Monthly Archives: May 2011

Don’t fuel your car or economy on economic projections.


Special to The Star

Published as a Guest Op/Ed piece May29, 2011

Its Memorial Day weekend- the start of the summer driving season! Oh, wait…..not this year. Who can afford to drive anywhere with these near-$4 gasoline prices and our economy in the ditch? And it’s becoming increasingly apparent that the high petroleum prices are the primary reason our economy is in that roadside ditch once again.

We have a tendency to focus on domestic oil and energy policy but the same petroleum supply crunch is actually biting down hard everywhere globally.

Although there’s been a myriad of excuses and blame for this current energy quagmire, the bottom line is oil supply has not been able to keep pace with global economic growth. From 2003 to 2007 the global economy was growing at a +6% / year clip. But global oil production stopped growing in 2005.  It’s like we have a governor on our fuel line. The world is trying to hit the economic accelerator but the fuel flow is restricted. Economic growth projections are crashing into geologic reality.

Since large oil production projects or viable alternatives to oil take at least 5-6 years to bring on, we can state with conviction that these supply restrictions aren’t going to ease anytime soon. Actually, they’re bound to tighten further due to accelerating older oil field depletion. In spite of sky high oil prices, global production has been on a steady plateau since 2005. Very soon, it’ll downtrend. The economist’s contentions that high prices will curtail demand and encourage additional supply aren’t working on either count.

Charles Koch recently authored an op/ed piece here in the KC Star entitled ‘U.S. Economic Prosperity Demands More Freedom’.

I was fortunate to have learned the oil business at Wichita-based Koch Refining having worked there as a refinery rep. and marketing manager throughout the ‘80s. The Koch brothers are definitely ardent libertarians with a legitimate firm conviction of the merits competitive forces and free markets. It’s not a self-serving facade. I have considerable respect for their business acumen within the context of our current business paradigm.  They’ve grown to become the 2nd largest private company in the U.S. by instilling and honing business efficiencies in the backwaters of major oil. They outmaneuvered and outmanaged many of their larger competitors. They’ve aggressively moved into any markets where profits seemed excessive. Contrary to the public’s perception, the oil industry- downstream from the wellhead- is very competitive. Fuels flow to the highest prices. Any collusion soon gets undermined. And it’s the large independents like Koch who really contribute to these constructive competitive forces.

But our current dire global energy supply problem isn’t due to market inefficiencies downstream from the wellhead. Its past time to acknowledge economists and their free market doctrines got it wrong on these very pivotal energy resource depletion issues.

Economists have always implied the world economy is powered by money. They even seem to imply that this money can create resources. They’re wrong. It’s the other way around.

We’ve reached a society changing crescendo which isn’t even on an economist’s radar screen. We can no longer grow energy supplies like we have for the past 150 years. It’s increasing apparent that until new breakthrough energy sources are developed, we can’t grow our economy. The political power is now shifting from oil consumers- who built very vibrant economies on cheap energy- to oil producers. This will translate into onerous wealth transfers to our adversaries and an escalating propensity for oil wars. To quote a recent McClatchy newspaper headline, “WikiLeaks cables show that it was all about the oil.”‎

A free market system only rewards the monetization and consumption of oil with all its inherent pollution. BP Deepwater Horizon, Fukishima, Fracking…are you seeing a pattern? Our system rewarded excessive energy consumption while failing to figure in the very expensive environmental costs.

There wasn’t any inherent economic incentive to conserve and preserve our valuable +100 million year petroleum legacy. To an economist oil, was no more important than any of their other input variables. It was incorrectly deemed replaceable and expendable. As a result, we overconsumed. We are still overconsuming.

U.S. Oil Production Peak in 1970 at sub$3/barrel

U.S. oil production peaked in 1970. Or to rephrase this, we depleted half of our valuable oil resource legacy into sub $3/ barrel economics. From here on out we’ll import oil from adversarial and autocratic regimes at over $100/ barrel. Those much heralded economic money flows won’t be reverberating here. If this reflects the merits of a free market approach to energy consumption, we sure should have passed.

So Charles Koch is clamoring for more economic freedom on energy policy? I’m not surprised. I’m just betting ExxonMobil and the Kingdom of Saudi Arabia like this approach too.


Those cagey oil speculators.

Published in Kansas City Star Midwest Voices Sunday, May 29, 2011 at 12:51pm

The Saudis, and now Obama, claim the run up in oil prices is due to speculators.

 Annual car sales in China have gone from 1 mil to 16 mil in the last decade. Are speculators running up the price of cars? No, because they know higher prices would bring on more car production and undermine the price rally. Oil is different because the price can go to $200 but geologic constraints limit output.

Yet conventional economics falsely treat cars and oil the same. This is a significant flaw in our system.

Smart speculators are indeed on the long side of the oil market. Because they understand global oil production capacity is bumping up against its limits. But their ‘front running’ is a good thing. They are preparing us for the $200/ barrel oil and $7 / gallon gasoline yet to come.

This isn’t a theory. We’ve had sky high oil economics since 2005. Yet global oil production has plateaued. Next comes the decline.

Instead of blaming speculators we should be digesting this as a wake up call. These escalating oil prices are telling us that our economics of plenty are now getting trumped by basic geologic depletion. Our American lifestyle is unsustainable. We’ve consumed past the ability of this finite world to supply us.

Squawking about speculators won’t help.

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