Offshore Drilling: Do We Need It? How Much?

August 5, 2008

 There’s been a lot of talk about the candidates’ positions on offshore drilling for oil in the past week.  Both candidates used to oppose it.  Now McCain is gung-ho in favor of it.  Obama has indicated a willingness to allow it to a limited extent if necessary for passage of broader energy policy reform.  All of this talk has been in the context of reducing gasoline prices.  But no one is talking about how this fits into the broader context of overall economic and environmental goals.  The following are three inter-related goals and issues:

  1. The stated goal of breaking our dependence on foreign oil.  This is not only a national security issue but a critical economic issue as well.  Our annual $300 billion trade deficit in oil (not to mention our $500 billion trade deficit in manufactured goods) is destroying the value of the dollar and our economy along with it.
  2. Regardless of how you feel about the issue of global warming, it has already been decided that it’s real and that America needs to reduce its carbon emissions by 50% by the year 2050.  The only practical way to do this is by reducing our burning of fossil fuels by  50%.  Yes, it may be technologically feasible to continue burning while removing CO2 from the emissions, but then what?  Where do we store all of the CO2?  It’s unsustainable, much like the problem with nuclear power.  (What do we do with all of the radioactive waste?)  In the final analysis, the only sensible approach is to cut our burning of fuel.  This includes not only oil but natural gas, coal, wood and trash. 
  3. Although the government has no stated population policy, it has an unwritten policy of expanding the U.S. population by about 1% per year, primarily through immigration.  In light of the above two priorities, can this be allowed to continue?

The environmentalist in me cringes at the thought of visiting the beach and seeing a horizon spoiled by oil wells.  (Visit a beach in Texas to see what I mean.)  But, being an engineer, I recognize that there may be a need for offshore drilling.  I decided to calculate just how much if any would be needed, and I’d like to share with you the results. 

Currently, the U.S. consumes about 21 million barrels of oil per day, the vast majority of which is burned for transportation and for stationary applications like power generation, home heating, etc.  Only about 8 million barrels per day is produced domestically, and that’s declining by about 2.3% per year as reserves dry up.  (Our current reserves are only sufficient to meet our domestic needs for ten years or less.)  We currently have over 700 wells in the Gulf of Mexico.  For the purpose of my calculation, I assume that we could conceivably build another 700 wells along the east coast and another 700 wells along the west coast.  I also assumed that each well could produce, on average, 500 barrels per day, a generous figure.  And all of this assumed that there are actually offshore oil fields that could be harvested.  I decided to plug these parameters into a spreadsheet and experiment with assumptions to see what combination of assumptions would enable us to meet these goals.  Here’s my spreadsheet, followed by a summary of conclusions:

Offshore Drilling

Conclusions:

  1. Both goals are achievable.  Of the two above-stated goals, it is the elimination of oil imports that is, by far, the more difficult objective to achieve. 
  2. Achievement of both goals by 2050 is impossible without immediately implementing plans to:
    1.  drill offshore as fast and as much as possible, bringing 100 offshore wells on line by 2018 and 50 more wells every year, reaching a maximum of 1400 wells, 
    2.  reduce our per capita consumption of oil by 3.6% per year and by almost 80% by 2050, and
    3. reduce our population by 0.5% per year from today’s level of about 305 million to 247 million by 2050.  Continuing reductions beyond that will likely be necessary. 
  3. All of these assumptions are extremely aggressive if they are achievable at all. 

This exercise really drove home for me just how dire our situation is.  We can’t meet our goals by simply cutting per capita consumption, not without driving our standard of living down to match that of 3rd world countries.  And it’s simply impossible to drill our way out of our problems, but it’s also impossible to solve our dependency on foreign oil without it.  Achieving both goals is simply imossible without immediate and dramatic changes to our immigration policy and without new programs designed to further reduce our population. 

To solve these probems is going to require action and dedication by our leadership the likes of which this nation has never seen.  By comparison, putting a man on the moon was child’s play.  We have to attack the problems of per capita oil consumption, domestic oil production and overpopulation with a war-like mentality where defeat is not an option.  I really wonder if our democracy is capable of this kind of action, or will we be bogged down in partisan arguments over details and minutia.  Our very quality of life hangs in the balance.


