# Oil math

I loved the FT.com’s interactive oil map – particularly the graph showing the global flow of oil.

I was also impressed by Qing Wang’s analysis of the impact of rising oil prices on China.   China imported about a bit more than \$70b worth of oil in 2006, enough to reduce China’s trade surplus by 2.7% of China’s GDP.   Wang calculates – based on Chinese import data – that \$10 a barrel rise in the price of oil over the course of the year would increase China’s import bill by about \$13.5b (and, absent an increase in the domestic gasoline prices, cut into the profits of China’s state oil companies by a bit over \$14b).

That was a somewhat smaller increase than I expected – which just shows the advantage of looking at the numbers.   So how much, by comparison, would a \$10 a barrel increase in the price of oil impact other economies, assuming no offsetting increase in spending and investment in the oil exporting states and thus no offsetting increase in exports to the oil-exporting states?

Using the BP data, I estimate that a \$10 a barrel increase in the price of oil would:

• Increase the US trade deficit by about \$50b over the course of the year.
• Lead to a \$46b (euro 31b) deterioration in the EU-25 trade balance.  The EU-25 imports a bit less oil than the US (12.6 mbd v 13.7 mbd) even though it produces less oil than the US and has a somewhat larger economy.

And conversely, each \$10 increase in the barrel of oil means:

• An additional \$57b for the GCC states (Saudi Arabia, Abu Dhabi, Dubai and the other emirates, Kuwait, Qatar and Oman) to spend or invest.
• An additional \$25-26b for Russia.
• An additional \$10b for the Iranian government.
• An additional \$9.5 or so for the socially conscious burghers of Norway to stash away in their already quite substantial sovereign wealth fund.
• An additional \$8b or so for Venezuela.

Or, to put it a bit differently, I suspect that the Gulf states will need oil to average \$50 a barrel over the course of the year to cover their import bill.   Spending and investment have picked up significantly.     But if oil averages \$100 a barrel, they will have enough funds to spend and invest over two times as much as they did in say 2002 and still have another \$285b to invest globally.    If oil averages \$70, they only have around \$114b.

It isn’t a total shock why investment bankers – and commercial banks needing a bit more equity capital — have suddenly discovered the Gulf.  In 2004 and 2005 the Gulf states were still worried that oil might fall back to its 2001-02 level and wanted to build up their cash reserves.  Now they are looking for a rather considerable return on their money.   I am not quite sure how various Gulf funds will achieve their 15-20% rate of return target though without taking on large risks.

Conversely, the US trade deficit would be roughly \$250b smaller if oil averages \$50 a barrel rather than \$100 a barrel next year.  China’s surplus would be \$65-70b larger.

This very rough analysis hasn’t looked at who benefits from more spending and investment in the oil exporting economies.   But on that point there is near-universal agreement.   Europe and Asia sell a lot more to the big oil exporters than the US.

The US consequently gets hit on both sides: it imports more oil than Europe and way more oil than China (even if Chinese imports are growing fast), and it sells an a lot less than Europe and I suspect China to the big oil exporting economies.    That isn’t a great combination.

Steps to encourage energy conservation and reduce US oil consumption could – particularly if they reduced the global price of oil – contribute to external adjustment.   The role energy policy could play in bringing down the trade deficit hasn’t received enough attention.  Especially since the needed policies could be adopted by the US unilaterally.    A lower oil price would cut into the savings surplus in the Gulf and cut the US import bill.    It might support the beleaguered dollar.

A lower oil price might also contribute to a range of US foreign policy goals.   Right now the governments of the major oil exporting are financial powers, and in some cases, financial super-powers.   Several are not exactly close US allies.

Reverse the arrows on the global flow of oil in the BP graph and you have a pretty good picture of the global flow of funds associated with oil.   It is a big flow out of the US.

There is a secondary flow that is also attracting a lot of attention – how the oil exporters invest the dollars they get in exchange for selling their oil.   With oil where it is, that matters a lot for the relative values of different currencies.    But it is also a subject worthy of a post in its own right.

Suffice to say that it increasingly looks like a real energy policy might do more to support the dollar than almost anything else.

