How To End Petrodictatorships

The supreme art of war is to subdue the enemy without fighting.” – Sun Tzu

It’s fitting that here on U.S. Memorial Day (for those outside the U.S. – a holiday commemorating the military service of current and past soldiers) to write about ending authoritarianism tied to petroleum without the loss of our military men and women. It’s hard to deny that our current military adventures in Iraq are at least in part due to the country’s vast energy reserves.  But it need not be that our young men and women come home in caskets draped in the American flag. It need not be that we send hundreds of billions of dollars of wealth overseas each day for energy. There’s a better way to loosen the authoritarian grip of petrodictators. We don’t have to fire a single shot to ruin them.

We simply bankrupt them.

We’ve done it before.. to the Soviet Union specifically. Actually, the British did. The Soviets collapse had little to do with President Ronald Regan’s impassioned “tear down the wall speech” nor did it have to do with the Soviet military adventures in Afghanistan (although the latter was certainly a contributing factor). Instead, the Soviets adopted a model whereby oil revenues were used to subsidize the consumption of is poorest citizens. The policy worked for a while until Prime Minister Margaret Thatcher came into power in the U.K. in 1979. The impact of her decisions to privatize the petroleum rich North Sea lead to a flurry of activity, which turned Britain into a major energy exporter. When the western democracies began to buy from Britain, and not from the Soviet Union, the Soviet revenue machine collapsed, and with it the social policies which kept social stability. What happened next was too predictable: the Soviet currency plummeted in value, the country pulled out of Afghanistan because of functional bankruptcy, and the media began to report on Soviets hauling barrels of rubbles to the local baker to buy a loaf of bread.

Hugo’s Folley

If this sounds all too familiar to anyone in Venezuela, that’s because President Hugo Chavez has implemented the exact same policies. The Chavista policies are likely to hold ground in an inflationary market for petroleum products, but would similarly collapse social security payments to the country’s poorest. You won’t hear that on Aló Presidente.

There’s already substantial evidence that his plan to buy his way to social stability with petrodollars is unwinding quickly. Until recently, the Venezuelan government was encouraging private investment in oil services. then on May 8th, Hugo Chavez changed the law to make the entire industry the ward of the state. The National Guard promptly began to occupy dozens of drilling rigs, docks and boats operated by private contractors, both local and foreign, hired by PDVSA, the state oil company. PDVSA next issues a press release on queue citing that the oil-services firms did not cut their prices when the oil price plummeted last year.

The real reason behind the nationalization is evident one you begin to scour PDVSA’s accounting ledger. Despite years of record oil revenues, PDVSA accumulated liabilities of almost $70 billion by last September, up from less than $30 billion in 2006, according to the company’s financial reports. The company is itself owed more than $24 billion, mostly by Cuba and other neighbours to whom Mr Chávez supplies oil on easy terms. Included in the $70 billion in liabilities are $14 billion in short term liabilities owed to contractors, according to a report to the National Assembly. The same contractors who were just nationalized.

In other words: Venezuela ran out of cash, so Chavez decided to nationalize his creditors in a fit of panic.

Ay Chihuahua.

By the Numbers

Of course to bankrupt petrodictatorships, we would first need to employ enough renewable energy resources to drop the demand for petroleum products below the break even point at which petrodictatorships. Fortunately, the IMF has already done the math based on OPEC meeting minutes. What follows here is a listing of the Dollars per barrel prices needed in 2008 to float the petroleum country’s spending. An oil price over that amount means the country is runnign a surplus relative to social spending. An oil price under means the country is running a deficit which, left uncorrected, will lead to “restructuring”, possibly of the Soviet kind. Here’s how it breaks down:

Bahrain $84
Kuwait $34
Oman $78
Qatar $24
Saudi Arabia $54
United Arab Emirates $24
Algeria $60
Azerbaijan $35
Iran $90
Iraq $94
Venezuela $95
Russia $70
Kazakhstan $67
Libya $53

As of the date of this posting, the price of a barrel of crude is hovering at $61 a barrel. It’s pretty obvious why Venezuela’s National guard is sitting on expropriated assets right now. Highlighted for emphasis is Saudi Arabia, who would need to feel the pinch substantially to make any dent, Iraq, who is just plain high, and the UAE, who has the lowest breakeven point.

Ideally, Our goal should be to invest in renewable energy to easily hold the Iraq price, push down below the Saudi price, and eventually hit the UAE price. Maybe I’m naive here, but I figure such a change will force these countries leaders to invest in people to grow GDP rather than drilling equipment. It’ll also make the planet more comfortable for us to live in as we use more solar, wind, and geothermal. And it will ensure more military veterans will be around to commemorate memorial days to come.

