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Energy fuels the economy. We cannot hand our resources over to private companies

By: 
Eddie Hobbes - Sunday Business Post

Eddie's column in the Sunday Business Post calls on newly appointed Minister Alex White to review Ireland's oil and gas strategy:

'Alex White, the new Minister at the Department of Communications Energy and Natural Resources (DCENR) takes over responsibility for Irish energy policy at a time when the strategic competence of the DCENR may be more important to our lives than the tactical competence of the Department of Finance.

Contrary to much current and conventional economic thinking, the global financial system and the GDP growth upon which it is priced depends less on the high wizards of debt creation at Central Banks and far more on the marginal cost of energy, a truth clearly grasped by the Russians whose annexation of the Crimea added an extra 36,000 square miles of Black Sea oil and gas potential, just as their 2016 budget flagged a decline in oil production of over 6%. Unlike conventional economists, who believe that rising prices attracts more production, students of history and biology know that whatever can grow exponentially will do so until, running out of affordable resources, it collapses.

Russia and Norway may shortly be hitting peaks in conventional oil production but what can be said with certainty is that Saudi Arabia, the swing producer since the 70’s has depleted its massive Ghawar oil column from 1500 feet to 150 and is expected to be surpassed within the next few years by USA as the world’s largest producer thanks largely to shale oil production. The race is on to match GDP growth with affordable energy but the economic cost of SBP-smlextraction is ballooning, measured by the energy cost of producing the next barrel of oil or cubic metre of gas, a fact well known to frackers and those drilling at frontier locations who are, today, spending eight times more energy on average than their counterparts did a century ago. Oil from tar sand production is thirty three times less efficient than conventional drilling, with an energy return on energy expended of just three to one compared to when the world first went to mechanised warfare in the poppy fields of Flanders. The truth is that if the costs in Co2 emissions, waste and environmental degradation were incorporated rather than socialised, there would be no profit and no incentive to maintain the growing reliance on the most expensive hydrocarbons to prop up the primary source of energy. The other inconvenient truth is that the lifecycle from fracking to depletion looks very short and the energy costs can multiply in direct proportion to production so, while currently helpful, the US gas glut is no panacea.

Energy is the feedstock into the global financial system and if its flow rate into industrial and agricultural production is constrained especially at a time of very high debt, then the growth required to service the debt would become severely compromised, having profound implications for bond and equity markets.

The chaos of the 70’s and the troubles in stock markets then, stabilised as swing oil from the North Sea, the Gulf of Mexico and Alaska came on stream, geographically helped by the US and NATO’s protection over supply lines and later the Soviet Union collapsed during a deep trough in oil revenues and exacerbated by the tragedy of Chernobyl. A seed of the current crisis can be traced to declining production from Alaska, the North Sea and the Gulf of Mexico peaking just after the millennium when a barrel of oil was under $30 after which oil prices ramped up to $147 before slumping with the credit bubble burst but still stabilising thereafter at $80 to $100. The 2006 peak in US interest rates, needed to head off inflation eventually burst the most vulnerable part of the debt bubble – subprime credit and adjustable rate mortgages, reaching a crescendo in autumn six years ago. The takeaway is that Central banks may dictate interest rates and money expansion but they do so on the bedrock of the real world. Money itself is worthless paper, its value is in the real assets we believe it can translate into when we cash in the chips.

In the past ten years swing power has shifted away from OECD production towards Russia, Central Asia and the Persian Gulf with much of its distribution network residing outside the influence of the US fleet in overland Eurasian pipelines, meanwhile, away from the gaze of the West, the Shanghai Cooperation Organisation involving trade and defence agreements between Russia, China, Kazakhstan and Uzbekistan is on the cusp of strategically expanding next month to include Iran, India, Mongolia and Pakistan. On the gas front, with production climbing, Russia, Iran and Qatar formed the Gas Exporting Countries Forum the same year Lehmann’s collapsed and which has since expanded to include member countries that control 70% of global gas reserves and nearly 40% of pipeline shipments. These are very significant developments that have a direct bearing on how Ireland ought to approach the development potential of our hydrocarbons whether offshore or in shale deposits in border counties.

Join the dots and what we are witnessing is a shift in the balance of power, possibly the biggest since 1945, led by a shift in swing production as cheap conventional oil gives way, at the crucial margin, to more expensive unconventional shale oil, extremely deep water drilling, biofuels and natural gas liquids (NGLs). Squeezed by national oil companies, multi-nationals and the minnows upon which they feed for new frontiers can only maintain their power by attempting to locally monopolise or engage in regulatory capture.

Ireland, in joining the EU and the Euro has already surrendered crucial parts of our national sovereignty to the imperial capital in Brussels and the powers behind it, measured in cold cash terms when bondholders, many of them big European banks, had their investment losses underwritten by Irish taxpayers. Ireland has ceded control over currency and banking but our decision to transfer legal ownership of onshore and offshore oil and gas is, quite remarkably, voluntary. Our planning system which, ideally, ought to rely on the independence of a High Court process, is a mishmash of conflicting agencies and interests and which, shortly, is likely to deliver a heated fracking controversy in Leitrim and Fermanagh on par with the Corrib fiasco but it is our overall strategy that’s nuts. If you accept that energy, its production, whether hydrocarbon or alternative and its distribution is the root system sustaining the perceived value of modern money, then why give that power away to private companies owned mostly by tax non-residents?

Minister Alex White ought to consider a wholesale strategic review of national policy preceded by a comprehensive energy audit of the economy, that’s what a Russian would do. There already is a broad hint to do so contained in the recent Wood Mackenzie report that specifically recommended looking at switching to Production Sharing Contracts as a substitution for licences which pass over ownership in the vague hope of future tax revenues and the establishment of a national oil company which could partner with private companies while building its own competences, much like Statoil did for Norway. Although Minister White brings to the portfolio the intellect and training of a barrister what may yet swing the issue is his admiration for Labour’s intellectual heavyweight Justin Keating who passed away in 2009 shortly after recording a succinct interview on Irish sovereign independence and the question her resources. What the new Minister decides in the short tenure left in this government may have a crucial bearing on our long term future if, indeed, we are witnessing, not just a temporary downturn in the business cycle fought with financial policies, but epochal change requiring a redrawing of Ireland’s relationship with its natural resources and eventually perhaps with our relationship to Europe, especially if the table manners deteriorate again when the pie next shrinks.'

Posted Date: 
9 September 2014