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The world is finally waking up to the idea that oil and natural gas are finite commodities and that world demand currently and for the foreseeable future will exceed world supplies. As with all commodities, when demand exceeds supply, the price will continue to rise until sufficient numbers of consumers leave the market to re-balance the supply and demand equation.

The fact that appears to be emerging that could not have been anticipated is that oil demand, on a worldwide basis, does not appear to be strongly impacted by price. In fact, oil demand is continuing to increase even as the price is rising. While it is only conjecture, it appears that the expanding economies that represent 75% of the world’s demand are not strongly impacted by price. While the poor economies that represent only 25% of the world’s oil demand do not have a strong enough market position to bring the price back in line. As the demand in the poorer economies decreases to its minimum levels (which does not represent a significant reduction in demand), the demand in the expanding economies simply takes up the slack.

In practical terms this means that the strongest economies in the world will continue to expand and the weaker economies will decline. More specifically, the 35 European countries, the U.S, Canada and Mexico, China, India, South Korea and Japan, Australia and Brazil will continue to expand. The oil supplying nations will continue to enjoy exceptionally high profits and should also continue to expand. But, all of the other nations of the world will decline. This means that 25% of the nations will enjoy prosperity while 75% will decline.

What is interesting in the above statistics is that there is one exception to all of the other countries mentioned; Brazil. More than 25 years ago Brazil made the decision that it didn’t want to be slave to the oil companies and suppliers. As a result, they have developed a fuel supply system largely based on Ethanol. The result of this decision is that Brazil has a positive balance of trade and is not being broadly impacted by the recent increases in oil prices.

The question must be asked, why haven’t other countries, including the U.S. moved in the same direction?

Ethanol and the U.S.:

The recently passed U.S. Energy Bill mandated the use of only 7.5 billion gallons of ethanol. While this is a step in the right direction, it makes a person wonder what would have happened if the Energy Bill had mandated 42 billion gallons of Ethanol instead of 7.5 billion gallons. The U.S. currently consumes more than 23 million barrels of oil each day which is more than 25% of the world’s production. At that consumption rate the U.S. consumes 352,590,000,000 gallons of oil each year. 42 billion gallons of ethanol represents approximately 12% of the total oil consumption. asked, why haven’t other countries, including the U.S. moved in the same direction?

First, our oil imports would fall by one billion barrels each year at a cost of more than $60 billion/year or about $5 billion/month. Second, the domestic economy would expand by more than $73 billion/year just from the ethanol sales and more than $40 billion/year in by-product sales. When a typical multiplier effect and down-stream industries are considered, the total positive impact on the domestic economy would be more than $500 billion/year.

From an environmental point of view, 12% ethanol in the transportation sector would result in a significant reduction in new greenhouse gas production. When all of the other potential ethanol producers are included, the world could continue to expand and the industrial impact would be reduced.

The farming sector of the U.S. economy would operate at full capacity, several million new jobs would be created and the Social Security Trust Fund would have many new participants forestalling the bankruptcy of that social contract.

Terrorism and the lack of oil supplies:

Why is ethanol so important? As mentioned above, 25% of the World’s nations will continue to expand while 75% will be in decline because they cannot afford to compete in the purchase of scarce oil supplies. I suppose conventional logic would dictate that all of these people, approximately one-half of the Worlds population will simply suffer quietly while the other half happily enjoys their expansion and increased ability to have new toys and homes. I think not.

What will happen is that these disenfranchised, under-educated, under-fed and under-employed people will become the next generation of terrorists. They may not go by the same names that we currently hear from the middle-east, but they will develop into activists and terrorists and they will have a cause. The great “Satan” will be the U.S. and the other expanding economies.

Why is Ethanol so important?

The single largest Balance of Trade issue with most developing and third-world countries is the purchase of fuel supplies. Many of these countries produce small amounts of oil but most purchase the bulk of their oil supplies. Why don’t all of the countries between the Tropic of Capricorn and the Tropic of Cancer produce ethanol from sugarcane? Why don’t these countries use something that they grow to produce something they need? Why don’t these countries decrease their Balance of Trade deficit by producing some of their own fuel? Why don’t these countries expand their job base by producing some of their own fuel?

The answer to these questions is not simple. Many of these countries are former colonies that have enjoyed price supports on the export of sugar. Many of these countries simply have not recognized the enormous change that is occurring in the Worlds economy and the impact that these changes will have on them.

