Category Archives: Energy

Reminder! February 6th Meeting

 The National Security Forum presents 

Dr. John Scire

on

American Energy Independence: 

A Realistic Goal? At What Cost?

Goodbye CENTCOM?

The Ramada, Wednesday, February 6, 9 am

Dr. John Scire is a leading expert on energy trends, both as an adjunct professor and as an investment advisor. He will review the revolutionary changes, especially in oil and gas production, and particularly in North America and the United States. Just a few years ago, experts were predicting the world had reached “peak oil” and that oil and gas production would begin a steady decline. However, aided specifically by new drilling techniques (hydraulic fracturing) it now appears that the US might achieve energy independence in a relatively short period of time. If so, what are the national security implications of the tectonic shift in the nation’s energy balance?

In this talk, John will discuss the potential as well as the pitfalls ahead in achieving energy self-sufficiency, the revolutionary changes brought about by shale rock exploitation, and the extraordinary success that the rapid  expansion of natural gas production has generated. Scire will look at the national security implications of this revolution in oil/gas production, the prospects for future “resource wars” (particularly by China with its neighbors), and U.S. policy in the volatile Middle East (as John says, “Goodbye CENTCOM?”).

Dr. Scire has taught Energy Policy at UNR as an Adjunct Professor for 15 years and has published numerous articles and one book on Energy Policy. His fulltime occupation is that of a Financial Advisor where has focused on energy-related investments. He has also served thirty years in the Active and Reserve Army and Marine Corps in infantry, intelligence, civil affairs, and psychological warfare assignments.

Please join us for what will be a very interesting discussion. A full breakfast will be served ($15 at the door; $5 for students with ID), so recommend you arrive by 8:30 to enjoy some coffee and conversation.

Please RSVP on our website by clicking here or you may RSVP by phone (775) 746-3222 or email twcobb@aol.com.

 

The Cost of Green Jobs

Green Jobs Cost Big Bucks—Or Do They Promote Diversification and Actually Lower Energy Costs?

 

The Council on Foreign Relations produced a study on the costs of “green energy” that lays out the high costs involved with the promotion of solar and wind, which–at a time of surging natural gas production domestically–should give us pause for reconsideration. However, Luke Busby, an energy expert and NSF participant, argues that the CFR study is biased and misleading. He lays out an argument for “clean energy” and for renewable energy mandates. 

The summary of the CFR study and Busby’s thoughtful response are below. Ty

 

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Obama’s Green Jobs Cost Big Bucks

Posted on November 2, 2012 9:52 am
by Benn Steil and Dinah Walker

President Obama is committed to pursuing a “[renewable-energy] strategy that’s cleaner, cheaper, and full of new jobs” (January 24, 2012). He highlighted the job point during the October 16 presidential debate: “I expect those new energy sources to be built right here in the United States. That’s going to help [young graduates] get a job.”

Green may be good, but this week’s Geo-Graphic shows that the jobs come at a hefty cost.

The Joint Committee on Taxation estimates that energy-related tax preferences will cost Americans $5.4 billion this year. Half of this, $2.7 billion, will benefit green sectors: $1 billion in nuclear subsidies, $1.3 billion in wind-energy credits for electricity production, and $400 million in solar-energy property credits.

So-called “section 1603” renewable energy grants, part of the 2009 fiscal stimulus package, will cost taxpayers a further $5.8 billion. If we assume that the grants are awarded across sectors in the last five months of this year as they were in the first seven, then the nuclear, solar, and wind energy sectors will receive $4 billion of this, boosting total green-sector subsidies to $6.7 billion this year.

Taxpayers will also provide $700 million in energy-efficient property credits. The credits apply mainly to solar, though we don’t know the precise allocation – so we leave it out of the figure, which therefore understates the cost of solar-backed jobs.

Dividing the total wind, solar, and nuclear subsidies by the number of Americans employed in these sectors (252,000), they are currently generating jobs at an average annual cost to taxpayers of over $29,000. Wind jobs cost taxpayers nearly $47,000 per job per year.

