The world is finally
waking up to the idea that oil and natural gas are finite
commodities and that world demand currently and for the
foreseeable future will exceed world supplies. As with all
commodities, when demand exceeds supply, the price will continue
to rise until sufficient numbers of consumers leave the market to
re-balance the supply and demand equation.
The fact that appears to be emerging that could not have been
anticipated is that oil demand, on a worldwide basis, does not
appear to be strongly impacted by price. In fact, oil demand is
continuing to increase even as the price is rising. While it is
only conjecture, it appears that the expanding economies that
represent 75% of the world’s demand are not strongly impacted by
price. While the poor economies that represent only 25% of the
world’s oil demand do not have a strong enough market position to
bring the price back in line. As the demand in the poorer
economies decreases to its minimum levels (which does not
represent a significant reduction in demand), the demand in the
expanding economies simply takes up the slack.
In practical terms this means that the strongest economies in
the world will continue to expand and the weaker economies will
decline. More specifically, the 35 European countries, the U.S,
Canada and Mexico, China, India, South Korea and Japan, Australia
and Brazil will continue to expand. The oil supplying nations will
continue to enjoy exceptionally high profits and should also
continue to expand. But, all of the other nations of the world
will decline. This means that 25% of the nations will enjoy
prosperity while 75% will decline.
What is interesting in the above statistics is that there is
one exception to all of the other countries mentioned; Brazil.
More than 25 years ago Brazil made the decision that it didn’t
want to be slave to the oil companies and suppliers. As a result,
they have developed a fuel supply system largely based on Ethanol.
The result of this decision is that Brazil has a positive balance
of trade and is not being broadly impacted by the recent increases
in oil prices.
The question must be asked, why haven’t other countries,
including the U.S. moved in the same direction?
Ethanol and the U.S.:
The recently passed U.S. Energy Bill mandated the use of only
7.5 billion gallons of ethanol. While this is a step in the right
direction, it makes a person wonder what would have happened if
the Energy Bill had mandated 42 billion gallons of Ethanol instead
of 7.5 billion gallons. The U.S. currently consumes more than 23
million barrels of oil each day which is more than 25% of the
world’s production. At that consumption rate the U.S. consumes
352,590,000,000 gallons of oil each year. 42 billion gallons of
ethanol represents approximately 12% of the total oil consumption.
asked, why haven’t other countries, including the U.S. moved in
the same direction?
First, our oil imports would fall by one billion barrels each
year at a cost of more than $60 billion/year or about $5
billion/month. Second, the domestic economy would expand by more
than $73 billion/year just from the ethanol sales and more than
$40 billion/year in by-product sales. When a typical multiplier
effect and down-stream industries are considered, the total
positive impact on the domestic economy would be more than $500
billion/year.
From an environmental point of view, 12% ethanol in the
transportation sector would result in a significant reduction in
new greenhouse gas production. When all of the other potential
ethanol producers are included, the world could continue to expand
and the industrial impact would be reduced.
The farming sector of the U.S. economy would operate at full
capacity, several million new jobs would be created and the Social
Security Trust Fund would have many new participants forestalling
the bankruptcy of that social contract.
Terrorism and the lack of oil supplies:
Why is ethanol so important? As mentioned above, 25% of the
World’s nations will continue to expand while 75% will be in
decline because they cannot afford to compete in the purchase of
scarce oil supplies. I suppose conventional logic would dictate
that all of these people, approximately one-half of the Worlds
population will simply suffer quietly while the other half happily
enjoys their expansion and increased ability to have new toys and
homes. I think not.
What will happen is that these disenfranchised, under-educated,
under-fed and under-employed people will become the next
generation of terrorists. They may not go by the same names that
we currently hear from the middle-east, but they will develop into
activists and terrorists and they will have a cause. The great
“Satan” will be the U.S. and the other expanding economies.
Why is Ethanol so important?
The single largest Balance of Trade issue with most developing
and third-world countries is the purchase of fuel supplies. Many
of these countries produce small amounts of oil but most purchase
the bulk of their oil supplies.
Why don’t all of the countries between the Tropic of Capricorn
and the Tropic of Cancer produce ethanol from sugarcane? Why don’t
these countries use something that they grow to produce something
they need? Why don’t these countries decrease their Balance of
Trade deficit by producing some of their own fuel? Why don’t these
countries expand their job base by producing some of their own
fuel?
The answer to these questions is not simple. Many of these
countries are former colonies that have enjoyed price supports on
the export of sugar. Many of these countries simply have not
recognized the enormous change that is occurring in the Worlds
economy and the impact that these changes will have on them.
