The Coming Energy Wars - Newsweek

Summary:
Rana Foroohar on what the effect will be of $200 oil on the global economy. No industry will be unaffected. Long-term demand will continue to grow while supply threats aren't going to go away rightaway. $200 in 6 to 24 months (Goldman Sachs estimate) is to fast for economies to cope. China and India have kept inflation down with cheap goods, but will be exporters of inflation once energy subsidies are reduced or stopped: end of cheap goods. Shift toward regional trade (regionalism), even major reversal of globalization itself, due to rising transport costs. Increase in corporate failures, and a lot of M&A; emerging-market firms swooping up ailing Western firms on the cheap. Effects will be worse for poor people in developing economies. Number of oil states rising as prices climb, ill-equiped to cope with corruption that oil-wealth brings. Shift in balance of world power, conflicts increasing. (Published: 31/05/08)

Notes:

• $4/gallon oil has already made an impact on American lifestyle
  
• driving less, using mass transit more, buying fewer gas guzzlers, shopping less wantonly
• energy revolution
  
• however: more and bigger changes in store
• Asian developing countries: currently protected from spiking price of oil buy subsidies
• if oil continues to rise and Asian energy subsidy dam eventually breaks, energy revolution will spread
• $200/barrel oil would have enormous global consequences
• year ago, no one was talking about $200/barrel oil, now everyone in the market is
• oil prices climbed from $10 in 1999 to $95 without slowing the surging world economy
• in large part because markets believed spike was at core driven by rising demand
• particularly from China and Inda
• feeds growth
• there was concern over supply, but nothing like in 1970s
• not until recent months
• with futures reaching $135, consensus began shifting to a new, more gloomy view:
• long-term demand, led by China and Inda, will continue to grow
• supply threats aren't going to go away any time soon
  
• increasing conflict, falling investment, industry bottlenecks and downward estimates of big field reserves in major oil fields
• Goldman Sachs: $200 barrier could be hit within next 6 to 24 months
• way too fast for comfort
• even for those who welcome hight gas prices as a way to induce energy conservation and fight global warming
• already causing real pain for ordinary people, threatening global growth and reviving spectre of inflation
• price pressure now particularly acute in emerging markets like China and India
• China and India
• have dampened global inflation by exporting cheap goods and services
• now they threaten to become exporters of inflation
• particularly if energy price controls give way
• Americans now making up for their losses at the pump by flocking to Wal-Mart for cheap Chinese goods
• will be out of luck
• oil drives so much of the global economy it's almost difficult to fully imagine the world of $200 oil
• will force nations to greener much faster than now
• conserving energy and developing and adopting new non-fossil fuels
• but: none of this can happen full stop in 6 to 24 months
• some analysts: shift toward regional trade, even major reversal of globalization itself
• rising transport costs will make it too expensive to ship many of goods long distances
• major acceleration in transfer of wealth from oil consumers to producers would alter the world balance of power
• Morgan Stanley: at $200/barrel, the proven oil reserves of the 6 Gulf nations would rise in value to $95 trillion
• twice the size of public equity markets
• corrupting curse of oil wealth
• Michael L Ross (UCLA): percentage of the world's wars that take place in oil states is growing
• number of oil states rising (Cambodia, East Timor, ...) with more likely to follow as prices climb
• many of these newcomers are small and ill-equipped to cope with the corruption that often wastes the windfall
• no industry will be unaffected by $200 oil
• death of at least one of the Big Three in Detroit
• airlines vulnerable
• Jean-Cyril Spinetta (Air France-KLM, CEO): $200 oil would represent a far bigger shock than 9/11 or SARS (2003); it's more than a change, it's a revolution, a new industry in fact; lot of bankruptcies very rapidly in Europe, US and Asia; restructuring of networks, cutting routes, cutting capacities
• as food and energy go up, spending on everything else will go down
• big-box stores like Wal-Mart are already having record quarters while middle-market chains are suffering
• trends will hit Europe too
• the more Europeans spend on gas, the less they will spend on furniture, clothing and white goods; sales in all those categories are already down
• Richard Reid (Citibank): expect an increase in corporate failures, and a lot of M&A; might well see flush emerging-market firms (e.g. Tata) swooping up ailing Western firms on the cheap
• American automakers
• were moving slowly to smaller cars before the spike
• but: sales of SUVs and pickups are now falling so fast that they appear to have been caught flat-footed
• Philip Verleger: at $200, GM tanks; they just don't have time to fix their fleet
• Alan Mullaly (Ford CEO), 2 weeks ago: no longer expects a return to profitability in 2009; believes gas-price shift is permanent
• Nissan: unveiled a $115m new plant designed to build lithium-ion/fuel cells
• Richard Berner (Morgan Stanley): "If you think things won't be pleasant for industrial nations, think about developing economies, where people spend 50% of their income on food and fuel"
• concern that as higher oil prices force many Asian economies to reduce or even cut their generous fuel subsidies, growth will slow sharply, and there could be social unrest as the world's poorest become more desparate
• political ramifications of this (moving away from free-trade), combined with ever-rising cost of doing business as usual, could force a retrenchment from globalization
• Jeff Rubin (CIBC World Markets): "It's a harbinger of the reversal of globalization; at $200 a barrel, you'll see transport costs rise so much that they will effectively reverse the trade liberalization of the last 30 years"
• regionalism: world will realign itself regionally
• Japan may continue to ship in goods from China, but the US will increasingly import from Latin America
• same thing happened from 1973 to 1979
• regionalism won't stop at trade
• Sovereign Wealth Funds will continue to buy big chunks of Western banks and blue-chip companies
• possibility of worse conflicts
• Scott Nyquist (McKinsey): "As areas like the Mideast and Africa, Russia and Venezuela continue to rise, you're going to see increasing energy greed, aggressive behaviours and neocolonial actions on the part of various countries."
• Western ideas about civil society, the environment and women's rights could be displaced with new sets of values
• lack of any spare capacity in the global pipeline makes it difficult to solve such situation with sanctions
• taking any oil off the market would at this point merely ignite an already explosive situation
• megatrends fueling the global supply shortage tend to feed on one another
• higher prices fuel the growing tendency of oil states like Russia and Venezuela to re-nationalize fields
• often leads to lower output due to the inefficiency of most state oil companies
• publicly traded companies have to go where they can
• fields in peaceful places tapped out
• hunt for new oil has moved into conflict zones (Nigeria, Angola) and geologically extreme territory (Siberia, deep sea)
• policy makers need to
• stop grilling big oil companies about why prices are so high
• they now control only a small percent of known reserves, out of their hands
• support smarter green initiatives
• wind and solar credits rather than ethanol boondoggles
• stop pandering to voters with subsidies and gas-tax cuts
• ignores the new reality: oil is a finite resource, more people want more of it, and the profligacy with which we've used it is going to change