The demise of the dollar
By Robert Fisk
In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading
In the most profound financial change in recent Middle East history, Gulf Arabs are planning - along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.
The Americans, who are aware the meetings have taken place - although they have not discovered the details - are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."
This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil - yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.
The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power - along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system - which has prompted the latest discussions involving the Gulf states.
Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.
China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq - blocked by the US until this year - and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.
Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.
Ever since the Bretton Woods agreements - the accords after the Second World War which bequeathed the architecture for the modern international financial system - America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.
The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."
Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.
The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.
"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."
Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
Showing posts with label oil discovery. Show all posts
Showing posts with label oil discovery. Show all posts
6 October 2009
5 March 2009
Non-Opec Oil Production Has Peaked
Yawn. Non-OPEC oil production peaked in late 2006 above 41 Mb/day. It’s unlikely we’ll ever see those production levels again. It’s also unlikely, if you follow oil supply data, that you'd be shocked by that revelation. That said, it’s worth laying out how this happened.
From January 1, 2003 to the price highs 2008, the price of oil went from 30.00 to 150.00. Now let’s take a look at non-OPEC oil production. Remember, much of non-OPEC supply is free market oil which leverages the latest technology and benefits from the profit motive. OPEC supply is about politics, state control, and kingdoms. Non-OPEC supply is about earnings per share, deepwater rigs, and high-tech engineering. So let’s take a trip through Econ 101, where supply always responds to higher prices.
Annual averages of non-OPEC Production in Mb/day
2002 Average 39,520
2003 Average 40,299
2004 Average 40,989
2005 Average 40,799
2006 Average 40,850
2007 Average 40,838
2008 Average 40,319
Although monthly production peaked in late 2006, you can already see indications of the first faltering in the annual averages in 2004. That’s a tell-tale sign of the transition from a legacy inventory of easier oil, which is extracted easily, to a newer inventory of more difficult oil.
If you are not sobered enough by the total lack of supply response, consider this ominous fact: Russia, which is the largest producer among non-OPEC countries, was able to ratchet up production this decade. Russia would add another 2 Mb/day to non-OPEC production in the annual time series above. Astonishing. Even though Russia too has now peaked, without Russia’s massive increase in supply, non-OPEC supply would have fallen into the the bull market in oil!
Tell that to your Econ 101 professor.
In case you do in fact run into your old Econ professor, I’d like to give readers a simple way to talk about non-OPEC supply. The next time you’re talking oil with friends and family, hit ‘em with this: For six years non-OPEC supply was flat, around 40+ Mb/day. This even though prices rose from 30.00 to 150.00. In fact, without Russia, non-OPEC supply would have fallen. What happened is that the legacy cheap oil was increasingly replaced by newer, harder, expensive oil. And now that the price has crashed back down to levels where we began the whole journey? The legacy cheap oil is depleted. The current oil was built upon much higher prices. So, just as you would expect, non-OPEC supply is on a crash course.
Further Reading:
From January 1, 2003 to the price highs 2008, the price of oil went from 30.00 to 150.00. Now let’s take a look at non-OPEC oil production. Remember, much of non-OPEC supply is free market oil which leverages the latest technology and benefits from the profit motive. OPEC supply is about politics, state control, and kingdoms. Non-OPEC supply is about earnings per share, deepwater rigs, and high-tech engineering. So let’s take a trip through Econ 101, where supply always responds to higher prices.
Annual averages of non-OPEC Production in Mb/day
2002 Average 39,520
2003 Average 40,299
2004 Average 40,989
2005 Average 40,799
2006 Average 40,850
2007 Average 40,838
2008 Average 40,319
Although monthly production peaked in late 2006, you can already see indications of the first faltering in the annual averages in 2004. That’s a tell-tale sign of the transition from a legacy inventory of easier oil, which is extracted easily, to a newer inventory of more difficult oil.
If you are not sobered enough by the total lack of supply response, consider this ominous fact: Russia, which is the largest producer among non-OPEC countries, was able to ratchet up production this decade. Russia would add another 2 Mb/day to non-OPEC production in the annual time series above. Astonishing. Even though Russia too has now peaked, without Russia’s massive increase in supply, non-OPEC supply would have fallen into the the bull market in oil!
Tell that to your Econ 101 professor.
In case you do in fact run into your old Econ professor, I’d like to give readers a simple way to talk about non-OPEC supply. The next time you’re talking oil with friends and family, hit ‘em with this: For six years non-OPEC supply was flat, around 40+ Mb/day. This even though prices rose from 30.00 to 150.00. In fact, without Russia, non-OPEC supply would have fallen. What happened is that the legacy cheap oil was increasingly replaced by newer, harder, expensive oil. And now that the price has crashed back down to levels where we began the whole journey? The legacy cheap oil is depleted. The current oil was built upon much higher prices. So, just as you would expect, non-OPEC supply is on a crash course.
Further Reading:
24 February 2009
China loan turns Russian oil east
MOSCOW - Officials involved in the Russian oil industry, and the country's state treasury, breathed a sigh of relief as the Chinese and Russian governments announced agreement on a revolutionary shift in future Russian crude oil flows.
According to the announcement from Beijing last Tuesday, where Deputy Prime Ministers Wang Qishan and Igor Sechin were meeting, China and Russia have finally agreed on terms for a China Development Bank loan of US$25 billion to Russian state oil exporter Rosneft and pipeline company Transneft to finance crude oil shipments over a 20-year period of not less than 241,000
barrels per day (15 million tonnes per annum).
The fine-print of the financing and oil-supply deals have not been released. However, the availability of $15 billion in 10-year finance for Rosneft and $10 billion to Transneft at a sub-market interest rate of around 6% will guarantee China's priority for East Siberian crude oil deliveries for the foreseeable future.
The loan and oil-supply agreements implement the inter-government memorandum of understanding signed more than three months ago, on October 29, 2008. They are the second major initiative between Beijing and Moscow, following the Chinese financing in 2004 for Rosneft's acquisition of Yuganskneftegaz in exchange for delivery of 48.4 million tonnes (194,000 barrels per day) between 2005 and 2010.
For China in the medium to long term, according to one Russian bank, the new deal will "provide an impetus to massive development of Eastern Siberia" from which China is best placed to benefit. "We believe that two options are possible: greater [Chinese] access to the East Siberian fields (currently two upstream projects via a joint venture with Rosneft) and the potential transformation of East Siberian Pacific Ocean pipeline network into a joint stock company, with China getting 49% or 50% control in it."
If the latter materializes, that would give Beijing a control stake in an oil port to be built at Kozmino Bay, near Nakhodka, on the Sea of Japan.
Reporting the loan as one of the largest in Russian credit history, a Moscow newspaper speculated that in financing the new Russian oil source, "China will reduce its dependence on deliveries of oil from the Persian Gulf, which currently comprise about 80% of China's oil imports."
The enormous size of the loan also adds to the strategic influence Beijing will have on the development of the Russian economy in the short term. According to Victor Mishnyakov, oil analyst at Uralsib Bank in Moscow, "We think that the development should offer support for the rouble and underlines our expectations that the devaluation of the rouble is over if crude prices remain at their current level throughout the year."
Troika Dialog Bank analyst Yevgeny Gavrilenkov reported, "For the balance of payments, this is really positive news," while Mikhail Galkin of MDM Bank commented that it was "a super-favorable loan for Russia".
At least $9 billion of Rosneft’s debt, due to be refinanced or settled this year, can now be covered.
Transneft will use part of the money to complete the first stage of its East Siberian Pacific Ocean (ESPO) pipeline for overland oil shipments to China, via Skorovodino to Daqing, due to start next year; and to extend the second stage of the ESPO pipeline to Kozmino Bay with additional capacity to ship up to 1 million barrels per day (50 million tonnes per annum). Transneft was saying last month that lack of finance would force postponement of commissioning of this new Asian oil outlet until 2013.
China's undertaking means that new Russian oilfields, such as Rosneft's Vankor field in central Siberia, will move oil eastwards to Asian markets, rather than westwards to Europe. This geostrategic shift of Russian energy flow has been a Chinese objective for years. Last week's signing defeats a similar objective pursued by the Japanese government, which has also been lobbying the Kremlin with promises of financing for the ESPO pipeline to the sea.
John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business.
According to the announcement from Beijing last Tuesday, where Deputy Prime Ministers Wang Qishan and Igor Sechin were meeting, China and Russia have finally agreed on terms for a China Development Bank loan of US$25 billion to Russian state oil exporter Rosneft and pipeline company Transneft to finance crude oil shipments over a 20-year period of not less than 241,000
barrels per day (15 million tonnes per annum).
The fine-print of the financing and oil-supply deals have not been released. However, the availability of $15 billion in 10-year finance for Rosneft and $10 billion to Transneft at a sub-market interest rate of around 6% will guarantee China's priority for East Siberian crude oil deliveries for the foreseeable future.
The loan and oil-supply agreements implement the inter-government memorandum of understanding signed more than three months ago, on October 29, 2008. They are the second major initiative between Beijing and Moscow, following the Chinese financing in 2004 for Rosneft's acquisition of Yuganskneftegaz in exchange for delivery of 48.4 million tonnes (194,000 barrels per day) between 2005 and 2010.
For China in the medium to long term, according to one Russian bank, the new deal will "provide an impetus to massive development of Eastern Siberia" from which China is best placed to benefit. "We believe that two options are possible: greater [Chinese] access to the East Siberian fields (currently two upstream projects via a joint venture with Rosneft) and the potential transformation of East Siberian Pacific Ocean pipeline network into a joint stock company, with China getting 49% or 50% control in it."
If the latter materializes, that would give Beijing a control stake in an oil port to be built at Kozmino Bay, near Nakhodka, on the Sea of Japan.
Reporting the loan as one of the largest in Russian credit history, a Moscow newspaper speculated that in financing the new Russian oil source, "China will reduce its dependence on deliveries of oil from the Persian Gulf, which currently comprise about 80% of China's oil imports."
The enormous size of the loan also adds to the strategic influence Beijing will have on the development of the Russian economy in the short term. According to Victor Mishnyakov, oil analyst at Uralsib Bank in Moscow, "We think that the development should offer support for the rouble and underlines our expectations that the devaluation of the rouble is over if crude prices remain at their current level throughout the year."
