Agora Financial’s Rude Awakening

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Dubai, UAE

· The race is on: Peak Oil vs. the “great green hope,”
· Could we soon see the birth of the “petroeuro?”
· Solar parking lots, no flaming guitar at Woodstock and more…

Joel Bowman, reporting from the United Arab Emirates…

Here in the Middle East, OPEC company cards have been running up dollar-denominated restaurant tabs for a good while. Thanks to the faltering greenback, however, dessert parties of the future may be paid for in Euros.

Despite its recent record highs, oil, adjusted for inflation and currency fluctuations, is actually slightly cheaper now than it was a year ago. A barrel of crude would have set you back $44.30 in June last year. This year, taking into account the above adjustments, it would set you back $43.60.

This, of course, provides little consolation to anyone filling up their SUVs with an American credit card…or anyone who sold their precious oil for dollars in the first place.

About 80% of the Middle East’s revenue is derived from the sale of sticky black goo…black goo that is priced, almost universally, in dollars. As the value of the dollar dwindles, so does the purchasing power of the Middle East along with it. An economist from Morgan Stanley recently estimated that a 10% decline in the dollar against major currencies amounts to a 5% loss in Middle East purchasing power.

Consider too that as the dollar slides against the Euro, the Middle East’s petrodollar accounts don’t stretch as far as they used to when importing from Europe. That’s a big problem when Saudi Arabia, for example, sources more than double the amount of imports from the Eurozone as it does from the US. Deutsche Bank has those numbers at about 26% and 12% respectively.

So what is the incentive for the OPEC to retain the dollar pricing for their goo? And, if the Peak Oil guys are correct and the world’s reserves are, or are about to be surpassed by the world’s demand, why would anyone with a dwindling reserve wish to sell the bottom of their barrel for something that is likely to be worth less tomorrow than it is today?

The endgame here is not a pretty one. If the OPEC do decide to reprice oil in Euros (or a basket of currencies) it will almost certainly precipitate invigorated selling of the dollar, further lessening its value. The Fed may not mind creating inflation with emergency rate slashes…but the OPEC certainly doesn’t fancy importing it.

Is there a way out of this mess? What about renewable energy and the “great green hope?” Guest columnist, Kevin Capp offers a few thoughts below…

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The End of Las Vegas, Part II
By Kevin Capp

“More electric energy, whether from renewables or coal, does not address the liquid fuels crisis posed by globally peaking crude oil. There is no green energy economy around the corner.” — Jan Lundberg

Harsh words, especially given our collective faith in so-called energy alternatives and the magic of the market. This doesn’t, however, translate into zero options for electrical power, especially in Nevada, where an abundance of sources ripe for exploitation exist, many of which are on display at the Springs Preserve.

Cruising around its 180 acres of clean-burning infotainment, one gets bright-eyed with optimism about our ability to adjust in the face of an inexorable oil decline.

Above the parking lot sits an array of solar panels capturing energy all day long. Attached to the building are a total of eight “cooling towers” that essentially act as swamp coolers, sucking in hot air through a moist membrane and releasing it back out in cool blasts, even in summer.

Meanwhile, high windows shaded by awnings ensure “you’re not getting the direct heat that comes along with the sun shining,” says spokesman Jesse Davis. And this catalog of green goodies doesn’t even include the insulation, which is composed of renewable materials that even sound eco-friendly, such as “straw bale” and “rammed earth.”

While Davis says “we can’t generate all of our power naturally,” about 70 percent of it is generated on-site. He adds, “We live in one of the most hostile environments anywhere. And because of that, it requires more energy consumption. It’s all about ensuring Las Vegas has a sustainable future.”

Currently, Nevada’s primary energy sources are anything but sustainable, since we rely largely on natural gas and coal to supply electricity, according to the Energy Information Administration. Same goes for Vegas. According to Nevada Power, 37 percent of its plants generate electricity via natural gas, and 63 percent use coal. The outlook is gloomy for both, but for different reasons.

Because coal is quickly becoming the bastard child of energy sources, with almost two dozen proposed coal projects getting axed since 2006, according to the Department of Energy, the future in our new, climate change-conscious world looks somewhat dim for the resource that launched the Industrial Revolution.

Not so with natural gas. Its future looks grim for the same reason oil’s does — supply scarcity. Recently, Southwest Gas Corporation delivered a report to the Nevada Public Utilities Commission warning of long-term supply problems in the face of a 4 percent increase in sales per year in Southern Nevada. The report also noted there was no conservation program on line to address it.

Heinberg says this isn’t unique to Nevada — it’s a national catastrophe in the making. “We’re facing a natural gas train wreck. We’re basically drilling all the time, and we’re getting less in return. That means you got to drill more and more wells. Yet the amount that’s being produced is stagnant and really declining.”

This is just one part of the fossil fuel saga, and one that should be remembered anytime someone mentions trading our use of conventional oil for natural gas. As the Hirsch Report flatly states: “Because of the time required to make major changes in the U.S. natural gas infrastructure and marketplace, forecasts of a decade of high prices and shortages are credible.”

Thankfully, there are alternatives being developed. But, again, the question is: Will they be ready in time to head off peak oil, and, perhaps more importantly, will they provide the same level of energy? It depends on who you talk to, and what scenario is imagined as we push toward a re-shaping of our energy policies and infrastructure.

Robert Boehm, director of UNLV’s Center for Energy Research, says we’ll see a future powered by a variety of energy sources, as there is no one replacement for fossil fuels. He points to a massive solar project at Nellis Air Force Base anticipated to generate more than 25 percent of its power, as well as various projects he’s involved in using solar energy.

