The 75% solution

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In his State of the Union speech, President Bush said "America is addicted to oil" and set a goal of replacing 75 percent of the nation's Mideast oil imports by 2025 with ethanol and other energy sources.

Replace 75% of US oil imports from the Mideast by 2025? Viewed in another way, this is not a "goal," it is a prophesy. There is no way that the US will be importing as much oil from the Mideast in 2025 as it imports today. And there is no way that the nations of the Mideast will be exporting as much oil in 2025 as they are exporting today.

Whether or not the Bush statement is a "goal," in 2025 the US will not be importing much in the way of petroleum from the Mideast, nor from anyplace else. The oil just will not be there for one side to export, nor for the other side to import. Welcome to the future.

As for what is happening in the Mideast, Kuwait has announced that its main oil field, the super giant Burgan, has entered the phase of irreversible decline. At current depletion & decline rates, by 2025 Kuwait will be exporting negligible amounts of oil, and at prices that most nations of the world will be unable to afford.

Saudi's Ghawar field is close to being in irreversible decline. The Saudis are only managing to maintain current oil production volumes by virtue of a massive seawater injection program that pumps more than seven million barrels of salt water per day into its oil fields. This pumping helps to maintain production pressures in the oil reservoirs, but is also the source of formation damage due to the presence of oxygen and bacteria in the seawater. By 2025, Saudi will still export oil, but far less oil than now and each tanker will be of such value as to require its own armed escort.

Iran is not quite at its production peak, but within 20 years even the most optimistic estimates forecast that Iran will cease to be a net oil exporter. (This may also have something to do with Iran's desire to develop a nuclear program.)

And Iraq? By 2025 Iraq may be an oil exporter, not to mention an eastern province of Iran. But considering the looming and inevitable decline in daily world oil production, who will be able to afford whatever gets exported? (Hint, do you speak Chinese?)

The point is, on the other side of Peak Oil the US will be fortunate to receive any oil at all from the Mideast, let alone the Bush goal of only 25% of current (let alone forecast) imports. The planners who are connecting the dots of the past, and mechanistically extrapolating out into the future with no allowance for Peak Oil, are living in a fantasy land. They are planning, if anything, for the failure of the American economy and the attendant decline of American civilization.

Still, our Mr. President raised the subject. To recall an old phrase, "What does the President know, and when did he know it?" If GW Bush is onboard with Peak Oil, he failed to bring up the subject with specificity in his State of the Union speech and give the concept the publicity and credibility that such a speech would merit. Then again, maybe the President saw the movie A Few Good Men. Maybe he is imitating Jack Nicholson's character, the colonel of Marines, who said "You want the truth? You can't handle the truth." Maybe, to Mr. Bush's way of thinking, he is just doing the best that he can.

But if you are reading this, you are probably one of the initiated. We are the few, the proud, the Peak Oil people.

Byron W. King has worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. He is currently a practicing attorney in Pittsburgh, Pennsylvania.

For more of King's essays, see The Saga of Oil.

ASPEN (ResourceInvestor.com) – In a presentation at the International Oil & Gas Investor Forum in Aspen, Colorado, Chief Investment Officer Frank Holmes of U.S. Global Investors, Inc. said the key to analyzing the price trend in natural resources lies in the East. For investors to take full advantage of booming oil and gas prices, Holmes frankly said “it’s important to recognize what’s taking place in Asia.”

Holmes said the supply side of the world cannot keep up with China’s 2% growth. He said there are three critical drivers to the market:

Holmes said it’s especially important to track and follow China’s gross domestic product (GDP).

Official statistics released in December showed that China's GDP figure in 2004 had been undervalued by $284 billion, or 16.8% - thus revising its economic expansion rate to 10.1% from 9.5%. China's revised GDP figure was $1.98 trillion. The new figure makes China the world's sixth largest economy, behind the U.S., Japan, Germany, the U.K. and France.

The first-ever economic census, conducted by the National Bureau of Statistics (NBS), found that China’s service sector had been understated by around $262 billion, Li Deshui, head of China's NBS, said at a press conference in Beijing.

According to an economic survey, China’s service sector accounted for 40.7% of the country's 2004 GDP, up from the previous figure of 31.9%. The country's agricultural sector accounted for 13.1% of GDP last year, while the manufacturing industry accounted for 46.2%.

