Global Bond Frenzy Raises Concerns

Posted on May 23, 2014 by

Global Bond Frenzy Raises Concerns

By LANDON THOMAS Jr. FEB. 19, 2014 New York Times.

Prospecting for oil in Brazil, manufacturing steel in Russia, erecting skyscrapers in China: Global bond investors have financed some of the grandest investment projects taken on by emerging economies in recent years.

But as growth falters in a number of developing nations, economists and regulators have become increasingly worried about the consequences of this borrowing frenzy and the risk that the mutual funds and hedge funds that have largely replaced more stable commercial banks as global financiers might all decide to rush for exits at the same time.

“It’s fair to say that the market got a little overexuberant,” said Scott A. Mather, the head of global portfolio management at the mutual fund giant Pimco. “Many years of private sector credit growth have created serious vulnerabilities.”

Analysts point out that compared to the Asian financial crisis in 1997, the borrowing binge this time is being funded largely by global bond investors and includes companies outside Asia as well. Unlike two decades ago, governments of developing countries have built up substantial foreign exchange reserves and are better able to weather any crisis. Still, fears remain that any panicky selling of Chinese, Russian or Brazilian bonds could turn into a financial rout. And over a longer stretch, the broader question is the potential effect from a closing of the once-welcoming global bond market to borrowers in regions of the world that have been driving growth in recent years.

The underlying problem, Mr. Mather said, is that bond investors with little or no experience in emerging markets piled in to pursue higher yields than they could get from safer government securities in the United States and elsewhere, snapping up the bond issues of companies with even riskier credit profiles.

The stampede has led to a so-called mirage of liquidity in which many investors may have been misled into thinking that selling the securities will be as easy as buying them was.

“The liquidity is much worse now than before the crisis,” Mr. Mather said.

Bonds Over Banks

In the five years since the Federal Reserve began taking extraordinary measures to stimulate the U.S. economy, emerging markets have relied more on global bond markets than banks to help finance their growth.

External debt of emerging market countries

IN THE 5 YEARS BEFORE QUANTITATIVE EASING (Sept. 30 ’03 – Sept. 30 ’08) Bank lending $1,097 Billion     Bond issuance = $432 billion   Total: $1,530

IN THE 5 YEARS AFTER QUANTITATIVE EASING (Sept. 30 ’08 – Sept. 30 ’13)

Bank lending $855 Billion     Bond issuance = $1,0e2 billion   Total: $1,898

its aggressive bond buying program, driving interest rates in the United States to lows not seen in decades, high-yielding international bonds issued by nongovernment emerging market borrowers have doubled.

Total bonds outstanding are now at a record high of $2 trillion, according to a new report by Merrill Lynch that warns of the consequences of this explosion in emerging market debt and the shift away from traditional bank loans.

Bond market veterans like Petrobras, the Brazilian energy concern that has issued close to $30 billion worth of foreign currency bonds in the last four years, are still leading the parade.

Petrobras is an investment-grade issuer; it issues bonds at relatively low interest rates because its oil and gas projects are considered to be ultrasecure.

But more worrisome are the high-yield or junk bonds, issued by, among others, steel companies in Russia and property developers in China. One particularly popular borrower has been Country Garden, a Chinese developer that has issued $4.2 billion in bonds since late 2009.

Most recently, in the autumn, the company raised $750 million by issuing seven-year bonds at an interest rate of 7.5 percent; the deal was so popular, bankers say, that it was oversubscribed by $18 billion. Like other risky bonds, Country Garden securities sold off aggressively in recent weeks, with the yield hitting 8.4 percent before regaining some strength in recent days.

As growth disappoints and profits suffer, some of these borrowers are defaulting on their debts. Among the largest defaults was the implosion of OGX, a Brazilian energy conglomerate that went bust recently; others include Mexican home builders and Kazakh banks.

“I think this is definitely coloring the expectations of investors,” said Richard Segal, an emerging market bond analyst at Jefferies in London.

Of late, the issue has received a public airing in Washington, after the Office of Financial Research, a newly created analytical body within the Treasury Department, came out with a report drawing attention to the lemminglike tendency of global asset managers to “crowd or herd into popular asset classes or securities regardless of the size or liquidity of those asset classes or securities.”

The report said that more than $1.5 trillion had flowed into bond funds in the last five years — far outpacing other segments like equities and money markets — and pointed out that large asset management entities such as Pimco, BlackRock, Capital Research and Fidelity had been the main beneficiaries of these inflows.

For a financial industry that already saw itself as over-regulated, the O.F.R. study came as a shock. The main trade group for asset managers, the Investment Company Institute, has aggressively contested the agency’s suggestion that too much exposure to risky emerging market bonds by American fund managers poses a broader financial risk.

By contrast, the agency’s decision to highlight this risk factor has drawn the support of several influential economists, including Hyun Song Shin, a financial economist at Princeton and the incoming head of research at the Bank for International Settlements, the idea factory based in Basel, Switzerland, catering to global central banks.

In a recent paper, Mr. Shin warned of the risks that prevail when bond investors, who traditionally have a shorter-term approach than commercial lenders, pile into and out of the same markets at the same time.

“We have never seen anything like this before,” he said. “It is unprecedented, and it is dangerous.”

Mr. Shin also worries that regulators, in pushing hard for big banks to increase their cash reserves, are missing the more critical issue: Aggressive borrowers in some of the larger emerging markets have been relying on fickle bond investors to fund their investments. And those investors are becoming nervous about their exposure to these economies, threatening to choke off the funding pipeline.

“It may not be an acute crisis,” Mr. Shin said. “But it will be slow and simmering and the impact on global growth will be damaging.”

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Student loan crisis widens gap between rich and the rest

Posted on May 23, 2014 by

Student loan crisis widens gap between rich and the rest. Bill Zimmerman.   February 21, 2014.  San Francisco Chronicle.

Growing concern about wealth and income inequality overlooks a principal cause: the student loan crisis, which is much deeper than the $1.1 trillion owed and the tens of millions who owe it. Unnoticed are the astonishing profits banks have made from these loans and the impact those profits have had on redistributing wealth.

Since 2010, federal student loans have come from the Treasury instead of private banks (which previously made them with a federal guarantee) so the government now gets the interest rate profit that the banks once realized. In August, the Congressional Budget Office predicted that between 2013 and 2023, the government would make a shocking $184 billion in profits from its student loan program.

If expected governmental profits are that large over the next decade, it is logical that bank profits were as big in past decades. Interest rates were higher then, and the spread between them and the discount rate the banks had to pay to borrow money from the Federal Reserve was comparable to the future spread anticipated by the CBO. Thus, in the four decades before 2010, when the banks made federal loans, their profits must have been some multiple of $184 billion.

That doesn’t include profits from private student loans. When federal loans could no longer keep up with the expanding student population or snowballing college costs, the banks made millions of these private loans. They were not as numerous as the federal loans, but the interest rates were much higher.

Add to these profits a recent windfall. Following the recession, while the “too big to fail” banks got bailout money, the Fed also lowered its discount rate to 0.50 percent in 2009 and 0.75 percent in 2010. The banks gladly accepted these taxpayer-funded subsidies but continued to charge pre-recession interest rates, some as high as 8.5 percent, to their student loan clients.

Figuring conservatively, total bank profits must have been at least $500 billion and more likely $800 billion or more. This vast transfer of wealth came from student families with the greatest need. It was not an actual college expense, only the profit on their loans. Such a vast amount had to have played a significant role in generating our current wealth inequality.

That role continues.

Of the tens of millions still paying off student loans, many are underemployed and unable to make regular payments. Cut off from credit, they are stuck in a debtors’ prison without walls because laws passed in 1998 and 2005 prevent student loans, federal or private, from being discharged through bankruptcy. Meanwhile, no agency of government is even considering meaningful relief for these borrowers.

The Federal Reserve, the Treasury and numerous others have warned that this huge unsecured debt, much of which can never be repaid, creates dangers to the entire economy similar to those generated by housing debt in 2008.

Two reforms are needed:

Monthly payments on student loans should be a percentage of the borrower’s income, after essentials like food and housing are covered, instead of being fixed.

Interest rates on student loans should be nonprofit, which means equal to the Fed’s discount rate, currently 0.75 percent.

Government can adopt these reforms for the loans it makes and force the banks to do the same, retroactively, for all student loans still outstanding. While that would cost the banks billions, it would merely offset some of their past profits. Government used its emergency powers to seize the steel industry in 1952 and mandate wage and price controls in 1971, acts undertaken to prevent damage to the overall economy. Similarly aggressive action is now required to avert another debt-driven recession like 2008.

Over the past 40 years, conservative ideology has shifted the cost of college from the state to the student. Now, for the same reasons that government funds primary and secondary education, it must return to funding higher education. These two reforms can help move it in that direction.

Bill Zimmerman, a California political consultant, is the author of the e-book “The Student Loan Swindle: Why It Happened, Who Is to Blame, How the Victims Can Be Saved.” To comment, to go sfgate.com/submissions/#1

 

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Foreign Investment in Shale Gas is Drying Up

Posted on May 23, 2014 by

Jan. 2, 2014  For U.S. Drillers, the Days of Easy Money Are Over By Daniel Gilbert, Wall Street Journal.

Oil and Gas Companies Slash Spending as Foreign Investment Dries Up

Last year, 80 big energy companies in North America spent a combined $50.6 billion MORE than they brought in. That deficit was twice as high as in 2011, and four times as high as in 2010.  The same producers have dialed back through the first nine months of 2013, though they still spent about $18.7 billion more than their cash flow.

Since 2008, deep-pocketed foreign investors have subsidized the U.S. energy boom, as oil and gas companies spent far more money on leasing and drilling than they made selling crude and natural gas.