Troika Dialog Bank analyst Yevgeny Gavrilenkov reported, "For the balance of payments, this is really positive news," while Mikhail Galkin of MDM Bank commented that it was "a super-favorable loan for Russia".
At least $9 billion of Rosneft’s debt, due to be refinanced or settled this year, can now be covered.
Transneft will use part of the money to complete the first stage of its East Siberian Pacific Ocean (ESPO) pipeline for overland oil shipments to China, via Skorovodino to Daqing, due to start next year; and to extend the second stage of the ESPO pipeline to Kozmino Bay with additional capacity to ship up to 1 million barrels per day (50 million tonnes per annum). Transneft was saying last month that lack of finance would force postponement of commissioning of this new Asian oil outlet until 2013.
China's undertaking means that new Russian oilfields, such as Rosneft's Vankor field in central Siberia, will move oil eastwards to Asian markets, rather than westwards to Europe. This geostrategic shift of Russian energy flow has been a Chinese objective for years. Last week's signing defeats a similar objective pursued by the Japanese government, which has also been lobbying the Kremlin with promises of financing for the ESPO pipeline to the sea.
John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business.
29 January 2009
Oil's going straight back up to new highs
There are 70,000 oilfields in production worldwide; however, the bulk of our production comes from 20 super-giant oilfields, which account for over 25% of daily world production. Of even more concern, the vast majority of these fields were discovered 50–70 years ago.
In addition to the dearth of new discoveries, depletion rates are rising as old fields mature and decline. Remember, newer discoveries over the last two decades have been fewer and smaller, and many of them have been offshore. Smaller oilfields and offshore oilfields deplete at much faster rates than some of the "old giants."
In its latest World Energy Outlook, the International Energy Agency (IEA) estimated that the average observed decline rate worldwide is currently 6.7%, and is projected to increase to 8.6% by 2030. Decline rates for the super-giants are 3.4%, 6.5% for giant oilfields, and 10.4% for large fields. Moreover, natural decline rates (a natural decline rate strips out ongoing investment in new production) are estimated at 9% for post-peak fields. The implication of these large and accelerating decline rates is alarming: "The implications are far-reaching: investment in 1 mbd of additional capacity—equal to the entire capacity of Algeria today—is needed each year by the end of the projection just to offset the projected acceleration in the natural decline rate"
More at Jimbo
23 December 2008
Bottom in for Oil ~ Captain Hook
Most financial commentators, even the well-known and respected ones, just don't get it. They don't understand what's happening in macro-conditions because they fail to accept the understanding that sentiment, as measured by speculator betting practices in the various options markets populating the landscape, is the single most important driver of prices in our mature fiat currency based financial markets. What this means is no matter how much money and bailouts our bureaucracy sponsors, until the collect mind changes, as measured by rising open interest put / call ratios on the major US indexes, meaning the speculators are becoming more pessimistic, in general, prices will keep falling. Of course this can change, and corrections (higher at present) will occur, however if you are waiting for unbridled monetary and fiscal largesse to result in hyperinflation with declining numbers of bearish equity market speculators to squeeze, you are likely in for a disappointment.
Does this mean that deflationists like Mike Shedlock are right, and that we are in a formal state of deflation at the moment? No, as a matter of fact, it does not. As outlined in our opening statement it simply means that en mass equity speculators don't see a percentage in getting short the various markets at current levels because they see prices moving higher, no matter how much they fall. It in no way means money supply is contracting, which is the formal definition of deflation, and the only one that would matter if equity bulls were to turn bearish. (i.e. falling prices do not constitute deflation.) Easily the best example of this at the moment is found in crude oil (and commodities), considering the stock market appears to have turned higher in earnest now. Are we in a state of deflation because crude oil prices are falling?
Here, it's important to note stocks have turned higher due to selling exhaustion and seasonal influences, not because speculators have turned predominantly bearish, as measured in still low open interest put / call ratios (see attached above) on the major US indexes. What this means is if speculative betting practices in these markets do not fundamentally change as the bounce in stocks matures into next year, any strength witnessed between now and then will be exactly that, a bounce, destined to fail once negative cyclical / seasonal influences are in a position to exert themselves once again. You will remember from our previous studies on this subject matter, history suggests this likely bounce could last into April of next year at which time the secular bear market will reassert itself.
In getting back to our crude example now, where prices have not turned higher due to selling exhaustion just yet, making a discussion on this subject matter here more pertinent, again, as mentioned above, it's important to realize why oil prices remain subdued so that correspondingly, we will know what to look for on the way up as well. This is very important moving forward because even though commodity prices have crashed with the larger equity complex in 2008, this does not mean the prices of these commodities can't run all the way back up to the highs (and beyond) under the right conditions. Is such an outcome possible if the stock market is to turn lower on a secular basis again next year, implying the credit cycle is still contracting long-term?
You bet it's possible under the right conditions, which is a lesson in history. First and foremost, and the reason I spent so much time explaining it above, one must realize we are not in a state of deflation, which I admit is challenging with all the confusing talk out there. Naturally then, if this true, we must necessarily be in a state of inflation to some degree, with currency hyperinflation the most excited condition therein. We are of course not there right now, however it's possible we are could be at some point if the Fed decides to devalue the dollar ($). And here's the kicker in terms of why commodity prices could run right back to the highs, with crude oil the exemplar due to it's importance to us, pictured below. If a $ devaluation were to occur concurrent to speculators becoming convinced such an outcome is not possible, which is not a stretch considering the drubbing commodity prices have just undergone, then the fuel for a short squeeze would be in place (put / call ratios on the energies would rise), and the 'wall of worry' would do the rest. (See Figure 1)
more
Does this mean that deflationists like Mike Shedlock are right, and that we are in a formal state of deflation at the moment? No, as a matter of fact, it does not. As outlined in our opening statement it simply means that en mass equity speculators don't see a percentage in getting short the various markets at current levels because they see prices moving higher, no matter how much they fall. It in no way means money supply is contracting, which is the formal definition of deflation, and the only one that would matter if equity bulls were to turn bearish. (i.e. falling prices do not constitute deflation.) Easily the best example of this at the moment is found in crude oil (and commodities), considering the stock market appears to have turned higher in earnest now. Are we in a state of deflation because crude oil prices are falling?
Here, it's important to note stocks have turned higher due to selling exhaustion and seasonal influences, not because speculators have turned predominantly bearish, as measured in still low open interest put / call ratios (see attached above) on the major US indexes. What this means is if speculative betting practices in these markets do not fundamentally change as the bounce in stocks matures into next year, any strength witnessed between now and then will be exactly that, a bounce, destined to fail once negative cyclical / seasonal influences are in a position to exert themselves once again. You will remember from our previous studies on this subject matter, history suggests this likely bounce could last into April of next year at which time the secular bear market will reassert itself.
In getting back to our crude example now, where prices have not turned higher due to selling exhaustion just yet, making a discussion on this subject matter here more pertinent, again, as mentioned above, it's important to realize why oil prices remain subdued so that correspondingly, we will know what to look for on the way up as well. This is very important moving forward because even though commodity prices have crashed with the larger equity complex in 2008, this does not mean the prices of these commodities can't run all the way back up to the highs (and beyond) under the right conditions. Is such an outcome possible if the stock market is to turn lower on a secular basis again next year, implying the credit cycle is still contracting long-term?
You bet it's possible under the right conditions, which is a lesson in history. First and foremost, and the reason I spent so much time explaining it above, one must realize we are not in a state of deflation, which I admit is challenging with all the confusing talk out there. Naturally then, if this true, we must necessarily be in a state of inflation to some degree, with currency hyperinflation the most excited condition therein. We are of course not there right now, however it's possible we are could be at some point if the Fed decides to devalue the dollar ($). And here's the kicker in terms of why commodity prices could run right back to the highs, with crude oil the exemplar due to it's importance to us, pictured below. If a $ devaluation were to occur concurrent to speculators becoming convinced such an outcome is not possible, which is not a stretch considering the drubbing commodity prices have just undergone, then the fuel for a short squeeze would be in place (put / call ratios on the energies would rise), and the 'wall of worry' would do the rest. (See Figure 1)
more
20 December 2008
The Charm of Zapata George
He knows that peak oil is the real deal and that OPEC are covering their tracks with production cuts.
We are headed for a economic crash, yes, but commodities, due to world growth, fiscal policy lead investment demand in infrastructure and most significantly embodied energy content and implied future costs of production, are going nowhere but up when deleveraging is complete and a massive move down in the US dollar kicks off.
Zapata George keeps it simple. He's the man on oil.
"
A recent release by the International Energy Agency (IEA) – they’re year end report – was quite interesting. What was significant was their reversal of form when it comes to Peak Oil. After repeatedly trying to convince us that all is well in the land of cheap oil, they’ve now jumped from a horse riding full tilt in one direction to the back of another horse running in the complete opposite direction! (Do you think someone over there has been listening to me?...ha!) In our full radio report this weekend, we will discuss this report more in full, but I wanted to share their opening remarks with you now:
“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable - environmentally, economically, and socially. But that can - and must - be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution.”
Isn’t this what I’ve been saying all along? Guess I was right…maybe?
It’s important, I think, to understand a little about the output of the world’s oilfields. Only 1% of the top 5 oilfields in the world are of the “super-giant size” and the majority of all of these fields has peaked and turned to the downside.
The important thing to know about an oilfield or a country that exports oil is when the peak oil production occurs. The discovery and number of barrels available for eventual production, which they calculate up front – a calculated guess, really – has no bearing on the number of barrels actually produced.
There are also a number of reasons why some fields last longer than others. Some fields are managed well and nursed along to a pretty consistent production output. However, some countries hit their resources hard, because they want the revenue. Take a country like Nigeria…you get a new ruler who three days ago was just an ambitious soldier, and the first thing he wants to do is stuff his bank account in Switzerland. He cranks up production to drain off as much as possible before the next coup hits and a new ruler kicks him out. Then the new guy does the same thing. No thought for sustainability…just greed.
