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     Jun 28, 2008
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Flat-earther blind to oil facts
By Henry C K Liu

Celebrated New York Times columnist Thomas L Friedman, a flat-earthling, in a provocative polemic this week accused the United States president of being the nation's addict-in-chief to oil with "a massive, fraudulent, pathetic excuse for an energy policy". ("Mr Bush, Lead or Leave", June 22, 2008).

He described the president's strategy as getting "Saudi Arabia, our chief oil pusher, to up our dosage for a little while and bring down the oil price just enough so the renewable energy alternatives can't totally take off. Then try to strong arm Congress into lifting the ban on drilling offshore and in the Arctic National Wildlife Refuge."

Friedman, whose books include The World is Flat: A Brief History of the Twenty-first Century, admits that "we're going to need oil for

 

years to come". But he said that for geopolitical reasons he prefers the US getting as much oil as possible from domestic wells. He also admits that "our future is not in oil".

He wants the president to tell the country an allegedly much larger truth: "Oil is poisoning our climate and our geopolitics, and here is how we're going to break our addiction: We're going to set a floor price of US$4.50 a gallon for gasoline and $100 a barrel for oil. And that floor price is going to trigger massive investments in renewable energy - particularly wind, solar panels and solar thermal. And we're also going to go on a crash program to dramatically increase energy efficiency, to drive conservation to a whole new level and to build more nuclear power. And I want every Democrat and every Republican to join me in this endeavor."

Friedman talks as if he wants the president to be an autocratic dictator. Does Friedman not know that with $4.50 gas and $100 oil, a large number of working people will not be able to make ends meet with their current income, or retirees on social security will not be able to heat their homes this winter? Airlines and other transportation companies would face bankruptcy? Does he not know that in a democracy, sustained $100 oil translates into a serious political problem? The oil problem does not lend itself to simplistic solutions. Yet that is precisely what our flat-earthling proposes.

Even multinational corporations are being forced to raise prices to ward off losses from high energy costs. For example, Dow Chemical has just announced it will raise the price of its products by as much as an additional 25% in July, on top of the 20% increase in June, in an effort to offset the continuing relentless rise in the cost of energy and hydrocarbon feed stocks. The company also will implement a freight surcharge of $300 per shipment by truck and $600 per shipment by rail, effective August 1, 2008.

Furthermore, Dow is temporarily idling and reducing production at a number of manufacturing plants, having reduced its ethylene oxide production worldwide by 25%, and idled 30% of its North America acrylic acid production. Dow also will idle 40% of its European styrene production capacity, and has reduced its European polystyrene production rate by 15%.

In light of a sharp decline in auto sales, Dow's Automotive unit is announcing a series of cost reduction measures covering facilities, people and external spending, divesting its paint shop sealer business and is implementing plant consolidations resulting in the closure of three production units. In addition, Dow Building Solutions temporarily idled 20% of its European capacity for producing Styrofoam insulation.

Earlier this month, Dow announced plans to idle three Dow Emulsion Polymers plants representing 25% of North America capacity and 10% of European capacity related to declines in the housing and consumer sectors, as well as rising costs. Dow chairman and chief executive Andrew N Liveris described the steps as "extremely unwelcome but entirely unavoidable" as the global cost of oil, natural gas and hydrocarbon derivatives surge ever higher, despite company efforts to improve energy efficiency by 22% from 1995 to 2005, and to target another 25% by 2015, to cut costs significantly, and with an array of efforts around alternative energy and alternative feed-stocks. Over the past five years, Dow's bill for hydrocarbon feed stocks and energy has surged four-fold, from $8 billion in 2002 to an estimated $32 billion-plus this year.

General Motors announced plans to close four plants manufacturing trucks and SUVs, citing decreased sales of large vehicles in the wake of rising fuel prices. Ford took similar actions. Yet about 65% of oil consumption is related to transportation, a sector where alternative fuel technology is relatively easy to tackle, with alternatives such as electric and substitute fuel engines.

In China, steelmakers were forced to agree to a record increase in annual iron ore prices in a move likely to boost the cost of cars, machinery and other products globally. Chinese millers agreed to pay Anglo-Australian miner Rio Tinto up to 96.5% more for their ore supplies this year, the largest ever annual increase and 10 times the 9.5% increase paid in 2007, surpassing the record increase of 71.5% in 2005 when the commodities boom began to gather pace.

The development fuels fears that global commodity-led inflation will continue. Anglo-Australian BHP Billiton, the world�s largest primary resources company, said the 96.5% record increase in iron ore cost announced by Rio Tinto was not enough, signaling it could ask for a rise above 100% with its steelmaker customers.