But the rivers of foreign cash are running dry for U.S. drillers. In 2013, international companies spent $3.4 billion for stakes in U.S. shale-rock formations, less than half of what they invested in 2012 and a tenth of their spending in 2011, according to data from IHS Herold, a research and consulting firm.

It is a sign of leaner times for the cash-hungry companies that have revived American energy output. The value of deals involving U.S. energy producers plunged 48% this year from 2012, to $47 billion, the first annual decline since 2008, according to an IHS report to be published Thursday.

So U.S. oil and gas producers have started to slash spending. “The days of easy money are over,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis. “The emphasis is going to be on lowering costs.”

Foreign cash helped cover the cost of the deep wells and heavy horsepower required to unlock oil and gas from shale and other dense rock in the U.S. The need for it has been acute: Last year, 80 big energy companies in North America spent a combined $50.6 billion more than they brought in from their operations, according to data from S&P Capital IQ. That deficit was twice as high as in 2011, and four times as high as in 2010.

The same producers have dialed back through the first nine months of 2013, though they still spent about $18.7 billion more than their cash flow.

U.S. and Canadian producers are “returning to spending within their means,” analysts at Sanford C. Bernstein wrote in a research note last week that analyzed spending patterns of 50 companies.

They are also turning to other investors, including private equity and the stock market, as overseas buyers lose their appetite for American energy projects. The shift has big implications for the oil and gas industry, analysts say, because Wall Street investors tend to be more sensitive to profits and stock prices, while foreign investors have historically been more focused on acquiring energy reserves and technology.

John Walker has seen this shift up close. The chief executive of closely held EnerVest Ltd. had courted big energy companies in Japan, Korea and China when he decided to sell vast holdings in Ohio’s Utica Shale.

But more than a year later, Houston-based EnerVest and its publicly traded arm, EV Energy Partners . . . LP, have sold only a portion of their Utica acreage for $284 million, well shy of the $6 billion Mr. Walker sought for all Utica interests. The buyer came not from Asia but Oklahoma: A new company backed by private equity and led by Aubrey McClendon, the former head of Chesapeake Energy Corp. . . .

“The whole market changed,” Mr. Walker said in a recent interview. Asian investors were interested in the company’s Utica Shale assets, he said, but very few bid. EnerVest has shifted gears, marketing the Utica properties in smaller packages to appeal to other energy companies with less cash on hand.

Mr. McClendon, who left Chesapeake in April, had raised $1.7 billion by October to launch American Energy Partners. His biggest backer was the Energy & Minerals Group, a private-equity firm.

Chronically low natural-gas prices have prompted international firms to cool on American shale, with some experiencing buyers’ remorse. Royal Dutch Shell . . . PLC in July concluded that its shale properties in North America were worth $2 billion less than it had estimated. A year earlier, BHP Billiton Ltd. . . . wrote down the value of its U.S. shale-gas fields by $2.8 billion.

In 2013 natural gas prices rebounded 26% to end the year at $4.23 per million British thermal units. But that increase come off near-historic lows. Natural gas prices sunk below $2 in 2012, the lowest level in a decade, as surging output across the U.S. and mild weather left a glut of the fuel. Prices rose last year as some power companies shifted to gas to reduce use of coal.

Some of the biggest financiers of the shale boom don’t expect the major Asian and European firms to reopen the spigot any time soon.

“They’re in digestion mode,” said Ralph Eads, vice chairman and global head of energy investment banking at Jefferies Group LLC. Still, he said, “as the foreign guys have withdrawn, we’ve seen a step-up in activity from private equity.”

Riverstone Holdings LLC, a private-equity giant focused on energy, said last month it would invest up to $300 million in closely held oil-and-gas producer Eagle Energy Exploration LLC. Riverstone has committed to invest about $25 billion globally, up from $20 billion a year ago.

The IPO market, too, remains a big source of financing for energy producers. Antero Resources Corp.’s . . . $1.6 billion public offering last month was the year’s fifth-biggest among U.S. listed firms. Combined, drillers that offered shares to the public on the New York Stock Exchange have netted $2.4 billion this year, the biggest haul in five years, according to figures from data-provider Dealogic.

 

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Financial system brought down by next oil shock

Posted on May 23, 2014 by

Erik Townsend. 6 January 2013. Why Peak Oil Threatens the International Monetary System. ASPO-USA

The U.S. Treasury bond market will most likely crash, and borrowing costs will skyrocket. Those increased borrowing costs will further exacerbate the fiscal deficit. Can you say self-reinforcing vicious cycle? Why didn’t the rest of the world abandon the dollar as the global reserve currency in reaction to the USA unilaterally reneging on gold convertibility in 1971? In my opinion, the best answer is simply “Because there was no clear alternative”. And to be sure, the unmatched power of the U.S.military had a lot to do with eliminating what might otherwise have been attractive alternatives for other nations.

After a few years of tense negotiations including the infamous oil embargo, the so-called petro-dollar business cycle was born. The Arabs would only accept dollars for their oil, and they would re-invest most of their profits in U.S. Treasury debt. In exchange for this concession, they would come under the protectorate of the U.S. military. Some might even go so far as to say that the U.S. government used the infamous Mafia tactic of making the Arabs an “offer they couldn’t refuse” – forcing oil producing nations to make financial concessions in exchange for “protection”.

With the Arabs now strongly incented to continue pricing the world’s most important commodity in U.S. dollars, the Bretton Woods system lived on. No longer constrained by the threat of a run on its bullion reserves, the U.S. kicked its already-entrenched practice of borrowing and spending beyond its means into high gear. For the past 42 years, the entire world has continued to conduct virtually all international trade in Dollars. This has forced China,Japan, and the oil exporting nations to buy and hold an enormous amount of U.S. Treasury debt. Exorbitant privilege is the key economic factor that allows the U.S.to run trillion dollar fiscal deficits without crashing the Treasury bond market. So far.

There’s a limit to how long this can last

But how long can this continue? The U.S. debt-to-GDP ratio now exceeds 100%, and the U.S. has literally doubled its national debt in the last 6 years alone. It stands to reason that eventually, other nations will lose faith in the dollar and start conducting business in some other currency. In fact, that’s already started to happen, and it’s perhaps the most important, under-reported economic news story in all of history.

Some examples…China and Brazil are now conducting international trade in their own currencies, as are Russia and China. Turkey and Iran are trading oil for gold, bypassing the dollar as a reserve currency. In that case, U.S. sanctions are a big part of the reason Iran can’t sell its oil in dollars. But I wonder if President Obama considered the undermining effect on exorbitant privilege when he imposed those sanctions. I fear that the present U.S. government doesn’t understand the importance of the dollar’s reserve currency role nearly as well as our leaders did in the 1970s.

The Biggest Risk We Face is a U.S. Bond and Currency Crisis

To be sure, Peak Oil in general represents a monumental risk to humanity because it’s literally impossible to feed all 7+ billion people on the planet without abundant energy to run our farming equipment and distribution infrastructure. But the risks stemming directly from declining energy production are not the most imposing, in my view.

Decline rates will be gradual at first, and it will be possible, even if unpopular, to curtail unnecessary energy consumption and give priority to life-sustaining uses for the available supply of liquid fuels. In my opinion, the greatest risks posed by Peak Oil are the consequential risks. These include resource wars between nations, hoarding of scarce resources, and so forth. Chief among these consequential risks is the possibility that the Peak Oil energy crisis will be the catalyst to cause a global financial system meltdown. In my opinion, the USA losing its reserve currency status is likely to be at the heart of such a meltdown.

A good rule of thumb is that if something is unsustainable and cannot continue forever, it will not continue forever. The present incarnation of the IMS, which affords the United States the exorbitant privilege of borrowing a seemingly limitless amount of its own currency from foreigners in order to finance its reckless habit of spending beyond its means with trillion-dollar fiscal deficits, is a perfect example of an unsustainable system that cannot continue forever.

But the bigger the ship, the longer it takes to change course. The IMS is the biggest financial ship in the sea, and miraculously, it has remained afloat for 42 years after the most fundamental justification for its existence (dollar-gold convertibility) was eliminated. How long do we have before the inevitable happens, and what will be the catalyst(s) to bring about fundamental change? Those are the key questions.

In my opinion, the greatest risk to global economic stability is a sovereign debt crisis destroying the value of the world’s reserve currency. In other words, a crash of the U.S. Treasury Bond market. I believe that the loss of reserve currency status is the most likely catalyst to bring about such a crisis.

The fact that the United States’ borrowing and spending habits are unsustainable has been a topic of public discussion for decades. Older readers will recall billionaire Ross Perot exclaiming in his deep Texas accent, “A national debt of five trillion dollars is simply not sustainable!” during his 1992 Presidential campaign. Mr. Perot was right when he said that 20 years ago, but the national debt has since more than tripled. The big crisis has yet to occur. How is this possible? I believe the answer is that because the U.S. dollar is the world’s reserve currency and is perceived by institutional investors around the globe to be the world’s safest currency, it enjoys a certain degree of immunity derived from widespread complacency.

But that immunity cannot last forever. The loss of reserve currency status will be the forcing function that begins a self-reinforcing vicious cycle that brings about a U.S. bond and currency crisis.While many analysts have opined that the USA cannot go on borrowing and spending forever, relatively few have made the connection to loss of reserve currency status as the forcing function to bring about a crisis.

We’re already seeing small leaks in the ship’s hull. China openly promoting the idea that the yuan should be asserted as an alternative global reserve currency would have been unthinkable a decade ago, but is happening today. Major international trade deals (such as China and Brazil) not being denominated in U.S. dollars would have been unthinkable a decade ago, but are happening today.

So we’re already seeing signs that the dollar’s exclusive claim on reserve currency status will be challenged. Remember, when the dollar loses reserve currency status, the U.S. loses exorbitant privilege. The deficit spending party will be over, and interest rates will explode to the upside. But to predict that this will happen right now simply because the system is unsustainable would be unwise. After all, by one important measure the system stopped making sense 42 years ago, but has somehow persisted nonetheless. The key question becomes, what will be the catalyst or proximal trigger that causes the USD to lose reserve currency status, igniting a U.S. Treasury Bond crisis?