### No Responses to “Oil math”

#### Guest • November 27th, 2007 at 12:17 am

“A real energy policy”? You’re joking, right? By the way you will note that the Abu Dhabi investment authority has just paid 7.5 billion for a chunk of Citigroup. The latter desperate for funds. Paying 11% on the preferred stock issued to Abu Dhabi.

#### Gluttonous American Consumer • November 27th, 2007 at 12:41 am

We (China, US, Japan & Euro) need to keep BW2 going until we are several years past peak world oil production in order to facilitate the transfer of precious irreplaceable natural resources to wealthy nations in exchange for soon-to-be worthless paper and electronic debits. Once the people of oil exporting nations have realized what their corrupt rulers have done it will be too late. Long live Islam! Bring back the commies to the Kremlin (Putin is catching on to the game.)

#### Hellasious • November 27th, 2007 at 1:39 am

The policy of the US since the meeting aboard the USS Quincy between FDR and King Saud in 1945 has been to link the value of the dollar to oil reserves, chiefly its own and Saudi Arabia’s. The US had done away with the dollar-gold connection back in 1933 and was looking for a new “standard” to drive the post-war global economy, financed and ultimately dominated by the dollar.

I strongly agree – on many levels – that we should establish a new energy regime. But given the physics involved, it would have to be based on overall much less concentrated energy sources (essentially solar, plus some nuclear). Such a development will necessitate a complete reformulation of the global currency structure and a re-think of fiat currencies.

To put it simply and somewhat simplistically, a less “concentrated” global energy regime is not supportive of one dominant reserve currency.

#### Guest • November 27th, 2007 at 1:41 am

Also surely it depends on exhchange rate movements? A \$10 rise in oil which is only a 5 euro rise will affect Europe less.

#### London Banker • November 27th, 2007 at 3:22 am

The outlines of the shape of things to come are becoming clearer every week. So far in the past year Gulf sovereign wealth funds have bought large stakes in NASDAQ, OMX (Nordic exchanges), London Stock Exchange, Euronext (French and Belgian markets) and other major financial infrastructure. They have also bought large stakes in Citigroup, Barclays, Deutsche Bank and other global banks. Add to that a growing portfolio of technology companies, and it is conceivable that there may be a strategy guiding how these various investments are knitted together in future.

The Gulf owners of capital are buying up the global market intermediaries and market infrastructure which determines how capital is deployed and at what prices. It may be that controlling the flow of financial market liquidity will take over from controlling the flow of oil liquidity in future economic analysis of the Gulf. Making purchases through SWF and private equity masks the political element of control of financial markets – for now.

This investment strategy represents a huge shift from the petrodollar era when the Gulf was content to deposit its wealth with foreign managers and allow foreign bankers to profit from investments. Today the Gulf is buying up the foreign managers and foreign bankers to ensure that it receives not only the returns on investment but the rents on investment services too.

#### Dr, Dan • November 27th, 2007 at 5:10 am

*************************

I make Oil (of OLAY)
I sell Oil to BRIC
I go bust

I am Abu Dhabi Company

#### ignatius • November 27th, 2007 at 5:58 am

The reason why the EU is less oil dependent and the European economy is more energy efficient in comparison to the US is really very simple: petrol taxes. While you complain about prices of \$3 per gallon, in Germany, gas at the pump costs about €1.40/liter or \$8/gallon, and people seem to get along quite nicely with no negative impact on the quality of living. In fact rather the opposite: less pollution, more public transport, better infrastructure and overall higher technical standards as a side effect from energy efficency.

If the US were to introduce a petrol tax comparable to European standards, this should bring down the oil price back to \$50 in no time and save both the US and the EU a huge pile of money. (Of course, this is not going to happen as long as the President is sponsored by the oil industry.)

#### Hellasious • November 27th, 2007 at 6:20 am

In 2006 the US consumed 260 billion gallons of gasoline, diesel, heating oil, aviation fuel and resid. Applying a \$5/gal tax would amount to \$1.3 trillion per year, or approx. 10% of US GDP. Clearly, this is not feasible.

But how about this, instead: an immediate increase in fuel tax by 50c/gal tax (producing ~1% of GDP as revenue), raised every quarter by an additional 5c/gal until oil consumption drops by, say, 20%. All tax revenue to be recycled into the economy towards efficiency, alternate energy projects and environmental amelioration.