7th Straight Month of Job Losses in July

August 4, 2008

The Labor Department released its employment report on Friday for the month of July and the numbers were grim once again. Another 51,000 jobs were lost from the economy, inluding losses in manufacturing, construction and services. This is the seventh straight month of job losses, bringing the total for the year to 463,000.

Not mentioned in the report is the fact that, thanks primarily to our extreme rate of legal immigration – a policy used by the government to keep labor in a state of over-supply and keep wages depressed – the labor force grew by about 150,000 per month. So, year to date, our economy is now 1,513,000 jobs behind where it needs to be to keep unemployment from rising. This has added about 1.0% to our unemployment rate, which jumped to 5.7%. (It’s actually much worse, but the government uses gimmicks to make the number more palatable.) Separately, the government reported that weekly jobless claims soared to 448,000. Multiply that by 52 weeks and you have an annual rate of 15.5% of the labor force filing for unemployment every year – almost one out of every six workers. That’s a much more accurate picture of how bad job prospects are.  Take a look around at the five people working around you at work.  Odds are, one of you will be visiting the unemployment office during the next twelve months!

As our population continues to grow beyond the optimum level – the level at which per capita consumption begins to decline out of the need to conserve space as people are forced to crowd together (as explained in Five Short Blasts) – matters will only get worse. Unemployment will continue to rise and wages will fall further behind the cost of living. Hope for a better life for your children and grandchildren becomes more of a fading memory.

If you’re worried about the direction of our economy – as everyone should be – you really need to read my book, Five Short Blasts, if you haven’t already.

With the auto manufacturing sector now in a state of total collapse and construction declining further, look for more jobs losses in August and another rise in unemployment to at least 5.8%.


I’d Trade This Economy for the 1970s in a Heartbeat!

July 16, 2008

http://www.reuters.com/article/topNews/idUSN1426984520080714?sp=true

This article appeared a couple of days ago and I can’t let it pass. The assertion that this economy is comparable to the 1970s is way, way off the mark. Trust me, I entered the civilian work force in 1974 and remember vividly the conditions then. Today’s economy is far worse.

For many Americans this feels like the worst economic crisis in their lifetimes, and some leading investors are starting to say they may be right.

… Most comparisons turn to the low growth, high inflation, weak dollar and soaring energy prices of the 1970s, but this time with a housing crisis and spiking commodities prices thrown in, all threatening a prolonged recession.

“It is the most serious financial crisis of our lifetime,” said billionaire investor George Soros, noting a growing effect on the U.S. economy as a whole, rather than just financial markets. “It is an idle dream to think that you could have this kind of crisis without the real economy being affected.

… Economist Jeffrey Sachs, who advised Eastern European governments after the fall of communism, also compared it to the early 1970s, which he said noted led to years of slow growth and economic difficulty.

“The ’70s were pretty bad,” Sachs said. “There were serious dislocations in the world economy. It was very tough and I hope we don’t go through that again.”

Younger people who didn’t live through the 1970s would probably read this stuff and think that it was really bad.  Let me tell you, I’d trade today’s economy for the 1970s in a heartbeat!  Here’s a comparison, based on my personal experience, to illustrate why today’s conditions are so much worse. At the time I entered the work force in 1974:

It was at the height of the Arab oil embargo, and I paid 45 cents per gallon for gas. Adjusted for inflation, that’s only $1.93 per gallon today. Instead, we’re paying $4.20 per gallon.

I was hired into a company from which I would retire thirty years later with a nice pension. In 1974 it was unheard of for a corporation not to offer a pension plan and full health coverage. Try finding that today.

My final year at Notre Dame cost just over $3,000. That’s less than $13,000 in today’s money but that same education today now costs over $40,000.

I was able to cover half of that tuition with a summer job making $3.65 an hour as an unskilled laborer working for a fence company. That’s $15.62 per hour in today’s money. How many summer kids are earning that kind of money now?

In 1974, U.S. per capita consumer credit was about $3800 (in 2005 dollars). Today it is about $8,000.

In 1974, our national debt was about $500 million, or about $2 trillion in today’s dollars. But today our national debt is approaching $10 trillion.

In 1974, our national debt per capita was about $10,000 (in 2005 dollars). Today, in 2005 dollars, it’s about $30,000.