China's GDP growth rate	Revised figure after economic census	Original figure
1993	14.0	13.5
1994	13.1	12.6
1995	10.9	10.5
1996	10.0	9.6
1997	9.3	8.8
1998	7.8	7.8
1999	7.6	7.1
2000	8.4	8.0
2001	8.3	7.5
2002	9.1	8.3
2003	10.0	9.5
2004	10.1	9.5

Holmes added that last year China installed an additional 50 gigawatts of power – equalling Spain’s entire energy production. He said China plans to increase 50 gigawatts each year until the Olympics.

Concerning the second driver, regulatory issues, Holmes did not delve too deeply into this, but said that it is becoming increasing difficult to obtain permits for drilling oil and gas in foreign countries. This will, of course, affect the ready supply of resources.

Speculation concerning natural resource policies continues to surround countries such as Peru, Mongolia, Tanzania, Venezuela and now Bolivia. Obviously, these countries want to cash in on the oil & gas boom, which brings us to Holmes’ third indicator – geopolitical concerns.

Lastly, Holmes pointed to geopolitical concerns fuelling the oil & gas market. After the newly elected Bolivian president said he wanted to nationalize the oil & gas sector, this without a doubt created concern in the market. Not to mention Russia’s falling out with Ukraine over gas supplies – while natural gas prices remain at all time highs.

Holmes also said that the Iran situation is a major geopolitical concern for the oil & gas market. As tensions increase with the U.S. over nuclear energy, the struggle over valuable natural resources will only heighten between the two countries.

To conclude, Holmes said that despite high oil prices, demand continues to rise - largely fuelled by China. IEA forecasts call for 2% growth in 2006, according to Holmes.

The February contract for benchmark for light, sweet crudes are still above $60 at $63.92 per barrel Friday on the New York Mercantile Exchange. The March contract was last at $64.58 per barrel. The February natural gas contract traded at $8.79/Mmbtu, still at relative highs.

[This is pure scorched earth. If the US and Western economies can’t extract oil and cut deals in Africa then arm sales and fomenting unrest virtually guarantee that nobody will. So much for the value of human life. – MCR]

U.N. adviser: West killing Africa with gun sales

February 2, 2006
CNN
http://www.cnn.com/2006/WORLD/africa/02/02/africa.guns.reut/index.html

GENEVA, Switzerland (Reuters) -- A senior United Nations aid official called on Thursday for a halt to arms sales to Africa, saying it would be more effective in addressing the continent's poverty than charity rock concerts or debt relief.

Dennis McNamara, special U.N. adviser on internal displacement, slammed world powers for neglecting some 12.5 million Africans uprooted within their countries, who form half of the world's internally displaced persons (IDPs).

He accused the West of supplying the weapons fuelling African conflicts which leave civilians homeless -- and prey to war crimes, hunger, disease and rape -- while greedy companies exploit the oil and mineral wealth.

"Guns are at the heart of the problem ... There is one slogan I would like to suggest for 2006: No Arms Sales to Africa. Zero. Not an embargo, not a sanction, a voluntary cessation of all arms sales to Africa," McNamara told a news briefing.

"The kids on the streets of Nairobi, Khartoum, Abidjan and Monrovia have guns in their pockets or up their sleeves ... We provided the arms. We the West, we the G8," he added, referring to the Group of Eight industrialized nations.

McNamara dismissed large rock concerts -- such as the Live 8 series held worldwide last July under the slogan "Make Poverty History" to pressure the G8 -- as focusing short-lived attention on starving babies while distorting deeper problems.

"The pop concerts save the kids for a short period of time. They do nothing about the underlying problems," McNamara said.

"Twenty years after Live Aid, the farms of the Ogaden of Ethiopia are as impoverished and likely to have famine as 20 years ago. Nothing has changed on the ground, in fact it has gotten worse," he added.

"The rape victims of eastern Congo don't give a damn about debt relief. They want to know who is raping them, who has provided the guns and can they get HIV tests," he added.

Yet refugees or ex-combatants returning to post-war areas ranging from Angola, southern Sudan to former Zaire find that basic services such as water, health and education are lacking amid massive unemployment, he said.

"It is all very well to have these important slogans, but it is not enough. The food aid and humanitarian aid is often a substitute for real political, economic and security action.

"This is the danger of humanitarian aid. It is a palliative, a necessary palliative, but we should stop kidding ourselves that it is a solution ... In fact, it detracts from solutions."

Food firm gouged by weakening sales, commodity costs, says it also expects to close up to 20 additional facilities.

CHICAGO (Reuters) - Kraft Foods Inc. said Monday it would cut up to 8,000 more jobs, or 8 percent of its work force, through 2008 as the food company, hammered by higher commodity costs and sluggish sales volume, looks to save more money.

