ASPO-5 Live

ASPO-5 Day 1: Robert Hirsch Says Mitigating Peak Oil Will Cost a Trillion Dollars a Year for 20 Years

Rob Bracken — Tue, 18 Jul 2006 17:48:00 +0000

Confronting peak oil will cost industrialized nations dearly, Robert Hirsch told ASPO-5, offering the crowd a preview of his new report -- set to be issued in the next few months -- that follows up on his groundbreaking US Dept. of Energy sponsored study from 2005.

Hirsch said that the peaking of “net energy” is not as important as hitting the peak of “clean liquid fuels.” His model focuses on the issue of liquid fuels and in particular how it impacts the United States, but the results are broadly applicable worldwide. He employed "reliable econometric models" that measured the costs and effectiveness of “aggressive mitigation” efforts including stepped-up vehicle efficiency, coal-to-liquids and gas-to-liquids projects, enhanced oil recovery, and shale oil programs.

All told, Hirsch found that crash-program initiatives on these fronts are going to be enormously expensive, requiring an investment of more than $20 trillion over 20 years, and still yield only marginal increases in liquid fuels – just 15 million barrels per day or so (CTL could yield an extra 5 mbpd, oil shale about 4 mbpd, enhanced recovery techniques about 2.5 mbpd, and better vehicle fuel efficiency about 2 mbpd). Yet plenty of jobs would be created in the process – around 500,000 according to Hirsch’s model.

Hirsch was surprised to find that bumping up vehicle fuel efficiency could be the costliest of all the options ($130 per barrel), followed by oil shale, coal-to-liquids and enhanced oil recovery. Oil shale presents timing problems because it requires heating the shale for a long time and building power plants, all of which delays rollout of shale oil projects by 7-8 years.

Hirsch’s model also factors in the rising costs for people and machinery required by crash programs. For the US alone, implementing the full range of mitigation programs would cost from $4-6 trillion over 20 years. And since the US makes up about a quarter of the world’s economy, the world would need to invest about $20 trillion over this period.

There’s a host of wild cards that could stymie efforts to boost liquid fuel production, Hirsch said, drawing the distinction between “geological peaking” and “political peaking.” Geological peaking assumes societies extract as much oil as possible, but political peaking depends on all kinds of unpredictable events like insurrection, terrorism or government policies to hold back production.

“Political peaking cold occur well before geological peaking,” Hirsch told the conference.

Hirsch doubts that the world can keep increasing oil flows for much longer. “CERA sees a long plateau ahead,” he said. “But I can’t find a plateau in the data I’m looking at.” The downturn, when it comes, could take the world by surprise. “Peaking could come with little warning and sharp declines,” he said.

ASPO-5 Day 1: Kjell Aleklett Takes on the IEA, EIA and USGS

Rob Bracken — Tue, 18 Jul 2006 11:34:00 +0000

Taking a page from George Bush’s State of the Union speech, ASPO President Kjell Aleklett told conference-goers that the world is addicted to oil and it’s “time to sober up.” He also took serious issue with the optimistic projections by big government energy agencies such as the IEA, EIA and the USGS, saying these bodies shouldn’t be allowed to publish what are clearly defective prognostications of robust future oil supplies.

Aleklett zeroed in on the problem by analyzing the need to pump up oil production to satisfy the growing needs of the oil-hungry US, Europe and China. “For every importer you need an exporter,” he said. “You need both sides of the equation."

So can the word’s top three exporters—Saudi Arabia, Russia, Norway—keep up? Citing trend data from the IEA, Aleklett said the world would need to increase imports by 30 million barrels per day by 2030. Yet there’s little hope of boosting production by even a fraction of that, he said.

The USGS says there’s lots out there—as much as 3.3 trillion barrels. “I don’t believe it,” Aleklett said. Indeed “it is irresponsible to publish these types of projections.” The USGS numbers fly in the face of reality, the professor at Sweden's Uppsala University said. “Discoveries have been declining since the 1960s and extrapolations point to the fact that there’s maybe 150 billion barrels left to find. That’s about all we can expect.”

The International Energy Agency is similarly guilty of wishful thinking, Aleklett told ASPO-5. The reason for IEA’s optimism is easy to understand: It derives from the skewed needs of the agency’s sponsors. “IEA is not an international agency at all,” he said. “It’s a political organization that should be called the ‘OECD Agency.’ It’s composed of the world’s richest countries and its reports fit the economic and political needs of these countries.”

Aleklett said that analysts with the IEA are obligated in public to stand behind the agency’s official reports, which say the world will consume—and be able to produce—about 121 million barrels per day by 2030. “This is not possible,” Aleklett said. “But over a cup of coffee, they something completely different.”

Aleklett said production of oil from deep waters "really forms the peak," but the falloff from these sources will be very steep. New production from the world's number one producer Saudia Arabia is also unlikely, with just five to six years left of growth possible, amounting to possible 2 million barrels per day of additional oil, if that. Number-two producer Russia “is also officially peaking now,” he said, and will fall further as a result of a growing domestic oil appetite. Number three Norway is also declining rapidly. “They will not be number three for long,” he said.

When you add it up, it’s obvious that by 2030 the world will be facing a gap of about 30 million barrels per day of export capacity.” He cited claims by the former Saudi oil production head Saddad al-Husseini that the world needs 10 new Saudi Arabia’s to make up for the shortfall. “Why don’t we listen to him,” he told the gathering.

What about the tar sands? Don’t count on it, Aleklett said. The best you can hope for is maybe five to six million barrels per day, but that will also require widespread deployment of nuclear plants to melt the asphalt-like tar into oil. “Those who say that tar sands can compensate for the decline of convential crude don’t know what they are talking about.”

Aleklett likened the gap between what the world needs what can be produced to the giant maw of a crocodile. “We’ve been inside the mouth for years and it’s about to clamp shut,” he said.

Robert Hirsch's Power Point Slides

Richard Katz — Tue, 25 Jul 2006 20:58:00 +0000

http://www.oilposter.org/blog/hirschslides.htm

Text of Terance Ward's ASPO Talk

Richard Katz — Tue, 25 Jul 2006 14:04:00 +0000

Iran and the US - Confrontation, Oil Disruption and the Impact
(ASPO 5th International Conference on Peak Oil, Pisa 2006)
July 18-19
by Terence Ward

Here at San Rossore, we have heard projections and analyses about the future crisis facing global oil reserves. The gap between diminishing supply and rising demand now hinge on a crucial third factor: politics and conflict.