Eventually, development of solar panel technology, especially storage, will allow us to run the Strip and beyond, he says. Plus, “after two or three years, you’ve usually paid off the energy that you’ve used to make it.”

Still, the trouble is that solar is expensive compared to, say, coal, which makes many people shy away from investing in it — at least until that magical market catches up to the times, and forces costs down. Boehm says technology needs to catch up, too. “The larger the system, the harder it is to store electricity. Your batteries have to get really large. And batteries are still problematic.”

Heinberg adds that the photovoltaic panels used to harness the sun’s energy are composed of rare elements such as gallium and indium “that are depleting pretty rapidly. There’s just not that much in the earth’s crust. If we’re talking about replacing all the coal plants with photovoltaics, we find ourselves” coming up short.

Yet Reid publicly stated as recently as June: “If we were to develop the solar resources of just 90 square miles of Nevada, we could have the power requirements of the entire nation.”

Lundberg says the assertion is “totally misleading, because loss over transmission lines is massive.” Adding, “One thing to keep in mind is that a hell of a lot of petroleum energy goes into making solar and other energy alternatives.” Meaning, if oil is scarce and thus more expensive, so is everything associated with it, including solar energy.

Another possibility is geothermal energy, especially in Nevada, which former oil geologist King labels “the Saudi Arabia of geothermal power.”

Here’s how it works: You find a hot spring, geyser or some other similar source, drill a hole around 2,000 feet deep, bring up the hot water, install a heat exchanger (basically a tube and shell pipes close to each other), which then heats “working fluid” like an old radiator with a glass of water on top. This, in turn, expands when it’s vaporized, generating pressure enough to turn a turbine. The energy is then captured and used again, says Thomsen.

The rub — one of them, anyway — is geothermal exploration is costly, because geologists must first search for a suitable source, then drill a “million dollar hole in the ground,” says Thomsen.

Nobody thinks in the post-cheap oil world will rely on one energy source the way we currently rely on fossil fuels, which provide more than 85 percent of everything we take as a “natural” part of life — from electricity to transportation. Over the next 20 years, demand is expected to increase “even with aggressive development and deployment of renewable and nuclear technologies,” according to the Department of Energy.

King likes geothermal. But, again, the problem is one of timing. “On the backside of peak oil, your energy costs are going to be more expensive. Whether it’s a geothermal well or an oil well or a gas well … the cost of all your inputs are going up. It’s going to be a lot harder because everything is going to be more expensive.”

Not to mention the time associated with bringing a major project to fruition. “You don’t do this stuff in two or three years. This is long term.” Adding, “We need crash programs.”

As for wind, many say it doesn’t give much of a return on energy-invested, since storage when the fans aren’t turning is still a problem — not to mention that the turbines are composed largely of steel (read: coal) and carbon composites.

Bottom line, says Kunstler: “Without cheap air conditioning for virtually everybody, places like Las Vegas and Phoenix will not function.” Adding “What we’re really in the process of seeing is the beginning of a big campaign to sustain the unsustainable, and it will end in tears.

“Both Phoenix and Las Vegas were developed in places that have poor prospects for supporting large numbers of people,” says Kunstler, “and it was enabled during a brief period of history solely by cheap energy. We are now leaving that era behind.”

It’s anybody’s guess how the slide down what King labels “the backside of peak oil” will go, but no one doubts the seriousness of the situation. “The Hirsch Report is all I need to let people know that you can’t start reacting to peak oil once it hits. When they say severe economic hardship, that’s bureaucratic language that they’ve had to tone down. They can’t say the shit’s gonna hit the fan,” says oil industry analyst Lundberg.

Although we may not recognize it when peak oil finally dawns, the repercussions will be massive. Says King, “Certainly, within the next five years, we’re going to feel something. Things are going to feel different. And a lot of it is going to depend on who gets the naming rights.”

Will we blame it on Mexican oil reserve supplies suddenly slumping off? A continued housing crisis? A hurricane? “For as bad as Katrina was, there was still enough slack in the system,” continues King. But now: “World demand is up, world supply is static. Another Hurricane Katrina … would probably push things over the edge [so] that we would never get back to the way it was.”

In Las Vegas, such a scenario would undoubtedly result in a population contraction, a mass exodus of necessity to other states not unlike that which occurred after Katrina. But, worries Heinberg, “How welcome they’ll be I don’t know.”

Adds Kunstler, “Places like Phoenix and Tuscon and Las Vegas will be faced with problems beyond many of the problems faced by other cities.” And the alternatives, even if they’re developed in time, won’t save us. “We are not going to run Wal-Mart, Walt Disney World, and the interstate highway system on any combination of alternative fuels. Instead, reality is going to compel us to make very different arrangements for the major activity of daily life.”

Especially in the unstoppable city of Las Vegas.

Joel’s Note: Thanks goes to Kevin Capp and the Las Vegas City Life newspaper for this Rude two-parter. If you would like to view the original article, in its entirety, check it out in Nevada’s most widely read weekly newspaper here.

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Rude Endnote: We’re already late today so, in the words of Jim Morrison, we’ll simply say, “this is the end.”

Cheers,

Joel Bowman
Rude Awakening

P.S. Contrary to our writings yesterday, Mr. Morrison never did utter these words at Woodstock…nor did Hendrix set his guitar ablaze there. Hmmm…no fire and no Doors. We don’t feel so jealous for having missed the event in light of these new realizations.