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Letters to the editor: "Planning, policy, strategy and energy"

IF YOU HAVE READ the mailbag before now, you know the drill. You send e-mails to Greg. Greg forwards them to me. I read the e-mails, answer the questions, and address the comments. Sometimes the shortest e-mail winds up prompting the longest answer. This particular e-mail wins the prize for that contest. So here goes.

"Worshipping Big Government"

Jim in South Carolina had this to say, short and sweet, with no editing from my side:

High gasoline taxes, Swedish central planning, Japanese social engineering; you people aren't libertarians. You are worshippers of big government.

Oh, come on, Jim. Give us a break. I write an article about how government at every level, and people everywhere, should begin to plan for national survival in the face of Peak Oil, and now we at Agora Financial are somehow "worshippers of big government"? To the extent it matters, I like my government limited, efficient, and, most importantly, honest. That's another topic entirely.

As for the political labels, don't get me started on so-called political "libertarians," who almost never win federal or state elections and are also known as "loser-tarians" in modern American political culture. If anything, I am a "Peak Oil-tarian." That is more my default political position than anything else, because the Republicans have just plain lost the bubble of governance and the Democrats are all but clueless.

While I am on the subject, though (bear with me), I should say that I still vote in every election. I am what is called a "super voter" in the political world. I do my bit for democracy, sometimes with my fingers firmly holding my nose shut as I pull the lever. But I still participate.

At root, my politics are that I look at the world through the lens of petroleum resource depletion, and the presently occurring irreversible decline in the world's production of conventional crude oil. Do the politicians, as the saying goes, "get it"? Author James Kunstler (of The Long Emergency fame, among other fine books) and I had a long discussion about this quandary of politics a couple of weeks ago, after he gave a talk here in Pittsburgh.

There are all of the makings of a political upheaval in the coming Peak Oil tsunami. There are even a few candidates running for office on a "Peak Oil" style of platform. You will probably read about it here in Whiskey and Gunpowder, because we are always ahead of the biggest waves. Another story for another time. Back to Jim's e-mail.

High Gasoline Taxes

In his e-mail, Jim uses the phrase "high gasoline taxes" in a rather accusatory form, like they are dirty words or something. "High gasoline taxes" as opposed to what, low gasoline taxes? Even if the tax rate is a mere one penny per gallon, the nation has still made the policy decision to have a gasoline tax.

A tax is a tax is a tax. Now it is just a question of how much tax. There is an old joke along those lines ("now that we have established what you are, we are just negotiating the price"), but I will not repeat that joke in its entirety in this otherwise family-oriented newsletter.

Essentially all rich countries, except the United States, tax gasoline rather viciously. Have you purchased any gasoline in Canada lately? How about in the United Kingdom? Or in Germany? Japan? You get the picture. Yet these other nations somehow seem able to maintain national cohesion and relatively sound economies over the long term.

They have their ups and downs over time, of course, but relatively high fuel taxes actually help their export economies. No kidding, this is true. High fuel taxes can be good for you. It is a long discussion, but this has been empirically demonstrated in numerous economic studies over many decades.

Many oil-producing nations, on the other hand, have low gasoline taxes, and usually very cheap gas at the pump. Venezuela and Saudi Arabia, for example, sell gas in the range of 30 to 50 cents per gallon, essentially below the cost of production, refining, and distribution. It is petro-welfare for the masses, pure and simple. You can draw your own conclusions about what cheap gasoline has done to benefit the economies and societies of these two lands.

Cheap Gas and Archaeology Sections

As to the United States, I believe that relatively low fuel taxes have not "helped" the country over the years, particularly the past half century or so. "Cheap gas" in the United States is an artifact that belongs in the archaeology sections of museums of the future. It is a political legacy of a vanished resource base that has not existed in America for many decades.

