Peak Oil Production May Already Be Here

From Science, March 25, 2011:

Outside of OPEC’s vast resources, oil production has leveled off, and it’s looking like it may never rise again

FIVE YEARS AGO, MANY OIL EXPERTS SAW trouble looming. In 10 years or so, they said, oil producers outside the Organization of the Petroleum Exporting Countries (OPEC) would likely be unable to pump oil any faster (Science, 18 November 2005, p. 1106). Non-OPEC oil production would peak, no matter the effort applied. All the high-technology exploration and drilling, all the frontier-pushing bravado of the oil industry would no longer stave off the inevitable as OPEC gains an even stronger hand among the world’s oil producers.

Five years on, it appears those experts may have been unduly optimistic—non-OPEC oil production may have been peaking as they spoke. Despite a near tripling of world oil prices, non-OPEC production, which accounts for 60% of world output, hasn’t increased significantly since 2004. And many of those same experts, as well as some major oil companies, don’t see it increasing again — ever. In their view, it’s stuck on a flat-topped peak or plateau at present levels of production for another decade or so before starting to decline. “Stable [non-OPEC] production is the best we can hope for,” says energy economist Robert Kaufmann of Boston University. “I have trouble seeing it increase more. It’s a wake-up call.”

Optimists remain. Some experts still see production from new frontiers, such as Kazakhstan, the deep waters off Brazil, and the oil sands of Canada, pushing production above the current plateau in the next few years. But time’s running out to prove that newly discovered fields and new technology can more than compensate for flagging production from the rapidly aging fields beyond OPEC.

Running to stay in place

There’s no debate about the reality of the 6-year-and-counting plateau of non-OPEC production. Output stagnated at about 40 million barrels a day beginning in 2004 after rising from an earlier plateau in the early 1990s, one induced by a low price for oil. But prices have been anything but low lately. They have gone from about $35 a barrel early in the past decade to double and nearly triple that. Normally, higher prices would encourage more production, but not this time. Since 2004, “there’s been a tremendous increase in price, yet this is all we get for it, stable production,” Kaufmann says. “It’s quite stark.”

The problem up to this point, all agree, has been increasing difficulties extracting conventional oil. That’s the easiest oil to get at, oil that freely flows out of a well of its own accord or with a minimum of encouragement, such as pumping it out or pushing it out with water. Production of conventional oil from any one well or field typically increases, peaks, and then goes into decline. Larger producing regions behave the same way. Production from the United States, once the world’s largest oil producer, peaked in 1970 as rising output from newly discovered fields failed to compensate for declines in old fields. Mexico’s production peaked in 2004 as its huge, aging Cantarell field went into steep decline. North Sea production peaked in 1999, just 28 years after starting up.

The same pattern now seems to be emerging across much of the world. “We believe — and pretty much everybody else believes — that non-OPEC [conventional] production has plateaued,” says oil analyst Michael Rodgers, a partner with PFC Energy in Kuala Lumpur. “Arguing that you’re going to get continued and sustained growth of conventional oil is a very hard case to make.” PFC Energy has just done a complete reassessment of the prospects for non-OPEC conventional production, he says. As in most oil outlooks, a country-by-country or even field-by-field survey of what producers are planning for the next 5 to 10 years was combined with an educated guess of how much oil remains to be discovered in each region.

That forecast of added production is balanced against how fast production from existing fields is declining. In the past decade, analysts have realized that rather than the 2% to 3% per year decline once assumed, production from existing fields is declining 4% to 5% per year. Some believe the depletion is even faster. The balance between added and declining production, in the PFC Energy assessment, is a plateau, though the plateau may undulate from year to year. “You bring on a [new] 100,000-barrel-a-day field,” Rodgers says, “and somewhere else you’ve lost a 100,000-barrel-a-day field.

Tough oil to the rescue?

But what about unconventional oil, the hard-to-get-at oil that’s only extractable using the latest in high technology? There’s the oil beneath kilometers of seawater far offshore of the U.S. Gulf Coast, Brazil, and West Africa. It wasn’t reachable until development of the necessary deep-water drilling and production technology. There is also the oil — more like tar—that is so viscous that steam must be piped underground to thin it before pumping it out. In Alberta, Canada, huge shovels just dig up the “oil sands” so it can be trucked to oil-extraction plants. And American drillers have lately taken to drilling into rock formations that would normally only dribble oil and fracturing the rock with high-pressure fluids in order to wrest worthwhile amounts from the rock. That’s how drillers have been “fracking” stingy natural gas formations (Science, 25 June 2010, p. 1624).

Such unconventional oil is out there in abundance, everyone agrees, and more will be produced than in the past. However, some major oil companies as well as other analysts don’t see unconventional oil boosting non-OPEC production much in the next 20 years. In their most recent annual energy outlooks to 2030, both ExxonMobil and BP — two of the world’s largest independent oil companies — forecast that non-OPEC production will more or less hold its own, no better. “It’s quite an accomplishment to keep non-OPEC supply flat level,” says analyst Kyle Countryman, who as a member of ExxonMobil’s energy and economics group in Dallas, Texas, helped put the outlook together. Adds his colleague, group manager Robert Gardner: “We’re not optimistic we’ll see a significant increase in unconventional liquids.”

The problem with unconventional oil is that, by definition, it is hard to extract. “It’s a matter of timing,” Gardner says. “It depends on the pace of technology development.” And even after the essential technology is developed, unconventional oil will still be difficult—as well as expensive—to extract, limiting the rate at which it can be produced. All in all, “technology matters, economics matters, but geology really does matter,” says oil analyst David Greene of the U.S. Department of Energy’s Oak Ridge National Laboratory in Tennessee. “Progress in technology is not fast enough to keep up with depletion” of oil reservoirs. Oil analyst Richard Nehring of Nehring Associates in Colorado Springs, Colorado, is more optimistic about prospects on oil’s frontiers and how fast some kinds of unconventional oil can be brought online, but he still finds that “non-OPEC will be stable or at the very best slowly increasing” over the next couple of decades.

Optimism not dead

“We’re a little more bullish about non-OPEC than some others,” says Peter Jackson of Cambridge Energy Research Associates (CERA) in London. Along with the U.S. Energy Information Agency (EIA), CERA sees real promise in underdeveloped oil provinces such as offshore Brazil and Kazakhstan. Likewise, if prices stay high, unconventional oil will contribute substantially, both fi nd, especially the Canadian oil sands. Beyond the next few years, “we’re seeing a gradual increase in non-OPEC supply,” Jackson says.

Such optimism has not always served forecasters well. In 2005, Jackson and his CERA colleague Robert Esser of the New York office predicted that “global oil production capacity is actually set to increase dramatically” up to 2010. It didn’t; both OPEC and non-OPEC oil production remained steady. Likewise, in its 2005 outlook, EIA projected a jump in non-OPEC production by 2010 if prices were high, which they mostly were. But 2010 production was about 40 million barrels per day, right where it was in 2005.


So what if the pessimists turn out to be realists and non-OPEC producers can’t answer the call for more oil? Demand will increase in this decade, mainly from developing countries like China and India as populations grow and incomes rise. That rising demand might be met by several sources. In decreasing order of reliability, production of another sort of petroleum liquid, natural gas liquids (NGLs), is expected to increase. NGLs are the lighter-weight hydrocarbons that condense from natural gas when it cools. The expected increase in global natural gas production—at least half of which would come from OPEC—would lead to increased production of NGLs.

