Figaro Magazine is a supplement to the weekend edition of Le Figaro (Paris). -- On Saturday, it published an analysis by Marc Durin-Valois, translated below, of the impact of the recent hurricanes on the world economy. -- Durin-Valois is a 46-year-old writer whose L'Empire des solitudes ['The Empire of Loneliness'] won the Prix La Rochefoucauld for a first novel in 2001. -- Durin-Valois began his career as a journalist writing on terrorism, third-world development, and money-laundering. -- He wrote for and edited periodicals treating questions of economics and strategy, then taught at Jussieu. -- He is the founder of the review Pouvoir d'entreprise. -- Durin-Valois's conclusion in this article: Hurricane Katrina is ushering in the end of the Age of Oil....
[Translated from Figaro Magazine (Paris)]
STORM OVER OIL
By Marc Durin-Valois
** Hurricane Katrina set on fire a market that was already tense as a bow. Now Rita has re-ignited the embers, and the entire world economy could suffer. An overview of the situation. **
Figaro Magazine (Paris)
September 24, 2005
Calamitous Hurricane Katrina, Rita's big sister, was more than just the greatest natural disaster the United States has ever seen. It sent out a shock wave that is now threatening the entire planet. How can it reach the rest of the world? Through the price of a barrel of oil, which has just nimbly leaped over the $67 bar. And all the experts in oil strategy are saying out loud and clear: the hurricane hit at the worst possible moment, in the worst place possible. Namely, in one of the principal production and refining zones of the United States, which already imports 60% of its colossal consumption from abroad.
"The region devasted by the hurrican represented about a quarter of American production. And the country's biggest refineries were hit," says Christophe-Alexandre Paillard, one of France's oil experts, a civilian administrator and one of the three co-authors of Géopolitique du pétrole ['The Geopolitics of Oil']. "And the Americans have made the investments they needed to make to increase their refining capacity. Their aging plants were working at full capacity. So there was nothing to cushion the impact of the cataclysm."
The pressure is all the more intense in that the United States always plays a major role in the oil market. It consumes a quarter of world production and half of all planet's gasoline.
"The disaster shut down 6% of American industry's refining capacity," notes Olivier Rech, an economist with the Institut français du pétrole ['French Oil Institute']. That's a lot, since the margin of global excess capacity is less than that 6%. That's what's causing the extreme pressure on refined petroleum, especially fuels, which make up 56% of the world's total consumption of petroleum."
THE GREAT BLACK GOLD MONOPOLY GAME
Since one misfortune always accompanies another, the market were just at the particularly delicate moment when American industry has to switch from summer production (concentrated on gasoline for cars), the so-called "drive in" period, to winter energy (dominated by domestic fuel oil). It would be hard to imagine a worst oil time for a catastrophe of this magnitude.
"It hit the U.S.'s nervous system, and, as a result, that of the Western countries, before spreading to the entire world," says Olivier Rech.
The worst thing about it is the structure of the global petroleum market. In great planetary black gold Monopoly game, you don't have to look long to find the countries that hold the best cards. A handful possesses among them 80% of reserves -- Saudi Arabia, Kuwait, Iraq, Iran, Russia, and Mexico. This little "club of six," upon which the energy future of the world depends, has one particularity: it refuses foreign investments (except Iran, on a case-by-case basis, in the form of specific contracts), preferring jealously to rely on national companies to exploit the precious raw material. "In Mexico, this investment ban even figures in the Constitution," notes Christophe Paillard. And local efforts at prospecting and exploitation are markedly inadequate, medium-term, to the task of responding to ever-increasing global demand.
All this at a strategic moment when the Asian countries are recording a significant increase in their energy needs. China is often cited (producing 3.5 million barrels a day but consuming... twice that) as the chief new buyer in the market. But Malaysia, Thailand, and above all India have also become extremely large consumers. The result: the market is as tense as a bow. Outside of the Katrina effect, some experts foresee a spectacular increase in the cost of a barrel of oil in coming months, reaching $85 next January, and more than $100 a year later! The American firm Goldman Sachs has even mentioned $105 medium-term. Since the hurricane devastating Lousiana, expectations continue to rise, encouraged by speculators and other traders who are moving in. And in case of new calamities like Rita or eventual geostrategic complications involving Iran, all bets are off... The expected evolution of refined petroleum on the global market is even tighter.