However, the fields owned by the big companies, Exxon, BP, Shell, Conoco, Chevron, etc. are in general better managed and we can learn much from them. The decline of those kinds of large fields is approximately 4.7 percent per year. With a daily production rate of approximately 85 or 86 million, 4.7 percent of that comes out to about 4 million barrels a day per annum. So once you’ve peaked, the decline will be about that rate. Well, there’s four quarters so it is my contention that we are making a decline rate of 1 million barrels per day per quarter. I also believe that the recent announcement that OPEC was cutting production about 4.2 million barrels a day confirms my decline suspicions. What’s’ happening? They’re saying “Oh, the price is too low. We’re going to cut production.” What they’re really doing is that they’re covering their tracks. They know they’re going to see a decline in output that they can do nothing about so they’re going to claim that it is voluntary, rather than being imposed on them by Mother Nature. This is a complete cover story that has nothing to do with reality.
Okay, so the IEA says that the energy system of the world is at a crossroads. They have never, ever used that kind of language before. They’re right. We are truly at the crossroads and in my opinion, if we had not had the economic slowdown and decline in consumption, we would already be feeling the effects of Peak Oil. We will surely feel them in the coming two quarters. The question is, what can we do about it? What are our alternatives? The lead time on effectively developing biofuels is measured in decades, not years, so we’re already behind the curve on that resource. What are our other options? Please turn in to our Radio Show on Free Radio Zapata George this weekend as we discuss this report and what it means for us over the next few years. I thank you for your time, and hope you’ll join us."
link
We are headed for a economic crash, yes, but commodities, due to world growth, fiscal policy lead investment demand in infrastructure and most significantly embodied energy content and implied future costs of production, are going nowhere but up when deleveraging is complete and a massive move down in the US dollar kicks off.
Zapata George keeps it simple. He's the man on oil.
"
A recent release by the International Energy Agency (IEA) – they’re year end report – was quite interesting. What was significant was their reversal of form when it comes to Peak Oil. After repeatedly trying to convince us that all is well in the land of cheap oil, they’ve now jumped from a horse riding full tilt in one direction to the back of another horse running in the complete opposite direction! (Do you think someone over there has been listening to me?...ha!) In our full radio report this weekend, we will discuss this report more in full, but I wanted to share their opening remarks with you now:
“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable - environmentally, economically, and socially. But that can - and must - be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution.”
Isn’t this what I’ve been saying all along? Guess I was right…maybe?
It’s important, I think, to understand a little about the output of the world’s oilfields. Only 1% of the top 5 oilfields in the world are of the “super-giant size” and the majority of all of these fields has peaked and turned to the downside.
The important thing to know about an oilfield or a country that exports oil is when the peak oil production occurs. The discovery and number of barrels available for eventual production, which they calculate up front – a calculated guess, really – has no bearing on the number of barrels actually produced.
There are also a number of reasons why some fields last longer than others. Some fields are managed well and nursed along to a pretty consistent production output. However, some countries hit their resources hard, because they want the revenue. Take a country like Nigeria…you get a new ruler who three days ago was just an ambitious soldier, and the first thing he wants to do is stuff his bank account in Switzerland. He cranks up production to drain off as much as possible before the next coup hits and a new ruler kicks him out. Then the new guy does the same thing. No thought for sustainability…just greed.
However, the fields owned by the big companies, Exxon, BP, Shell, Conoco, Chevron, etc. are in general better managed and we can learn much from them. The decline of those kinds of large fields is approximately 4.7 percent per year. With a daily production rate of approximately 85 or 86 million, 4.7 percent of that comes out to about 4 million barrels a day per annum. So once you’ve peaked, the decline will be about that rate. Well, there’s four quarters so it is my contention that we are making a decline rate of 1 million barrels per day per quarter. I also believe that the recent announcement that OPEC was cutting production about 4.2 million barrels a day confirms my decline suspicions. What’s’ happening? They’re saying “Oh, the price is too low. We’re going to cut production.” What they’re really doing is that they’re covering their tracks. They know they’re going to see a decline in output that they can do nothing about so they’re going to claim that it is voluntary, rather than being imposed on them by Mother Nature. This is a complete cover story that has nothing to do with reality.
Okay, so the IEA says that the energy system of the world is at a crossroads. They have never, ever used that kind of language before. They’re right. We are truly at the crossroads and in my opinion, if we had not had the economic slowdown and decline in consumption, we would already be feeling the effects of Peak Oil. We will surely feel them in the coming two quarters. The question is, what can we do about it? What are our alternatives? The lead time on effectively developing biofuels is measured in decades, not years, so we’re already behind the curve on that resource. What are our other options? Please turn in to our Radio Show on Free Radio Zapata George this weekend as we discuss this report and what it means for us over the next few years. I thank you for your time, and hope you’ll join us."
link
13 November 2008
Buy Coal, Oil and Gold Equities imo
NOW IS THE TIME TO BUY LOW, ESPECIALLY COMMODITY SHARES (November 9, 2008): It is ironic that the investing public talks about buying low and selling high--but everyone instead likes to buy at multi-decade peaks and is afraid to buy at multi-decade lows. No wonder the vast majority of investors lose money in the stock market even with the strong long-term upward bias for global equities. Meanwhile, corporate insiders were heavy sellers a year ago, and have been equally aggressive buyers in recent weeks. It's hardly surprising that the rich get richer and the poor get poorer.
The following statement is cynical but true: the financial markets exist to transfer money from the middle classes to the upper classes. Wealthy people train themselves to buy when the media and the public are most gloomy, and to sell when the prevailing sentiment is either euphoric (as in early 2000) or irrationally complacent (as in late 2007).
Commodity shares in particular have rarely been more undervalued than they have been in recent weeks. Gold mining shares traded at the same levels in late October 2008 as when gold had been $328 per ounce in 2002. Energy shares traded at the same prices a couple of weeks ago as when crude oil was $28 per barrel in 2003. Every single major coal producer saw heavy insider buying by top executives during the past several weeks. Agricultural-commodity shares slumped to five- and six-year lows while the price/earnings ratios of many of these companies reached all-time nadirs.
Numerous other major asset classes slumped to multi-year and even multi-decade bottoms. High-yield corporate bonds, or "junk bonds", plummeted to their lowest valuations since 1933--an amazing 75-year low. Convertible bonds, preferred shares, and similar groups also became absurdly oversold. Japan's Nikkei index fell to its lowest point since October 1982--not only marking a 26-year nadir, but showing a far more ridiculous undervaluation since corporate profits in Japan, especially for small companies, have soared since 1982. With global liquidity at a multi-decade low and hedge funds forced to dump assets left and right, profitability and rationality has been completely ignored.
While global equity markets have been forming a bullish pattern of higher lows, the average investor feels emotionally that they are making lower lows. This is a classic sign of a major bottom and a strong buy signal.
If there is any doubt about whether stock markets around the world will rebound sharply, all you have to do is look at a chart of TLT, which is a fund of U.S. Treasuries averaging 25 years to maturity. As a general rule, the vast majority of Treasury traders are the world's most knowledgeable global investors. TLT has been forming a bearish pattern of lower highs for several weeks, meaning that the smartest asset allocators are positioning themselves for an environment of global economic expansion and sharply higher inflation, along with a weaker U.S. dollar. This is the exact opposite of the media's insistence on "deflationary depression" that is as dead wrong as the media's bullish Goldilocks outlook on the stock market a year ago, or their equally foolish "buy commodities" mantra a half year ago.
link
The following statement is cynical but true: the financial markets exist to transfer money from the middle classes to the upper classes. Wealthy people train themselves to buy when the media and the public are most gloomy, and to sell when the prevailing sentiment is either euphoric (as in early 2000) or irrationally complacent (as in late 2007).
Commodity shares in particular have rarely been more undervalued than they have been in recent weeks. Gold mining shares traded at the same levels in late October 2008 as when gold had been $328 per ounce in 2002. Energy shares traded at the same prices a couple of weeks ago as when crude oil was $28 per barrel in 2003. Every single major coal producer saw heavy insider buying by top executives during the past several weeks. Agricultural-commodity shares slumped to five- and six-year lows while the price/earnings ratios of many of these companies reached all-time nadirs.
Numerous other major asset classes slumped to multi-year and even multi-decade bottoms. High-yield corporate bonds, or "junk bonds", plummeted to their lowest valuations since 1933--an amazing 75-year low. Convertible bonds, preferred shares, and similar groups also became absurdly oversold. Japan's Nikkei index fell to its lowest point since October 1982--not only marking a 26-year nadir, but showing a far more ridiculous undervaluation since corporate profits in Japan, especially for small companies, have soared since 1982. With global liquidity at a multi-decade low and hedge funds forced to dump assets left and right, profitability and rationality has been completely ignored.
While global equity markets have been forming a bullish pattern of higher lows, the average investor feels emotionally that they are making lower lows. This is a classic sign of a major bottom and a strong buy signal.
If there is any doubt about whether stock markets around the world will rebound sharply, all you have to do is look at a chart of TLT, which is a fund of U.S. Treasuries averaging 25 years to maturity. As a general rule, the vast majority of Treasury traders are the world's most knowledgeable global investors. TLT has been forming a bearish pattern of lower highs for several weeks, meaning that the smartest asset allocators are positioning themselves for an environment of global economic expansion and sharply higher inflation, along with a weaker U.S. dollar. This is the exact opposite of the media's insistence on "deflationary depression" that is as dead wrong as the media's bullish Goldilocks outlook on the stock market a year ago, or their equally foolish "buy commodities" mantra a half year ago.
link
9 July 2008
There is no Oil to reduce prices
Because output at existing wells declines faster than new discoveries.
Output plummets at huge Mexican oilfield
By Adam Thomson in Mexico City
Published: July 8 2008 00:35 | Last updated: July 8 2008 00:35
Production at Mexico’s Cantarell oil complex, one of the world’s largest, has plummeted by a third in the past year, an indication the country could lose self-sufficiency in oil in the medium term.
Average daily production dropped to slightly more than 1m barrels a day in May compared with more than 1.6m b/d in the same month last year, according to the energy ministry.
Mexico’s total oil production fell about 10 per cent in the past 12 months to 2.79m b/d in May. That was only marginally above April’s output, which was the lowest in a decade.
“This is not a good sign,” said George Baker, head of energia.com, a Houston-based consultancy. “But it does at least strengthen the government’s position that there is an approaching crisis in oil production.”
The centre-right administration of President Felipe Calderón has for months been trying to use the deteriorating oil production figures to persuade Congress that something must be done quickly.
In April it presented legislators with a proposal for more flexibility in the service contracts that Pemex, the state oil company, signs with third parties. Currently, the contracts are narrow in scope and inflexible because Mexico’s constitution prohibits private investment in oil.
