Page 1 of 4 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
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
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
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