The critical point to understand is that while the national debt has more than doubled, the U.S. Government’s cost of borrowing hasn’t increased at all. The reason is that interest rates are less than half what they were 10 years ago. Half the interest on twice as much principal equals the same monthly payment, so to speak. This is exactly the same trap that subprime mortgage borrowers fell into. First, money is borrowed at an artificially low interest rate. But eventually, the interest rate increases, and the cost of borrowing skyrockets. The USA is already running an unprecedented and unsustainable $1 trillion+ annual budget deficit. All it would take to double the already unsustainable deficit is for interest rates to rise to their historical norms.

This all comes back to exorbitant privilege. The only reason interest rates are so low is that the Federal Reserve is intentionally suppressing them to unprecedented low levels in an attempt to combat deflation and resuscitate the economy. The only reason the Fed has the ability to do this is that foreign lenders have an artificial need to hold dollar reserves because the USD is the global reserve currency. They would never accept such low interest rates otherwise. Loss of reserve currency status means loss of exorbitant privilege, and that in turn means the Fed would lose control of interest rates. The Fed might respond by printing even more dollars out of thin air to buy treasury bonds, but in absence of reserve currency status, doing that would cause a collapse of the dollar’s value against other currencies, making all the imported goods we now depend on unaffordable.

In summary, the U.S. Government has repeated the exact same mistake that got all those subprime mortgage borrowers into so much trouble. They are borrowing more money than they can afford to pay back, depending solely on “teaser rates” that won’t last. The U.S. Government’s average maturity of outstanding treasury debt is now barely more than 5 years. This is analogous to cash-out refinancing a 30-year fixed mortgage, replacing it with a much higher principal balance in a 3-year ARM that offers an initial teaser rate. At first, you get to borrow way more money for the same monthly payment. But eventually the rate is adjusted, and the borrower is unable to make the higher payments.

The Janszen Scenario

When it comes to evaluating the risk of a U.S. sovereign debt and currency crisis, most mainstream economists dismiss the possibility out of hand, citing the brilliant wisdom that “the authorities would never let such a thing happen”. These are the same people who were steadfastly convinced that housing prices would never crash in the United States because they never had before, and that Peak Oil is a myth because the shale gas boom solves everything (provided you don’t actually do the math).

At the opposite extreme are the bloggers on the Internet whom I refer to as the Hyperinflation Doom Squad. Their narrative generally goes something like this: Suddenly, when you least expect it, foreigners will wise up and realize that the U.S. national debt cannot be repaid in real terms, and then there will be a panic that results in a crash of the U.S. Treasury market, hyperinflation of the U.S. dollar, and declaration of martial law. This group almost always cites the hyperinflations of Zimbabwe and Argentina as “proof” of what’s going to happen in the USA any day now, but never so much as acknowledges the profound differences in circumstances between the USA and those countries. These folks deserve a little credit for having the right basic idea, but their analysis of what could actually happen simply isn’t credible when examined in detail.

Little-known economist Eric Janszen stands out as an exception. Janszen also happens to be the same guy who coined the phrase Peak Cheap Oil back in 2006, drawing an important distinction between the geological phenomenon of Hubbert’s Peak and the economic phenomenon which begins well before the actual peak, due to increasing marginal cost of production resulting from ever-increasing extraction technology complexity.

“But there’s no sign of inflation…” (Hint: It’s coming)

Janszen has put quite a bit of work into modeling what a U.S.bond and currency crisis would look like. He initially called this KaPoom Theory, because history shows that brief periods of marked deflation (the ‘Ka’) usually precede epic inflations (the ‘Poom’). He recently renamed this body of work The Janszen Scenario. Briefly summarized, Janszen’s view is that the U.S. has reached the point where excessive borrowing and fiscal irresponsibility will eventually cause a catastrophic currency and bond crisis. He believes that all that’s needed at this point is a proximal trigger, or catalyst, to bring about such an outcome. He thinks there are several potential triggers that could bring such a crisis about, and chief among the possibilities is the next Peak Cheap Oil price spike.

How Peak Oil could cause a Bond and Currency Crisis

There are several ways that an oil price spike could trigger a U.S. bond and currency crisis. Energy is an input cost to almost everything else in the economy, so higher oil prices are very inflationary. The Fed would be hard pressed to continue denying the adverse consequences of quantitative easing in a high inflation environment, and that alone could be the spark that leads to higher treasury yields. The resulting higher cost of borrowing to finance the national debt and fiscal deficit would be devastating to the United States.

A self-reinforcing vicious cycle could easily begin in reaction to oil price-induced inflation alone. But we must also consider how an oil price shock could lead to loss of USD reserve currency status, and therefore, loss of U.S. exorbitant privilege. In the 1970s, the USA represented 80% of the global oil market. Today we represent 20%, and demand growth is projected to come primarily from emerging economies. In other words, the rationale for oil producers to keep pricing their product in dollars has seriously deteriorated since the ‘70s. The more the global price of oil goes up, the more the U.S. will source oil from Canadian tar sands and other non-OPEC sources. That means less and less incentive for the OPEC nations to continue pricing their oil in dollars for all their non-U.S. customers.

Iran and Turkey have already begun transacting oil sales in gold rather than dollars. What if the other oil exporting nations wake up one morning and conclude “Hey, why are we selling our oil for dollars that might some day not be worth anything more than the paper they’re printed on?” Oil represents a huge percentage of international trade, so if oil stopped trading in dollars, that alone would be reason for most nations to reduce the very large dollar reserves they now hold. They would start selling their U.S. treasury bonds, and that could start the vicious cycle of higher interest rates and exploding borrowing costs for the U.S. Government. The precise details are hard to predict. The point is, the system is already precarious and vulnerable, and an oil price shock could easily detonate the time bomb that’s already been ticking away for more than two decades.

Let’s pretend the oil-independence hyperbole is true

But let’s just pretend for a moment that hyperbole is reality, and that the USA will achieve energy-independence in just a few years’ time. Now consider the consequences to the IMS. The oil-exporting nations would lose the USA as their primary export customer, and would no longer have an incentive to price their oil in dollars, or to maintain large dollar reserves. They would start selling off their U.S. treasury bonds, and pricing their oil in something other than dollars. Large oil importers like China and Japan would stop paying for oil in dollars, and would no longer need to maintain present levels of U.S. dollar reserves. So they too would start selling U.S. treasury bonds, pushing up U.S. interest rates in the process. Once again, we have the ingredients for a self-reinforcing vicious cycle of increasing U.S. interest rates causing U.S. Government borrowing costs to skyrocket.

Without the artificial demand for treasury debt created by exorbitant privilege, the U.S. would be unable to finance its federal budget deficit. The Federal Reserve might respond with even more money printing to monetize all the government’s borrowing needs, but without the international demand that results from the dollar’s reserve currency status, the dollar would crash in value relative to other currencies as a result of excessive monetization by the Fed. The resulting loss of principal value would cause even more international holders of U.S. Treasury debt to panic and sell their holdings. Once again, a self-reinforcing vicious cycle would develop, with consequences for the United States so catastrophic that the 2008 event would pale in contrast.

Rambo to the Rescue?

Let’s not forget that the USA enjoys virtually unchallenged global military hegemony. China is working hard to build out its “blue water navy”, including strategic ballistic missile nuclear submarine capability. But the USA is still top dog on the global power stage, and if the USA was willing to use its nuclear weapons, it could easily defeat any country on earth, except perhaps China and Russia.

While the use of nuclear weapons in an offensive capacity might seem unthinkable today, the USA has yet to endure significant economic hardship. $15/gallon gasoline from the next Peak Cheap Oil price shock coupled with 15% treasury yields and a government operating in crisis mode just to hold off systemic financial collapse in the face of rampant inflation would change the mood considerably.

All the USA has to do in order to secure an unlimited supply of $50/bbl imported oil is to threaten to nuke any country refusing to sell oil to the U.S. for that price. Unthinkable today, but in times of national crisis, morals are often the first thing to be forgotten. We like to tell ourselves that we would never allow economic hardship to cause us to lose our morals. But just look at the YouTube videos of riots at Wal-Mart over nothing more than contention over a limited supply of boxer shorts marked down 20% for Black Friday. What we’ll do in a true crisis that threatens our very way of life is anyone’s guess.

If faced with the choice between a Soviet-style economic collapse and abusing its military power, the USA just might resort to tactics previously thought unimaginable. Exactly what those tactics might be and how it would play out are unknowable. The point is, this is a very complex problem, and a wide array of factors including military capability will play a role in determining the ultimate outcome.

I certainly don’t mean to predict such an apocalyptic outcome. All I’m really trying to say is that the military hegemony of the USA will almost certainly play into the equation. Even if there is no actual military conflict, the ability of the U.S. to defeat almost any opponent will play into the negotiations, if nothing else.

Conclusion

The music hasn’t stopped quite yet, but when it does, this will end very, very badly. I’m pretty sure we’re on the last song, but I don’t know how long it has left to play.

Further Reading

Time Magazine’s overview of the Bretton Woods system at http://www.time.com/time/business/article/0,8599,1852254,00.html offers an excellent discussion which anyone can understand.

For those seeking a more detailed discussion, Iowa State University’s Professor E. Kwan Choi offers excellent course notes on the subject at http://www2.econ.iastate.edu/classes/econ355/choi/bre.htm.

Wikipedia also offers articles on both the Bretton Woods system and the actual conference held there in 1944.

Erik Townsend is a hedge fund manager based in Hong Kong.