In 1974 we had a trade deficit of about $4 billion, or the equivalent of about $17 billion in current dollars. Today, our trade deficit is approximately $750 billion, eliminating approximately 10 million jobs.

In 1974, we had a population of 213 million and were only slightly dependent on foreign oil. Today our population is 306 million and we are dependent on foreign suppliers for about 60% of our oil, giving them a stranglehold on our economy.

When you hear someone say that things are better today, or no worse than they were during some previous decade, ask someone who lived it whether or not that’s true.  I’m sure that someone who lived through the Great Depression would tell you that today’s economy is better, but I doubt that anyone since then would make that claim. 

What’s scary is that our economy has been so badly eroded by decades of enormous trade deficits that it could easily collapse into a situation in which the 1930s would look like the good old days.


More Job Losses in June

July 9, 2008

http://www.reuters.com/article/companyNewsAndPR/idUSN0345446720080703?sp=true

The Labor Department released its employment report on Thursday and the numbers were grim once again. Another 62,000 jobs were lost from the economy and, were it not for the government adding 29,000 jobs, the picture would have been even worse. This is the sixth straight month of job losses, bringing the total for the year to 438,000. The job loss figures for April and May were also revised upward.

Not mentioned in the report is the fact that, thanks primarily to our extreme rate of legal immigration – a policy used by the government to keep labor in a state of over-supply and keep wages depressed – the labor force grew by about 150,000 per month. So, year to date, our economy is now 1,038,000 jobs behind where it needs to be to keep unemployment from rising. This has added about 0.7% to our unemployment rate, which held steady at 5.5%. (It’s actually much worse, but the government uses gimmicks to make the number more palatable.) Separately, the government reported that weekly jobless claims soared to 404,000. Multiply that by 52 weeks and you have an annual rate of 14% of the labor force filing for unemployment every year – one out of every seven workers. That’s a much more accurate picture of how bad job prospects are.

As our population continues to grow beyond the optimum level – the level at which per capita consumption begins to decline out of the need to conserve space as people are forced to crowd together (as explained in Five Short Blasts) – matters will only get worse. Unemployment will continue to rise and wages will fall further behind the cost of living. Hope for a better life for your children and grandchildren becomes more of a fading memory.

If you’re worried about the direction of our economy – as everyone should be – you really need to read my book, Five Short Blasts, if you haven’t already.

The following are high-lights from the article:

U.S. employers cut workers for a sixth straight month in June for the longest such streak since 2002 and the country’s vast service sector unexpectedly contracted, underscoring the economy’s frailty.

The Labor Department said on Thursday that 62,000 nonfarm jobs were shed last month, bringing the number of jobs lost this year to 438,000 as a housing market crash chilled growth.

… A separate report showed new applications for jobless benefits hurdling to 404,000 last week, a level associated with past recessions and that suggests the labor market continued to weaken.

… Downward revisions to both May and April’s jobs count took the combined losses for those two months to 129,000, compared with an early estimate of 77,000.

In addition, the creation of 29,000 government jobs helped support payrolls. Private-sector employment actually dropped by 91,000.


Advice for Obama: Choose Your Advice (and Advisors) Carefully

July 3, 2008

http://www.reuters.com/article/politicsNews/idUSNYG00114420080630?sp=true

Bill Gross, chief investment officer of PIMCO, is likely correct that Obama will be our next president, given that the economy is literally crumbling around us. But his advice to Obama on how to deal with the economy is miles off the mark.

Gross’s July investment outlook letter was addressed to Obama, as if he had been elected.

“Dear President Obama,” the letter began. “You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans,” Gross wrote. “He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love.”

No arguments here so far. But this is where Gross’s advice goes astray.

The next president has little choice but to step up fiscal stimulus to revive the economy, Gross said.

“You’ve inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions,” he wrote. “Your administration will produce this nation’s first trillion dollar deficit.” …. “what you need now is fiscal spending and lots of it,” Gross wrote.

… “This economy will need an additional jolt of $500 billion or so of government spending real quick,” he wrote.

