Sunday, March 25, 2012

Why Saudi and American bluffing won't lower oil prices (Hint: It doesn't work when people know you're bluffing)

If you have the power and the desire to bring down oil prices, the best way to proceed is to start bringing them down. The easiest and fastest method would be to make more supplies available to the world market and keep adding until you reach your target price. The less you say about what you are doing, the better. When market participants are filled with uncertainty about your intentions, they have only the direction of prices to guide them. That means the speculative players can help you achieve your goals more quickly as they panic out of their positions.

This was not, of course, the path chosen by the United States, Great Britain and Saudi Arabia recently when they announced that they were contemplating intervention in the oil markets--in the form of releases from strategic petroleum reserves in the case of the United States and Britain and in the form of increased production by Saudi Arabia.

It seems that while all three countries have the stated wish to bring down oil prices, they appear to lack the power or at least the desire to do so. So, they are left with bluffing. It's true that oil markets move on rumors and sentiment, but not as far nor for as long as people believe. The joint U.S.-Great Britain announcement caused oil prices to fall sharply the same day before recovering nearly the entire loss by the close. The Saudi announcement that it might increase production caused a sharper one-day fall which was largely recouped the following day.

Oil prices are ultimately tied to the delivery of actual oil. Unlike, say, stock prices, which can become unhinged from fundamental conditions for companies or the economy as a whole for long periods, oil prices are constantly being disciplined by actual supply and demand in the real world. Short-term misperceptions can occasionally drive the price to unsustainable highs or lows, but not for very long.

What oil market participants took away from the two tightly spaced announcements was that neither party is serious about doing much of anything. It seems unlikely the United States and Great Britain would dip significantly into their strategic reserves at a time when a war with Iran could break out at a moment's notice--not so much because the United States and Britain want war, but because Israel may act unilaterally to start one. A war with Iran would constitute a real emergency, and so, draining strategic reserves now to appease voter concern over high gasoline prices might prove foolhardy. Unless war with Iran breaks out, look for a token release of oil if such a release comes at all.

As for Saudi Arabia, the question is not whether the country could increase production, but how much, for how long, and of what kind of oil. The Saudis announced late last year that they were stopping their capacity expansion program because they had reached their target of 12.5 million barrels per day. But that new capacity has yet to be tested. Saudi production currently stands at about 10 million barrels per day. We do not know for certain what output Saudi Arabia could achieve over this on a sustained basis. And, even if the Saudis could increase their oil production substantially, would they really want to? They would risk adding supply in the face of a faltering European economy that could pull the legs out from under oil demand thus crashing prices far below the level the Saudis and their friends in OPEC really desire.

The reports that Saudi Aramco's shipping arm, Vela, has been chartering extra very large crude carriers which can carry up to 2 million barrels of oil should be taken with a grain of salt. It's hard to know whether this means the country is actually increasing total world supply or whether it means that Vela simply found its own fleet committed and needed to hire tankers from other shippers. We should take note that the Saudi oil minister admitted that his country's March and April oil production would be essentially unchanged. In this context, a Financial Times article (via The Globe and Mail) entitled "The price that launched a wall of ships" seems like another public relations plant by the Saudis designed to manipulate market sentiment. In any case, crude futures prices had by the end of trading last week regained almost the entire loss suffered after the piece appeared.

There is also the question of what kind of oil would make up any extra Saudi production. Not all oil is the same. Arab light is highly prized for its ease in refining. Most refineries in the world are designed to refine light crude with low sulfur content. Saudi Arabia is adding capacity from a new offshore field and from a previously mothballed onshore field both of which produce heavy crude, a less desirable crude that is more difficult and costly to refine. This tells us that while Saudi Arabia may be able to supply extra oil to the market, it may not be the kind of oil that the market can easily absorb.

Saudi actions beg this question: If the desert kingdom has so much oil left under its territory, why it is scraping the bottom of the barrel offshore and at an old field that was closed in 1980?

It's likely that market participants already understand all this and that's why they see the recent announcements by the United States, Great Britain and Saudi Arabia for what they are: bluffs.

What would bring oil prices down quickly in the short term is an economic slowdown, a possibility about which economists and market analysts are split. The slowdown would, of course, reduce demand for oil and oil products. A longer term strategy would be to move away from dependence on oil. That would take political courage and discipline, but Europeans seem to have long since accepted this strategy. Germany and Italy, for example, have both been gradually reducing their total petroleum consumption since 1998. In Asia, Japan's overall consumption has been declining since 1996.

