Sunday, March 29, 2015

The puzzling flattening of carbon emissions and the problem of global growth

Last week we learned that maybe, just maybe, global carbon emissions were flat in 2014 even though the global economy supposedly grew by 3 percent. As Brad Plumer of Vox (whose work I greatly respect) points out, carbon emissions have moved up almost in lockstep with economic growth for the entire industrial age except during recessions and one year of growth 40 years ago.

This is why I use "supposedly" when referring to the global economic growth number. It's because there is another obvious and plausible explanation for the flat carbon emissions, namely, that the global economy did not grow by the stated percentage, that it may have grown only a fraction of that amount or not at all.

Economic measures are constantly being revised, and I think it is very likely that the global economic growth number for 2014 will be revised downward. Probably not to zero, but downward nonetheless. It's also possible that estimates of carbon emissions are too low. Plumer cites "notoriously unreliable" Chinese emission numbers as one reason to be skeptical.

But, even if 2014 turns out to be a year of growth without rising emissions, we shouldn't get particularly exercised. Nor should we be particularly excited if it continues for a time. This is because the only trend that will actually address climate change is a RAPID DECLINE in worldwide emissions (as Plumer rightly points out).

Plumer makes one very telling statement in this regard:

If we ever hope to stop global warming, we'll have to sever that relationship [of economic growth to emissions] — and figure out how to have economic growth while reducing emissions. (Alternatively, we could halt economic growth, but no one wants that.)

"Alternatively, we could halt economic growth, but no one wants that." Two questions arise from this observation: Is it true that "no one wants that"? Who specifically wants economic growth to continue and why?

The answer to the first question is no; there is, in fact, a small minority of people advocating an end to growth. Herman Daly, former World Bank senior economist, is the acknowledged dean of the steady-state economy movement. In a September 2005 Scientific American piece, "Economics in A Full World," he outlined his case for why there is little room for economic growth and why growth in recent decades has been uneconomic, that is, the cost of such growth has outweighed the benefits.

There are also the deep ecologists who value other species on the planet as much as our own, a view which implies not only an end to economic growth but a serious rollback of industrial civilization. Perhaps Derrick Jensen is the best known of the deep ecologists whose views about how to achieve the proper role for humans on planet Earth varies greatly.

Given that there are people who want to halt or even reverse economic growth, we must now ask the second question: Who wants growth and why?

If we follow Herman Daly's logic, we have long since passed the point of economic growth and now have "uneconomic growth," growth that imposes costs greater than the growth is worth: social costs in terms of inequality and environmental costs that undermine the long-term sustainability of human society.

So, who benefits from such growth? We now have a name for this group, the one percent. Those with the highest incomes and greatest financial wealth continue to benefit from such growth since they can both reap disproportionate rewards from it and insulate themselves from the costs associated with it--leaving others to bear them.

When Plumer says that no one wants economic growth to end, what he is unwittingly saying is that the power elite in the world does not want to face the grand implication of a steady-state economy--namely, that lower-income groups cannot be assured of a better material existence through economic growth and so such betterment would, of necessity, have to come from the redistribution of wealth.

As long as the chimera of perpetual growth can be sold to the masses, no one will have to deal with the thorny issue of redistribution as the primary method for the economic betterment of the middle and lower classes.

And yet, growth ended for many people around the globe in 2008. According to the International Labour Organization (ILO), if you earn the median wage in Kenya, your real income has declined 26 percent from 2008 through 2013. For Greece, the decline has been 24 percent. For prosperous Singapore and Japan the number is minus 1 percent. Egyptian real median income declined 10 percent; the United Kingdom declined 7 percent; Iceland and Italy, 6 percent; Taiwan, 5 percent; Spain and the Netherlands, 3 percent; Ireland, 2 percent; Austria, Luxembourg and the Philippines, all hovered around zero percent growth.

Of course, some prospered. Median wages in Romania, Panama, Paraguay, Norway, Jordan, Poland, Vietnam and Morocco all rose more than 10 percent from 2008 onward. There were standouts: The Brazilian median wage grew by 21 percent; Thailand by 26 percent; China by 74 percent; Mongolia by 75 percent. Ukrainian workers enjoyed a media wage increase of 43 percent through 2013 though it is likely that much of that has since been wiped out by the war and currency crisis there. In the United States, the median wage registered a one percent increase according to the ILO, though homegrown analysis suggests a decline.

The metaphorical tide of economic growth that is supposed to lift all boats is lifting far fewer people much more selectively than before.