We can only hope that Obama sees this kind of advice and similar advice from other corporate leaders for what it is – a lot of self-serving crap from people who care nothing about the U.S. economy and are only interested in their corporations’ profits and their own outlandish compensation packages. What else would one expect from someone in the business of trading bonds? Of course he wants more deficit spending, requiring the government to crank out hundreds of billions and even trillions of dollars more in bonds! Who cares if it bankrupts the nation, as long as PIMCO gets to execute more bond fund trades?

My advice to Senator Obama? It’s just as I laid out in Five Short Blasts. First and foremost, as quickly as possible, institute trade policy reforms – specifically a population density-indexed tariff structure – that will gradually eliminate our trade deficit in manufactured goods. This will inject $500 billion into the economy not once, but year in and year out, without bankrupting the nation as Bill Gross’s plan would do. The economy will rejuvenate like a starved dog in a meat-packing plant!

Second, begin cutting legal immigration – that’s right, legal immigration – to bring the supply of labor in balance with demand, allowing for real wage growth. Third, begin a national conversation on population and challenge our nation’s government and corporate leaders to explain how any of our most critical goals – eliminating our trade deficit in oil, reducing greenhouse gas emissions, etc. – can ever be achieved if we continue pursuing policies of rampant population growth.

Choose your advisors carefully, Senator, and consider their motivations. Are they motivated by a desire to see you and the nation succeed or are they motivated by more selfish interests?


The “Big Three” Sinking Fast – Along with America’s Economy

July 1, 2008

http://www.reuters.com/article/ousiv/idUSN2728662620080627

If, while reading some of my more recent posts, you thought I was exaggerating the dire condition of America’s “Big Three” automakers, here’s an article that may change your mind.

The mounting trouble for U.S. automakers has cost them any chance of winning more than partial help from a foreign investor or overseas rival.

Bankers and analysts say Detroit-based automakers could still find partners for limited tie-ups but caution it could prove impossible to find a deep pocket overseas for the cash the U.S. industry could need to ride out the current downturn.

European and Asian automakers are investing in more promising markets and face their own challenges from the rise in prices for fuel and raw materials like steel, analysts say.

The “more promising markets” referenced in that last sentence are, of course, China and India. But that’s all these markets have – promise. They’ll never materialize into the kind of auto market we have in the U.S. because they are far too crowded (especially India) for their citizens to consume vehicles at anywhere near the rate of the U.S. Consequently, if we give them free access to our market, we won’t get access to equivalent markets in return. Their auto production capacity (for export) will overwhelm ours and destroy what is left of our domestic auto industry. Unfortunately for the “Big Three,” even they fail to recognize this. Like the fabled dog that looks into a calm pool and sees another dog with a bone, and drops his to snap at the illusory one, American auto manufacturers surrendered the domestic market and joined the chorus of free trade cheerleaders in the hopes of cashing in on the big, potential, imaginary auto markets of Asia. Have they made money there? Sure, but only a tiny fraction of what they used to make in the U.S., now wiped out by invading hordes of manufacturers from foreign countries who have virtually no market to offer in return for access to ours. Still, the “Big Three” remain free trade cheerleaders, chasing the pot of gold at the end of the Asian rainbow. There is no pot of gold. What they will find is bankruptcy and oblivion.

How bad is it for GM?

With a market capitalization of $6.5 billion, GM is now worth less than a third of Renault SA ($23.7 billion), the French automaker that was spurned when it sought an alliance with GM in 2006.

The leading U.S. automaker is worth just one-fifteenth of Toyota Motor Corp ($99 billion), which overtook GM this year as the global sales leader by volume.

Once seen as a bellwether for the U.S. economy, GM is also in danger of being eclipsed in value by the likes of India’s Tata Motors ($4.4 billion) and Russia’s Avtovaz ($4.6 billion), home of the Lada brand.

$6.5 billion – that’s all it would take to buy General Motors right now, one of America’s biggest corporations. That’s less money than the value of the vehicles they build in one month.

“What’s wrong with GM is it’s too big now. GM is also deep in the red and no one would want to buy it. I can’t think of ways to help it except through restructuring,” said Koji Endo, a Credit Suisse analyst in Tokyo.

Notice that Mr. Endo says nothing about Toyota, the same size as General Motors, being too big. If Mr. Endo can’t think of other ways to help GM besides restructuring, here’s a couple of ideas: 1) Change U.S. trade policy to impose population density-based tariffs on countries like Japan and Korea, and 2) Commit Japan to buying as many vehicles from the U.S. as we buy from them. I wonder if Endo didn’t think of these things or if he thought them but dared not say them.

