Energy: The Grim Future For Our Global Community

In our global community, the markets are intertwined. The energy market is the largest market in the world. Energy effect’s everyone’s day to day life. Decreasing supply and increasing demand has cause political strife and social determent even beyond inconvenience of three dollar per gallon of gasoline.

Even before global warming peak oil will affect all of our day to day lives. In 1970, King Hubbart, a petroleum geologist who worked for Royal Dutch Shell made the profound statement that the continental United States would peak in oil production. Meaning that in the early 1970’s the continental United States would reach the maximum oil extraction rate possible. Hubbart was considered a laughing stock in the oil and gas community, for that year the US continental had produced more oil than it ever had in previous years. In 1975, looking back, the oil community had realized that we had in fact peaked in oil production. In other words, global peak oil as predicted by King Hubbart is the maximum global extraction rate of oil which should occur sometime in the next decade.

There are many consequences of peak oil even beyond the scope of this paper. Among these is the obvious consequence of high energy prices. Other less obvious but more dangerous consequences are commodity wars, hyperinflation, political instability, increased famine, and global recession or depression.

When considering the price of energy, one shouldn’t think of past historical gasoline prices because oil and gas has flowed readily from the ground at astonishing rates allowing for extremely depressed prices compared to probable historical norms. If one was to make a trip into Boston which might cost 3.50 in gasoline with their car, one would find this nearly impossible to replicate borrowing someone’s horse or donkey. The energy that we use today is extraordinarily inexpensive compared to previous forms of energy for example burning wood and animal power.

An example of political instability caused by high energy prices can be examined when looking at last year’s energy crisis in Eastern Europe during the cold winter. Gazprom, the state owned Russian Natural Gas Company effectively used its pipelines as leverage to raise the price of oil to former Soviet Union (FSU) States. These FSU states were effectively purchasing natural gas at extreme discounts to global prices. By shutting down the pipelines, Gazprom raised the prices of the natural gas and effectively marks the beginning of energy as a weapon. This tactic, now being used by Iran not only provides political legitimacy to a government but provides significant free cash flow to fund military endeavors such as nuclear programs. By doing these actions, a country with an insignificant military can appear much more powerful and have significant effects on our global community.

To go more in depth, Iran controls a relatively significant amount of oil, approximately 4 million barrels a day (US DOE/EIA) of the 80 million barrels consumed globally. Iran, a member of OPEC, can vote in conjunction with other non western friendly countries to cut production which in return raises prices and increases profits for all oil producing nations. Saudi Arabia, the former swing oil producer appears not to have the extra capacity which it once did to minimize the effects of rouge oil nations decreasing capacity (Matt Simmons, ASPO USA 2006). What this means is that we are extremely vulnerable to severe price fluctuations caused by political unrest in such nations as Iran.

Going back to Europe, what Gazprom did caused thousands of people to freeze and live in the extreme cold while their natural gas, their main source of heating, was shut off. This has caused political strife and instability as we have seen in countries such as Belarus. Because of the way the pipelines are setup, shutting off a nation like Belarus will in turn shut off the natural gas supply to further Western nations which are on the same pipeline. These unintended consequences increase global concerns and heighten our awareness of our vulnerability to energy supply. For European countries, most energy for heating comes from Russia and thus little can be done to go around this monopoly. In the United States, we have seen extremely cheap energy prices relative to the rest of the global community. Nations of Europe mostly pay five or six dollars per liter for gasoline. The United States has been spoiled with our readily vast supply of Texas oil and in little government rigs to inflate the price.

In the West which might be “addicted to oil” will face significant hardships from energy price inflation. However, it is the poorest countries which will face the most severe and deadliest consequences to this peak oil crisis. African countries which are only now attempting to reach Western living standards are extremely poor and generally most of their electricity is generated from burning oil. For example, Senegal, generated 76% of its electricity from oil (http://www.theoildrum.com). Because of this, a price change as insignificant as fifty cents per barrel can cause extreme hardships and deplete government budgets for energy. This high electricity generation price causes citizens to become angry at their government because they are forced to pay more for their energy at a reduced reliability. Senegal has been unable to purchase its oil for its electricity generation because price inflation has made it extremely difficult to budget for the purchase of this energy (http://www.theoildrum.com). Because of this instability and because electricity is less expensive, countries must divert funds from agricultural endeavors to purchasing energy to generate electricity for their hospitals and manufacturing sectors.

For the United States, we do not need to worry about feeding our population base for our agricultural industry produces a surplus. However, our level of efficiency and lush lifestyle is completely unfeasible without cheap energy. Not only will we not be able to afford to drive to our local mall whenever we please, we must be concerned about job security, which is dependent on twenty to thirty minute commutes. When energy is at two hundred dollars a barrel it is unrealistic to expect the average person to be able to make these long drives daily and still be able to feed their families. While we produce a surplus of food, the average piece of produce that the American consumes travels 1500 miles (http://www.theoildrum.com). This means that the complete reworking of our food distribution system will have to be accomplished. This radical viewpoint is not a necessity within the next ten years. While oil prices may fluctuate radically during plateau and post peak periods, short term economic depressions and recessions will drive price down for the short term, allowing communities sometimes to react.

