Last week’s post on the Globalization of Leadership ended with a clarion-call for change. Given that the entire US economy is built upon a foundation of energy and energy policy, it makes sense to start looking there to see where the biggest economic levers lie. Here, I offer a somewhat more analytical approach than can be found in the general media.
The US’s problem with today’s global energy game is that the worldwide playing field is dramatically tilted. The game of global macro-economics simply isn’t a fair game. The odds are dramatically stacked through the distribution of resources, both natural (most notably fossil fuels) and human (in terms of population). But the game is also biased based on which country has the technical and infrastructure wherewithal to exploit the resources wherever they might be distributed. For half a century, America developed a significant global advantage as the direct result of national policy which strongly promoted technical innovation and large infrastructure investments based on those technologies. When the whole world depended on US innovation to exploit their local natural resources, our country purposely stood in the position of gate-keeper to the world’s mineral and economic resources and it was a position we exploited handily to establish a long tenure of control, dominating petroleum and natural gas collection and refining.
But over the last twenty years, two disturbing trends have served to tilt the playing field in the opposite direction, away from the Yankees. The first trend can be seen in the rise in traditional religious influence that has through financial and political support, largely coupled itself to the machinery of the Republican Party. In reaching to sustain traditional values and strongly supporting the historical practices which made America successful in the last century, the religiously influenced right has unfortunately set itself squarely against the fundamental principles of scientific and technical progress which underpinned the US emergence as a world power. This national resurgence in Luddite attitudes is frightfully witnessed by the fact that we actually have a presidential candidate who does not know how to use a computer or even what the Internet really is much less what industry or infrastructure based on these might need to look like. The paired Vice Presidential candidate believes that intelligent design should be taught in science classes despite the observable truth that the entire nation’s critical biotechnology industry, today’s most fundamental building block of health care advancement, rests on the repeatedly demonstrated facts of evolution. Worse, these candidates are representative of giant swaths of the US that actually support them and their traditional view that last century’s outdated beliefs, technologies, and practices will suffice to lead tomorrow’s national policy.
As the US in its recent growing obsession with “traditional values” (now recast as “small town” or rural values) and celebrity has retreated from supporting fundamental research, and national-scale technology and infrastructure investments, other countries, most notably China and India who each comprise the largest concentration of the world’s human resources, have turned in the opposite direction to invest ever more in technologies and infrastructure and technical education. To their great advantage, our international competitors have managed to couple staggering national investments in science and technology education with staggering company and even national industry sponsorship to literally become the engines of manufacturing and production for the entire world. They learned what made America great, and are doing more and more of it just as we are turning to do less and less.
The second troubling development is that while China and India develop and tune their human and infrastructure engines of progress, America has managed to teach those countries fortunate in their mineral wealth to become savvier in capturing and retaining the economic value of those natural resources. Each year more countries nationalize their utility and energy companies. America is losing its position as the lone facilitator and gatekeeper (and toll-taker in the sense that by investing in, creating the technology and operating the infrastructure, US companies have made enormous profits on very high volumes of trade) for the world’s fuel and infrastructure technology and at the same time, abandoning the educational and government practices which could offer the hope of becoming the leader and gatekeeper for the world’s next set of critical resource.
We have been the technology leader of the world for almost a century, but that technological advantage has slipped. Now our cars are slower and less efficient than almost every other industrialized nation that manufactures cars. Our infrastructure, buildings and bridges, energy production and distribution, telecommunications and most recently our data network infrastructures led the world. We now lag behind much of Europe and Asia in all of those areas including Internet usage and broadband penetration and performance where we now rank 17th among industrialized nations in a technology that we invented. We squandered a ten year head start. At no time in the history of the United States has this decline been more apparent and measurable than over the last eight years. We Americans now find ourselves paying ever more dearly to purchase the best cars and displays, wireless networking technologies, and countless other things from countries that have now surpassed the systems and technologies we invented and built.
But the single biggest tilt to the global playing field is the one cast by the regionally skewed distribution of fossil fuels. Because we were the first and most ardently industrialized country, our rate of energy consumption is prodigious compared to the rest of the world. As a result, despite being the third-largest producer of petroleum in the world, the US appetite is larger still. Today we must purchase fuel from those countries that now control the local energy harvesting and refinement and extraction infrastructure, much of which we originally built for them. As contracts expire, and countries nationalize their energy infrastructure, western corporations are rapidly losing their financial leverage in petroleum energy management.