Sure, cheap fuel felt real good while it lasted, and who can really resist the buzz of driving a big car down the interstate highway? But that is also the problem, isn't it? Over the long term, low fuel taxes have led directly to the gas-guzzling car culture, urban sprawl and inefficient overall fuel usage pattern that has gotten America to the point where it is now, which is over someone else's oil barrel.

$1 Billion Per Day

Look at it another way. At $70 per barrel and more, the United States currently pays out about $1 billion per day, every day, for the privilege of importing foreign oil and oil products, and much of that from people who do not like us very much, for whatever reason. Do you have an extra billion dollars per day just lying around? No, I did not think so.

On the other side of the oil trade, America has to export a lot of soybeans and Boeing jet airliners to pay for all that imported oil. (And those soybeans and jet airliners require a lot of energy to produce in their own right.) My question to any reader out there is, "What do you make, sell, and export every day to pay for the oil that your fuel use directly causes to be imported?"

I am not trying to be snide or make you feel guilty, I'm just trying to put it in perspective. (And OBTW, at Agora Financial, we have many thousands of foreign subscribers, whose payments for our financial advice generate foreign exchange for the U.S economy. We are part of the solution, I am happy to report.)

Getting back to Jim's short and focused e-mail comment, is he saying that high fuel taxes are a bad thing just because they add to the pain of paying high prices at the gas pump? Let me ask again, high prices as opposed to what? Paying high prices at the pump due to taxes? Or paying high prices because aggregate U.S. demand has driven up the world price of the underlying crude oil?

You can pay it to one entity, the tax collector, or you can pay it to another, say, Hugo Chavez of Venezuela or Napoleon Ahmadinejad of Iran. At least with a domestic tax on fuel, there is the glimmer of hope that the political process can control what happens to the revenues.

Let's think about it some more. In America, motorists are presently paying relatively high prices for fuel because aggregate U.S. oil demand is large and growing, thus keeping a high floor under the price of oil. If America had higher fuel taxes, then aggregate U.S. demand for petroleum would stop growing, if not decline.

Japan has accomplished this feat of absolute demand reduction over the past 30 years, and built a world-class automobile industry in the process. Meanwhile, in Detroit, we see the result of pushing big iron out the door. Well, that is another long and sad story. Let's not go there just now.

So high fuel taxes can and do substitute as a component of the price at the pump, instead of motorists paying higher prices based on the underlying cost of the oil. One way or another, through high taxes or high prices for the underlying product, U.S. drivers are going to pay. It is just a question of who benefits.

Those Wily Swedes

In his e-mail, Jim also seems to be knocking what the Swedes (and the Japanese, see above) have done and are doing in the field of energy conservation and oil substitution. First question or two is "Have you been to Sweden lately? Have you even talked to anybody who is at all knowledgeable about the Swedish program?" It might help to go there, if not to learn something, before you get all judgmental on me. Just a suggestion.

In my recent three-part article [also at EB] of about 10,000 words on the subject of "Planning, Policy, Strategy, and Energy," as well as in other articles I have written in the past many months, I referred favorably in a few paragraphs to Sweden's national goal of becoming oil independent within 20 years. I would like to know just who has a problem with that, and what exactly is that problem? I say, good for the Swedes. ABBA forever, and all that.

Sweden plans, among other things, to harvest as much of that midnight sun as possible to grow biomass and convert it into derivative fuels. Sweden will also derive its energy supplies from direct solar conversion, and hydro and wind power, and tidal resources, and geothermal, and anything else that can be useful in the nation that awards Nobel Prizes to smart people of great accomplishment. It all sounds good to me. Again, is there a problem? What am I missing?

OK, let's ask if Sweden can realistically accomplish such an ambitious energy goal, and do it within 20 years? Heck, I don't know, but I would not sell them short. (Have you driven a Volvo lately? Ever flown a Saab jet airplane?)

We in the United States will just have to wait and see how the Swedish energy campaign turns out, if we live that long and do not get into a war with an opposing nuclear power over access to energy resources in faraway places whose names most Americans cannot spell. But I digress.