 

 

 

 

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Michael Dittmar, Institute of Particle Physics: Peak Uranium 2015

Posted on May 22, 2014 by

The End of Cheap Uranium

June 17, 2011. Michael Dittmar, Institute of Particle Physics,   Zurich, Switzerland Journal: Science of the Total Environment

This paper concludes that “the end of the cheap uranium supply will result in a chaotic phase-out scenario with price explosions, supply shortages and possible electricity shortages in many countries:
Some highlights from this paper:

Historic data from many countries demonstrate that on average no more than 50-70% of the uranium in a deposit could be mined.

An analysis of more recent data from Canada and Australia leads to a mining model with an average deposit extraction lifetime of 10±2 years. This simple model provides an accurate description of the extractable amount of uranium for the recent mining operations.

Using this model for all larger existing and planned uranium mines up to 2030, a global uranium mining peak of at most 58±4 ktons around the year 2015 is obtained.

Thereafter we predict that uranium mine production will decline to at most 54 ± 5 ktons by 2025 and, with the decline steepening, to at most 41 ± 5 ktons around 2030. These numbers are not even anywhere near the present global usage, about 68 ktons/year, and imply significant shortages over coming decades.

This amount will not be sufficient to fuel the existing and planned nuclear power plants during the next 10-20 years.

In fact, we find that it will be difficult to avoid supply shortages even under a slow 1%/year worldwide nuclear energy phase-out scenario up to 2025. We thus suggest that a worldwide nuclear energy phase-out is in order. If such a slow global phase-out is not voluntarily effected, the end of the present cheap uranium supply situation will be unavoidable. The result will be that some countries will simply be unable to afford sufficient uranium fuel at that point, which implies involuntary and perhaps chaotic nuclear phase-outs in those countries involving brownouts, blackouts, and worse.

Nuclear fission energy in industrial societies is often proposed as a long term replacement for the limited fossil fuel resources and as a solution to the environmental problems related to their use.

However, even 50 years after commercial nuclear fission power began, nuclear reactors produce less than 14% of the world’s electric energy, which itself makes only about 16% of our final energy demand [1].

More than 80% of the 440 nuclear power plants, with a capacity of 374 GWe [2], are operated in the richer OECD countries, where they produce about 21% of the annual electric energy [1]. The relatively small nuclear energy contribution today indicates that even a minor transition from fossil to nuclear fuel for generating electric energy over the next 20 to 30 years would require significant increases in the use of nuclear fuel.

Including the year 2010, a total of about 2.5 millions tons of uranium have been mined and about 2 million tons have been used for electric energy production. Most of the remaining 500 ktons are essentially under the control of the military in Russia and the USA.

The fact that essentially all of Europe’s required 21 ktons/year uranium, [7], must now be imported is worth noting since it demonstrates that uranium, like the fossil fuels, is a finite resource that does not somehow magically appear in greater quantities just because demand pushes its price higher. As with the fossil fuels, the mining data from Europe show that deposit depletion and production declines are unavoidable consequences of finite resources.

Uranium mining in 2010 in the USA and in South Africa provided 1.7 ktons and 0.6 ktons respectively[5], namely about 10% compared to their peak production at the beginning of the 1980’s when 16.8 ktons (USA) and more than 6 ktons/year (South Africa) were mined. in light of the fact that annual production has declined steeply to roughly 10% of the peak level that was achieved in the 1980s, the present RAR numbers do not appear to be realistic (472.1 ktons[7]).

History

Uranium mining between 1945 and 2005 can be divided into three periods. The first period (1945-1975) can be associated with the rush to fulfill the military uranium requirements during the nuclear arms race. An extraction peak of almost 50 ktons/year was achieved around the year 1959, after which mining declined to about 35 ktons/year between 1965-1975. About 750 ktons of uranium were extracted during that period. The second period (1975-1990) coincided with the time when many civilian nuclear power plants were planned and constructed. This period ended around the year 1990, when annual uranium requirements became larger than the annual extraction. During this period, uranium mining increased within a few years from 40 ktons to a production peak of almost 70 ktons/year around the years 1980/81. A production level of more than 60 ktons was maintained between 1978 and 1986 and a total of 1000 ktons were extracted between 1975 and 1990. During the third period (1990-2005) the construction of new nuclear power plants essentially stopped at a capacity of about 374 GWe, far below the original ambitious plans in many countries from the 1970’s. During this period and due to depletion and environmental reasons, uranium mining stopped in many productive regions and countries in Europe, Africa and North- America. Mining was reduced to an average of about 35 ktons/year, well below the uranium demand of 65 ktons/year, and a total of 500 ktons were mined. During the past five years about 250 ktons of uranium were produced and the fast rising contribution from Kazakhstan from 4.4 ktons in 2005 to almost 18 ktons in 2010 might be used as an indication that a new production period has started.

References
[1] Data about electric energy production in different countries and from the different sources
can be found at http://www.worldenergyoutlook.org/. For the OECD countries the
12
data are summarized on a monthly basis at http://www.iea.org/stats/surveys/mes.
pdf.
[2] Data about the world nuclear reactors and their performance are available at the PRIS,
the IAEA data base at http://www.iaea.org/programmes/a2/.
[3] The uranium requirements under the three WNA future scenarios, a slow growth of 1-2%
per year or a decline of -1%/year can be found at http://www.world-nuclear.org/info/
inf22.html.
[4] The press declaration for the publication of the 2009 edition of the Red Book contains a
warning statement about uranium shortages and can be found at http://www.nea.fr/
press/2010/2010-03.html.
[5] The reported uranium mining results from all countries and for the last few years including
2010 are summarized at http://www.world-nuclear.org/info/inf23.html.
[6] The 2006 review “Forty Years of Uranium Resources, Production and Demand in Perspective.
The Red Book Retrospective” can be found at OECD bookshop http://www.
oecdbookshop.org/oecd/display.asp?sf1=identifiers\&st1=9789264047662. A free
online version can be found via “Google books.”
[7] The latest 2009 edition of the Red Book from the IAEA and the NEA under
google books or at http://www.oecdbookshop.org/oecd/display.asp?lang=en\&sf1=
DI\&st1=5KMD4HVBSN41.
[8] The world distribution of uranium deposits from the IAEA database UDEPO can be found
at http://www-nfcis.iaea.org/UDEPO/UDEPOMain.asp. The 2009 status can be found
at the same site under IAEA-TECDOC-1629.
[9] Detailed reports about recent uranium mining in Canada and Australia and further references
can be found in the WNA documents http://www.world-nuclear.org/info/
inf49.html and http://www.world-nuclear.org/info/inf48.html respectively. Data
from individual deposits are also taken from http://www.world-nuclear.org/info/
inf49i_Canada_Uranium_Mining_Historya.html and [8].
[10] The detailed McArthur River Technical report from 2009 can be found at the website
of CAMECO, the main operator of the mine, under http://www.cameco.com/mining/
mcarthur_river/.
[11] The first quarter of 2011 results from the McArthur River mine are reported at http:
//www.cameco.com/media/news_releases/2011/?id=559.
[12] More details about plans for future uranium mines in Australia are given in http://www.
world-nuclear.org/info/inf48.html.
[13] The paper “An even bigger hole” from John Busby with many details about the Olympic
Dam project from 2007 with its 2010 update can be found at http://www.after-oil.
co.uk/evenbiggerhole.htm.
[14] See the statements from Vladimir Shkolnik, former energy minister and now Kazatomprom
at the beginning of April 2011 http://oldn.themoscowtimes.com/business/article/
kazakhstan-stockpiles-uranium-for-a-century/434615.html.
13
[15] The uranium mines in Kazakhstan and their target plateau production values are listed
at http://www.world-nuclear.org/info/inf89.html.
[16] The particularity about the Rossing mine are given in the 2009 report IAEA-TECDOC-
1629 page 45.
[17] Details about environmental problems related to the uranium mining in the area of Krasnokamensk
are reported in an article by Heinz H¨ogelsberger http://www.motherearth.
org/nuke/uranium/kras.htm.
[18] Details about uranium mining in Russia and further references can be found at http:
//www.world-nuclear.org/info/inf45a_Russia_nuclear_fuel_cycle.html.
[19] See the section about new mines in the Red Book 2009 [7] page 54 and the detailed country
reports at the WNA website http://www.world-nuclear.org/info/default.aspx.
[20] See http://www.world-nuclear.org/info/inf45.html.
[21] The WNA mining forecast estimate can be seen in the Figure at the end of the http:
//www.world-nuclear.org/info/inf22.html report.
[22] The EWG 06 uranium mining forecast can be found at http://www.energywatchgroup.
org/fileadmin/global/pdf/EWG_Report_Uranium_3-12-2006ms.

Posted in Nuclear Power Energy, Peak Uranium | Comments Off on Michael Dittmar, Institute of Particle Physics: Peak Uranium 2015

Miscellaneous predictions

Posted on May 22, 2014 by

Prediction: there will be more large and Megacities in the Future

[As fossil fuels decline, large and super-large “megacities”, with over 20 million people, will emerge as rural populations are forced to migrate to cities as gas stations close and farming isn’t an option as industrial farms continue to grow larger.  Most of these cities will be on navigable waterways since trucks will have fuel to deliver food and other essential products, and trains in America only have 95,000 route miles. This trend has been happening for decades, but will soon accelerate. Alice Friedemann www.energyskeptic.com] 

Packer, G. November 13, 2006. The Megacity. Decoding the chaos of Lagos. The New Yorker.

3 Aug 2014. David Stockman: The Collapse of the American Imperium A perfect storm of policy failures by Adam Taggart 

David Stockman, former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier is an insider’s insider. Few people understand the ways in which Washington DC, The Fed, and Wall Street work and intersect better than he does.

He’s extremely concerned by the “perfect storm” he sees of concurrent failures in US policy across foreign, monetary, economic, and fiscal fronts:

If you look at the entire radar screen of things developing both domestically and internationally, we are plunging deep into a perfect storm of policy failure. The American Impirium is collapsing. There is blowback everywhere. The wreckage of prior policy mistakes of our intervention with foreign policy is coming home to roost, and the Ukraine is one area at ground zero for that.