#### Guest • November 27th, 2007 at 6:51 am

“…United Arab Emirates shares dropped on speculation Persian Gulf states may revalue their currencies… “Foreign investors are selling heavily… They expect a revaluation of the dirham and they are trying to get out ahead of others.”…” http://www.bloomberg.com/apps/news?pid=20601084&sid=a3H3AW7Yh3w0&refer=stocks

“Hedge funds sometimes get a bad rap in the U.S., but in Norway they are taking an epic beating following reports that four public municipalities have suffered huge losses because of hedge fund investments…” http://www.finalternatives.com/node/2975

“…Rather than discuss the problems of sovereign wealth funds, we should focus on their poor justification. If international reserves exceed a certain level, exchange rates should appreciate, which should impede the accumulation of reserves… The current Western concern is that sovereign wealth funds from oil-producing countries and China will buy up large swathes of Western economies. A similar worry arose with Arab investments in the late 1970s and with Japanese real estate investments in the late 1980s. But inexperienced foreign investors tended to lose money and they had amazingly little impact. Do you remember when Mitsubishi bought half of Rockefeller Center in Manhattan in 1989 at the top end of a real estate boom? They lost big…” http://www.themoscowtimes.com/stories/2007/11/08/006.html

#### ignatius • November 27th, 2007 at 7:05 am

> 260 billion gallons of gasoline, diesel, heating oil, aviation fuel and resid. Applying a \$5/gal tax would amount to \$1.3 trillion per year

The petrol taxes are usually not uniform. It’s highest with gas, heating oil is taxed much less and kerosine isn’t taxed at all (for competitive reasons). So the average would probably only be about half that figure.

> 10% of US GDP. Clearly, this is not feasible.

An over night 10% GDP increase in total tax amount would clearly be unfeasable but as long as you don’t run out of other taxes to cut in compensation (preferable not only for the super-rich this time), you don’t have to change the overall tax total at all and can still pocket the savings from a lower oil price.

> an immediate increase in fuel tax by 50c/gal tax (producing ~1% of GDP as revenue), raised every quarter by an additional 5c/gal

This is of course much more realistic for the US, but it would also take that much longer to have a significant impact on consumption and thus on oil prices. But any change in the right direction would be good thing.

#### Hellasious • November 27th, 2007 at 7:37 am

For ignatius, re: fuel taxes

Of the 260 billion gallon figure, 205.5 billion is gasoline and diesel alone. That would translate to \$1.03 trillion in taxes, so…

A 50c tax plus the quarterly rise won’t take long at all to have an effect, given the parlous state of US household finances. Cutting other taxes in compensation (i.e. be revenue neutral) is not advisable because the US will need the funds to finance its transition to a new energy regime.

Ideas for achieving this are not lacking, yours, mine or even smarter peoples’. What is clearly lacking is the will to apply them. There is simply too much profit from oil.

#### Guest • November 27th, 2007 at 7:58 am

> [...] and it sells an a lot less than Europe and I
> suspect China to the big oil exporting economies.
> That isn’t a great combination.

Might that be new effects following the Iraq-war?
I’ve heard a lot about extremely rising european exports (e.g. Germany) to arab countries – not at least because they didn’t join this war. I’d not wonder if US-exports were constant or shrinking as an effect of their bad reputation.

#### bsetser • November 27th, 2007 at 8:17 am

London banker – could you remind me who invested in DB? thanks

#### London Banker • November 27th, 2007 at 8:53 am

Dubai International Financial Centre revealed a 2.2 percent stake in Deutsche Bank in May 2007.

Around the same time, Dubai International Capital acquired just below 3 percent of HSBC.

FTAlphaville is taking an interest in SWF investments today too.

#### JohnH • November 27th, 2007 at 11:19 am

Actually, Brad, the US does have an oil policy: it’s called annexing major oil producers, starting with Iraq, next Iran. Once annexed, they can be forced to spend their petrodollars in good old USA, even if all we have to sell them is guns and bullets.