By way of comparison, the coal, oil, and gas sectors receive $2.7 billion in subsidies annually, and employ about 1.4 million Americans. The taxpayer-cost per job in these sectors is therefore just over $1,900.

The bottom line is that green-energy jobs cost taxpayers, on average, 15 times more than oil, gas, and coal jobs. Wind-backed jobs cost 25 times more.

Given the current state of energy-production technology, green jobs don’t come cheap.

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Response to “Obama’s Green Jobs Cost Big Bucks”

By Luke Busby

“Given the current state of energy production technology, green jobs don’t come cheap,” concludes a recent Council on Foreign Relation’s article entitled, “Obama’s Green Jobs Cost Big Bucks.” There is nothing novel, new, or even important about this simplistic assertion, which is clearly intended to stoke anti-renewable sentiment. A deeper look at the subtleties of the issue reveals a more complex picture.

For example, it’s widely known that renewables are more expensive, but only if one does not account for extremely expensive environmental externalities such as global warming, which the oil and gas industry conveniently gets to ignore in its pricing.

There are significant reasons for the resurgence of political support for the renewable energy industry over the past twenty years or so. Growing awareness of global warming and the approach of peak oil coupled with events like the dramatic price spikes in fuel prices — such as the one which followed hurricane Katrina and  immediately preceded the economic crisis in 2008  — frightened the consuming public and exposed the frailty and inflexibility of our energy infrastructure. As a result, the public demanded action and elected leaders who support renewable energy.  But the economic crisis that began in 2008 caused a substantial drop in demand for electricity and prices for natural gas and coal have fallen dramatically.  Now some fickle policy makers have forgotten the hard lessons of the past 20 years and have waned in their support for renewables, largely based on narrowly focused data like that presented in CFR’s article.

But the fundamentals haven’t changed. My home state of Nevada has an electricity generation fleet that is roughly 70% dependent on natural gas, basically none of which is produced in the state.  The costs for this fleet will amortize over a period of about 30 years.  Just 4 years ago the price of natural gas spiked almost four fold over what it is today.  If such a spike were to happen now it would certainly crush Nevada’s recovering but fragile economy. In the short term there would be essentially nothing that state policy makers could do about it.

With such reliance on natural gas, it is reasonable to question whether utilities are setting up customers for hugely risky and economically damaging price swings.  It’s not in the public’s interest to have an energy policy that is reactive and that makes long term decisions based on the fossil fuel du jour. The “surging natural gas production” in the United States the past few years— which is causing the current low prices — is yet another turn on the fossil fuel wheel of samsara.  We are in the boom now, so all of the news is rosy.  We are told that the supply is massive and that prices will always be low.  But when the bust comes, as it inevitably will, the pain will be appreciable, as it always is.  Renewables have one hugely underappreciated advantage: you know exactly what you are getting and for how much up front.  This knowledge has huge value.

Policies that promote renewable energy development, such as renewable portfolio standards and feed-in-tariffs, create substantial downward pressure on prices for other electricity sources.  Offsetting thirty-three percent of demand for fossil or nuclear fueled electricity in California, one of the world’s largest economies in and of itself, will certainly have an impact on the demand for these other sources.  In Nevada, our twenty five percent by 2025 renewable portfolio standard will lessen demand for electricity from non-renewable sources by about 500 megawatts.  A 500-megawatt natural gas plant costs somewhere in the neighborhood of $700 million dollars to build, not including the price of the gas to make it run.

The low prices we are currently seeing in natural gas and coal could be in part a consequence of this pressure.  This is the clearly the experience with the German wholesale electricity market, which experienced significant price and demand declines as a direct result of Germany’s aggressive feed-in-tariff.  The motivation for the Germans to become energy independent is largely driven by the geopolitical subtleties of Europe. Since much of its natural gas comes from Russia, strains in that relationship can cause major energy headaches in Germany.