The United States has become the world’s energy protection service. When someone wants to purchase a barrel of oil they first much purchase US Dollars. William R. Clark in his book Petrodollars Warefare, makes the argument that our entire debt structure is propped up by this energy currency trade. He argues that because of this when an oil producing nation attempts to switch from using the US Dollar to a basket of currencies or some other exchange rate, it is met with either political sanctions and an up cry from the United States and possibly me with a US aircraft carrier. The war on terror, while it legitimately is an attempt to defend ourselves from radical Islam extends beyond terrorism itself and continues our operations as the global energy protectors. The war on terror is actually just a label for a shell for a Western Energy agenda. Currently, the United States has its largest military base being built in Iraq with tens of thousands of soldiers stationed in Afghanistan meaning we have the largest military force in the Middle East lying to the North and the South of Iran. If that actions is not one of intimidation, than I don’t know what is. Iran’s actions, while from Western motives is outrageous, one viewed from Iran’s perspective, they almost have little option. However this does not justify their actions. Iran, the predominately Shi’a nation, is speculated to be concerned that its Northern neighbor Pakistan who possesses the nuclear bomb is a source of their desire to also become a Nuclear power. This extremely intertwined tension between Middle Eastern nations sourcing from religious tribal and political desires is affecting our global energy prices. In the past the abundant supply of energy from stable places such as the United Kingdom’s North Sea and Mexico’s largest field Cantarell provided us with excess capacity to minimize or eliminate the effect of these hostile nations had on our energy prices. Unfortuntately, both these fields have peaked and are now in decline having the inverse effect of causing increased importance to these hostile nations. We can no longer sit by and watch these nations bully Western countries but we now must use military force under the War On Terror Name to create price stability for the global economy.
We are told by our leaders that the future lies in hydrogen and ethanol as our new source of fuel to power the 21st century economy. Frankly, this is little more than a fantasy lacking any true or historical merit. Brazil has graced the headlines as the first energy independent nation and the marker of things to come with the help of ethanol. Unfortunately, when one looks in depth at really how Brazil claimed energy independence, one will find that it was not ethanol that saved Brazil but it was drilling (http://www.theoildrum.com). This has not been published readily due to political pressures. In addition, while Brazil’s ethanol does account for a significant portion of their energy demand, it is an unrealistic solution for the United States. High yielding sugar crops of Brazil have an energy return of approximately eight to one while corn grown in the United States has barely a positive return (http://www.agrofinancial.com). Not only do these crops require significant fertilizer input, which predominately is manufactured using natural gas but also the energy density measured in Kj/gallon is significantly less than normal octane fuel. Octane fuel (gasoline), has an energy density of 118,690 Kj/gallon while ethanol has merely 82,958 Kj/gallon which is a relative energy value of 70% (Blanchard). What this means for the consumer is that if one’s tank of gas holds 20 gallons he will only be able to travel 70% as far on ethanol. Often you hear quoted the gallons per acre which is produced by ethanol crops but you don’t hear that it is 70% less efficient and less attractive as a liquid fuel. We can conclude that ethanol with current technology can not replace America’s energy needs in the future. Moreover, our energy needs should not compete with our food sources as this is a dangerous mix.

President Bush has spent our tax payer dollars on funding for our “Hydrogen Economy”. This “Hydrogen Economy” doesn’t make any sense from an energy standpoint. Hydrogen, has a relative energy value when compared to gasoline of 13%. In addition, the sources for producing Hydrogen predominately electrolysis of water uses more energy to extract then is created (Blanchard). Most experts do not find Hydrogen to be even a possible solution to our energy needs.

While the energy markets will remain volatile, our global civilization’s standard of living will get undoubtedly become worse. Energy prices will go down and go up intraday but the long term outlook for the consumer is grim. Therefore one would conclude that even with social, political, and economical pressures in the future alternative energies as of now are not feasible and disaster on mass proportions in our global community is imminent.

Leeb, Stephen. The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel. 1. New York: NY, 2006.

“International: Blood and oil; Nigeria.” The Economist 38217/03/2007 71. April 2007 .

“Down on the Niger Delta.” Wall Street Journal Europe 16/02/2007 10. April 2007 .

Myers, Jimmy. “Creating alternative energy, university saw the future long ago.” Knight Ridder Tribune Business News 27/03/2007 1. April 2007 .

Ford, Neil. “The end of an era for Canadian gas exports; The US has enjoyed steady gas imports from Canada but high oil prices have made tar sands projects more tempting. This energy-intensive form of production needs plenty of gas, as will a booming power-generation sector which will see hydro production drop..” International Gas Report 57026/03/2007 3. April 2007 .

Blanchard, Roger. The Future of Global Oil Production. 2005. April 2007. [www.theoildrum.com]. With Help From Carl Kanner

About Eric Schleien: "I'm 18 and live just outside New York City.  I have been interested in investing for about four years.  The book I recommend for anyone starting out is Joel Greenblatt's Little Book that Eeats the Market.  My best advice that has worked for me is thinking for myself.  My best investment ideas weren't sparked by other people's opinion but my own. My website is www.WarrenBuffett.tk; Myspace - www.myspace.com/myspaceontheweb; Email - eric@warrenbuffett.tk; AIM - EricSchleien"

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