Wednesday Night #1226 – Oil & Katrina

How is it that the richest country in the world, with the largest military budget in the world, does not have the military equipment – tents, ships – to move in quickly to solve these problems?
Forget about large government organizations, people-to-people efforts work

Gerald Ratzer OWN
This evening marks a major milestone as Gerald Ratzer retires from McGill and embarks on a new phase in his professional life.

Homeopathy
Dr. Mark Roper was recently interviewed by CBC about an article published in the medical journal, Lancet that questions the efficacy of homeopathic remedies and has equated their clinical effects to nothing better than placebos. The researchers found that in small-scale trials, homeopathy proved beneficial to the patients, but failed to show any significant effect in larger trials. “Good large studies of homeopathy do not show a difference between the placebo and the homeopathic remedy, whereas in the case of conventional medicines you still see an effect”
Homeopathy, Dr. Roper explains, should not be confused with traditional medicines, which can be very effective (i.e. digitalis); it is based on giving patients a dose of the illness that is trying to kill them, in order to develop an immunity, but the dilution is so great that it does not produce the desired effect. Nonetheless, the placebo effect may be very positive in a certain number of cases.
Modern medicine has become effective, but very dangerous
The cleaner the doctor’s white coat, the better the patient feels

Tonight’s topic of what the world would look like with oil at $100 a barrel was selected several weeks ago, long before the devastating Hurricane Katrina hurled itself at the U.S. Gulf states wreaking havoc, compounded by the predictable – and predicted – bursting of the levees. No single scenario emerged, but the intense and informed discussion produced many ‘ponderables’ for further study and debate.

Hurricane Katrina
With the bursting of the levees and flooding of the major part of New Orleans, Katrina has become probably the greatest natural disaster to touch the U.S.
The Governor has asked for federal aid and as of this (Wednesday) evening is hopeful that it is on the way. Looting and violence are increasing, as is the misery of the people taking refuge in the Superdome.
The situation in New Orleans has been likened to Pompeii, however, as our favorite professor of Geology points out, the construction of a city on a flood plain, or any other mobile geological environment, is a major mistake. [Disgracefully underfunded] efforts by the Army Corps of Engineers to tame the natural processes have proved fruitless. This is not the last time that the area will be hit by a hurricane and one can only wonder: is there any sense in rebuilding in this problem area?

[Editor’s note: Another dimension of the problem was raised in an excellent piece in the Independent story: New Orleans: Loss of wetlands opens floodgates to disaster which points out that
“many scientists say the real problem is what has been wrought on the ground in the Gulf Coast region itself. And most serious of all may be the loss of the wetlands. Wetlands, along the edges of rivers and near the coast itself, are vital for absorbing and storing floodwaters. As such, they provided New Orleans with a natural defence against storm surges such as the one generated by Katrina.
But, according to the US Geological Survey, Louisiana has lost 1,900 square miles of wetland in the past seven decades – an area larger than the state of Rhode Island.
The draining of the wetlands to make way for roads, malls, beach communities, marinas and condominiums has also meant shrinkage of the shoreline. Louisiana, in fact, loses 25 square miles of coast every year.
General Robert Flowers, the head of the Corps of Engineers until last year, is concerned by the loss of a ‘natural storm protection’, along Louisiana’s coast. ‘With that loss of wetlands … we had to build hurricane protection. I think a longer-term solution that replenishes Louisiana’s wetlands will better serve us’.”]

A suggestion for Relief Effort
Prompted by the sight of an RV Park filled with gleaming new vehicles, David Nicholson, suggests that Canada might help to assist in alleviating the drastic housing shortage in the aftermath of the storm by assembling a convoy of Canadian-manufactured RVs and mobile homes (which could be stocked with other necessary supplies and tools), and driven by volunteers from the automotive unions and/or construction workers whose most active season is coming to an end and whose skills will be needed in the stricken areas. The Nicholsons have communicated this suggestion to various levels of government, along with the President of GM and Buzz Hargrove of the CAW, two entities capable of mobilizing the effort rapidly.
Wednesday Nighters had a range of reactions to the idea, suggesting that it could take massive coordination and resources that might be better invested in contributions directly to the Red Cross who know what is needed where. Furthermore, RVs do not offer the kind of mass shelter that is obviously required. On the other hand Bombardier, which is winding down its housing and RV manufacturing division has a sizeable inventory in Florida.
Think of it as a parade of hundreds of RVs instead of floats, sponsored by corporations like GM, Ford, Canadian Tire, Magna, municipalities, associations…

[Note: One response to this suggestion was received from Hugh Upton, an experienced RV operator, who stated: “My contact, a pillar of the retail trailer business, thought it was a good idea except for two things. After checking his contacts in the US, he was advised that at this time, FEMA, the NGOs and Red Cross need experienced volunteers with feet on site to manage the rescue and stabilization efforts.”
In the light of the subsequent evaluation of FEMA’s performance, this hardly represents a credible source of objection.]