Subsidization of renewables is working to lower prices for renewables, as indicated by the decline in prices for photovoltaic solar over the past ten years.  Should subsidies for renewables decline as the prices decline?  Of course they should.  But pulling the rug out from underneath the industry now belies all of the substantial investments made so far in building it up. Moreover, it makes much more sense to build a renewable energy infrastructure while we still have time to make an orderly transition from fossil fuels, than to wait until we’ve reached a crisis point of fossil fuel scarcity. With China and other countries investing heavily in renewable technology, we could find ourselves hopelessly behind and at the mercy of foreign manufacturers.

CFR’s article does a disservice by providing ammunition for incomplete analysis of such complex issues.  Comparing oil and gas to renewables in terms of one denominator is simplistic and uninformative.

Luke Busby is a lobbyist and attorney in Nevada. His practice includes representing clients before the Public Utilities Commission, the Courts, and local governments. He wishes to thank Kevin Pedraja of Seattle for his assistance on this article.

The Explosion of US/Americas Oil & Gas Production

Colleagues: Two columns today looking at the nation’s energy future, with the key arguments being that the coming explosion in availability of natural gas and, yes, oil, makes a focus on some renewable sources, such as wind and solar, questionable at this recessionary time. First, my column that appeared in today’s Reno Gazette Journal, and the second by a leading energy expert, Dan Yergin, in today’s Washington Post. A key takeaway–the Americas, if not the US, can soon be “energy independent”, a thought we could not have considered uttering just a year ago. Ty

Let’s Stop Drinking the Renewable Energy Kool-Aid

Proponents of “Green Energy” continue to hype the potential of solar, wind, biomass and other renewable resources as cheap, abundant engines that can efficiently propel economic growth in the state. These cheerleaders, however, ignore the soaring costs associated with producing electricity from these sources, a differential that will only be magnified as vast new reserves of traditional fossil fuels become available.

These adherents seem unaware of the shale gas revolution that has occurred in the last few years and the coming explosion of oil production in North America. Hydraulic fracturing (fracking) has unearthed vast natural gas reserves previously buried in inaccessible shale rock. That technique is now being applied to extracting oil, opening up tremendous potential in Canada and throughout the central United States.

There is a historic shift occurring in global oil and gas production. American expert Dan Yergen predicts an anmazing “new rebalancing”, with the Western hemisphere moving back to self-sufficiency and an end to our reliance on long distance energy shipments from areas of conflict! Venezuela is now considered to have bigger oil reserves than Saudi Arabia, new finds in the Arctic area are very promising, and recent oil exploits in Canada and the U.S. suggest that technology may be trumping geology. Offshore oil will be tapped, but the most significant development is the exploitation of extensive rock formations ranging from Texas to North Dakota, believed previously to be too costly and technologically impossible to extract the fuels.

Just a few years ago, many of us worried that the world had reached “peak oil”, the point at which global petroleum production began a steep downward slope. Now these new extraction techniques promise such an expansion of oil and gas production that some observers believe the United States could soon become energy independent. While these estimates are somewhat optimistic there is no doubt that the revolution in technology will alleviate our dependence on oil from the volatile Middle East and gas from such unreliable suppliers such as Russia and Algeria.

Inexplicably, in the midst of this revolution we still hear claims that Nevada can play a key role in the development of green technology as well as becoming a net exporter. In fact, the only renewable that offers real potential for the state is our extensive geothermal resources. We need to maintain the emphasis on geothermal, with a view to exploiting the promising returns that could come from deep drilling and “fracking”.

Presently solar and wind cost about five times per kw/hr of electricity generated than natural gas, despite questionable extensive federal subsidies (think Solyndra, whose bankruptcy caused the government to lose a half billion dollar loan guarantee!) We need to continue conducting research in these areas given that fossil fuels can’t last forever, but the expansion of gas and oil production affords us time to make solar, wind and, yes, nuclear, more reliable and cost efficient alternatives.

While the United States must continue to invest in renewable energy technologies, and exploit the potential offered by nuclear and geothermal today, we must take advantage of the coming surge in shale gas and oil production here. To not embrace this revolution would be economic suicide.