There is little optimism that the proposal will survive a slow-moving, entangled legislative debate amid strong resistance from both the main opposition parties.
Many opposition leaders argue the problems stem mainly from the government’s rising dependence on oil income, which has starved Pemex of cash it could use for exploration.
But the government maintains the vast bulk of the country’s reserves lie in deep waters and require technology and knowhow to develop that Pemex does not possess.
Output plummets at huge Mexican oilfield
By Adam Thomson in Mexico City
Published: July 8 2008 00:35 | Last updated: July 8 2008 00:35
Production at Mexico’s Cantarell oil complex, one of the world’s largest, has plummeted by a third in the past year, an indication the country could lose self-sufficiency in oil in the medium term.
Average daily production dropped to slightly more than 1m barrels a day in May compared with more than 1.6m b/d in the same month last year, according to the energy ministry.
Mexico’s total oil production fell about 10 per cent in the past 12 months to 2.79m b/d in May. That was only marginally above April’s output, which was the lowest in a decade.
“This is not a good sign,” said George Baker, head of energia.com, a Houston-based consultancy. “But it does at least strengthen the government’s position that there is an approaching crisis in oil production.”
The centre-right administration of President Felipe Calderón has for months been trying to use the deteriorating oil production figures to persuade Congress that something must be done quickly.
In April it presented legislators with a proposal for more flexibility in the service contracts that Pemex, the state oil company, signs with third parties. Currently, the contracts are narrow in scope and inflexible because Mexico’s constitution prohibits private investment in oil.
There is little optimism that the proposal will survive a slow-moving, entangled legislative debate amid strong resistance from both the main opposition parties.
Many opposition leaders argue the problems stem mainly from the government’s rising dependence on oil income, which has starved Pemex of cash it could use for exploration.
But the government maintains the vast bulk of the country’s reserves lie in deep waters and require technology and knowhow to develop that Pemex does not possess.
18 June 2008
Kunstler on Iowa
A catastrophe for Iowa farmers will not be just a catastrophe for Midwestern Americans. In the Iowa floods, we'll see more evidence of how the problems of weird weather (climate change) combine and ramify the problems associated with peak oil. In this particular case they lead to an inflection point sometime around the 2008 harvest season, which will also be our time of political harvest.
These are not your daddy's or granddaddy's floods. These are 500-year floods, events not seen before non-Indian people starting living out on that stretch of the North American prairie. The vast majority of home-owners in Eastern Iowa did not have flood insurance because the likelihood of being affected above the 500-year-line was so miniscule -- their insurance agents actually advised them against getting it. The personal ruin out there will be comprehensive and profound, a wet version of the 1930s Dust Bowl, with families facing total loss and perhaps migrating elsewhere in the nation because they have no home to go back to.
Iowa in 2008 will be an even slower-motion disaster than Hurricane Katrina in 2005. Beyond the troubles of 25,000 people who have lost all their material possessions is a world whose grain reserves stand at record lows. The crop losses in Iowa will aggravate what is already a pretty dire situation. So far, the US Public has experienced the world grain situation mainly in higher supermarket prices. Cheap corn is behind the magic of the American processed food industry -- all those pizza pockets and juicy-juice boxes that frantic Americans resort to because they have no time between two jobs and family-chauffeur duties to actually cook (note: reheating is not cooking).
Behind that magic is an agribusiness model of farming cranked up on the steroids of cheap oil and cheap natural-gas-based fertilizer. Both of these "inputs" have recently entered the realm of the non-cheap. Oil-and-gas-based farming had already reached a crisis stage before the flood of Iowa. Diesel fuel is a dollar-a-gallon higher than gasoline. Natural gas prices have doubled over the past year, sending fertilizer prices way up. American farmers are poorly positioned to reform their practices. All that cheap fossil fuel masks a tremendous decay of skill in husbandry. The farming of the decades ahead will be a lot more complicated than just buying x-amount of "inputs" (on credit) to be dumped on a sterile soil growth medium and spread around with giant diesel-powered machines.
Like a lot of other activities in American life these days, agribusiness is unreformable along its current lines. It will take a convulsion to change it, and in that convulsion it will be dragged kicking-and-screaming into a new reality. As that occurs, the US public will have to contend with more than just higher taco chip prices. We're heading into the Vale of Malthus -- Thomas Robert Malthus, the British economist-philosopher who introduced the notion that eventually world population would overtake world food production capacity. Malthus has been scorned and ridiculed in recent decades, as fossil fuel-cranked farming allowed the global population to go vertical. Techno-triumphalist observers who should have known better attributed this to the "green revolution" of bio-engineering. Malthus is back now, along with his outriders: famine, pestilence, and war.
We're headed, it seems, toward a fall "crunch time," and that crunching sound will not be of cheez doodles and taco chips consumed on the sofas of America. I think we're heading into a season of hoarding. As the presidential campaign moves into its final round, Americans may be hard-up for both food and gasoline. On the oil scene, the next event on the horizon is not just higher prices but shortages. Chances are, they will occur first in the Southeast states because oil exports from Mexico and Venezuela feeding the Gulf of Mexico refineries are down more than 30 percent over 2007.
Perhaps more ominous is the discontent on the trucking scene. Truckers are going broke in droves, unable to carry on their business while getting paid $2000 for loads that cost them $3000 to deliver. In Europe last week, enraged truckers paralyzed the food distribution networks of Spain and Portugal. The passivity of US truckers so far has been a striking feature of the general zombification of American life. They might continue to just crawl off one-by-one and die. But it's also possible that, at some point, they'll mount a Night-of-the-Living-Dead offensive and take their vengeance out on "the system" that has brought them to ruin. America has only about a three-day supply of food in any of its supermarkets.
The yet-more-ominous thing here is that shortages of food and oil are two fiascos that are pretty clearly predictable for the second half of the year. That's bad enough without figuring in the "unknowns" that could kick up American hardship a few more notches.The hurricane season just got underway -- obscured for the moment by the bigger weather story in Iowa. The fate of the banks is a train wreck still waiting to happen. As it occurs -- also heading into the high political and hurricane seasons -- we could find ourselves not only a nation wet, hungry, and out-of-gas, but also completely broke. I'm sorry that Tim Russert will not be here to talk us through it all.
These are not your daddy's or granddaddy's floods. These are 500-year floods, events not seen before non-Indian people starting living out on that stretch of the North American prairie. The vast majority of home-owners in Eastern Iowa did not have flood insurance because the likelihood of being affected above the 500-year-line was so miniscule -- their insurance agents actually advised them against getting it. The personal ruin out there will be comprehensive and profound, a wet version of the 1930s Dust Bowl, with families facing total loss and perhaps migrating elsewhere in the nation because they have no home to go back to.
Iowa in 2008 will be an even slower-motion disaster than Hurricane Katrina in 2005. Beyond the troubles of 25,000 people who have lost all their material possessions is a world whose grain reserves stand at record lows. The crop losses in Iowa will aggravate what is already a pretty dire situation. So far, the US Public has experienced the world grain situation mainly in higher supermarket prices. Cheap corn is behind the magic of the American processed food industry -- all those pizza pockets and juicy-juice boxes that frantic Americans resort to because they have no time between two jobs and family-chauffeur duties to actually cook (note: reheating is not cooking).
Behind that magic is an agribusiness model of farming cranked up on the steroids of cheap oil and cheap natural-gas-based fertilizer. Both of these "inputs" have recently entered the realm of the non-cheap. Oil-and-gas-based farming had already reached a crisis stage before the flood of Iowa. Diesel fuel is a dollar-a-gallon higher than gasoline. Natural gas prices have doubled over the past year, sending fertilizer prices way up. American farmers are poorly positioned to reform their practices. All that cheap fossil fuel masks a tremendous decay of skill in husbandry. The farming of the decades ahead will be a lot more complicated than just buying x-amount of "inputs" (on credit) to be dumped on a sterile soil growth medium and spread around with giant diesel-powered machines.
Like a lot of other activities in American life these days, agribusiness is unreformable along its current lines. It will take a convulsion to change it, and in that convulsion it will be dragged kicking-and-screaming into a new reality. As that occurs, the US public will have to contend with more than just higher taco chip prices. We're heading into the Vale of Malthus -- Thomas Robert Malthus, the British economist-philosopher who introduced the notion that eventually world population would overtake world food production capacity. Malthus has been scorned and ridiculed in recent decades, as fossil fuel-cranked farming allowed the global population to go vertical. Techno-triumphalist observers who should have known better attributed this to the "green revolution" of bio-engineering. Malthus is back now, along with his outriders: famine, pestilence, and war.
We're headed, it seems, toward a fall "crunch time," and that crunching sound will not be of cheez doodles and taco chips consumed on the sofas of America. I think we're heading into a season of hoarding. As the presidential campaign moves into its final round, Americans may be hard-up for both food and gasoline. On the oil scene, the next event on the horizon is not just higher prices but shortages. Chances are, they will occur first in the Southeast states because oil exports from Mexico and Venezuela feeding the Gulf of Mexico refineries are down more than 30 percent over 2007.
Perhaps more ominous is the discontent on the trucking scene. Truckers are going broke in droves, unable to carry on their business while getting paid $2000 for loads that cost them $3000 to deliver. In Europe last week, enraged truckers paralyzed the food distribution networks of Spain and Portugal. The passivity of US truckers so far has been a striking feature of the general zombification of American life. They might continue to just crawl off one-by-one and die. But it's also possible that, at some point, they'll mount a Night-of-the-Living-Dead offensive and take their vengeance out on "the system" that has brought them to ruin. America has only about a three-day supply of food in any of its supermarkets.
The yet-more-ominous thing here is that shortages of food and oil are two fiascos that are pretty clearly predictable for the second half of the year. That's bad enough without figuring in the "unknowns" that could kick up American hardship a few more notches.The hurricane season just got underway -- obscured for the moment by the bigger weather story in Iowa. The fate of the banks is a train wreck still waiting to happen. As it occurs -- also heading into the high political and hurricane seasons -- we could find ourselves not only a nation wet, hungry, and out-of-gas, but also completely broke. I'm sorry that Tim Russert will not be here to talk us through it all.