Shares of Kraft (Research) jumped over 3 percent in after-hours trading Monday after closing at $30 on the New York Stock Exchange.

The job cuts are part of the second major restructuring announcement Kraft has made in two years and will add $2.5 billion in restructuring charges to a plan first announced in 2004, the company said.

The announcement came as the maker of Oreo cookies, Jell-O gelatin and a host of other well-known brands, posted a 23 percent increase in net income, though part of the increase came because the company had an extra week in the 2005 quarter.

Kraft, like many packaged food companies, has been struggling with a range of commodity cost increases in recent years and is still being pressured by high fuel and packaging costs.
Price increases have only been able to match part of the higher costs and in some instances also chased consumers to less expensive brands, especially in Europe, the company said.
Kraft said it expects to close up to 20 additional facilities under the expanded restructuring, generating an additional $700 million in annual cost savings.

The company posted a profit of $773 million, or 46 cents a share, for the fourth quarter, compared with $628 million, or 37 cents a share, a year earlier.

[I’ll bet that the possibility of Iran importing oil has crossed few people’s minds. The reason, the problem and the common thread with the whole world is summed up by one word: growth. As billions of investment dollars pour into Iran, the ruling theocracy can afford, at least for a while, to improve domestic living conditions. The fact that Iranian gasoline is ultra-cheap at 11 cents/gallon is nowhere near as important as the fact that such growth in demand stretches the rubber band of supply even tighter. Iran is caught in the same trap as every other nation. Until we change the way money works, we change nothing. – MCR]

TEHRAN, Jan. 30--Iran’s gasoline production capacity will rise to 140 million liters a day in five years, once the projected $14-billion investment in refinery construction and rehabilitation schemes is realized.

According to ISNA, Mohammad Reza Nematzadeh, deputy oil minister and managing director of National Iranian Oil Derivatives Production and Distribution Company further told a Seminar on Offering Plans for Constructing and Rehabilitating Refineries that the country is expected to face a huge 10.5-percent hike in gasoline consumption, underscoring the need to rectify consumption patterns and boost production.

“The ever-increasing gasoline consumption has prompted the government to take necessary measures to increase gasoline production capacity from the current 40 to 140 million liters a day over the next fiver years,“ he said, adding that a technological improvement in gasoline production processes will help decrease heavy derivatives output and increase production of petrol and other light derivatives.

He said with the implementation of refinery rehabilitation schemes, the production ratio of gasoline to other oil derivatives will jump from the current 16 to 35 percent.

Gasoline consumption has reached record highs in Iran.

Bahman Arman, a senior economist, told ISNA earlier that a 13.3 percent growth has been witnessed in gasoline consumption during March-December 2005 against the figure for the corresponding period a year earlier.

“This is unprecedented not only in Iran, but also in the whole world,“ he said, adding that once known internationally as a major exporter of oil derivatives, Iran has now turned into one of the world’s largest gasoline importers.

Iran has to meet its need for gasoline from countries such as China, United Arab Emirates, Kuwait or Saudi Arabia. The country is paying four billion dollars a year on petrol imports.

Arman said the parliamentary move to keep prices of goods and services unchanged is meant chiefly to keep people satisfied, blaming it for the high gasoline consumption.

Each liter of gasoline sells for about 11 cents in Iran, which has one of the cheapest petrol prices in world.

Oil industry experts warn that the country is expected to be forced to import not just gasoline, but also oil and gas for domestic use next year, if consumption continues to grow fast.

Some 40 percent of domestic demand for gasoline is met from imports. Gasoline consumption hovers around 67 million liters a day.

Iran's really big weapon

WASHINGTON, Jan. 18 (UPI) -- The prospect of a mushroom cloud rising from the Dasht-e-Lut, Iran's Desert of Stones, may not be Tehran's greatest threat to international stability. A successful test of an Iranian nuclear weapon at some point in the next few years may prove less destabilizing than a simple free market economic measure that Iran is said to be planning for March of this year.

Tehran is preparing to open a bourse, a mercantile exchange and potentially a futures market, where traders can buy and sell oil and gas, along the lines of the International Petroleum Exchange (IPE) in London and the NYTMEX in New York.

The differences are first, that this one would price its energy in euros, not dollars, and second, that it would not use West Texas Intermediate or Brent Crude (from the North Sea) as its standard oil for pricing. It would use a Persian Gulf-produced oil instead.

