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The Wholesaler - Columns: December 2011: Morris Beschloss

Former Shell Oil CEO warns of upcoming

U.S. energy grid breakdown

PVF and economic analyst emeritus

In a dramatic warning of upcoming nationwide breakdowns of America’s energy capability, John Hofmeister, chairman of Citizens for Affordable Energy and former Shell Oil CEO, stunned a packed Houston audience of PVF Roundtable members at the city’s Hess Club in mid-October.

This group, comprised of manufacturers, distributors, end users and product specifiers of international energy-oriented products meets quarter-annually to focus on the state of the industry and its ongoing ramifications.

Hofmeister, whose Washington, D.C.-based action organization strives to enlist millions of Americans to support a new centralized energy agency to circumvent a 40-year deadlock of the politicization of this crucial bedrock of America’s electric power and transportation network, described the current status of the nation’s Internet as approaching a rolling breakdown in the next five years. He attributed this primarily to the refusal of U.S. government action to confront an aging energy production and facilitating capability so critical in the functioning of America’s still world-leading economy.

Describing the mid-20th century development of this nation’s previous electrification and gas energy infrastructure as rapidly deteriorating, Hofmeister blamed presidents and members of Congress for refusing to confront this inevitable disaster in the making.

The former Shell Oil CEO went further in blaming the multiple trillion dollar renewable energy programs of ethanol, solar, wind power and geothermal, which he says could, at best, provide 2% to 3% of the U.S.’s needs to support a population growth exceeding the current 312 million plus.

Hofmeister’s solution is to enroll millions of Americans in support of a professional, centralized agency divorced from political interference, akin to the independence of the U.S. Federal Reserve Board. As an exemplar of the success of such a focused strategy, he cited China’s aggregation of world oil supplies and upgrading of a 21st century power and transportation infrastructure. The intrepid Chinese are accomplishing this through contracts for an ownership of worldwide energy sourcing.

He concluded his stirring presentation by blaming the “destructive” paralysis imposed on an unrestrained Environmental Protection Agency by imposing its “fanatical” will on all aspects of America’s attempts to urgently bring its increasingly deteriorating energy network up-to-date. It’s Hofmeister’s hope that a growing citizen-led outcry will reverse this trend.

Natural gas production vaults U.S. to potential global leadership

Only a few short years ago, the U.S. was experiencing a drastic natural gas shortage and was not able to supply the expanding electric power generating utilities, who were attempting to switch as quickly as possible from the cheaper but effluent-producing coal.

This accelerating shortage had driven up the price of units per one million Btu to $15 in 2005, with no indication that this shortage would be assuaged. Much of natural gas deposits were imbedded in large swaths of land owned and controlled by the federal government. Even areas available for leasing were deep down in dolomite rock areas, with only high-cost drilling extraction in those areas available, with even the high mid-teen pricing making such a recovery expedient unprofitable.

Only the Northeast U.S. quadrant found satisfactory accessibility available from Canada, enough to get it through the cold winter. But then the fracturing (fracking) technology, which had been around since the mid-twentieth century, had evolved to the point where it could be used to crack open the dolomite-covered deposits. This breakthrough, combined with the lower extraction costs and the ability to also liberate oil simultaneously, gave new life to opening the practically unlimited deposits, including the Rocky Mountains, and not yet available on federal lands.

In the past five years, the growth of fracking has been revolutionary. It’s estimated that the natural gas potential throughout the U.S. is plentiful enough to satisfy the nation’s growing need for natural gas for power generation and even the potential usage for future transportation expansion for the next 100 years.

Already, the New York–Pennsylvania Marcellus Range and the North Dakota/Montana Bakken Belt are furiously pumping up natural gas. This is only the beginning, as other discoveries have been announced almost monthly. Plans for liquid natural gas importation and the docks needed to import it from Algeria, Qatar and even Russia have been discarded.

Even the animosity of the EPA bringing up new “straw men” in ongoing opposition, has been staid in light of White House pressure during the election year heat-up. An optimistic projection of future natural gas production even estimates major American worldwide exports, which would provide the U.S. with eagerly sought-after trade deficit reduction.

Oil prices headed for long-term climb

Just recently it looked like gasoline prices and other oil derivatives were headed for yearly lows, as the approach of winter seemed to justify the dropping costs of Cushing, Okla., inventories, primarily comprised of West Texas Intermediate “light” crude. However, this seemed to be contradicted, as this focused supply, primarily stored for U.S. consumption, experienced further unexpected drops.

While professional observers attributed this turn of events to technical factors, such as a switch to heating oil for the oncoming winter, the global impact of geopolitical events on world oil availability is being lost. A one-day increase of 5% in late October can better be explained by major North African and Mideast geopolitical changes.

The historic parallel to the current Arabic-centered convolutions recalls the Saudi 1973 –74 oil boycott against the Western nations, especially the U.S., in the wake of the Arab-Israeli October war.

Premature optimists believe that the toppling of Egypt’s Mubarak, Libya’s Ghadaffi, and Tunisia’s Ben Ali, together with heavy bets against the survival of Syria’s Bashar Al-Assad, would lighten up oil availability, freed of the harsh control of monolithic dictators.

But, just as events 40 years ago proved, when Iran’s Shah opportunistically allied himself with Hussein’s Iraq and the Saudis to vault the per barrel price from $2 to $10, a confluence of dangerous events is emerging as a force of returning to the $100, and eventually higher, price per barrel of light, sweet crude.

The coincidental election of Shariah-law supporting governing bodies in Tunisia, likely followed by similar events in Libya and Egypt, will allow Iran to dictate world prices. The unwitting facilitator in this case will have been President Obama, as no American troops will be left to keep Iraq from falling under Tehran’s heavy hand. Iran has always been the ultimate hawk in ultimate oil pricing, which it desperately needs to ameliorate its deteriorating economic condition.