Could the United States be "just like Sweden" and become oil independent within 20 years? The realist, if not the cynic, in me says probably not. And I never said that America even ought to try to go Swedish. The United States is not, after all, Sweden.

But then again, dear readers ("take-away point" here), I have to wonder from where and from whom the United States will be importing oil in 20 years, in any event. We in America might just turn Swedish over the next 20 years without having any choice in the matter.

Back to Depletion

Huh? "Turn Swedish?" What do I mean, bringing up the rather impertinent question of "from where and from whom the United States will be importing oil in 20 years?" Aren't we just going to, as the expression goes, "buy it" from people? Not so fast, pilgrims.

Let me spell it out for you. It all goes back to the geologic concept of depletion, which is not for amateurs, but neither is it some black art of the gray wizard. Let's take a look into the crystal ball of future crude oil production. We can do this with a relatively good sense of mathematical certainty, because 90% of all the oil that will ever be discovered in the crust of the Earth has already been found.

(Yeah, just deal with it. Ninety percent has been found, and about half of that has been produced and consumed. Can you spot the issue?) And to forecast the future, we can use the results of a mathematical process called "Hubbert linearization," but I will skip describing the guts of the linearization math in this article.

Major Oil Exporters

Look at the world's major oil exporters. Saudi Arabia is presently at its own version of Peak Oil. The water cut is rising in Saudi production, and reservoir pressures are falling. The Saudis will be lucky over the next two decades to maintain current levels of oil production, and the better bet is that Saudi production will decline at a modest rate as more and more tankers head east to China laden with petroleum.

Kuwait is in the same situation, with its super-giant Burgan Field in irreversible decline, as I have discussed in articles such as "Things Just Got Worse." [Also at EB]

And according to the Hubbert linearization gurus, oil-exporting Russia is nearing a dramatic decline in oil production. And one of Russia's leading energy managers has recently announced that Russia will curtail oil exports to Europe. (Oh, you missed that news?)

Iran

By 2025, even Iran, nuclear weapons or no, and Napoleon Ahmadinejad at the helm or not, will have minimal oil available for export. Iran currently imports refined products, due to a shortage of refining capacity, which just serves to take refined product off the world markets.

By 2025, domestic Iranian demand will eliminate essentially all Iranian oil exports as well. (Gee, I wonder if the Iranian realization that their nation will not be an oil exporter in 20 years might have something to do with their present nuclear ambitions? Things do not just sort of happen in a vacuum, do they?)

Caspian Sea and Europe

Elsewhere in the world, oil from the Caspian Sea region will make up for some of the depletion and loss of exports from other currently exporting countries, but most of that Caspian oil will go to Europe, if not to China and India.

By 2025, Europe's North Sea oil bonanza will have played out, and the continent will be sucking for oil at the far end of other people's pipelines. Little, if any, of the oil of the Caspian Sea will ever land on the shores of the United States.

West Africa

It will be much the same for the oil from West Africa over the next 20 years, assuming that oil production can occur in what is truly a long-term deteriorating social and political situation. (Professor Thomas Barnett, of the U.S. Naval War College, has some very depressing things to say about the region in his book The Pentagon's New Map.)

And whatever West African oil might be produced will be sold into a hyper-competitive world market of eager buyers, many of the richest of whom will speak Mandarin as their mother tongue.

Venezuela

How about Venezuela? This is a nation that has exported oil to the United States for over 50 years and which holds immense reserves of so-called "heavy oil" in the Orinoco region. Won't good old Venezuela keep on shipping its oil to the United States in 20 years? This prompts another question: How much of whatever is left of that nation's petroleum resource after the current leader, Hugo Chavez, gets through with it will be coming to the United States?

Perhaps it is time to note that Panama is discussing upgrading the Panama Canal to accommodate wider vessels of deeper draft, such as modern supertankers. It inclines me to think that Venezuela may well be exporting her oil to the likes of India and China in two decades. So don't bet on Venezuela as a major U.S. oil supplier in 20 years.