Violently intrusive tactics can generate chain reactions that are hard to anticipate, and even more difficult to control. Witness the $75 price for oil reflected from the escalation of violence between Israel, Hamas and Hezbollah, the bombing of Beirut, Southern Lebanon and the threat of extending strikes into Syria.

Iran is a more dramatic case in point. The recent UN Security Council referral pushes the US closer to military action. Hard-liners in the White House pointedly refer to Iran’s role in the conflicts of Iraq, Palestine and Lebanon. The White House, the US Air Force and Israeli military planners are now preparing a bombing campaign that will usher in dramatic repercussions.

PERSIAN CONUNDRUMS – IS THERE A SECRET WEAPONS PROGRAM?
• The most recent American intelligence estimate is that Iran could build a warhead sometime between 2010 and 2015.
• There is no evidence of a secret nuclear weapons program or its location, although Iran has been working on its nuclear program for 18 years.
• The recent US offer of negotiation was made because Russia and China were prepared to prevent passage of a UN resolution. According to a former NSC aide for the Bush administration, The President wants a guarantee that Iran will surrender before he talks with them. Iran cannot accept long-term restraints on its fuel cycle without a security guarantee. At stake,is a form of a mutual non-aggression pact with the US.
• US and Israeli evidence falls short of what would be needed to publicly justify preventative action. Israeli intelligence during Prime Minister Olmert’s visit to Washingon failed to provide Washington with specific evidence about secret sites in Iran.
• Describing the current US offer of negotiations, Giandomenico Picco who negotiated the end of the Iraq-Iran war in 1988 said: “If you engage a superpower, you feel you are a superpower. Now the haggling in the Persian bazaar begins. We are negotiating over a carpet--the suspected weapons program--that we are sure exists, that we don’t want to exist. And if at the end there never was a carpet, it will be the negotiation of the century.” If a pre-emptive war takes place, it could well begin with false WMD promises like in Iraq.
• The question remains: What if both the US and Iranian presidents seek confrontation and war?

OPPOSING VIEWS OF THE WAR’S OUTCOME
• American neo-con believe that after a massive bombing campaign, the Iranian people will rise in anger. The mullahs, humiliated with shame, will be subjected to a revolt that will overthrow the Islamic rulers.
• Iranian hard-liners believe the bombing will unite the people. Enraged with the destruction and loss of life, and infused with wounded national pride, they will rally behind their government. This will inject new life into the radicalism of the Islamic regime.
• Iranian exiles loathe and reject the hard-line regime, yet fear a conflict. Almost all of the 2 million in diaspora, wish for a collapse of the regime. Yet, they are certain that the bombing will, quite simply, create disaster by strengthening the hand of the hard-liners.
• “Nuclear nationalism” is the only tool left for the hard-liners. Fundamentalist popular fervor has long disappeared from Iran. Consider the report by the Islamic Republic's Ministry of Culture and Guidance –- less than 2% (1.4 % to be exact) of the population attend Friday prayers regularly.

IRAN’S ENERGY ALLIANCES WITH ASIAN GIANTS
• China has signed a $100 billion long-term liquefied natural gas deal with Iran over 25 years. Currently China imports oil as well. Beijing will veto any UNSC motion for military action that will disrupt their future supplies.
• India has signed a long-term $20 billion gas deal to be delivered by a historic pipeline across Pakistan. India will not embrace a military strike.
• Russia supports the Iranian nuclear program. Billions of dollars of nuclear fuel and material will be sold to Tehran. Russia will veto UN military action.
• Shanghai Cooperation Organization is embracing Iran’s future membership, creating new alliances for Tehran among Asian giants reflecting the global Asia power shift.
• The Reality – energy alliances will force the US to attack alone.

THE SCOPE OF ATTACK: THE COMING WAR
• Under the scenario of 1,000 targets, bombing could last 2 weeks. An earlier analysis by Patrick Lang—military head of Middle East intelligence at the Defense Intelligence Agency—estimates 1,000 military strike sorties at 450 targets. (NY Times, “Why Not a Strike on Iran” by David Sanger, 22.1.2006). Most recent estimates have doubled to 1,000 targets ranging from sea ports, missile defense systems, military bases, airports, industries, and 20 nuclear facilities. Any such attack will be considered in public opinion to be a war—not a strike. No media spin will change this perception in world public opinion.
• The US Navy reports that Iran has more than 700 undeclared dock and port facitlities along its Persian Gulf coast. The Iranian Navy recently conducted exercises in the Straits of Hormuz, the narrow channel linking the Persian Gulf to the Arabian Sea and the Indian Ocean. The Strait is regularly traversed by oil tankers, in which a thousand small Iranian boats simulated attacks on American ships in the exercise (New Yorker, Last Stand, by Seymour Hersh 10. 7. 2006).
• General Pace, head of the military Joint Chiefs, forced the White House to agree not to use nuclear devices. This rebellion by the military has infuriated the White House, which wanted to keep nuclear weapon use on the table to destroy the enrichment plant at Natanz, 200 miles south of Tehran (New Yorker, Last Stand, by Seymour Hersh 10. 7. 2006). Ironically, the military leadership also pointedly warned the White House about possible political and economic repercussions of such a war.
• The irony is that war planners are not sure what to hit. American and European intelligence agencies have not found specific evidence of clandestine activities or hidden facilities. Many sites are suspected to have been moved into population centers.
• Confirmation of efficiency of strikes in eliminating the nuclear program is virtually impossible. Good bomb damage assessment can only be done with people on the ground. Absent of capturing an Iranian nuclear scientist and documents its impossible to set back the program for certain.
• The air war in Iran will be one of overwhelming force. Vice President Cheney represents the strategic bombing lobby in the Air Force—who think carpet bombing is the solution to all problems,” according to Seymour Hersch of the New Yorker. He writes: “Rumsfield and Cheney don’t want to repeat the mistake of doing too little. The Air Force, with their “bomber mentality,” still believe their plan assures that all distributed targets can be hit.”
• The Navy and the Marines no longer believe in “shock and awe” and are openly critical of the Air Force plan. They argue the tactic will not work. The commanders know that if it fails their troops will be on the ground.
• Unless Iran’s nuclear-weapon program is solidly and publicly provable, there will be an dilemma over premature timing. At present, IAEA and Pentagon analysts estimate at least 6-10 years before Iran would obtain nuclear weapon capability. A US/Israel strike risks being branded as a premature act. Like with Iraq, public debate may condemn the pre-emptive US/Israeli actors and redeem the Iranian regime, if such an attack occurs before all diplomatic options are exhausted.
• President Bush may decide to bomb before November elections to preserve his Republican majority in Congress using his “War on Terror” and “politics of fear” to silence Democrats. However, the risk of American public’s disaffection will be high. The current load of security commitments worldwide is already enormous and a pre-emptive war would leave America with little reserve power to deal with unexpected chain reactions. The other likely possibility is that Bush begins a bombing campaign shortly after the election knowing that he has two years to intervene with force to re-shape the Mid-east.

