Yes...but!

May 12 2008

Home > Columns >Yes...But! Year 8-27 2008

The fire floods from the Sub Prime Lending volcano have temporarily been contained thanks to Chairman Bernanke who rained green showers of dollars on these deadly streams, helping the lenders but not the borrowers, but in doing so merely postponed the Day of Reckoning, as even greater dangers are ready to emerge from behind our façade of false confidence.

This became plain last week at a conference in Houston Texas on Offshore Technology, attended by all the big shots in the oil and finance industry.

Matthew R. Simmons, himself a prominent banker, spoke there. His topic had a two fold warning: End the oil addiction; Replace its aging infrastructure. He has sounded the alarm bells for at least 5 years, especially in his book, “Twilight in the Desert”, casting doubt on Saudi Arabia’s oil reserves.

Mr. Simmons, whom I met last year at a Peak Oil Conference in Boston, began by emphasizing that steel deteriorates the minute it is cast, because “Rust Never Sleeps.” There are 335,890 miles (some 530,000 km) of aging steel pipe lines in the USA alone, all subject to corrosion, leaks and metal fatigue. And that is only a fraction of the oil network: 1,127 tank farms plus hundreds of refineries have many more millions of miles of steel tubes, both monstrous and minute. Because the price of oil has been so low for so long – it was $10.00 per barrel 10 years ago - there simply was not enough money to properly inspect this decaying mesh of intricate tubing and replace them were needed.

These tired steel building blocks are a symptom of the dual exhaustion the oil industry is subject to: both the pumping of the liquid gold and its transportation systems are now in terminal decline. Mr. Simmons is convinced that Peak Oil is here. Peak Oil means that we have reached a plateau in oil production, with ever greater decreases to come, even while demand is rising. Of course this means ever rising prices.

As the foremost insider, he backs this up with statistics: World Oil production was 69,448 million barrels per day (mbd) in 2003, jumped to 72,512 in 2004, increased to 73, 807 million mbd in 2005, and from there it fell 268,000 barrels per day to 73,539 mbd in 2006 and a further 265,000 to 73,274 million mbd last year, with more rapid declines in years to come. The quicker the fall in production, the higher jump at the pump, of course.

Mr. Simmons warned that the convergence of eroding steel and diminishing supply could produce a Black Swan situation, defined as “The Impact of the Highly Improbable,” in this case a ‘Societal System Failure,’ as a severe energy shortage imperils our water and food supply and will have sickly consequences for our health system. We all know that our entire life style is entirely dependent on ample supply of energy: once that falters, society falters.

We are already getting a little foretaste. Suddenly, without warning, everything is up in price. For too long low prices of food and energy have hurt supply and increased demand. Now the scenario has reversed: now, you name it, and it costs more, while supply is down. This is the case not only in wheat and rice- also increasingly influenced by weather related events – but equally and even more so in other commodities: nickel up 630 percent; zinc up 497 percent; lead up 705 percent. With a Big Bang the world’s supply of cheap hard assets has ended. The eight disastrous Bush years have brought the world to the brink of the abyss. Now the contours of the Four Horses of Apocalypse - War, Famine, Pestilence, Death - are forming on the horizon, whipped onward by the policies of the current US administration.

Mr. Matthew Simmons concluded his presentation as he started it: “Our challenge is two-fold: End our Oil Addiction; Replace the Oil Infrastructure within 5 years. Failure here means Failure everywhere.”

I see little evidence that the US, which uses 25 percent of the world’s energy, will have a fundamental change of heart. Perhaps the hour is too late for this anyway, given that our existence is entirely built on the quicksand of finite resources. Only a mass conversion, a total new view on how we must live, from ‘ego-centered life style’ to an ‘eco-oriented way of life’, can be the solution.

When I shop at the food market, I am almost always the only one who brings my own bags, such a little thing to do. This tells me that if we cannot be trusted to be ‘faithful’ in small matters, how can we expect to tackle the immense issues of Climate Change, Peak Oil and Infinite Inflation?