Greenspan sounds alarm on oil supply
Published: June 7, 2006
WASHINGTON Alan Greenspan, the former Federal Reserve chairman, offered a grim view on Wednesday of the world's rising vulnerability to high crude oil prices, saying he was skeptical that oil producers could pump enough crude to meet future demand.
Since the 1940s, U.S. consumers have shown an uncanny ability to shoulder rising energy prices, but consumers' immunity to oil price shocks was running out, Greenspan said.
"The United States, especially, has been able to absorb the huge implicit tax of rising oil prices so far," Greenspan told the Senate Foreign Relations Committee in his first congressional testimony since leaving the U.S. central bank earlier this year. "However, recent data indicate we may finally be experiencing some impact."
Greenspan was appointed Fed chairman by President Ronald Reagan in 1987, and served until Jan. 31 of this year.
Lawmakers would occasionally call on Greenspan to speak on energy issues when he was chairman, but his views were still highly sought on Capitol Hill.
Since 2004, crude oil prices have doubled. Since the start of 2002, the cost of a barrel of oil has soared by $50.
Crude oil prices have stubbornly stayed above $70 a barrel despite OPEC and other world producers pumping to capacity. Prices are still within striking distance of the $75.35 a barrel record set in U.S. futures in April.
Greenspan warned that a big oil price increase could spur "a significant contraction in the economy."
Greenspan said that few of the world's dominant producers, aside from Saudi Arabia, see the danger that rising crude oil prices pose to the economy, and to their sustained ability to sell oil.
Saudi Arabia is the only country with enough untapped reserves to meet future short-term energy crunches, and has unveiled a $50 billion plan to lift output capacity by 1.5 million barrels per day by 2009.
Greenspan said while U.S. businesses had so far been able to improve productivity to compensate for costly energy, households were suffering from higher gasoline prices.
"Current oil prices over time should lower to some extent our worrisome dependence on petroleum," said Greenspan, who now runs a private consultancy. "Still higher oil prices will inevitably move vehicle transportation to hybrids, and despite the inconvenience, plug-in hybrids."
Greenspan warned that the buffer between supply and demand was extraordinarily thin and that price spikes were a risk.
"The balance of world oil supply and demand has become so precarious that even small acts of sabotage or local insurrection have a significant impact on oil prices," he said, adding that global refining capacity was still too limited.
Strong euro causes concern
Finance ministers from France, Spain and Luxembourg said Wednesday that they were growing more concerned that the euro's appreciation might sap the European economic expansion, Bloomberg News reported from Luxembourg.
"It is not a type of level we would like, but we have been living with a strong euro for a while," the Spanish economy minister, Pedro Solbes, said at a meeting of European Union finance chiefs.
The euro's 8 percent advance against the U.S. dollar this year risks removing a prop from the $10 trillion economy by making exports more expensive, just as the European Central Bank prepares a possible interest rate increase on Thursday for a third time in six months.
Earlier this week, the euro reached a 13-month high point of $1.2979. It was trading at $1.2799 late in New York on Wednesday. About 40 percent of the euro region's gross domestic product stems from shipments abroad.
Thermodynamics and Money
Peter Huber, 10.31.05, 12:00 AM ET
In his day M. King Hubbert was a great geologist who spent his life studying the planet's deposits of oil and gas. But as he got older, he simply lost it. His "peak oil" theory--which many people are citing these days--is a case study in junk economics.
Hubbert was born in 1903. By 1949 he had concluded that the fossil-fuel era was going to end, and quite soon. Global production would peak around 2000, he predicted, and would decline inexorably thereafter. By 1980 the aging Hubbert was certain that the impending crisis "was unique to both human and geologic history.... You can only use oil once. You can only use metals once. Soon all the oil is going to be burned and all the metals mined and scattered." Indeed we would soon be forced to abandon our entire "monetary culture," replacing it with an accounting tied to "matter-energy" constraints. An editor of Geophysics magazine summarized Hubbert's views in 1983: "The science of matter-energy and the historic system of finance are incompatible."
Today this same nonsense is often dressed up with numbers in an analysis that's dubbed "energy return on energy invested" (Eroei). According to this theory it can never make sense to burn two units of energy in order to extract one unit of energy. The Eroei crowd concedes, for example, that the world has centuries' worth of junk oil in shale and tar sands--but they can also prove it's irrelevant. It takes more energy to cook this kind of oil out of the dirt, they argue, than you end up with in the recovered oil. And a negative Eroei can only mean energy bankruptcy. The more such energy investments we make, the faster things will grind to a halt.
Eroei calculations now litter the energy policy debate. Time and again they're wheeled out to explain why one form of energy just can't win--tar sands, shale, corn, wood, wind, you name it. Even quite serious journals--Science, for example--have published pieces along these lines. Energy-based books of account have just got to show a profit. In the real world, however, investors don't care a fig whether they earn positive Eroei. What they care about is dollar return on dollar invested. And the two aren't the same--nowhere close--because different forms of energy command wildly different prices. Invest ten units of 10-cent energy to capture one unit of $10 energy and you lose energy but gain dollars, and Wall Street will fund you from here to Alberta.
As it happens, the people extracting oil out of tar sands today use gas from the fields themselves to power their refineries. There's gas, too, under what has been called Alberta's "trillion- barrel tar pit," but it's cheap because there's no pipeline to deliver it to where it would be worth more. As an alternative to gas, Total S.A., the French oil giant, is thinking about building a nuclear power plant to supply heat to melt and crack the tar. But nuclear reactors extract only a minuscule fraction of the energy locked up in the nuclei of uranium atoms; all the rest gets discarded as "waste." On Eroei logic, uranium would never be used to generate either electricity or heat. But per unit of raw stored energy, uranium is a thousand times cheaper than oil.
Greens touting the virtues of biomass as a source of energy rarely note that almost all of it is used by lumber mills burning branches and sawdust on site. No one cares how much energy the sun "invested" to grow all that waste wood. And every electric power plant, whatever it's fueled with, runs a huge Eroei deficit, transforming five units of cheap, raw heat into two units of electrical energy. But it all works out because the market values the energy in electricity at about 30 times the energy in coal.
The economic value of energy just doesn't depend very strongly on raw energy content as conventionally measured in British thermal units. Instead it's determined mainly by the distance between the BTUs and where you need them, and how densely the BTUs are packed into pounds of stuff you've got to move, and by the quality of the technology at hand to move, concentrate, refine and burn those BTUs, and by how your neighbors feel about carbon, uranium and windmills. In this entropic universe we occupy, the production of one unit of high-grade energy always requires more than one unit of low-grade energy at the outset. There are no exceptions. Put another way, Eroei--a sophomoric form of thermodynamic accounting--is always negative and always irrelevant. "Matter-energy" constraints count for nothing. The "monetary culture" still rules. Thermodynamics And Money
Peter Huber is executive vice president of ICx Technologies, a fellow of the Manhattan Institute and coauthor of The Bottomless Well (Basic Books, January 2005). Visit his home page at www.forbes.com/huber.