Forwarded from Nestor (reply to Julio)

Mark Jones jones118 at SPAMlineone.net
Wed Jun 13 17:59:18 MDT 2001



>
> Nobody has asked you to leave the list except Nestor. Frankly, I think it
> is good that you are here because you represent a current in Marxism that
> has to be engaged with.

It also wasn't my intention to suggest that Julio leave, and I'm sorry if I
gave that impression.

On the question of energy crises, obviously it is real and serious, altho
whether energy shortages might ever be enough by themselves to destroy
capitalism is a moot point. The US is the main culprit/victim, because it is
both very profligate and is now highly dependent on imports. The US economy
is 30% less energy-efficient than the EU and Japan, according to a recent
Deutsche Bank report, so there is plenty of room for improvement.
Conservation and increased efficiency (so called 'negawatts') would go a
long way to solving the more pressing problems of brown-outs etc, at least
in the short-term, ie the next 5-10 years. Whether that solves anything
fundamental is a moot point. Something very weird is happening to US natural
gas, in particular. Some of us have talked for years of the possibility that
natgas production may not decline gradually but 'fall off a cliff'. However,
speculation is one thing; seeing it happen is still another, and it may be
happening, because something has seriosuly gone wrong with the US natural
gas production system in just the past year, and even the energy corps like
Enron, seem a little surprised.Despite heroic efforts and a near 200%
increase in drilling, US natgas production stays obstinately flat and shows
signs of decline; meanwhile the electricity utilities have embarked on a
massive programme of electric-generator construction, which is costing up to
$200bn in the next 3 years alone and will require a 25% increase in natgas
output: and suddenly, no-one is sure if the gas is there. 90% of planned new
generator capacity is reliant of natural gas. So yes, it's serious. One may
reasonably ask how on earth it is possible for such a catastrophic state of
affairs to come about: how is it possible that the US Geologic Service, the
oil corps, the American Petroleum Institute, not to speak of the WSJ, Morris
Adelman, Mike Lynch and Greg Nowell, have been caught with their pants down
like this.

 Below is what investment banker and oil maven Matt Simmons has just been
saying on the subject of 'the perfect energy storm'.

Mark Jones
----------------------------------------------

Montreux Energy Roundtable XII
Montreux, Switzerland
May 30, 2001

Meeting Energy’s Investment Challenges: Financing Energy’s Marshall Plan

By: Matthew R. Simmons
President
SIMMONS & COMPANY INTERNATIONAL



MEETING ENERGY’S INVESTMENT CHALLENGES: FINANCING ENERGY’S MARSHALL PLAN

The world is now in the early days of a very serious Energy Crisis. Solving
this crisis will take nothing less than an Energy Marshall Plan.
Implementing such a program will take a long time. It will also be extremely
costly. There is no way to estimate any precise cost to re-create sufficient
energy capacity and also rebuild (or at least modernize) the world’s
existing energy base. Until detailed blueprints for each part of this
massive project are prepared, one can only estimate the costs involved. But
a quick glimpse easily gets into trillions of dollars. The challenges to
raise these funds will be one of the many arduous aspects of solving the
Energy Crisis. A roadblock to beginning even the financial planning aspect
of this task is that the Energy Crisis, itself, is still being denied by so
many.

There are many skeptics who argue that we have no crisis. These skeptics
say, “Perhaps California has some odd laws that now creates blackouts from
time to time. Or, parts of the USA certainly have some complex regulations
about what type of motor gasoline can be sold in each region of the country,
creating price spikes from time to time. But these issues certainly do not
spell even a US Energy Crisis, let alone one on a global crisis.” If these
were the only energy problems the world faced, then no one, other than those
living in these limited regions, should ever worry about energy’s future.
But sadly, the energy woes of California or the fears for US motorists this
summer are merely the tip of a giant “energy iceberg.” And as this iceberg
is mapped, the whole world will soon appreciate how serious our global
energy problems really are. In essence, the world has now run out of spare
energy capacity. This problem is not simply an oil problem or a problem for
both oil and natural gas. It extends across the entire face of energy,
ranging from the ability to expand our use of electricity to natural gas and
oil. It is the convergence of all three energy sources that make this Energy
Crisis a true “Perfect Energy Storm.”

Much confusion and denial exists about what this Energy Crisis is all about.
Too many people who hear that there is no spare energy capacity think they
heard, “there is no more energy.” This is not the case. The world has
abundant energy resources to fuel economic prosperity for generations or
centuries. But these energy resources tend to be locked deep in the earth
and are often also under thousands of feet of water. Futhermore, the
resources tend to be located thousands of miles away from where energy is
consumed. These resource constraints are not new, though they have become
far more challenging in the past decade or so. It is this complex energy
infrastructure that is now at full capacity. This energy infrastructure can
and will be expanded. But getting this job done will take years to
accomplish, as each piece of the gigantic energy mosaic needs to be
designed, built and installed. Adding more energy capacity takes a long time
and cannot be done in small steps.

