The solutions to the problem are not always simple
Posted by Heading Out on September 23, 2005 - 10:39am
Consider that, just yesterday, Texas was facing the third worst storm in known history and things looked very dire. The storm has now got just a bit less intense and folk are already talking about Houston having "missed the bullet." All of a sudden a Category 4 hurricane becomes news enough to ease oil prices.
We have seen this over the past year with oil prices themselves. Prices rise from $30 to $40 to $50 and then they fall back $3 and we discuss the "collapse of the price of oil." It rises to $60 and then $70 and then slips $4 and suddenly "the crisis is over."
Unfortunately the problems of the oil and gas loss in the Gulf will not let themselves be so easily moved from the front pages. The likely losses are identified in the posts that Prof G is so assiduously been keeping current over the past few days. Sadly they will become reality over the weekend. And the impact will then develop over the next couple of weeks as crude oil production fails to return to its early Summer levels, while needs start to go unmet. (And with due deference to Econbrowser those who have to heat a home in Boston this winter will not willingly forgo that need because the price is higher than last year).
It has been fairly easy for FEMA to meet the needs they have to hand out water, and to hire (purportedly at $24/hr with 16 hours days allowed and a credit card for all expenses) a sufficient work force for that purpose. Unfortunately for the real work in getting the oil and natural gas supplies on hand for the winter they will likely be less lucky. The nation and the universities which carry the responsibility to train the technical support that must underpin our economy, has fallen into the management trap of purely meeting the immediate need. Petroleum Engineering Departments are high cost, and have not been strongly supported by an industry that has been more remiss than many in funding the research and development that it now has need of. Thus Departments have closed, and support infrastructure has declined.
But that needs merely highlights an overall problem, for the skill sets that we need to address many of the issues revealed over this past month have been neglected. All Engineering disciplines are more expensive, by their nature, than the competing disciplines which are found on our campuses. Increasingly state budgets have been unwilling to meet those extra costs. It has been easy, and cheap, to transfer our needs for those talents to countries overseas, where the costs are less. But there is a price to be paid for such indulgence. We can only hope that it will not be too steep. And we must also hope that we will now begin to recognize this need, and start to build a greater knowledge base and engineering infrastructure to protect us more effectively in the future. Because, inexorably, the talents currently being marshaled for our protection will need to be replaced, and the current crop of acolytes is small.
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And there are more problems on the supply side - world political events for example - than just hurricanes in the Gulf of Mexico, like Nigeria, for example:
Nigerian militants take over Chevron oil facility in Delta Region
www.chinaview.cn 2005-09-23 01:03:00
http://news.xinhuanet.com/english/2005-09/23/content_3529842.htm
And then there's Venezuela... China, India, dropping output in the North Sea, short supply of diluants for oil sands... and the list goes on. Its amazing that storm season has shifted the talk from one set of problems that were perfectly valid in driving price up over the past 9 months to storms alone, as if the passing of this season will solve all!
MATT SIMMONS, CEO SIMMONS CO. INTERNATIONAL: I mean what`s amazing, when you go back to the benefit of hindsight, World War II was 40 percent over when suddenly we got awakened by Pearl Harbor and finally realized that we were at war.
KERNEN: OK, that`s you`re analogy not necessarily the significance historically to the event, but in that it`s a wake-up call for us being asleep.
SIMMONS: We`ve missed an awful lot of wake-up calls that we`re on this, that if we didn`t do some things quickly, we were backing ourselves into a terrible corner. Over 30 years, we basically shrunk down our energy center, and put the V8 part of our engine right -- exactly in Louisiana and Texas on the coast and Hurricane alley. It`s sort of -- it`s just conning fate.
MELISSA FRANCIS, CNBC ENERGY REPORTER: What difference does it make, really? I mean, if you look at prices, isn`t this how it`s supposed to work? Prices get high enough to the point where people start consuming less. That`s how the markets work. We all drive a little less. We buy cars that consume less gasoline. What`s wrong with prices spiking and then seeing this happen?
SIMMONS: Yes, you know, 30 years ago, we created a concept, ironically, after the 1973 oil shock, that we needed enormous amounts of extra stocks on hand. And we created the Strategic Petroleum Reserve, so that we -- so that if somebody cut us off someplace else. But in our domestic reserves, we set what we called minimum operating levels -- 300 million barrels a day, when we were only using 14 million barrels a day, well, because we didn`t have any surprises. Over the last 15 years, particularly every time demand occasionally succeeded supply, we liquidated stock. We went to adjusted time inventory on the concept that we were now Wal-Mart, and that somehow or another, if we ever had a problem, we would -- we`d just overcome the problem.
FRANCIS: But we don`t need more crude oil right now. I mean, should we start stockpiling gasoline?