The world clamors for cheap energy as an addict clamors for a cheap fix. Both behaviors result in less than optimal outcomes until the parties involved realize it's time for some serious treatment. Europe and Japan are leading the way. Will America have the wisdom and ingenuity to follow them?

Kurt Cobb is the author of the peak-oil-themed thriller, Prelude, and a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.

Sunday, March 18, 2012

An eerie winter

Last week's summerlike weather provided an exclamation point on the end of the fourth warmest winter in the lower 48 states. Back in late December and early January as the winter was unfolding, I thought to myself that somehow we needed eerie music piped into the sky to give people some clue about how they should feel. In the Great Lakes area where I live, we are used to having snow dumped on us in copious amounts--or at least we used to be.

I can remember as a child entire weeks given over to snow days with snow so deep we could build tunnels through it--much to my parents' dismay. But with each decade, winters in the Great Lakes Basin have become more and more mild. This winter was not just a one-off. And yet, it was the warmest since 2000, and so people have remarked about it.

It's the nature of those remarks, however, that begs for the corrective touch of a haunting soundtrack. So often did I hear what a pleasant winter we were having. How lucky we Michiganders were to have this balmy reprieve from snowy discontents. Naturally, the winter sports enthusiasts were disappointed. But they seemed to chalk it up to freakish weather patterns that are not likely to repeat next year.

We should take no comfort in the extremely cold European winter since climate scientists actually predicted this. They explained that the melting sea ice due to rising temperatures in the Arctic would favor "the formation of a high-pressure system near the Barents Sea which steers cold air into Europe."

Back on my side of the globe, a friend in Texas reports that the multiyear drought there has gotten so bad that he is thinking about putting a diesel generator on his property to provide electricity during the expected brownouts and blackouts. This is because the continuing drought may force a number of electric generating plants to shut down for lack of cooling water from shrinking rivers and reservoirs.

Environmental activist Vandana Shiva has rightly dubbed what we are experiencing as climate chaos. Predictable climate patterns are changing everywhere with unpredictable results.

It is not always easy to pin down the causes of any specific weather pattern. And yet, the unprecedented rate of change in temperature and weather patterns worldwide should give us concern that the winter just past is but a preview of coming attractions. What the geologic record shows has previously taken 5,000 to 20,000 years to occur--namely, a 100 ppm rise in carbon dioxide concentrations in the atmosphere--has taken only 120 years in our era. What that implies is that in the past no single human being could have witnessed the kind of changes in climate we are now seeing in the space of a single lifetime or even a single generation.

In a way we have become inured to rapid change. The ever increasing drumbeat of industrial civilization and technological change has made us think that rapid change is both inevitable and good. At least that's what we tell ourselves. So, when the rhythm of seasons is disrupted, it seems like just one more change.

Of course, climate change isn't just one more change. And, it is the rate of change which tells us something is awry. It is the very fact that I can detect the general trend of warming winters in the Great Lakes in the course of my lifetime that ought to set off loud, buzzing alarms.

Alas, there is no one in charge of providing suitable sound effects for me or anyone else that would convey the predicament into which we as a global society are now walking with our eyes wide shut. I say eyes wide shut because even though concern about global climate change is very high nearly everywhere except the United States, little is being done to address it.

Earlier this month I highlighted two recent films which I thought captured the deepseated unease in our collective unconscious, an unease that is only rarely linked to our ecological predicament. The soundtracks of both were suitably eerie in keeping with the winter just past. But, it seems we'll need a lot more eerie music before the great mass of people will be able to hear the frightening silence of a winter in the snowbelt...without snow.

Kurt Cobb is the author of the peak-oil-themed thriller, Prelude, and a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.

Sunday, March 11, 2012

The narrowing window for a transition to a sustainable industrial society

The viability of modern civilization depends on two important dimensions: 1) the continuous availability and deployment of essential resources and 2) the long-term productivity and habitability of our environment. Acquiring and deploying the necessary resources tends to be a short-term goal. We may have stockpiles of ready food, fuel and other nondurable goods, but they are not typically meant to last for years.

Our long-term goal ought to be maintaining the productivity and habitability of our environment. It is, after all, the only environment we have. But, of course, in the interest of maintaining an ever increasing availability of resources (economic growth), we have injured the long-term productivity of our farm fields, fisheries and forests and put ourselves at the mercy of unforeseen declines in the rate of extraction of energy and other key finite resources from the Earth. And, we threaten the planet's habitability for humans and many other creatures by causing rapid climate change through the burning of fossil fuels, changes in land use and the release of other potent greenhouses gases such a nitrous oxide and methane into the atmosphere.