30 May 2008
The Geopolitics of $130 Oil
By George Friedman
Oil prices have risen dramatically over the past year. When they passed $100 a barrel, they hit new heights, expressed in dollars adjusted for inflation. As they passed $120 a barrel, they clearly began to have global impact. Recently, we have seen startling rises in the price of food, particularly grains. Apart from higher prices, there have been disruptions in the availability of food as governments limit food exports and as hoarding increases in anticipation of even higher prices.
Oil and food differ from other commodities in that they are indispensable for the functioning of society. Food obviously is the more immediately essential. Food shortages can trigger social and political instability with startling swiftness. It does not take long to starve to death. Oil has a less-immediate -- but perhaps broader -- impact. Everything, including growing and marketing food, depends on energy; and oil is the world's primary source of energy, particularly in transportation. Oil and grains -- where the shortages hit hardest -- are not merely strategic commodities. They are geopolitical commodities. All nations require them, and a shift in the price or availability of either triggers shifts in relationships within and among nations.
It is not altogether clear to us why oil and grains have behaved as they have. The question for us is what impact this generalized rise in commodity prices -- particularly energy and food -- will have on the international system. We understand that it is possible that the price of both will plunge. There is certainly a speculative element in both. Nevertheless, based on the realities of supply conditions, we do not expect the price of either to fall to levels that existed in 2003. We will proceed in this analysis on the assumption that these prices will fluctuate, but that they will remain dramatically higher than prices were from the 1980s to the mid-2000s.
If that assumption is true and we continue to see elevated commodity prices, perhaps rising substantially higher than they are now, then it seems to us that we have entered a new geopolitical era. Since the end of World War II, we have lived in three geopolitical regimes, broadly understood:
The Cold War between the United States and the Soviet Union, in which the focus was on the military balance between those two countries, particularly on the nuclear balance. During this period, all countries, in some way or another, defined their behavior in terms of the U.S.-Soviet competition.
The period from the fall of the Berlin Wall until 9/11, when the primary focus of the world was on economic development. This was the period in which former communist countries redefined themselves, East and Southeast Asian economies surged and collapsed, and China grew dramatically. It was a period in which politico-military power was secondary and economic power primary.
The period from 9/11 until today that has been defined in terms of the increasing complexity of the U.S.-jihadist war -- a reality that supplanted the second phase and redefined the international system dramatically.
With the U.S.-jihadist war in either a stalemate or a long-term evolution, its impact on the international system is diminishing. First, it has lost its dynamism. The conflict is no longer drawing other countries into it. Second, it is becoming an endemic reality rather than an urgent crisis. The international system has accommodated itself to the conflict, and its claims on that system are lessening.
The surge in commodity prices -- particularly oil -- has superseded the U.S.-jihadist war, much as the war superseded the period in which economic issues dominated the global system. This does not mean that the U.S.-jihadist war will not continue to rage, any more than 9/11 abolished economic issues. Rather, it means that a new dynamic has inserted itself into the international system and is in the process of transforming it.
It is a cliche that money and power are linked. It is nevertheless true. Economic power creates political and military power, just as political and military power can create economic power. The rise in the price of oil is triggering shifts in economic power that are in turn creating changes in the international order. This was not apparent until now because of three reasons. First, oil prices had not risen to the level where they had geopolitical impact. The system was ignoring higher prices. Second, they had not been joined in crisis condition by grain prices. Third, the permanence of higher prices had not been clear. When $70-a-barrel oil seemed impermanent, and likely to fall below $50, oil was viewed very differently than it was at $130, where a decline to $100 would be dramatic and a fall to $70 beyond the calculation of most. As oil passed $120 a barrel, the international system, in our view, started to reshape itself in what will be a long-term process.
Obviously, the winners in this game are those who export oil, and the losers are those who import it. The victory is not only economic but political as well. The ability to control where exports go and where they don't go transforms into political power. The ability to export in a seller's market not only increases wealth but also increases the ability to coerce, if that is desired.
The game is somewhat more complex than this. The real winners are countries that can export and generate cash in excess of what they need domestically. So countries such as Venezuela, Indonesia and Nigeria might benefit from higher prices, but they absorb all the wealth that is transferred to them. Countries such as Saudi Arabia do not need to use so much of their wealth for domestic needs. They control huge and increasing pools of cash that they can use for everything from achieving domestic political stability to influencing regional governments and the global economic system. Indeed, the entire Arabian Peninsula is in this position.
The big losers are countries that not only have to import oil but also are heavily industrialized relative to their economy. Countries in which service makes up a larger sector than manufacturing obviously use less oil for critical economic functions than do countries that are heavily manufacturing-oriented. Certainly, consumers in countries such as the United States are hurt by rising prices. And these countries' economies might slow. But higher oil prices simply do not have the same impact that they do on countries that both are primarily manufacturing-oriented and have a consumer base driving cars.
East Asia has been most affected by the combination of sustained high oil prices and disruptions in the food supply. Japan, which imports all of its oil and remains heavily industrialized (along with South Korea), is obviously affected. But the most immediately affected is China, where shortages of diesel fuel have been reported. China's miracle -- rapid industrialization -- has now met its Achilles' heel: high energy prices.
China is facing higher energy prices at a time when the U.S. economy is weak and the ability to raise prices is limited. As oil prices increase costs, the Chinese continue to export and, with some exceptions, are holding prices. The reason is simple. The Chinese are aware that slowing exports could cause some businesses to fail. That would lead to unemployment, which in turn will lead to instability. The Chinese have their hands full between natural disasters, Tibet, terrorism and the Olympics. They do not need a wave of business failures.
Therefore, they are continuing to cap the domestic price of gasoline. This has caused tension between the government and Chinese oil companies, which have refused to distribute at capped prices. Behind this power struggle is this reality: The Chinese government can afford to subsidize oil prices to maintain social stability, but given the need to export, they are effectively squeezing profits out of exports. Between subsidies and no-profit exports, China's reserves could shrink with remarkable speed, leaving their financial system -- already overloaded with nonperforming loans -- vulnerable. If they take the cap off, they face potential domestic unrest.
The Chinese dilemma is present throughout Asia. But just as Asia is the big loser because of long-term high oil prices coupled with food disruptions, Russia is the big winner. Russia is an exporter of natural gas and oil. It also could be a massive exporter of grains if prices were attractive enough and if it had the infrastructure (crop failures in Russia are a thing of the past). Russia has been very careful, under Vladimir Putin, not to assume that energy prices will remain high and has taken advantage of high prices to accumulate substantial foreign currency reserves. That puts them in a doubly-strong position. Economically, they are becoming major players in global acquisitions. Politically, countries that have become dependent on Russian energy exports -- and this includes a good part of Europe -- are vulnerable, precisely because the Russians are in a surplus-cash position. They could tweak energy availability, hurting the Europeans badly, if they chose. They will not need to. The Europeans, aware of what could happen, will tread lightly in order to ensure that it doesn't happen.
As we have already said, the biggest winners are the countries of the Arabian Peninsula. Although somewhat strained, these countries never really suffered during the period of low oil prices. They have now more than rebalanced their financial system and are making the most of it. This is a time when they absolutely do not want anything disrupting the flow of oil from their region. Closing the Strait of Hormuz, for example, would be disastrous to them. We therefore see the Saudis, in particular, taking steps to stabilize the region. This includes supporting Israeli-Syrian peace talks, using influence with Sunnis in Iraq to confront al Qaeda, making certain that Shiites in Saudi Arabia profit from the boom. (Other Gulf countries are doing the same with their Shiites. This is designed to remove one of Iran's levers in the region: a rising of Shiites in the Arabian Peninsula.) In addition, the Saudis are using their economic power to re-establish the relationship they had with the United States before 9/11. With the financial institutions in the United States in disarray, the Arabian Peninsula can be very helpful.
China is in an increasingly insular and defensive position. The tension is palpable, particularly in Central Asia, which Russia has traditionally dominated and where China is becoming increasingly active in making energy investments. The Russians are becoming more assertive, using their economic position to improve their geopolitical position in the region. The Saudis are using their money to try to stabilize the region. With oil above $120 a barrel, the last thing they need is a war disrupting their ability to sell. They do not want to see the Iranians mining the Strait of Hormuz or the Americans trying to blockade Iran.
The Iranians themselves are facing problems. Despite being the world's fifth-largest oil exporter, Iran also is the world's second-largest gasoline importer, taking in roughly 40 percent of its annual demand. Because of the type of oil they have, and because they have neglected their oil industry over the last 30 years, their ability to participate in the bonanza is severely limited. It is obvious that there is now internal political tension between the president and the religious leadership over the status of the economy. Put differently, Iranians are asking how they got into this situation.
Suddenly, the regional dynamics have changed. The Saudi royal family is secure against any threats. They can buy peace on the Peninsula. The high price of oil makes even Iraqis think that it might be time to pump more oil rather than fight. Certainly the Iranians, Saudis and Kuwaitis are thinking of ways of getting into the action, and all have the means and geography to benefit from an Iraqi oil renaissance. The war in Iraq did not begin over oil -- a point we have made many times -- but it might well be brought under control because of oil.
For the United States, the situation is largely a push. The United States is an oil importer, but its relative vulnerability to high energy prices is nothing like it was in 1973, during the Arab oil embargo. De-industrialization has clearly had its upside. At the same time, the United States is a food exporter, along with Canada, Australia, Argentina and others. Higher grain prices help the United States. The shifts will not change the status of the United States, but they might create a new dynamic in the Gulf region that could change the framework of the Iraqi war.
This is far from an exhaustive examination of the global shifts caused by rising oil and grain prices. Our point is this: High oil prices can increase as well as decrease stability. In Iraq -- but not in Afghanistan -- the war has already been regionally overshadowed by high oil prices. Oil-exporting countries are in a moneymaking mode, and even the Iranians are trying to figure out how to get into the action; it's hard to see how they can without the participation of the Western oil majors -- and this requires burying the hatchet with the United States. Groups such as al Qaeda and Hezbollah are decidedly secondary to these considerations.
We are very early in this process, and these are just our opening thoughts. But in our view, a wire has been tripped, and the world is refocusing on high commodity prices. As always in geopolitics, issues from the last generation linger, but they are no longer the focus. Last week there was talk of Strategic Arms Reduction Treaty (START) talks between the United States and Russia -- a fossil from the Cold War. These things never go away. But history moves on. It seems to us that history is moving.
