At the VOTER49 party I talked briefly with Don about my concern that no one in the Chicago political elite has stepped forward to do a risk analysis. We chatted a bit as to why that was, and then he suggested we could, if we put the nation's resources to work on it, solve this problem in 5 years.
Uhhhhh.......no Don. We won't.
Let's start with the Hirsch Report of 2005, which makes it plain that the primary issue is transportation fuel. Dr. Hirsch estimates a 20 year lead time to put mitigation actions into effect, and he is quite clear that doing so will REQUIRE A CRASH EFFORT! He gives the details behind his thinking, and I believe him.
But Kheris, that report is 2 years old and a lot has changed. We spend so much on Iraq, we surely can solve this if we reallocate resources.
Oh really? Yes, a lot has changed, and not in ways that will help us.
1. The National Petroleum Council report tells us that after 2015 the balance of oil supply and demand will be tenuous. They acknowledge the need to make changes, however Tom Whipple points out the self serving nature of those recommendations. We are all glad NPC noticed Peak Oil, but how strongly will the government push the envelope in preparation? Not much.
2. On July 27 PEMEX acknowledged that they have 7 years of oil left. 7 Years!!!! By 2014 they will be toast. They don't have the financial or technical wherewithal to overcome this problem. Assuming they struck a supergiant tomorrow, it would still be 5 years (minimum) before first oil (based on the usual development cycle), and longer until the field is producing at anything near an optimal, let alone peak, level. They are our second largest single country supplier. Who's going to replace that oil?
3. The oil companies are still doing well by any standard, but signs of slippage are there.
Some Wall Street analysts were concerned about Shell's falling output, a trend that has been replicated across the industry as major oil companies contend with declining production at their mature fields and the challenges of finding new reserves. "All the oil companies are struggling to grow production," said Peter Hitchens, an analyst at brokerage Teather & Greenwood. "It's becoming more and more difficult to bring projects in on time and on budget."
4. The bombing of oil assets in Mexico is raising concerns about the country's ability to protect itself and its economy. Want to speculate on the impact to us if the Mexicans find themselves being pinched by local terrorism? And if you are wondering if those bombs had any real impact, allow me to fill you in:
The Mexican chamber of manufacturing industries reported that some 1,200 factories across Guanajuato, Qeretaro, Aguascalientes and Jalico were forced offline. The Washington Post reported that Mexican glass maker, Vitro, lost some US$800,000 a day while it waited for Petroleos Mexicanos (Pemex) to restore the energy feed. Mexico's beer manufacturer Modelo SA along with food manufacturer Hershey and auto makers Nissan and Honda were all forced to close temporarily.
The bombers knew what they were doing according to the article.
5. Finally, commentary from Jerome a Paris about the sale of Chrysler (subscription only). It's a very accessible article, and he draws a scary implication:
As we know, US consumers have barely seen their incomes increase in recent years. Consumption has been propped up by ever increasing levels of debt, and by buoyant house prices (whch made possible to raise home equity, i.e. to pile in again more debt). Such levels of debt are no longer going to be available, both as banks tighten standards, and as house prices stagnate or worse. And as incomes are unlikely to go anywhere in the context described above, consumption is likely to struggle, leading to lower growth, creating more economic hardship and tightening the noose over weak, over-indebted borrowers, whether households or companies, and putting their lenders in the position of having to take over assets (houses, businesses, or financial assets underpinned by the same) and holding them or trying to sell them in a hostile market. Selling makes the cost visible, but at least ends the problem. The problem is that if everybody tries to do the same, the markets will crash, as there won't be enough buyers on the other side - or not at the prices needed by the sellers.
For an example of how dicey things might get, see this article about Landry's. They are looking for new financing. $400M in unsecured debt has been called in due to delays in filing SEC reports.
According to the Company's Chief Financial Officer, Rick Liem, "The Company will refinance the amount outstanding under the Notes and under the Company's existing Credit Agreement. Due to the recent downturn in the credit markets and the increase in interest rate spreads, our 7.50% below market Notes did not provide enough of an economic return to our bondholders and prompted their decision to accelerate the Notes."
We currently spend, as a nation, between $1.3B and $1.6B on oil each day. Yes, that is a "B" for BILLION! That is based on a price range of $65-77/barrel. Crank the price to $100/barrel and we are at ~ $2.1B/day. We are buried in Iraq and will remain so for at least another year. In less than 7 years our second largest supplier will likely end exports in order to take care of domestic needs. The financial environment of easy money is over, and there are consequences to that. Big Oil sees the problem coming, recognizes the issues, and thinks it could get dicey 8 years from now. Their own financial situation is starting to deteriorate and so they want subsidies and a free rein in order to continue business as usual.
