Newt Gingrich has just released a half-hour lecture on US energy policy.
To say, the ex-speaker is bullish on US domestic energy prospects is an understatement. He sets four objectives: (i) zero dependence on imported energy from potentially hostile states (Saudi Arabia, Iraq, Iran, Venezuela, etc); (ii) over a million additional high-paid jobs in the energy sector; (iii) a strengthened dollar due to a reduction of energy imports and increase in exports; (iv) gas at $2.50 per gallon.
Newt’s vision is based on massive exploitation of what he believes are more or less unlimited unconventional oil and gas reserves. The US could have three times as much oil as Saudi Arabia, he argues, and gas for 100 years or more. The geopolitical consequences of this bounty will be striking. As President, he would have the Saudis firmly in his sights:
I want to get to a point where we produce so much oil in the United States that no American president will ever again bow to a Saudi King. I thought, frankly, it’s time that we tell the Saudis the truth: We know that they are the largest funders of schools called madrassas, which teach hate. We know that they spend several billion dollars a year exporting a very, very extreme version called Wahhabism, and we know that they are not straight with us.
And up until now, our presidents have been too cautious to say, “Oh gee, I don’t want to offend the Saudis. I don’t want them to do something with their oil supply.”
Well, we have an opportunity now to turn that around. We have an opportunity to build up the American oil supply, the American natural gas supply, so we can then tell the Saudis the truth, so we can deal with them from a position of strength, so we can no longer worry about the Persian Gulf.
And at that point, if, in fact, the Iranians want to do something with the Straits of Hormuz, maybe the Chinese have a problem or the Indians have a problem or the Europeans have a problem. But I am not sure at that point that the Americans will have a problem if we become once again what we were in World War II, the leading producer of oil in the world.
As is often the case, Newt has tapped deep into the Zeitgeist by choosing today to go large on energy. Talk to American policy makers and they have become incredibly bullish about the prospects for the domestic sector (although few, of course, rising to Gingrichian heights of enthusiasm).
Citigroup recently proclaimed the end of Peak Oil, triggering a debate on whether shale gas and tight oil prospects are fundamental game changers or whether they will have a more marginal – although still significant – impact (see Chris Nelder for example). No-one credible I have talked to would disagree that a shift of some kind is afoot.
Newt is also right to see potential geopolitical advantages for the US. American energy demand is fairly stable and its domestic endowment is growing. In contrast, China and India face decades of rapidly increasing consumption of all natural resources. They also still have lots and lots of resource-hungry cities to build. Their transition is going to be much more tricky to handle.
The US also has leadership in key technologies (fracking, enhanced oil recovery, solar, even nuclear) that are increasingly valuable as energy demand grows. And it’s well-placed on food and land (although water is a big problem for some parts of the country).
Characteristically, of course, Gingrich overplays his hand (that’s his shtick). America sitting back while the Gulf implodes? Good luck with that. And market prices for oil – less so for gas – are set globally. Demand overseas will continue to drive the price the American consumer pays for gasoline at home: ‘oil isolationism’ is, and will remain, a fantasy.
And, of course, climate change does not get a mention in Gingrich’s current world view (although it used to), even though new fossil fuel discoveries are putting huge amounts of new carbon in play. That is not a problem that can be ignored ad infinitum.
I’m expecting Newt’s energy fervour to be much mocked, but don’t bet against him getting some momentum too. And the mood could spread. We might see quite a lot more bullish talk on energy in the American presidential debate.
Update: Just reading the transcript, one misses some of the glory of Newt’s delivery, which is Pinteresque at times: “Under President Obama, because he is so anti‑American [pause] energy, we have actually had a 40 percent reduction in development of oil offshore.”
Update II: The Onion weighs in:
As Newt Gingrich continues to cede ground to Rick Santorum, the former House speaker’s campaign team has responded by advising him to stay focused on the belligerent, mean-spirited message that has long been the hallmark of his presidential run, sources confirmed Monday.
“Newt’s rhetoric can become abstract and idiosyncratic at times, and we have to gently remind him that he just needs to be himself, to be the Newt people are familiar with—the Newt devoid of any discernible scruple beyond his own insatiable instinct for self-promotion,” campaign director Michael Krull said Friday, explaining that whatever lies at Gingrich’s cold, depraved core is what will make or break him with voters. “Every time he veers off course and talks passionately about about outer space or how the United States has to stop spending beyond its means, I tell him, ‘Look, your greatest asset is being a remorseless asshole.”