In South Korea, Pohang Iron and Steel Company (Posco), the third largest steel producer in the world, increased prices by up to 21%, taking the cumulative price inflation to about 60%. German steelmaking giant Salzgitter AG, successor company of Reichswerke Hermann G�ring of the Third Reich, also said it would raise prices by 20%.

Three years ago (The Real Problem with $50 Oil, Asia Times Online, May 26, 2005), I laid out the economics and geopolitics of oil. The main points are updated below to show the impact of a $100 floor for oil as proposed by Friedman.

It is unfair of Friedman to label Saudi Arabia as "our chief oil pusher". Since Arabs are also Semites, one is tempted to point out that Friedman opens himself to accusations of anti-Semitism when he picks on Saudi Arabia unfairly.

The world's oil problem began in 1973 when the Organization of Petroleum Exporting Countries, having formed in 1960, emerged as an effective cartel after the Arab oil embargo against the US, Western Europe and Japan for supporting Israel in the Yom Kippur War. The embargo started on October 19, 1973, and ended on March 18, 1974. During that six-month period, the price for benchmark Saudi light increased from $2.59 in September 1973 to $11.65 in March 1974. Since then, OPEC has been setting bottom benchmark prices for its various kinds of crude oil in the world market, with Saudi Arabia as swing producer to increase or decrease supply to stabilize prices.

To keep the oil price at the $100 floor proposed by Friedman, the cooperation of Saudi Arabia is needed to reduce production whenever oil price drops below the $100 floor. By that standard, Saudi Arabia can hardly be called a "chief oil pusher".

By 1984, the effects of a decade of higher oil prices had affected US demand in the form of better insulated homes and more energy-efficient industrial processes, and in substantial improvement in automobile fuel efficiency, not to mention new competitive use of cleaner coal, wind and solar and other alternatives. At the same time, crude-oil production was increasing throughout the world, stimulated by higher prices. During this period, OPEC total production stayed relatively constant, around 30 million barrels per day.

However, OPEC's market share was decreased from more than 50% in 1974 to 47% in 1979. The OPEC loss of market share was caused by non-OPEC production increases in the rest of the world. Higher crude prices caused by OPEC production sacrifices had made exploration more profitable for everyone, not just OPEC, and many non-OPEC producers around the world rushed to take advantage of it, including the US.

Global demand for oil had peaked by 1979 and it became clear that the only way for OPEC to maintain prices was to reduce production further to compensate for the high production of non-OPEC producers. OPEC reduced its total production by a third during the first half of the 1980s. As a result, the cartel�s share in world oil production dropped below 30%. Non-OPEC producers, including the US, got a big lift from higher prices, larger market shares, and an expanded definition of proven reserves which expanded as oil prices rose.

After two decades of high prices, oil dipped below $10 per barrel in the wake of the Asian financial crisis of 1997 as demand fell when the global economy stalled. After oil prices peaked above US$58 a barrel in early April, 2005, the White House announced that it wanted oil to go back down to $25 a barrel. When oil rises above $50 a barrel and stays there for an extended period, the resultant changes in the economy become normalized facts. These changes go way beyond fluctuations in the price of oil to produce a very different economy.

In 2005, I listed 10 new economic facts created by $50 oil. I now adjust these facts for $100 oil as proposed by Friedman to see if his proposal makes sense. The key fact is that while $100 oil may stimulate development of alternative energy modes, such development cannot be expected to bring the oil price back down, or the stimulated alternative energy sector will go bankrupt. While there is no known solution that will lead to lower oil prices short of a global recession, $100 oil is not without problems.

Fact 1: Oil-related transactions involving the same material quantity involve greater cash flow, with each barrel of oil generating $100 instead of $25. The United States consumed in 2007 about 22 million barrels of oil each day, about 25% of world consumption of 87 million barrels. China consumes 7.3 million barrels per day. Yet daily world production is only about 85 million 

Continued 1 2 3 4 


The Complete Henry C K Liu

Bernanke's words strike false note
(Jun 27, '08)

Oil speculators leave giveaway print
(Jun 27, '08)

The Real Problem with $50 Oil


1. Russia joins the war in Afghanistan

2. Israeli threats stiffen Iran's resolve

3. Training to attack Iran

4. China toys with India's border

5. The myth of 'weapons-grade' enrichment

6. The Pentagon's merchants of war

7. Are they really oil wars?

8. Firing blanks in Afghanistan

9. A blueprint for US withdrawal

10. Why kung fu never won a World Cup

(24 hours to 11:59 pm ET, June 26, 2008)

 
 


 

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