CHAIN REACTIONS: IRAN’S RESPONSES AND THE IMPACT ON OIL
• The Iranian Government will attempt to hit directly at U.S. interests. The goals will be to disrupt oil flow to the West and Asia by blocking the Hormuz Straits, to engage in naval mining in the Gulf area, and to trigger an explosion of Shiite violence across Iraq as weapons are turned against US troops.
• Iran will cut off exports in the event of an attack sending oil prices soaring. Expect short term economic shocks. Projections range from from $120 – $160 a barrel. The global impact on oil prices will be volatile and dramatic. Oil supplies removed from markets for a timeframe, either by force majeure or by Iran’s decision will not only shock the global economy, but also encourage protests in numerous urban centers throughout the world.
• Retaliation by Iran in asymetric responses will be the rule, not the exception. Iran has agents throughout the Gulf and Middle East with the ability to strike at will. Hamas and Hezbollah should be expected to flair up like this present week in attacks against Israel. Warnings have been given to the Emir of Qatar during his private visit to Tehran in May.
• Oil and gas facilities in Qatar will be vulnerable to retaliatory strikes that could disrupt oil supplies and seriously panic financial markets. Attacks in the Gulf will occur in manners unforeseen by current defense planning. The intelligence level of Iranian operatives is a level above their Arab counterparts. Qatar will be extremely vulnerable as the site of US regional headquarters of Central command (re-located from volatile Saudi Arabia). Qatar’s vast off-shore gas field installations (shared with the Iran’s Pars-1 field) will also be exposed to retaliatory strikes as will Saudi Arabian oil installations in Aramco.
• Saudi Aramco, the world’s largest oil company will become a target: collection stations of Abqaiq, the terminal at Ras Tanura, the pipelines to Yanbu and Jubail, and the headquarters in Dhahran will all be targets. The largest oil field in the world, the Ghawar field, could be hit as well in a symbolic strike. Saudi complicity against Iran makes this all the more likely.
• America’s $500 billion investment and 3 years of sacrifice in Iraq will be at grave risk. Shia politicians—under pressure by mass public demonstrations—will demand the withdrawal of US forces. Upon the news of the first bombings, Shia militias can be expected to attack coalition forces. The current Shia-US alliance prevailing in Iraq will be threatened. Moqtada al-Sadr—head of the al-Mahdi militia—has publicly stated this threat during his most recent visit to Tehran.
• The possibility of a Chernobyl disaster may expose millions of Iranian civilians to nuclear fall-out, as well citizens of Bombay, Dubai or Baghdad. A nuclear blast could vent radiation for miles. The panic prior to the attack could lead to startling exoduses out of these population centers as the threat builds. Should the US not give an ultimatum, then planners will place millions at risk.
• Television coverage by international media will unleash a wave of negative public reaction. The risks of significant collateral damages on civilian populations would be high given the fact that many nuclear plants are close to cities. The exposure of innocent civilians to radiation will provoke TV debate on this action. This is a neglected consideration in discussions about Iran. The convergence of these factors will be grave. Global perception will reflect the further decline of America’s moral standing in the world.
• An attack will be portrayed in the world as an “anti-Islamic” and stimulate Islamic extremists from Pakistan to Indonesia to Europe. US allies with Moslem populations will experience turmoil on an unprecedented global scale. In Pakistan, mass rioting could topple Musharraf’s tentative hold on power and place nuclear warheads into the hands of Islamist Wahhabi extremists in the Pakistani military and ISI (the primary strategic fear of Iran). Such an event may trigger a response from India.

SIESMIC DEMOGRAPHY – SHIA / SUNNI DIVIDE AND MIDDLE EAST OIL
• The largest bulk of oil reserves on earth lie under Saudi Shia lands.
The Shia of Saudi Arabia would love to have the same control over their oil revenues as their Shia brothers in Iraq. Long oppressed by the Sunni Wahhabi rulers, these Shia go on pilgrimage to Iran and will react in subtle and overt ways if Iran is attacked. Bahrain is over 95% Shia and has experienced unrest before along the Shia/Sunni divide. Dubai is a large center of Persian-speakers and Iranian influence. Kuwait is also 30% Shia. In Aramco and KOC, the Shia vastly represent the local skilled labor force. An incident like the attempt on the Abqaiq collection stations by al-Qaeda operatives is not out of the question.
• The Saudi and Jordanian monarchies openly speak of a radical “Shia crescent” across the Middle East. Both ruling families would support such a strike against Iran. Shia-governed Iraq strikes fear in the heart of Saudi leadership because they know it emboldens Shias in the Saudi oil-rich Eastern Province of al-Hassa. The emergence of Iran as a regional power is their principal concern, not Israel. The links between Hamas and Hezbollah also worry them greatly.
• Southern Lebanon is a land of Shia majority. Syria’s leadership, Bashar al-Assad is also of the Alawite Shia sect. The alliance between Hezbollah and the Syrian regime are strong. Iran has provided monetary and military assistance to Hezbollah for decades, so it should be expected that southern Lebanon will become a flashpoint if a conflict breaks out.
• Many Sunnis view the US and Shia cooperation in Iraq as a conspiracy against them: a "Wahhabi containment policy." The profound conviction among much of the Arab world today, including the Saudi royal family, is that the U.S. plans to do the same to Saudi Arabia that they have engineered in Iraq. Like Iraq, the theory goes, Saudi Arabia would be divided into three parts. The moderate Hashemites of Jordan would regain their historic control of the holy cities of Mecca and Medina; autonomous Saudi Shia would control the oil-laden Eastern Province; and the Wahhabis would be left baking in the sands of the Nejad Desert.
• This Shia/Sunni divide will provoke regional conflict, re-defining the Middle East. Iraqi leadership may soon find themselves supporting Iran, with Syria. Saudi Arabia, Egypt and Jordan would support the US action, yet anger among their population may become unmanageable. Recent Shia electoral victories in Saudi Arabia are a potent sign for the future.
• Iran and Saudi Arabia could well become open adversaries placing the largest global reserves of oil at risk for the foreseeable future. Iraq is and will continue to be the open battleground. Access to Gulf oil exports will also be affected by this tension.
• Saudi Arabia with Israel have entered a strange alliance by mutually pushing for the US to attack Iran. They are united with Egypt and Jordan against the Shia. The conflict in Lebanon will only heighten this brewing sectarian conflict across the Middle East