On the other hand, if you possess substantial financial assets, you have prospered quite nicely as financial markets post daily records in the face of ever more precarious economic growth numbers around the world. But, only a small portion of the world's people have any financial assets at all. The fate of a large number of the others has been stagnant or falling incomes or unemployment in an increasingly uncertain world.

Whether economic growth for all the world's people will return is an open question. The system by which we've governed the world economy, a system dependent on central banking, central government spending, the build-up of huge and unsustainable debt, and the ever more rapid depletion of fossil fuels and other resources is showing its decrepitude.

Six years of pedal-to-the-metal monetary policy and government deficit spending have barely nudged world growth forward while levitating financial markets to unsustainable levels (and thereby exacerbating inequality). Such policies in the past would have had the world economy quickly overheating with central bankers responding by hoisting interest rates sky high to rein in inflation and financial excesses.

Instead, the economy remains so weak that the U.S. Federal Reserve had to reassure the world that despite language in its recent public statement that would indicate an imminent increase in interest rates for the first time in 10 years (that's not a typo), the central bank really wouldn't be raising them anytime soon after all.

So, maybe flat carbon emissions are actually telling us something "no one" wants to hear: that economic growth has faltered or even halted for a large portion of the world's people and that we are going to have to deal with the consequences of that until we design a new system that can either grow for the benefit of everyone--a difficult proposition--or that can sustainably, equitably and successfully manage a steady-state economy--an even more difficult proposition.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Thursday, March 26, 2015

Recent radio interview on Israeli National Radio

I was recently interviewed by Doug Goldstein on his personal finance show, "Goldstein on Gelt," which plays on Israeli National Radio, the English-language radio network in Israel. Goldstein saw a piece of mine and asked me on the show to discuss the recent sharp decline in oil prices. A podcast of the interview is now available. Goldstein is a good interviewer with an eclectic mind and brought out the best in me with his conversational approach. The interview starts at about 2:30. Click here to go to the page containing the podcast.

Sunday, March 22, 2015

Cheap oil, complexity and counterintuitive conclusions

It is a staple of oil industry apologists to say that the recent swift decline in the price of oil is indicative of long-term abundance. This kind of logic is leading American car buyers to turn once again to less fuel efficient automobiles--trading efficiency for size essentially--as short-term developments are extrapolated far into the future.

The success of such argumentation depends on a disability in the audience reading it. The audience must have amnesia about the dramatic developments in the oil markets in the last 15 years which saw prices reach all-times highs in 2008 and then after recovering from post-crash lows linger at the highest average daily price ever from 2011 through most of 2014. And, that audience must have myopia about the future. It is an audience whose attention has narrowed to the present which becomes the only reference point for decision-making. History is bunk, and what is, always will be.

The alternative narrative is much more subtle and complex. As I've written before, the chief intellectual challenge of our age is that we live in complex systems, but we do not understand complexity. How can cheap oil be a harbinger of future supply problems in the oil market? Here's where complexity, history and subtle thinking all have to combine at just the right intellectual temperature to reveal the answer.

Cheerleaders for cheap oil only seem to consider the salutary effects of low-priced oil on the broader economy and skip mentioning the deleterious effects of high-priced oil. They seem to ignore the possibility that the previously high price of oil actually caused the economy to slow and thereby dampened demand--which then led to a huge price decline.

If this is the primary driver behind cheaper oil, then cheaper oil in this case is not a sign of abundance, but of lack of affordability for many of the world's people. It suggests that there is an oil price speed limit now in effect for the world economy above which it cannot grow for long.

If the ultimate significance of high-oil-prices-turned-to-low-oil-prices is a worldwide recession, then we will have a better idea whether such a price speed limit applies. The past does not offer much hope that it's different this time. Economist James Hamilton has documented that 10 of the last 11 recessions were preceded by a significant rise in oil prices.

This time around we haven't had a spike in prices, but rather persistently high prices above $100 a barrel for more than three and a half years prior to the oil plunge. This produced a different kind of pressure on the economy, but pressure nevertheless.

The Chinese economy is slowing down. The European economy is stagnant. Russia is or shortly will be in outright recession. Canada is teetering on the edge of recession and it seems Australia might go there, too. Japan continues its stagnant ways despite record monetary stimulus.

Cheap oil in its own way may be presaging, not a period of abundance, but one of austerity. That austerity has already hit the oil industry itself as it undergoes deep cuts in personnel and exploration and development spending.

The big question now is: Can oil be both abundant and cheap in the long run? Or are we living through the first period in history in which oil can only be "abundant" at high prices?