But second, monetary central planning is now coming to a dead-end. It is inflating the third financial bubble of the century and the Fed is now clueless as to how it will manage to unwind the massive balance sheet expansion it has been undertaken.

And third, the fiscal doomsday machine continues to crank on. Washington is ignoring the fact that we are six years into a business cycle expansion and we are still running massive deficits and there is no cushion for the next upset that comes to the economy.

Now, why is all of this important? Because I think the foreign policy failures — the collapse of the American Impirium as I call it — is at the center of this, and it will push all of these things in the wrong direction.

We are now becoming much more aggressive in our foreign policy than ever before. We can’t afford it by any means. And the potential for this to create black swans to roil or dislocate these very fragile markets that have been created by this massive central bank balance sheet expansion — it all makes what is happening in the Ukraine, or in the Middle East in Gaza, or in the collapse of Iraq, even more dangerous in terms of what it could trigger. So we are in a real pickle here and I think it is compounding by the day.

At risk here is America’s capability to remain the world’s dominant superpower.

For example, in the current rush to demonize Russia, Stockman sees the military industrial complex (as warned by President Eisenhower) steamrolling over any of the necessary debate, diplomacy or consideration that should proceed such warmongering:

Basically, the war machine in Washington (I call it the Warfare State), couldn’t abide that. There are just too many people that operate in the devil’s workshop; which is to say we have all of this capacity, we have all this machinery of war-making and of intervention and of global empire that is obsolete and unnecessary — and yet it is manned by people who want something to do. Who need to justify budgets. Who need to pursue and prosecute missions. That is what I think is happening at the present time.

It’s just the warfare state machinery has gotten itself activated into motion and it is drastically simplifying the real facts that we face and creating a narrative that is really preposterous in terms of what our national security, the safety and security of the American people, really requires in this circumstance.

And on the domestic front, he foresees very difficult times ahead as we try to wean ourselves off of the dependency on massive thin-air stimulus our economy has developed over the past six years:

On the way up as they inflated this bubble, the smart money got on board and basically was front running everything the Fed was doing. Once they became confident that the $85 billion of bond buying was going to stabilize, if not enhance, the price of the bond and they could buy it on 98% repo leverage at $0 carry cost, they jumped in hammer and tong. And so the Fed then had this magnetic force working with it, which was the fast money and the market attempting to front run the direction of Fed policy.

But just think: What happens if they actually began to allow interest rates to rise or begin to attempt, through one mechanism or another, to shrink their balance sheet?

The fast money will get on the other side of the trade just as fast as it rode the bubble expansion to the top. And they will sell what they think the Fed is selling. And that will cause a massive unwind of the greatest overvalued market bubble in the world, which is the government bond market.

Redefining “Peak Oil” for the USA

Feb 9, 2009. Richard Vodra. ASPO NEWSLETTER

The US has long consumed about 25% of the world’s oil, and we act as if we can expect this pattern to continue. There are 2 reasons to question this assumption. First, the rest of the world wants to grow their usage quickly, and that will eventually increase their share of the total.

Second, the US has had to borrow extensively to finance its oil imports. When oil is $80 per barrel and we import 14 million barrels per day, that comes to $1.1 billion per day, or $400 billion per year. Some of that is paid for by our exports, but much has been made possible by foreign purchases of our debt securities. With the massive deficits America is creating to finance the bailouts and recovery packages, who will lend us money in the future? What interest rates, or other security, will they demand? It is reasonable to assume that at some point foreign investors will drastically reduce the investments that fund our imports.

One example of how all of this could play out: if total net world production falls from 80 mbd (out of 86 mbd gross production – assuming a 7% gross-to-net factor, probably low) to 75 (a 6% decline), and the American share drops from 24% to 19%, then American supplies will drop from 19 mbd to 14, a 25% cut, while the rest of the world would continue to share the 61 mbd balance. Our reliance on importing oil with borrowed money could place much of the burden of global Peak Oil on the United States.

When the amount of oil available to the US falls far short of the average historical supply, then some process other than price will be used to allocate it. We can be sure that the military will get whatever it needs, and emergency uses including police and ambulances will also get their supplies. Then someone will decide whether to set aside special allotments for agriculture and long-distance trucking (pending the expansion and electrification of our rail network), for school buses and mass transit, and other priorities. If the country decides to take seriously the transition to carbon reduction and a new energy system, oil will be required for the conversion process. These decisions will not be pretty, or easy. However, the “rest of us” will have to share whatever is left.

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Thorium: the wonder fuel that wasn’t. Bulletin of the Atomic Scientists

Posted on May 22, 2014 by

Thorium: the wonder fuel that wasn’t

May 11, 2014. Robert Alvarez. Bulletin of the Atomic Scientists.

“Thorium-Fueled Automobile Engine Needs Refueling Once a Century,” reads the headline of an October 2013 story in an online trade publication. This fantastic promise is just one part of a modern boomlet in enthusiasm about the energy potential of thorium, a radioactive element that is far more abundant than uranium. Thorium promoters consistently extol its supposed advantages over uranium. News outlets periodically foresee the possibility of “a cheaper, more efficient, and safer form of nuclear power that produces less nuclear waste than today’s uranium-based technology.”

The United States has tried to develop thorium as an energy source for some 50 years and is still struggling to deal with the legacy of those attempts.

In addition to the billions of dollars fruitlessly spent to develop thorium fuels, the US government will have to spend billions more, at numerous federal nuclear sites, to deal with the wastes produced by those efforts.

And America’s energy-from-thorium quest now faces an ignominious conclusion: The US Energy Department appears to have lost track of 96 kilograms of uranium 233, a fissile material made from thorium that can be fashioned into a bomb, and is battling the state of Nevada over the proposed dumping of nearly a ton of left-over fissile materials in a government landfill, in apparent violation of international standards.

For a terrorist, however, uranium 233 is a tempting theft target; it does not require advanced shaping and implosion technology to be fashioned into a workable nuclear device. The Energy Department recognizes this characteristic and requires any amount of more than two kilograms of uranium 233 to be maintained under its most stringent safeguards, to prevent “onsite assembly of an improvised nuclear device.” As for the claim that radiation levels from uranium 232 make uranium 233 proliferation resistant, Oak Ridge researchers note that “if a diverter was motivated by foreign nationalistic purposes, personnel exposure would be of no concern since exposure … would not result in immediate death.”

Early thorium optimism

The energy potential of the element thorium was discovered in 1940 at the University of California at Berkeley, during the very early days of the US nuclear weapons program. Although thorium atoms do not split, researchers found that they will absorb neutrons when irradiated. After that a small fraction of the thorium then transmutes into a fissionable material—uranium 233—that does undergo fission and can therefore be used in a reactor or bomb.

By the early 1960’s, the US Atomic Energy Commission (AEC) had established a major thorium fuel research and development program, spurring utilities to build thorium-fueled reactors. Back then, the AEC was projecting that some 1,000 nuclear power reactors would dot the American landscape by the end of the 20th century, with a similar nuclear capacity abroad. As a result, the official reasoning held, world uranium supplies would be rapidly exhausted, and reactors that ran on the more-plentiful thorium would be needed.

With the strong endorsement of a congressionally created body, the Joint Committee on Atomic Energy, the United States began a major effort in the early 1960s to fund a 2-track research and development effort for a new generation of reactors that would make any uranium shortage irrelevant by producing more fissile material fuel than they consumed.

The first track was development of plutonium-fueled “breeder” reactors, which held the promise of producing electricity and 30 percent more fuel than they consumed. This effort collapsed in the United States in the early 1980’s because of cost and proliferation concerns and technological problems.  (The plutonium “fast” reactor program has been able to stay alive and still receives hefty sums as part of the Energy Department’s nuclear research and development portfolio.)

The second track—now largely forgotten—was based on thorium-fueled reactors. This option was attractive because thorium is far more abundant than uranium and holds the potential for producing an even larger amount of uranium 233 in reactors designed specifically for that purpose. In pursuing this track, the government produced a large amount of uranium 233, mainly at weapons production reactors. Approximately two tons of uranium 233 was produced, at an estimated total cost of $5.5 to $11 billion (2012 dollars), including associated cleanup costs.

The federal government established research and development projects to demonstrate the viability of uranium 233 breeder reactors in Minnesota, Tennessee, and Pennsylvania. By 1977, however, the government abandoned pursuit of the thorium fuel cycle in favor of plutonium-fueled breeders, leading to dissent in the ranks of the AEC. Alvin Weinberg, the long-time director of the Oak Ridge National Laboratory, was, in large part, fired because of his support of thorium over plutonium fuel.

By the late 1980’s, after several failed attempts to use it commercially, the US nuclear power industry also walked away from thorium. The first commercial nuclear plant to use thorium was Indian Point Unit I, a pressurized water reactor near New York City that began operation in 1962. Attempts to recover uranium 233 from its irradiated thorium fuel were described, however, as a “financial disaster.” The last serious attempt to use thorium in a commercial reactor was at the Fort St. Vrain plant in Colorado, which closed in 1989 after 10 years and hundreds of equipment failures, leaks, and fuel failures. There were four failed commercial thorium ventures; prior agreement makes the US government responsible for their wastes.

Where is the missing uranium 233?

As it turned out, of course, the Atomic Energy Commission’s prediction of future nuclear capacity was off by an order of magnitude—the US nuclear fleet topped out at about 100, rather than 1,000 reactors—and the predicted uranium shortage never occurred. America’s experience with thorium fuels faded from public memory until 1996. Then, an Energy Department safety investigation found a national repository for uranium 233 in a building constructed in 1943 at the Oak Ridge National Laboratory. The repository was in dreadful condition; investigators reported an environmental release from a large fraction of the 1,100 containers “could be expected to occur within the next 5 years in that some of the packages are approaching 30 years of age and have not been regularly inspected.” The Energy Department later concluded that the building had “deteriorated beyond cost-effective repair. Significant annual costs would be incurred to satisfy current DOE storage standards, and to provide continued protection against potential nuclear criticality accidents or theft of the material.”