This progressive disenfranchisement of the Exxons of the west is reflected in both the global price of oil and diminishing access to this critical resource as demand increases through the burgeoning growth of India, China, and other third-world countries. We have become a middle-man that no longer produces or controls its vital resources and we face the classic case of a middle-man being cut out from the middle when the ends can manage without. But this isn’t about a Midwest farming equipment reseller who can find another living in an economy rife with alternatives. This is happening around today’s only viable fuel commodity on the planet, and on a global scale at that.
Financially then, we have to borrow more money every year to fuel an aging, increasingly obsolete, and increasingly expensive transportation and energy habit with decreasing economic leverage. Every year, we pay ever more to other countries which supply our petroleum addiction, and every year, we buy more products and services from those countries that can now make and provide things more efficiently than we can. The net flow of both leverage and money is away from “those who manage,” and more towards “those who have or produce” minerals or products to sell that they can generate more cost-effectively.
I think a lot of people get this general idea, but my sense is that there is an utter lack of appreciation for the massive SCALE of the problem in the energy sector, or of how much that imbalance really tilts the global macro-economic playing field. Otherwise, for example, the debate about Arctic drilling could have been settled with a single graph that made it clear that the marginal change in oil production due to newly tapped Arctic reserves would still be dwarfed by both the import volume AND the speculative price components due to future demand projections. And that would be true even if the production could all come on line at once rather than the 5-15 years it would take to set up the infrastructure and start the actual flow of fuel.
At last December’s World Economic Forum in Davos, I happened to end up sitting next to the Foreign Minister of Dubai at one of the Energy workshops. His great lament was that they had over $250 Billion dollars of technical infrastructure they wanted to build in Dubai LAST YEAR with the money literally burning a hole in their government pockets. But sadly, they couldn’t find anywhere near enough technically trained personnel to actually build it. Yes. $250 Billion in one year. The then CEO of Fleur was almost despaired thinking about the out-of-reach opportunity even having started several schools in India specifically to train thousands of technical construction workers per year specifically for Dubai’s infrastructure plans. And keep in mind, Dubai is the capital of the UAE, a country about the size and population of Massachusetts. Further, Dubai is one of the smaller oil and natural gas producers in the Middle East. No wonder they can afford to have someone build the world’s largest building there.
Russia’s resurgence over the last decade from a difficult transition to a partial market economy has been almost entirely funded through their energy production as the second largest fossil fuel supplier in the world after Saudi Arabia. The Gasprom execs in Davos were claiming they made a slight profit back when Oil was $40 a barrel (Even this was disingenuous as we know Saudi production costs run about $2 per barrel leaving LOTS of margin.) Last January, they were all smiling very widely indeed, chauffeured in Bentleys and attended by strings of super-model type female staffers they had sent to US Ivy League schools. They have almost completely resurrected the old Soviet military machinery and are sitting pretty with oil prices of over $100 per barrel and a very health national production-to-consumption ratio. Take a look at this chart and note in particular the massive scale of production volume (in millions of barrels per day), ratios of consumption to production and the resulting foreign trade balances of petroleum, the world’s highest-value commodity.
Top global petroleum consumers (red) and Producers (blue) in barrels per day.
Now look at how each individual nation’s Oil consumption versus production imbalance skews its overall economic position on the international macro-economic playing field. At today’s price of $100 per barrel, the tilt in the playing field amounts to a cash flow of ~$1.5 billion dollars PER DAY out of the US and into those with a positive net oil trade balance. (Here I simply deducted our local US oil production from our consumption needs and multiplied the net consumption by the price per barrel.) Remember that number, but also keep in mind that the $1.5B per day number is not really a complete measure because we haven’t even begun to discuss either natural gas, or the necessary ancillary costs in addition direct fuel purchases including having to pay another $720 million a day for a war in a region that would otherwise be as meaningless to the US economy as Ethiopia if it wasn’t replete with oil and natural gas, not to mention the ongoing cost of regional turbulence surrounding Israel and the Palestinians. This simple estimate also fails to include the staggering costs that are accruing due to environmental damage and global warming from our fossil fuel programs as well, which has been estimated as a potential detriment in the multiple trillion dollar range. To top it all off, there is another cost that nobody seems to even talk about, the opportunity cost of failing to otherwise invest that astronomical cash flow where it could do more economic good for the nation rather than fueling international competitors.
So where are these US dollars going? Who is on the uphill side of the field of this $1.5+ billion dollar per day slope? That’s right, Saudi Arabia, Russia, Norway, Venezuela, Iran, Nigeria, UAE, Kuwait, and Iraq.