Tyrus W. Cobb

This op-ed appeared in the Reno Gazette-Journal, October 30, 2011

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Oil’s new world order

By Daniel Yergin, Washington Post, October 30, 2011

For more than five decades, the world’s oil map has centered on the Middle East. No matter what new energy resources were discovered and developed elsewhere, virtually all forecasts indicated that U.S. reliance on Mideast oil supplies was destined to grow. This seemingly irreversible reality has shaped not only U.S. energy policy and economic policy, but also geopolitics and the entire global economy.

But today, what appeared irreversible is being reversed. The outline of a new world oil map is emerging, and it is centered not on the Middle East but on the Western Hemisphere. The new energy axis runs from Alberta, Canada, down through North Dakota and South Texas, past a major new discovery off the coast of French Guyana to huge offshore oil deposits found near Brazil.

This shift carries great significance for the supply and the politics of world oil. And, for all the debates and speeches about energy independence throughout the years, the transformation is happening not as part of some grand design or major policy effort, but almost accidentally. This shift was not planned — it is a product of a series of unrelated initiatives and technological breakthroughs that, together, are taking on a decidedly hemispheric cast.

The search for a “hemispheric energy policy” for the United States has been a subject of discussion ever since the oil crises and supply disruptions of the 1970s. Yet it was never easy to pin down exactly what such a policy would mean. Some years ago, an economic adviser to a presidential candidate dropped in to see me, explaining the directive that his boss had given him: “You know that Western hemispheric energy policy that I have been giving speeches about? Could you talk to some people around the country and find out what I actually mean by a Western hemispheric energy policy?”

The notion of “hemispheric energy” in the 1970s and 1980s rested on two pillars. One was Venezuela, which had been a reliable petroleum exporter since World War II. The other was Mexico, caught up in a great oil boom that had transformed the United States’ southern neighbor from an oil importer into a major exporter.

But since Hugo Chavez took power in Venezuela, its petroleum output has fallen — about 25 percent since 2000. Moreover, Venezuela does not seem quite the pillar to rely on when its leader denounces “the U.S. empire” as “the biggest menace on our planet” and aligns his country with Iran. And Mexico, which depends on oil for 35 percent of its government revenue, is struggling with declining output. Without reform to its oil sector and international investment, it could become an importer of oil later this decade.

The new hemispheric outlook is based on resources that were not seriously in play until recent years — all of them made possible by technological breakthroughs and advances. They are “oil sands” in Canada, “pre-salt” deposits in Brazil and “tight oil” in the United States.

In little more than a decade, Canada’s oil sands have gone from being a fringe resource to a major one. Oil sands (sometimes known as “tar sands”) are composed of very heavy oil mixed with clay and sand. The oil is so heavy and molasses-like that, for the most part, it does not flow until it is separated from the sand and clay and treated. To do that on a large scale and on a commercial basis has required substantial advances in engineering over the past 15 years.

Oil sands production in Canada today is 1.5 million barrels per day — more oil than Libya exported before its civil war. Canadian oil sands output could double to 3 million barrels per day by the beginning of the next decade. This increase, along with its other oil output, would make Canada a larger oil producer than Iran — becoming the world’s fifth largest, behind Russia, Saudi Arabia, the United States and China.

The oil sands have become particularly controversial because of environmental groups’ vigorous opposition to the proposed 1,700-mile Keystone XL pipeline, which would carry oil from Alberta to the Texas coast. The pipeline is waiting for the Obama administration to say “yea” or “nay.” Though large, it would increase the length of the oil pipeline network in the United States by just 1 percent.

The main reason given for the opposition is the carbon dioxide associated with oil sands production, but the impact of this should be considered in the context of the overall release of CO2. When measured all the way from “well to wheels” — that is, from production to what comes out of an auto tailpipe — oil sands average 5 to 15 percent more carbon dioxide than the average barrel of oil used in the United States. And this country uses other streams of oil that generate CO2 in the same range.

Even while the environmental argument rages, oil sands are proving to be a major contributor to energy security. Although it is easy to assume that most U.S. oil imports come from the Middle East, the largest individual share by far — nearly a quarter of the total — comes from Canada, part of a dense network of economic ties that makes Canada the United States’ largest trading partner. More than half of Canada’s oil exports to the United States come from oil sands, and that share will rise steeply in the years ahead.