#### Guest • November 27th, 2007 at 11:34 am

“…The price of oil was \$50 per barrel in January this year and is now double that — a 100 percent increase in a span of just 10 months. This is a lot of volatility… Oil futures are a specific asset class that is tied to the broader galaxy of financial markets… The subprime crisis, fear of resurgent inflation and higher interest rates are discouraging investment in bonds and other fixed income assets; uncertainty about future growth, especially in the United States, is discouraging investment in equity; investors therefore have apparently focused on commodities, pushing higher the prices of a broad range of commodities, not just oil. In addition, the futures market… is influenced by technical trading and other forms of speculation, which tend to profit out of volatility, and at the same time further increase it. It is therefore possible for the futures market to push prices well beyond their “equilibrium” level… Volatility, therefore, is especially damaging because there is no effective mechanism to dampen swings and encourage a reversal of expectations. In the long run, demand will slow down, expectations will reverse, prices will decline; but a lot of economic damage may be done in the meantime. If then the root cause of the current situation is to be found in the fact that the price of oil is fixed by trading of a financial, not a real asset, the step which is required of OPEC is that it should again take upon itself the role of price maker… Prices should continue to be set by market forces… Or, to say the least, a market in which the demand and supply of wet barrels are more important than the demand and supply of paper barrels…” http://www.arabnews.com/?page=6&section=0&article=103651&d=17&m=11&y=2007

#### cam • November 27th, 2007 at 1:03 pm

If the U.S. raised gas taxes by \$5/gallon and got \$1 trillion in revenue, the income tax (and IRS) could be eliminated. That sounds like a good deal to me.

#### Dave Chiang • November 27th, 2007 at 1:06 pm

Chinese Industrial Policy takes Oil Independence seriously with an astonishing \$265 billion in Renewable Energy investment by 2015.

Beijing spent some \$2 billion on the renewable energy source last year, and the mainland is on track to eclipse Europe, Japan, and the U.S. in a few years

China’s alternative energy market is growing in gusts. Beijing has set the ambitious goal of having renewable energy (including hydro, solar, biomass, and wind) meet 15% of its energy needs by 2020. The European Union, by contrast, is aiming for 20% by the same date, and the U.S. just 7.5% by 2013. Achieving that 15% goal will take an astonishing \$265 billion in investment, and just last year China sank some \$10 billion into alternative energy, second only to Germany.

For China, wind is the fastest growing renewable: In 2006, the government spent some \$2 billion, doubling capacity, and putting China on track to eclipse top wind manufacturers in Europe, Japan, and the U.S. within a few years, predicts a report released on Nov. 14 by Washington (D.C.)-based Worldwatch Institute.

“Wind power in China historically has been driven by a desire for industrial development,” says Eric Martinot, senior visiting scholar at the Tsinghua-BP Clean Energy Research& Education Center in Beijing and one of two authors of the report. “But it is now being eclipsed by a desire for energy security. Martinot predicts China will easily exceed its wind power plan, which calls for 5 gigawatts (a gigawatt equals 1 billion watts) of installed capacity by 2010.

“The demand for turbines here in China is going to be huge,” says Gary Evans, CEO of GreenHunter Energy, a privately held alternative energy company based in Grapevine, Tex. “That’s because there is a mandate for state utilities in China to use alternative energy. And China has excellent wind resources, especially along the coast,” he adds. China has estimated that it has total potential wind resources which, with development, could reach 250 Gw onshore and 750 Gw offshore. And installed capacity is expected to double again this year.

#### Peter Schaeffer • November 27th, 2007 at 1:57 pm

Mr. Setser,

“Conversely, the US trade deficit would be roughly \$250b smaller if oil averages \$50 a barrel rather than \$100 a barrel next year”

This strikes me as an unusual thing for an economist to say. Aren’t you assuming that every incremental dollar spent on imported oil, represents a reduction in US savings? Is that realistic?

Let’s assume that the US savings rate remains unchanged. Then each incremental dollar spent on oil, means one less dollar spent on something else. In that scenario doesn’t the US trade deficit remain unchanged even with higher oil prices?

It’s worth noting that Japan runs a rather large trade surplus in spite of per-capita oil imports equal to the US. Same is true for South Korea.