OPEC would, it is fervently hoped outside of the cartel, be willing and able to boost its output of conventional oil. ExxonMobil has OPEC production rising from about 29 million barrels per day today to about 36 million barrels per day in 2030. That would increase OPEC’s share of oil production even further, but Kaufmann, among others, expects that OPEC will see an opportunity to make more money from its oil by curbing production and driving prices up. That would tend to encourage production of liquid biofuels, but whether output could be ramped up quickly enough to bring relief remains unclear. The clearest outcome, according to Greene, is likely to be continued or even greater volatility in the price of oil with all the economic downsides that would entail.

Perhaps the most sobering outcome of a non-OPEC plateau might be reminding everyone that even planet-scale resources have their limits. And that when you are consuming them at close to 1000 gallons a second, the limits can catch you unaware. The next 5 years, assuming oil prices remain on the high side, should show who the realists are. –RICHARD A. KERR

Climate Change: The Threat to Life and A New Energy Future

Last summer, I went to the American Museum of Natural History to see their (temporary) special climate change exhibit, called Climate Change: The Threat to Life and A New Energy Future. The exhibit has now moved on to Chicago, to the Field Museum of Natural History.

The first part of the exhibit was quite striking. A neon line along two walls traced CO2 levels in the atmosphere.


On the walls were dates, as well as pictures of the technology of the time.


Coal, the rock that burns.


A Radio Shack TRS-80 was displayed as an example of how fast computers spread and became a necessary part of our lives...and how computers and their energy demands are likely to keep increasing, as they are still scarce in many parts of the world.


Children look at a spinning model of the earth.


The drowned city. You can "flood" this model of New York City, to see what it will look like as sea levels rise.


An arctic fox, in a part of the exhibit devoted to how climate change is affecting the arctic.




(There were also some artifacts from Chaco Canyon, a civilization done in by climate change, and a display on ocean acidification.)

A different graph of rising temperatures.


The text at right says:

Month by month, our planet's climate has been warming, as shown by the color shift in this table from blue (colder temperatures) to red (warmer temperatures).

To create the table, researchers looked at whether the average temperature for any particular month was hotter or colder than the average temperature for that month between 1951 and 1980. For instance, in 1978, the average July temperature was .15°C (.27°F) than the average for all Julys between 1951 and 1980.

How ocean temperatures are measured. An ocean buoy:


A robotic underwater glider used to measure temperature.


This was kind of fun. You could move the white pieces around, and a light meter would measure how much light was reflected. It made a pretty big difference.




The display on oil. (There were displays on other CO2 sources as well, including cement, natural gas, and land use.)


There was also a model oil rig.


There were models of all our energy sources. Here's a solar panel.


There was a big section on solutions.






And a section on what you can do, that encouraged people to write down what steps they were planning to take on little pieces of paper.

Switching Horses on Oil Strategy

From the Wall St. Journal:

By LIAM DENNING

Thunder Horse turns 10 next month. BP's billion-barrel oil field, discovered in 1999 in the Gulf of Mexico, is a source of pride. It also is a reminder of what ails the oil majors.

Thunder Horse, which started up in 2008, will provide 42% of BP's incremental upstream production over the next three years, according to analysts at J.P. Morgan Chase. Unfortunately, it is also one of BP's few discoveries of such scale in recent memory. Neil McMahon of Sanford C. Bernstein calculates that less than half of BP's additions to reserves over the past five years have come through its exploration efforts.

BP has done better recently, especially in terms of reserves replacement. At its latest strategy presentation, the company promised production growth out to 2020.

But that target is open to question. BP must contend with declining production at existing, mature fields and has cut its capital-expenditure budget. Meanwhile, it also has committed to maintaining its dividend.

Trying to be all things to demanding investors isn't a dilemma peculiar to BP or even just the oil industry. But the majors, given their size and exposure to volatile energy prices and geopolitics, feel the pressure more than most.

This decade, many of them have chased scale and touted synergies from mergers. Investors have been unimpressed. BP, for example, invested $211 billion in capital expenditures and acquisitions between 1998 and 2008, according to Mr. McMahon. Its stock was one of the worst-performing across that period.

Shares of ConocoPhillips, another big acquirer, have performed better. However, its stock crashed hardest over the past year as falling energy prices exposed flaws in its acquisition strategy.

Absent high energy prices, the majors' investment appeal is under scrutiny. Is it about share-price growth, high payouts, or both? To a large degree, they have ceded exploration and technology leadership to smaller competitors and the oil-services sector.

Of the majors, Exxon Mobil has achieved the best balancing act, reflected in its high valuation multiples. And with ample net cash, it can continue doing so. The clock is ticking on several others.

Barring Exxon, all of the majors outspent their operating cash flow on capex and dividends in the first quarter, according to IHS Herold. Leverage for most is low, but straining for growth while dishing out lots of money to investors without the underlying cash flow to match isn't sustainable.

Another round of megamergers, even if allowed, wouldn't likely cut it with investors. Acquisitions of some smaller competitors to pick up choice assets and underpin stable production are fine at the right price. But this also requires financial flexibility and can only be an adjunct to organic reserve replacement over the long term.

Above all, the majors need to reassure investors that the regular distributions of cash are sustainable. That means, when it comes to replacing barrels, proving they can go out and find, not buy, more Thunder Horses.

Growing Pains

From Barrons:

Goosing growth is the only way out of this mess.

HOW ARE WE GOING TO GET OUT OF THIS MESS? We face recession, a banking crisis and mammoth government debts. We face either deflation or inflation, if not both, one after the other. We practice protectionism and internationalism at the same time. Our politics can no longer be called a system -- just a cat fight.

Solutions are not in short supply, of course: Stimulus spending, financial regulation and austerity are popular forms of change. So are business bailouts, authoritarian environmentalism and generalized activism. On the fringes we find such nostrums as soaking the rich with taxes, a return to the gold standard and radical redistribution of wealth.

We can't count on any of them.

They have a common flaw. It's the belief that there's one misdeed at the root of our mess, so that repenting of our economic sin will restore the prosperity we enjoyed so much so recently.

Let's face the fact that much of our recent prosperity was borrowed from the future. It must be paid back with economic growth.

Losing Ground

A society that grows at an average 1.8% a year (as the U.S. economy did from 1973 to 2001) will double its income in 39 years. We certainly can't grow our way out of our debts to the next generation that way.

At recent Chinese rates of growth -- let's say 10% per year -- income doubles every seven years. The Chinese are growing their way out of the economic malaise imposed by their former political system. Note well, as the Chinese do, that doubled income means people can spend on things and services that also double in number and quality, also every nine years.

China's adoption of capitalist methods has lifted more people out of poverty than all the world's foreign aid since World War II. Imagine if the U.S. were growing like that. We might be able to pay off our debts to our elder generation and our foreign creditors.

In some circles, however, growth like this is considered a gigantic problem. "China cannot continue along its current path because the planet can't handle the strain," declared Paul Krugman, a Nobel-prize-winning economist and New York Times columnist. He called recently for tariffs on Chinese exports to force the Chinese to stop using so much coal. "Letting China match the West's past profligacy would doom the Earth as we know it," he said. Is that protectionism? "So what?"

Lester Brown, founder and chief visionary of the Earth Policy Institute, goes Krugman one better. In an article in Scientific American, Brown raised the specter of food shortages that destroy civilization. Rising populations and rising incomes, he warned, mean rising food prices, falling water tables, and eroding soils. Rising temperatures compound the problem, he added.

"The world is in a race between political tipping points and natural ones," Brown announced. "Can we close coal-fired power plants fast enough to prevent the Greenland ice sheet from slipping into the sea and inundating our coastlines?"

Beyond the apocalyptic rhetoric, there is an economic truth: China's use of coal, particularly to generate electricity, is very inefficient. The country produces half as much as the U.S. and generates more carbon dioxide in the process. But this is also an opportunity: Chinese prospects for sustainable economic growth include more efficient use of energy and labor. India, Vietnam, Indonesia and other developing countries also can meet the challenge of energy efficiency as well as or better than the U.S. (which itself is 50% behind the world's leader in energy efficiency, Japan).

