The Big Saudi Oil Questions

[For a brief note on the transgender bathroom wars, click here.]

Good questions are the beginning of wisdom. Right now, everyone in our flaccid, corrupt and mostly useless “mainstream” media is asking a single question: how far will Donald Trump go? But is that the right question?

The importance of any question depends on two factors. The first is the probable consequences of the answer. The second is its knowability: how much we think we know the answer, and how likely the answer we think we know is to be right.

Based on this two-factor scale, how far Trump will go is not a very important question. The consequences of his becoming president seem horrific, but the probability of that happening is very low. The most likely outcome is a repeat of the Johnson-Goldwater landslide of 1964. Even huge possible consequences with very low probability do not pose a big risk.

If you want to focus on consequences much more horrible than a Trump presidency, think about global warming. The consequences of it continuing to accelerate are many times as horrific. They will will affect our entire species, not just one nation. They will affect us all directly and dramatically, and they will last for the foreseeable future.

Global warming will permanently and dramatically change the climate in which we evolved. Eventually, our climate will arrive at a new, relatively permanent equilibrium: hotter, wetter, cloudier, with more violent storms and less land area. An estimated one-third of all species now extant will be extinct. And tropical diseases and their vectors—such as zika and the mosquito that spreads it—will have stressed or exceeded our collective ability to cope. It’s entirely possible that our global population will have suffered a dramatic decline characteristic of species that outgrow their habitat, or whose habitat changes too quickly for their biological evolution to adapt.

Next to that, a bad person as the president of 4% of us, for just four years, doesn’t seem so bad, does it?

As for the likelihood of harm, I’ve already written on acceleration due to positive feedback and the likelihood that the most alarmist current forecasts are timid. Suffice it to take a look at Bloomberg.com’s interactive display of actual global-warming data since 1880. If you come away with something less than an impression of runaway, either you lack mathematical or physical intuition, or the fossil-fuel industries have paid you not to think.

So the biggest question today—globally and for every race, nation, culture, religion and ethnicity—is “when are we going to get really serious about reducing the acceleration of global warming, and what strenuous efforts, in what order, will we make”? That’s a big question that will almost certainly decide your children’s and grandchildren’s futures, livelihoods and happiness, if not your own.

Right now, there are signs that we as a species are beginning to move. The President has adopted rules that, if our Supreme Court upholds them, will start phasing out coal, by far our dirtiest and most dangerous fuel. The Chinese have put a moratorium on new coal plants. And plans for a half-billion-dollar terminal to ship our own coal to China have just been canceled, albeit on irrelevant environmental ground.

All this is good news, but it’s just a bare beginning of what we have to do. And like the President’s coal rules if the Supreme Court misses the point, all of it is subject to reversal. Our collective determination to face the single greatest challenge we have ever faced as a species is still very much in doubt. So the most important question of all has, at present, an unknowable answer.

But you do what you can. If you can’t answer the most important question, maybe you can ask subsidiary questions that bear on it. Maybe, in short, you can break the big question down into little ones.

If you try to do that, you inevitably come back to Saudi Arabia. Why? Because it has the single greatest oil reserves of any nation and the single greatest oil-producting capacity. And oil is the dirtiest fossil fuel that we still haven’t really figured out how to do without.

Not only does Saudi Arabia lead the great OPEC oil cartel. As the clear and unchallenged leader in oil reserves and production, it has a rare capability. All by itself, it could set the price of oil just about as high as it wanted, simply by reducing its own production.

Let’s do the math. The production glut that has reduced oil prices from their 2013 peak of $111 per barrel to their current level of about $45 is generally believed to be about 2 million barrels per day. But Saudi Arabia, right now, is producing 12 million barrels per day. So it could, in theory, eliminate the entire glut and boost global prices back to somewhere around $110, simply by cutting its own production by 2 million barrels per day, or about 16%. Here’s how its revenue would change:

Current revenue: $45/b x 12 million b/d = $540 million/d
Adjusted revenue: $110/b x 10 million b/d = $1,100 million/d

In other words, Saudi Arabia could more than double its daily oil revenue simply by cutting its own production to dry up the glut.