Finally, we return to the two traditional suppliers of oil to the United States, Mexico and Canada. Will the next 20 years be just like the past 20 years? Don't bet that card, either.

Mexico

Mexico's major oil-producing field, Cantarell, has entered into irreversible decline, and at a rapid rate, due to all of that wonderful "new technology" that has accelerated oil production from a finite reservoir. Absent some very significant new discoveries, Mexican oil exports to the United States will taper off to minimal levels. In the interest of full disclosure, the Mexicans have announced that they have found what they are calling "another Cantarell."

Viva! Except that this "other Cantarell" is further offshore, in deeper waters, and producing from deeper depth and has a higher sulfur content and will be far more expensive to develop than previous oil fields. And Mexico is already a net importer of natural gas (from the United States, of all places -- go figure) and its domestic oil use is growing every year, despite Mexico's national policy to export millions of its poorest souls to the United States (another story). The trends are not our friends.

Canada

Canada's great offer of hope for the world's energy future, if not for the energy future of its customer base in America, has been its aggressive development of the so-called "oil sands" of Alberta. Sure, the sands are there, and sure, there is lots of tarry bitumen embedded in those sands.

Sure, with enough effort you can even extract the bitumen and upgrade it into something approaching conventional fuel oil. So let's sing a song for Canada. And as they say at the beginning of the hockey games, "Oh Canada!... With glowing hearts we see thee rise/ The True North strong and free!"

But one major problem with the Canadian tar sands is that the energy efficiency of tar sand production is easily an order of magnitude less than that for conventional crude oil. Yes, this is a major problem in the nature of energy return on energy investment (EROI). Another major problem is simply the logistical effort of building out the production infrastructure necessary to produce the gooey stuff in an otherwise remote and relatively undeveloped part of Canada.

There are already critical shortages of materials and skilled labor in the region, and workers are migrating to the frozen north from as far away as Eastern Europe and China.

And the final "big problem" is that no less a source than the Canadian government has estimated that, by 2025, the "tar sand" effort will yield all of 3 million barrels per day of oil-equivalent production. This amount will be a minor fraction of anticipated world usage in 2025, and will not in any way make up for the decline in world oil production from other regions between now and then.

And I guess I should also mention that the Chinese are paying to build a pipeline from the Alberta tar sands region to the western coast of Canada, through which to export product to guess where.

Importing Oil From Whom and From Where?

So now you can see what I meant when I posed the question above of from whom will the United States be importing oil in 20 years? What oil? From where will it come? From whom will America buy it?

All of a sudden, that whole Swedish program of oil independence within 20 years does not look like such a bad idea. Unless, of course, you are a died-in-the-wool libertarian and believe that high fuel taxes do evil things like "distort the market." We should all be so lucky as to have a "market" in oil to "distort" in 20 years.

So am I "worshipping big government?" No, I am writing about issues of national survival, and by implication, issues of personal survival. Without an aggressive process of planning, policy, and strategy-making in the field of energy, the United States is in all likelihood destined to decline into what President Reagan once called, in another context, "the dustbin of history."

Thank you for reading Whiskey & Gunpowder, and keep those e-mails coming, addressed to greg@whiskeyandgunpowder.com

Until we meet again...
Byron W. King

P.S. Jim from South Carolina, I just used your e-mail because it was short and focused. Nothing personal and no hard feelings, amigo. Another correspondent wrote and called us "socialist crazies." And one guy said that my Clausewitz-quoting article "sounded like a product of the Soviet Union." Sorry, pal. Clausewitz was German, and he died in 1831, which was 86 years prior to the Bolshevik Revolution of 1917. But then, the same correspondent added, "Despite my complaining, I really enjoy your thought-provoking articles. Keep 'em coming!" We will do just that, so keep on reading.

Editorial Notes: 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 and list of articles. King's essays appear in Whiskey & Gunpowder, an investment newsletter. -BA

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