All of this has implications for the amount of time we have to transition to a sustainable industrial society. Nearly everyone, even wild-eyed resource optimists, believes we must make this transition at some point because of our reliance on finite fossil fuels and metals. The current talk of vast new supplies of oil and natural gas and vast remaining supplies of coal has people thinking that we have plenty of time for such a transition. The fact that the data do not support these claims is one strike against this line of thinking. But even if it were true, we would have to consider the consequences, namely, enormous additional greenhouse emissions that are likely to heat up the planet so much that food supplies will fall off sharply and water supplies will decline as rainfall patterns are disrupted. So, while one development--increased availability of energy resources--would tend to lengthen the window for a transition to a sustainable society, the climate effects would narrow it all the more.

Even if we discounted climate change (which we shouldn't), increased cultivation using industrial farm methods will tend to degrade the soil and eventually bring down agricultural productivity. Increased harvesting of food from the world's oceans would tend to undermine and even permanently prevent the recovery of their fish and seafood populations. Pollution of fresh water resulting from increased industrialization would require the use of more and more resources to purify that water. And, the harvesting of ever greater amounts of fiber from the world's forests will undermine future forest productivity by impoverishing the land upon which they grow. Each of these has the effect of destroying the long-term carrying capacity of the Earth and thus its productivity for human needs.

So, it turns out that we have several additional causes for the shrinking of the transition window. And, when we come back to reality on actual likely future energy supplies, we reintroduce one more reason for an urgent transition. Perhaps we could simply speed up our adaptation. Certainly, an all-out effort to transition to renewable energy and to a cradle-to-cradle recycling scheme would help (however politically unlikely such an effort might seem). But it has essentially taken us 50 years to build out an energy infrastructure of pipelines, refineries and service stations for oil and a second one for natural gas. We probably do not have the luxury of that kind of time to build out a renewable energy society either because we don't have the necessary fossil fuels (which must be used to build that society) or because climate change is moving too fast to make such a leisurely time line prudent (or both).

So when government officials or industry spokespersons or media commentators speak only of new energy supplies extending the time before we must make a transition to a sustainable society, they are thinking one-dimensionally. This is seductive and dangerous thinking. It is seductive because it seeks to make simple what is really a very complex and multi-layered transition. It is dangerous because that one dimension ignores all the other factors that are making a transition so urgent.

It is also dangerous to judge the resilience and success of our current living arrangements solely by our level of wealth or health. We are using up the natural capital upon which our very survival depends more rapidly than it can be regenerated. It's true that one can experience the illusion of great wealth by spending all one's savings in a week. But life after that would become quite precarious as a single large expense, say, a large medical bill, could send one to bankruptcy court.

That is how we are living with respect to the natural systems we depend on. Right now we are in the last day of a week of a natural capital spending spree. When those natural systems become incapable of sustaining our accustomed consumption and pollution levels, we could find ourselves caught in a kind of natural bankruptcy, living in straitened circumstances but without much preparation.

Some will say that the window for a transition to a sustainable industrial society has long since passed and that we are destined for an eventual return to an agrarian and craft society. There are two problems with this kind of thinking that have nothing to do with whether it is correct or not. First, almost no one will be able to accept such a message upon the first hearing and perhaps not ever. If you argue something which your audience will likely never accept, you will miss the chance to move them incrementally toward your view.

Second, it is unlikely that there will be a clear line in any future society between what we call industrial and what might be called craft. No matter how difficult our circumstances become, we will not suddenly forget how to generate electricity. Nor will we forget how to do many other things which form the basis of industrial society. Of course, we may not be able to do these things on the same scale as now. But, I think it is permissible to talk about doing many of the same things we do today on a much smaller scale to meet our needs.

Using a comprehensible and palatable message at least makes it more likely that people will think that a transition is possible and want to participate in it. Without that, the length of time available for a transition won't even matter.

Kurt Cobb is the author of the peak-oil-themed thriller, Prelude, and a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.

Sunday, March 04, 2012

Cinema imagines the worst: A psychological journey

It's one thing to create a literal portrayal of civilization-destroying natural disasters on film. It's quite another to depict a character's inner psychological journey as the world moves closer and closer to cataclysm. In the literal portrayal category we find the likes of Armageddon and Deep Impact, both about asteroids impacting the Earth. There is as well The Day After Tomorrow which depicts a rapid cooling in the Northern Hemisphere brought on, ironically, by global warming which shuts down the thermohaline ocean currents, the mechanism by which the Earth distributes heat from the equator to the poles.