What if Iran, Russia, Nigeria and all the other petrostates increased their own production? Well, let’s suppose that they could boost their production, collectively, over three years, by as much as 3 million barrels per day. Then Saudi Arabia might have to decrease its own production by another 3 million barrels per day, thus:

Further adjusted revenue: $110/b x 7 million b/d = $770 million/d

Even if we assume the others’ production hikes were instantaneous (which they most certainly would not be), three years down the road Saudi Arabia would have enjoyed three years of oil revenues at $770 million/d, instead of just $540 million/d. That’s a total of ($770 - $540) million/d x 365 x 3 = $ 251 billion dollars.

So it looks as if Saudia Arabia left a quarter-trillion dollars on the table. Moreover, if Saudi Arabia had followed this plan, it would have 3 x 365 x 5 million = 5,475 billion barrels of oil still in the ground to sell later. Even at just $45 a barrel (the current price), that’s another quarter-trillion dollars left on the table.

Now a half-trillion dollars is real money, especially to a small kingdom falling into serious debt. Why did Saudi Arabia leave it on the table?

There are plenty of plausible political reasons. The Saudis might have wanted to harm their arch-enemy Iran economically, as it emerges from sanctions under the nuclear deal, and to harm their arch-enemy’s backer, Russia. We Yanks might have encouraged the Saudis to do so for similar reasons: in order to sanction Russia’s adventurism in Crimea, Eastern Ukraine and Syria.

We and other Westerners also might have encouraged the Saudis to keep oil prices low in order to continue healing the global economy, which is still in some trouble. After all, the Saudis have become experts in milking the global economy for oil money without killing the milk cow. If that theory is right, then we ought soon to see oil prices rise as the global economy begins to show a robust recovery and the Saudi Princes turn the milking machines on high again.

It’s hard to see a sound economic reason for their not doing so, as least in the short term. Sure, other petrostates could boost their production to compensate for Saudi Arabia’s cuts. Maybe they could even do so faster than foreign analysts expect. But Saudia Arabia has the productive capacity now. If it cut now and raised production later, it would be in no worse position then than now, and it would have had enjoyed higher revenue in the interim and smaller reductions in its reserves. Why hasn’t it yet done so?

The only economic reason that makes much sense is a Saudi prediction of a longer-term glut. If Saudi Arabia saw that coming, it might be willing, even eager, to sell its big oil reserves as fast as it could at any price it could get. The fact that it has the lowest-cost reserves, and so can make a profit at any price that other petrostates can bear, gives Saudi Arabia another incentive to sell first and fast. Also, Saudi Arabia might be reluctant to play around with short-term oil-price manipulation for fear that it would: (1) destabilize the global economy, (2) lose the backing of its Yankee mentor and protector, (3) lose its patient and prudent leadership of OPEC, or (4) even start a war. Anyway, stabilizing and temporizing appears to be what Saudi Arabia has been doing since 2013.

So let’s play devil’s advocate. What evidence can we find that might have led the Saudis to predict an oil glut for the medium-to-long term, say, five years to the end of oil as a major energy source?

Five factors provide such evidence. First, more oil from traditional petrostates is coming on line. Iran is off sanctions and will likely stay so as long as it honors its part of the nuclear deal. The longer it stays off sanctions, the more foreign investment will flow into Iran to increase its oil production. Russia is probably self-sustaining in oil investment and technology, so its output will likely increase steadily. Even pathetic Venezuela might get into the act again; once its leaders come to understand that it has little wealth but oil, smarter ones will bring the international community back in to increase production. Although Venezuelans might, global oil markets don’t much care whether the capital and technology used to increase Venezuelan production come from us “imperialist” Yanks or from the so-called “Communist” Chinese.

Second, new petrostates might join the fun. Nigeria is an example. Much of the world has already been explored for oil and gas, but there are probably places (for example, in Central Africa) where chronic political instability has prevented exploitation or even exploration, or has impeded development. As political stability increases globally, entirely new oil may come on line.