SIMMONS: We should have stockpiled -- well, in crude, one of the scary stories in my opinion that came post-Katrina is that Exxon Mobil is the single biggest refinery in Port Arthur -- in Lake Charles, which wasn`t hurt by the hurricane, was down to four hours remaining crude before they had to borrow from the Strategic Petroleum Reserve. We`ve shut down now sufficient days between Katrina and now Rita that will probably liquidate half of our strategic stocks over -- before this is all over. And then, we`ll basically go a decade or two maybe trying to build up an insurance policy again.
KERNEN: Yes, I heard your 30 year -- that this could affect us for 30 years. That was another thing that I thought was overstated. But you -- that`s -- I mean not that I would know.
SIMMONS: Yes.
KERNEN: But that`s a long period of time for.
SIMMONS: Well, unless we basically immediately stop consuming. Now the answer to this, we could go on a massive conservation, and take our consumption down by 20-30 percent. But that`s very hard to enact in America.
END
http://www.finance24.com/articles/economy/display_article.asp?Nav=ns&lvl2=econ&ArticleID=151 8-25_1804831
"We will kill every iota of oil operations in the Niger Delta. We will destroy anything and everything. We will challenge our enemies in our territory and we shall feed them to the vultures," said the statement from the Niger Delta People's Volunteer Force (NDPVF).
http://www.mweb.co.za/hubs/news/newsItem.aspx?id=BUS_more|2956344
Many people see Indonesia as the canary
in the mine of financial stability.
Looking at current production, he said that "Iraq will be lucky" to maintain its level of some 1.5 million barrels a day.
http://www.iht.com/articles/2005/09/21/business/oil.php
However, we might expect fewer to heat their offices or homes to the borderline-sweltering temperatures that are not uncommon. And maybe the the usually-sweltering winter temperatures on busses and trains could be cranked down to something reflecting the way people actually dress in wintertime. And maybe a few people might close off some rooms in their palatial houses (compared to any other part of the world, even many of the "poor" live in huge digs). And no one needs to travel a hundred miles to a fifth-grade hockey game, maybe some monumentally egotistical coaches ought to be fired. And maybe others would make many other adjustments. None of this would be bad, though, of course, many adjustments are not indefinitely scalable.
And in the meantime, high prices might stimulate supply, or stimulate alternative sources. Not one of the alternatives yet proposed is cheap when it is done on a large enough scale to make a difference. Alternatives aren't going to happen at low prices. Nor will they happen anytime soon as the result of subsidized government projects, since those seem to exist mainly to provide travel money for "researchers" to fly around to endless "conferences."
Good point about the bad-news good-news thing - amazing, isn't it?
Not only are Engineering disciplines expensive, they are Politically Incorrect. These days, we have the IDEA Act and the Disability Act and so on, so everybody is supposed to get a diploma even if they cannot, in a timely fashion, accomplish the work the diploma says they can do.
Now, that may be OK in the more obscurantist branches of the humanities, where the Sokal hoax proved that no one can tell the difference anyhow. But alas, in the real Engineering world, that sort of thing causes fury and multi-billion-dollar lawsuits. People expect results. After all, the glacial Federal response to Katrina passed the Untimed Test with flying colors: New Orleans is now swarming with Guardsmen and emergency-service providers tripping over each other. And yet everyone is thoroughly disgusted.
The solution is to move Engineering shops overseas to any place where they are allowed to hire competent people. Too bad FEMA couldn't have been moved overseas as well. But it will cost us dearly in the end, and the folks who were supposed to be "protected" by the fraudulent diplomas and other ego-assuaging apparatus will go unprotected as well. Sigh.
I got a degree in English, which is hard to use, since in my jobs the people I've had to please have had English so bad they can't see what the problem is with how whatever incomprehensible copy is written. I currently work at a temporary contractor job for a Large Software Company (yes, that one), where hundreds of people with those ostensibly advanced degrees from India have put the project months and millions behind schedule, and made it a fucked up ugly mess.
Computer science departments have been contracting at almost 20% a year for several years now, because students figure what's the point of working hard to lose out in future work to some unwashed visa holder who'll work 20 hours a day for peanuts. Might as well do something more fun and work at Target.
I didn't know how well I really was doing in math and science. If I'd known how competent most people with those degrees are now I would've squeaked through college calculus with confidence.
There are 6 BILLION people on this planet. 5.9 billion of them work for either Target or Wal-Mac. Therfore you are an infinitessmely small element in the overall squeeze of things. As we grow to a population of 9 BILLION by year 2050, the planet will be pushed to new "limits" and it will "converge" toward its ultimate solution.
Cheers.