Footnote on Disaster Relief
In the week following the disaster, there has been unrelenting criticism of the failures of President Bush, the federal government and FEMA to quickly address the acute problems.
Despite President Bush’s (ungracious) statement on ABC’s “Good Morning America” that the United States could take care of itself [the actual quote is: “this country’s going to rise up and take care of it,”], there has been an amazing outpouring of offers of assistance from other nations.
Two offers of assistance have brought a smile. The first, from Cuba’s President Castro who has offered to fly 1,100 doctors to Houston, Texas, with 26 tons of medicine to treat disaster victims (can’t you just see Castro enjoying this joke?) and the second the UN’s offer to help coordinate international relief (how galling for John Bolton and the rest of the UN-bashing neocons!).
Canada has been singled out with an official request for help and will contribute medical supplies, beds and blankets for as many as 6,000 people and, if necessary, might later step up its contribution to include mobile hospitals. U.S. authorities also requested a team of more than 35 divers to help inspect the levees in New Orleans for repair and to help clear the way for ships to enter New Orleans harbour.

Oil
Scientific evidence suggests that roughly half of the world’s available resources of crude oil have been extracted. While most OPEC oil fields data are proprietary, we do know the predictions of Marion King Hubbert that U.S. production would peak in 1970 proved to be true; since then Hubbert’s methods have been applied to global oil production and have mathematically determined that the world’s oil supply would peak shortly after 2000 (Kenneth Deffeyes in his recent book “Beyond oil: the view from Hubbert’s Peak” suggests Thanksgiving Day 2005), and then drop steadily thereafter. There will continue to be oil, but Hubbert’s Peak is about the end of cheap oil.
The problem is compounded by supply problems – the U.S. has not built refinery capacity since 1976.
In the view of an oil industry expert at the table, while oil is a finite resource, the ratio between production and proven reserves, has been stable, or even increasing slightly over the last years. [But the capacity of proven reserves is often stated for political purposes and we don’t know how much oil is really in the ground.] Predictions of the imminent shortfall of oil have been around for at least 30 years, but somehow this doesn’t happen as quickly as the numbers might indicate. On the one hand, the world has shown a capacity to find new reserves and extract proven reserves, and on the other, since the mid-70s there has been an increase in energy efficiency.
He adds that of the world’s oil reserves, only one-third is in the form of conventional petroleum. Two-thirds – half of which are in Canada – are tar sands. It is of course more expensive, cumbersome and environmentally difficult to extract than conventional oil, but it is not necessary to have $100 bbl oil to make this a good business. The tar sands will be developed even if oil is at $20-$30 bbl.
The U.S. would not be in Iraq if that country did not have oil …. Ralph Klein, watch out!
Sensibilities about nuclear power and overriding aboriginal land claims will quickly fade as we search for alternative solutions
Current U.S. consumption (250 million people consuming 25% of the world production) is simply not sustainable. Higher taxes on oil companies, while political suicide, would make economic sense. This policy, already in practice in Europe, accounts for better transportation patterns, more fuel-economic cars and concurrently a reduction in CO2 emissions with a positive impact on the environment. Thus it is arguable that the end of cheap oil may accomplish what other policy tools have been unable to do.
Venezuela reduced the profits of the oil companies from 84% to 70% – why could Canada not introduce similar restrictions on profits above a certain price?
Is there a price per barrel at which people will start to change their consumption patterns? In 1980, it was $80. According to a recent article in Le Monde, authorities in France calculate that the price would have to reach $100.
I think $100 a barrel will be really cheap
However, we have a global economy where everything on Walmart’s shelves is shipped from China; the world will need a transformation of the global economy that has been built for 100 years on cheap oil, and that transformation will not be accomplished overnight, or even within a couple of decades. On a more positive note, people are thinking about the future and looking for solutions to their petroleum dependency.