Growing Up Faster

The idea that America can grow at 8% a year is not usually open for discussion. The U.S. is already the world's richest nation. It has an economy twice as big as China's, and its per-capita GDP is 10 times greater than China's. The U.S. is criticized around the world for sucking up resources, not praised for creating them.

Imagine what Krugman and Brown and their ilk would think of a restarted American economic engine, growing at 8% a year by the application of some unexpected technological advance, such as fusion energy, highly efficient batteries, or widespread biotechnology. They would see it as disaster.

In the current economic mess, it's easy to believe that the U.S. has reached a point where there are diminishing returns to the usual forms of investment. Putting more people to work at the same tasks doesn't do as much as it used to. Putting more capital equipment to work at the same tasks doesn't do as much as it used to. We have even found that higher leverage -- borrowing more to get more work out of every dollar of capital -- has its drawbacks. Should we rest content with what we have, even if recession and debt payments force us to have a little less?

Quite the contrary: We should press forward with investments that offer chances to improve the efficient use of key economic inputs. Just as the computer revolution that started in the 1960s has improved the quantity and quality of some kinds of labor, the biotech revolution that started in the 1980s may improve the productivity of agriculture.

Clairvoyance

The future is not clear. Those searching for a vision will select a vision they want. Krugman and Brown are among those who envision a future of greater government control for the greater good. Naturally, they have their fans. We prefer visionaries along the lines of Freeman Dyson, who expects technological solutions to the same problems.

If the question is carbon dioxide emissions, the answer could be bioengineered plants that make more efficient use of carbon dioxide. Shortage of water? New desalinization technology. Living space? Maybe hollowed-out asteroids accessible with cheap space travel. "Infinite in all directions," as Dyson put it in a book title.

The American economic policy should be to wait and see. Not injecting false stimulation to fool consumers into unwarranted confidence; encouraging genuine investment with prospects for big profits in the long run. Not soaking the rich; letting producers keep more of their earnings. Not "cap and trade"; nuclear power. Not corn-ethanol mandates; free-market fuel at free-market prices.

Not stagnation; growth for the world.

What to do

I added a new links section the sidebar, called What to do. I was originally going to call it Solutions, but honestly, I'm not sure there are actual solutions to the problems we face. Just things we can do mitigate the hardship for our ourselves and ours.

The first link I added was John Michael Greer's unfortunately named Advice from German Poets. I say unfortunately named because the title doesn't really grab the reader. Nor does it really give you an idea of what's inside. I suspect a lot of people who would be very interested in what it says will not bother to read it.

Greer, who believes there will be a collapse, but that it will be slower than most "doomers" anticipate, suggests three things to do to prepare: give up something, learn something, and save something. Give up something that ties you to the current system, learn something that will be useful in the world to come, and save something from our current culture that you want to see continue in the future.

If the future unfolds as he expects, these would be useful steps to take. However, they could be useful even if he's wrong, at least if you keep that possibility in mind. For example, you could give up smoking or junk food, which would save you money and improve your health even if cigarettes and Twinkies remain plentiful the rest of your life. You could learn something that would be fun or useful even if the happy motoring lifestyle continues. And if you love something enough to try and save it, you will probably enjoy the time spent with it, even if it turns out there was no danger of it going extinct.

What am I going to do? Um, well, I'm still thinking about it. I've always been something of a jack of all trades, master of none. We INTPs have a hard time choosing.

A stitch in time ...

From Petroleum Economist:

A stitch in time ...

There's a new peak-oil organisation on the block. Is it saying anything new? Does it matter? Tom Nicholls writes

THE ENERGY locked into one barrel of oil is equivalent to that expended by five labourers working 12-hour days non-stop for a year. When you put it like that – as a new report warning the UK government of the perils of peak oil does – petroleum's not something you want to run out of, unless you have something that does the same job. And nothing does.

As Jeremy Leggett, co-author of The oil crunch: securing the UK's energy future, puts it: "Nothing will impair our competitiveness as much as premature peak oil." It's a bigger worry – in the immediate future – than global warming, he argues. "In the longer term, climate change is formidable; it could be curtains for civilization." But a mismatch between oil supply and demand is likely to occur sooner – possibly as early as 2011-13.

That is the view of the report's publisher, UK Industry Taskforce on Peak Oil & Energy Security – a newly formed association of UK companies "concerned that threats to energy security are not receiving the attention they merit". In its analysis of market dynamics, the taskforce is in good company: the International Energy Agency's (IEA) World Energy Outlook (WEO) 2008, published last month, makes similarly alarming predictions. It says the oil industry will struggle to meet the world's energy needs in the next two decades, because of falling production rates at existing fields and continued energy-demand growth, making supply shortages and price spikes increasingly probable (see p25).

The taskforce – which aims to provide a "pro-active" strategy for tackling these problems – comprises an eclectic mix of prominent corporate names: transport companies Virgin, FirstGroup and Stagecoach; architects Foster and Partners; energy company Scottish and Southern; Arup, a consultancy; and internet search-engine firm Yahoo. More want to join, says Leggett. The organisation plans to continue its research, with a report next year on the net return on energy that various energy-producing systems are able to provide, which would allow useful comparisons to be drawn between different energy sources.

Many of the arguments the taskforce uses to support its pessimistic view about the outlook for the upstream industry are familiar: huge field discoveries are rare and lead times for projects are long. Producers, many of which are already protective of their natural resources, will need more oil and gas for their domestic markets, leaving less for export. Investment in maintaining and expanding the world's ageing energy infrastructure is insufficient. There aren't enough young people replacing retiring skilled workers in the energy sector. And the fall in prices since mid-year is already causing project delays and cancellations, which could have serious implications for supply in a few years' time.

The report also repeats the accusation – made, for example, by Matt Simmons, an investment banker specialising in the energy sector, against Saudi Arabia – that Opec countries may be overstating their reserves, lulling the world into a false sense of security about oil and gas production. One or two radical downward revisions and the world could be facing a collapse in supply, says Leggett.

The taskforce calls for a national energy plan that would promote exploration and production, energy conservation and efficiency, investment in renewable energy and sustainable renewable fuels and a national skills programme to deal with the manpower shortage. Policies in the Renewable Energy Strategy process should go beyond the EU target for renewable energy to account for 20% of the EU-wide energy mix by 2020. Decisions on nuclear power must be taken more speedily.

Again, there are many similarities with the approach advocated by the IEA's WEO 2008, which calls for improved energy efficiency, more low-carbon energy and very large investments in energy infrastructure.

Fortuitously, too, the policies that are needed to tackle peak oil and those needed to achieve sufficiently deep cuts in greenhouse-gas emissions to abate climate risk, a greater concern for the IEA, are the same – "immediate and rapid acceleration in our use of non-fossil sources of energy, and reduction in the overall demand for energy," in the words of the report. But these technologies must be introduced much more quickly to the UK, it adds, than "anything that has yet been considered in the climate-change response arena".

In his day job, Leggett, a geologist and former Greenpeace activist, heads up Solarcentury, a UK supplier of solar-photovoltaic panels. The company claims it's in business "to make a big difference in the fight against climate change" and "to revolutionise the global energy market".

They are lofty-sounding aspirations, certainly. But, claims the taskforce, it would not take much to accelerate the development of clean energy: many of the numerous alternative-energy technologies being explored in Silicon Valley and elsewhere can displace traditional energy markets "far faster than many people probably realise" – dealing with the problems of energy security and climate change simultaneously.