The neglect extended beyond the repository and storage containers; the government had also failed to keep proper track of its stores of uranium 233, officially classified as a Category I strategic special nuclear material that requires stringent security measures to prevent “an unauthorized opportunity to initiate or credibly threaten to initiate a nuclear dispersal or detonation.”

A 1996 audit by the Energy Department’s inspector general reported that the Oak Ridge National Laboratory, the Rocky Flats nuclear weapons facility, and the Idaho National Laboratory “had not performed all required physical inventories ... the longer complete physical inventories are delayed, the greater the risk that unauthorized movement of special nuclear materials could occur and go undetected.” The amounts of uranium 233 that the Oak Ridge and Idaho national labs have reported in their inventories has significantly varied. Based on a review of Energy Department data, there appears to be  an inventory discrepancy; 96 kilograms or 6 percent of the U-233 produced is not accounted for. The Energy Department has yet to address this discrepancy, which difference is enough to fuel at least a dozen nuclear weapons.

Uranium 233 compares favorably to plutonium in terms of weaponization; a critical mass of that isotope of uranium—about 6 kilograms, in its metal form—is about the same weight as a plutonium critical mass. Unlike plutonium, however, uranium 233 does not need implosion engineering to be used in a bomb. In fact, the US government produced uranium 233 in small quantities for weapons, and weapons designers conducted several nuclear weapons tests between 1955 and 1968 using uranium 233. Interest was renewed in the mid-1960s, but uranium 233 never gained wide use as a weapons material in the US military because of its high cost, associated with the radiation protection required to protect personnel from uranium 232, a highly radioactive contaminant co-produced with uranium 233.

The end of an unfortunate era

After its 1996 safety investigation at the Oak Ridge National Laboratory, the Energy Department spent millions to repackage about 450 kilograms of uranium 233 that is mixed with uranium 235 and sitting in the lab’s Building 3019, and to dispose of diluted uranium 233 fuel stored at the Idaho National Lab. The Energy Department’s nuclear weapons program managed to shift responsibility for the stockpile in Building 3019 from Oak Ridge to the Office of Nuclear Energy, which envisioned using the uranium 233 to make medical isotopes. This plan fell apart, and in 2005 Congress ordered the Energy Department to dispose of the uranium 233 stockpile as waste.
Since then, the Energy Department’s Office of Environmental Management has considered uranium 233 disposal to be an unfunded mandate, disconnected from other, higher-priority environmental cleanup compliance agreements. After several fits and starts, including a turnover of 4 project managers in less than 2 years, the Energy Department’s disposition project “had encountered a number of design delays, may exceed original cost estimates, and will likely not meet completion milestones,” the department’s inspector general reported in 2010. The cost of the project increased from $384 million to $473 million—or more than $1 million per kilogram for the disposal of uranium 233.

In an effort to reduce costs, the Energy Department developed a plan to ship nearly 75%t of the fissile materials in Building 3019, as is, to a landfill at the Nevada Nuclear Security Site by the end of 2014. Because such disposal would violate the agency’s formal safeguards and radioactive waste disposal requirements, the Energy Department changed those rules, which it can do without public notification or comment.  Never before has the agency or its predecessors taken steps to deliberately dump a large amount of highly concentrated fissile material in a landfill, an action that violates international standards and norms.

In June 2013, Nevada Gov. Brian Sandoval and members of the state’s congressional delegation announced their opposition to the landfill disposition plan. Energy Secretary Ernest Moniz visited with Sandoval but did not back down from the landfill plan.  Even though the Oak Ridge material in its current form meets the legal definition for radioactive waste requiring geologic disposal, the Energy Department has taken the position that the sweeping authority granted to it under the Atomic Energy Act allows the department to dispose of the fissile material however it pleases, regardless of the state’s objection.

The United States has spent nearly $10 billion to discourage practices like landfill dumping of fissile materials in the former Soviet Union, only to have the Energy Department try it at home. Heedless of the discrepancy between overseas and domestic disposal policies, the department’s agenda—which focuses on saving money on guards who would be needed to secure the uranium 233—is placing the United States in an impossible position when it comes to criticizing the nuclear materials security of other countries. So ends America’s official experience with thorium, the wonder fuel.

Robert Alvarez. A senior scholar at the Institute for Policy Studies, Alvarez served as senior policy adviser to the Energy Department’s secretary and deputy assistant secretary for national security and the environment from 1993 to 1999. During this tenure, he led teams in North Korea to establish control of nuclear weapons materials. He also coordinated the Energy Department’s nuclear material strategic planning and established the department’s first asset management program. Before joining the Energy Department, Alvarez served for five years as a senior investigator for the US Senate Committee on Governmental Affairs, chaired by Sen. John Glenn, and as one of the Senate’s primary staff experts on the US nuclear weapons program. In 1975, Alvarez helped found and direct the Environmental Policy Institute, a respected national public interest organization. He also helped organize a successful lawsuit on behalf of the family of Karen Silkwood, a nuclear worker and active union member who was killed under mysterious circumstances in 1974. Alvarez has published articles in Science, the Bulletin of Atomic Scientists, Technology Review, and The Washington Post. He has been featured in television programs such as NOVA and 60 Minutes.

Posted in Thorium | Comments Off on Thorium: the wonder fuel that wasn’t. Bulletin of the Atomic Scientists

Cambridge Centre for the Study of Existential Risk

Posted on May 21, 2014 by

University of Cambridge: Cambridge Centre for the Study of Existential Risk

Some of Britain’s finest minds are drawing up a “doomsday list” of catastrophic events that could devastate the world, pose a threat to civilization and might even lead to the extinction of the human species.

Members include Stephen Hawking, the worlds’ most famous living scientist, Martin Rees. emeritus professor of cosmology and astrophysics at Cambridge, Huw Price professor of philosophy at Cambridge, Jaan Tallinn: co-founder of Skype, and Robert May, past president of the Royal Society.

Some of their concerns are:

  • Human technology may pose new, extinction-level risks to our species
  • Events could arise as unexpectedly as the 2008 financial crisis that might cause world-wide disruption
  • Our increasing reliance on technology and the formation of complex interconnected networks is making society more vulnerable, because if something goes wrong in one system, it can affect all the others (i.e. power, food supplies, financial system).
  • We import most of our fossil fuels from abroad, so a conflict over resources in the future is possible
  • In a modern, efficient world, we no longer stockpile food. If the supply is disrupted for any reason, it would take about 48-hours before it runs out and riots begin
  • Although some of these events have a low probability, if one occurs the consequences would be catastrophic. But politicians only focus on short-term problems, and the public is in denial about what we’re doing to the planet and the consequences to their grandchildren (i.e. climate change / the 9 boundaries we must not cross), and the vulnerability of an interconnected world to the actions of terrorism by a small group or one individual.

Cyber attacks: One of the biggest threats is some kind of attack on the computers controlling the electricity grids around the world. Loss of electrical power would have immediate and possibly severe consequences if it could not be restored quickly.

Systemic risk. Complex interactions between a rising global population, greater pressure being placed on natural resources, more complex supply chains, and an increasing reliance on both on interconnected technologies and interconnected markets. Our interconnected world depends on elaborate networks: electric power grids, air traffic control, international finance, just-in-time delivery to name just a few. Unless these are highly resilient, their manifest benefits could be outweighed by catastrophic (albeit rare) breakdowns cascading through the system.

Resource depletion or ecological destruction. The natural resources needed to sustain a high-tech civilization are being used up. If some other cataclysm destroys the technology we have, it may not be possible to climb back up to present levels if natural conditions are less favorable than they were for our ancestors, for example if the most easily exploitable coal, oil, and mineral resources have been depleted.

Bioterrorism:  Large infrastructure is required to build and deliver nuclear weapons, but genetically engineered harmful microbes or viruses could be developed in a relatively simple laboratory.

Food shortages: The modern food industry is based on “just in time” delivery with little or no stockpiling. Failure of the information networks controlling this could quickly lead to shortages and food riots.

Nuclear holocaust. Even if some humans survive the short-term effects of a nuclear war, it could lead to the collapse of civilization.

Genetically engineered biological agent. As genetic technology advances, it may become possible for a tyrant, terrorist, or lunatic to create a doomsday virus, an organism that combines long latency with high virulence and mortality

Pandemics:  Increasing mobility makes it more likely a new,  infection could quickly spread around the world via air travel before a vaccine is developed to combat it.

Agriculture. there has been a trend towards more widespread use of fewer genetic varieties of crop, potentially increasing the vulnerability of global food supplies to emerging pathogens.

Asteroid or comet strikes the earth. Not likely, but possible, happens every half million years or so.  Since Bostroms paper was published, it looks like many of the past large extinctions were from global warming rather than comets or asteroids.

Not likely (don’t worry): solar flares, supernovae, black hole explosions or mergers, gamma-ray bursts, galactic center outbursts, supervolcanoes, loss of biodiversity, buildup of air pollution, gradual loss of human fertility.

My opinion: Peak oil, coal, natural gas less the odds of runaway greenhouse

Runaway climate catastrophe:  Climatologists fear that, as the climate is polluted with increasing quantities of carbon dioxide, it may pass a tipping point after which feedback effects cause it to get warmer and warmer.

My opinion:  computer chips will be among the first technologies to fail.  This is a silly worry

Malign computers: Some experts fear that increasingly intelligent computers may one day turn “hostile” and not perform as they were designed.