To some level the U.S. and other expanding economies depend on the third-world economies as outlets for their goods. If these economies are allowed to contract, the expanding economies will lose markets for their products. Therefore, countries that join the energy production sector by producing ethanol will be in a better position to purchase goods and services provided by the other expanding economies.

Ethanol is not “The Solution” to the world’s energy supplies, but it is certainly one of the solutions. Within the next ten years the World’s oil demand will exceed 100 million barrels per day. If ethanol production worldwide could reach 10 million barrels per day, the pressure on oil price, refining capacity and exploration would be reduced. But, more importantly, the ethanol producing countries would be able to join the other expanding economies, reducing the political pressures and the potential for terrorism.

A recent article by Cathy Procter, The Denver Business Journal on August 7, 2005 provides some interesting pieces of additional information. Oil is expected to remain in the range of $50 to $70 per barrel for two years, said Mark Rodekohr, director of energy markets and contingency information for the federal Energy Information Administration. And the price of natural gas, used by 69 million homes, businesses and manufacturing plants across the United States, could climb to $12 per thousand cubic feet in the next two years.

The demand for oil has risen every year but one in the last 20, and shows no signs of slowing, particularly with the economies of China and India growing, said Tom Petrie, chairman and CEO of Parkman & Company Inc., a Denver-based oil and gas investment firm. In the past, excess production has cushioned consumers from big price jumps at the pump. But that cushion is gone.

Worldwide demand for oil in 2005 is expected to be about 84.7 million barrels per day, up 2.4% from 2004. Petrie predicted that oil prices would remain between $40 and $60 per barrel with occasional price rises to over $80 per barrel; I believe this is incorrect.

He then explained that existing oil production would decline between 2.5% and 8% in the next five years. On the low end this would be a loss of 10 million barrels/day and on the high end it would be a loss of over 28 million barrels/day of supplies. Of course these supplies would be replaced by new production that is predicted to be between 13 million and 25 million barrels per day to the market by 2010. Statistically, this means that oil production may not increase over the next ten years. Based on the current expansion levels, and using a future expansion level of only 1.5%/year, the demand for oil should exceed 100 million barrels/day within ten years.

When you balance these two figures, it is clear that oil supplies five years out will be about the same as they are today. If demand continues to increase the pressure on price will actually increase and we may see prices approaching $100 per barrel of oil on the market.

On the natural gas side, production dropped by 2% in 2004 despite higher prices and a drilling rig count higher than it’s been in 20 years, Stu Wagner, an analyst with Petrie Parkman stated.

Summary:

The immediate reaction to this is probably that I have reached a long way to establish my position. I would argue that a very quick examination of the Middle East and terrorism, as well as the fact that the U.S. went to Iraq and has protected Kuwait from invasion would serve as an excellent proof that the expanding economies will protect their positions to get oil or some other fuel source.

Other expanding nations such as China and India have been smugly content to watch the U.S. protect the availability of the world’s oil supplies. They will let us spend our money and our lives to keep the oil flowing. This begs the question of how these countries will behave when supply and demand are seriously out of balance. Will they participate in protecting the availability of supplies for everyone or will they only protect their own self-interest by literally taking the supplies that they need. The nations that surround China and have oil should be concerned.

Technology will expand the efficiency associated with conversion of agricultural products into ethanol. While this will not solve the energy crises it has the potential for expanding supplies and expanding the base of energy production.

Oil supplies may expand incrementally, but it appears that the expanding economies will increase their demand at a greater rate than the supplies will expand. Based on the continued imbalance of supply and demand it is reasonable to project further increases in oil price.

Ethanol production has the potential to increase supplies by 10 million barrels or more per day if the sugarcane producing nations and other starch based crops enter the market. While 10 million barrels per day will only represent 10% of the world’s supplies, it appears that oil supplies do not have the potential for this same level of expansion.

More importantly, more than 50 nations may have the potential to enter the production side of the market. These 50 nations would be able to reduce their balance of trade, improve local job conditions and participate in the current economic expansion.

The fact is, if we don’t move to the interim step of maximum world ethanol production, along with other renewable energy sources, we are going to create a two class world of “haves” and “have nots” that will sponsor an economic terrorism for the next 100+ years, or until there is an economic substitute to oil.