One-dimensional thinking

Solar – in common with many other emerging energy technologies – suffers from the perception that it is prohibitively expensive. But that's partly down to one-dimensional thinking, says Leggett. It's about return on investment, not just pay-back time on energy bills. Investing in solar is "better than putting your money into the building society, assuming you take a view that energy prices will continue to rise as they have done."

Various organisations have been frightening the public for years – almost since the start of the oil industry in the mid-19th century – about the imminent exhaustion of oil reserves. In that sense, the taskforce and its gloomy report do not break new ground. Many of the arguments behind the theory and solutions to the problem have been deployed before. But the price of inaction makes the argument worth repeating. Leggett draws a parallel with the prevailing financial crisis: what would have happened, he wonders, if eight well-known companies had warned the world about the threat of a credit crunch five years ago?

And, he adds, even if the more conservative oil companies, such as ExxonMobil and Saudi Aramco, are proved to be right in their assertion that peak production is decades further off than the peak-oil movement believes, it makes economic and environmental sense to be building alternative-energy capacity as quickly as possible anyway. "We have to try."

Green Roof

The green roof at the California Academy of Sciences

I love natural history museums. I was in northern California last week, and decided to check out the California Academy of Sciences in San Francisco. They recently built a new "green" building with newly designed exhibits.

Perhaps because it was new, it was amazingly crowded. They encourage environmentally friendly transportation, suggesting on the ticket that you bike, take public transportation, walk, or car pool. Nevertheless, the parking lot was full when we got there. We drove around awhile, and finally found a spot on a side street a couple of blocks away. (Which was at least cheaper, since there's no charge for parking on the street.) The first sight of the building was quite striking, not least because of the immense crowds lined up to go in.

There was a planetarium, and a multi-story rain forest, neither of which we saw. It was simply too crowded. The lines were incredible. The aquarium was cool, but again, it was so crowded we couldn't take it for long. People were packed in like sardines (and many of them were babies who were coughing their lungs out). I'm kind of surprised the fire marshall allows it.

I was also disappointed by the lack of dinosaur stuff. Aside from a therapod skeleton near the cafe, there wasn't any.

The food at the cafe was pretty good. We had spring rolls with shrimp and chicken "manapua" (Chinese steamed buns). Long lines and expensive, but good.

The best part of the museum was the "living roof." It wasn't as crowded as the rest of the place, and it was interesting.

All in all, though, I was underwhelmed. The Carnegie in Pittsburgh and the Museum of Natural History in NY are much better.

And I fear I am really not cut out for city life. San Francisco is a beautiful city, but arrghhhh! All those people. It made me want to crawl into a cave somewhere and become a hermit.

I was also struck by water restrictions in northern California. Low-flow faucets and shower heads everywhere. The toilets all had signs saying not to use too much TP because it would clog the low-flow toilet. The public bathrooms had signs about how you could reduce your water use at home. ("This toilet saves water. You can do the same at home by putting a brick in the tank!")

I stayed near the Port of Sacramento. It had just received a shipment of natural gas generators for a new power plant that was supposedly the heaviest shipment ever. Wind turbine blades go through there, too, with blades so large they hang off the end of the ship.


What's shipped out is mostly rice. Apparently, they flood the desert so they can grow rice, which is shipped to Japan. That doesn't seem like a wise use of water for an area that suffers from chronic water shortages.

California is a beautiful place, but I was happy to go home, where there's decent water pressure and a lot less people.

A seagull near the Golden Gate Bridge

Commodities Rebound? Watch the Job Cuts

From the Wall St. Journal:

Resources Layoffs Bode Ill

By LIAM DENNING

Along with the government, one of the few sectors seemingly immune to layoffs has been the resources business. Indeed, a shortage of skilled workers, pushing up wages and lengthening development schedules, was cited as a key reason for soaring commodities prices.

So why the recent flurry of pink slips? Wednesday, BHP Billiton said it will cut 6% of its work force. Oil major ConocoPhillipsand oil-field-services giant Schlumberger also announced staff reductions this month.

With crude oil and industrial metals prices having collapsed, some trimming is to be expected, especially following the hiring spree of recent years. Moreover, as in BHP's case, many of the workers being let go are contractors, with lower associated hiring and firing costs.

Even if cutting some workers makes sense in a crunch, however, this is worrying, and not merely for the sector's employees. Until recently, investors in mining and energy were fed a diet of Malthusian predictions about peak oil, equipment shortages and a dearth of engineering graduates.

Instead, the cycle lives on. Consensus forecasts still point to a bounce back in the price of commodities such as oil and aluminum as early as this year. But if the pace of layoffs picks up, the unavoidable conclusion would be that the producers themselves don't share such optimism.

The Worse Inauguration Day Ever

For the stock market, that is. I think it was more related to the British banking crisis than to Obama's taking office. However, there was a 100-point drop as soon as Obama's speech ended, suggesting that traders were disappointed in what they heard. I'm not sure what they were expecting. It was your typical inauguration day speech. Presidents don't lay out policy details in such speeches. The only thing I can figure is that, like the good folks at The Automatic Earth, they found the speech not very inspiring. Perhaps they were hoping Obama would show more charisma - in order to get the voters behind the tough choices that loom in the near future.

I found the speech disappointing as well. It seemed like a speech Dubya could have made.

We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you.

If I didn't know that was Obama's speech, I'd have guessed it was the Shrub's.

Perhaps I was just expecting too much. Expectations were insane for this speech. People were saying it would be not only Obama's best speech ever, it would be the best presidential speech in history. The reality was a reasonably competent inaugural speech, but nothing to write home about.

A lot of my friends are extremely excited over the new Obama presidency. I'm not. It's better than four more years of Bush...but not much. I just don't see much difference between the Democrats and the Republicans. Geithner for Treasury. Salazar for Interior. Jason Furman for economic policy director. Ugh.

I think the honeymoon is going to be short-lived. The financial crisis is heating up again. If there isn't real change, instead of just talk about it, Obama will end up being even more despised than Bush. Mark it down: in four years, many of the people who are euphoric today about Obama's election will be calling for his head and denying they ever voted for him.

Western prosperity is based on resources that are running out

This letter is from the January 8, 2009 issue of Nature:

SIR — In response to the lack of a flagship achievement by economics, as noted by Jean-Philippe Bouchaud in his Essay ‘Economics needs a scientific revolution’ (Nature 455, 1181; 2008), Jesper Stage proposes in Correspondence that the prosperity of western societies is one such achievement (‘Speaking up for economic sciences modelling’ Nature 456, 570; 2008). However, this prosperity is mainly based on the use of non-renewable resources and therefore is probably spurious.

Several hundred million years were needed to form the fossil energy that will be exhausted during a few hundred years. This is roughly equivalent to spending all one’s annual income during the first 30 seconds of a year. In particular, the frenzy to automate processes in order to increase competitiveness leads to rapid exhaustion of available resources, for example through over-fishing or degradation of soils.

All current growth-based economic models imply massive use of non-renewable resources and environmental degradation. These models are not sustainable, even in the short term. As early as 160 years ago, John Stuart Mill affirmed that “the richest and most prosperous countries would very soon attain the stationary state” (Principles of Political Economy Longmans, 1848). In contrast to that time, when resources were being used up at a rate that was several orders of magnitude slower than today, a phase of economic degrowth is necessary before a stationary state can be reached. It would be a major achievement of economics to achieve such a degrowth without social and political disasters.

Hervé Philippe
Département de Biochimie
Université de Montréal
Montréal, Québec, Canada

"Degrowth," eh? Interesting term. I think I like it.

Ithaca Carshare: Carshare Implementation in a Small Upstate City

This story is from the Fall 2008 Technology Transfer News, a publication of the state of New York.