#### Peter Schaeffer • November 27th, 2007 at 2:03 pm

“Of course, this is not going to happen as long as the President is sponsored by the oil industry”

Does anyone really believe this? Did Bill Clinton impose a \$5 per gallon gasoline tax? Did Jimmy Carter? Is any Democratic candidate for president proposing any such thing?

Public opinion favors cheaper fuel, not higher energy taxes.

#### bsetser • November 27th, 2007 at 2:09 pm

Peter Schaeffer — good point. that is my assumption. it actually is a reasonable assumption based on how the US economy responded to the rise in oil prices through 2006. the rise in oil imports wasn’t offset by a fall in other imports (even v. trend) and the increase in spending oil was financed by a fall in household savings rather than a fall in consumption. I should also look at investment but you get my sense. indeed, the overall fall in the us trade deficit was larger than the increase in us oil import bill from 2002 to 2006.

things though have changed a bit this year, but my sense is that the adjustment has come more from a fall in investment (residential investment) than a rise in household savings/ cut back in consumption growth.

suffice to say you are right that I was making a bit assumption, but that it is an assumption that matches the us and global data till recently. a fall in us savings (v investment) has offset a rise in savings (v investment) in the gulf, russia and much of asia (china, japan).

now more of the adjustment is coming from europe. there is a section in my peterson institute policy brief that has the actual numbers.

#### gillies • November 27th, 2007 at 2:37 pm

i live in an area of turf bogs. (tipperary, ireland.) i am however ceasing to heat with electricity – turned it off a year ago – and turf. ( turf is finite, polluting, and the price rises in sympathy with heating oil.) i am learning to use timber – (renewable, but remember to take into account the expense of chainsaw and labour, and the input of my own time and effort. )

that is personal and practical. now the theoretical : relatively cheap oil is the past. oil relatively hard to buy is the future. the picture is drowned out by excessive speculation which can cause overshoot in either direction. oil could easily go back to \$40, especially if it goes to \$150 first.

how you tax oil is largely a matter of national outlook – look to the past and subsidise oil. look to the future and tax oil, while subsidising alternative energy systems with the revenue. face now what you will soon have to face, anyway. war does not make oil cheaper.

often u s policies seem not to make sense. is this because the country is governed to the benefit of certain interests, not the benefit of the country as a whole ? it may actually suit the elite that these massive oil profits are generated outside of the country. it may suit the elite to nail down iraq (militarily, geopolitically) while actually squeezing the flow of oil to the benefit of prices.

every \$10 on the oil price costs the country . . . . . so much. but every \$10 on the oil price may also produce profits for certain allies of the elite, and who knows what little favours are done in return ?

i am not saying the politicians are corrupt . . . . ah, hell, lets say it. i am.

#### Peter Schaeffer • November 27th, 2007 at 2:51 pm

Mr. Setser,

Can’t the 2002 – 2006 fall in the saving rate be explained by household wealth effects including home and security prices? After all the consumer saving rate fell dramatically in response to rising asset prices in the 1990s, without any associated major shift in energy prices.

As you know, MEW rose dramatically from 2002 – 2006. Of course, it can always be argued that the need for MEW was a consequence of higher energy prices. A counterargument is that (apparently) MEW has been concentrated in higher income groups who are (in percentage terms) less affected by energy costs.

At least recently, the BEA NIPA data shows rising personal saving. The low point was Q3 2006 at 0.0% (the -0.5% value for Q3 2005 appear to be an outlier). The most recent value is 0.8% for Q3 2007. Interestingly enough the saving rate was also 0.8% back in Q2 of 2005 when energy prices were considerably lower.

Doesn’t your observation that the trade deficit rose faster than the growth in oil imports support a household wealth model?

#### Peter Schaeffer • November 27th, 2007 at 2:54 pm

Mr. Setser,

Can’t the 2002 – 2006 fall in the saving rate be explained by household wealth effects including home and security prices? After all the consumer saving rate fell dramatically in response to rising asset prices in the 1990s, without any associated major shift in energy prices.

As you know, MEW rose dramatically from 2002 – 2006. Of course, it can always be argued that the need for MEW was a consequence of higher energy prices. A counterargument is that (apparently) MEW has been concentrated in higher income groups who are (in percentage terms) less affected by energy costs.