US petroleum imports by origin for June 2008.
It’s tempting to take heart from the fact that around 40% of this month’s US oil imports come from Canada and Mexico. But that ignores the truth of the open global petroleum market. Simply by consuming at our prodigious rate, we leave all the other countries in the world no choice but to buy fuel from the remaining producers, the other OPEC nations. We set the price in our rapacious demand since the US alone comprises the majority of global consumption. So whether we buy directly from Iran or not, they benefit economically from the balance of broad international demand while we pay Canada, Saudi Arabia, and Mexico. Who we buy our oil from doesn’t really make any difference. Money flows out of the international consumers and into the producers’ coffers.
Worse yet, our fuel trade position is rapidly deteriorating as western petroleum reserves are taped and overall production in the region progressively declines. The tailing off in western production is unfortunately compounded by the rapidly rising US, and international demand particularly through the industrialization of China and India. The countries with the largest remaining reserves that look to supply the next century’s fuel demands are Saudi Arabia, Russia, Iran, and other less savory international partners. The OPEC nations would benefit enormously from a continued US focus on drilling for more oil because they know that even with the taps wide open, the US reserves (that petroleum yet waiting to be harvested from underground) are nowhere near large enough to meet even today’s demand even much less tomorrow’s with China and India in the mix. That focus would keep us dependent on them even as their economic leverage continues to increase.
Neither the US economy, nor the individual consumer would benefit from more drilling in the US because even the most optimistic flow rate projections wouldn’t ever amount to more than 2% of global production. Relative to growing demand in India and China, that effect on pricing is completely negligible. Just consider that 15 years of effort to ramp up US production using the controversial new Arctic oil fields would be overtaken in less than half a year by growth in demand from China alone. Another way of appreciating the insignificance of the drilling proposal is to realize that from one day to the next, OPEC decided last week to reduce production volume by a greater amount than the Alaska project would produce in the next three years. Just to keep prices high. We have no pricing leverage when we do not control the majority of production volume whether we drill in Alaska or not.
As a slight digression, it is worth asking, “if it won’t change the overall market dynamic, or production or consumption volume by any meaningful amount, and it won’t change the price of oil, which is still basically controlled by OPEC as a consortium, and it won’t do anything to reduce US foreign dependence given the negligible global contribution, why is ANYONE even discussing the idea? Why is it a political issue at all?” The answer is actually easily discovered by examining who would benefit from more drilling in Alaska; just follow the dollars. It’s the local oil companies and worker’s organizations in Alaska that are spending huge amounts lobbying to induce the balance of cash flow from US production to shift towards their local efforts. Is it any surprise that the governor of Alaska is working to benefit her home state? I don’t think so. But that local benefit for the hometown is being purchased with a continued national addiction to a trade imbalance that is crushing the US economy as a whole. In this case, what is good and appropriate in a Governor’s role is actually in direct conflict with what is good and appropriate for the role of the Vice President. It is the very definition of partisan in its most negative sense that politicians fail to rise above local and personal interest to place the good of the entire country first. End of digression.
So in summary, we find ourselves in a situation where the very industrial success which made us a superpower is driving our need for a commodity which will bankrupt our country if we keep trying to milk the same economic structure long term. This is an economic structure we have spent the last century building, and it was purposely built upon the cheapest energy source that would fuel our industrialization. The open and free market has led us naturally over the decades to incrementally invest staggering finance in an infrastructure that we are losing control of, both operationally and financially. We happen to be sitting on the wrong plot of land that doesn’t contain the Oil and natural gas commensurate with our industrialized needs and there is no incremental path that will change that fact. The only good news here is that China and India are eventually headed for similar problems as they industrialize beyond the support of their local resources. But given their trove of natural and human resources respectively across their vast geographies as yet untapped, the United States may no longer be competitive or even solvent by the time their rapidly growing fuel needs drive them to the same scale of foreign energy trade debt and economic impasse.
As long as the US transportation infrastructure is primarily focused on petroleum which our national reserves alone cannot supply, we are playing a game we cannot win on a field that is too tilted against us. It’s not simply a matter of figuring out how to play the game better, though any broad efficiency and conservation efforts would certainly help. We need to change the game completely and find a level playing field that doesn’t depend on raw materials we don’t have. On a level field, American ingenuity and innovation will tell, as long as we don’t abandon those values in the meantime.
More on fostering innovation and changing the global energy game in future posts.
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Greeeat article, thanks much, thanks.
Dan Howitt