Ithaca Carshare Nissan Versa in home location near Cornell University. Note sign for reserved parking, similar to busstop or taxistand (“Tow Away Zone” sign not yet installed by City of Ithaca).
During the summer of 2006, Program Opportunity Notice (PON) 1028 was issued to support the development, qualification and/or demonstration of innovative transportation products and systems. This PON was a joint effort of the New York State Department of Transportation (NYSDOT) and the New York State Energy Research and Development Authority (NYSERDA). One of the projects selected for funding was Ithaca Carshare, an early small-city implementation of car sharing.

Carsharing is a membership-based program that allows approved members 24/7 automated access to a fleet of vehicles located in scattered sites, usually in or near dense neighborhoods or employment centers.

Members' driver records are vetted before approval, allowing the Carshare organization to hold auto liability insurance on the entire group as a pool. Use of vehicles is coordinated with a reservation system where members can reserve cars via the web or an automated phone system, on a first come, first serve basis. Access to the cars and records of time of use and mileage, are created and kept using an RFID system with computers in the cars that send information to a central server via text messages and a cell phone
modem.

Members pay an application fee, an annual or monthly membership fee, and usage charges (per hour and per mile) only when they reserve and use vehicles. All other expenses, including gas, insurance, maintenance, cleaning, and other costs, are borne by the carshare organization, with members receiving a monthly bill itemized by trip.

Carsharing is particularly suited to short duration trips from locations where the user does not have convenient access to a personal car. For instance, non-SOV (single occupant vehicle) commuters can benefit from carshare vehicles located at employment
centers for mid-day errands including doctor visits, or work related errands. Residents of dense neighborhoods benefit from car sharing because their need for a dedicated private automobile may be infrequent. Car sharing can provide the occasional access to a car for shopping trips or other trips not well served by transit, walking, or biking, thereby allowing reduced car ownership by residents of downtowns and other nodes.


Carshare members use RFID fobs to lock and unlock vehicles. In-car computer system disables ignition when car is locked with the fob, increasing security since the ignition key remains inside vehicle.
Car sharing was first launched in Switzerland in 1987 and in North America in Quebec City in 1993. As of July 2008, there were 33 programs serving 318,838 members with 7,505 vehicles in North America. Most cities with car sharing are large urban areas. Ithaca Carshare is one of the first to explore applying this mode in a small city, in view of the possibilities for other Upstate cities.

Ithaca Carshare's business model includes strong partnerships with Cornell University and Ithaca College, serving both the student and staff populations. Because so many people are able to benefit from Ithaca Carshare vehicles, the City of Ithaca, Cornell University and Ithaca College have all provided parking for carshare vehicles, similar to what is provided for bus stops.

A major hurdle for the project was finding auto liability insurance. The conservatism of the insurance industry coupled with the innovation of this business model proved challenging. After nearly two years struggling with this issue, Ithaca Carshare finally ended up using a connection with another nonprofit
carshare outside NYS to secure this insurance.

Cornell and Ithaca College have also purchased memberships in bulk for students and staff, with Cornell tying eligibility for these “free” memberships to participation in their award-winning TDM (transportation demand management) program.

Ithaca Carshare launched with six Nissan Versa hatchbacks located in downtown Ithaca, on the Cornell and Ithaca College campuses, and at EcoVillage at Ithaca (a co-housing community located 2 miles west of Ithaca). In the first three months of operation, Ithaca Carshare has grown to serve 500 members with nine cars and one Toyota Tacoma pickup truck. They have also served as a mentor for several other groups exploring carsharing services in other Upstate cities.


One of the ten Ithaca Carshare vehicles is a Toyota Tacoma truck, registered with the local solid waste transfer station. Note sign for reserved parking includes “Tow Away Zone” designation, similar to a busstop.
Future plans include outreach to low-income populations in partnership with social service agencies and investigation of the possibility of adding electric or plug-in hybrid vehicles to the fleet.

For additional information on this please contact Joe Tario at jdt AT nyserda.org

UPDATE: Jennifer of Ithaca Carshare asked me to add this information:

Thanks for the post about our organization! We have been operating nearly six months now, and are really pleased with how things are going.

I just wanted to let you know that it may be more useful for people interested in Ithaca Carshare to contact us directly, instead of Joe Tario, who is our funding contact at the New York State Energy Research and Development Authority. (Of course, if they are interested in funding opportunities in New York State, Joe would be a great contact.)

Here at Ithaca Carshare, we can be reached at 607.277.3210 or info@ithacacarshare.org, and our snail mail address is P.O. Box 418, Ithaca, NY 14851-0418

Thanks!

Jennifer

***
Jennifer Dotson, Executive Director
IthacaCarshare.org
607.277.3210

The Monastery

I drove a few minutes up the mountain yesterday to visit the local monastery. They were having their annual Christmas Fair.

The first snow of the year was falling (a little later than usual). Just enough to make it festive. It stuck to the ground, but not to the pavement. Which was good, since those narrow mountain roads are treacherous enough without snow. There are a lot of horse farms and Christmas tree farms in the area. Many cars had freshly-cut trees tied to their roofs.

The monks call it a Christmas Fair, but it's a really low-key event - more so than the name suggests. Basically, they support themselves by selling things they produce, and the Christmas Fair is when they open up a little shop at the monastery.

They could probably sell a lot more if they advertised more. The average garage sale has more advertising than the Christmas Fair. But that's not really what they're about. They have regular customers who know about the Fair, and they sell enough then that they don't need to advertise.

It's not easy to find the place if you don't know it's there. There are no signs by the main road. The monastery is marked by a gate off a winding, barely paved mountain road. The gate is open with a small sign when the Fair is on, and you drive up a narrow dirt road through the woods to the monastery. (The road is only wide enough for one car at a time. Luckily, I've never encountered a car going the other way.) Among the trees are scattered religious statues and some farm animals (sheep, goats, chickens).

There's no parking to speak of. The monks don't have cars. People park wherever they can, and no matter where you park, you pretty much block the road.

The "shop" is a tiny wooden shed. It's heated by a wood stove, with a couple of friendly cats in front of it. The shed is so small that it's hard to move if even three or four people are in it. Shelves built by students at local colleges hold items for sale: jams, salsas, tomato sauces, chutneys, soups, vinegars, soaps, dried spices, candles, and small craft items.

I don't really "do" Christmas any more, at least as far as gift-buying. However, I do buy small consumable items as gifts, if I know the recipient will actually use them. So I bought some aromatic vinegars and handmade soaps as gifts for friends and family members who like them.

There was an article in the local paper about the monastery. College students can work there and earn credits. One young woman said she enjoyed it so much she planned to keep working there, for no pay and no college credits. She said after graduation, she planned to take up subsistence farming.

That's great, but her college is one of the most expense in the country. Seems kind of a waste to spend over $200,000 on a degree if you want to be a subsistence farmer. But then, her family can probably afford it.

Letter from Iceland

From the Financial Times comes this account of life in Iceland:

By Robert Jackson

Give it a population of 300,000, about the same as Coventry, 70 per cent of them in the cities of Reykjavik and Akureyri. Ensure they are all related and give the majority the ability to trace their ancestry back to the times of settlement, more than a thousand years earlier. Endow these people with industry and ambition. Give them their own language - all but unchanged for a millennium - a literary tradition, three national newspapers, two television channels, free universal healthcare and education and close to zero unemployment. Give this country a consistently high ranking in the world standard-of-living charts and you have the Iceland of the recent past. Not a bad place, all in all.

Now allow this country's banks - virtually unregulated - to borrow more than 10 times their country's gross domestic product from the international wholesale money markets. Watch as a Graf Zeppelin of debt propels its self-styled "Viking Raiders" across the world's financial stage, accumulating companies like gamblers hoarding chips. Then sit on the sidelines as the airship flies home and explodes, showering its blazing wreckage over this once proud, yet tiny, nation.