Change can come at us in very interesting ways.
Your fed up with $4/gallon gas analyst,
John F. Mauldin
johnmauldin@investorsinsight.com
Oil prices have risen dramatically over the past year. When they passed $100 a barrel, they hit new heights, expressed in dollars adjusted for inflation. As they passed $120 a barrel, they clearly began to have global impact. Recently, we have seen startling rises in the price of food, particularly grains. Apart from higher prices, there have been disruptions in the availability of food as governments limit food exports and as hoarding increases in anticipation of even higher prices.
Oil and food differ from other commodities in that they are indispensable for the functioning of society. Food obviously is the more immediately essential. Food shortages can trigger social and political instability with startling swiftness. It does not take long to starve to death. Oil has a less-immediate -- but perhaps broader -- impact. Everything, including growing and marketing food, depends on energy; and oil is the world's primary source of energy, particularly in transportation. Oil and grains -- where the shortages hit hardest -- are not merely strategic commodities. They are geopolitical commodities. All nations require them, and a shift in the price or availability of either triggers shifts in relationships within and among nations.
It is not altogether clear to us why oil and grains have behaved as they have. The question for us is what impact this generalized rise in commodity prices -- particularly energy and food -- will have on the international system. We understand that it is possible that the price of both will plunge. There is certainly a speculative element in both. Nevertheless, based on the realities of supply conditions, we do not expect the price of either to fall to levels that existed in 2003. We will proceed in this analysis on the assumption that these prices will fluctuate, but that they will remain dramatically higher than prices were from the 1980s to the mid-2000s.
If that assumption is true and we continue to see elevated commodity prices, perhaps rising substantially higher than they are now, then it seems to us that we have entered a new geopolitical era. Since the end of World War II, we have lived in three geopolitical regimes, broadly understood:
The Cold War between the United States and the Soviet Union, in which the focus was on the military balance between those two countries, particularly on the nuclear balance. During this period, all countries, in some way or another, defined their behavior in terms of the U.S.-Soviet competition.
The period from the fall of the Berlin Wall until 9/11, when the primary focus of the world was on economic development. This was the period in which former communist countries redefined themselves, East and Southeast Asian economies surged and collapsed, and China grew dramatically. It was a period in which politico-military power was secondary and economic power primary.
The period from 9/11 until today that has been defined in terms of the increasing complexity of the U.S.-jihadist war -- a reality that supplanted the second phase and redefined the international system dramatically.
With the U.S.-jihadist war in either a stalemate or a long-term evolution, its impact on the international system is diminishing. First, it has lost its dynamism. The conflict is no longer drawing other countries into it. Second, it is becoming an endemic reality rather than an urgent crisis. The international system has accommodated itself to the conflict, and its claims on that system are lessening.
The surge in commodity prices -- particularly oil -- has superseded the U.S.-jihadist war, much as the war superseded the period in which economic issues dominated the global system. This does not mean that the U.S.-jihadist war will not continue to rage, any more than 9/11 abolished economic issues. Rather, it means that a new dynamic has inserted itself into the international system and is in the process of transforming it.
It is a cliche that money and power are linked. It is nevertheless true. Economic power creates political and military power, just as political and military power can create economic power. The rise in the price of oil is triggering shifts in economic power that are in turn creating changes in the international order. This was not apparent until now because of three reasons. First, oil prices had not risen to the level where they had geopolitical impact. The system was ignoring higher prices. Second, they had not been joined in crisis condition by grain prices. Third, the permanence of higher prices had not been clear. When $70-a-barrel oil seemed impermanent, and likely to fall below $50, oil was viewed very differently than it was at $130, where a decline to $100 would be dramatic and a fall to $70 beyond the calculation of most. As oil passed $120 a barrel, the international system, in our view, started to reshape itself in what will be a long-term process.
Obviously, the winners in this game are those who export oil, and the losers are those who import it. The victory is not only economic but political as well. The ability to control where exports go and where they don't go transforms into political power. The ability to export in a seller's market not only increases wealth but also increases the ability to coerce, if that is desired.
The game is somewhat more complex than this. The real winners are countries that can export and generate cash in excess of what they need domestically. So countries such as Venezuela, Indonesia and Nigeria might benefit from higher prices, but they absorb all the wealth that is transferred to them. Countries such as Saudi Arabia do not need to use so much of their wealth for domestic needs. They control huge and increasing pools of cash that they can use for everything from achieving domestic political stability to influencing regional governments and the global economic system. Indeed, the entire Arabian Peninsula is in this position.
The big losers are countries that not only have to import oil but also are heavily industrialized relative to their economy. Countries in which service makes up a larger sector than manufacturing obviously use less oil for critical economic functions than do countries that are heavily manufacturing-oriented. Certainly, consumers in countries such as the United States are hurt by rising prices. And these countries' economies might slow. But higher oil prices simply do not have the same impact that they do on countries that both are primarily manufacturing-oriented and have a consumer base driving cars.
East Asia has been most affected by the combination of sustained high oil prices and disruptions in the food supply. Japan, which imports all of its oil and remains heavily industrialized (along with South Korea), is obviously affected. But the most immediately affected is China, where shortages of diesel fuel have been reported. China's miracle -- rapid industrialization -- has now met its Achilles' heel: high energy prices.
China is facing higher energy prices at a time when the U.S. economy is weak and the ability to raise prices is limited. As oil prices increase costs, the Chinese continue to export and, with some exceptions, are holding prices. The reason is simple. The Chinese are aware that slowing exports could cause some businesses to fail. That would lead to unemployment, which in turn will lead to instability. The Chinese have their hands full between natural disasters, Tibet, terrorism and the Olympics. They do not need a wave of business failures.
Therefore, they are continuing to cap the domestic price of gasoline. This has caused tension between the government and Chinese oil companies, which have refused to distribute at capped prices. Behind this power struggle is this reality: The Chinese government can afford to subsidize oil prices to maintain social stability, but given the need to export, they are effectively squeezing profits out of exports. Between subsidies and no-profit exports, China's reserves could shrink with remarkable speed, leaving their financial system -- already overloaded with nonperforming loans -- vulnerable. If they take the cap off, they face potential domestic unrest.
The Chinese dilemma is present throughout Asia. But just as Asia is the big loser because of long-term high oil prices coupled with food disruptions, Russia is the big winner. Russia is an exporter of natural gas and oil. It also could be a massive exporter of grains if prices were attractive enough and if it had the infrastructure (crop failures in Russia are a thing of the past). Russia has been very careful, under Vladimir Putin, not to assume that energy prices will remain high and has taken advantage of high prices to accumulate substantial foreign currency reserves. That puts them in a doubly-strong position. Economically, they are becoming major players in global acquisitions. Politically, countries that have become dependent on Russian energy exports -- and this includes a good part of Europe -- are vulnerable, precisely because the Russians are in a surplus-cash position. They could tweak energy availability, hurting the Europeans badly, if they chose. They will not need to. The Europeans, aware of what could happen, will tread lightly in order to ensure that it doesn't happen.
As we have already said, the biggest winners are the countries of the Arabian Peninsula. Although somewhat strained, these countries never really suffered during the period of low oil prices. They have now more than rebalanced their financial system and are making the most of it. This is a time when they absolutely do not want anything disrupting the flow of oil from their region. Closing the Strait of Hormuz, for example, would be disastrous to them. We therefore see the Saudis, in particular, taking steps to stabilize the region. This includes supporting Israeli-Syrian peace talks, using influence with Sunnis in Iraq to confront al Qaeda, making certain that Shiites in Saudi Arabia profit from the boom. (Other Gulf countries are doing the same with their Shiites. This is designed to remove one of Iran's levers in the region: a rising of Shiites in the Arabian Peninsula.) In addition, the Saudis are using their economic power to re-establish the relationship they had with the United States before 9/11. With the financial institutions in the United States in disarray, the Arabian Peninsula can be very helpful.
China is in an increasingly insular and defensive position. The tension is palpable, particularly in Central Asia, which Russia has traditionally dominated and where China is becoming increasingly active in making energy investments. The Russians are becoming more assertive, using their economic position to improve their geopolitical position in the region. The Saudis are using their money to try to stabilize the region. With oil above $120 a barrel, the last thing they need is a war disrupting their ability to sell. They do not want to see the Iranians mining the Strait of Hormuz or the Americans trying to blockade Iran.
The Iranians themselves are facing problems. Despite being the world's fifth-largest oil exporter, Iran also is the world's second-largest gasoline importer, taking in roughly 40 percent of its annual demand. Because of the type of oil they have, and because they have neglected their oil industry over the last 30 years, their ability to participate in the bonanza is severely limited. It is obvious that there is now internal political tension between the president and the religious leadership over the status of the economy. Put differently, Iranians are asking how they got into this situation.
Suddenly, the regional dynamics have changed. The Saudi royal family is secure against any threats. They can buy peace on the Peninsula. The high price of oil makes even Iraqis think that it might be time to pump more oil rather than fight. Certainly the Iranians, Saudis and Kuwaitis are thinking of ways of getting into the action, and all have the means and geography to benefit from an Iraqi oil renaissance. The war in Iraq did not begin over oil -- a point we have made many times -- but it might well be brought under control because of oil.
For the United States, the situation is largely a push. The United States is an oil importer, but its relative vulnerability to high energy prices is nothing like it was in 1973, during the Arab oil embargo. De-industrialization has clearly had its upside. At the same time, the United States is a food exporter, along with Canada, Australia, Argentina and others. Higher grain prices help the United States. The shifts will not change the status of the United States, but they might create a new dynamic in the Gulf region that could change the framework of the Iraqi war.
This is far from an exhaustive examination of the global shifts caused by rising oil and grain prices. Our point is this: High oil prices can increase as well as decrease stability. In Iraq -- but not in Afghanistan -- the war has already been regionally overshadowed by high oil prices. Oil-exporting countries are in a moneymaking mode, and even the Iranians are trying to figure out how to get into the action; it's hard to see how they can without the participation of the Western oil majors -- and this requires burying the hatchet with the United States. Groups such as al Qaeda and Hezbollah are decidedly secondary to these considerations.