The 4 levels of risk are: (Bostrom)

Bangs – Earth-originating intelligent life goes extinct in relatively sudden disaster resulting from either an accident or a deliberate act of destruction.

Crunches – The potential of humankind to develop into posthumanity[7] is permanently thwarted although human life continues in some form.

Shrieks – Some form of posthumanity is attained but it is an extremely narrow band of what is possible and desirable.

Whimpers – A posthuman civilization arises but evolves in a direction that leads gradually but irrevocably to either the complete disappearance of the things we value or to a state where those things are realized to only a minuscule degree of what could have been achieved.

I was so annoyed with the idea that malign computers could be a problem I wrote the following letter (and to the Global Catastrophic Risk Institute as well):

I think your worry about malign computers is highly unlikely.

Microchips are the pinnacle of civilization, the most complex product, and therefore the most vulnerable to supply chain failure, cascading failure, single-source failures, energy supply shocks, financial collapse, and all the other bangs, crunches, shrieks, and whimpers.

The Fragility of Microchips

Microchips and Fab Plants: a Detailed description

Motherboards in Computers – too complex to make in the future

High-Tech can’t last: Limited minerals & metals essential for wind, solar, microchips, cars, & other high-tech gadgets

The real threat to civilization is the exponential decline of all fossil fuels and other natural resources (topsoil, aquifers, fisheries, forests, etc).

The importance of fossil fuels to human civilization

The world depends on oil for transportation – agriculture and trucks can’t be electrified, but the only energy resource that could fuel the existing 1 billion combustion engines are biofuels. But that won’t happen for many reasons Peak Soil: Why Biofuels are Not Sustainable and a Threat to America’s National Security

In fact, there are no alternative energy resources which can replace fossil fuels:

No single or combination of alternative energy resources can replace fossil fuels

Martin Hoffert, et al 2002 Advanced Technology Paths to Global Climate Stability: Energy for a Greenhouse Planet, Science. Vol 298

David Fridley, LBNL scientist, on why alternative energy won’t save us

Tilting at Windmills, Spain’s disastrous attempt to replace fossil fuels with Solar Photovoltaics

This is too large a topic to cover in an email, for more information on this topic, see my

Alternative Energy Reading List, big picture book list, and the energy section of my website, www.energyskeptic.com

The good news is that we may not go extinct – the carrying capacity of homo sapiens without fossil fuels is probably 1 billion or less. All of the harm and risk of crossing the 9 boundaries comes from fossil fuel energy.

Alice Friedemann   www.energyskeptic.com

I’ve been studying systemic risks, cascading failures, and so on over 10 years. My career was in Information technology, first as an assembler programmer and eventually systems engineer and architect. Now I am a science writer specializing in energy and natural resources. I try to use only peer-reviewed science from the best scientific journals.

References

Bostrom, Nick. 2002. Existential Risks Analyzing Human Extinction Scenarios and Related Hazards. Journal of Evolution and Technology, Vol. 9, No. 1

Posted in Cambridge Centre Study of Existential Risk, Scientists Warnings to Humanity | Comments Off on Cambridge Centre for the Study of Existential Risk

Steven Kopits – peak 2014-2016

Posted on May 17, 2014 by

29 April 2013. ASPO-USA Peak Oil Review. Commentary: Interview with Steven Kopits by Steve Andrews

My summary/edited down version (the full version is below):

Oil companies are cancelling projects because their costs are going up, yet the price of oil isn’t rising at the same rate, because people just cut back on their oil use. This was a surprise to oil companies, they thought the price would keep going up like in 2008. But it didn’t, so now they’re cutting back on Exploration & Production.

China will get more oil because they’re willing to spend $115-120, USA $95-100.

The cost of extraction development has continued to increase. Last year costs increased somewhere between 10% and 13% faster than revenues.

Oil production is falling at most the of the oil majors, but official oil production figures aren’t falling because

  1. The increased “oil” production is actually natural gas production, including natural gas liquids, LNG, and gas-to-liquids diesel. That’s 50% of global oil supply growth in the last six years.
  2. We threw massive amounts of money at E&P: from $250 billion in 2005 to $650 billion this year. So by really jacking up how much money we were putting into the system, we were able to increase production…a little bit.
  3. we made some important technological advances with hydrofracking technology. US tight oil production and Canadian oil sands growth is 100% of net oil supply growth in the last two years. But still– the system hit a wall in 2005—Ken Deffeyes was spot on with his prediction—and the way we maintained and only slightly grew production after that was essentially by throwing money at it.

if you look at their capex plans then you see that Shell, BP, Total, Exxon and Hess are all cutting their upstream spend in their 2013-2017 plans going forward. Only Chevron is raising theirs, and only modestly. So in a world where we are struggling to increase global oil supply and the price itself remains high, the major oil companies are in fact beginning to carve back on their exploration and production investments. It’s capex compression.

This is in line with our model, which says is that oil prices can’t rise much faster than GDP and inflation. And in fact geological costs, as you come down the back side of Hubbert’s peak, will increase and will do so at an accelerating rate. I think we are beginning to see that process now. Even when we look at the “good-news” shale / tight oil, some investment is slowing. In the Bakken, for example, the rig count actually peaked in September of 2012, and the year-over-year production growth rate peaked at 90% three months earlier in June. Today the growth rate, while still impressive, is down to about 40%. If that trend continues, we could see single-digit growth in the Bakken much sooner than most think.

Unless the shales start picking up rapidly from non-exploited plays—not the Permian and the Eagle Ford and the Bakken, but places like the Utica and Monterey, where results have been disappointing, or some other plays or even abroad—you are looking at a world in which the marginal consumer is beginning to reject the marginal barrel. And if you run this out for a period of time, you will peak out the oil supply.

I think the peak occurs 2014 or 2016—I’m not exactly sure, but sometime pretty soon, unless shale oil really takes off in new plays.

We’ve maintained the plateau by turning to non-oil liquids, by dramatic increases in upstream spending, and also by technological innovation related to hydrofracking. All of these, as of today, look to be running their course. Even shale oil. Yes, it will grow for the next few years from the three majors plays in the US, but the peak of production growth is already behind us in the Bakken. On current trends, Bakken production will be increasing by single digits within two years. Not a tragedy by any means, but not enough to move the global oil supply at that time, either. Of course, we have one more arrow in the quiver after that: government take.

Governments typically take 60-90% of revenues of oil production. There’s nothing wrong with that, as in most cases the oil belongs to the respective government.

Oil companies will need tax relief in one form or another. Far from being able to raise taxes on oil companies, the sober reality is that governments are going to have to get used to getting less. Expect this theme to come front and center in the next couple of years. If government take is reduced quickly, then oil production levels could be sustained for a few more years. But what then? Will global production rejoin the anticipated trend line from a 2005 peak sharply and quickly? Will the major oil companies invest just a bit less, or do they start culling their new project list aggressively and without material replacement? I don’t know what the answer to that is. But that’s what we’re trying to find out. That’s the focus of our macro thinking today.

 

Full article:

Q: Can you give us a quick definition of what the issue of compression of capital expenditures—or capex compression—in the oil industry is?

Kopits: Capex compression is a term we use to describe the reduction of upstream spending by the oil companies when their exploration and production costs are rising faster than their oil revenues.

This is occurring because oil prices haven’t been increasing, and costs have. So oil companies are looking at their portfolio of projects and deciding to postpone or cancel some of them That’s what’s happening today.. Were the oil supply rising quickly and oil prices falling, this sort of capital restraint would be normal—the usual boom-bust cycle of the industry. But oil is still in short supply, and very few of the large oil companies have been able to hold oil production over the last few years—even as they were investing massively in oil exploration and production. Now, they are actually reducing investment in upstream projects, even in the face of historically high oil prices and falling production. That’s capex compression. Hess is divesting oil producing properties to increase profits; BP has shelved the deepwater Mad Dog Phase 2 project in the Gulf of Mexico.

Q: And here I thought investments in exploration and development were still on their way up. What’s changed?

Kopits: In aggregate, upstream spend is still rising, but at a decreasing pace. If we look at the issue more broadly though, there are some things happening in the oil business that are beginning to validate views that we, and analysts like Chris Skrebowski, have held regarding economic peak oil. Peak oil does not occur when we run out of oil. Peak oil occurs when the marginal consumer is no longer willing to pay the cost of extracting and processing the marginal barrel of oil. And we can actually calculate what the related numbers are.

Q: How do we do that?

Kopits: To begin with, we refer to the price a nation’s oil consumers are willing to pay as its “carrying capacity.” For the US, carrying capacity is about $95-100 Brent [per-barrel oil price in London]. If the oil price is above this level, oil consumption will decline—which is exactly what we see and what we predicted four years ago. But carrying capacity is not a static number. It changes over time, specifically, with three things: GDP growth, efficiency gains in the use of oil, and dollar inflation. So if GDP goes up, efficiency goes up and the CPI goes up, then the amount that consumers are willing to pay for oil will increase. For China, by the way, we estimate the carrying capacity at around $115-120 / barrel Brent. So oil consumption will increase in China at $115 Brent, but fall in the advanced economies—exactly the pattern we’ve seen in the last few years.

On the supply side, the global oil supply and related costs are determined primarily by two factors: geology and technology. Geology is driving costs by forcing us to frontier areas like ultra deepwater and the Arctic. Technology, on the other hand, is allowing us to access new resources like shale gas and shale / tight oil. So, for any given oil price, depletion will always drive us to more difficult geologies and thus higher costs. Technology, on the other hand, can move us back to easier geologies and lower costs. Hydrofracking of shale oil and gas wells, for example, has done just that. Also, if you are so inclined, you can add above-ground constraints—Saudi policy or Venezuelan policy or Alaskan tax and royalty rates, for example. But assuming these latter factors are relatively constant, geology and technology will determine supply for any given oil price. So, to sum all this up: we hit peak production when the marginal consumer is no longer willing to buy the marginal barrel.

