September 2005 Archives

I urge you to read Dr. John Rutledge's article The Cost of Distraction.

In China last week I learned a disturbing fact from my friend Peter Schwartz at SRI. At current levels of oil per dollar of GDP and projected growth rates, China will consume more oil in twenty years than total global oil production today. It is paramount that both countries find ways of reducing oil and energy consumption per unit of GDP and do what we can to increase supplies of oil, gas, coal, nuclear, and renewable energy. [Emphasis added.]

That quote should give all of us pause. I have my doubts whether the world could produce double the amount of oil it does today. Or said differently, I have my doubts that the world can sustain production 170 million barrels of oil per day, which is double the current production of about 84 million barrels per day. And just imagine the environmental affects if we do consume 170 million barrels of oil per day.

Interestingly, the IEA projects that there will only be a 50% increase in global consumption between years 2002 and 2030. Please see the International Energy Agency's 22 September 2005 Press Release.

Oil and gas are likely to continue to dominate the world's energy supply for several decades. The IEA projects that, without new energy policies, oil demand will grow by more than 50% between 2002 and 2030 and that gas demand will almost double, with most of the easy, low cost, hydrocarbons being located in the Middle East. Accelerated technological development is going to be the key to supplying the required quantities at prices that do not impair worldwide economic growth, while ensuring diversity of supply origins.

We see that John's and the IEA's quotes do not agree. John appears to be suggesting that at least a doubling of supply will be required in twenty years. The IEA suggests that perhaps as much as a 50% increase will be required in 25 years. I am suspicious of China causing a doubling the global oil consumption. First, I doubts whether the world can actually produce that much oil. Second, even if the world can produce that much oil, considerable resources (capital, equipment, and people) will have to be mobilized to find, find, secure, produce, and refine the oil in a very short time frame. Good luck on the finding part as we have not found any elephant fields in decades. Third, as the world attempts to meet this insatiable demand, oil prices will go much higher. But remember, Economics 101 teaches us that price can only go as high as people can or are willing to pay. I think significantly higher prices may push many people beyond their ability to pay. And fourth, if production were to double, I would hope that people would begin to place more emphasis on environmental considerations.

That said, I encourage you to read Dr. Rutledge's post. He certainly gives us something to think about.

I wrote an article Markets Have No Memory Whatsoever where I doubted that $100 per barrel oil price would not cause a recession.

The online version of the Financial Times has two interesting articles. First, Fuel prices spur American to drop flights (subscription might be required) where Doug Cameron wrote that American Airlines is temporarily reducing service.

American Airlines on Friday said it would temporarily cancel 15 domestic services and drop one flight to Japan after the price of jet fuel soared to almost $125 a barrel in a move likely to be followed by other carriers.

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American said the refining crack spread for jet fuel reached $58.64 on September 28 on top of crude costs of $66.35 a barrel. This compares with a crude price of $45.94 a year ago and refining costs of just $11.31.

"Jet fuel prices have been rising even faster than crude oil prices for the last year, but it was the 39 per cent rise in jet fuel costs in the last month alone that pushed us to make this decision," said Dan Garton, executive vice-president at American . "We have made incredible progress in lowering our operational costs for over two years now. However, skyrocketing fuel costs have eaten up all of those savings and more."

And second, Indonesia shocks with fuel price moves (subscription might be required) where Shawn Donnan wrote that the Indonesian government raised key fuel prices substantially. Please note that Indonesia is an OPEC member that is also a net importer of oil.

Indonesia's government on Friday night raised key fuel prices by a higher-than-expected average of 126 per cent and announced a plan to bring prices in line with the global market in moves likely to test the patience of its people for tough reforms.

President Susilo Bambang Yudhoyono's decision to slash fuel subsidies and more than double prices just days before the Islamic holy month of Ramadan marks one of the most daring economic reforms launched by a leader in Jakarta since the 1998 fall of strongman Suharto.

These two articles help to shed more light on the economic difficulties companies and countries face as oil prices rise. I doubt strongly that the world can sustain a $100 per barrel oil price without falling into recession. As I mentioned in my prior article, I just hope we do not get to $100 per barrel oil price to find out.

The New York Times reports Times Reporter Free From Jail; She Will Testify (free registration required).

WASHINGTON, Sept. 29 - Judith Miller, the reporter for The New York Times who has been jailed since July 6 for refusing to testify in the C.I.A. leak case, was released Thursday from a Virginia detention center after she and her lawyers reached an agreement with a federal prosecutor in which she would testify before a grand jury investigating the case, the publisher and the executive editor of the paper said.