AFTERMATH – THE WIDENING GYRE
• The bombing of Iran will surely trigger chaos, provoking oil shortages and a global recession. The conflict will inflame the region with untold consequences. Look to Pakistan, Iraq, Afghanistan, and the Gulf countries as immediate flash points.
• A preventive war without UN approval could mark the end of the UN era. Will the U.S. and its allies have the legitimacy to formulate and help implement a new set of international governance rules after having emptied from their content the rules of international law established sixty years ago?
• Iran’s clerical regime includes three pragmatic factional power blocs willing to engage in an opening to the USA: Mehdi Karroubi , Mostapha Moin, Hashemi Rafsanjani, the Leader of the unelected Guardian Council. They all continue to openly criticize the President who is increasingly viewed as a loose cannon. His Messianic claims have proved more controversial in Iran itself than in the West. Among the President’s critics, the “dealmaker” Rafsanjani may be a significant figure, for he represents the business class and the unelected clerics. These three factions in contrast to Ahmedinejad, do not thrive on a siege mentality or on provoking a clash with the West.
• After the catastrophe of war has run its course and hostilities cease, the end result will surely be political negotiations between the US and Iran. Tragically, these negotiations should occur sooner than later to prevent the disaster.

LOOKING AHEAD: A FRAMEWORK FOR PEACE AND OIL SECURITY
A recent Trilateral Commission Report--Is There a Plan B?--prepared for the plenary meeting of the Trilateral Commission in Tokyo, April 22-24, recommended US-Iran negotiations with the goal of The Grand Bargain which could take shape in the following framework:

1) Regional Middle East Nuclear Council would engage all countries with nuclear weaponry: The United States, Russia, Israel, Iran, China, India, Pakistan, Japan, the UK and France. IAEA inspections will become accelerated with open, transparent, unrestricted access in all countries.

• Israel would be provided with a comprehensive security package both by the United States and such as defined within NATO’s Article 5 Charter.
• Iran would be offered explicit US security guarantees.
• This security umbrella would re-define Middle East.

2) Middle East Marshall Plan (with an economic dimension) would provide Palestine, Jordan, Tunisia, Morocco, Turkey, Egypt and Algeria access to WTO, World Bank funding and Aid to promote security and enhance the chances of a gradual transformation towards more democracy.

3) Regional Middle East Energy Council would deal with the region’s second rarest resource: oil and gas. Regional pipelines, oil security, technology-sharing, reservoir depletion and monitoring, all will be discussed. Such a council would include Saudia Arabia, the United Emirates, Kuwait, Bahrain, Oman, Yemen, Iraq, and Iran.

4) Regional Middle East Water Council would deal with the region’s rarest resource. Such a council may serve to diffuse potential conflicts—“water wars.” Potential members would be: Turkey, Syria, Lebanon, Iraq, Israel, Palestine, and Jordan. Inter-dependency is lacking in the Middle East (the Arab league is not simply capable of dealing with such a critical issue as water, without Turkey or Israel’s presence).

CONCLUSION – A Personal Word
Before engaging in this tragic confrontation that will consume thousands of innocent lives and threaten the global economy, both Presidents Ahmedinejad and Bush would do well to listen to the words of the Persian poet Saadi:

Children of Adam all come from the same source,
When one is wounded, all share the pain,
He who cannot feel the pain of others,
Cannot call himself Son of Man.

They should also consider the sage advice of another Persian poet, Rumi, the best-selling poet in America today. Seven centuries ago, he wrote:

Out beyond the idea
Of right-doing and wrong-doing
There is a field.
I’ll meet you there.

Terence Ward’s Profoundly Disturbing Presentation

Richard Katz — Sat, 22 Jul 2006 17:23:00 +0000

Terence Ward’s presentation, “Confrontation, Oil Disruption and the Impact” was profoundly disturbing and the detail of his presentation brought this very grim scenario to life. Ward suggested that Iran and the US are on a collision course which promises to disrupt oil supplies, shock global financial markets and threaten the fabric of oil-producing Persian Gulf states. The impact of an American bombing campaign will mark a dramatic departure in secure oil, opening up the possibility of Gulf fields as retaliatory targets. He discussed the possibility of civil war in the Gulf states and the violent chain reactions. We’ll have the full text up in the next few days.

Chris Sanders Talk - NATO: Out of Area, Out of Oil

Richard Katz — Sat, 22 Jul 2006 10:51:00 +0000

NATO: Out of Area, Out of Oil

ASPO July 18-20, 2006 Pisa

Chris Sanders

In this short talk we are going to examine the impact of a shift in the centre of gravity of the oil and gas industry away from the Anglo-American Atlantic West, east to the Russian dominated heart of Central Asia. We are going to see how this shift in power implies a shift in corporate profitability and ultimately threatens the very nature of the Anglo-American political economy, an international system based on the control of cash flows employing centralised control of the finance, real estate retail and manufacturing industries.