Perhaps that's the real problem; an across the board desire to continue business as usual. Folks; we don't have 20 years to prepare for a serious downturn in oil supplies. We don't even have 8 years. We have as much time as it will take for Mexico to turn off the export tap. Say 3 years, 5 on the outside. But 5 years will not be enough to identify and put in place the alternatives that could mitigate any fuel shortages. A close reading of The Oil Drum and its contributors makes it very clear that alternatives are out there, at varying stages of viability, but none is a silver bullet. All are considered silver BBs.
Five or six years ago when money was loose and we were riding high on the hog, probably right after 9/11, we could have mobilized the nation to reduce our oil dependency and be on our way to viable alternatives. We didn't do it. No one really tried and those who raise the issue are still seen as Chicken Littles.
I guess the sky really will have to fall before anyone even considers a risk analysis for Chicago. By then, we will be reacting rather than actually planning. By then, we will know something as to whether oil supplies will drop slowly or rapidly. By then, it will be too late to avoid fuel shortages. The lights will be on, CTA will run, bicycles will be back in vogue, and I wonder how Rogers Park will cope with an economy in pain and few options. By then we will have gone through another aldermanic election and I wonder if the next alderman will be as blissfully ignorant as the current one.
2 comments:
This is your very best post, Kheris.
The fact that Don thinks that we can solve the problem in 5 years if only we free up the resources we now spend on the Iraq war effort and use them for that purpose, shows how some of the more thoughtful and willing members of our population just don't grasp the gravity of the problem.
The most disturbing thing is that the people we pay to think, seem to believe that we can, with will and money, money, money for "alternative energy", just segue seemlessly over to the next big source of energy.
Worse, how could anyone call the Hirsch Report "out of date"? Sure, things have changed since that report have issued- supplies are tighter, and we are now verifiably post peak. Production is down worldwide at least 1.5% and demand is up 1.5%.
Most ominous of all is the export crunch- the exporting countries are now cutting back the amount they export as a percentage of their total production as that drops- thus, we have a pair of scissors closing in on us. We are going to be chopped from both sides.
The Hirsch Report did not factor in the loss of imports from Mexico. Well, that is going to happen for a certainty within 4 years, and if people want to know what that means, they should recall the 1970s, when a 5% drop in imports was sufficient to produce long lines at the gas stations and a decade-long recession. Consider also, that we had only 220 million people then, and they drove fewer miles since most people were still clustered in the inner suburbs and the massive exurban buildout had barely begun. We also still had much more of our own oil then.
So we need to consider what a 10% to 20% drop in our oil supplies would mean for this country, what kind of misery, economic contraction, SHORTAGES OF FUEL AND FOOD, and other extreme misery we could be dealing with.
In the near term, we could be looking at severe fuel shortages with dizzying fuel prices. That would mean that absolutely everything we buy or eat or in any way use will become vastly more expensive. Food is already ratcheting upward in price in response to both higher fuel costs and the conversion of cropland from food production to fuel production. Transportation costs to transport goods will spike,and so will the prices of raw materials.
In other words, we will be an a supply crunch involving absolutely everything we buy and use, notably heat, food, transportation, and electrical power- the props of our lives.
Consider what life will be like if your food, your basic clothing, your heat bill, your electric bill double or triple while your income stagnates, or drops, or DISAPPEARS altogether because of the masses of layouffs that occur as the crippled economy starts to fail.
And what have we done to prepare? Nothing. Nothing, that is, except talk up "alternative fuels" that are only going to make the problem worse.
We have not even begun to talk about making the policy changes that will create urban and town environments in which people can live comfortably without a car, or with vastly reduced use of cars. Why are we still building highways instead of funding mass transit? Why are we subsidizing air travel while crippling the railroads with crippling regulation and murderous tax policies? Why are we still zoning for low density construction and excessive auto dependence?
Everything we do and make our living by is dependent upon cheap, plentiful fuel, and when we cease to have that, whole categories of occupations will vanish, yet we have no other alternatives to offer people. We have no manufacturing to speak of, and about 40% of our population makes its living at "fluff" occupations in finance, advertising,high tech and other industries that are valuable only in a cheap fuel economy and where about 50% of the workers so employed stand to become redundant overnight in an economic crunch. That's practically everybody in this city.
We could be in very, very bad trouble in just a few short years.
I want to be very clear that no one actually called the Hirsch Report out of date, I was postulating one possible response. However, it wouldn't surprise me if there were folks out there thinking exactly that.
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