Most of the capacity additions need to be done in big blocks. Take a
refinery or a power plant for instance. It would be easy to expand the
capacity of refinery if mini-energy factories could be built in every energy
consuming community. But the units all need to be large. And creating them
takes years not months to accomplish. If we really are going to solve this
crisis, the amount of additional energy capacity needed is enormous. Not
only do we need to build enough capacity to meet energy demand growth but we
also must restore the energy reserve margin that allowed the world to enjoy
reliable, dependable and affordable energy for so long.

If the world only needed to add 10% more capacity, it would still take at
least a decade to accomplish. But adding only 10% would merely create the
ability to grow energy demand by 3% per annum for three years and three and
a half months before we were totally out of spare capacity once again. An
expansion of at least 30% needs to be undertaken and once this task is
finished, we can never again let energy capacity additions come to a halt,
unless we are certain that the age of energy use is finally drawing to a
close. Some argue that the world does not need 30% more energy capacity and
it is wasteful to build even a ten-percent cushion of energy insurance.
These are the same fuzzy-thinkers that applauded the way energy became a
just-in- time business. They cheered as the world’s petroleum stocks were
being used up as evidence that energy had finally become as modern in its
management skills as Wal-Mart had. Even as the last few precious percent of
our energy reserve margins were being gluttonously consumed, the exercise
was described as “taking the fat out of our energy complex.”

What these poor energy planners missed is that energy is not just a
commodity. Energy is our economy’s equivalent of oxygen. Like oxygen for the
human body, energy makes every aspect of our economy work. The human body
dies without oxygen, and without energy, our economy simply stops. Evenly
balancing energy supply to keep pace with energy demand is a tricky art
form. Adding even a percent or two of energy supply can take years, while
growth in energy demand occurs in an almost fickle fashion. Energy demand
growth can spurt by 4 to 5% in a matter of 12 to 18 months. Weather, which
is still one of the world’s most unpredictable things, can also impact
regional energy demand by changes of 20 to 50% in a single season. Without
an energy cushion to absorb these volatile demand swings, the inevitable
results of these demand surges are electricity blackouts and shortages of
gasoline and heating fuels. Our developing nations have coped with these
energy limits for years, but they are painful, extremely costly and wreck
economic prosperity. However, blackouts and energy shortages are simply
unacceptable for the highly developed countries of the globe. And as
California will unfortunately discover, once you lack spare energy capacity,
the days of economic prosperity are over until it is once again created. The
task of recreating spare energy capacity is as real and important to get
done as defending a nation from an invading army. The task might be even
more difficult to accomplish. Rebuilding and expanding our energy complex
involves thousands of individual energy components. It is like building a
wall of thousands of energy bricks. And each of these thousand energy bricks
is made up of hundreds of thousands of specific energy parts. Expanding
capacity in the oil and gas arena has to begin with new land-based seismic
crews and offshore seismic vessels, along with computer laboratories and
complex workstations. Expansion at the wellhead involves hundreds of
individual parts, all highly customized to a particular type well. Each
component has to be built and installed in each well bore before
hydrocarbons can ever be unlocked from their energy vaults and brought to
the surface of the earth. Then every pipeline and loading terminal needs to
be rebuilt and expanded along with the world’s tanker fleet, the unloading
terminals, the tank farms and pipelines just to get crude oil to the world’s
refinery system.

The Composite Catalogue is the world’s most complete energy buyers’ guide to
the upstream part of the oil and gas world. There are over 50,000 individual
“parts” in this buyer’s guide if you include items like a “Drill Bit” as a
part. Yet in the drill bit category, there are actually over 50 very
different types of bits. Every one of these parts is one miniscule piece of
the upstream oil and gas side of this massive energy wall. Expanding
electricity capacity begins at the mine mouth for coal-created kilowatts or
the uranium mines for nuclear kilowatts. Then the complex logistic
infrastructure necessary to bring this feedstock to the power plants capable
of turning this into valuable kilowatts must also be rebuilt. Once kilowatts
are created, they then need to travel across an extremely complex network of
transmission lines. Again, this network of wires and transformers are all
part of what needs to be expanded by 30% and also simultaneously rebuilt.

Every one of these components needs to be expanded and rebuilt. They all
represent the infrastructure that allows the world to consume over 180
million barrels a day of oil equivalent energy each day. Just creating a
master plan so that this massive investment can begin is almost
mind-boggling. Then doing the detailed engineering drawings for each aspect
of this plan could consume billions of man-hours of scarce engineering
talent. Merely estimating how long it will take to create this energy
blueprint begins to define why it will take at least a decade or more to
complete this energy expansion. There is insufficient factory capacity today
to even start manufacturing many of the badly needed individual energy
parts. And the scarcest resource of all as the world begins what could
become the most costly investment task undertaken is energy people.