More info:

http://seekingalpha.com/article/116369-behind-the-numbers-problems-loom-for-opec

http://www.cnbc.com/id/27355967

What’s Really At Stake: Hubbert, China, and the Dollar

Every once in a while, I read a blog post ties together a number of memes I’ve been thinking about. I’ve recently met Elliot Ng at a dinner in San Francisco, and found him to be an incredibly sharp guy whose recent posting me pause to tie together many of the themes I’ve spoken about here.

The World Says We Suck

But let me start at the beginning here. The BBC recently reported on the results of a regular survey of 17,000 respondents around the world, who were asked to rate the influence of countries around the world as positive or negative. Here’s a breakdown of the average:

Elliott compared the results of the U.S. and China responses, and compared the two. The results are sobering:

Which country has a more positive influence in the world, U.S. or China?

  • Overall: China. 47% for China vs. 35% for U.S. (excluding subject country)
  • Latin America: China. 45% for China vs 32% for U.S.
  • Europe: China. 39% for China vs 31% for U.S.
  • Middle East: China. 63% for China vs. 34% for U.S.
  • Africa: United States. 66% for China, 70% for U.S.
  • Asia (ex-China): China again. 40% for China vs 39% for U.S.

In fact, only 9 of 23 countries rated the U.S. higher than China: Portugal, Italy, Israel (just barely), Kenya, Ghana, Phillipines, South Korea, Indonesia, and Japan.

Caveat: Data was collected in December 2007 before the recent March Tibet events and the torch run. Things may have changed.

Neither country garnered a majority positive opinion, but folks in the U.S. may be surprised to note that the bastion of freedom is viewed as a more negative influence on the world than an authoritarian governed nation. How did we get into this mess? It’s misleading to dismiss this as baiting and resentment ala Faux news. The easy answer is Iraq, but more specifically Iraq has become a symbol for the perception that the US has and will in the future act capriciously. Fair warning: here’s where I turn up the ecogeek rant..

The Intersection of Peak oil, Iraq, and the Value of the Dollar.

Geoscientist M. King Hubbert saw this coming. He noted in 1956 that there’s a simple fact to oil production – the amount of hydrocarbons under the ground in any region is finite, therefore the rate of discovery which initially increases quickly must reach a maximum and decline (this is called “Peak Oil“). The U.S. stopped finding places to drill in the 1950s, and domestic oil production peaked in 1970, dropping mercilessly after that. The British were able to float our hydrocarbon dependence for a while from the North Sea oil fields while domestic supplies dried up, but eventually the North Sea production fell precipitously. Enter the complex and inscrutable U.S.-Saudi relationship of convenience. Of course it’s only a matter of time before Saudis’ own production starts falling out. Stuart Staniford believes it’s already happening.

The blue line represents drilling activity and the other graphs are oil production averages. The punchline here is that the Saudis are drilling for new holes as fast as they can, but total oil production isn’t rising. This isn’t OPEC shenanigans here – there’s nothing the Saudis can do about output drops, despite their reassurances.

There’s a double hit to the United States however, as hydrocarbon commodities are traded commonly in world markets in U.S. Dollars. Hence the continued reliance on an unsustainable fossil fuels infrastructure is reinforced by a political need to maintain a system on which the value of the U.S Dollar is predicated – the value of the U.S. Dollar partly relies on demand from countries who need Dollars to meet energy needs.

There’s a number of hydrocarbon reserves adjacent to Saudi Arabia of course, specifically northward. Saddam Hussein virtually sealed his fate in September 2000 when he announced Iraq would no longer accept dollars for oil being sold under the UN’s Oil-for-Food program, and decided to switch to the euro as Iraq’s oil export currency. The Financial Times reported that “Saddam Hussein in 2000 insisted Iraq’s oil be sold for euros, a political move, but one that improved Iraq’s recent earnings thanks to the rise in the value of the euro against the dollar”. He was playing the foreign exchange game as an insider, hoping to reap the windfall. The Bush-meister implemented the currency transition despite the adverse impact on profits from Iraqi’s export oil sales (In mid-2003 the euro was valued approx. 13% higher than the dollar, and thus significantly impacted the ability of future oil proceeds to rebuild Iraq’s infrastructure). Funny enough, none of the five U.S. major media conglomerates who control 90% of information flow in the U.S. touched this.

So the perception the U.S. is acting in a unilateral and capricious manner stems from the last few years’ activity, but there’s more to the story. The next chapter is more ominous.

Iran’s nuclear ambitions have taken center stage in the media, but there are again unspoken macroeconomic drivers underlying the second stage of petrodollar warfare. I’m talking about Iran’s upcoming oil bourse. In essence, Iran is about to commit a far greater “offense” than Saddam Hussein’s conversion to the euro for Iraq’s oil exports in the fall of 2000. Beginning in March 2006, the Tehran government has plans to begin competing with New York’s NYMEX and London’s IPE with respect to international oil trades – using a euro-based international oil-trading mechanism. Without some sort of U.S. intervention, the establishment of the Iranian trading center firmly establishes a euro based international energy trading system. That means the U.S. will no longer have the ability to effortlessly expand its debt-financing via issuance of U.S. Treasury bills, and the dollar’s international demand/liquidity value will fall.