At the other end of that hemispheric oil axis is Brazil. When Brazil began to develop ethanol from sugar in the 1970s, it did so based on the conviction that the country had no oil. As it turns out, Brazil has lots of oil. Just the increase in Brazilian oil production since 2000 is more than one and a half times greater than the country’s entire ethanol output.

In the middle of the last decade, new breakthroughs in technology made possible the identification and development of huge oil resources off the southern coast of Brazil that until then had been hidden below a belt of salt a mile thick. The salt had rendered unreadable the seismic signals necessary to determine whether oil was there. “The breakthrough was pure mathematics,” said Jose Sergio Gabrielli de Azevedo, the president of Petrobras, Brazil’s national oil company. “We developed the algorithms that enabled us to take out the disturbances and look right through the salt layer.” Once discovered, further technical advances were required to cope with the peculiarities of the salt layer, which, sludge-like, keeps shifting.

Developing these “pre-salt” resources, as they’ve become known, is a big technical, political and logistical challenge for Brazil, and will require huge investments. But, if development proceeds at a reasonable pace, Brazil could be producing 5 million barrels of oil per day by around 2020, about twice Venezuela’s current output — and more than half the current output of Saudi Arabia. That would make Brazil, not Venezuela, the powerhouse of Latin American oil, and could make it a major exporter to the United States.

The third major supply development has emerged right here in the United States: the application of shale-gas technology — horizontal drilling and hydraulic fracturing, a process popularly known as “fracking” — to the extraction of oil from dense rock. The rock is so hard that, without those technologies, the oil would not flow. That is why it is called “tight oil.”

Case study No. 1 is in North Dakota, where, just eight years ago, a rock formation known as the Bakken, a couple of miles underground, was producing a measly 10,000 barrels of oil per day. Today, it yields almost half a million barrels per day, turning North Dakota into the fourth-largest oil-producing state in the country, as well as the state with the lowest unemployment rate.

Similar development is taking place in other parts of the country, including South Texas and West Texas. Altogether, tight oil production is growing very fast. The total output in the United States was just 200,000 barrels per day in 2000. Around 2020, it could reach 3 million barrels per day — a third of the total U.S. oil production. (And that is a conservative estimate; others are much higher.)

Together, these three developments will radically alter the global flow of oil. The Western Hemisphere will still require supplies from the rest of the world, but not to the same degree — and certainly nowhere near the growing amounts forecast just a few years ago. The need could fall by as much as half by 2020, which will mean declining imports from the Middle East and West Africa.

Oil that would have gone west from those regions will instead flow in increasing volumes to the east — to the booming emerging markets of Asia. And those markets will be in urgent need of additional supplies. China, which today consumes half as much oil as the United States, could by the beginning of the next decade overtake America as the world’s largest oil consumer. All of this points to a major geopolitical shift, with Asian economies having an increasing stake in the stability of Mideast oil supplies. It also raises a very significant question over the next several years: How will responsibility be shared among the great powers for the stability of the Persian Gulf?

For the United States, these new sources of supply add to energy security in ways that were not anticipated. There is only one world oil market, so the United States — like other countries — will still be vulnerable to disruptions, and the sheer size of the oil resources in the Persian Gulf will continue to make the region strategically important for the world economy. But the new sources closer to home will make our supply system more resilient. For the Western Hemisphere, the shift means that more oil will flow north to south and south to north, rather than east to west. All this demonstrates how innovation is redrawing the map of world oil — and remaking our energy future.

outlook@washpost.com

Daniel Yergin is chairman of IHS Cambridge Energy Research Associates and the author of “The Quest: Energy, Security, and the Remaking of the Modern World.”

NSF: High Speed Application for CNG!

Colleagues:

When I sent out the point paper on natural gas (NG), highlighting what appears to be a vast expansion of gas production through “unconventional means”, a number of you were in agreement but some had reservations. A few doubted that natural gas could be converted for use in the transportation sector as fast or as effectively as I noted (and as Dr. Scire has claimed) and questioned its ability to power larger trucks or cars.