There you see the Iceland of today - the victim of an economic 9/11 and one of the very few places in the world where the words "financial meltdown" can be used without fear of exaggeration.

There is no daytime TV in Iceland. Parents are at work and children at school, so the test card, that feature of a bygone age, is the only thing aired. For the transmitters to be switched on in mid-afternoon and a sombre-looking Geir Haarde, the prime minister, to appear behind a desk, a national flag at his side, it had to be serious - and it was. The country was on the verge of bankruptcy; the government was taking control of the banks and was going to assume far-reaching powers to secure the safety of the nation and its savers.

As I watched, I felt a detached sympathy for those poor people living on a blighted island - until it dawned on me that I was one of them. Recent events had savaged my net worth by 60 per cent and pushed up my cost of living by more than 20 per cent. Iceland's plight was mine, too. What I failed to appreciate at the time was the emotion of this unprecedented television address, particularly in the way it finished:

"Fellow countrymen... If there was ever a time when the Icelandic nation needed to stand together and show fortitude in the face of adversity, then this is the moment. I urge you all to guard that which is most important in the life of every one of us, to protect those values which will survive the storm now beginning. I urge families to talk together and not to allow anxiety to get the upper hand, even though the outlook is grim for many. We need to explain to our children that the world is not on the edge of a precipice, and we all need to find an inner courage to look to the future... Thus with Icelandic optimism, fortitude and solidarity as weapons, we will ride out the storm.

God bless Iceland."

Edda, my partner, was in tears on the sofa beside me.

A drive across town later that afternoon, October 6, at first gave grounds for comfort. The roads were as full as usual for the Reykjavik rush-hour - a half-hour build-up of traffic. Aircraft flew in and out of the downtown airport, students made their way home from schools and universities - note the plural - while visitors went to hospitals and fitness fiends to sports clubs. Reykjavik showed all the outward appearances of carrying on.

But a different picture began to emerge from the hourly news bulletins on the car radio. The Icelandic krona's freeze in the capital markets had now spilled over into the day-to-day transactions of Icelanders abroad. Holidaymakers and business travellers venturing "til Útlanda", as it is called, found their credit cards refused, and those wishing to buy foreign currency could not find willing sellers, aside from one or two who limited their purchases to €200.

Trust in the banks had evaporated and people were trying to find a safe haven for their cash. One man had waited for six hours in a bank while his life savings, more than £1m in kronur (at IKr200 to the pound), were counted out in cash in front of him. "I feel like an innocent man dragged from his bed, put in a barrel and hurled over Gullfoss!" wrote one journalist that morning. "We have been brought down by a handful of men who bet our nation's wealth, fame and prosperity on a throw of the dice." Gullfoss is one of Iceland's tourist attractions - a majestic 100ft waterfall.

On collecting our daughter from her handball practice, I learnt the news that her club could not obtain the foreign currency it needed to release their new team shirts from customs. The city's myriad sports teams rely on local sponsors and our daughter also brought the news that this source of funding for her team was likely to dry up in the months to come. Later that evening, Skype, our communications lifeline, would not renew our credits with an Icelandic credit card. E-mails began to arrive from friends overseas, alarmed by news reports and asking if we were all right.

But all this was trivial compared with the financial distress, in some cases ruin, that now faces a significant proportion of the population.

Easy access to 100 per cent mortgages has seen a change to the traditional pattern of young Icelanders living with their parents until their mid-twenties. The suburbs of Reykjavik have grown by a third in the past decade, most of it housing for first-time buyers. Whole new neighbourhoods have emerged. New streets house young couples, many with children, most with two cars in the drive and furnished with the best that Ikea can provide. All bought with 100 per cent loans, many in foreign currencies.

Iceland is the only country in the world that indexes its loans in addition to charging interest. This means that when Icelanders borrow IKr1,000 from the bank and inflation increases by 5 per cent, the bank increases their debt to IKr1,050 at the end of the year. A great deal for the bank and fine for you, too - so long as the property's value and your salary are increasing by inflation and more. The majority of Icelandic mortgages are based on this punitive system and with inflation running at nearly 20 per cent, they will see their IKr1,000 loan turn into a IKr1,200 loan. The interest burden will increase proportionally. This is bad enough, but when coupled with falling house prices, it means that many face a particularly savage variety of negative equity. The impact on highly geared borrowers, which in practice means most Icelanders, would be hard enough even with two incomes, but with unemployment set to soar, many households are going to go under.

A recent first-time buyer, a woman in her late twenties, said: "I took a 100 per cent loan to buy an apartment. I placed my savings in Kaupthing's money market account, because it promised high interest rates, and my pensions in Kaupthing's Vista 1 at the prospect of becoming a millionaire retiree. Both of these funds were based on stock investments and I knew that they were risky - but I took the bait and the risk. Now most of this money, if not all, is lost."

Icelanders are by nature frugal people. It was one of the few countries in the world, perhaps the only one, that had a pension system that could meet the needs of its ageing population. But in recent years, many older people have been persuaded by the banks to invest their savings in high-yielding money-market accounts. As a result of the collapse of the banking system, many of these accounts have seen huge write-downs and some are now worth less than half of their previous values. The additional money people had put aside to top up their pensions has been hard hit.

Bjork, Iceland's ambassadress of cool, summed it up in The Times on October 28: "Young families are threatened with losing their houses and elderly people their pensions. This is catastrophic. There is also a lot of anger. The six biggest venture capitalists in Iceland are being booed in public places and on TV and radio shows; furious voices insist that they sell all their belongings and give the proceeds to the nation. Gigantic loans, it has been revealed, were taken out abroad by a few individuals and without the full knowledge of the Icelandic people. Now the nation seems to be responsible for having to pay them back."

A homemade banner, made of sheets, hangs over the main motorway in Reykjavik, tied to the railings of a bridge. "Stondum Saman!" it cries out. "Let us stand together!" It's the new rallying cry of a beleaguered nation.

Icelanders have seen their economy swell and shrink from time to time over the centuries, and always handled it calmly. Perhaps their heritage in fishing and agriculture enabled them to meet good years and bad with equanimity. Now they must cope equally well with an attack of economic bulimia. To understand what makes this crisis - kreppa, as it is known here - so unlike any other, a little history is needed.

For Icelanders, the golden years were the early years, shortly after the land was settled in the ninth century. The Viking tradition, the Althing - the legislative assembly dating to 930 - and the literary canon of Sagas and Eddas are the nation's cultural bedrock. But after that, Iceland almost disappears from the history books. While the agricultural revolution, the Renaissance, the industrial revolution came and went, while the fine cities of Europe were being built, while artists from Michelangelo to Mozart were pouring forth their creations, while the great inventions and discoveries were being invented and discovered, Icelanders were hunkering down in their turf houses, meeting the hardest challenge of all - survival.

They survived plague, famine, earthquakes and volcanoes. There were times when some even considered abandoning the island. But they stayed on. They stayed and survived. Icelanders will tell you that only the fittest survived, but that is only half the story, because survival requires another key attribute: stubbornness. And Icelanders have it in spades. It is a national trait, and they view it not as a weakness but as a virtue. It comes from experiencing hardship and enduring it. It means finding satisfaction in a simple task done well and sticking to it; finding comfort and solace in family and kinship and being bound by those familial bonds and duties. And perhaps most important of all, it means believing in the independence of the individual as part of the fabric of nationhood, and fighting for that independence. Put simply, the country has values.

