Crude Reality (Is the US economy less susceptible to a major oil disruption than we thought?)

[NickB79]

http://www.boston.com/bostonglobe/ideas/articles/2011/02/13/crude_reality/

"Economists have a term for this disruption: an oil shock. The idea that such oil shocks will inevitably wreak havoc on the US economy has become deeply rooted in the American psyche, and in turn the United States has made ensuring the smooth flow of crude from the Middle East a central tenet of its foreign policy. Oil security is one of the primary reasons America has a long-term military presence in the region. Even aside from the Iraq and Afghan wars, we have equipment and forces positioned in Oman, Saudi Arabia, Kuwait, and Qatar; the US Navy’s Fifth Fleet is permanently stationed in Bahrain.

But a growing body of economic research suggests that this conventional view of oil shocks is wrong. The US economy is far less susceptible to interruptions in the oil supply than previously assumed, according to these studies. Scholars examining the recent history of oil disruptions have found the worldwide oil market to be remarkably adaptable and surprisingly quick at compensating for shortfalls. Economists have found that much of the damage once attributed to oil shocks can more persuasively be laid at the feet of bad government policies. The US economy, meanwhile, has become less dependent on Persian Gulf oil and less sensitive to changes in crude prices overall than it was in 1973."


Not sure if I agree with their conclusions, but I thought a few posters on DU would like to read it as well and discuss it.

[ananda]

1. Real reality means no crude at all.

Clean and alternative energy now!

[ixion]

2. Our entire socio-economic model is built-around and based-on cheap oil

so I will have to beg to differ with these economists who think that the cost and/or availability of oil is not a major factor.

[stuntcat]

4. yah, ditto

SO much depends on the cheap oil.

[joshcryer]

6. In a way, yes, but only insofar as cheap oil benefits globalization.

The United States, if it wanted to, and it will in due course, will become protectionist and closed up, once the oil dries out. In the meantime it will benefit from cheap fuel around the world.

[hunter]

3. Lovely. Why risk our own troops when oil producers can hire thugs and mercenaries?

Let's murder activists who think a nations' oil wealth should be shared by the people.

Let's buy off some brutal despots.

Let's kill all the fish and pollute drinking water.

It's the magic of "free" markets!

[joshcryer]

5. Probably, we get most of our oil from Canada, and we will embark upon shale deposits...

...very very soon. Already the BLM has leased out almost all of the Green River Formation land. Already pilot plants are proving that in-situ works. Already we're raping ourselves.

The US knows how to do capitalism, if there is cheaper oil overseas, dry it up first, then go for the harder to get shit. It's going to happen. WEO 2010 already projected that much of our future oil supplies is coming from unconventional oil. And it'll happen.

[GliderGuider]

7. They might be right about the impact on the USA of temporary supply disruptions.

However, the global effect of a long term contraction of supply in the face of rising demand from Chindia isn't addressed.

[joshcryer]

18. Indeed, there will be war.

[JohnWxy]

8. the article is talking about short term disruptions. We may be better able to handle short term

disruptions but what about the longer term reality of increasing demand from developing world (esp. China and India). This increase in demand is only going to grow.

According to the article we get 15% of our oil is imported directly from the Persian Gulf: "15 percent of imported US oil comes directly from the Persian Gulf". Now for an oil supply shock it's probably not likely that ALL of the Persian Gulf oil would be cut off, but half of it could be a more plausible possibility (7.5% supply shock). NOw, one thing that has changed from the 70's and 80's is that we now produce ethanol that equals about 7.6% of our total fuel consumption. So we are producing enough ethanol to 'cover' a 50% loss of the Persian Gulf supply.

I would feel a lot better if we were producing ethanol in the amount of about 10% of the total consumed, though.

But the longer term problem of increasing demand from the developing world is no short term phenomenon. It won't go away. It's going to just keep growing. For that we have to have an increasing supply of alternative fuels to keep up with the increased demand or we are going to see gasoline prices rise enough to put us back into a deeper recession if not a depression.

[GliderGuider]

9. I don't think ethanol production insulates us from a supply shock.

If we are already burning all the oil you produce and import, and all the ethanol we can distill, a disruption of imports would still leaves you with a fuel shortfall. You can't cover a shortfall with a fuel you're already using. Am I missing something totally obvious here?

[JohnWxy]

12. Good point. We are already, with the ethanol, at $3.07 - $3.10. what I should have said is without

the ethanol we are currently producing we might very well be in trouble already depending upon how much you think the extra supply of fuel from ethanol is bringing down the price of gas. If you used Blanch's 15% we'd be spending about $3.50 a gallon right now. That price level might be enough to stall our weak recovery. (now others have put the percent impact, of incresed supply, on gas prices at less. Another factor is gas price elasticity with respect to income.) I think the income affect is greater now, for obvious reasons, than when Blanch made his estimate. At this time, with greater unemployment, people are going to react more quickly to a rise in gas prices with reduced consumption/purchases of gas which would tend to hold down gas price increases by reducing demand as a reaction. the only problem with that is, along with the reduced demand for gas we would see reduced demand for most of everything else...leading to a slow down of economic activity with a given increase in the price of gas. Which means we are more susceptible to an economic slow down with a given increase in gas price compared to 2008 (first half).