Third, existing and new petrostates may turn to fracking to increase oil production or to extract dwindling reserves. The US is far in the vanguard of frackers, having discovered the technology and having already used it to bend oil markets. But what happens when all the petrostates, including potential new ones, begin exploiting the technology to increase production, too?

At the moment, fracking of US wells does not pay at a price below about $45 -$50 per barrel, which is about the current price. So fracking may not explode abroad until the global price goes a bit higher. But who’s to say that fracking might not be cheaper abroad, where subsurface conditions might vary, environmental restraints might be looser, and labor and/or steel pipes cheaper? When fracking does go abroad in a big way, the global price of oil may come down below $40 per barrel. Or at least it will stabilize at that price or a bit higher.

The last two factors are on the demand side. When I was a graduate student in 1971, I drove a big old car that got 11 miles per gallon. Today I drive a little Hyundai that gets almost 33 miles per gallon. All else being equal, that’s a factor-of-three reduction in oil demand for my personal transportation. It took about four decades, but the pace of innovation is accelerating along with the need. Tomorrow’s more efficient hybrid and smaller cars will likely succeed today’s, and at an increasing pace. As that happens, increases in efficiency, even for gasoline-driven cars, may start to produce actual decreases in the global demand for oil.

Before that happens, markets for gasoline-driven vehicles will have to reach global saturation. But saturation may already have happened, or may be happening, in the US, the EU, Japan, and other big cities of East Asia. Why? Population is leveling off or declining. People are gravitating to cities, where cars can be an inconvenience, parking is difficult, and rides can now be shared. Anyway, many big cities today have gridlock; there’s not much room for more cars. So as urbanization continues globally, it looks as if the total number of cars driven, like the population, will level off and maybe even decline. With gallons-per-mile decreasing along with numbers of cars, the resulting demand for oil has nowhere to go but down.

The countryside is a different story. There’s still a lot of space there. But there are few places in the global countryside that have the density of roads prevailing in the US or the EU.

So the saturation (or not) of the global countryside with gasoline-drive vehicles is perhaps the part of the picture that is hardest to predict. Common sense may prevail, along with more-efficient forms of transport, such as rail, boat and ship. Or more undeveloped hinterlands may try to emulate Ohio, a US state with an extraordinarily dispersed (largely rural) population in which everyone seems to use cars to get around. My own view is that most of the rest of the rural world will not follow Ohio’s energy-profligate model, but that’s just a guess.

The final factor on the demand side is new technology, such as electric cars and better rail systems. All the excitement today is with electric cars, which are simpler, cleaner, easier to maintain and far more energy-efficient than gasoline-driven cars. As their prices come down and their single-charge ranges increase—a process already well under way—they will begin to make serious inroads into the light vehicle base. But they don’t use any oil at all, except for lubrication, for which synthetics will suffice.

Natural-gas vehicles may be equally important in the medium term, before both it and oil run out. Right now, today, oil costs about $45 per barrel. In New York (Henry Hub), as of April 27, an energy-equivalent quantity of natural gas (5.8 million BTU) costs less than $11, or one-fourth the price of oil ($1.88 per million BTU, times the conversion factor 5.8 million BTU per barrel). Some day car makers will begin to understand that internal combustion engines can burn natural gas as well as gasoline, that ranges are similar, that natural gas burns cleaner and doesn’t require refining, that it’s easier to transmit by pipeline, that it doesn’t “spill,” and that its prices are likely to be more stable than oil’s because there is no global market for natural gas. When that understanding dawns, a “gold rush” to natural-gas cars, which are just modified gasoline cars, will further reduce demand for oil.

I must admit, I was astonished recently when Saudi Prince Mohammad bin Salman announced a grand plan to sell off a large part of Aramco and invest the proceeds in (among other things) alternative energy. It’s not that I think that’s a bad idea. I just didn’t expect to see it, let alone from the Saudis, for another twenty years, if I lived that long.

But now we have before us the Saudis’ openly announced plans. Are they real? Are they a head fake? Those, too, are good questions.

