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Oil Painting By Numbers

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Mark Graffis

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Jul 6, 2005, 9:52:57 PM7/6/05

Oil Painting By Numbers

http://www.fromthewilderness.com/free/ww3/070505_world_stories.shtml
Quick jump to below stories:
Oil Painting By Numbers
Threats of Peak Oil to the Global Food Supply
One in six countries facing food shortage
Putin calls on France, Germany to aid US
Bush administration annexes internet
New hurdle for China's Unocal bid
Unocal Deal: A Lot More Than Money Is at Issue
Chinese factories face power cuts
China Tells Congress To Back Off Businesses

[I cannot offer enough praise for the cogent and clear-headed analysis
offered here by Eric Sprott. If you want to know what's coming, read this...
and weep. I will add some geo-political observations to fill out the picture.

Several things are now clear.

First, it has been decided that "demand destruction" is the only
immediate way to mitigate a collapse that is coming sooner than almost anyone
expected. The US, with 5% of the world's population is using more than 25% of
the world's energy yet has become (by design) an economic basket case, ripe
for a liquidation sale. The American people are becoming -- to quote Kissinger
-- "useless eaters". China's (now confirmed) pending re-evaluation of the Yuan
will only hasten this demise.

Oil production numbers are dismal to say the least. Is it possible
that Russia has declined to commit increased oil production to either Japan or
China because it can't? Absolutely! We already know that Russia is teetering
on the brink of its own decline. The problems are worse with respect to
natural gas. Just two days ago Britain received its first-ever LNG tanker
import marking the final death knell for the North Sea gas fields. The US
congress has just approved a federal override for governors and local
jurisdictions on the placement of LNG regasification terminals in the US.

The hand might have been forced sooner than planned. Either US demand
must be curtailed (and quickly) or else there will be no way to keep itchy
fingers off of nuclear buttons around the world. We are at the point where one
nation's full supply is another nation's starvation and collapse. Suddenly the
massive realignment of Eurasian powers with China and Russia over the weekend,
marching to a new NWO manifesto excluding the US makes good sense. Watch
closely what happens when Russian and Chinese leaders meet in Kazakhstan next
week.

In the meantime the Bush administration becomes increasingly weakened
and ineffective by the Rove/Plame scandal and other problems. This becomes a
perfect excuse (out) to explain why the administration will be unable to cope
with the collapse that is coming. "The Bush administration, hobbled by recent
scandals, has proved incapable of dealing with these crises on Capitol Hill"
CNN will say. The people will scream, "It's time for a change!"

"Meet the new boss..." Isn't it strange that best friends GHWB and
Bill Clinton just conveniently went boating in Maine? It is the perfect set up
for Hillary in 2008 and also a convenient way to explain the collapse of the
American economy.

We have very little time and all FTW subscribers are encouraged to
start planning for a winter that may include inflation, blackouts, fuel
shortages, and even possibly rationing. - MCR]

Oil Painting By Numbers

Eric Sprott, CA & Sasha Solunac, CFA
Sprott Asset Management
July 5th, 2005
http://321energy.com/editorials/sprott/sprott070505.html

In accordance with Title 17 U.S.C. Section 107, this material is
distributed without profit to those who have expressed a prior interest in
receiving the included information for research and educational purposes.

At the risk of sounding like a broken record (or a scratched CD as the
case may be), in this Markets at a Glance we will once again revisit one of
our favourite topics: Oil. We don't mean to be long in the tooth on this
subject, for, as our readers are well aware, we've already written about
Hubbert's Peak and Peak Oil on quite a few occasions since our first article
on oil in April, 2004. This time around we won't bore you with the theories
and hypotheses, and the whys and wherefores, of imminently declining global
oil production. Nor will we mention the world's ultimate demise when it
finally realizes that there just isn't enough of the stuff to go around
anymore. Verily, our views in this regard are already well known to those who
read our articles.

Rather, we will merely be connecting the dots (painting by numbers if
you will) on a canvas of interesting data points that have come to light
recently. Truth be told, the dynamics in the oil market are changing so
rapidly that it is a topic worthy of frequent visitation. The problem, as we
see it, is one of mathematics - the numbers just aren't adding up. Global oil
demand is expected to increase by 1.8 million barrels per day this year
(according to the IEA), and yet everywhere we look we see evidence that
production is falling short of expectations. Countries that were supposed to
grow production and be the "saviours" (Russia, Mexico, and perhaps even Saudi
Arabia) are showing signs of peaking production, and countries that are
already in decline are declining more rapidly that expected (U.K., Norway, and
Indonesia). More and more experts (executives of oilfield services companies
like Schlumberger and Baker Hughes for example) are now saying publicly that
the average decline rate of the world's oil wells is 8%! - a shockingly high
hurdle to overcome with new production.

The implication of an 8% decline rate is that 6.7 million barrels per
day of new production must be found every year just to break even (let alone
meet growing demand). Although data on decline rates is difficult to come by,
we suspect that 10 years ago nobody was using decline rates greater than 5%
(we've even seen ranges as low as 1-3%). Let's be conservative and assume 5%.
That means in 1995, when oil production was 71 million barrels per day, the
world needed to find 3.5 million barrels per day in order to break even on
production. To overcome today's decline rates means that we have to find over
3 million barrels per day more of new oil than we did 10 years ago. Based on
recent evidence, that just ain't happening. Furthermore, 10 years ago it was
known that OPEC could increase production by 10 million barrels per day over
the next decade, and Russia by 3 million. (That's how we got from 71 million
barrels per day to 84 million.) The rest of the world (non-OPEC/Russia) has
merely flatlined. If OPEC and Russia flatline today, then global oil
production is sure to go down.