And this is what sets this catastrophe apart from the earthquakes and plagues of former years. This is a man-made disaster and worse still, one made by a small group of Icelanders who set off to conquer the financial world, only to return defeated and humiliated. The country is on the verge of bankruptcy and, even more important for those of Viking stock, its international reputation is in tatters. It hurts.

Picture a pig trying to balance on a mouse's back and you'll get some idea of the scale of the problem. In a mere seven years since bank deregulation and privatisation, Iceland's financial institutions had managed to rack up $75bn of foreign debt. In his address to the nation, Haarde put the problem in perspective by referring to the $700bn financial rescue package in America: "The huge measures introduced by the US authorities to rescue their banking system represent just under 5 per cent of the US GDP. The total economic debt of the Icelandic banks, however, is many times the GDP of Iceland."

And here is the nub. Iceland's banks borrowed more than $250,000 for every man, woman and child in Iceland, and placed an impossible burden on the modest reserves of the central bank in the event of default. And default they have.

Voices of caution - there were many in Iceland - were drowned out by a media that became fixated on the nation's emergence from drab pupa to gaudy butterfly. Yet, Icelanders' opinions were divided. For some, the success of their Viking Raiders, buying up the British high street, one even acquiring that most treasured bauble of all, a Premier League football club, marked the arrival of a golden era. The transformation of Reykjavik from a quiet, provincial fishing port to a brash financial centre had been as swift as it was complete, and with the musicians Bjork and Sigur Ros and Danish-Icelandic artist Ólafur Eliasson attracting global audiences, cultural prestige went hand in hand with financial success. Icelanders could hold their heads high before the rest of the world.

Hallgrimur Helgason, well-known for his novel 101 Reykjavik, said in a letter to the nation in a Sunday newspaper on October 26: "Deep down inside we idolised these titans, these money pop-stars. Awestruck we watched their adventures and admired them when they supported the arts and charities. We never had clever businessmen, not for a thousand years, not to mention men who had won battles in other countries... "

For others, the growth was too rapid, the change too extreme. Many became uncomfortable with the excesses of the Viking Raiders. The liveried private jets, the Elton John parties, the residences in St Moritz, New York and London and the yachts in St Tropez - all flaunted in Sed og Heyrt, Iceland's equivalent of Hello! magazine - were not, and this is important, they were not Icelandic. There was a strong undertow of public opinion that felt that all this ostentatious celebration of lavish lifestyles and excess was causing the nation to disconnect from its thousand-year heritage. In his letter to the nation, Hallgrimur continued: "This was all about the building of personal image rather than the building of anything tangible for the good of our nation and its people. Icelanders living abroad failed to recognise their own country when they came home."

What international sympathy there was for Iceland's plight evaporated with the dark realisation that the downfall of Iceland's three main banks - Landsbanki, Kaupthing and Glitnir - brought with it the potential loss of £8bn for half a million savers in northern Europe, the bulk of whom were British. The shrill media response in the UK was reported extensively in Iceland. The British government's use of anti-terror legislation to freeze the assets of Landsbanki pushed Iceland's banking system into the abyss. It was a move viewed in Iceland as hateful and unnecessary. A few days later the one remaining viable bank, Kaupthing, went under.

Then Landsbanki was placed on a British Treasury list of groups subjected to financial sanctions, along with al-Qaeda and the Taliban. A copy of the UK government webpage appeared in Icelandic papers and a new website, www.indefence.is, was launched. A picture on it shows a young girl with a placard that reads: "I am not a terrorist, Mr Brown."

At this time of year, the most-watched TV show in Iceland is Saturday night's Spaugstofan, which translates literally as The Spoof Room. It's a hit-or-miss affair, but events of the past few weeks have provided the writers with a rich seam of source material. A recent episode featured a well-worked lampoon of the film Titanic, entitled Icetanic, with Geir Haarde and the chairman of the governors of the central bank, David Oddsson, standing on the bridge of "the economy that could not sink". A sketch shows Gordon Brown throwing Icelanders off a life raft. "Get back in the water where you belong, you terrorist bastard!" he shouts as he throws another one overboard.

When I tried to explain Iceland's plight to a friend in the UK who works in banking, I received short shrift. "You must have gone troppo, Robert! They may not have dressed up in burkas and strapped several kilos of Semtex around their waists. But to go into the high street, persuade charities, pensioners, local authorities to deposit money and then disappear, having trousered nigh on £8bn is, even by City standards, bad. Financial terrorism, grand larceny, call it what you will, but the government had to act and act quickly to stop funds leaving the country."

Troppo can hardly apply one degree south of the Arctic Circle, but if its northern equivalent is to go polar, then evidently I have.

Fear, outrage, jealousy and guilt have mingled to form a volatile cocktail of emotions as the blame game has started, and Icelanders attempt to come to terms with it all. They are divided between those who blame the Viking Raiders and those who blame successive governments and central banks for allowing them to behave the way they did.

There have been demonstrations, previously almost unheard of in Iceland, in which families have marched on the parliament buildings, stringing up an effigy of Oddsson along the way.

Of the various Viking Raiders, only one, Jon Asgeir, of Baugur fame, has had the guts to turn up and face the music on a TV chat show. But any temporary benevolence towards him evaporated when it emerged that he had arrived back in Iceland with high-street billionaire Sir Philip Green in tow. Together they proposed to buy Baugur's debt, reported at the time as £2bn, thereby acquiring the group's UK retail assets, including House of Fraser and Hamleys at a significant discount that would involve massive debt writeoffs.

One of the most telling images was the departure of Jon Ásgeir's private jet on news that the government had nationalised Glitnir Bank (in which his investment vehicle Stodir was a leading shareholder), wiping out his shareholding and rattling the debt-burdened house of cards that is his Baugur business empire. Painted black and as sleek as a Stealth bomber, the aircraft was photographed taxiing from its hangar by Morgunbladid, a daily newspaper. Like the last helicopter out of Saigon, the departure of Ásgeir's jet symbolised the end of an era, the last act of Iceland's debt-fuelled spending spree.

Bjorgolfur Thor and his father Bjorgolfur Gudmundsson have, to date, disappeared from the radar. Together they own a majority stake in Landsbanki, and Gudmundsson owns West Ham United football club. Their jets have also flown the coop. Downtown, beside the harbour, construction work on a landmark project underwritten by them, the National Concert Hall, is expected to stop any day now. Like Hallgrimskirkja, the striking cathedral that presides over Reykjavik and that took more than 40 years to complete thanks to a lack of finance, the concert hall might need a change in the country's fortunes before it can be completed.

The government has announced that it will carry out a thorough investigation into what happened and determine who is to blame. It will be called "The White Book", and "leave no stone unturned in getting to the truth". It will not be a slender volume.

We live now in a foreign-currency lockdown, and although the government has assured everyone that there are sufficient reserves to buy essentials such as oil, grain and medical supplies for the winter, such assurances only serve to create a further sense of unease in a people who have learnt to take such commodities for granted.

There is some encouraging news. The International Monetary Fund is putting the finishing touches to a $2bn bailout package and this is likely to lead to a further $4bn from a consortium of Nordic central banks. These funds will come with stringent conditions that will impose external financial controls and impinge heavily on Iceland's hard-won sovereign independence. But they should inject some much-needed confidence into the currency and into an embattled people.

There is an Icelandic expression: "We started with two empty hands." Whoever coined it could not have expected that it would still be so pertinent in 2008, as the nation begins the process of rebuilding its economy and that thing it covets most of all, its reputation.

It is going to be a long, hard struggle.


Robert Jackson is a British journalist who has lived in Iceland since 2003.

Saudi Arabia: Expanding Surplus, Falling Oil Prices and Riyadh's Sway

From Stratfor:

Summary

In spite of the falling price of crude oil, the Saudis are working on an ambitious investment project to expand their surplus oil production capacity to 12.5 million barrels per day in 2009. The plan serves Riyadh’s strategic objective of upholding the kingdom’s geopolitical primacy in the global energy markets.