Well, let me highlight one individual who is using compressed natural gas (CNG) quite efficiently in the world of high speed racing. Specifically, Roger Lessman of Truckee and Reno, has designed and built this very successful racing car that will attempt to set a land speed record of over 400 mph at the Bonneville Salt Flats this year in the AA/BG class (“AA” relates to all cars running with over 500 cubic inch displacement; “BG” means Blown Gas).

Roger wanted to build a car that had a “green tint” to it and ran on alternative fuels. He was convinced by friends at Colorado St. University to switch to CNG. Lessman is now doing something that has not been done before—trying to get a large amount of horsepower out of a piston engine using CVNG as the fuel. The engine is an aluminum racing version of a “big block” Ford 460, with a displacement of 572 cubic inches, twin turbo-charged, and “all the race stuff inside”. He believes the car can reach speeds over 400 mph at the Flats—he already has gone over 332, the fastest a CNG-powered car has gone.

Of course Roger is not alone in this endeavor, with a team that stretches from a friend in Smith Valley, NV, to the Riley Technologies firm, and his partner, Reno based lobbyist Susan Fisher. He keeps the “Streamliner” in his garage in Truckee and will bring it to Reno prior to heading for the Salt Flats and a shot at the record.

In the endeavor Roger says he has become a strong advocate of using CNG as a partial solution to our energy problems and specifically to reduce our dependence on foreign oil. He thinks current engines can be easily modified to use CNG, which costs less than half what gasoline does per energy equivalent.

Want more on Roger, the Streamliner and the use of CNG in high-powered racing cars? See his website—www.lessmanracing.com

–      Ty

Global Oil Flows and the Fragility of the Saudi Monarchy

Colleagues: Two very thoughtful and important op-eds on the fragility of the Saudi political structure, the prospect of the revolutions in the Arab world sweeping away all remnants of the old order, and the likelihood of a serious disruption of global oil markets.

We have been striving for “Energy Independence” for decades, yet we have gone from importing 36% of our petroleum requirements in the Reagan days to almost double that today–about 66%. We have had little success in substituting for oil, particularly in the transportation sector, and in exploiting domestic oil reserves (and not just for political reasons). We have had a schizophrenic policy on the protests that are exploding in the Arab world, but as the two authors warn, we need to be very careful in not assisting the overthrow of monarchies/stable, autocratic governments lest the turmoil and anarchy lead to serious disruptions in the flow of oil and a likely collapse of the global economic order.

Difficult to thread the needle between our moral imperatives and our need for stability in this region, but both authors worry that the current administration is not handling that balance very well. Read on! Ty

The new geopolitics of oil

By Ed Morse

Published: April 6 2011 in the Financial Times

A new dynamic has emerged in oil markets that is likely to push prices on to a higher path in the years ahead than almost anyone had forecast a year ago. It relates to the now unfolding critical dimensions of what can be called the “new geopolitics” of oil.

Although the disruption of Libyan supplies has had a tangible impact both in the Mediterranean market and in the global balance between light sweet and heavy sour crude streams, the 30 per cent increase in oil prices since the start of the year has had far more to do with changed expectations than market fundamentals. And while there may be good reasons to believe that oil prices could fall later this year, there are many more to fear rising prices.

Three elements of the new geopolitics are becoming clear.

First, the profile of many oil producing countries has long been seen as precarious. The profile includes a combination of rapidly growing, young populations, high unemployment, skewed distribution of income, geriatric and kleptomaniac leaders with diminishing political legitimacy, and rising public expectations.

This is not new news. What is new is the explosive way popular discontent can lead to civil disorder and regime change and spark contagion. The prospect of the largest oil producing countries confronting challenges, such as those seen largely in north Africa so far, is more probable now than a year ago, telescoping the potential day of reckoning and raising the probability of an apocalyptic oil supply disruption.