So what? This sounds like a minor change, and possibly even a useful one, broadening the choice among traders and consumers in the kind of way that Adam Smith, the 18th century father of modern capitalism, would have recommended.

Not so. This could be a far more profoundly punishing blow to American interests than Iran's ability to manufacture a crude atom bomb that would have little credibility until it became small and stable and reliable enough to be delivered on some putative target.

The relationship between the oil price and dollar is intimate and important, and very useful to the dollar's highly profitable status as the world's reserve currency. The prospect of a rival bourse and futures market opens the intriguing possibility, beyond hedging the future oil price, of profitable arbitrage between the euro and the dollar.

And if oil and gas are to be denominated in more than just one currency, why not open the trade to others? Why not denominate the price of a barrel of oil in Japanese Yen, or in Chinese yuan, the currency of the world's second biggest oil importer?

Such a move would not be welcomed in Washington, which swiftly moved after the fall of Baghdad in 2003 to reverse Saddam Hussein's impudent decision to start selling Iraqi oil for euros, rather than dollars. After all, the great benefit of running the world's reserve currency means that if all else fails, the United States Treasury can just print more and more of the stuff and pay for its oil imports that way.

There are, naturally, limits to the degree to which the United States can debase its currency, as the world found with the first great OPEC price rise of 1973, when the price per barrel tripled. This is usually attributed to the political decision by Saudi Arabia and other Arab oil producers to punish the United States for its decisive support of Israel in the Yom Kippur War. That is partly true, but the crucial OPEC decision was as a direct result of President Richard Nixon's Aug. 15 decision to end the dollar's link to the gold standard.

The dollar declined in value, which meant the OPEC producers received less value for their oil. So at their Beirut meeting on Sept. 22, OPEC adopted resolution XXV:140, which resolved to take "any necessary action ... to offset any adverse effects on the per barrel real income of member countries resulting from the international monetary developments as of Aug. 15."

That was also the time when Sheikh Zaki Yamani, the Saudi oil minister, first mentioned the possibility of deploying the ultimate weapon of an oil embargo.

Most of the financial world is currently awaiting another, similar devaluation of the dollar, in response to the monstrous scale of current deficit on the U.S. current account. Writing in the Financial Times last week, Harvard Professor Marty Feldstein suggested that on the basis of the 1985-87 Louvre and Plaza devaluations, the dollar could fall as much as 40 percent or even more.

The markets simply do not know when. But should it come after an Iranian bourse is up and running, some very tidy sums could be made by those playing a dollar-euro trade on Tehran's energy futures market.

The Tehran bourse is listed as an objective for this year in Iran's current five-year plan. The Tehran Times reported July 26 that the final authorizations had been received for the bourse to go ahead. Mohammad Javad Asemipour, the technocrat and former deputy petroleum minister who has been charged with launching the bourse, has made a number of discreet scouting trips to London, Frankfurt, Moscow and Paris. Just after Christmas, he was quoted by the Iran Labor News Agency saying "transparency in oil transactions would be one of the advantages of having such an establishment "(the bourse), and adding that this would "allow dealers access to related information and promote equal trade opportunities."

Asemipour is an elusive type, but one who seems convinced that Iran can play off the European against the Americans, the euro against the dollar. Just over a year ago, he was quoted in the quasi-official Iran Daily saying that the Europeans have played "a beautiful game" with the United States during the years of sanctions, when they actively participated in economic projects, particularly in the energy sector, across Iran.

"In this game, the Europeans have pretended to be siding with America, whereas they got involved in business here and developed a sort of competition with the Americans," he said. "But in practice, they (the Europeans) have pursued their own interests." There is no shortage of officials in the Bush administration who nurture such suspicions of the French and Germans, despite what seems at the moment to be a common concern about Iran's nuclear ambitions.

The question now is whether the world's traders will come to a Tehran Bourse if and when it opens, bearing in mind that a similar idea in Dubai failed to gain much traction. But that was before oil prices reached $65 a barrel, and before the Dubai's partners in the Gulf Cooperation Council decided it was time to stop glowering at Iran as a potential enemy, and started to invite Tehran to their meetings as an observer. Before, that is, the Arab world began to judge that whatever the American intentions, Iran had become the real winner of the Iraq War.

U.N. adviser: West killing Africa with gun sales

February 2, 2006 CNN http://www.cnn.com/2006/WORLD/africa/02/02/africa.guns.reut/index.html

Iran's really big weapon

February 2, 2006
CNN
http://www.cnn.com/2006/WORLD/africa/02/02/africa.guns.reut/index.html