The US is commonly thought of as a liberal-capitalist free-market democratic republic. Regardless of one’s subjective political leanings, this commonly accepted template has implications for the analyst. For instance, we assume as economists that business works to maximise profit by improving its competitiveness, an idea most commonly associated with productivity. Actually, things are quite different.

Take the Pentagon for instance. We usually think of armies, navies and the like. Actually, the Pentagon is the world’s biggest investment bank and industrial combine, with a work force of more than six million people, an operating budget of over $500 billion, and a total annual spend on national security on a GAAP basis of about $1 trillion. The market capitalisation of the top fifty corporate contractors through whom the Pentagon purchases goods and services is more than $1.5 trillion. You may not be aware, however, that their contracts with the military are cost-plus, and have been since the early 1960s.

[Point to Military Node then CLICK]

This is great business if you can get it. The Pentagon provides venture capital as well, so that the companies do not absorb any undue risk in designing and building new weapons systems. The point for us here is that when your profit margin is guaranteed, your profits become positively correlated to costs, and productivity is how well you lobby for contracts, not how efficiently you manage your production process.

[Point to Production Node then CLICK]

Or take the retail trade in the US, the consumer’s paradise. Total sales in the US retail sector are on the order of $1,791 billion, of which fully 14% were generated by one company, Wal-Mart, which employs more than 1.3 million people, or nearly 8% of the country’s labour employed in the retail sector. Wal-Mart alone is a huge force in US international trade, with an Asian manufacturing base supplying its US and increasingly European and Brazilian markets. Anyone who thinks that it is just the Chinese who like a weak Yuan and a strong dollar should think again.

[Point to Finance Node then CLICK]

Look at banking, where consolidation over the course of thirty years and wealthy political action committees have resulted in the repeal of the legal barriers to bank investment in industrial companies, insurance and so on that were legislated in the 1930s. And of course the sine qua non of monopoly, the Federal Reserve System, is in fact owned by the banks it regulates. Yes, you may say, but the board of governors of the system is appointed by the President and approved by Congress. This prevents the industry from exerting undue influence over policy.

Well, consider this. An ex-chairman of Goldman Sachs is the head of the president’s Council of Economic Advisers and also chairs the White House Intelligence Committee. Another ex-chairman of Goldman Sachs is the Secretary of the Treasury. And yet another former senior executive from Goldman Sachs is the White House Chief of Staff.

[Point to Government Node then CLICK]

That kind of influence is what has made it possible for the banking industry, championed by the Federal Reserve, to build an off-balance sheet balance sheet in the form of financial derivatives contracts worth more than $1 trillion dollars, self-regulated, which is to say priced by the banks, and which allows the banks to shift the risk on their balance sheets onto the public.

What a wondrous modern age we live in.

The housing market is one of the biggest industries in the country. The construction of homes, their sales and their financing are the pivot on which the entire so-called private sector turns. Most of the financing in the sector passes at one stage or another through three institutions called government sponsored enterprises, The Federal National Mortgage Association, The Federal Home Loan Banking Corporation, and the Federal Home Loan Banking System. These companies purchase home loans originated by banks and convert them into pools of mortgages that then are bundled into bonds and resold. Then there is the Department of Housing and Urban Development, a Federal Agency which is in the same business that is second in size only to the Pentagon itself.

.

[Point to Ideology Node then CLICK]

Finally, there is the media and the system of higher education. Most of the broadcasting and print media in the country is owned and controlled by five corporations. The business schools retooled in the late 70s to turn out graduates versed in finance as opposed to production. And University departments as diverse as sociology, psychology, physics, computer science and area studies depend for their existence on government grants, much of the money being sourced from the military and the intelligence services. .

This is not a free market economy. It is a war economy.

It does not operate in isolation. The alliance system built by the US since world war two was based on an economic trade-off for strategic benefits,

which allowed the US to create a system of bases protecting the access of its corporations to resources and controlling the access of others to those same resources. The economic trade-off was access to the US markets for those key allies, especially Japan and Germany, into which US corporations poured billions in investment capital.

Reinvesting their dollar export earnings in the US capital markets allowed the US access to credit with which to maintain demand growth. Underpinning the economics is control of global trade in oil which, denominated in dollars, has assured the United States of a market for dollars that it creates, literally allowing it to trade paper, or today bits and bytes of data representing money, for real things.

During the years of the Cold War, this is the system that governed what we loosely call The West. Since the collapse of the Soviet Union it has absorbed the former Soviet Union, China and India into a world monetary system that is dominated by the US, abetted by the European Union, and financed by Asia. Every region of the world today is a net lender to the United States, which we can see graphically in the large and growing current account deficits that the US runs with those regions.

Now the prospective end of the first half of the Age of Oil is most commonly addressed as a financial and engineering problem. Financial, so the argument goes, insofar as two or three decades of underinvestment in commodities has resulted in too little supply. Engineering, inasmuch as the necessity of finding alternatives is basically a matter of first finding adequate investment capital after which it is simply a matter of the market and scientific progress doing their work to create alternatives to oil and gas.

There is valid precedent underlying this point of view, of course. After all, the transitions from wood to coal and from coal to oil were managed against a backdrop of what appears to the collective memory to have been a linear march of progress onwards and upwards.

Viewed through the lens of geopolitics though, things look different. The transition from wood to coal initially favoured newly industrialising Britain thanks to her abundant coal resources. The transition that followed from coal to oil at the dawn of the twentieth century was, from financial and scientific point of view fairly straightforward perhaps. But two world wars were fought in the first half of the 20th century largely because one alliance was trying to get access to oil and the other was trying to deny that access. The deniers won.

The point here is that what looks straightforward from the perspective of the market trading floor, the scientific laboratory or the wellhead is something else altogether when the human element and the will to power are introduced. For the millions who died in the two world wars the transition from coal to oil was a major discontinuity. It is neither a coincidence nor insignificant that the fighting in the current world war to control the world energy net has been in the Balkans and latterly in Afghanistan and Iraq. In each case, what is at issue is control of energy supply and distribution.

The reason for this is simple enough, and is made abundantly clear from the oil and gas clocks showing world oil and gas reserve distribution. It is in the Persian Gulf and the former Soviet Union, mostly Russia, that the world’s remaining gas and oil reserves lie. This represents a substantial shift in the fulcrum of world power. For the first time in the history of the oil age the marginal barrels of crude oil and cubic feet of natural gas are not directly controlled by the Anglo-American powers.