Ever heard of spare capacity theory? It’s defined by Gregor Macdonald as:
the assumption among western bankers, policy makers, economists, and stock markets that OPEC producers can lift oil production at will, and, export all of that spare production to world consumers.
(See also this recent post on Global Dashboard, and this one from back in 2008.) There’s a lot of spare capacity theory doing the rounds at the moment, given what’s happening in North Africa and the Middle East. Libya normally produces 1.6 million barrels of oil a day (a little under 2% of global production). It’s estimated that about 350,000 barrels, or 22%, of that is now offline, and depending on how things pan out, it could stay offline for some time.
Now imagine what happens if it all kicks off in Algeria (a larger exporter than Libya of oil plus oil products). Or, for that matter, in Iraq, Iran, or Saudi Arabia – all of which are much more significant again. That’s what has traders and futures markets spooked, and everyone looking to Saudi Arabia: as a source quoted in the FT this morning puts it,
“It is fear of the unknown. The risks are all to the upside. Saudi Arabia needs to respond.”
Saudi Arabia, for its part, insists that it can and will increase production if needed:
“Right now, there are active talks in order to implement what is needed,” the Saudi official said. He stressed that the kingdom retains spare capacity of some 4m barrels a day – more than double Libya’s entire output, which totalled 1.58m b/d in January, according to the International Energy Agency.
Saudi Arabia has not yet decided whether to increase production. If it proved necessary to produce more, “then that will happen, there’s no problem at all”, the official said.
But what if that’s not true? Gregor Macdonald argues that the extent to which markets have climbed over the past week “suggests the market is justifiably concerned about events in Libya, and the risk of more unrest to come in oil producing regions”. His conclusion:
Given the potential magnitude of this situation, I actually think its good that we can still rely on price as a means to ration supply.
True though that may be, a new oil price spike is exactly what we didn’t need on global food prices at this point. Back at the start of the year, the fact that we weren’t in the middle of an oil spike was one of the factors I drew comfort from on the food outlook. Not now…
Back in 2008, just as the oil price started to plummet after hitting its all-time high of $147 a barrel, I did a post pondering whether the drop was “the start of a long decline, or just a brief pause to draw breath before a resumption of the relentless upward march of recent years”. I argued that oil prices would stay low as long as the credit crunch lasted, but that
once we’re through the crunch, we may be back to a game of cat and mouse between oil supply and economic growth. Demand falls, oil price falls; demand picks up, oil price goes back up too – but never for long enough to give investors a clear signal to pump cash into new oil supply infrastructure
Over at the Energy Bulletin, Dave Cohen’s just published a post thinking about the same question – and wondering when the next oil spike is due. His take is that the next crunch will likely be in 2013, give or take a year, as his graph below illustrates:
As Dave notes, this graph is not a forecast on oil prices, but rather a schematic illustrating that a) demand surges cause oil price shocks [i.e. the peaks on his graph]; b) oil price shocks cause recesssions and force reductions in demand [the troughs]; and c) the average price of oil goes up over time [the straight line]. Informally, he notes, “we can say there’s been an oil price shock when the real (inflation-adjusted) price goes over $100 per barrel and stays there for at least 2 months”.
His whole post is worth reading (n.b. especially his emphasis on the key variable in all this, namely prospects for Chinese growth) – and leaves the reader wondering: how do we break out of the cycle?
As I argued back in 08, one answer could be massive new investment in oil production – remember the IEA’s consistent warnings throughout the downturn about how under-investment in new oil production is setting the stage for a new supply crunch. But there are two problems with that option. One: we’re into diminishing returns territory. With the age of easy oil over, production increases from now depend on unpalatable options like tar sands, oil shales and, ahem, a lot more deepwater drilling (which is projected to account for 40% of global oil demand by 2020). Two: this approach does nothing to solve climate change.
So, I concluded 2 years ago, “it looks like the only way through is for policymakers to agree a global climate policy framework that’s both global in scope and sufficiently long term to provide investors with an unequivocal signal of where to put their cash: this is the only way of squaring energy security with climate change”.
I still think that’s right – but obviously, prospects for that have dimmed considerably since Copenhagen. So where does that leave us? That leaves us, alas, stuck in the yo-yo world depicted in Dave’s graph (which looks a lot like the Multilateral Zombie climate policy scenario that David and I described in our 2009 report for the UK government on global climate architecture – see page 7 onwards).