So then,for additional price shock protection we would need more ethanol production (andor imports).

As far as growing demand from China and India, we definitely need to increase ethanol production as quickly as possible (and add to that methanol from natural gas). Without this we will see gas/oil prices increase enough to put us into a deeper recession or even a depression. Just how soon this extra supply would be needed is subject to debate. but probably in the next few years to keep up with growing demand.

Note: we also need to stop wasting the ethanol we do produce. require all cars sold in U.S. to be Flex-Fuel cars. Incentivize the manufacture of the MIT designed ethanol boosted Direct Injection engine which gets 30% better gas mileage than conventional ICE of comparable power (using only 5% ethanol). To help make this engine a commercially attractive undertaking for auto manufacturers we would need far more ethanol blenders pumps so ethanol would be far more available to drivers.

Blenders pumps would enable drivers of FFvs to set the blend level of ethanol. According to a http://www.ethanol.org/pdf/contentmgmt/ACE_Optimal_Ethanol_Blend_Level_Study_final_12507.pdf">study by the University of North Dakota Energy & Environmental Research Center (EERC) and the Minnesota Center for Automotive Research (MnCAR) a Flex Fuel Chevrolet Impala got 15% better fuel economy on E20 than it did on gasoline. So use blenders pumps to enable drivers of FFVs to use whatever ethanol blend gets them the best fuel economy (different FFVs may very well do better on different percentages of ethanol).

OF course, I don't believe we will do that. At least not until said recession/depression is already on us.

[Kaleva]

13. Removing the tariff on Barazilian produced Ethanol would provide another source.

[JohnWxy]

14. Yes, we should do that and also increase production of methanol from natural gas. THis can be

blended with the ethanol and gasoline. THese are things which can be done relatively quickly (quicker than the 20 years it will take to get a meaningful number of electrics on the road).

By preventing a petroleum cost induced long term recession/depression this would also protect the more advanced (and mor expensive) technologies (e.g. electric cars, fuel cells) from being significantly delayed by the negative impact on the economy of sigificant petroleum price increases.

[Kaleva]

15. Cuba is a potential major source of Ethanol

Most of the Ethanol, if not all, produced in Brazil is from sugar cane. The major crop in Cuba is sugar cane. To tap that potential resource, the trade embargo with Cuba would have to be lifted and tariffs on imported Ethanol be eliminated.

[JohnWxy]

16. never thought of Cuba! yeah!

[joshcryer]

17. Brazilian produced ethanol that grows on defunct cattle land which was made from rainforest...

...destruction. Check.

[JohnWxy]

20. Sugar cane not grown in former RAinforest areas. See link, get informed.

the biggest factor in rainforest destruction is cattle ranchers cutting down trees for cattle to graze on whatever small plants grow up after trees cut down. Here is a good post form another DUer who has actually gone to the trouble to look into the facts of the matter, rather than mindlessly repeating bumper-sticker slogans written by EXXON MOBIL types or Lobbyists (Glover Park) hired by the http://www.growthenergy.org/images/reports/beatin-up-on-ethanol_roll-call.pdf">Grocery Manufacturers Association

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=103&topic_id=586115&mesg_id=586289

As Mongabay site indicates the biggest cause of deforestation is cattle farmers clearing forest to provide land for their cattle to graze on. That's why I said, seriously, if anyone is concerned about deforestation the best thing they can do to affect those market forces which do impact rainforests is to reduce their consumption of beef. If we cut back beef consumption 10% it would have an affect.

"..the Amazon region does not offer favorable conditions for commercial sugarcane production."

[joshcryer]

22. Then why did Brazil have to ban people from growing it there?

http://news.mongabay.com/2009/0918-sugarcane_brazil.html

C'mon dude. It's basic economics.

[JohnWxy]

23. former rainforest land not fertile enough for sugar cane. Also, thousands of miles from buyers.

http://www.mongabay.com/brazil.html

Today deforestation in the Amazon is the result of several activities, the foremost of which include:

Clearing for cattle pasture - 65%-70%
Colonization and subsequent subsistence agriculture 20%-25% (subsistence agriculture refers to small farmers raising food for their own needs - i.e. food or for feed for their animals - usu. chickens and maybe a pig or in some parts of the world, goats.)

Infrastructure improvements 1%-2%
Commercial agriculture 5%-10%
Logging 2%-3%



regarding commercial agriculture:

Recently, soybeans have become one of the most important contributors to deforestation in the Brazilian Amazon. Thanks to a new variety of soybean developed by Brazilian scientists to flourish in rainforest climate, Brazil is on the verge of supplanting the United States as the world's leading exporter of soybeans.

NOte that soybeans are cultivated and sold for feed for cattle.

So then in total, cattle account for about 70%-80% of deforestation in Brazil.

regarding sugar cane, I have read that actually the area of former rainforest is not fertile enough to sugar-cane production.