Of course, it's only abundant if you can afford it. So, demand for oil would likely remain subdued under a high-price scenario suggesting that we've burned through the cheap stuff and must find alternative low-cost energy sources or possibly suffer ever worsening recessions until we do. We can only hope that the 2008 crash is not a prelude to even deeper recessions ahead.

This would also suggest that we are perilously close to a ceiling on oil production mediated by a combination of affordability, geology and the limits of technology. The risk is plain, and yet, it is faith that sustains the optimists in a rock-solid belief that the future will be like past--until, of course, it isn't.

But faith isn't a good basis for energy policy, even if it seems to have worked in the past. An intellectually honest consideration of all the complexities of our energy situation reveals risks to adequate oil supplies worldwide from here on out that we can only ignore at our peril.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, March 15, 2015

Lipstick on a pig: America as the world's swing producer of oil

Most people have heard the old saying: "You can put lipstick on a pig. But it's still a pig." That's sort of what is happening in the American oil patch as producers try to put a positive gloss on the devastation that low oil prices are visiting on the industry.

Perhaps the most inventive redefinition is as follows: The part of the U.S. oil industry devoted to extracting tight oil from deep shale reservoirs in places such as North Dakota and Texas has made the United States the world's "swing producer." A swing producer is a country or territory that has large production in relation to the total market, substantial excess capacity and the ability to turn its capacity on and off quickly in response to market conditions.

The term makes the U.S. oil industry sound powerful and important. And, while the U.S. industry remains an important player in the world--third in production behind Russia and Saudi Arabia--it is most definitely not powerful in the sense that the moniker "swing producer" would imply.

To understand why this is so, we need only examine the history of the world's other two swing producers. Prior to 1970, Texas was the world's swing producer. Starting in the 1930s the state of Texas began regulating the amount of oil that an oil company could produce from its wells. It did this when overproduction drove the price of oil down to a mere 13 cents a barrel. (That's not a typo.) No one was making any money. Well owners were then forced to abide by a system called "proration" in which each well was allowed to produce at a percentage of its capacity.

The Texas Railroad Commission was given the responsibility to manage this percentage in order to insure that oil prices--and this meant world oil prices--would provide a fair return for oil producers. It would raise the percentage when supplies were tight and this would bring prices down. It would lower the percentage when supplies were too great and this would bring prices up.

By 1970 the world needed all the oil that Texas could pump and so the commission announced 100 percent "proration."* The commission essentially stopped regulating oil well output based on market demand. The inability of Texas to maintain significant excess capacity while supplying the market with adequate amounts of petroleum meant that the days of Texas as the swing producer were over.

The tightness of the world oil market set the stage for the Arab oil embargo and the success of OPEC. Neither would have been able to raise oil prices if Texas had been able to maintain significant excess production capacity. The ensuing price hikes led Saudi Arabia to build significant additional production capacity that it believed would allow the country to take advantage of rising world oil demand. When demand subsided in the early 1980s, the kingdom was stuck with substantial excess capacity and inadvertently became the world's swing producer.

Saudi Arabia had very large production, the largest in the world at the time. It had (and still has) oil that was cheap and easy to produce just as Texas had had when it first became the world's swing producer. And, the Saudis had the will to exercise discipline in raising and lowering production to moderate price declines and spikes.

The logic behind this role is that large oil producers neither wish to flood the market and make oil unprofitable, nor restrict production so much that high prices make substitutes for oil more attractive. In addition, prices that are too high are liable to crash the world economy, leading to a rapid fall in demand and thus prices. Swing producers prefer a "Goldilocks" world in which the price of oil is not too high and not too low, but just right to allow both producers and consumers of oil to prosper without making alternatives too attractive. It's a tough needle to thread.

Saudi Arabia has played this role (sometimes well, sometimes poorly) since the 1980s. Some say the country relinquished this role recently since it refused to reduce its production in the face of falling world demand and rising U.S. and Canadian production. But actually, the Saudis are merely doing what a swing producer has to do occasionally to discipline market participants who overproduce. They are punishing profligate producers now centered in the United States and Canada by allowing prices to drop precipitously in the face of excess supply.

The kingdom has declared that it is up to other producers to cut. This seems like an abdication of its role. But, in fact, the Saudis have punished other producers previously for overproduction in the mid-1980s by flooding the market with Saudi oil.

Still, many contend that this makes the American tight oil fields the world's swing producer by default. Let's see if the definition fits.

