To oil addicts: Be afraid, be very afraid

Looks like ex-Texas oilman George W. Bush finally saw the light and declared America an unfortunate oil addict. He must have read a report in Fortune magazine about discussions in Davos on the subject which opened with this lead sentence: Be afraid. Be very afraid. And Dubya took the message to heart when he delivered his State of the Union address last week.

Normally, one would have expected Dubya to go all ballistic against the "greens" and demand the opening up of more land in Alaska to oil drilling. But Dubya’s solution was, surprisingly, throwing a lot of money into scientific research that would among other alternative energy options, make ethanol a viable alternative to gasoline, and thus free the Americans from their oil addiction.

Then again, before one jumps to the conclusion that Dubya has turned green, it must be noted that he ignored two quick ways of improving America’s energy efficiency: conservation and requiring the vehicle manufacturers to drastically improve their fuel efficiency. I suppose he is aware that the last time an American president, Jimmy Carter, urged Americans to conserve energy, as he posed in his cardigan sweater to demonstrate lower thermostat settings in the White House, he was ridiculed out of office.

In his address Tuesday night, Bush had set a goal of reducing the nation’s Mideast oil imports by 75 percent by 2025. "I believe in a relatively quick period of time, within my lifetime, we’ll be able to reduce if not end dependence on Middle Eastern oil by this new technology of converting corn, wood, grasses and other products into ethanol," he said. To those who understand what it takes for a wide scale ethanol program to take root, he made it sound too easy. He glossed over the many complexities of using ethanol in place of gasoline in terms of the agricultural and logistics implications. But at least he got the right idea.

The other thing is, I wonder if Dubya is really serious about ethanol because he failed to mention the Brazil experience with sugar cane as base crop. That would have delivered the message that ethanol isn’t that much of a pie in the sky. It is here and now. The base crops he mentioned are as yet unproven for use on a scale as large as is now in Brazil. Or, he could have proposed lifting the 50 cents a gallon tariff that keeps Brazilian ethanol off the American market.

But one should be happy with small victories and it should be enough for now that Dubya got the scary part of the story right: not only is the dwindling world supply of oil in politically volatile regions, the price of the commodity can also only go up. Oil prices today, he said, are simply the result of the marketplace and that consumers socked with soaring energy costs should not expect price breaks.

It must have taken some amount of guts for Dubya to break ranks with his friends in the oil industry to say what he said in his State of the Union speech. In Davos, the oilmen are still saying there is nothing to worry about. In fact, the oil industry reacted to Dubya’s speech with disappointment, calling it counterproductive in so far as it would make investments in Middle East oil fields that more difficult to make, because a major market has effectively warned it would cut the volume it normally buys from them.

Going back to the "Be afraid" message on the topic of high oil prices… that message came from two financial gurus during the Davos conference. One of them, Hermitage Capital’s Bill Browder, according to Fortune, has outlined six scenarios that could take oil up to a downright terrifying $262 a barrel.

Browder doesn’t yet have the stature of George Soros, the other guru who made comments on the topic. But a veteran of Salomon Bros. and Boston Consulting Group, the 41-year old Browder comes with impressive credentials. His $4-billion Moscow-based Hermitage fund rose 81.5 percent last year and is up a whopping 1,780 percent since its inception a decade ago.

Anyway, according to the Fortune report, Browder’s team came up with some likely scenarios in the event of an international crisis, doomsday scenarios one to six. They performed what’s known as a regression analysis, extrapolating the numbers from past oil shocks and then using them to calculate what might happen when the supply from an oil-producing country was cut off in six different situations. Here’s how Fortune reported it.

"The fall of the House of Saud seems the most far-fetched of the six possibilities, and it’s the one that generates that $262 a barrel. More realistic – and therefore more chilling – would be the scenario where Iran declares an oil embargo a la OPEC in 1973, which Browder thinks could cause oil to double to $131 a barrel. Other outcomes include an embargo by Venezuelan strongman Hugo Chavez ($111 a barrel), civil war in Nigeria ($98 a barrel), unrest and violence in Algeria ($79 a barrel) and major attacks on infrastructure by the insurgency in Iraq ($88 a barrel)."

I forwarded the article to Energy Undersecretary Peter Abaya and got back the following comments.

"Very interesting article. I’ve read a book entitled "Twilight in the Desert" saying "$200/barrel for oil would be too low". I did some number crunching on the $3T requirement for infra alone to be able to meet world demand by 2025 (additional 45M barrels/day on top of our present global demand of 87M barrels/day), comes out as additional $90/barrel to today’s price. It does not take into consideration cost of money and return of investment to whoever coughs up the $3T.

"That’s also assuming 1) the world’s present 87M barrels supply remains constant. Otherwise, we will need more investments; 2) the extra oil is easy to find and extract. But would they not have found them by now if it were that easy? Otherwise, higher extraction costs; and 3) this $3T will have to be invested in the Middle East and North African Regions…70 percent of all proven reserves are there…99 percent of the bad news are there too.

"Looks like $200/barrel oil is more probable than not. $100/barrel oil is just a matter of time. Hate being the doomsayer. But we must understand these things now to prepare for what’s to come."

And to think, here we are threatening transport strikes at $68 a barrel. Paano na kaya tayo when it hits $200? Well, at least someone in our government is thinking about it. Hopefully, they get their act together so that we are able to do something to face the inevitable.

Wish list

Got this e-mail from PhilStar reader Ren Angat, reacting to our column last Wednesday.

Being a resident of Cavite... I would like to add the LRT Extension Project to Cavite of DOTC to your short list of Ate Glue’s must do. We Caviteños need it. Wondering why they are not mentioning it as a priority project. Panahon pa ni Pangulong Ramos, bakit hanggang ngayon, kahit isang poste, ala pa??????????

Thanks!

I also got this e-mail from Joel Mari Yu of Cebu.

Your suggestions on which projects the President should fasttrack in order to prove she means business is somewhat unfair to the rest of the Philippines. The projects you outlined are all in the National Capital Region (NCR). No mention for any project or initiative anywhere else. Are we that insignificant?

My response:

To Ren, I should have added the LRT extension to Cavite. Not only would it make commuting from Las Piñas to Cavite easier, the extension could pass by the Manila Domestic Airport, making it easier for domestic airline passengers to get to places in Metro Manila.

As for the point of Joel, he is right. I should have included projects out of Metro Manila. But I am not familiar with their needs. I wanted a short list for starters and those are the projects that have languished for so long that I know of. Even then, I don’t think Ate Glue can meet the challenge. But I want to be proven wrong.

Service contract

Speaking of Texas oil men, here’s something from our favorite Texan, Dr. Ernie E.

Storming into his lawyer’s office, a Texas oil magnate demanded that divorce proceedings begin at once against his young bride.

"What’s the problem?"

"I want to hit that adulterin’ bitch for breach of contract," snapped the oil man.

"I don’t know if that will fly," said the lawyer. "I mean your wife isn’t a piece of property. You don’t own her!"

"Damn right," the tycoon rejoined, "but I sure as hell expect exclusive drillin’ rights!

Boo Chanco’s e-mail address is [email protected]