Circling Back to China

Will Clark notes that “China’s announcement in July 2005 that it was re-valuing the yuan/RNB was not nearly as important as its decision to divorce itself from a U.S. dollar peg by moving towards a “basket of currencies” – likely to include the yen, euro, and dollar.” Interestingly, the Chinese re-valuation immediately lowered their monthly imported “oil bill” by 2%, over Dollar-denominated oil trade, but it is unclear how much longer this monopoly arrangement will last. Note that 2% is the inflation tax we’ve been passing along to them.

So the negative opinions are grounded in a rational fear of the U.S. intervention as China seeks to diversify its foreign currency reserves and has Sinopec signs a sourcing deal with Iran, which will ostensibly revolve aroudn the Iranian exchange. China’s voracious hydrocarbon appetite would allow an expanding credit-fueled Dollar valuation to continue unabated, effectively passing our inflation abroad. In short, we can float the value of the Dollar by increasing the amount of fear, uncertainty, and doubt around the world about our motivations.

Add yet another reason to move the U.S. beyond a hydrocarbon-based economy. I hope you’ll keep this in mind during our 2008 election season and vote for change.

Oil: Key Players and Movements

Here’s a fascinating interactive map summarizing who’s producing oil and where it’s going (click image to go to the map). The key takeaway here folks is that 13.6 million barrels are coming into the USA each day.

That means that at $100 per barrel, we’re exporting nearly $1.4 billion  in wealth every day.  Where’s our renewables energy policy, Washington D.C.???

Peak Oil, Ghawar, and Why You Should Buy A Horse

I’m willing to wager most people haven’t heard the term “Peak Oil” yet. That’s about to change in the next few years. First, a little warning – this post will be pretty dense with info, and you might feel like you’re drinking from a fire hose as you read through it. Pucker up, I’m turning on the hose full blast.

Peak Oil is based on the idea that there is a finite amount of oil in the ground, and we will eventually reach the point where we’ve extracted half the oil on earth. As we get to the point where half the earth’s finite supply has been pumped out, a couple of things will start to happen. The total oil production will start to slow down, because we’ll start retiring productive oil fields. We won’t be able to replace lost oil fields by definition: To simply it a bit, say we’re actively running all the available oil fields on earth. If half of those run dry, there’s no place to go to find new ones. So we won’t be able to replace lost production. Let that sink in a moment – we won’t be able to replace lost production. So in effect, at point we reach about half the oil gone, we’ll reach a “Peak” moment – where production in future years will decline and there is nothing anyone can do about it, because we simply can’t find more fields to satisfy world oil demand. That’s a gross oversimplification, but you get the idea.

The fact is most of the continents are past peak and in oil production decline. That doesn’t bode well for maintaining the high standard of living we now enjoy, fueled mostly by, well, fuel. If we run dry, no more affordable airplane flights. No more car rides. No more machinery powering superefficient farms and no more lighter fluid for backyard barbecues.

We’ve been fine so far though, because there’s one area which so far has been pumping out plenty of oil: the Arabian gulf region. In fact, the gulf is home to Ghawar, the largest oil field which will ever be discovered on earth (if there was anything bigger we would have found it by now). Ghawar sits just on the coastline of Saudi Arabia, and the northern part of Ghawar contributes a whopping 55-60% of Saudi Arabia’s oil production. By extension, that means Ghawar is responsible for almost 15% of the world’s production. Fifteen percent from just one field. No other field comes close, and there is simply no way the Saudis can replace this field once it starts running dry. So once Ghawar is past peak production, Saudi Arabia is past peak production. Once the Saudis pass peak, the world is past peak.

Well, guess what: evidence is mounting that Ghawar peaked in 2005. what’s worse, there is also evidence that the Saudis have been too optimistic about the amount remaining. Even non-industry people have noticed.
The most conclusive evidence of a past-peak Ghawar field would be increased drilling with decreasing production, as the Saudis scramble to prop up output of a field in decline. Take a look at the following graph plotting new rigs in northern Ghawar on top versus the area’s oil production on the bottom (click for a larger view):

Not good. So should all go out and buy horses? I hope not. That’s pretty fatalistic, and nobody wants to return to a pre-industrial society. We’ll probably want to design hyper efficient tech goodies. We’ll probably want to stop suburban sprawl and make driving less frequent. Most importantly, we need to start pouring money into research on renewable and nuclear energy. The good news is we have time to start switching now, and we may be able to mitigate the crunch if we attack the problem from multiple angles.

I know what you’re thinking: “dude, we’ve got, like, technology and stuff”. It ain’t going to happen; technology won’t replace lost oil supplies. However, technology can be applied to develop commercially viable nuclear and renewable power. Time to get moving on that.