Copied from another site:
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This appeared a short time ago on Financial Sense Online's website.
I thought it might be of interest to some.
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The Perfect Storm
The Halloween storm of October 1991 was caused by a rare event seldom seen by meteorologists. Three storms, an artic cold front, a nor’easter, and a hurricane met out at sea to from one giant perfect storm. We now have the same potential in the energy markets. A strike in Venezuela, a possible war in Iraq, and a cold winter in the Midwest and Northeast could form together and give the US its next energy crisis.
As this WrapUp was being written, crude oil prices jumped $1.40 in the futures markets to $31.70 a barrel with heating oil jumping $3.65 to $89.60. The problem with oil is that the world oil markets could withstand a disruption of one large source of oil but not two. We currently have one large source of disruption with the workers strike in Venezuela. The next possible disruption could come because of war with Iraq. ABC did a report last week that stated it is widely believed Saddam Hussein has mined his energy infrastructure and would blow it up if attacked by American and British forces.
The outcome of war is never predictable, especially with a war in the Middle East where oil is a key commodity. If a supply disruption resulted because of war with Iraq, the world oil markets would skyrocket. You already have one supply disruption in Venezuela. If Iraqi oil flow was disrupted as result of war or if Saddam damaged his own oil infrastructure as a result of war, there would not be enough spare capacity to make up these disruptions. As the table below shows, most of the world’s spare oil capacity is located in the Middle East and within OPEC.
Region
Production Capacity
Estimated Production
Unused Capacity
Persian Gulf OPEC 24.1 19.6 4.5
Non-Persian OPEC 10.3 9.3 1.0
Total OPEC 34.4 28.9 5.5
Non-OPEC OECD 20.2 20.0 0.2
Former Soviet Union 7.4 7.4 0.0
Mexico 3.7 3.3 0.4
Other Non-OECD 14.6 14.4 0.2
Total Non-OECD 25.7 25.0 0.6
Total Non-OPEC 45.9 45.0 0.8
Total World Source EIA 80.2 73.9 6.3
Source: EIA
As the above table illustrates, the only real spare capacity in energy lies within OPEC and mainly in the Middle East. What replaces oil if two major oil suppliers, Iraq and Venezuela, are taken out of production? Is it alternative fuels such as natural gas? The answer to that question is there is no alternative fuel now to replace oil, not even natural gas. The world and especially the United States have become too dependent on imported hydro carbons. Therefore, any disruption because of war or strikes will most certainly send the price of energy soaring, acting as an additional burden to weak economies around the globe.
The situation in energy without war or strikes is only going to get worse throughout this decade. The current unfolding crisis will be the second energy crisis of the new decade. As the world population increases, demand for energy will rise along with it. World population is expected to grow from just above 6 billion to 8 billion in the next two decades. In the last decade, we added over 700 million people. We have added as many people to the world base in the last two decades as existed in 1890. More people means more energy use. While western energy analysts look mainly at western energy growth, they ignore the explosive growth in energy use occurring in the rest of the developing world. Despite the much-hallowed cry for energy conservation, there are very few things that can be conserved that could help us avoid another energy crisis. Warm sweaters, more efficient cars and refrigerators, and solar panels on rooftops will not solve the problem. In the meantime, the world will be woefully dependent on imported Middle Eastern oil and subject to all of the vagaries of its geopolitics.
The problem is not just one of environmental constraints, which keep us from solving the problem. Added to the problems of environmental extremism, which dominate much of the energy debate, there is also government interference in the market place with my own state of California as prime example. The other issues, which have not been addressed, are the assumptions made by government, academic and industry beliefs that supply is abundant and that prices will steadily fall. It is unfortunate that these misconceptions are widely held, because they bring us to another crisis in a very fragile energy world of growing demand and shrinking supply of cheap energy supply and alternatives.
The Bear is Coming After California
This brings me back to my own state of California, which I believe is about to face another energy shock. California is a high consumer of all forms of energy—oil, natural gas and electricity. The state has a very high demand for all forms of energy with very low domestic energy supply that keeps getting shorter thanks to environmental restrictions. Although heavily dependent on outside imported energy, California is embarked on an environmental crusade at a time when it is the nation’s number one and two consumer of all forms of energy. It is number one in the consumption of gasoline and residual fuel oil. It holds the number two position in consumption of natural gas, aviation fuel and distillate fuels. We are the country’s fourth largest oil producer with nine of the nation’s largest oilfields. The state has done very little to increase supply, while demand keeps rising. Consequently, California must import over 50 percent of its oil needs and 84 percent of all of its natural gas needs. While demand keeps rising and the state keeps building new gas plants (not enough to meet energy demand), it has done very little to build a natural gas infrastructure to supply these new power plants. This includes expanding the state’s grid system.
Unfortunately for California, the state’s problems will only get worse. In addition to having a major energy problem, it also has massive budget deficits. Now that the state’s governor has won reelection, the true position of California’s budget problems have been revealed. Starting with a $10 billion budget surplus when he took office, Governor Davis reported last week that the state now faces a budget deficit of $34.8 billion. The budget deficit is the result of declining capital gains tax revenues and a 35 percent increase in state spending by the Davis administration. Experts warned the governor that the capital gains tax revenues were not permanent. He had been warned by budget analysts not to spend money since the revenue increase from California’s tech industry would not be permanent. The governor ignored the warnings and now faces both a budget crisis and an energy crisis. Ironically, the architect of California’s failed electricity plan, former lawmaker Steve Peace, has now been appointed by the governor to solve the budget crisis. The Peace plan for deregulation forced utilities to sell their power plants, it fixed the price of energy, prevented the utilities from locking in long-term contracts for energy, and did very little to increase supply and expand infrastructure. Many of the state’s budget woes can be traced back to the Governor and Peace’s deregulation plan. I can just imagine what awaits the state with these two now tackling the budget deficit.
State residents have been warned that more tax increases are on the way. Residents of the People’s Republic of California will be stuck with a larger, more expensive bureaucracy, fewer services and higher taxes to pay for all of it. At a time the state will be facing its next energy crisis, there will be no money left to build, expand and increase its energy infrastructure and supply of energy.
As California Goes... So Goes The Nation
Why this is important is that many of the problems facing California will also face many other states of the nation. California’s economy is between the fifth and sixth largest economy in the world. With experts predicting strong economic growth next year and a recovery in the market, it is hard to visualize that happening judging by what I see here in the golden state. You can’t build prosperity on regulation, taxation, and debt, of which the state has plenty of all three. |
