|Oil Shortages in America
The Politics eZine - Oil Economics
The Political Impact of $120 Oil
By Charles Moffat - April 23rd 2008.
United States - Oil prices continue to skyrocket and yesterday they hit a new record price of $119.90 US. Some analysts are predicting prices to skyrocket even more, hitting perhaps $150 sometime before or during July 2008.
The problem is the ever increasing demand for oil, particularly the drastic increase from emerging economics like China and India, and the upcoming summer driving season. Stop and consider. Traditionally we tended to think of the summer driving season as being just for North America and Europe, but now Chinese and Indians are taking regular summer roadtrips too. It is afterall still cheaper than flying.
China's oil usage is 9 million barrels per day and it is expected to go up to 20 million barrels per day in the next 4 years, and is currently outpacing estimates on both its economy and its oil usage. Russia, Iran and Venezuela have unique opportunities right now to make a huge fortune selling their oil to China.
Which for North America means it is a seller's market and the United States is losing the bidding war. The USA still uses 21 million barrels per day and that number continues to grow despite attempts to cut back on oil consumption. China's usage is expected to pass that of the USA by 2014.
To get that oil however has led the Chinese to establish deals with dubious African governments – including Sudan, Chad and Zimbabwe where citizens live under brutal dictatorships and the dictators are using their power to reap huge profits from oil exports while ignoring their own people. (See Robert Mugabe: Dictator for Life.)
This global demand is creating a shortage of oil (and therefore gasoline/petrol and diesel). This shortage also boosts the demand for bio-diesel, and directly raises the prices of corn and other products used for making bio-diesel.
That means that the prices of food commodities skyrocket for two separate reasons: #1. Farmers need fuel for their tractors and other farming machinery, and higher diesel prices equals higher overall food costs. #2. Demand for bio-fuel raises the prices of specific commodities, forcing farmers to make choices to grow more valuable crops (thus creating a shortage of other crops).
Food prices in some cases have doubled or quadrupled in value, and this has resulted in foot riots in some of the world's poorest nations where the price of food has become so intolerably high that people are becoming desperate and resorting to violence just to get the food they need for their families.
The World Food Programme (an United Nations organization that helps distribute food to the world's poorest nations) has said that high food prices are creating the biggest challenge that WFP has faced in its 45-year history, calling it "a silent tsunami" threatening to plunge more than 100 million people on every continent into hunger, starvation and war.
Nor is this the end of the problem.
The United States is already in a recession, and a recession in the USA usually means a global economic slowdown. GDP in the USA is still up 2%, so its not officially a recession, but the American dollar has lost approx. 20% of its value in the last year against all other major currencies. So while the USA continues to produce the same products and slightly more of them, the overall value of those products have been diminished. This is actually good for the USA in the long run because it will boost exports and Americans will be more likely to purchase goods made in North America instead of cheaper goods made in Asia.
There is a psychological effect however. Americans know something wonky is going on with the economy and the result is that they cut back on spending and try to spend more wisely. Having oil prices over a hundred dollars makes Americans nervous and the cost of filling up their SUVs to go to work or drive their kids home from school is suddenly becoming more pricey.
What is actually really unnerving is that if you look at the history of oil prices you see that in 1999 oil prices hit roughly $10/barrel. So in 9 years it has gone from $10/barrel to $120. In 2003 it was hovering around $30/barrel. After Hurrican Katrina it shot to over $60, and only in the last few years the shortages have started to pile up and demand has been growing so strong that it is now first come first served.
So oil producing nations are going to become very rich in a short period of time (more so than they are already). OPEC (The Organisation of the Petroleum Exporting Countries) made $650 billion from oil sales in 2006, compared with $110 billion in 1998.
Two of the Bush administration’s least loved leaders: Hugo Chávez of Venezuela and Mahmoud Ahmadi-Nejad of Iran will have more spending money. Venezuela's policy is to subsidise everything from housing to cheaper bus fares. Iran will have more money to fund its nuclear programme and to support groups such as Hamas in Gaza and Hezbollah in Lebanon.