The end of suburbia?
Excerpts of the compelling Canadian-produced documentary “The End of Suburbia: Oil Depletion and the Collapse of The American Dream”, featuring highly respected oil experts, point out that all oil production – no matter where – follows a classic bell curve with the light sweet crude coming first and the heavier, more-difficult-to-pump oil following; the rate of extraction peaks at about the half-way point and then begins to fall. It is this characteristic that validated the predictions of Dr. Hubbert about American oil production. Those who gleefully scoffed in the early ’70s that the United States had never produced more oil were soon confronted with the declining production figures indicating that American production had indeed peaked.
The simple fact is that you have to discover oil before you can produce it
One of the experts featured is investment banker Matthew R. Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. The Saudis have always been the supplier of last recourse, the swing supplier who could help bring prices down, however, the author’s detailed analysis of the Saudi oil and gas industry, based on technical papers published by the Society of Petroleum Engineers, shows the advanced maturity of the Saudi oil fields.
Whether or not one is convinced that the suburbs will disappear, cheap oil has exercised a dismaying effect on spatial economics in the U.S. – how cities and transportation systems are laid out has been predicated on the availability of cheap oil. In Europe, people make far greater use of trains, but the distribution of the population favours this transportation mode.
As the documentary demonstrates, there are huge numbers of people in North America who have no other way to get around than by car and they will go on living that way because the cities have evolved in a pattern that leaves them no choice. Ideally, suggests one individual, communities would be clustered around companies and businesses where the citizens work, however economists respond that efficient economies are not modeled on the ability of people to bike to work and to school.
In any event, the cost of building an energy distribution alternative to the present petroleum infrastructure would be astronomical.
Unfortunately, these days (with the notable exception of McGill professors who retire after 40 years), people do not work for the same company all their lives. As a series earlier this year in the New York Times pointed out, the upwardly mobile executive moves every two years or less, lives in new communities that are located 25 – 50 miles away from city centre, commutes by plane to home office and has a family who are dependent on car transport to take them to schools, community, school and sports events. Aside from the dismal picture painted of a rootless society of yuppies in cookie-cutter mansions, the findings of this report underline the thoughtless dependence on gasoline for every activity.
Can technology replace fuel? Telecommuting, which has been touted as a major change for years, has yet to be adopted as a way of life by the majority.

Additional readings
Matt Simmons Answers Tough Questions About Peak Oil
It’s the Crude, Dude, by Linda McQuaig

Summary
A major cause of concern is the aggressiveness of the U.S. effort to seize petroleum assets, or control of petroleum-producing areas, combined with the jihadism in Saudi Arabia, where the per capita income of $20,000+ some twenty years ago has declined to less than $7,000 today. It must not be forgotten that much of the Saudi oil money of the 90’s fed Islamic extremism through the Madrassas outside Peshawar and gave money to the Taliban struggle against Russia in Afghanistan. The Russians are gone but the Taliban …?
The jihadists’ primary goal is to restore Islamic lands to a political state reflecting the early days of the Prophet. Saudia Arabia is vulnerable.
Then there are Pakistan and India to worry about with nuclear ballistic missiles. We have not seen the last of Al Quaeda. It is a very risky time.
One other source of worry is World Hunger. The Green Revolution was largely fuelled by chemical fertilizers, insecticides and pesticides, raising the question of the carrying capacity of Mother Earth in the absence – or limited availability – of cheap fossil fuels.
Forecast
Oil prices are bound to increase whether or not we have reached Hubbert’s Peak. What we do know is that the world is consuming some 8 million barrels a day more than it did 2 years ago and expectations are that within 20 years, China will be consuming an additional 15 million barrels a day. Adding India to the equation, we must calculate the impact of increased consumption by 40% of the world’s population.
On the positive side, economies are amazingly adaptive. Once oil prices reach a high enough point, there are surprising gains to be made in efficiency as investment in new technologies increases, individuals begin to think about substitution along with a reduction of domestic consumption and divesting themselves of the hummers. In other words, this is not the end of life, but a massive shift.
However, while the discussion focused on individual behaviour, another area of concern in the face of rising oil prices is the heating of public buildings – what happens to hospitals, for instance? In Québec the availability of electricity offers a very viable alternative, but natural gas prices will inevitably follow oil prices upward.
I am much more scared by the effects of pollution than I am by high oil prices

The Economy
There is a slight, but perceptible slowing of the economy today, but it takes a prolonged period at a higher price for patterns to change significantly.
As energy stocks climb, Ron Meisels warns of the danger that the oil sector becomes too dominant in the TSX, but reminds us that retail salesmen are still stating that the public is not asking questions about oil stocks.
We are probably two-thirds of the way through this bull market. There are only a few real opportunities, three of which he recommended on tonight’s “Market Call Tonight with Howard Green”.
While oil constitutes an important “head wind”, in Peter Perkins‘ view, the profitability of an array of U.S. and Canadian companies is phenomenal. However, we have largely exhausted the benefits of the global housing boom and while this market can continue for a while, to a large extent because money is cheap, down the road there are a variety of risks that are not fully priced for – there’s a lot of complacency, investors should be fairly cautious right now.
Another expert comments that the reaction of the U.S. market to the disaster in the Gulf states is puzzling. The market went up and down, with many voices talking about the impact on the economy; for sure, there is a big short-term negative impact, but further down the road the reconstruction efforts will be very positive for the construction and housing industries. The loss of resources and production capability, along with the rise in oil prices will no doubt bring inflation, another negative for the economy.