Capital could come from a foreign sovereign fund, but Pflum said he did not expect it to happen. “The automotive sector has been volatile. It is cyclical. The issue is that in the United States it is not a growth business,” he said.

If the U.S. is such a lousy business, then why don’t Toyota, Honda, Nissan, Lexus, Infiniti, Kia, Hyundai, Mercedes, Volkswagen, Porsche, BMW and the countless others just leave? Oh, wait, I forgot. The auto markets in Japan, Korea and Germany are much worse. Their companies couldn’t survive on just their domestic markets. Luckily for them, there are suckers like the U.S. who happily give away most of their markets.

If foreign car makers step in, they will do it by buying an asset or forming a narrowly defined partnership to contain any potential risks, analysts said.

Italy’s Fiat, for example, wants to build Alfa Romeo cars in North America and has been talking with the three U.S. automakers about using one of their plants.

That could ease the burden of the excess production capacity U.S. automakers have been left with due to dwindling share in their home market and the slump in light truck sales.

You may think that this is good news that more foreign companies want to assemble cars in the U.S. Think again. Those Alfa Romeos will simply take more market share from a domestic company. Selling or renting factory space to Alfa Romeo will accomplish nothing because domestic automakers will have to shut down another factory to compensate for the market share now lost to Alfa Romeo. And Alfa Romeo won’t be designing those cars in the U.S. or procuring the parts domestically. All of that will come from Italy.

Here’s an example. Visit the Detroit area and you will see automotive parts suppliers, suppliers for parts suppliers, and so on, everywhere you go. They’re called “tier one, tier two and tier three suppliers” and so on down the line. Assembly plants are surrounded by parts manufacturers and other industries providing support.

By contrast, I recently drove past a Nissan plant in the middle of nowhere in Mississippi. It was surrounded by empty field. Not a part supplier anywhere in sight. Why? Because most of the parts are funneled in from Japan, along with all of the design and engineering.

So why assemble them in the U.S.? Because cars are mostly empty space. A whole lot more unassembled parts can be fit on a container ship and shipped much more cheaply than finished autos.

Meanwhile, India’s Mahindra & Mahindra is seen as a possible bidder for GM’s Hummer brand, which is on sale. Mahindra is keen to get a foothold in the U.S. market, where it plans to launch its Scorpio SUV next year.

Nice timing, Mahindra. I’m sure those Scorpio SUV’s will really sell like hot cakes in today’s environment. But forget about that. The real question is: isn’t Hummer the maker of vehicles for the military? Do we really want to hand over Hummer production to a country who doesn’t give a rat’s you-know-what about U.S. national security? Do we want Sergeant Smith from the motor pool to have to deal with the same crappy telephone support that American computer and software customers get?

And along with all of these new foreign companies setting up shop in the U.S. will come a new tidal wave of foreign workers, pushing aside U.S. workers in all but the lowest-paying jobs. With workers and the engineering know-how all being imported, the U.S. will finally have lost the intellectual assets and critical mass needed to sustain  or restore the manufacturing sector of our economy. It will be lost forever, rendering the U.S. incapable of ever again meeting the needs of its citizens through domestic manufacturing. We’ll be completely at the mercy of foreign corporations. Essentially, we will have ceased to exist as a country, except in name only. Foreigners will command all of industry and call all the shots. Government will be at their beck and call. You and I will be like poor tourists in our own country, watching it all happen but powerless to do anything about it.

For a long time I have pointed out that our trade deficit is financed by the sell-off of American assets and have asked what will happen when those assets are depleted. As we draw closer to that point, American assets will become ever-more worthless. At that point, their foreign owners will likely shut them down and abandon them in order to stop throwing good money after bad to keep them going. Our economy could grind to a halt and the 1930s would like boom times in comparison. With GM, one of our biggest corporations, now worth only $6.5 billion – about the value of one month’s worth of vehicle production – we may be very near that point.

There’s little time left to act. We badly need the population density-indexed tariff structure laid out in Five Short Blasts if the manufacturing sector of our economy is to have any chance of survival. Indeed, our entire economy is at risk if the last of our manufacturing capacity vanishes.