All I can do is quote you the facts on the current conditions on the ground in Brazil.

Most sugar-cane is grown in Southern Brazil (90%).

http://www.brazil.org.uk/publications/index_files/mythsvsfacts.pdf


Most sugarcane for ethanol production (90%) is harvested in South-Central Brazil, over
2,500 km (1,550 miles) from the Amazon. The remainder (10%) is grown in Northeastern
Brazil, about the same distance from the Amazon’s easternmost fringe. That is roughly
the distance between New York City and Dallas, or between Paris and Moscow. There
is a very tiny production of sugarcane in the Amazon (less than 0.2% of Brazilian total
production) that is processed at four mills that were built more than 20 years ago at a
time when the government provided fiscal incentives to set up industrial facilities in this
region to supply the local market. Without subsidies these mills would not have been
economically viable since the Amazon region does not offer favorable conditions for
commercial sugarcane production. For this reason, future expansion is anticipated to
continue in South-Central Brazil, primarily in degraded pastures.


...now it is certainly possible that some idiots might plant sugar cane in already deforested regions, either not knowing or not caring that they might only get two seasons of decent yield. After that the yield would decline rapidly. But as the above source said, the rainforest area is not fertile enough for "commercial production of sugarcane".

Thus it is very unlikely that a commercial operation would bother planting in an area

1) that is not suitable yield-wise for profitable sugar cane farming, and

2) that is thousands of miles away from anyplace they could sell it. Sugar cane has to be made into ethanol very soon after harvesting it(the sugar begins to rot, and you lose the sugar content). The ethanol plant would have to be within several miles of where the sugar cane was harvested. It's not likely anybody is going to build a multi-million dollar ethanol plant (on land where it's illegal to build) thousands of miles from their prospective market. NOte it costs big bucks to transport your product where there is NO INFRASTRUCTURE (i.e. highways, bridges able to handle multi-ton trucks)


...so if you're concerned about deforestation, cut back on eating red meat! (just try cutting back 10%). Not only are cattle the major cause of deforestation..they also produce world-wide MORE GreenHouse Gases than the entire transportation sector (which includes trains, planes and ships at sea!). It's the methane you see.

[NickB79]

24. South-Central Brazil is the Pantanal

One of the sites specifically mentioned in the link joshcryer posted, ranking almost as ecologically valuable as the Amazon. It's like saying it's ok to drain the Everglades for farming, so long as you don't touch Yellowstone. Both are ecologically valuable and sensitive in their own right. Either you didn't read his link, or you don't know the geography of the very area you are attempting to argue about.

Also from his link:

"Some researchers have also argued that sugarcane expansion has displaced ranchers and small farmers to ecologically sensitive regions, including the Amazon, resulting in deforestation and forest degradation. "

Which also supports joshcryer's claim that sugarcane ultimately affects rainforest clearing.

[bananas]

10. Leading Peak Oil Theorist Colin Campbell has already changed his mind

see http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=115x274189

[GliderGuider]

11. He hasn't changed his mind about the supply peak, just about pricing.

While rising prices do cause demand destruction and that will help eke out the supply a little longer, they don't do a damn thing to put more oil in the ground. Not to mention that $100 oil doesn't enable renewable energy as well as $200 oil would.

The supply peak is still a reality, despite what is happening to the demand and the price. That's the whole point of the exercise, despite the opinions of uninformed economists.

[joshcryer]

19. Relevance = none

[JohnWxy]

21. Expenditures for imported oil as percent of GDP has remained about the same as in 1973.

http://www.eia.doe.gov/oiaf/economy/energy_price.html


Prior to the embargo of 1973-74, total energy expenditures constituted 8 percent of U.S. gross domestic product (GDP), the share of petroleum expenditures was just under 5 percent and natural gas expenditures accounted for 1 percent. The price shocks of the 1970s and early 1980s resulted in these shares rising dramatically to 14 percent, 8 percent, and 2 percent respectively, by 1981. Since that time, the shares have fallen consistently over the last two decades to current levels of about 7 percent for total energy, while petroleum has fallen even further to 3.5 percent and natural gas to just over 1 percent. The shares were lower during 1998, when oil and natural gas prices were lower, but have risen recently in response to higher oil and natural gas prices. (Figure 1)

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Although the U.S. has reduced its use of petroleum as a share of its economy, there is a growing dependence on imported oil. In 1973, net imports of petroleum made up 35 percent of petroleum product supplied (consumption). For 2000, this share has risen to over 50 percent and is expected to reach 64 percent by 2020.
(my emphases_JW)
(more)
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So while the Petroleum expenditures as a percent of GDP has gone down about 29% (4.9% to 3.5%) the share of the Petroleum expenditures going for imported oil went from 35% to 52%. The result is that the expenditures for imported oil as a % of GDP has stayed about the same (going from 1.7% to 1.8%). Meaning the power of imported oil supply shocks to have an impact on the economy should be about the same as in 1973.