Yet as this brief essay shows, there are good reasons to suppose that they are no head fake. Maybe the Saudis could make a few big bucks, in the shorter term, by cutting their production and jacking up global oil prices. Maybe, for a whole host of political reasons, they don’t want to do that, at least not right now. Maybe, as people who live on one of the hottest parts of our planet, they are beginning to ken that global warming won’t improve their lives. After all, they are human beings, too.

Anyway, two things are clear. First, there are a bunch of market, demographic and technological reasons to believe that persistently high oil prices are a thing of the past, unless and until our species gets so stupid as to let oil run out with billions of gasoine engines still running. Second, Mohammad bin Sultan’s plans suggest that the Saudis are not short term thinkers. They may actually be looking into the future that our species must make for itself, in which fossil fuels like oil will play a minor role, if any, in energy production but will serve as feedstocks for synthesizing organic chemicals and (some day) artificial replacement organs.

The Saudis’ announced plan to sell a big stake in Aramco has another crucial implication. Since the First Arab Oil Embargo of 1973-1974, the Saudis have become more and more sophisticated in maximizing the value of their oil reserves and the reserves’ monetary benefit to themselves. If they are indeed selling a huge stake in Aramco now, and not earlier or later, that act alone suggests that Aramco's price is at a peak today, or at least the Saudis think it is.

But the price of oil is obviously not at a peak today; it’s about 60% lower than it was in late 2013. That fact, coupled with the Saudis’ reported desire to sell now or soon, suggests that they think the price is going lower.

What about reserves? As I have noted previously, whether the Saudis’ own reports of their oil reserves are on the money or (as some people think) 70% high makes the difference between current (unfracked) global reserves lasting 43 years and only 18 years (from late 2014). Would the Saudis be eager to sell now if they thought their oil reserves are actually lower than generally reported? Maybe. But if that is so, supply shortages that are bigger and come earlier than expected would make even their lower reserves very valuable. The best guess is that the Saudis believe their own reserve reports but question the future value of oil as the global supply of it increases with normalization of broken petrostates, the advent of new petrostates, and the spread of fracking technology globally, and as demand for oil comes under global assault from substitutes (electricity, natural gas, and electric trains and buses), from the growth of car-inefficient cities, from the increasing efficiency of gasoline-driven cars, and from a universal desire to avoid the most horrific effects of accelerating global warming.

Footnote. I drew this somewhat dark picture of Ohio from having lived and taught there for eleven years. But a single statistic tells part of the tale. All together, Ohio’s six largest cities account for only 16% of its roughly 11.7 million population. The other 84% of its people live in suburbs, small towns and the countryside.

I suspect, but haven’t verified, that Ohio has the most geographically evenly distributed population of any US state. With that sort of distribution, it’s hard to imagine living without cars. You can’t run a rail or bus line to every tiny town and farmhouse. Maybe electric cars fueled by the Sun or made-safe nuclear power will become Ohio’s salvation.

The Transgender Bathroom Wars

Sometimes you wonder whether the “silly season” has come early this year, or whether it’s become a permanent condition of our Yankee culture. Trump’s entire campaign evokes this wonderment. But now comes one better: the transgender bathroom wars.

Don’t get me wrong. I’ve supported homosexual rights and homosexual marriage all along. I believe that people should, if they wish, have the right to change their genders and to have their choices respected by society and by government.

But at a time when our species is just becoming aware of how fast global warming is accelerating, and when a crypto-fascist is set to become a major-party candidate to lead the free world, should we all really be obsessing about this?

Homosexuals may be a significant minority (and an important one, because they slow our population explosion). But people who use modern hormonal medicine and surgery to change their gender are a minuscule minority of us Yanks, and an even tinier minority globally. Most members of our species are having too much trouble surviving economically or even physically to even think about changing their gender. So why the big explosion of interest and concern now?

As you may have noticed, there’s an election on. And the social “hot-button issues” that have let the GOP delude ordinary people into voting against their own economic interests are getting a bit stale. Homosexual marriage has not destroyed and will not destroy the Republic or Western civilization, and that truth is becoming increasingly apparent, especially to the young. The pro-life folk are winning some skirmishes in red states, but there are still many places nationwide to get clean, safe abortions. So that issue appears to be reaching an uneasy truce, if only due to voter and activist fatigue. Finally, the lie that Christianity is under siege in America has been exposed for the frothy bit of propaganda it is.