To some level the U.S. and other expanding economies depend on
the third-world economies as outlets for their goods. If these
economies are allowed to contract, the expanding economies will
lose markets for their products. Therefore, countries that join
the energy production sector by producing ethanol will be in a
better position to purchase goods and services provided by the
other expanding economies.
Ethanol is not “The Solution” to the world’s energy supplies,
but it is certainly one of the solutions. Within the next ten
years the World’s oil demand will exceed 100 million barrels per
day. If ethanol production worldwide could reach 10 million
barrels per day, the pressure on oil price, refining capacity and
exploration would be reduced. But, more importantly, the ethanol
producing countries would be able to join the other expanding
economies, reducing the political pressures and the potential for
terrorism.
A recent article by Cathy Procter, The Denver Business Journal
on August 7, 2005 provides some interesting pieces of additional
information. Oil is expected to remain in the range of $50 to $70
per barrel for two years, said Mark Rodekohr, director of energy
markets and contingency information for the federal Energy
Information Administration. And the price of natural gas, used by
69 million homes, businesses and manufacturing plants across the
United States, could climb to $12 per thousand cubic feet in the
next two years.
The demand for oil has risen every year but one in the last 20,
and shows no signs of slowing, particularly with the economies of
China and India growing, said Tom Petrie, chairman and CEO of
Parkman & Company Inc., a Denver-based oil and gas investment
firm. In the past, excess production has cushioned consumers from
big price jumps at the pump. But that cushion is gone.
Worldwide demand for oil in 2005 is expected to be about 84.7
million barrels per day, up 2.4% from 2004. Petrie predicted that
oil prices would remain between $40 and $60 per barrel with
occasional price rises to over $80 per barrel; I believe this is
incorrect.
He then explained that existing oil production would decline
between 2.5% and 8% in the next five years. On the low end this
would be a loss of 10 million barrels/day and on the high end it
would be a loss of over 28 million barrels/day of supplies. Of
course these supplies would be replaced by new production that is
predicted to be between 13 million and 25 million barrels per day
to the market by 2010. Statistically, this means that oil
production may not increase over the next ten years. Based on the
current expansion levels, and using a future expansion level of
only 1.5%/year, the demand for oil should exceed 100 million
barrels/day within ten years.
When you balance these two figures, it is clear that oil
supplies five years out will be about the same as they are today.
If demand continues to increase the pressure on price will
actually increase and we may see prices approaching $100 per
barrel of oil on the market.
On the natural gas side, production dropped by 2% in 2004
despite higher prices and a drilling rig count higher than it’s
been in 20 years, Stu Wagner, an analyst with Petrie Parkman
stated.
Summary:
The immediate reaction to this is probably that I have reached
a long way to establish my position. I would argue that a very
quick examination of the Middle East and terrorism, as well as the
fact that the U.S. went to Iraq and has protected Kuwait from
invasion would serve as an excellent proof that the expanding
economies will protect their positions to get oil or some other
fuel source.
Other expanding nations such as China and India have been
smugly content to watch the U.S. protect the availability of the
world’s oil supplies. They will let us spend our money and our
lives to keep the oil flowing. This begs the question of how these
countries will behave when supply and demand are seriously out of
balance. Will they participate in protecting the availability of
supplies for everyone or will they only protect their own
self-interest by literally taking the supplies that they need. The
nations that surround China and have oil should be concerned.
Technology will expand the efficiency associated with
conversion of agricultural products into ethanol. While this will
not solve the energy crises it has the potential for expanding
supplies and expanding the base of energy production.
Oil supplies may expand incrementally, but it appears that the
expanding economies will increase their demand at a greater rate
than the supplies will expand. Based on the continued imbalance of
supply and demand it is reasonable to project further increases in
oil price.
Ethanol production has the potential to increase supplies by 10
million barrels or more per day if the sugarcane producing nations
and other starch based crops enter the market. While 10 million
barrels per day will only represent 10% of the world’s supplies,
it appears that oil supplies do not have the potential for this
same level of expansion.
More importantly, more than 50 nations may have the potential
to enter the production side of the market. These 50 nations would
be able to reduce their balance of trade, improve local job
conditions and participate in the current economic expansion.
The fact is, if we don’t move to the interim step of maximum
world ethanol production, along with other renewable energy
sources, we are going to create a two class world of “haves” and
“have nots” that will sponsor an economic terrorism for the next
100+ years, or until there is an economic substitute to oil.
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