The glue that has held together the world industrial economy embodied by the OECD is beginning to dissolve in the solvent of peaking world oil and gas production. OECD oil production peaked ten years ago. The industrial world has to look further and further afield for its oil and gas. This includes buying oil and gas from its former enemy, Russia, and facing the reality that the interests of producers are not identical with those of the consuming countries. More exactly, they are not aligned with the interests of those who rule the consuming countries.

Since American lower forty-eight oil production peaked in 1970, American policy has focused on controlling access to the oil and gas supplies of the Persian Gulf. The difficulty faced by the United States has been its inability to control both sides of the Gulf since the Iranian Revolution ousted the Shah. If the solution to the challenge of peak oil were simply a matter of combining sufficient investment capital with exploration and extraction technologies this would not be an intractable problem. However, as we know today, the limits of recoverable oil and gas are neither financial nor technical, they are geologic.

This implies a step change in the price of energy, as well as a long period of increased volatility in prices until supply from alternative sources can be matched to the shortfall of oil and gas relative to demand. This is as far as one usually gets with an analysis of the impact of peaking oil and gas production on the world economy, and is still well within the comfort zone of most analysts.

This may be a mistake. To begin to see why, we might look at the yield curve, that is to say the term structure of interest rates.

This is usually restricted to an analysis of paper debt, that is to say, cash, bills and bonds. This is actually incomplete. Real money, for instance, that is to say gold and silver, is left out. The reason for this is that the world no longer has a de jure monetary connection to gold. This was lost in 1971, the year that the United States abrogated its obligation to exchange dollars for gold at a fixed price. It is no coincidence, I believe, that this happened immediately after the peak of US lower 48 oil production.

Since then, gold has been commodified, meaning that trade in it is open to the public, which it had not been, in the US at least, since its ownership was criminalised by the Roosevelt administration. Nor is it legal tender, which it once was, in which form it served as a commonly accepted store of value, enabling borrowers and lenders to exchange capital with confidence, knowing, thanks to the value of gold, the relative value of their transactions.

One can change the rules but one cannot change behaviour, and gold is still a monetary asset, whatever the world’s bankers may tell us, as anyone can plainly see from the fact that the bankers continue to hold quite a bit of it themselves, and it is still an important reserve asset. However, the time value of money and the interest rates that represent it are paid in paper money, not gold. If you want to own gold, you have to pay transactions fees and storage costs, which, as it happens, have been going up in recent years. This means there is a negative interest rate for owning real money.

At the other end of the yield curve, bonds are in fact not the only asset. So are equities, which are claims on the current and future assets and income streams of businesses. And there is real property, which also carries with it a rate of return. These asset classes represent, in effect, the collateral against which the debt at the other end of the yield curve issued. It is confidence in future growth, quantified in the prices of these assets that provides the rationale for issuance of debt today in exchange for repayment tomorrow.

Keep this picture in mind, because it is important to our discussion going forward. A step change up in the price of oil due to Peak Production being reached is going to force a rise in the yield on corporate and real property assets. This means that the price of those assets relative to the income they generate, and relative to the assets at the short end of the yield curve – especially gold – is going to have to fall.

To understand why, consider the model of the American economy with which we started this talk. This is a model built on the twin foundations of debt and consumption, both predicated on cheap oil and gas to fuel the cars trucks and aircraft and to cool the warehouses, offices, homes and IT centres.

A cursory look at conurbations like Phoenix and Las Vegas is enough to see the challenges posed by a significant increase in energy costs. But if you doubt the long term impact, let’s look at the markets themselves.

Here is a chart of oil measured in terms of the number of hours of work that it takes to produce a barrel of the stuff. We can see that oil prices fell in real terms for nearly a century before vaulting in the 1970s. In the 80s the triple impact of recession, conservation, and high output, especially in Saudi Arabia, led to a fall, reaching new lows in 1998. Since then the value of a barrel in hours worked has more than doubled. .

Let’s look at this now in comparison to the real value of corporate America, measured by the S&P 500 deflated by CPI. This is a pretty arresting picture. The inverse correlation between corporate asset values and real oil prices could not be clearer.

Now logically, if oil prices were simply a function of finance and exploration this would not be a big deal, just one more credit cycle. But we know that is not the case. Oil prices are now a function of geology too. We have already discovered pretty much what there is to discover. From now on scarcity places a floor under relative oil prices. And that implies that there is a ceiling, for the time being at least, on corporate and real property values.

The finance model that lies at the base of the US political economy is no longer viable. This depends on unlimited housing development utilising cheap space and cheap energy. The sort of horizontal urban development so loved by US planners and politicians who thrive on the cash cycled through the permit, building, sale, mortgage and remortgage process is no longer profitable on anything other than the shortest term payback period. This represents nothing less than an existential crisis for the American political class.

No wonder they invaded Iraq. And no wonder they are picking a fight with Iran. Without control of Iranian oil and gas they have no hope of securing the Middle East. For that they need to control both sides of the Persian Gulf.

But Iran has applied for membership in the Shanghai Cooperation Organisation, and speaks openly of an oil and gas axis stretching from the arctic to the Persian Gulf. It does not have the West in mind, except as a customer.

Look to Russia, and remember John D. Rockefeller. Vladimir Putin may well be his equivalent for the Twenty First Century.

Pictures from the Conference

Dave Menninger — Thu, 20 Jul 2006 01:36:00 +0000

Taken by R. Katz

Bus ride to the conference site at Parco di San Rossore, Pisa, Italy.

Conference Tent III on the first day.

Futuristic police cars patroling the park.

ASPO-5 Day 2: Charles Hall Calls Ethanol "Unviable"

Rob Bracken — Wed, 19 Jul 2006 13:28:00 +0000

With temperatures in Pisa soaring into the 90s, Charles Hall delved deep into what he calls “one of the most important defining issues of the future”: energy return on investment (EROI). The concept, he said, embodies a kind of bottom line for oil-addicted societies, defining the range of feasible energy-production options. It stops dead any project that costs more energy to produce than you get from burning it.

