Month: August 2017

On June 29, 2017, President Trump gave a speech at the Department of Energy regarding his planned Energy Policy.  He proposed a program to achieve “Energy Dominance” in which the US would “export American energy to The World to establish Dominance”.  To a world already largely dependent on energy from Russia and Arabs with respect to supply and price determination the idea of being further dominated by the United States must not have seemed very attractive.

President Trump outlined factors by which the US would establish this dominance:

1. Expand domestic US nuclear power for electricity generation
2. Remove barriers to financing foreign coal-powered electric plants
3. Build a pipeline to export gas to Mexico
4. Sempra Energy will begin negotiations to export Liquefied Natural Gas to South Korea
5. Two applications to export LNG from Louisiana have been approved
6. Initiate a new offshore US oil and gas leasing program in areas previously closed to leasing.

A few days later, Secretary of Energy Rick Perry defined Energy Dominance:

“An energy dominant America means self-reliant. It means a secure       nation, free from the geopolitical turmoil of other nations who seek       to use energy as an economic weapon.  An energy dominant America       will export to markets around the world, increasing our global                 leadership and our influence.”

The clear emphasis by the President was on exporting “energy” but in what form was not clear.

None of the President’s six points nor the Secretary’s definition offer a clear means of establishing “Energy Dominance”, self-reliance, or freedom from geopolitical turmoil.  If Energy Dominance means self-reliance that sounds much like energy independence which has been an objective of every American President since Nixon thought he had an Energy Crisis in the 1970s.

The US is not in a position to establish Dominance by exporting coal, nuclear plants, electricity, natural gas, or oil “to the World”.

Exporting coal must contend with restrictions imposed by climate and emissions considerations.   Expansion of nuclear power for electricity generation is a worthwhile objective for many reasons: reduced emissions, increasing electricity demand, and a reduced physical footprint compared to solar and wind methods.  The rest of the world has moved forward with nuclear technology while the US has not built nuclear plants for decades, however, and the US has reduced its nuclear manufacturing capabilities.  From a weak position, the US would be entering a market already supplied.  Development of nuclear power by the US will mainly be for domestic use.

The US has developed domestic gas supplies to the point we are the only advanced industrial nation to meet the reduced emission requirements of the Kyoto treaty.  We did it by replacing coal-fired electric power plants with natural gas.  Abundant natural gas supplies were developed with a combination of horizontal drilling and hydraulic fracturing which environmentalists oppose with their own peculiar version of logic.  The Europeans also refuse to apply these technologies to develop their own gas supplies preferring to continue hand-wringing and complaining about being dependent on Mr. Putin’s sympathies.

With our large domestic supplies of natural gas and low prices for power we have stimulated investment and expansion of new manufacturing facilities in the US.  We can export natural gas or electricity to our neighbors, Canada and Mexico, and have historically done so.  Both of these countries have large domestic supplies of energy, however, so exporting to them is based on convenience of location of supply, markets, and transportation facilities and cannot be expected to establish World Energy Dominance.

Exports of US gas to other parts of the world as Liquefied Natural Gas increased significantly in 2015, mostly to Latin America, but they have not yet reached the level of a strategic commodity to achieve dominance.  These gas exports are entering a market with abundant sources of supply and with transportation routes and facilities already established.  US gas supplies are not in a first-supplier position or shortage environment to establish dominance in most of these markets.  EIA estimates that US gas exports will not exceed 10% of domestic production.   I have been through several cycles of abundance and shortage and have reservations about exporting resources we may need later.

Which brings us to oil.   Oil is the elephant in the room with respect to international financial relationships, foreign policy, supply and pricing relationships, and strategic concerns for several reasons.  First:  A reliable oil supply at tolerable cost is necessary to establish and maintain a modern economy.  Second:  Oil is the largest component of international trade.  Third:  Oil is priced and paid for in international trade in US dollars, known as Petrodollars.  This price system and the size and critical nature of the oil markets supports the US dollar as the international reserve currency, tightly intertwines the oil markets with the international financial system, and causes the value of the dollar and Federal Reserve actions to significantly impact the price of oil.  Fourth:  Many major industrialized advanced economies are large consumers of oil but have no significant indigenous supplies of oil and many nations with major supplies are not major consumers.  Therefore maintaining trade between consumers and producers is critical.  Fifth: The US imports over 8 million barrels of oil per day.  Sixth:  For all the previous reasons, oil is a major consideration in foreign policy but is understood by few people making that policy.