Absolutely: the social attitudes and dodgy degrees are not necessarily exclusive to particular subjects. It's a fairly safe bet that some of those responsible - at each and every level of government - for the hurricane-related failures held very expensive MBA or Finance degrees. And even "hard" degrees like Computer Science don't necessarily guarantee competence these days.
There is a huge difference between a person who is "book smart" and a person who will be productive in the real world. In my current field (CS), lots of people come out of school with horrible problem solving skills, and couldn't think outside of the box if their lives depended upon it. They apparently managed to pass their classes simply by rote memorization, and have trouble stepping back and getting the big picture.
I have had many discussions with people about whether problem solving is an inate ability, or whether it is something that can be learned. We have never really come up with a satisfactory answer, but tend to lead towards the "inate ability".
I imagine it to be the same in many other fields. People who can merely learn by rote, and parrot stuff back are always going to be at the bottom rungs. Some recognize their limitations and become managers (the pointy-haired boss) :-).
I was a working stiff engineer (hardware/software interfaces) for many years. Then I "defected" and went into a field where adherence to the laws of Mother Nature is not required. All you have to do is "persuade" other humans in order to consider yourself as being "successful".
Most of our "modern" society (Adam Smith society) is based on one human being B.S.ing another human being.
Many of us negotiate "fair" prices for stuff. Very few human beings do "real" stuff anymore in the USA. We are all virtual. Your plumber deals with the real stuff, and your other craftsmen do too. However, very often you will run across massive populations of people where no one knows how to pick up a screwdriver and turn it in the right direction or what makes the car "go".
In the computer field, I am astounded by how many practitioners do not understand that their "code" is usless unless there is physical hardware to execute it. We have each become so "specialized" as Adam Smith suggested we do, to the point that we are clueless as to how the world comes together into an operative whole. It all seems to happen by "magic". After a while, we and the bozzos we put in the White House start believing in "magic" and "intelligent design". We/They have no clue. How sad.
Schools don't and shouldn't teach for jobs that no longer exist.
We let "They who are in power" dump their psycho-babble on us about what a great job "they" are doing managing the Gulf Coast and others of "their" assets in this "ownership society". Alan Greenspin keeps crowing about improvements in "productivity" and big gains in GDP. But all those "productivity" gains mean that McDee can run a store with fewer and fewer people, thereby increasing "profits" for the corporation and screwing the little people out of yet more jobs. Soon, no more jobs for any of the people, no matter what your skills set is.
Remember when the government advised your little brother to go get the education for that "high tech" job by studying computer science? He followed their advice didn't he? They gave him a loan to do it, right? Then someone grabbed the money in the "education" sector and ran away. Now where are all those noble folk who value "values" and evade evaluation of themselves for all their screw-ups? Oops, they are in the White House.
It'll be interesting to see what the bankruptcy rate is a year or two from now. There's a lot of folks living in homes with mortgages larger than common sense, and a declining market, would suggest having.
I haven't figured out which of two scenarios is the most likely.
One scenario is a declining market, where housing prices actually fall, unemployment rises, and people are pushed into foreclosure.
The second scenario is much higher inflation, driven in no doubt by high energy prices, coupled with stagnation of wages and housing prices, and rising unemployment. Even here, with the adjustable rate mortages will be forced into forclosure.
There are common elements to both of these of course, but the distinctions can become important as time goes on. My guess is the higher inflation scenario is more likely in the short term, but that's just my guess.
Rising oil prices will put upward pressure on pretty much all prices. The actual change in retail prices, though, will vary a lot, because people's purchasing decisions will be different for each different product. The result will be a squeeze on corporate profits for producers of the things that people end up buying less of so they can still afford the minimum energy products that get them to work and keep their houses warm. Those prices increases, though, are not, strictly speaking, "inflation." They're a decrease in everyone's standard of living.
Decreases in standard of living are unpopular, of course, so there will be pressure to do something. One thing the Fed might do to respond to falling corporate profits and a general decline in the standard of living, would be to boost the money supply. That would give you your inflation.
So the reason you can't "figure out" which scenario is more likely, is that it is really an intractable question. It turns on who is on the Fed's Open Market Committee when things get bad, what they can see in economic statistics that are never as timely or complete as they'd like, and what political pressures they face from their various constituencies.
The Fed could take a hard-to-understand realignment of prices combined with a general decrease in the standard of living, and turn it into a hard-to-understand realignment of prices combined with a general decrease in the standard of living plus inflation. (And, if they're too careful to avoid that, they could instead turn it into a general decrease in the standard of living plus deflation.)
Who is this asshole?