Ms. Miller was freed after spending more than 12 weeks in jail, during which she refused to cooperate with the inquiry. Her decision to testify was made after she had obtained what she described as a waiver offered "voluntarily and personally" by a source who said she was no longer bound by any pledge of confidentiality she had made to him. Ms. Miller said the source had made clear that he genuinely wanted her to testify.

That source was I. Lewis Libby, Vice President Dick Cheney's chief of staff, according to people who have been officially briefed on the case. Ms. Miller met with Mr. Libby on July 8, 2003, and talked with him by telephone later that week, they said.

I believe that reporters should be entitled to keep their sources confidential. I believe that adds to a free and democratic society where an individual without fear of retribution can bring the media's attention to a subject that deserves further scrutiny. Moreover, I believe a free and democratic society that allows its media to protect its sources and to highlight important subjects serves as a role model for those countries that do not enjoy our liberties. Said differently, by placing restrictions on our media and not allowing it to protect its sources, then we have diminished our argument for encouraging other less democratic countries to allow more freedom for their media.

Perhaps with weblogs and Internet, this will become less of an issue in the future. Even so, I believe that the media ought to be allowed to protect its sources.

Financial Times has an excellent article Blockage in the pipeline (subscription required). The article provides a solid review of the oil industry from a global perspective, with emphasis on refining. Furthermore, the article has graphs that show global oil refining capacity utilization, U.S. supply, U.S. petrol refining margins - 'crack' spread, and Refinery capacity change.

Mr Tillerson, who is expected to take over at the helm of the world's largest publicly traded oil company and refiner this year, warned against taking long-term investment decisions on the basis of short-term price movements. "Short-term price fluctuations do not significantly affect the pace of our projects at ExxonMobil," he said. "Nor should -current prices significantly affect the pace of investment or market liberalisation."

A company deciding to commission a refinery today would also have to contend with a market for engineering and construction services that is stretched to the limit. Building costs have doubled or, in some cases, tripled over the past three years, making financial projections even more uncertain. "It's sort of an Alice in Wonderland deal," says Matt Simmons, an independent energy banker. "Once we've solved one bottleneck, we realise there's another bottleneck right behind it."

If you are at all interested in oil, I highly recommend reading this article. It provides a wealth of information in a succinct fashion.

Scheherazade Daneshkhu and Sophy Buckley wrote UK grows at slowest rate for 12 years (subscription might be required) for the Financial Times.

Britain's economy grew at its slowest annual rate for 12 years, according to official figures published on Wednesday, suggesting that Gordon Brown, the chancellor, may have to cut his newly-revised growth forecast for this year even more aggressively.

The figures coincided with more gloom on the High Street and the release of the CBI's weakest retail survey for 22 years. Retail chiefs said the falling sales reflected increased pressure on disposable incomes.

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Alan Giles, chief executive of HMV, which has seen a 9.2 per cent fall in underlying sales since the year began, said people on faced increased pressure on disposable incomes which meant they were staying at home. "This perhaps even explains why Premiership clubs are seeing attendances fall," he said. "People have battened down the hatches and that knocks on to us."

In another article Chris Giles, Economics Editor, wrote UK house prices continue to fall in September (subscription might be required) for the Financial Times.

House prices continued to fall gently in September even though the level of new buyer interest and mortgage approvals was rising strongly at the end of the summer.

The Nationwide building society reported that house prices fell by 0.2 per cent in September, leaving average prices in the UK only 1.8 per cent higher than in September last year, a nine year low.

The annual rate of house price inflation fell from 2.3 per cent in August and there was no increase at all in the past three months.

Is the economy in the UK serving as the proverbial canary in the coal mine for the economy in North America? Will we soon suffer the same fate of slower growth as consumers are burdened with debt and higher expenses? As I have discussed in other articles, higher interest rates will lead to higher mortgage and loan expenses and higher energy expenses are certainly biting consumers' disposable income. To add insult to injury, the U.S. has suffered two large natural disasters that have further damped consumer confidence. The markets have been lackluster this year, and if you were to strip out energy companies, the S&P would be down this year. I continue to watch for an indication that the market is either picking up or slowing down. At present, it seems to be stuck somewhere in the middle. So, is the economy in the UK the canary in the coal mine?