[Editor’s note: we would add the following from the Independent Sep 2: General Motors, the world’s largest car maker, saw its stock drop 3 per cent amid fears of the impact of rising fuel prices. Meanwhile shares in Aggreko, the UK company that is the world’s largest supplier of portable power generators, rose as much as 7.5 per cent as traders bet it would benefit from the emergenc

The Prologue
While many Canadians are crowing over Ontario’s new-found possibility of becoming a have-not province, Alberta is King.
Pundits and demographers are having a field day analysing the effect of Alberta’s $7-billion energy-generated surplus, raising questions about how the province will use its windfall while not creating jealousy among the country’s cash-strapped provinces, or worse yet, attracting almost all the inhabitants of the rest of the country, leaving a vast uninhabited wasteland in the East. And the windfall may grow bigger, given the bold headlines proclaiming the imminent arrival of$100 a barrel oil . One can successfully search Google for that phrase, but there is a distinct shortage of analysis available that would indicate what kind of world we will be looking at if/when oil prices reach that level. Consider what will happen to the world’s economies and, closer to home, to North American consumption patterns and trade. In case you have been marching with the Penguins in Antarctica and oblivious to Oil news, we include below some samples and useful links.
The proposed focus of the evening will be OIL, but we cannot neglect other items such as the softwood lumber dispute which appears to have embroiled the new American Ambassador, assorted Cabinet ministers and all the media heavyweights. Even closer to home, the sorry case of fraud at Norbourg Asset Management Inc. and the curious delays surrounding action by the autorité des marchés financiers deserves attention. On a possibly happier note, there is the report by the Canadian Institute for Health Information (CIHI), of a net gain in doctors (317 returning versus 262 who left). It sounds good, but experts caution that we are a long way from solving our healthcare problems. Mark Roper OWN will certainly give his views and also treat us to a rundown on the meeting of the CMA (where he managed to get himself quoted by the Globe & Mail’s André Picard).

Is oil heading for $100 a barrel? The Guardian, Aug 17
Bets are on for $100 a barrel oil Reuters Aug 25
Strong U.S. inflation and an earnings warning from the world’s biggest retailer Wal-Mart last week highlighted market concerns that soaring crude prices were beginning to take an economic toll. “None of the analysis we’ve done on fundamentals would support a $100 price, certainly not on a sustainable basis,” said Julian Lee of the Center for Global Energy Studies
With prices setting records on a daily basis, the potential drag that costlier oil could have on global economic growth has become an urgent issue. According to the Asian Development Bank, rising oil prices have slowed exports across East Asia this year and are likely to reduce economic growth across the region this year.
“During the 1979-1980 period of rapidly increasing prices, Saudi Arabia’s oil minister Ahmed Yamani repeatedly warned other members of OPEC that high prices would lead to a reduction in demand. His warnings fell on deaf ears.
Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher mileage. These factors along with a global recession caused a reduction in demand which led to falling crude prices. Unfortunately for OPEC only the global recession was temporary. Nobody rushed to remove insulation from their homes or to replace energy efficient plants and equipment — much of the reaction to the oil price increase of the end of the decade was permanent and would not respond to lower prices with increased demand for oil.” Oil Price History and Analysis
“The world is not running out of oil. What the world is shortly running out of is its ability to produce high-quality cheap and economically extractable oil on demand. After more than fifty years of research and analysis on the subject, it is now clear that the rate at which world oil producers can extract oil is reaching the maximum level possible. This is what is meant by Peak Oil. With great effort and expenditure, the current level of oil production can possibly be maintained for a few more years, but beyond that oil production must begin an irreversible decline and civilization is in trouble.” http://www.oildecline.com/