Oh – and it also leaves us on track for 3 degrees plus of global warming.
What do countries do when they run out of oil? That’s the question posed by Oxford University’s Joerg Friedrich in a fortcoming journal piece in Energy Policy (already available here). Friedrich give three examples of strategies taken by countries facing this very issue in the past, which go like this.
First, you can opt for predatory militarism, where Japan before and during World War Two provides his case study. According to Friedrich, “the spectre of future resource shortages had played an important part in shaping Japan’s imperialist strategy ever since the end of World War One … when an American oil embargo became imminent, in 1941, Japan pre-emptively attacked the US and radicalized its war of conquest in order to gain access to the oil supplies of the East Indies”.
A second strategy, he reckons, is totalitarian retrenchment, which is what North Korea did after the Cold War. “When subsidized deliveries of oil and other vital resources from the Soviet Union were disrupted, the ‘Hermit Kingdom’ reacted in a shockingly reckless way. Elite privileges were preserved in the face of hundreds of thousands of North Koreans dying from hunger.”
Third, he offers what he calls socio-economic adaptation – which, he argues, is what Cuba successfully achieved when faced with the same challenges as North Korea. While the end of subsidized deliveries from the USSR presented a massive challenge here too, “there was no mass starvation comparable to North Korea. Instead, Cubans relied on social networks and non-industrial modes of production to cope with energy scarcity and the concomitant shortage of food. They were actively encouraged to do so by the regime in Havana”.
It’s an engaging analysis, and worth reading the whole thing – and I absolutely share Friedrich’s concern about the risk of hugely damaging zero sum games as resources get scarce.
But as with many other peak oil analyses, I hesitate about the implied assumption that the answer to peak oil is necessarily local. I’d love to hear Friedrich’s take on what might an internationalist approach to managing increasing resource scarcity might look like. Cuba’s hardly the best case study for examining that, of course, given that it also faces the small matter of a US trade embargo. But it’s still a big – and largely unexamined – question.
As regular readers will know, I’ve been banging on for a long time about the need for a comprehensive database that tells us exactly how exposed international trade is to peak oil – or, for that matter, to the maritime sector being brought into the international climate regime and made subject to really severe emission controls.
After all, the bunker fuels used to power container ships and bulk carriers are much less easily substitutable than other kinds of fossil fuels. You can replace coal-fired power stations with renewables or nuclear; you can replace petrol-fuelled cars with ones that run on electricity or hydrogen. But ships? That’s another story. As a UK government study published just before Copenhagen found, for instance, “it will be extremely challenging, and expensive, to reduce emissions of carbon dioxide from shipping and aviation … there are a number of options available in each sector, but currently most of these are not economically viable”.
But if we don’t have readily available substitutes for marine bunker fuels, then what happens to maritime trade – to globalisation itself, in other words – if oil costs start really soaring again, or governments start to get serious about carbon pricing?
In particular, as I asked in The Feeding of the Nine Billion, what happens to the import bills of countries that depend on food imports from overseas (like most of the fragile states in West Africa, for example)? And what does it mean for China – whose advantages on wage costs could easily end up offset by increased transport costs, as actually happened when oil costs went into triple digits?
Although a number of analysts have been asking that question ever since the oil price spiked in 2008 (most notably Jeff Rubin – see the link above and also this), what we’ve all lacked is a really serious database that works out the costs of maritime trade, and how exposed these are to energy prices. Until now.
For it turns out that the OECD have been compiling a large new Maritime Transport Costs database. Although they didn’t make a lot of noise about it, they also posted a working paper (pdf) on their website a few months back – which confirms the significance of the issue (emphasis added):
Maritime transport costs represent a high proportion of the imported value of agricultural products — 10% on average, which is a similar level of magnitude as agricultural tariffs. This study shows that a doubling in the cost of shipping is associated with a 42% drop in trade on average in agricultural goods overall. The tendency to source imports from countries with low transport costs is therefore strong. Trade in some products is particularly affected by changes in maritime transport costs, in particular cereals and oilseeds, which are shipped in bulk.
Most valuably of all, the database goes into massive levels of detail on fuel costs in particular – making it a truly indispensable part of the toolkit for working out what happens to globalisation in a world of emission controls and peak oil. So, where can you access the database?
Answer: you can’t. For news reaches me that its publication is being blocked, by one OECD member state alone – namely, the United States. For, it is said, reasons of national security. How do you like them apples? (Locally grown, I suppose.)