The US, with considerable expenditure of capital, time, effort, and other resources and over 200 oil company bankruptcies has developed and applied oil-well horizontal drilling and hydraulic fracturing methods which have significantly increased US oil production by more than 4 million b/d; this increase has been widely publicized and recognized.  In addition, US demand has decreased somewhat.

The salient point, however, is that the US still imports over 8 million b/d of oil. 

The US is not self-sufficient with respect to oil supplies.  All oil exported by the US must be replaced by increased imports.  To reach oil supply independence and develop an additional significant export capability would require the US to increase sustained production by about 3 times as much as it already did.  This is an unrealistic objective; it will not happen.

In our foreign affairs we are confronted by China, Iran, and Russia.  Each of these confrontations involves oil in some fashion and each of these countries is heavily involved in Venezuela.

Vladimir Putin has an obvious foreign policy; he is using energy to dominate Europe either directly with Russian resources or through Russian companies, particularly Rosneft, which invest in and gain control of strategic oil and gas supplies worldwide.  Rosneft is now negotiating a takeover of Venezuela’s oil fields.

Venezuela is still supplying oil to Cuba, Nicaragua, and Bolivia and supporting other Latin American socialist paradises despite the failure of its domestic economy.  This in a country where the oil industry was initially discovered and developed by American companies and which produces a relatively heavy oil which American Gulf Coast refineries were designed to process decades ago.  The US has announced it may not buy any more Venezuelan oil.  Would Rosneft sell it to us?  They have plenty of customers: China, India, etc.

So:  Who is the Dominator?   Who is the Dominatee?

Because they are so closely inter-related, the US needs clear, strategic, and realistic foreign, energy, and financial policies.  We do not need policies based on unattainable results and offensive slogans.  Who is formulating these policies and who is establishing strategy?  The domestic industry currently provides a strong position from which to establish new supply, market, finance, and price relationships.

This commentary is not directly about oil – but it concerns the location of the largest oil deposits in the world, in our own neighborhood, which we have acquiesced in allowing them to be dominated by adversaries.

In the 1990s I was doing considerable business in SE Asia and was in and out of Hong Kong frequently.  In July, 1996, I was asked to give an after dinner talk to a mixed audience in a rather rustic setting in Northern California on what I expected would “Happen to Hong Kong when China Takes it Over”.  The transfer of Hong Kong from British to Chinese rule was scheduled for the following March.

Although scheduled to arrive onsite a few days early, due to flight delays, meetings, and so on, I arrived just before dinner in a suit which I was contemplating burning if I ever got it off.  I told the audience that I thought the subject needed to be changed to:  “What will Happen to Us When Hong Kong takes over China”.  My thesis was that combining the 24-hour, 7-day-week, full-bore capitalistic, entrepreneurial energy of Hong Kong and its capital, management experience, and aggressiveness with the largest, cheapest labor force in the world would be a problem for us, not them – and they would bury us.  Many acquaintances were already moving plants and offices to Shanghai.

When asked what we should do about it, I said we should embrace Latin America; a continent with a shared history of European colonialism, Christian faith and values, and a Western Civilization heritage; a continent with a large population and rich in resources.   We should establish treaties, economic ties, and other strong relationships with the countries there.  I saw no other way we could counter China’s size in any contest for world dominance.

What have we done about Latin America?  Almost nothing; mostly we ignored it.  Although in November, 2013, Secretary of State John Kerry announced to the Organization of American States that the Monroe Doctrine of the US was no longer in effect; another foreign policy action which cannot be justified by rational analysis.   This decision was consistent with long-term policy neglect of other countries in our own hemisphere.  Many of them do not even have ambassadors.  We have increasingly antagonized, alienated, estranged, and withdrawn from, Latin America.