Another Bad Week for the Economy

June 27, 2008

I’ve been able to keep up with little snippets of the news when I’m not fishing, hiking or canoeing up here in the north woods. There’ve been several items of interest this week.

First of all, Treasury Undersecretary Ryan pronounced that it may be in our best interest to let some financial institutions fail. What this means is that the Federal Reserve is out of ammo for Bear-Stearns like bail-outs for stockholders. One of my long-shot predictions for 2008 (see “2008 Predictions“) was the failure of a major financial institution. Well, hold onto your hats because there may be more than one coming! The mortgage default mess has ravaged the balance sheets of banks. Only a day or so later, Citigroup announced that it will have to take yet another $9 billion in write-offs. By and large, these mortgage defaults and foreclosures are by average folks like you and me who just can’t make ends meet anymore, thanks to the failure of wages to keep pace with inflation, thanks to the millions of job losses due to our enormous trade deficit.

Then came the Federal Reserve’s decision to leave interest rates unchanged, and the accompanying announcement that it’s worried about inflation. The Fed has found that it’s interest-cutting campaign of the past few months has been totally ineffective in restoring the economy because the low rates haven’t translated into reduced lending rates at the consumer level. Why? Because treasury yields didn’t drop a bit. Why? Because the Fed’s bond auctions have gone poorly. Investors won’t buy them when they can get better interest rates elsewhere which, currently, is almost anywhere. This is why credit is drying up, seizing up the economy. Why does the government need to keep selling more and more treasury bonds? To finance its budget deficit, largely due to programs to offset the negative consequences of our trade deficit.

So if the Fed’s interest cutting has all been illusory, will the Fed now raise rates to fight inflation? It may, but it knows that it’s equally powerless here as well. The inflation we’re experiencing is due to the decline in the dollar. Interest rate moves by the Fed will do virtually nothing to affect this. The decline in the dollar is due to our persistent, enormous trade deficit. We’ve been flooding the world with dollars and the over-supply is steadily eroding their value. One third of the trade deficit is due to oil imports and two thirds is due to imports of manufactured goods. You may ask, “won’t the decline of the dollar help reverse the trade deficit?” That’s what economists would have you think, but it’s not true because the value of the dollar has nothing to do with the trade deficit. The trade deficit is due almost entirely to the collision of economic forces I warned of in Five Short Blasts – the inability of overpopulated nations to bring to the trade table an equivalent market in exchange for access to ours. The fact that the trade deficit has held steady while the dollar has declined dramatically is proof of this.

So the Fed is caught between a rock and a hard place. It’s only recourse to affect the direction of the economy is the one that its chairman, Ben Bernanke, may find the most distasteful (for him) of all: admit that free trade (what I call blind trade) is a failed economic model and press the President and Congress to begin imposing tariffs as necessary to eliminate the trade deficit. Failing this, the U.S. economy will continue to unravel, which is now happening at an alarming rate as the financial, manufacturing and construction sectors of the economy are simultaneously nearing collapse.

One final item of interest is that Barack Obama had a meeting with CEO’s of major U.S. companies. This is significant because the deteriorating economy assures that Obama will soon be president. Such a meeting calls to mind a similar meeting that Dick Cheney held with energy industry leaders soon after election to seek advice in formulating energy policy. We all know how that turned out. Let’s hope Obama’s meeting doesn’t yield similar results. What did the CEO’s tell Obama? Only Ford CEO Alan Mulally (sp?) was talking afterwards and made some vague reference to emphasizing the importance of government and industry working together.

So no one’s talking, but I can tell you exactly what each one of them told Obama: 1) “We need tax breaks,” and 2) “Beware of protectionist trade sentiment. Everything will be alright if we just have more free trade.”  Frankly, I don’t worry that much about tax policy. It takes a certain amount of revenue to run an orderly society and, regardless of how it’s collected, in the end it will be paid by you and me, either directly to the government or indirectly, in the form of higher prices paid for goods. But, regarding the second item above, we can only hope that Obama can see through the smoke and mirrors of free trade pushers and cheerleaders and put the nation’s interests ahead of those of global corporations. He’d better. He certainly doesn’t want to leave the economy in far worse shape than he found it, as his predecessor has.