The oil risk premium is likely to remain high for a long period as any review of potential additional instability and supply disruptions makes clear. This month’s set of three weekends of Nigeria elections is likely to bring violence and potential oil disruption. Civil disorder and political fragmentation in Yemen could interrupt 300,000 barrels a day of oil exports and cargoes of liquefied natural gas and could further jeopardize shipping through the 18-mile wide Bab El-Mandab through which 4m b/d of oil flows to the Suez Canal and the Sumed pipeline.

Then there’s the ever present dangers from terrorist attacks on Saudi oil facilities, political upheaval in Iran, or an awkward combination of simultaneous disruptions in Algeria, Nigeria, Syria and Libya. Or civil disorder could erupt in Venezuela where the socioeconomic political profile doesn’t differ much from oil producers in the Middle East.

Particularly dangerous in the short term is a real disruption of light, low-sulphur crude oil from Algeria or Nigeria or both. As has been learnt from the Libyan shortfall, light sweet crude is needed to make low sulphur transportation fuels and there is no capacity to replace that anywhere, whatever the level of Saudi spare production capacity.

Second, in order to ward off popular discontent, oil producing countries are dramatically increasing public expenditures. In Saudi Arabia, King Abdullah has announced two packages of spending equivalent to $125bn, about 27 per cent of last year’s gross domestic product, where the important impact is on what Saudi Arabia needs to earn from oil exports. The budgetary break-even price for Saudi Arabia seems to have escalated by 30 per cent to $88 per barrel, with similar impacts elsewhere, according to a recent report from the Institute of International Finance. These spending commitments cannot easily be wound down, and looking at Opec as a whole, pressure for ever higher prices is likely to become a more permanent part of the petroleum landscape.

Third, as part of the pressure to deliver more material goods at home, oil producers are likely to continue domestic subsidies, including for energy, accelerating domestic oil demand and decreasing oil production available for exports. Middle East producers are set to consume 1m b/d more in 2015 than in 2010 with another 1.5m b/d by 2020. That could tighten markets considerably.

There are reactions to future supply disruptions already. Just last week, President Barack Obama appeared to eat a lot of past words on the balance between environmental protection and development of fossil fuels at home, tilting the balance toward oil and gas less than one year after the Macondo disaster. Mr Obama’s target to decrease US oil imports by a third by 2022 may well be doubled, given the pace of US discoveries in the Gulf of Mexico and onshore.

Notwithstanding all of the dangers ahead, the price of oil could well fall by summer or year-end, as some of the risk froth comes out of the market. Investors have dramatically increased purchases in high-priced call options for expiry at the end of 2011 and 2012, reflecting a higher probability of increased prices. If short-term stability prevails, their bets will come off the table. But it remains the case that while oil markets are unlikely to face Armageddon this year, it looks like it’s coming a lot sooner than it appeared a year ago.

Ed Morse was US deputy assistant secretary of state for international energy policy from 1979-1981. He will join Citigroup in May as global head of commodities research

Copyright The Financial Times Limited 2011

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Washington Post
April 8, 2011

A Hard Line In The Sand

President Obama’s Saudi dilemma

By Martin Indyk

There’s a crisis in U.S. policy in the Middle East — and it’s not about Libya. For weeks the Obama administration has been preoccupied with averting a humanitarian catastrophe in North Africa. But on the other side of the region, in the oil-rich Arabian Peninsula, a matter of vital, strategic importance awaits the urgent attention of policymakers.

Over there, the ailing 87-year-old king of Saudi Arabia probably isn’t getting much sleep. Abdullah, this Sunni monarch of monarchs, custodian of the holy mosques of Mecca and Medina, can see the flames of instability and turmoil licking at all his borders. In the south, Yemen is imploding, to the advantage of his al-Qaeda enemies. In the east, Bahrain’s Shiite majority has been in such a state of revolt that Abdullah has already sent armed forces to prevent Iran from establishing a “cat’s paw” on the Sunni Arab side of the Persian Gulf. In the north, Abdullah sees Iraq’s Shiite-dominated government as nothing more than a front for the hated Persians. In the west, a Palestinian majority is demanding that the Hashemite king of Jordan become a constitutional monarch. Meanwhile, Egypt’s Hosni Mubarak, that other Sunni pillar of regional stability, has already been overthrown.