This neglect has been exploited by China and Iran who have been penetrating the area for many years.  Iran has expanded its diplomatic, intelligence, fund-raising, and Hezbollah presence throughout Latin America.  After Kerry’s announcement, Russia announced their intent to build naval bases in Venezuela and Nicaragua, the same countries where Iran has reportedly built missile bases.  Failure to do this yet probably has more to do with the drop of oil price than lack of intent.  Of course, Kerry’s announcement was well received by both Venezuela and Nicaragua and their Marxist dependents and allies:  Bolivia, Ecuador, and Cuba.

The attitude toward Latin America among US foreign policy commentators is obvious.  After the election several journals had special sections of commentary regarding their analysis of what foreign policy will be with the new Trump Administration.  I reviewed  and issue of Foreign Affairs which had a section titled Trump Time.  This was a special section with multiple authors with their opinions regarding various subjects which they considered challenges facing the new Trump Administration and discussions of various aspects of foreign policy.  Similar reviews and analyses appeared in other journals as well.   I presume the discussions pertain to the issues considered of primary importance by the editors and the authors.  Latin America is not mentioned; it is the Missing Continent.

We ignore Latin America at our peril.  We maintain armies in the Middle East and Central Asia and have an uncertain supply and volatile price of oil when the largest oil deposits in the world are in Venezuela, a country falling apart, and Colombia, a long-term friend, and we offer no help.   We need to strengthen our bonds with these countries in particular and Latin America in general.

Venezuelan Agonistes

Venezuela is in terrible shape.  The social/economic situation there is so bad the New York Times and other mainstream media, never eager to point out the failures of Socialism, have taken notice.  The country with the largest oil deposits in the world cannot feed its own people.  Even the Organization of American States, one of the most lethargic of international organizations, is criticizing Venezuelan government policies.  The oil industry is so mis-managed it is importing oil from the US for its refineries.  The government is supplying oil and propping up its Communist brethren in Cuba and Nicaragua while a generation of its own children will be stunted by malnourishment.  Russian, Iranian, and Chinese influence and presence in the country are growing less than a five-hour flight (or a medium missile range) from the US.

What are we doing about it?  We are still buying between nearly 800,000 barrels of oil per day from Venezuela and following a common US foreign policy practice: Trade with our adversaries and make them rich.   We send troops and aid missions around the far corners of the earth on so-called humanitarian missions but ignore a true humanitarian problem of a long-standing friend in our own neighborhood.  Is the problem that we do not want to publicize the latest blatant case of the failure of Socialism?  Venezuela is a great candidate for a Case Study of how Socialism can wreck a rich and prosperous economy in less than 20 years.

What can we do about it?  Headlines today say the Trump Administration is considering sanctions.  These seem to include cutting off purchases of Venezuelan oil by American companies.  Cutting off income to the Venezuelans is not a policy which will accomplish much for the starving population.  It probably will not be successful because the Chinese will then buy the oil anyway.

We need to find a policy that will get some direct help to Venezuelans.  I think we should try Wal-Mart.  CITGO is an American oil company owned by Venezuela which is in debt to the Russians (Rosneft) and the Russians are considering foreclosure and then would control the company.   The US should impound its assets and payments by American companies for Venezuelan oil and put them in an account in trust for the Venezuelan people.  These funds can then be accessed on-line by individual Venezuelans who can go to a computer terminal, enter their ID number and make a withdrawal every two weeks.  For those without access to the internet, terminals can be set up at Wal Mart facilities.  The withdrawals can be in the form of a currency or pre-paid credit cards redeemable at Wal-Mart for food and daily hygiene items.  The currency and cards would expire in six weeks to reduce value to criminals.  Redemptions of the currency or cards would be covered from the Trust Account.

A lot of details will need worked out: The computer systems, the logistics, and security.  I have every confidence that this country has the ability to put the right people together in a room – and I know some of such people – and the details can be worked out in less than 48 hours.  We could then start moving food and soap and toothpaste to our suffering neighbors – if not with Wal-Mart, then by another means; we need to help them.