At least recently, the BEA NIPA data shows rising personal saving. The low point was Q3 2006 at 0.0% (the -0.5% value for Q3 2005 appear to be an outlier). The most recent value is 0.8% for Q3 2007. Interestingly enough the saving rate was also 0.8% back in Q2 of 2005 when energy prices were considerably lower.

Doesn’t your observation that the trade deficit rose faster than the growth in oil imports tend to support a household wealth model?

#### RealThink • November 27th, 2007 at 4:17 pm

Good for Brad for getting real on the energy front!

For those interested in the issue, a good primer may be the work of Matthew Simmons, Chairman and CEO of Houston-based Simmons & Company International, the leading investment bank specializing in the energy industry, CFR member and author of “Twilight in the Desert – The coming Saudi oil shock and the world economy.” (Notably, when the book was published in mid-2005 Saudi production was 9.6 Mbpd, and it soon started to decline until stabilizing at 8.6 Mbpd in 2007, although it appears to have picked up since last August to 9 Mbpd in November, as commented in http://www.econbrowser.com/archives/2007/11/relief_on_oil_s.html). And no, I’m not on Simmons’ payroll.

His presentations can be found at
http://www.simmonsco-intl.com/research.aspx?Type=msspeeches
and his interviews by Jim Puplava at
http://www.financialsense.com/Experts/2007/Simmons.html

To start, I suggest the following two recent presentations:
At CalTech in Pasadena, October 23, 2007.
http://www.simmonsco-intl.com/files/CalTech.pdf
At ASPO World Conference in Houston, October 18, 2007
http://www.simmonsco-intl.com/files/ASPO%20World%20Conf.pdf

I particularly suggest reading carefully pages 37-39 of the ASPO presentation, and pages 34-37 of the CalTech presentation.

As page 37 of the CalTech presentation is precisely about the “steps to encourage energy conservation and reduce US oil consumption”, I copy below the part dealing on that subject from his August 18, 2007 interview at http://www.financialsense.com/transcriptions/2007/0818.html

JIM: If all the canaries have stopped singing – I guess as you look at this, and how important energy is to all economies – what’s plan B?

MATT: We don’t have a plan B. I’ll tell you several things that we could do that create sort of a very viable semi-plan B. But the problem is no one is doing them yet. And they have to take some sort of coordinated effort. Now, I think there’s an enormous amount of things that we could do to significantly reduce the way we drive. There are enormous amounts of things we could do to significantly reduce the amount of food miles embedded in our whole food distribution system. There’s an enormous amount of things we could do to change the way we transport goods and get things on water versus roads. But all those things basically take coordination, and somebody needs to start doing them, and we’re starting to run out the clock on that.

JIM: One of the main uses that everybody’s aware of oil is transportation, so it seems like, for example, conservation on this front can go a long way to help mitigate part of the crisis. But you know, Matt, here in California and San Diego where I live we’re finally building another couple of lanes on the freeway; we’re not building mass transit. If you look in the parking lots of stores you see SUVs, Humvees, you know Suburbans, and that’s what we’re doing here. Nobody seems to get this.

MATT: It’s what we’re doing in Maine, it’s what we’re doing in Texas. I’ll tell you though, Houston, Texas of all cities is basically probably one of the leaders in the world in a bunch of work being done to liberate the workforce – Mayor White’s calling it Flex in the City – and to start to basically encourage companies to give flexible work rule hours, and basically start letting people work where they want to and pay by productivity.

That program could sweep the nation in a 5 year period of time. This is a software issue and a mindset issue. And it’ll eliminate in most places long distance commuting and traffic congestion. So there are some things we could do but the problem is that they’re being hindered by so few people understanding that this isn’t a feel good thing or let’s do this to reduce the carbon footprint, which might or might not be an issue. This is basically a crisis because demand can’t basically grow anymore;

JIM: I want to get back to maybe not plan B but some logical choices here which if you take a look at all the oil that is consumed through transportation, it seems like rail or rebuilding the rail system, the barge system is a more efficient way to move goods. And I think some investors…I mean when you’ve got Warren Buffett buying railroads. I don’t know if he believes in peak oil but he does know that at \$100 oil…

MATT: I suspect he understands the concept.