Historically, in times of trouble, Saudi kings have depended on American presidents to guarantee their external security. But at this moment of crisis, Abdullah views President Obama as a threat to his internal security. He fears that in the event of a widespread revolt, Obama will demand that he leave office, just as he did to Mubarak, that other longtime friend of the United States. Consequently, Abdullah is reportedly making arrangements for Pakistani troops to enter his kingdom should the need to suppress popular demonstrations arise. (Did Marty really say “Pakistani troops?”)

This presents the Obama administration with a particularly thorny dilemma. Saudi Arabia is the world’s largest oil producer and the only one with sufficient excess production capacity to moderate rises in the price of oil. Instability in Saudi Arabia could produce panic in the oil markets and an oil shock that could put an end to America’s economic recovery (and the president’s hopes for reelection). This would argue for granting an “exception” to Saudi Arabia from the Obama administration’s trumpeting of universal rights. Indeed, the soft criticism of Bahrain’s Saudi-dictated suppression of its people suggests that this has already become U.S. policy.

Yet helping the Saudi king effectively erect a wall against the political tsunami sweeping across the Arab world is not a long-term solution. If there’s one thing that we can now predict with some confidence, it’s that no Arab authoritarian regime can remain immune from the demands of its people for political freedom and accountable government. To be sure, $100 billion in subventions from the palace and the promise of 60,000 jobs can help postpone, for a time, the demands of unemployed Saudi youths. But political freedom, transmitted across borders via cable TV and the Internet, has proved to be a seductive idea. In the end, it will not be assuaged by economic bribes or police-state suppression.

And the Saudi system is fragile. Power is concentrated in the hands of the king and his brothers, who are old and ailing. The Saud family’s legitimacy depends in significant part on its pact with a fundamentalist Wahhabi clergy that is deeply opposed to basic political reforms, such as equal rights for women. The deep structural tensions generated by a 21st-century Westernized elite existing within a 15th-century Saudi social structure have been papered over for decades by oil wealth. If this strange social contract begins to fray, it might tear completely. And over in the eastern quarter, adjacent to Bahrain, where most of Saudi Arabia’s oil reserves are located, sits a restive Shiite minority who have been treated as second-class citizens for decades.

Even if the Obama administration were understandably inclined to leave well enough alone, it cannot afford to do so for other reasons. The Saudis are attempting to erect the wall beyond their borders not only by suppressing the revolt in Bahrain but also by insisting that Jordan’s king not pursue the reform agenda he has promised his people. In effect, Abdullah intends to carve out an exception for all the kings and sheiks — Sunni to a man — in Saudi Arabia’s neighborhood. It might work for a time. But should this dam break, it could generate a sectarian Sunni-Shiite, Arab-Iranian conflict on one side and an Arab-Israeli conflict on the other. It could spell the end of Pax Americana in the Middle East.

For all of these reasons, President Obama urgently needs to negotiate a new compact with King Abdullah. He has to find a way to convince him that defining a road map that leads to constitutional monarchies in his neighborhood, and eventually in Saudi Arabia, is the only effective way to secure his kingdom and the interests of his subjects. Abdullah has been willing to undertake important reforms in the past. But if the king is to be persuaded to embark on this road again, he will need to know that the president will provide a secure safety net of support, rather than undermine him. And he will need to know that the United States will not make a deal with his Iranian enemies at Saudi expense.

Such a compact would be difficult to negotiate in the best of times. It cannot even be broached in current circumstances unless the basic trust between the president and the king can be reestablished. With a budget crisis at home and turmoil in the Middle East, it’s understandable that Obama has had little time for the personal engagement with potentates that does not come naturally to him. But it’s not just Abdullah’s survival that is at stake. A revolt in Saudi Arabia could sink his presidency.

The writer is vice president and director of the Brookings Institution’s foreign policy program and convener of the U.S.-Islamic World Forum, which meets in Washington next week.