I work for the DOE as a research scientist and the bastards are so stingy regarding foreign and even domestic travel that it is truly stifling scientific advancement. You pretty much have to beg to go to a conference, and by the way conferences are how you share your work and learn what other people in the field are doing. It isn't "fun" it is work. When you have to beg to do your job it is time to tell them to blow it out their asses.
Yet on close up --as you do here-- we can be humiliated into temporarily admitting that our thinking is an evolution-driven muddle of inconsistent and self-deluding states.
Yes, things were really "bad" when crude oil futures were heading for $70/barrel and Hurricane Rita was whirling at 175 MPH. But now things are relatively "better" because oil has drifted back to a more "normal" $65/barrel and Rita has slowed to 145 MPH. WE dodged a bullet through our magical ability to utter self-enchanting encantations. Clearly, Mother Nature is listening to our magic because we listen to our own spell castings. WE are in control, not Mother Nature. Therefore death and die-off will never happen.
If only "magic" were real and the magic of words moved Mother Nature as much as it moves us.
For an old interview on "energy illiteracy" look at:
http://www.motherjones.com/news/qa/2004/05/paul_rob_qa.html
I have thought of writing a post pointing to a convergence of problems. You have beat me to it on the energy and education front. We still have the impacts of global warming and country debt load to add to the mix. Both will probably make the rebuilding of the coast and energy infrastructure problematic.
Thanks again for a timely post and a HUGE thanks to PG for keeping the site current. I noticed the EnergyBulletin is just pointing people at TOD for Rita impacts on energy rather than do independant posts. The whole TOD team is first class.
Or are the end products prices like gasoline contaminating upstream the industry ? that is to say : are the high prices at the output of refineries (which could be explained by a capcity tightness to suplly refined products) causing the crude oil up too ? It would be the lone "rational" explanation...
With my first post, I must say I am really enjoying Tod, its readers, and their well advocated in depth discussion, which i find interesting after my personal "discovery" of the PO problem 2 years ago and tons of reading ever since.
However, as JDH points out in the article, while sweet light crude is becoming more valuable faster than heavy sour is, heavy sour is also going up in price. For this, I can only say that the market might be collectively edging up to the realization of the value of oil (when you start to run out of something is when it becomes really valuable), and that it is infact limited.
Hey, to any site admins, a good idea I think would be to have the price for some heavy sour oil, right beneath the spot price for the sweet light crude.
When the whole "Indian outsourcing" thing sprang up I told the younger guys "don't worry, it's not going to work as well as they think it is."
The feedback I'm now getting from people (not just the poster above) is that I was correct.
FWIW, my experience is that when you have widely separated groups working on the same project they will inevitably suffer a divergence of goals. The most obvious is that the contractor likes the work, and the manager would like to finish the project ;-), but it often operates at more subtle levels.
Anyway, I'm not expecting an end to the oursourcing of engineering jobs, just suggesting that the pendulum will swing back a ways.
Right after Katrina struck, the N. Y TImes on August 30th had an article that bore the headline HURRICANE KATRINA: NEW ORLEANS; Escaping Feared Knockout Punch, Barely, New Orleans Is One Lucky Big Mess. As we now know, New Orleans was mostly destroyed. Yesterday on NPR, I heard a guest "expert" tell me that refineries in the Houston/Beaumont area should be relatively unaffected by Rita because these facilities are "spread out" a bit, not tightly clustered in just one geographical area. And now, Houston will now dodge a bullet based on one possible track report and oil prices have eased because Rita is only a Category 4.
Humankind can not bear very much reality.
T. S. Eliot
On the other hand, perhaps we should feel fortunate that the emergency response to Rita will be better than that for Katrina (if there are any resources left, that is) since we have avoided those long-term memory problems that humankind is so prone to.
The steam crackers running on ethane or LPG (from natural gas) have been suffering ever since gas prices started their upward climb a couple years ago. Unlike refineries that are making lot$ of money right now, the ethylene plants were barely staying above water. Any potential hurricane damage could be the death blow for some of these: no one wants to re-invest capital (as in repairs) in a low-margin business.
Long term, I see integrated U.S. petrochemical companies moving to higher margin fuels businesses (gas, heating oil, and everything in between) and importing chemicals from overseas--especially the Persian Gulf.
For those who do not understand how vital "plastics" are to our modern way of life, I strongly urge you to sit through Chapter 1 of the Fate of Humanity Power Point at
http://www.peakoilandhumanity.com/chapter_choice.htm
Try to pay attention to how often you can find "plastics" in the equation, not just in the disposal hospital plastics shot, but everywhere. Our fruits and veggies come packaged in plastics as they make their way to our plates from the 4 corners of the Earth.
p.s. Wow. Just took a look at the Fate site. They have put up multi-language presentations. That site keeps getting better and better (except for the Canadian Nationalism thing).