The professor at the State University of New York, Syracuse, who practically invented the energy-return concept, said that oil is beginning to suffer the fate of diminishing energy returns, as crude becomes tougher and more expensive to find. “It doesn’t matter how much you find if it costs you a barrel to get that barrel.”

In his talk, Hall railed against conventional neo-classical economists who refuse to acknowledge the reality and logic of finite energy resources. He says the second half of the age of oil will require a new brand of economics that he calls “biophysical economics.”

Hall doubts that technology or markets can solve the world's oil-depletion predicament. The measure of success of new technologies would be a rising EROI. But that’s not what’s happening, he said. Despite massive applications of new oil exploration and recovery techniques, the energy profit from oil production has been falling inexorably. In 1930, we got 100 barrels of oil for every barrel invested. By 1970, the ratio had fallen to 30 to 1, and today the figure is around 15 to 1.

“The harder we drill, the less efficient you get at finding it,” he said.

Hall dismissed the prospects for ethanol, calling its EROI marginal at best. Even if you don’t agree with Pimental that ethanol has negative returns, even the best estimates peg the biofuel at less than 5 to 1. “Anything energy source less than 5 to 1 is probably unviable,” he said.

And Now a Few Words from Chris Skrebowsky

Guest Blogger — Wed, 19 Jul 2006 15:14:00 +0000

The greatest aspect of any ASPO gathering is joining together with the like-minded people. What is more disconcerting is what good memories they have for what you'd said previously. More seriously exactly because people come and challenge what you're saying is what enables you to make presentations clearer and hopefully better. The range of speakers and their interest is also very stimulating as one wrestles with ideas and concepts not in one's immediate specialty. What is becoming ever clearer is that Peak Oil is just one component of a range of challenges confronting our societies and our way of life -- climate change, food supply, water resources and energy resources. Happily most still retain considerable optimism about our collective ability to survive and adapt. Fewer and fewer believe the new emerging world will be much like the old. Some are mildly apocalyptic, but most retain hope and humor about our collective futures.

Chris Skrebowsky

ASPO-5 Day 2: Dennis Meadows Says We’ve Already Overshot

Rob Bracken — Wed, 19 Jul 2006 10:10:00 +0000

Thirty-five years after he co-wrote the landmark study, Limits to Growth, Dennis Meadows told ASPO-5 that almost all of his original predictions of ecological collapse are coming true. “We have already overshot,” Meadows said. “Collapse is not inevitable but it will very tough to avoid.”

Meadows said peak oil is one of a number of limits that mankind is confronting. “Were facing a lot of peaks and oil is just one of them," he said. “We are also drawing down our fertile soils, groundwater, and forest stocks.” Governments, he said, will be overwhelmed trying to deal with them.

The signs of collapse surround us, Meadows said. These include deteriorating natural resources, rising levels of pollution, more frequent and devastating natural disasters, growing political instability, higher debt loads, and greater demand for resources to secure energy sources. Steady decline has already shown up in the statistics from over 50 countries, Meadows said, a key summary indicator being declining per capita GNP.

Meadows said the critics of peak oil – and to physical limits in general – are slowly coming round, if reluctantly, following a predictable path from denial to qualified acceptance. “Critics start off by saying ‘don’t worry, there are no limits.' Critics of peak oil intuitively don’t believe that oil is finite."

But now people are starting to get worried, he said. Yet political systems are inherently incapable of responding to peak oil. “Current politics and markets are not working under these circumstances,” Meadows said. “Peak oil is a hard problem,” he said. “You have to go through a period where things will get worse before than can get better.” Politics, with its short-term election cycles, just isn’t equipped to deal with problems that demand short-term privation.

“That’s why collapse occurs. We are fundamentally unable to do the things we must do to avoid collapse. Sustainable development is possible but not likely and probably too late.”

Meadows is pessimistic about society's ability to survive the steady depletion of finite oil stocks. “There is no possibility that alternative energy sources will rise fast enough to offset the decline in oil,” he said. Meanwhile world population continues to skyrocket. “Global society will most likely adjust to limits by overshoot and collapse, not by growth,” he said.

Alice's Musings on ASPO Pisa

Guest Blogger — Wed, 19 Jul 2006 08:59:00 +0000

All of Dennis Meadows talk today was excellent, here are just a few of the points he made:

1) The Club of Rome finally convinced people there was a problem, but had no solutions to offer. He recommended that ASPO be prepared to switch to a mode of offering specific, local solutions lest they too become irrelevant when people are seeking answers to how to cope with the new realities brought on by peak oil

2) Politics and the market are structurally incapable of dealing with hard problems like those we face now (overshoot of carrying capacity from depletion of fisheries, forests, water, soil, peak oil, increasing pollution, etc). The models all show that collapse is the most likely outcome, and this is one of the reasons collapse is more likely than a sustainable society.

3) As an aside, he tossed out that the models showed collapse in 2020 to 2030 but that real world events were moving forward faster than their model.

-------

Charlie Hall's latest research shows the EROI of existing oil and gas is about 25 to one, but that NEW oil is approaching 1 to 1, which means that the discovery of new oil may be irrelevant after 2015 to 2020.

When asked about how the future might unfold, he mentioned that he thought that people will not be willing to make the capital investments needed to build solar, wind, and so on when oil was costing them $10 per gallon or more.

--------

Colin Campbell
- we were the first species to use EXTERNAL energy, beyond what our own muscle power could provide. Agriculture used animals and slaves to produce food.
- It's significant that slavery came to an end when oil provided energy.
- Now there's a slavery of DEBT.
- Will peak oil eventually lead to the end of the nation state? Will power return to local regions and new local currencies be developed?

--------

Kjell Alekett (President of ASPO)
- Why are we addicted to oil? Because it's so powerful. Consider this: the oil you use to fill up your car could lift 50 cars to the top of the Eiffel Tower

---------

Richard Heinberg explained the depletion protocol developed by Colin Campbell and Kjell Alekett. For me, this was the most important presentation of the meeting, because it answered many of the objections and questions I had about how this could possibly work. It is our best chance of avoiding world war over the remaining resources. He also had many original and brilliant practical ideas on how all of us can cope as individuals with declining energy. This is a must buy book for all of you who care about how the future unfolds. The principles are easy to understand and communicate to your political leaders and business community. Societies and businesses that plan for less energy in the future and cut their consumption at or below the rate of depletion will be better off in the future than those that delay making the transition.