JIM: Yeah, because as he pointed out in this year’s Berkshire Hathaway meeting, he said at a \$100 oil it’s more efficient to move goods on rail or by barge.
MATT: I don’t know if I’ve ever used the example of barge versus railroad on your program, but it involves San Diego, so let me just quickly tell you. These are approximate numbers but I had several people in the transportation business – Intermodal Transportation helped me do these – if you envision a container ship coming in to San Diego, which I would guess happens coming from China every three or four minutes.

MATT: On that container ship happens to be 340 cargo units. What do you call them? You put them on either trains or trucks filled with goods that are going to northern New England. So Portland, Maine is your destination. That happens to be about the longest city-to-city transportation route in the United States: San Diego to Portland, Maine. If you have one of three options: keep them on the water; putting them on rail; or keeping them on the road.

It’s basically 340 trucks, and basically if you put the goods in the trucks and then you have a convoy and double crews you can do like the pony express, you could be in Portland Maine in about six days; maybe even five days. But that isn’t how trucks travel. They stop in each town and then they get the goods off, and so basically it would take on average about 25 days before the goods would finally show up in Portland.

If you put them on rail and we had a dedicated rail line, it would get there in about five days or four days and you would save about five times the amount of fuel. But we have so much of our rail system now that is one track, and so most of the time the trains are basically on the sidelines waiting for another train to pass them.

If you put them on barges and the barge business is what they call a six-pack which is three barges wide, six barges long, all chained together and pushed by one 11,500 horsepower tugboat. And you went down the Panama canal – all assuming there was no traffic congestion – and then you hugged our inner coastal water way crossing the canal in Florida and going up the East coast you’d be in Portland, Maine in about 13 days and you’d save 35 times the fuel. 35 times. So that’s the future.

There were some interesting additional points in his Sep 30, 2006 interview at http://www.financialsense.com/transcriptions/2006/0930simmons.html

“the only thing we can do in a 5 to 7 year period time that’s going to make a difference is an enormous change in how we use energy, and make our society far less energy intensive. And what that’s all about are some simple things like liberating the workforce and starting to pay by productivity, and let people work when they want to, and where they want to. And those that figure out a way to work close to home and get twice as much done get paid twice as much.

Step number two, is we need to take a deep breath and look very carefully about our whole food supply and how much of our food today comes from continents away that’s unbelievably energy intensive to deliver and keep it fresh – and it doesn’t taste very good. And we need to start growing food close to where we live; and we need to figure out some ways to basically redesign our buildings so that we’re not using so much energy – basically to heat them in the Winter and cool them in the Summer. And all these things basically have to be done on a simultaneous basis because there’s no single one thing that will make a difference.”

Lastly, my own 2 cents: is it really wise to keep fostering the construction of energy-inefficient buildings located in far away places (aka suburban and exurban McMansions), which assume the availability of cheap energy for heating/cooling and commuting? Wouldn’t it be for the greater good to allow the credit crunch to run its course, the housing market to implode and construction activity to grind to a halt until there is widespread awareness that things must be done differently?

#### Guest • November 27th, 2007 at 4:28 pm

if you should, or could, factor in the (correlated) economic impact of ‘paper oil’ related markets – country by country – as oil at \$50 or less would have ripple effects far beyond the pumps.

#### Peter Schaeffer • November 27th, 2007 at 4:36 pm

RealThink,

I would also commend “Twilight in the Desert” and I don’t work for Matt Simmons either.

However, you have to have some background in petroleum to fully understand much of the book. Plenty of detailed reservoir engineering data.

#### euro • November 27th, 2007 at 5:04 pm

Thanks, Brad, for posting on oil (energy) costs and consumptions:

The main answer would be consume less and save more, the same old recipe (in the end it’s economy)!
The second, try to be more efficient in all senses: more public transportations, less suburbia, less cars and a lower thermostat (the above consume less).

This seems to be too much to ask to joe6pack american, but prices have to do the rest. They will come to balance, sooner or later, by force.