We are very early in this process, and these are just our opening thoughts. But in our view, a wire has been tripped, and the world is refocusing on high commodity prices. As always in geopolitics, issues from the last generation linger, but they are no longer the focus. Last week there was talk of Strategic Arms Reduction Treaty (START) talks between the United States and Russia -- a fossil from the Cold War. These things never go away. But history moves on. It seems to us that history is moving.
Change can come at us in very interesting ways.
Your fed up with $4/gallon gas analyst,
John F. Mauldin
johnmauldin@investorsinsight.com
11 June 2007
Tsunami Survivor at Munich Re Warns of Intense Hurricane Season
Warm Seas
``The current warm phase of sea-surface temperatures, which started in 1995, is still the most important driver behind higher hurricane intensity and frequency,'' Hoeppe said in an interview last week at Munich Re's headquarters. ``We will remain in this phase for at least another 10 years.''
His research guides Munich Re's management board and underwriters in deciding how much risk to take and at what price. ``We need to know what burdens we would have to bear if the worst came to the worst,'' said Heike Trilovszky, the head of Munich Re's underwriting department.
Munich Re almost doubled rates for property and casualty reinsurance in hurricane-affected areas after Katrina. Prices for coverage of oil rigs in the Gulf of Mexico jumped as much as 400 percent. The company said it further raised rates for storm-prone regions this January.
The 127-year-old Munich-based company and larger rival Swiss Reinsurance Co., based in Zurich, help insurers such as American International Group Inc. and Allstate Corp. shoulder risks for clients.
Climate Change
``The trend clearly points toward more frequent and more expensive natural disasters,'' said Ernst Konrad, the Munich- based head of equities at Bayern-Invest, which manages about $35 billion and owns shares of Munich Re and Swiss Re. ``That's good for reinsurers as it will drive demand and prices.''
Munich Re's net income rose for the past three years, reaching a record 3.4 billion euros ($4.6 billion) in 2006. Shares of Munich Re rose 32 percent in the past year, topping the 24 percent gain of the Bloomberg Europe 500 Insurance Index.
Hoeppe expects human-driven global warming to trigger more severe natural disasters.
This winter he predicted a major storm in Europe after noting that warmer-than-usual weather left less snow cover in the region. In mid-January, winter storm Kyrill swept through Britain, France and Germany, resulting in more than 40 deaths. Climate models indicate winter storms in Europe will become more intense and less frequent, Hoeppe said.
He reckons the 2007 hurricane season will be worse than usual because of the likely absence of El Nino, a warming of the Pacific Ocean that occurs every few years, and Saharan sandstorms that diminished the impact of last year's storms.
$100 Billion Storm
Hoeppe and most of his team work from the reinsurer's five- story complex in the Schwabing district of Munich, where a glass- encased mock-tornado machine whips up a cloud of mist to greet visitors. They analyze loss reports connected with major catastrophes since 1975, and have archives stretching back to the eruption of Mount Vesuvius in 79 AD.
Other forecasters concur on the likelihood of more big storms. Colorado State University's Philip Klotzbach and William Gray last month predicted five major hurricanes, or those with winds of at least 111 miles (179 kilometers) per hour, will form from the 17 hurricanes expected this season.
Hoeppe foresees a storm resulting in insured damages of $100 billion within the next 20 years. Climate change may eventually bring hotter summers to Europe, hurricanes to Lisbon and bigger storms in the Mediterranean, he said.
Cyclone Gonu, the worst to hit the Arabian Peninsula in more than 60 years, over the past two days pummelled coastal areas of Oman and Iran, including oil shipping lanes around the Strait of Hormuz. Earlier in the week Gonu was a Category 5 storm, the strongest on the Saffir-Simpson scale, as it churned across the northern Arabian Sea.
`Relatively Lucky'
Down the hall from Hoeppe's office, past maps showing ocean currents and storm systems, a computer model pinpoints the oil rigs in the Gulf of Mexico that are reinsured by Munich Re.
``With Hurricane Katrina we were relatively lucky that it didn't hit New Orleans with full force and that it didn't cross the areas most densely used by oil rigs,'' Hoeppe said, pointing to the storm's path colored in red and green.
One mouse click and Lorenz Dolezalek, the department's geoinformatics expert, shows a hurricane path moving through the Gulf toward the Houston-Galveston area. That represents one of Munich Re's worst-case scenarios because such a hurricane ``would hit an awful lot of drilling rigs,'' Hoeppe said.
Galveston, Houston
The region around Galveston is vulnerable because it ``has open access to the Gulf and therefore the sea could be pushed all the way into Houston,'' Hoeppe said. ``This would be a similar scenario to New Orleans, however not as severe since New Orleans is located in part below sea level.''
Losses from hurricanes could be surpassed by earthquakes in Los Angeles, San Francisco or Tokyo, events that are much harder to predict. ``Geologic risks like earthquakes, volcanoes and tsunamis don't show real trends,'' he said. ``Atmospheric events like hurricanes and winter storms do.''
Hoeppe, a native of the Bavarian town of Hassfurt, had little experience outside academia when he joined Munich Re. A year later he replaced Gerhard Berz, who tracked and forecast natural disasters there for 30 years.
``Berz was a famous personality in the international research community,'' said Robert Muir-Wood, chief research officer at Newark, California-based risk-modeler Risk Management Solutions Inc. ``Hoeppe is well on the way to establishing a similar reputation.''
One in 100
An adjunct professor at Ludwig-Maximilians-University, Hoeppe also lectures at the Geneva-based World Health Organization and World Meteorological Organization, and the Paris-based Organization for Economic Cooperation and Development.
The tsunami caught Hoeppe off-guard on Dec. 26, 2004.
``We felt an earthquake about 2 1/2-hours earlier, but I didn't expect that to result in a tsunami because that only happens in about one out of 100 quakes,'' Hoeppe said.
He fled with other guests to a higher point on the atoll, which was submerged under hip-deep water for several minutes. Reefs surrounding the island where he was staying diminished the waves' surge, he said.
more
``The current warm phase of sea-surface temperatures, which started in 1995, is still the most important driver behind higher hurricane intensity and frequency,'' Hoeppe said in an interview last week at Munich Re's headquarters. ``We will remain in this phase for at least another 10 years.''
His research guides Munich Re's management board and underwriters in deciding how much risk to take and at what price. ``We need to know what burdens we would have to bear if the worst came to the worst,'' said Heike Trilovszky, the head of Munich Re's underwriting department.
Munich Re almost doubled rates for property and casualty reinsurance in hurricane-affected areas after Katrina. Prices for coverage of oil rigs in the Gulf of Mexico jumped as much as 400 percent. The company said it further raised rates for storm-prone regions this January.
The 127-year-old Munich-based company and larger rival Swiss Reinsurance Co., based in Zurich, help insurers such as American International Group Inc. and Allstate Corp. shoulder risks for clients.
Climate Change
``The trend clearly points toward more frequent and more expensive natural disasters,'' said Ernst Konrad, the Munich- based head of equities at Bayern-Invest, which manages about $35 billion and owns shares of Munich Re and Swiss Re. ``That's good for reinsurers as it will drive demand and prices.''
Munich Re's net income rose for the past three years, reaching a record 3.4 billion euros ($4.6 billion) in 2006. Shares of Munich Re rose 32 percent in the past year, topping the 24 percent gain of the Bloomberg Europe 500 Insurance Index.
Hoeppe expects human-driven global warming to trigger more severe natural disasters.
This winter he predicted a major storm in Europe after noting that warmer-than-usual weather left less snow cover in the region. In mid-January, winter storm Kyrill swept through Britain, France and Germany, resulting in more than 40 deaths. Climate models indicate winter storms in Europe will become more intense and less frequent, Hoeppe said.
He reckons the 2007 hurricane season will be worse than usual because of the likely absence of El Nino, a warming of the Pacific Ocean that occurs every few years, and Saharan sandstorms that diminished the impact of last year's storms.
$100 Billion Storm
Hoeppe and most of his team work from the reinsurer's five- story complex in the Schwabing district of Munich, where a glass- encased mock-tornado machine whips up a cloud of mist to greet visitors. They analyze loss reports connected with major catastrophes since 1975, and have archives stretching back to the eruption of Mount Vesuvius in 79 AD.
Other forecasters concur on the likelihood of more big storms. Colorado State University's Philip Klotzbach and William Gray last month predicted five major hurricanes, or those with winds of at least 111 miles (179 kilometers) per hour, will form from the 17 hurricanes expected this season.
Hoeppe foresees a storm resulting in insured damages of $100 billion within the next 20 years. Climate change may eventually bring hotter summers to Europe, hurricanes to Lisbon and bigger storms in the Mediterranean, he said.
Cyclone Gonu, the worst to hit the Arabian Peninsula in more than 60 years, over the past two days pummelled coastal areas of Oman and Iran, including oil shipping lanes around the Strait of Hormuz. Earlier in the week Gonu was a Category 5 storm, the strongest on the Saffir-Simpson scale, as it churned across the northern Arabian Sea.
`Relatively Lucky'
Down the hall from Hoeppe's office, past maps showing ocean currents and storm systems, a computer model pinpoints the oil rigs in the Gulf of Mexico that are reinsured by Munich Re.
``With Hurricane Katrina we were relatively lucky that it didn't hit New Orleans with full force and that it didn't cross the areas most densely used by oil rigs,'' Hoeppe said, pointing to the storm's path colored in red and green.
One mouse click and Lorenz Dolezalek, the department's geoinformatics expert, shows a hurricane path moving through the Gulf toward the Houston-Galveston area. That represents one of Munich Re's worst-case scenarios because such a hurricane ``would hit an awful lot of drilling rigs,'' Hoeppe said.
Galveston, Houston
The region around Galveston is vulnerable because it ``has open access to the Gulf and therefore the sea could be pushed all the way into Houston,'' Hoeppe said. ``This would be a similar scenario to New Orleans, however not as severe since New Orleans is located in part below sea level.''
Losses from hurricanes could be surpassed by earthquakes in Los Angeles, San Francisco or Tokyo, events that are much harder to predict. ``Geologic risks like earthquakes, volcanoes and tsunamis don't show real trends,'' he said. ``Atmospheric events like hurricanes and winter storms do.''
Hoeppe, a native of the Bavarian town of Hassfurt, had little experience outside academia when he joined Munich Re. A year later he replaced Gerhard Berz, who tracked and forecast natural disasters there for 30 years.