Alice Friedemann from Oakland, CA

ASPO-5 Day 1: Colin Campbell and the Second Half of the Age of Oil

Rob Bracken — Tue, 18 Jul 2006 07:50:00 +0000

Colin kicked off the conference this morning under the main tent in the balmy seaside park of San Rossore, painting the big picture of The Oil Age. We’re entering the second half of it, he says, an era in which all the conventional rules of economics and politics won’t apply.

Conventional economics says that one supply of energy always replaces another. The high price of oil are supposed to conjure up new supplies. But that’s old school thinking, he says, and a new wave of economists is on the rise that is beginning to recognize –- and factor into their models -- the natural limits of the earth's resources.

We’re facing a bumpy ride down the far side of Hubbert’s curve, Campbell says, an era characterized by a devastating ratcheting up of oil prices that triggers successive recessions or worse, easing prices for awhile, until the next cycle of depressing price spikes sets in.

High oil prices amounts to “simple profiteering from shortage,” he says, because costs haven’t changed materially.

Peak oil is driving a new geopolitical configuration, with energy rich Russia on the one side, energy depleted US and Europe on the other, an energy hungry China and a newly independent South America in the middle. In this new configuration, the power to control money is now shifting because the Middle East is pumping out petrodollars at a massive rate. But this is a “false liquidity” Campbell says, based on nothing but shortage.

Politicians don’t like to talk about peak oil and the recessions that will follow in its wake. “If they mention it, they will assume responsibility for not having stopped it. It is a strange world of half truths that we live in.”

Ironies abound these days: The better the world gets at extracting oil, the faster we accelerate depletion. Iraq shows us that we can’t produce oil on a battlefield, but that’s ironically good, he says, because it leaves more in the ground for future generations. “It’s the silver lining,” he quipped.

Ultimately, the new world spawned by energy descent will see the return of power to regions and nation states. “Economic and political power may return to places like Tuscany and Scotland, and indeed local currencies are now appearing, and the old idea of barter my return.”

Intelligent responses include “depletion protocols” that require importers importers to cut imports to match world depletion rate, now 2.5% a year. Prices would thus be forced to match costs and put an end to profiteering which is destabilizing the world financial system.

Step one is to inform people, Campbell told the conference. Perhaps a healthy shock—like a weeklong power outage—could do some good in the long run by spreading awareness in the clearest way possible.

Cutting waste is the next step, and this includes a combination of energy rationing and turning to new renewable resources such as solar, tides, geothermal, wind, waves and biomass. And a return to nuclear is likely in the offing, for all its failings. Personally, Campbell has no position on nuclear.

We must live differently in the second half of the oil age, the retired oil geologist said. We’ll need to redefine happiness. As an example he showed a picture, circa 1954, of a smiling man working toting peat in a wheelbarrow in the 1950s, and compared this simple mode of work with the typical airport worker that he sees so often today: the x-ray screeners, for example, simultaneously bored and stressed. “Are we happier today?” he asked the crowd.

By the 22nd century, Colin concluded, we can imagine a bishop in a “new benign age” thanking god for “having lifted the curse of oil from the world.”

Thoughts from Andrew McKillop- Speaker

Guest Blogger — Tue, 18 Jul 2006 09:25:00 +0000

THIS Aspo 5 Conference, held just as Israeli containment of Gaza's mega slum shanty town breaks out into hotter war against Lebanon - with a smallish spike up in oil prices to crown the show - is the right medecine at the right time.

My own input was initially going to solely treat the very simple fact that high oil prices push the world economy faster and further into supergrowth, feeding back as reinforced and stronger oil demand growth. But this deadly feedback is now close to busting the strained supply side of world oil; the US EIA and the OECD IEA, both of them highly opaque institutions, are doing what they can to bend and distort figures on world supply, and world oil demand, but the gap is now real - and growing. Speakers at this Conference have the numbers.

So what we need badly, but cannot have is an International Energy Transition Plan, based on compressing oil intensity in the high-energy, high-wasting countries, and a coordinated, multilateral, worldwide program for renewable energy development. This type of IETP is described in my paper to this Conference.

Andrew McKillop

Thoughts from Chris Sanders - Speaker

Guest Blogger — Tue, 18 Jul 2006 09:47:00 +0000

Perhaps the biggest challenge facing analysts of the Peak Oil issue is how to square a political circle circumscribed by capital dependent on an economic model biased toward centralisation and falling real wages with solutions that call for decentralisation, political devolution, local control and even a shift back to more labour intensive models of food production. This discussion has barely begun, and is in real danger of being drowned out by the noise of military solutions. Indeed, as war spreads steadily in the Middle East, the risk is very real that reasoned responses to the problem of bringing world energy demand into line with supply will be rendered simply irrelevant by events on the ground.

Chris Sanders

Dick Lawrence on Skrebowski

Guest Blogger — Tue, 18 Jul 2006 11:15:00 +0000

Chris Skrebowski updated his "Megaprojeccts" analysis, which couples known data about oil field developments with best-available estimates of depletion. We saw him in Nov. 2005 estimating peak sometime in 2008; now with new data (extending the analysis down to many more & smaller fields) he estimates peak sometime in 2010 time frame - or "1500 days" which makes it sound more urgent, which it is of course.

There are as one would expect some significant uncertainties. Depletion rates are sometimes rough estimates as some fields recently peaked have short depletion histories. Another wild card is internal consumption of the oil-producing countries. Frequently these countries - like Indonesia and Iraq - subsidize gasoline to their citizens with a resulting ridiculously cheap price of fuel. If the benefits of this oil largesse are somewhat democratically distributed (rather than going to a few elites) you get a natural tendency for rapid growth of a middle class, which wishes to emulate that middle-class lifestyle and accompanying energy consumption. Thus there is a new factor that tends to reduce available oil for export.

This factor is not included in "mainstream" calculations of global oil available for export, but it's an increasingly important part of the equation that must be considered. Any country with big oil-based revenues, including the Soviet Union, will have growing internal consumption which means less for export.

Dick Lawrence
ASPO-USA