Analysis

The price of crude oil dipped to $57.62 Nov. 6, its lowest level since early 2007. The drop occurs amid a widespread financial crisis hitting the three main economic hubs of the world: the United States, Europe and Asia. Though to some extent the Organization of the Petroleum Exporting Countries (OPEC) appears to have cut oil production, the cut still has not been enough to buoy the price of oil and bring relief to politically strained and petrodollar-dependent Iran and Venezuela.

The Saudis, however, are still strutting with style. The Saudi government has some $400 billion in foreign assets sitting in its central bank, and with the government budget already set for $45 oil, the Saudis could come out of 2008 with a surplus of around $150 billion. Cushioned with petrodollars, the Saudis have time to plan for the future and ensure their geopolitical primacy in the oil markets.

Saudi Arabia’s massive oil reserves are both a blessing and a curse. With oil wealth, Saudi Arabia is a powerful player in the international arena, arming it with the tools to sink or support other regimes through its leverage in the energy markets. Without oil wealth, Saudi Arabia is a desert backwater.

Though oil wealth allows multibillion-dollar arms purchases, these alone cannot transform the Saudi military into a professional fighting force when the country lacks the training, experience, skill and discipline to fight even a small war. But by creating a codependency with an energy-hungry superpower like the United States, Saudi Arabia can more or less outsource its military requirements. Without oil revenues, the Saudi royal family would be unable to pacify and subsidize a deeply divided population and to combat internal and external threats to its rule. But an oil-rich economy has created a work force in Saudi Arabia that largely lacks the skills, training — and most important, the will — to develop industries independent of oil for long-term growth.

If Saudi Arabia wants to remain the leading Sunni power in the Arab world and a highly influential player in global energy politics, it must have the surplus oil production capacity to ensure its position as the swing player in the energy markets. Without such a production buffer, Riyadh would not be able to bend Washington’s ear on matters like Iran whenever Saudi Arabia sees the need. OPEC’s total surplus crude oil production for 2008 is about 1.55 million barrels per day (bpd), almost all of which is held in Saudi Arabia, at a time when global crude consumption is at around 85 million bpd. With the margin so thin, oil prices became all the more vulnerable to supply disruptions.

Now that the global economic contagion has depressed demand, there is more oil in the market to give oil prices more wiggle room. Saudi Arabia can thrive in this type of market simply by ensuring it has enough spare capacity either to flood or drain the energy market at will.

To this end, Saudi Arabian Oil Co. (Saudi Aramco) is working on an ambitious $129 billion project to raise its oil production capacity to 12.5 million bpd in 2009, construct new petrochemical plants and refineries so it can move up the value chain, and invest in advanced exploration and production technologies to increase Saudi Arabia’s proved recoverable reserves from 260 billion barrels to more than 450 billion barrels within the next two decades.

With plans to up their country’s oil production capacity to 12.5 million bpd, a 32 percent increase, the Saudi royals essentially are building an insurance plan: The more oil Saudi Arabia keeps in reserve, the more leverage it holds in the energy market.

To accomplish this, the Saudis need not trouble themselves with increasing the number of operational oil fields. Those reserves need to be safeguarded for hard times far down the road, when Saudi Arabia actually must worry about having its existing oil production sites run dry. Instead, the Saudis will work to maximize production at existing fields. Those fields include Khurais, which is expected to produce 1.2 million bpd in 2009; Shaybah, where output will rise from 500,000 bpd to 750,000 bpd in 2009; Khursaniyah, which will produce 500,000 bpd in 2009; Manifa, an offshore field that will yield 900,000 bpd in 2011; and Ghawar, the world’s largest oil field, which has been in production since 1951 and has seen a surge in drilling activity in recent years.

The Saudis cannot simply live by a “drill, baby, drill” mantra in extracting oil from these fields. Many of these fields are old and must be treated with care. As Abdullah al-Naim, vice president of petroleum engineering for Saudi Aramco said in a recent Forbes interview, “We go really slow and soft … Ghawar we treat as you would a young woman.” Saudi Aramco uses technology that restricts the penetration of the drill in creating the oil well, thereby reducing the resulting water flow that could end up damaging the field. This is a delicate and expensive process, but a necessary one if Riyadh hopes to maintain its vigor in global energy politics in the longer run.

Saudi Arabia’s investment plans should be of increasing concern to oil producing states like Iran, Venezuela and to a lesser extent Russia, which probably are all on Riyadh’s target list. Historically, the Saudis have a penchant for using their oil wealth as a weapon to drive competitors out of the energy market, thereby cutting the legs out from under geopolitical rivals.

By increasing their production capacity, the Saudis are essentially building up an arsenal to swing the energy market in their favor. For the Saudis, $30 crude is a pinch to the purse, but an eminently survivable one. For the Iranians or the Venezuelans, however, it could mean a matter of life or death for the regime. Regardless of whether Saudi Arabia follows through in massive production cuts or boosts, the mere threat of such action creates hefty geopolitical sway — something that can only be reinforced with a large enough surplus crude production capacity.

Highlights of the IEA report

Next week, the IEA is releasing their new World Energy Outlook. There have been rumors that the IEA was going to break loose of US political pressure and finally be honest about the energy situation. Some of the media seem to have gotten early copies of the report, among them the Financial Times. They published three articles about the report today. I'm posting them in three separate posts. The first is this overview:

Highlights of the IEA report

In a flagship report due to be published next week by the International Energy Agency, the developed world’s energy watchdog doubles its forecast the price for oil will reach by 2030 and predicts the era of cheap oil is over. Below are the report’s highlights.

The Challenge:
“It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply.”

The Oil Price:
“While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over.”

Supply and Investment:
“Globally, oil resources might be plentiful, but there can be no guarantee that they will be exploited quickly enough to meet the level of demand projected.”

“Production continues to outstrip discoveries (despite some big recent finds, such as in deepwater offshore Brazil).”

“Observed decline rates vary markedly by region; they are lowest in the Middle East and highest in the North Sea.”

“Investment in 1m b/d of additional capacity – equal to the entire capacity of Algeria today – is needed each year by the end of the projection period just to offset the projected acceleration in the natural decline rate.”

International versus National Oil Companies:
“The opportunities for international companies to invest in non-Opec regions will diminish as the resource base contracts, eventually leaving the countries holding the bulk of the world’s remaining oil and gas reserves to take on a larger burden of investment.”

“The increasing dominance of national companies may make it less certain that the investment projected in this Outlook will actually be made.”

Emissions and Renewable Energy:
“The projected rise in emissions of greenhouse gases in the Reference Scenario puts us on a course of doubling the concentration of those gases in the atmosphere by the end of this century.”

“Modern renewable technologies grow most rapidly, overtaking gas to become the second-largest source of electricity, behind coal, soon after 2010.”

There was also this sidebar:

The Report in Numbers

On Cost

● $26,000bn – total energy investment needed 2007-2030

● $200 – Nominal oil price in 2030

● 5-7% – percentage of income consumers will spend on oil

● $2,000bn – Opec’s oil and gas export income in 2030, three times as much as in 2006

● $310bn – total amount the 20 largest developing countries spent on fuel subsidies in 2007

On Oil Barrels

● 106m b/d - total oil demand by 2030, up 25 per cent from 2007

● 9% – the natural decline rate of oil fields

● 80% – national oil companies’ share in providing incremental production 2007-2030

On Emissions

● 6°C – global average temperature increase if prevailing emission trends continue

● 75% – China, India and the Middle East’s combined share of incremental carbon dioxide emissions increase to 2030