The paradox of this gigantic global show-down between supply and demand, which day after day looks for 500,000 barrels more to attain a precarious equilibrium, is that it gives a few "exotic" countries the role of arbiter: Nigeria (leading African producer with 2.5 million barrels a day), Ecuador, and Bolivia, for example are emblematic of these new emerging oil nations. Because there is just about no way to resolve matters by increasing supplies. OPEC sometimes produces up to 30.2 million barrels a day, maxing out its capacity, beyond its own quotas. Even the decision announced on Sept. 20 by its Kuwaiti president, sheik Ahmad al-Fahd al-Sabah, to make available to the market on demand 2 million additional barrels a day may soon show itself to be only a drop of water in an ocean of black. What's more, companies know that this would be a low-quality crude, as though they were scraping the bottom of the oilfield...
The structural problem remains unaffected. Because non-OPEC producers are likely to pay for their own lack of investments in the next four to five years: according to the International Energy Agency, Russia, China, the United States, Mexico, Kazakhstan, Azerbaijan, and Norway, which furnish 60% of the market for crude today, will see an inevitable decline in production.
WHEN OIL STRATEGY BECOMES MILITARY
Since the Kissinger years, the link between arms and oil no longer needs to be demonstrated. The new deal brings with this interesting geostrategic consequences. More and more persistent rumors have it that George Bush is not altogether unhappy about the present pressures on oil. "They legitimate in public opinion a military strategy aiming to secure oil supplies in the Middle East," notes an observer. "All of a sudden, the Iraqi adventure seems less absurd in this context." For Americans, that is, imbued with an automobile culture, unable to imagine questioning this essential element of the 'American way of life.'
What is gained on one side is lost on the other. The present pressure also reduces Americans' room for maneuver with respect to an offensive on some of the "axis of evil" countries like Iran (12% of world reserves and 15% of natural gas) or Syria. Otherwise, the world oil markets might catch fire and provoke a major worldwide recession. "As soon as pressure on the price of oil drops, the United States can be expected to recover its aggressive desires, which are being fed by new weapons," notes a military specialist. A real race against time is under way, especially with respect to Iran, which is going all out to complete its nuclear program, even as it creates confusion through contradictory declarations.
But the present overheating above all casts doubt on the worldwide economy. By raising the costs of transport, slowing trade, increasing costs, disrupting trade balances and inflation, part of growth could be threatened. In a sign of the nervousness of authorities, the French government hurriedly created a working group on oil problems... And the threat of new taxes on the windfall profits of oil companies, withdrawn immediately by Thierry Breton, the minister of the economy, signals the nervousness of those in power on the subject of fuel. The minister of the economy also said that "all factors are in place to keep oil at a high price in the years and decades to come."
A FOURTH INDUSTRIAL REVOLUTION?
There is just about no sector that is insulated from the danger of increased costs, with ripple effects on the automobile industry, agro-business, the chemical industry, pharmaceuticals...
"In our hydrocarbon society," emphasizes Christophe Paillard, "12% of the products are, in addition, directly derived from petroleum, from plastics to fertilizers. A cost increase in a raw material automatically increases the cost of food, for example."
Other analysts are less pessimistic, because of the gradual nature of the price rises, which are completely unlike the brutal shocks of 1973 or 1979.
"Those who profit from the oil manna have the time to recycle their capital toward the Western countries without drying up our liquidity," notes Olivier Rech. "It's this time element that's bailing us out. Besides, to reach 1979 levels, the price would have to reach $90. We're still far from that."
But it's still true, as all are aware, that the time of "all oil" is doomed to disappear little by little. Hence the call by the International Energy Agency to consumer states: economize energy and diversify! To put it plainly, we are thought to be at the dawn of a major industrial reformation, even a "fourth industrial revolution": the one that will cause us to abandon our hydrocarbon economy for a future that associates mastery of our oil dependency and recourse to energy substitutes. The IEA is, moreover, recommending a variety of measures: reduction of speed limits to 90 kilometers an hour (about 55 mph), free public transit, remote work sites, all-out research on substitute forms of energy, etc. Thus in an upcoming work [The Long Emergency], economist James Howard Kunstler evokes the end of oil as the real challenge of the 21st century. With, as a corollary, heartbreak for the lovers of American beauties: the death of the automobile utopia.
Translated by Mark K. Jensen
Associate Professor of French
Department of Languages and Literatures
Pacific Lutheran University
Tacoma, WA 98447-0003
Home page: http://www.plu.edu/~jensenmk/