The production from American tight oil fields is significant, approaching 4 million barrels per day (mbpd). But is that production sufficiently flexible to qualify it as a swing producer? In the past when Texas was the world's swing producer, the Texas Railroad Commission merely adjusted the allowed percentage of the maximum "efficient" flow rate for wells already producing. That's pretty flexible.

Today, the Saudis claim that they can add or shut down production "immediately" in order to respond to changes in global demand. This flexibility also comes from having existing well production which can be adjusted up or down quickly. Almost certainly there are some wells not currently producing which can be called upon if necessary to boost production. How much is this spare production cushion? The Saudis say it is 2.5 mbpd. Not all agree, and no one knows for sure. But the Saudis and their close allies, the United Arab Emirates (UAE) and Kuwait, do appear to have substantial unused capacity estimated to be at least 3.3 mbpd.

The fact that the Saudis and their fellow OPEC members refused to reduce production in the face of weakening global oil demand does not necessarily disqualify Saudi Arabia from swing producer status. Sometimes swing producers allow excess production in order to discipline other market participants as I suggested above.

In light of this Saudi strategy, can we now say that America's tight oil plays are the world's new swing producer? It's true that America's tight oil fields have many existing wells pumping high-quality crude to the surface. But, we must ask: Can these wells simply be shut in or production reduced until the current oil glut abates? The answer is that most of them cannot.

Most of these wells have been drilled by public corporations using money from outside investors (through drilling partnerships) and from lenders such as banks and bondholders. Shutting in or throttling wells would reduce revenue and make it difficult to pay investors and lenders. In some cases, companies would violate debt covenants even though it might make sense for all parties to forbear until prices rebound.

Next, can production from the existing wells be increased in a short time? Because of the way these wells have been financed, they generally run at 100 percent of production capacity so that revenues can be realized as quickly as possible. The only way to increase production of tight oil in the United States substantially is to drill more wells, something that will be difficult to do under current circumstances. Lenders and investors will be reluctant to throw more money at an enterprise that has lost them great gobs of it even when prices rise again substantially. They will fear another Saudi-led assault on prices (which is exactly what the Saudis are counting on.)

This problem does not plague Saudi Arabia or its allies, the UAE and Kuwait. State control of oil resources means these countries can take a very long-term view toward current investment. They can drill and produce not subject to the lending and investment climate.

But perhaps the most salient difference between the oil produced by Saudi Arabia and that produced from tight oil plays in the United States is the cost of getting the oil out. The all-in cost of producing most tight oil is around $80 per barrel. But nobody wants to invest in something to break even, so $90 per barrel is a better estimate of what will attract investment capital.

Saudi Arabia claims that its extraction cost is around $4 to $5 per barrel. Even if this estimate is low by a factor of 10, Saudi Arabia is still in a position to withstand today's low prices.

The lesson is that the swing producer must also be a low-cost producer in order to have effective control of prices.

U.S. tight oil plays fail to meet the definition of a swing producer. Producers in these plays do not have the flexibility to lower and raise production quickly from existing wells in response to market conditions. In fact, U.S. production continued to grow through December in the face of declining prices, much of that growth coming from tight oil wells still to be completed and even some new drilling in prime spots. Many of these producers are on a one-way treadmill that requires them to drill faster and faster to satisfy lenders and investors. In addition, these producers are high-cost operators. Most are independents and cannot weather a sustained period of low prices without threatening the viability of their enterprises. For this reason operators are unable to make long-term commitments to build the significant excess capacity needed to play the role of the world's swing producer.

Moreover, there is no federal regulatory body comparable to the Texas Railroad Commission that can coordinate production throughout the United States.

So, while U.S. domestic oil drillers will continue to be an important factor in oil markets, they can best be characterized as marginal producers of oil. They produce the marginal barrels of oil for the market when the oil price gets high enough to make it profitable to drill their high-cost deposits as was the case before the recent drop in oil prices.

Naturally, nobody likes to be called marginal. So, the spinmeisters in the investment sales community and the industry are afoot reinventing the tight oil drillers as "swing producers." Investors and policymakers would be wise to stop staring at the glossy lipstick now being applied to the carcass of the U.S. industry. At least a pig with lipstick brings hope of a pork dinner at some point. All the industry has to offer now are shattered dreams and negative cash flows.

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*This refers to "prorated wells" and should not be confused with "proration unit" which is defined by the Schumberger Oilfield Glossary as: "The amount of acreage, determined by governmental authority that can be efficiently and economically drained by a well at a particular depth or horizon."

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, March 01, 2015

Taking a short break--no post this week

I'm taking a short break this week and next and expect to post again on Sunday, March 15.