It seems that global warming is nice to see on TV, until you get a very hard drought, general fires or very dangerous floods. In the meantime…

It’s getting clear that to change “bad” behaviors, you have to attack not to Iraq, but to consumer’s wallet.
I’d say that even taxing the oil directly, the second-best solution, is not justice at all for a joe6pack living 60 miles away from their workshop. But that’s my mania, probably. Direct taxes are always unfair, for a progressive society. But this is a sort of bug (or a feature in Europe: if you are rich go to work in your BMW, if you are poor, take the train). Not all is rosy.

You know far-far more on economy than me, and I don’t want to be too grim, but green projects like those in Black Swan comments take lots of years to get developed.

So, a big crisis will change minds on consumers and investors, but not before.

Anyway, I want to give one bright green-spark in the energy madness, there is an enterprise (among thousands) that gives some hope to make it easier the transition from oil to green energy. It’s in silicon wally and it’s called nanosolar (dot com in the web).

Next year will know if solar energy investments will get cheaper removing 0s of investments, but so has to change law and regulation. An excerpt from an interview:

2 of 10 Questions for Nanosolar CEO Martin Roscheisen:

Q). Do you have customers lined up to purchase the product, and if so which companies?

A). We are lined up with the industry’s top system integrators as our partners, and it is clear we are going to be manufacturing capacity limited for about as far out as we can see. There’s presently really only two truly scalable solar markets in the world — Germany and Spain — and we do a lot there. Being a scalable market is today as much about feed-in-tariffs as about the administrative framework; tomorrow, with grid-parity PV systems, it is primarily about the latter.

For the United States to also become a truly scalable market, some ingrained bureaucracy stands in the way for that still — everything from 1920s-era conduit-around-cables and grounding requirements to insanely complicated town-by-town permitting processes. It’s hard to believe that California is more bureaucratic than Germany — but it is so in solar power. Fortunately, people are beginning to realize this and so change is possible even if it affects electric code rules designed around 1920s electric technology.

[Translated: The Green Party in Germany changed the law several years ago and it works, if Spanish socialist party wins in next elections, we'll follow in Spain (much more solar-energy)].

[The next is interesting to you (some interesting info between the lines) and dedicated to David Chiang]:

Q). An analyst told me that thin film solar companies in the U.S. are worried about price competition with Chinese solar firms. . . .is that true and something Nanosolar thinks about competitively?

A). If I ran a company based on solar thin films deposited in high-vacuum chambers, I’d worry too. Because [Chinese market leader] Suntech achieves better capital efficiency today with conventional silicon-wafer based solar factories than a typical thin-film vacuum line. That’s a problem right there. At Nanosolar though, we have a nanoparticle-based printing process that is 5-10x more capital efficient on the total line. So we have a good delta.

All things being equal, given the \$/kg economics of solar panels, I don’t think the competitive end game is to be shipping them from China. The end-game winners will be optimized for net working capital days and proximity to customers. (Btw, shipping from China costs ten times as much as shipping to China these days…) The middle game will be dominated by quality issues; this is a product that people expect to last for decades.

Quality is quite hard to do with the kinds of manual factories that are behind the capital efficiency of Chinese production lines. I see a lot of big customers in Europe quite unhappy with Chinese panels. That all said, my general rule on China is that one has to recheck all of one’s assumptions about China about once every three months.

[Sorry the long post, please, but economic policy will need to be supported by fiscal and legal policies. So, a crisis + changing the chimp on charge of USA, will be necessary, IMHO]

THKX

PS: The best websites on energy, IMHO, are theoildrum dot com and energybulletin dot net.

#### euro • November 27th, 2007 at 5:40 pm

Realize that I talked just on energy and economy, and not on ecology.

Because I smoke, and not only tobacco.

But, you the economist are normally too optimistic, and “growth” is the main word of your speech or writing.

I suggest you (all economists) a different point of view about growth, by Albert Bartlett, president of the American Association of Physics Teachers.

It will help you all in this overshoot society and in American honesty.

http://globalpublicmedia.com/transcripts/645

Thkx

#### euro • November 27th, 2007 at 7:41 pm

To Guest on 2007-11-27 07:58:00,

It’s not easy to give any data, but I think your questions is right.
And the asnswer would be Yes.

Do you remember that when the president China went to Washington, to Bush’s official reception, the loudspeakers were playing Taiwan hymn?

The next day, Chinese people were signing checks in Saudi Arabia.

But the chimp was so happy!…

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