The last time such a costly and massive undertaking was done, which also had
a similar degree of urgency, was when The Marshall Plan was organized as a
means to systematically and urgently begin the re-building of Europe after
World War II. This remarkable feat not only worked, but also became perhaps
the finest example of how the public sector can work hand-in-hand with the
private sector and the labor movement. The government money spent on The
Marshall Plan ended up being less than 1% of the total cost of rebuilding
Europe. These government funds were judiciously used on an eyedropper basis
to grease certain skids or break bottlenecks so the private sector could get
the job done. When Secretary of State George Marshall announced the need for
such an effort at Harvard University’s 1947 Commencement, he warned that the
world had become more unstable than it was in 1939 and without such a crash
program, the economies of both Europe and the United States would likely
sink into a sickening depression again.

Because the Marshall Plan worked, it not only led to the longest stretch of
economic prosperity Europe and America had ever known, but it also created
the beginnings of a globalized world economy and peace throughout Western
Europe for the first time since these nations were established. The Marshall
Plan, in my opinion, is a great template for how the world goes about
solving our energy crisis. As tempting as it is to simply leave the task to
the free market to solve, it would take too long. And the free market can
often operate in a capricious fashion. The burden of expanding and
modernizing our energy systems has to be undertaken not only by the energy
private sector but the public sector has to play a role, too.

Another key aspect of the Energy Marshall Plan is to assemble the most able
energy experts to help the poor countries of the world construct systems of
clean, modern energy. If the true environmental problems of the globe were
properly prioritized (like when the FBI begins solving a crime), the top ten
issues would likely all be anchored around poverty and we all know poverty
and pollution always go hand-in-hand. Like the task-forces of volunteers who
mapped out how Europe needed to get rebuilt, the Energy Marshall Planners
could make the biggest impact in cleaning up our globe since the
environmental movement first began. Getting all this done will be extremely
expensive. Can trillions of dollars be raised to finance this Energy
Marshall Plan? There has never been a worthwhile project that stopped
because of lack of funds. Money flows to projects that work. So the key to
insuring the financing can be raised is to make sure each brick of this
thousand brick energy wall works.

Making sure each part works means that each individual energy project has
“connected the dots” to insure it is a seamless energy system. It does no
good to build billion dollar power plants if the needed feedstock turns out
to be in short supply. Nor does it help to generate major additions of
kilowatts if a transmission shortage prevents them from being delivered.
Each energy dot needs to be connected or many badly needed energy solutions
will not work. Spot market projects worked when the world was awash in spare
energy capacity. Now it is gone, all the “dots” need to be connected, from
the location of the primary energy resource to the point where energy is
consumed. Otherwise, a multi-billion dollar project might grind to a halt
because one simple “dot” failed to get connected. The other requisite for a
successful energy project is the creation of a sufficient and predictable
return on the capital needed. To make this happen, energy prices need far
better stability and predictability than we had over the last two decades.
We might also need energy prices much higher than today’s.

This we will not know until the rough cost estimates of this program are
completed. One thing that is certain is that the energy prices of the past
decade will never come close to paying for any aspect of the Energy Marshall
Plan. They were simply too low. Price out any aspect of our energy complex
on the cost of building a complete energy system and the returns created
from “historical norm” energy prices are almost nil. The easiest way to
insure we never solve the Energy Crisis is to try and drive down future
energy costs. Unless they rise to a level to create attractive financial
returns, the projects will simply not work. Most energy consumers will not
welcome higher energy prices but they have to happen. It is far better for
consumers to pay realistic energy prices and have reliable energy than to
have undependable “cheap energy”.

Higher energy prices also usher in many already developed technologies to
create genuinely clean coal and even more energy-efficient technology that
has historically been hampered because energy prices were so low. It is time
to stop pretending that energy is almost free. It is extremely costly to
produce and the most precious aspect of our global economy Finally, the
industry needs to back away from pricing energy on a spot market basis, set
by the trading action of speculators in commodity pits using 90% leverage
and only 10% real money. Let these pits be energy casinos but they cannot be
responsible for setting future energy prices. If the volatility this casino
pricing creates continues, then the cost of the Energy Marshall Plan needs
to include financial returns equal to what is demanded in venture capital to
justify the inherent risk involved. There has to be a better way to price
“industrial oxygen.”

The world can solve its Energy Crisis. It will just take a long time and
massive amounts of money. The sooner it starts, the faster the job will be
accomplished. And when it is finished, the world needs to take a blood oath
to never again fritter away spare energy capacity by calling it glut. Energy
is truly our industrial oxygen. We need to grow up and begin treating it in
as precious a manner. The stakes are high. It we get the Energy Marshall
Plan launched and solve the serious problems, it unleashes decades of future
prosperity. But, if we fail to deliver, we risk destroying our economic
prosperity. Thank you for your attention to this extremely serious topic.






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