So if the splintered, fraudulent and probably dying GOP didn’t have another hot-button issue to distract voters from what really matters, it would have to invent one. Hence the transgender bathroom wars.

The puzzling thing is not that the GOP should pull this rabbit out of the hat. Distracting, deluding and deceiving the public with irrelevancies are its stock in trade. The puzzle is why the Dems, up to the President, have not just gone along with it in this case, but have upped the ante, having the DOJ send out its “guidance” circular to the nation’s schools.

So what’s going on here? Are the President and Attorney General Lynch complicit in giving the GOP yet another policy-free “hot button” campaign issue? Are they shooting themselves in the foot?

General Lynch gave us a hint when she analogized denying transgender people a choice of bathrooms to Jim Crow. That analogy has so many holes it’s difficult to count them. First, neither transgender people nor their ancestors (in general) ever were slaves. Second, while homosexuality is not a choice, changing one’s gender is. It’s not only a choice; it’s a painful, discomfiting and extended voluntary procedure. In contrast, being “black” is entirely involuntary, the more so under the “one drop” rule, which often subjected people who could and did “pass” for white, after discovery, to myriad agonies up to lynching. Third, unlike bathroom restrictions, which make it hard to pee and poo, Jim Crow made it hard to pee, poo, eat, sleep, travel and do business. It severely impaired the travel “privileges and immunities” of citizens, which are among all Americans’ birthrights.

That a crack lawyer like Lynch should make such a bogus analogy from a public dais gives us all a signal. To progressives, it signals that something odd is going on. To bigots, it’s a signal to pile on. A “black” woman is standing up for a tiny, misunderstood minority that wants to mess with sex. To religious fundamentalists, it’s a signal to conflate overt or unconscious racism with loathing for sexual deviance and hyper-prudish privacy and circle the wagons of dogmatic certitude.

Remember Ted Cruz? (How quickly we forget.) Remember the guy whom everyone who met him but one roundly hated, and who nevertheless mounted the most successful opposition to Herr Drumpf? Remember all those evangelicals and religious fundamentalists who would follow Cruz’ arch-conservativism into Hell, at least as against Trump?

They are the real targets of that “guidance” letter. They are the ones who are going to stay home on general-election day, or—out of sheer spite—maybe even vote for Hillary. And one of many reasons they are going to do so is that attack ads, funded by anonymous but probably progressive donors, are going to show Trump, over and over again, revealing the attitude of most people nationwide (and especially cosmopolitan New Yorkers): that he doesn’t much care what kids do with their genders as long as no one gets jumped.

What we have here, I think, is another bit of political jujitsu from the President and his staff. Not for nothing did he get elected twice, by clear popular majorities, as the first “black” president in what he subsequently showed us to be—still—a consummately racist nation. He knows how to bend an opponent’s momentum to his ends, often without his opponents even knowing what he’s doing.

The GOP’s establishment/money men don’t give a damn about transgender people or high-school bathrooms one way or the other. They just hope the issue will be a hot button—“don’t let boys pretending to be girls ogle or fondle my daughter in her high-school locker room”—that will let them keep control of Congress, if not the presidency, and keep the money flowing into their anonymous donors’ bottomless maws. But in enraging a significant faction of their base, they forget that that very same faction doesn’t like Trump much anyway, and that this will only make them hate him more.

It’s a “wedge issue,” all right. But the wedge is like the ones that our pioneers used to split logs. The log is the Republican Party.

This episode gives us a preview of just how hard and just how nasty the coming general-election campaign will be. When AG Lynch can analogize denying trangenders their bathroom choice to Jim Crow, you can bet that no hold will be barred. If we all sometimes seem to act as if the end justifies the means, remember to look closely at the end: preventing an utterly unqualified, crypto-fascist, impulsive super-egotist from becoming leader of the free world and bearer of our Nuclear Codes.

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