Long-term investors, unlike professional energy observers, put heavy weight on forthcoming geopolitical reverberations and allocate their funds accordingly. In the annals of historical developments, such prudent long-term analyses have more often than not proven correct, resulting in money well spent by risk-prone investors.

U.S. global chemical exports continue to set records

Although little attention has usually been focused on the U.S. chemical industry, it dipped less than other major sectors during the ongoing global recession. In fact, America’s chemistry-oriented capability has been a driving force behind the entrepreneurial activities that have driven new product development, a major factor in the U.S.’s surprising technological growth. This includes such diverse innovations as solar cells, therapeutic drugs, water purification systems, etc.

One out of every five patents issued is based on chemistry-related technology, according to the American Chemistry Council, while almost 10% of America’s rebounding export sector is chemical-based.

An ancillary factor is the U.S. chemical industry’s future growth access to the burgeoning national shale gas boom. This will lead to more competitive costs and making future contributions to energy efficiency, according to the American Chemical Council.

Regarding export activities, direct chemical-based products have grown astronomically in the past 20 years. With less than $45 billion annually in 1990, it reached a record $180 billion in 2010, with only a slight downward bounce in 2009.

While the overall stagnation of the U.S. economy and its minuscule growth, together with intractable unemployment, has grabbed the headlines, little has been dramatized regarding this important sector’s headway.

Indisputably, the U.S. chemical industry and such industrial giants as Dow, DuPont and BASF have become key to America’s continued dynamics as a world leader. It is one of the few components in the overall dismal picture painted by those looking at America’s future opportunities with discouragement. However, the availability of technically-trained participants has become an increasing problem. Many of those graduated from U.S. universities are of foreign origin and have increasingly chosen to return to their home nations, which have been active in building a budding chemical potential.

Canada’s Harper warns of ‘no delay’ in Canada-U.S. oil pipeline

In a relatively unpublicized interview with Business Week magazine, Canada’s Prime Minister Steve Harper delivered an ultimatum to the United States regarding U.S. approval of the Keystone XL pipeline, destined to move four million barrels of oil a day by 2025 into U.S. refineries.

What has become a major sticking point in U.S./Canadian relations is the hesitancy of the Obama administration to culminate this agreement by the end of the year. The drawback in initiating this massive project is the fierce opposition by the EPA and its head, Lisa Jackson.

The EPA, which has never lost the opportunity to curb the previously dwindling output of domestic fossil fuels (oil and gas) production threatens White House demonstrations. They’ve even run a threatening full-page ad in the New York Times under the label “Tar Scandal Watch”. With nuclear power development, except on-site expansion, all but dead, knowledgeable observers have put a termination point on new nuclear site development. With the Japanese earthquake/tsunami catastrophe on everyone’s mind, the nuclear option has never been more unacceptable.

Deep-sea drilling in the Gulf of Mexico has also come to a standstill, as last year’s drilling rig explosion has frightened the administration from approving a Gulf drilling revival as yet. What, however, is not highly publicized, is the nationwide dry land production, which has reached the highest level in the past decade. With the EPA on a warpath against oil and natural gas production (especially the revolutionary fracking method), the Obama administration finds itself stuck with an impotent renewable energy alternative that has been rejected by energy experts as barely marginal in replacing fossil fuels.

Canada’s Harper has made it crystal clear that a rejection of the Canada/U.S. oil pipeline will turn the bulk of Canada’s oil potential toward China and other Southeast Asian booming economies.

With 30,000 construction jobs and a major closing of the energy gap at stake, it’s a near certainty that placing the decision in Hillary Clinton’s State Department is a prelude to White House year-end passage of oil pipeline approval.

“Keystone Copout” questions Administration’s job creation seriousness

The shocking recent news that the Administration has abandoned the trans-Canada Keystone XL pipeline, is a crushing blow to the almost immediate employment of 30,000 to 50,000 construction workers, and an additional million barrel a day infusion into America’s energy needs, as well as cheaper gasoline prices in 2012 and beyond. It’s obvious that job creation in a sector that suffers the highest unemployment rate (construction) offers no leverage.

The $7-billion project, which has been hanging fire since 2008, had received the U.S. State Department’s tentative go-ahead, since its investigation disclosed “no significant impact” on the environment. However, after having given the final decision to the State Department for go or no-go, Obama tipped his hand early in November by calling on the U.S. Inspector to review the tentatively approved process, and that he personally would render the final decision. This process assures that no decision will be reached before next November’s general election.

It’s obvious that the environmentalists, with 8,000 activists surrounding the White House earlier in the week, carried more clout than Richard Trumka, AFL-CIO boss, whose union adherents pressed for the pipeline green light.

The lame excuse that the pipeline would cross the Nebraska Ogalala Sioux Reservation and a giant aquifer carries no merit, since 25,000 miles of pipeline already crisscross that area.

The most serious consequence emanating from the President’s literal dismissal of a pipeline that would greatly expand U.S. refining activity is that it comes after the Canadian Prime Minister Steve Harper’s stern warning that any pipeline startup delay later than December 31 would result in the sale of additional tar sand production to those willing to receive such shipments with no strings attached.

This means that the Canadian Government, starting immediately, since the delay announcement quashed any further discussion, would let Trans-Canada simply load the oil on railroad cars for trans-shipment from British Columbia to other countries, primarily China. The Chinese have already helped finance rail lines and an expanded Vancouver port for just such an expedient. In effect, the President will have speeded up China’s evolution into the world’s leading and oil-independent economy, sooner than later.

Morris R. Beschloss, a 55-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst emeritus for The Wholesaler.

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