 18% in this labor force.

There would be a large positive local economic impact.

Not cheap, not easy, not quick. Demand destruction is the default solution.

Federal initiatives needed: Higher car mileage standards, substitute liquid fuel programs
State: Smart growth, telecommuting, mass transit
All levels: Educate the public