Such film depictions are usually heavy on special effects that dazzle the viewer with explosions (often lots of them) and in the case of Armageddon and Deep Impact, elaborately staged space missions. I'm normally allergic to such stuff, but found the special effects in The Day After Tomorrow quite compelling because they depicted mostly natural processes--speeded up immensely, of course, for dramatic purposes.

Now we have two films which attempt to portray the inner life of the main characters as these characters sense and then come to grips with impending civilization-scale catastrophe. Melancholia follows a new bride, Justine, into her wedding reception only to find her distraught and withdrawn. Through her conversations with her sister, we sense that Justine has had a history of depression. So, what could be troubling the poor bride on her wedding night at an elaborately planned party where she is surrounded by friends? We are given several possibilities. But the real problem is only hinted at vaguely here and there.

(Perhaps I need to insert a spoiler alert here since I will henceforth reveal a considerable amount of the storyline of the two films I discuss below. But I believe the analysis will actually enhance the enjoyment of first-time viewers.)

As it turns out, the sudden appearance of a blue planet from behind the Sun is what's unsettling Justine; only she doesn't know it at first. The film's opening leaves us in no doubt about its conclusion. So, we are freed to contemplate how each character deals with the coming of this planet and the dangers it poses. There is the denial of Justine's brother-in-law, John, an amateur astronomer who assures everyone that the planet will simply pass the Earth by. That's what all the scientists say, he explains. Justine's young nephew has a healthy, but naive curiosity about the phenomenon. Justine's sister, Claire, feels something is wrong. We witness Claire doing a little research on the internet, research which reveals the reason for Justine's abject depression and Claire's uneasiness. But as the moment of truth approaches, it is Justine, who, snapping out of her deep depression, is able to face the enormity of what is about to happen with remarkable equanimity.

And, that is the director's point. Lars von Trier means for the film to be an expression of his experience with deep depression. The depressed person, it turns out, is the one who can, paradoxically, accept very bad news without falling apart, who can actually function and act with decisiveness in the face of certain catastrophe--not so much to solve the problem as to accept it.

In Take Shelter a working class family man, Curtis, begins to have dreams of devastating storms that threaten his home and community. At first, he tries to ignore these dreams. But soon they become so insistent that he is driven to spruce up and then stock supplies in the underground storm shelter just outside his house in the back yard. And yet, the dreams continue.

Curtis wonders whether what he sees in his dreams will come to pass or whether the dreams might simply be delusions. His mother, after all, is a paranoid schizophrenic. He reads some books on mental illness trying to determine if he is following his mother's path. He's not sure. More dreams prompt him to expand the shelter at considerable expense, requiring him to take out a home improvement loan to do so.

Curtis's wife is angry about the expense. His neighbors and relatives think he is crazy. His boss is upset because Curtis borrows equipment from work without permission which he uses to help expand the shelter.

Take Shelter provides an excellent description of a man, susceptible to the messages that nature is sending him, but unable to articulate those messages to others. He senses danger and formulates a plan to protect his family. He does not, however, have the slightest idea how to explain or justify the danger he senses to people in his town. And, even if he knew what to say, his fellow citizens think he is crazy; so why would they listen?

The fears, the difficulty in articulating them, the attempts at preparation, the ridicule by family members, friends and neighbors, all this should be familiar to those involved in the peak oil movement and even still to a certain extent those working to arrest climate change. And, then there is the depression. I believe that if you haven't experienced depression to some degree or another related to these issues, then you haven't grasp the seriousness of our predicament.

These films tell me that filmmakers are beginning to give voice to the emerging emotional turbulence in the collective unconscious arising out of our ecological predicament. Whether Lars von Trier, who also wrote the screenplay for Melancholia, understands the implications of peak energy or climate change or the myriad other ecological challenges we face, I do not know. But clearly he has passed through the emotions associated with a very similar journey of awakening. The director and writer of Take Shelter, Jeff Nichols, obviously understands climate change. The severe weather depicted in the film can have no other physical referent.

Strange as it may seem to some, watching both films has enlivened me. Here are two movies that give substance to my depression and my nightmares--reaffirming that these flow not from mental disease but from an acute awareness of the human predicament on a planet that is sending us messages about how to heal both our damaged biosphere and our damaged souls.