Q: I think I’ve read in your work elsewhere that you believe the consumer is already there.

Kopits: The marginal consumer banged into the price of the marginal barrel, on a static basis, somewhere in 2011 at about $110-115 Brent. And then, oil prices essentially stopped rising. Those of us who use supply-constrained forecasting weren’t surprised. It’s entirely consistent with the historical record. But I think many in the oil business still thought, somehow, that oil prices would continue to rise as they had done in the 2000s. After all, the oil supply is widely acknowledged as constrained, even by those who are not necessarily believers in peak oil. So why wouldn’t prices continue to rise if we’re supply short? Well, because there was a price at which the marginal global consumer would rather reduce oil consumption than pay more. And that price is around $110-115 Brent, and from here on in, we should expect that number to rise only with the purchasing power of the marginal consumer.

On the other hand, the cost of extraction development has continued to increase. Last year costs increased somewhere between 10% and 13%. Exxon’s costs rose about 7% in excess of its increase in revenues, which were also falling. And Petrobras’ costs were rising 10% to 13% faster than its revenues. So what we can see is that in the contest between technology and geology, in recent times geology has been winning. Oil has become more expensive to extract.

Q: But when costs increase to a certain level, production should fall; yet we haven’t seen that.

Kopits: In fact, oil production is falling at most the of the oil majors. It was even down at 2% at Petrobras last year. But on a global scale, you’re right. Oil production hasn’t fallen—for three reasons. First, much of what passes for increased “oil” production is actually natural gas production. This includes natural gas liquids from “wet” natural gas wells; LNG [liquefied natural gas] from gas wells; and gas-to-liquids diesel made from natural gas. That’s about half of global oil supply growth in the last six years right there. Check out any investor presentation from the majors. LNG features prominently.

Second, we started throwing massive amounts of upstream spend into this business. Upstream expenditures essentially went from $250 billion around 2005 to about $650 billion this year. In essence, by really jacking up how much money we were putting into the system, we were able to increase production…a little bit. To that we can add some changes in above-ground constraints, primarily in Iraq, which is a very important part of supply growth. Finally, we made some important technological advances with hydrofracking technology. US tight oil production and Canadian oil sands growth represent just about 100% of net oil supply growth in the last two years. But leaving these aside, the system hit a wall in 2005—Ken Deffeyes was really spot on with his prediction—and the way we maintained and only slightly grew production after that was essentially by throwing money at it.

This was facilitated by dramatic oil prices jumps, from $25 in 2002 to $112 in 2012. But since 2011, depending on rapidly rising oil prices is no longer a viable strategy. The global economy has said, “this is how much we’ll pay and no more.” At the same time, geology just kept marching along right down the back half of Hubbert’s peak, and costs have continued to rise. That’s where we are today: price resistance from the consumer and E&P costs that just continue rising. Despite the very high oil price environment, the upstream financial performance at most of the oil majors, including Exxon and Petrobras, has deteriorated. True, Petrobras’ performance is distorted by government interference, but Exxon is arguably the most disciplined investor in the world. But both of them face deteriorating upstream performance for oil.

Q: Given that emerging reality, how are these companies responding?

Kopits: Well, if you look at their capex plans then you see that Shell, BP, Total, Exxon and Hess are all cutting their upstream spend in their 2013-2017 plans going forward. Only Chevron is raising theirs, and only modestly. So in a world where we are struggling to increase global oil supply and the price itself remains high, the major oil companies are in fact beginning to carve back on their exploration and production investments. It’s capex compression.

Q: Why are they going that route?

Kopits: It’s because they’re not getting the bang for their buck. Their megaprojects—ultra deepwater and LNG—are often not able to hold the line on costs. The growing hit-list here includes Australia’s Browse, a $45 billion LNG project that was just cancelled. It includes the Arctic, specifically Alaska, where Shell is sitting out the coming season, in part because they ran their drilling rig aground. But Statoil has said they won’t proceed in Alaska until Shell has shown some progress. ConocoPhillips has just cancelled a jack-up rig order that was intended for the Alaskan market. Total pulled out of Canadian oil sands at a loss. Then we see just last week that BP pulled the plug on Mad Dog Phase 2, which would have been one of the major developments in the Gulf of Mexico—a $10 billion megaproject—and that cancellation was a surprise.

What we’re seeing is that the majors are looking at these high-cost projects, and they are beginning to take a more critical eye. This is very much in line with what our model says, which is that oil prices can’t rise much faster than GDP and inflation, plus or minus. And in fact geological costs, as you come down the back side of Hubbert’s peak, will increase and will do so at an accelerating rate. I think we are beginning to see that process now. Even when we look at the “good-news” shale / tight oil, some investment is slowing. In the Bakken, for example, the rig count actually peaked in September of 2012, and the year-over-year production growth rate peaked at 90% three months earlier in June. Today the growth rate, while still impressive, is down to about 40%. If that trend continues, we could see single-digit growth in the Bakken much sooner than most think.

Q: So the shale oils won’t be the ever-growing cavalry that everyone expects them to be?

Kopits: If you take the plain vanilla interpretation of this, unless the shales start picking up rapidly from non-exploited plays—not the Permian and the Eagle Ford and the Bakken, but places like the Utica and Monterey, where results have been disappointing, or some other plays or even abroad—you are looking at a world in which the marginal consumer is beginning to reject the marginal barrel. And if you run this out for a period of time, you will peak out the oil supply. I think the peak occurs in a finite time frame—not 2030, not 2020. Maybe 2014 or 2016—I’m not exactly sure, but sometime pretty soon, unless shale oil really takes off in new plays.

Q: So the story line getting a ton of ink of late—peak oil is dead….it isn’t actually quite dead yet?

Kopits: No. But importantly, we’re going to peak out production not because we’re “running out of oil,” but because the marginal consumer is not willing to pay for the marginal barrel. We seem to be pretty much at that level today.

We need to understand these dynamics better. What are the combined effects of flat oil prices and rising production costs, that’s where I think the challenge is and where our professional work is focusing on the macro side…to better understand what these trends are, what they mean, and how companies in the industry should respond to it. I’ll give you an example.

Normally, if you look at an oil production system, it tends to be symmetrical around the peak. The rate at which you approach the peak is the rate at which you depart from the peak. We haven’t done that. What we’ve done is that we’ve approached the peak and we’ve leveled out production, the so-called “undulating plateau”.

But we’ve maintained the plateau by turning to non-oil liquids, by dramatic increases in upstream spend, and also by technological innovation related to hydrofracking. All of these, as of today, look to be running their course. Even shale oil. Yes, it will grow for the next few years from the three majors plays in the US, but the peak of production growth is already behind us in the Bakken, for example. On current trends, Bakken production will be increasing by single digits within two years. Not a tragedy by any means, but not enough to move the global oil supply at that time, either. Of course, we have one more arrow in the quiver after that: government take.

Governments typically take 60-90% of revenues of oil production. There’s nothing wrong with that, as in most cases the oil belongs to the respective government. But if the cost of production is increasing, then the value of reserves is falling. Put another way, current levels of government take, whether production or profit sharing, royalties, lease payments or taxes of any sort, are likely unsustainable. Oil companies will need tax relief in one form or another. Far from being able to raise taxes on oil companies, the sober reality is that governments are going to have to get used to getting less. Expect this theme to come front and center in the next couple of years. If government take is reduced quickly, then oil production levels could be sustained for a few more years. But what then? What’s the outlook for oil production globally? Will production at the high cost producers just ease off gently, or will global production rejoin the anticipated trend line from a 2005 peak sharply and quickly? Will the major oil companies invest just a bit less, or do they start culling their new project list aggressively and without material replacement? I don’t know what the answer to that is. But that’s what we’re trying to find out. That’s the focus of our macro thinking today.

Steven Kopits has been Managing Director for the New York office of energy business advisors Douglas-Westwood since 2008. He is solely responsible for the views expressed here, which do not necessarily represent those of Douglas Westwood. He can be reached at steven.kopits@douglaswestwood.com

Posted in Investment, Peak Oil | 1 Comment

The end of insurance: Ports and Hurricanes, Storm Surges, & Rising Sea Levels

Posted on May 17, 2014 by

 

The world is about to be shaken by many storms besides cyclones and hurricanes — declining energy & natural resources and the social unrest generated by ever larger numbers of the 7+ billion people getting poorer and hungrier.

Since most people see the world through the blinders of politics and economics, the fury of the natural world will reveal itself to most via the financial system when a disaster so large occurs that it bankrupts the insurance industry. That in turn will likely topple over-leveraged banks and brokerages.

In a study of the top port cities susceptible to rising sea levels, these are the 20 highest population cities most likely to be affected by present-day wind damage:

Rank / Wind Damage Index / City

  1. 100 Tokyo

  2.   53 New York-Newark

  3.   41 Shanghai

  4.   41 Calcutta

  5.   35 Dhaka

  6.   32 Osaka-Kobe

  7.   30 Manila

  8.  26 Bombay (Mumbai)

  9.   24 London

  10.  24 Guangzhou_Guangdong

  11.   21 Shenzen

  12.   20 Hong Kong
  13.   20 Madras (Chennai)
  14.   18 Buenos Aires
  15.   16 Karachi

  16.   15 Miami

  17.   15 Philadelphia
  18.   12 Boston
  19.   12 Sydney
  20.   12 Houston

Table 11. The Top 20 world port cities in terms of population exposed to present-day wind damage. In Bold: population also exposed to present-day extreme sea levels. USA: Red. Japan: Blue. China: Black. India/Bangladesh: Green. Each of these cities (with the exception of Shenzen) also appear in the Top 20 rankings for future population exposure.

Posted in Hurricanes, Sea Level Rise | Tagged , , | Comments Off on The end of insurance: Ports and Hurricanes, Storm Surges, & Rising Sea Levels