The Russian government will find it easier to buy off impoverished pensioners and to take tough positions on a range of international issues, from the future of Kosovo to America’s plans for missile defence in Europe.
Tyrannical governments sitting on oilfields will be more likely to find protection from powerful oil-consuming countries. China, for example, will be even less likely to support bringing pressure to bear on the governments of Burma and Sudan.
Then there is the tricky matter of Iraq and Iran. If expensive energy further slows the US economy, then spending billions in Iraq every month will seem even more painful. But retreating from a country with huge oil reserves also becomes a less attractive prospect. And what about the plans to build an oil pipeline from Iraq, through Iran and Afghanistan and all the way to China? The Chinese have already finished building their part of the pipeline and construction is already going on in Iraq and Afghanistan to finish those sections of pipeline too.
So the problem now is that we have to finish building the pipeline, which means attacking Iran and finishing the pipeline across Iran, thus connecting China with a source of oil for the next 30 to 50 years, which would lessen the demand because there would be ample supply.
It won't be George W. Bush leading the war against Iran however. It will be up to whoever replaces him to reluctantly go to war against Iran and secure oil supplies for China.
Only then will oil prices finally settle down and only then will food prices become cheaper and things can go back to relatively normal.
Scientists, engineers and the energy sector are still years away from making hydrogen cars a reality and the first mass production hydrogen cars are not expected until after 2011.
Bio-fuel is also not as green as it appears, as it is basically like setting fire to whole fields of crops and neither helps the environment or keeps food prices down. Making bio-fuel is a mistake and we would better off shelving that one in the Guinness Book of Records as one of the stupidest things we've ever done.
Meanwhile the Zenn car is now being marketed in the USA as a city vehicle, but electric cars are still not suitable for long commutes.
US to buy reserve oil even if cost tops $100/barrel
U.S. Energy Secretary Sam Bodman said on Friday that the government won't delay its plan to buy oil this summer for the Strategic Petroleum Reserve even if crude prices stay above $100 a barrel.
"As best I can tell, yes, that's correct," Bodman said when asked by Reuters if the department would still purchase oil if prices were more than $100 per barrel during the peak summer driving season.
The price of U.S. oil reached a record $117 a barrel on Friday at the New York Mercantile Exchange.
The Energy Department plans to spend about $584 million to help replace some of the 11 million barrels of crude from the reserve it sold to refineries in the autumn of 2005 after Hurricane Katrina disrupted petroleum supplies.
The department will first conduct an analysis on the impact to the market and to consumers of buying oil for the reserve before it would solicit bids to energy companies. In reviewing any bids, the department would look to see if buying oil would be a good deal for taxpayers.
The emergency reserve, created by Congress following the 1973-74 Arab oil embargo, now holds about 701 million barrels of crude at four underground storage sites in Texas and Louisiana.
Many U.S. lawmakers and energy experts have urged the department to temporarily halt crude deliveries to the reserve, which now average about 70,000 barrels a day, arguing they keep valuable supplies off of the market and help to push up oil and gasoline prices.
However, Bodman told reporters he was against a recent proposal from the Republican presumptive presidential nominee Senator John McCain to stop adding crude to the reserve with prices so high and also to suspend for the summer the federal excise tax of 18.4 cents levied on each gallon of gasoline sold.
"I don't think it's a good idea," Bodman said of suspending the gasoline tax. He said the revenue is needed to help build and repair U.S. highways and bridges.
As for McCain's idea to delay putting more crude into the oil reserve, Bodman said: "That is not something I'm in favor of."
Bodman said the United States needs to build its emergency oil stockpile so it can replace 90 days of crude imports if necessary, and now the reserve only holds about a 55-day supply.
Separately, Bodman said growing reliance by the United States on fuel ethanol, made mostly from corn, has helped to increase food prices.
"Well, I think it is fair to say that it has contributed to it," said Bodman. "Food, corn is more expensive than it was."
Bodman said the weak U.S. dollar has also made commodities, such as grains and oil, more attractive investments, which has helped to push up prices. (Reporting by Tom Doggett; Editing by Marguerita Choy)