``Berz was a famous personality in the international research community,'' said Robert Muir-Wood, chief research officer at Newark, California-based risk-modeler Risk Management Solutions Inc. ``Hoeppe is well on the way to establishing a similar reputation.''
One in 100
An adjunct professor at Ludwig-Maximilians-University, Hoeppe also lectures at the Geneva-based World Health Organization and World Meteorological Organization, and the Paris-based Organization for Economic Cooperation and Development.
The tsunami caught Hoeppe off-guard on Dec. 26, 2004.
``We felt an earthquake about 2 1/2-hours earlier, but I didn't expect that to result in a tsunami because that only happens in about one out of 100 quakes,'' Hoeppe said.
He fled with other guests to a higher point on the atoll, which was submerged under hip-deep water for several minutes. Reefs surrounding the island where he was staying diminished the waves' surge, he said.
more
7 June 2007
Solazyme selling algal oil feedstock
In answer to a public challenge six months ago, biotech company Solazyme is to announce a deal today to start supplying oil derived from algae feedstock to biodiesel maker Imperium Renewables.
Solazyme has entered into a biodiesel feedstock development agreement under which Solazyme is to generate algal oil for Imperium’s biodiesel production process.
Under the agreement, Solazyme is to grow proprietary strains of microalgae, extract the oil, and deliver it to Imperium, which then intends to convert it into fuel.
Industry observers haven't expected any company to be in a position to provide meaningful commercial quantities of algal oils in the near future, given difficulties in cultivating the right strains of algae and the challenge of extracting oil from it cost-effectively.
But Solazyme co-founder Jonathan Wolfson, president and chief operating office, told Inside Greentech that his traditionally "media-shy" company is farther along than many might think.
"Our technology is advanced enough that we're producing the kinds of quantities that were interesting to do a deal with. We'll be delivering agreed-upon quantities [to Imperium] this year."
Wolfson wouldn't clarify exactly what those quantities would be, however.
He did say that beyond the Imperium relationship, Solazyme expected to hold public demonstration projects this year, showing fuel made from its algal oil powering an internal combustion engine.
Speaking at an event last December with companies pursuing algae oil for biofuels, Imperium CEO Martin Tobias said, in front of hundreds of investors, that he'd "buy 1,000,000 gallons of algae oil today if anyone here on the panel can deliver it." (see Inside Greentech's Biofuel from algae on horizon, say experts.)
At that time, nobody on the panel, which included leading algae companies LiveFuels and GreenFuel Technologies, made commitments.
Why not? Getting oil out of algae cost effectively has turned out to be difficult.
Government researchers experimenting with algae oil extraction have been using centrifuges, which have been expensive and scale poorly. Front-running well funded commercial developers—which, in addition to LiveFuels and GreenFuel, also include Solix Biofuels and Aurora BioFuels—are investigating other techniques.
When asked about Solazyme's extraction process, Wolfson was coy.
"I think we're probably going to keep that under wraps for a while. This is a pretty competitive space. There's certainly money going in, as you know. You can file for intellectual property six ways to Sunday, but there are some things that you should keep private as long as possible."
"I can tell you we've spent a couple of years developing technology around extraction."
Wolfson made it clear that Solazyme does not feel it is at commercialization economics with the technology yet, but said the company is a lot closer than many people believe algae is currently.
"I won't tell you that the economics of extraction are exactly where we want them to be in the long run, but we've made giant strides to get a point where we now feel comfortable that we'll be able to get to the extraction price per gallon that we think is appropriate."
Imperium Renewables has submitted an S-1 filing to the Securities and Exchange Commission, announcing its intention to become publicly traded, and, as a result, is now in a quiet period.
Founded in 2003 and headquartered in South San Francisco, Solazyme is focused on the engineering and optimization of algae for production of biofuels and health and wellness materials. In March, the company raised a $8m+ Series B, plus $2m of debt. The Roda Group led the financing, with participation from Harris & Harris and other undisclosed investors (see Inside Greentech's Another week, another three Khosla biofuel investments.)
Imperium Renewables currently operates a 5 million gallon per year biodiesel production facility, but is constructing a 100 million gallon per year facility in Grays Harbor, Washington, scheduled to open next month.
Solazyme has entered into a biodiesel feedstock development agreement under which Solazyme is to generate algal oil for Imperium’s biodiesel production process.
Under the agreement, Solazyme is to grow proprietary strains of microalgae, extract the oil, and deliver it to Imperium, which then intends to convert it into fuel.
Industry observers haven't expected any company to be in a position to provide meaningful commercial quantities of algal oils in the near future, given difficulties in cultivating the right strains of algae and the challenge of extracting oil from it cost-effectively.
But Solazyme co-founder Jonathan Wolfson, president and chief operating office, told Inside Greentech that his traditionally "media-shy" company is farther along than many might think.
"Our technology is advanced enough that we're producing the kinds of quantities that were interesting to do a deal with. We'll be delivering agreed-upon quantities [to Imperium] this year."
Wolfson wouldn't clarify exactly what those quantities would be, however.
He did say that beyond the Imperium relationship, Solazyme expected to hold public demonstration projects this year, showing fuel made from its algal oil powering an internal combustion engine.
Speaking at an event last December with companies pursuing algae oil for biofuels, Imperium CEO Martin Tobias said, in front of hundreds of investors, that he'd "buy 1,000,000 gallons of algae oil today if anyone here on the panel can deliver it." (see Inside Greentech's Biofuel from algae on horizon, say experts.)
At that time, nobody on the panel, which included leading algae companies LiveFuels and GreenFuel Technologies, made commitments.
Why not? Getting oil out of algae cost effectively has turned out to be difficult.
Government researchers experimenting with algae oil extraction have been using centrifuges, which have been expensive and scale poorly. Front-running well funded commercial developers—which, in addition to LiveFuels and GreenFuel, also include Solix Biofuels and Aurora BioFuels—are investigating other techniques.
When asked about Solazyme's extraction process, Wolfson was coy.
"I think we're probably going to keep that under wraps for a while. This is a pretty competitive space. There's certainly money going in, as you know. You can file for intellectual property six ways to Sunday, but there are some things that you should keep private as long as possible."
"I can tell you we've spent a couple of years developing technology around extraction."
Wolfson made it clear that Solazyme does not feel it is at commercialization economics with the technology yet, but said the company is a lot closer than many people believe algae is currently.
"I won't tell you that the economics of extraction are exactly where we want them to be in the long run, but we've made giant strides to get a point where we now feel comfortable that we'll be able to get to the extraction price per gallon that we think is appropriate."
Imperium Renewables has submitted an S-1 filing to the Securities and Exchange Commission, announcing its intention to become publicly traded, and, as a result, is now in a quiet period.
Founded in 2003 and headquartered in South San Francisco, Solazyme is focused on the engineering and optimization of algae for production of biofuels and health and wellness materials. In March, the company raised a $8m+ Series B, plus $2m of debt. The Roda Group led the financing, with participation from Harris & Harris and other undisclosed investors (see Inside Greentech's Another week, another three Khosla biofuel investments.)
Imperium Renewables currently operates a 5 million gallon per year biodiesel production facility, but is constructing a 100 million gallon per year facility in Grays Harbor, Washington, scheduled to open next month.
1 June 2007
KNOC confirms huge oil
KNOC confirms huge oil field off Russia's Kamchatka penisula
A South Korean consortium led by state-run Korea National Oil Corp. has
confirmed its field in Russia's Kamchatka has an estimated 10 billion barrels
of crude reserves, company officials said Thursday.
The consortium has a 40% stake in the field off the Kamchatka peninsula,
while the remaining 60% interest is controlled by Russia's state-run oil
company Rosneft.
"The estimated oil reserves are much bigger than previously expected," a
KNOC official said. The field was previously estimated to hold up to 3.7
billion barrels of crude.
The size of the deposit was confirmed by an internationally accredited
petroleum exploration company, the official said.
KNOC controls a 50% stake in the South Korean consortium that also
includes state-run Korea Gas Corp. with a 10% interest, GS-Caltex Corp with a
10% stake, SK Corp. with a 10% stake and Daewoo International Corp. with a 10%
interest. Kumho Petrochemical and Hyundai Corp. has a 5% stake, respectively.
KNOC signed a memorandum of understanding on joint development of the
block in Kamchatka in September 2004 when President Roh Moo-Hyun made a state
visit to Russia. In February 2005, KNOC signed an interim finance agreement
for the project, and the consortium acquired the stake ten months later.
KNOC is spearheading upstream oil projects abroad for South Korea. The
country imports all of its crude oil requirements overseas, with more than 80%
of the supplies comes from the Middle East. The state oil company has
designated Kamchatka as the upstream oil development hub in Northeast Asia.
The South Korean government has provided benefits to local companies
involved upstream oil projects in countries other than the Middle East, in an
effort to diversify oil supply sources.
A South Korean consortium led by state-run Korea National Oil Corp. has
confirmed its field in Russia's Kamchatka has an estimated 10 billion barrels
of crude reserves, company officials said Thursday.
The consortium has a 40% stake in the field off the Kamchatka peninsula,
while the remaining 60% interest is controlled by Russia's state-run oil
company Rosneft.
"The estimated oil reserves are much bigger than previously expected," a
KNOC official said. The field was previously estimated to hold up to 3.7
billion barrels of crude.
The size of the deposit was confirmed by an internationally accredited
petroleum exploration company, the official said.
KNOC controls a 50% stake in the South Korean consortium that also
includes state-run Korea Gas Corp. with a 10% interest, GS-Caltex Corp with a
10% stake, SK Corp. with a 10% stake and Daewoo International Corp. with a 10%
interest. Kumho Petrochemical and Hyundai Corp. has a 5% stake, respectively.
KNOC signed a memorandum of understanding on joint development of the
block in Kamchatka in September 2004 when President Roh Moo-Hyun made a state
visit to Russia. In February 2005, KNOC signed an interim finance agreement
for the project, and the consortium acquired the stake ten months later.
KNOC is spearheading upstream oil projects abroad for South Korea. The
country imports all of its crude oil requirements overseas, with more than 80%
of the supplies comes from the Middle East. The state oil company has
designated Kamchatka as the upstream oil development hub in Northeast Asia.
The South Korean government has provided benefits to local companies
involved upstream oil projects in countries other than the Middle East, in an
effort to diversify oil supply sources.
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