The oiloholics
Oil prices could yet go higher-unless the world’s biggest gas guzzlers curb their thirst
THE price of oil affects the cost of almost everything. It helps determine not just the cost of driving to work or flying off on holiday, but also the cost of furniture, food and anything else which has to be transported from factory to shop floor. The past three global recessions were all triggered by a jump in oil prices. Thus, it should be alarming that oil prices have more than tripled since late 2001. So far, though, the world economy has held up remarkably well: global GDP growth is strong and inflation remains modest. How long can this continue?
…The main reason why high oil prices have so far not kiboshed the world economy is that cheap money has supported spending sprees and housing bubbles in many countries, notably America, which have offset the impact of dearer oil. The two main engines for the world, the United States and China (also the two biggest oil consumers), have both had their growth boosted by lax monetary conditions in the past couple of years. Indeed high oil prices can partly be seen as a consequence of low interest rates. The two most important prices in the world economy are the price of oil and the price of money, and they are linked.
..America and China, in their different ways, are drunk on oil consumption. The longer they put off taking the steps needed to curb their habit, the worse the headache will be. George Bush once learned that lesson about alcohol. It is time for him to wean America off oiloholism too.
The Economist (25 August 2005)

IMF managing director Rodrigo de Rato warned that high oil prices posed a significant risk to global economic expansion, and said they were not likely to fall in the near term.
He said both Indonesia and the Philippines need to be vigilant to curb the inflationary threat of high oil prices. In Indonesia, oil prices have pulled the local currency to a 41-month low and have slowed economic growth.
The price spike in Asian trading also came after China released data showing that its crude imports rose 15 percent in July from a year earlier. In the first seven months of this year, China’s crude oil imports have risen 5.4 percent compared to a year ago.
China’s growing appetite for crude is said to be one of the key reasons for the world’s shrinking excess capacity to offset any lost output.
“The market sentiment is not whether crude will one day reach $70, the question is when,” said Victor Shum, energy analyst at Texas-based consultants Purvin & Gertz in Singapore.” Forbes Aug 25
Soaring global oil prices pose risk to inflation: RBI
MUMBAI: The Reserve Bank of India (RBI) on Saturday projected a moderate inflation of five per cent in this fiscal year and said the soaring global crude oil prices posed a risk to inflation. The HINDU Business Line Aug 27
…As a result of low interest rates, America and some other economies have enjoyed a boom in house prices, accompanied by a surge in household borrowing and a falling saving rate. Higher oil prices have acted like a tax on consumers, leaving them less money to spend on other goods. But in America this has been fully offset by borrowing against soaring home prices. This explains why higher oil prices appear to have depressed domestic demand by more in Europe than in America: in most euro-area economies there has been little or no cushion from increased borrowing against property.
The fact that America’s economy has been able to shrug off higher oil prices mainly as a result of a housing and mortgage bubble is hardly a comforting thought. What happens when house prices flatten, or even fall? Consumers will then feel the full force of dearer oil. Come to think of it, a further spike in oil prices could even be what pops the housing bubble, if it unsettles consumers enough. So far, the rising oil price has done little harm; but worse may well be on the way. The Economist Aug 25
The Impact of Higher Oil Prices on Low Income Countries and on the Poor
March 2005, by the UNDP & world bank
The world’s reliance on oil and gas is set to increase sharply as global energy demand soars by 60% over the next 25 to 30 years, World Energy Outlook 2004.
The good news is that there is plenty of oil and gas in the ground to meet demand. “The Earth’s energy resources are more than adequate to meet demand until 2030 and well beyond,” the report says. And the bad news? Well, where to begin? BBC 26 Oct 2004
“Today the food system is even more reliant on cheap crude oil. Virtually all of the processes in the modern food system are now dependent upon this finite resource, which is nearing its depletion phase.” Energy Bulletin Apr 2005 Why Our Food is So Dependent on Oil
“Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $23.00 per barrel in response to war or conflict in the Middle East.” WTRG Economics

China’s energy buy
With oil prices hitting new records again this week, China National Petroleum Corporation agreed to buy PetroKazakhstan, a firm based in Canada with energy assets in the Central Asian country, for $4.2 billion. It is China’s biggest-ever cross-border takeover. CNPC won the bid despite expressions of interest from India’s Oil and Natural Gas Corporation, a state-run company that has indicated it may make a counter-offer. China and India are seeking to increase energy capacity as their economies expand. The Economist Aug 25
PETTEN – The world could run out of time to develop cleaner alternatives to oil and other fossil fuels before depletion drives prices through the roof, a leading Dutch energy researcher said on Thursday.
“The greatest drag on oil exploration and production these days is that the world’s greatest reserves sit under despotic and corrupt nations, who are pursuing the kind of destructive economic nationalist policies to which Canada fell prey a quarter century ago. Oil revenues certainly fund radicalism and fail to lift local populations out of penury, but the notion that we should put on the energy equivalent of government-mandated sackcloth and ashes in order to protect against possible external disruption is surely the fulfillment of our enemies’ dreams.” National Post May 6, 2005

y.]