As a side note, the decline rates being experienced in the natural gas
industry are even more onerous. First Energy revealed that Canadian natural
gas production is expected to rise by a measly 0.1% this year, even though
exploration and development costs are up 25%. So 25% more money has to be
spent in order to find 0.1% more natural gas. As one can see, the supply side
of the natural gas market is having problems of its own.

So far this year the supply side of the oil equation has been anything
but encouraging to those who believe that plentiful oil will be with us for
decades to come. On the contrary, with each passing day we are becoming
increasingly convinced that a "supply shock" is just on the horizon, and it
will likely manifest itself before the year is out. This year, 2005, may well
turn out to be the peak year for global oil production. In the seasonally
strong fourth quarter, demand is expected to be 86.5 million barrels per day -
that's 4 million barrels per day higher than current demand in the second
quarter. Where this extra production is supposed to come from is leaving many
of us scratching our heads. Be that as it may, the moment of reckoning is
quickly approaching.

So why are things looking so bleak for oil supply? For one thing, it
is becoming increasingly apparent that North Sea oil production is now falling
off a cliff. In a report released this week, it was revealed that Britain had
the steepest decline in oil production of any oil-producing nation last year,
falling by 10% or 230,000 barrels per day. Norway (the other major North Sea
oil producer) in the first four months of the year saw its oil production
similarly fall 10% compared to last year. Even more disturbingly, the month of
May alone saw a drop of 40,000 barrels per day versus April. If such a
month-over-month rate of decline continues then Norway will lose at least
400,000 barrels per day of production this year alone.

The heyday of North Sea oil production is clearly a thing of the past.
It is worth noting that at its peak in 1999, the North Sea accounted for 9% of
world oil production. Since that time it has lost one million barrels per day
of oil production, with the most precipitous declines occurring in the last 12
months. The news coming out of Mexico isn't helping matters either. Until
recently, Mexico has been a bright spot on the oil scene, having achieved
consistent production increases over the past decade from 2.6 million barrels
per day in 1995 to 3.4 million barrels per day last year. However, production
figures coming in for this year show that Mexico may already have peaked.
Production so far this year is coming in slightly down year-over-year, after
only a marginal increase (12,000 barrels per day) last year. Mexico's largest
oilfield is Cantarell, a giant that produces 2 million barrels per day and
accounts for over half of Mexican production. Late last year, the CEO of
Mexico's state-owned oil company warned that Cantarell may start to go into
decline as early as the middle of this year, and once it does the decline rate
will be 10%-15% per year! That amounts to another 200,000-300,000 barrels per
day of oil production per year falling by the wayside.

Meanwhile, the Russian Economy Minister said this week that Russian
oil production will only grow 3.5% this year - half the average growth rate
experienced in the last five years. Even 3.5% seems optimistic to us given
that in the first five months production was up only 3.2%, and that was an
easy compare (Russian production was still ramping up at the start of last
year). However, if one were to look at the monthly chart of Russian oil
production it is definitely starting to look "peakish".

Production has been flat to slightly down since October 2004 after
ramping up considerably in the five years before then. Be that as it may, even
if Russia were to realize the 3.5% growth that they claim, it would amount to
a mere 300,000 barrels per day over what they produced last year. To put that
in perspective, that's an amount equivalent to Cantarell's (potential)
decline, and is still less than half of what North Sea oil production is
losing every year. In short, nowhere near enough to make up for the decline
rates we mentioned earlier.

Have the OPEC countries been picking up the slack? Hardly. OPEC
ministers are saying publicly that many member countries such as Iran,
Venezuela, and Indonesia are failing to meet production targets. (Indonesia is
now a net importer of oil. so much for the E in OPEC). The Iranian oil
minister even went as far as to say, "OPEC members are already pumping at full
capacity and can do nothing about prices." Recall that it is OPEC (along with
Russia) that has been responsible for the majority of the world's oil
production growth over the past decade. The rest of the world as a whole has
remained more or less flat over that time. If OPEC and Russia are indeed
running their wells flat out, then it's game over. There is no excess capacity
anywhere in the world.

The problem is that we are reliant on a handful of gigantic (and
aging) oilfields for the vast majority of our oil supply - oilfields that have
been in production for decades and may have been "overproduced" in order to
keep up with growing demand. As these fields go, so does global oil production
- they are that large. Nothing found since can hold a candle to these
goliaths. Nowhere is this more apparent than in the Middle East, especially
Saudi Arabia which is the largest OPEC producer by far. 90% of the oil that
Saudi Arabia has ever produced has come from five giant oilfields, some of
which (like Ghawar) are over 50 years old. The two largest, Ghawar and
Safaniya, have accounted for 75% of all Saudi oil production ever, and Ghawar
today at five million barrels per day still accounts for almost 60% of Saudi
production. To put the size and relevance of Ghawar in perspective, in the
last 25 years the number of oilfields discovered in the world that are
producing over 250,000 barrels per day can be counted on one hand. Hot off the
presses is a new book by Matt Simmons, Chairman and CEO of Simmons & Company
International and a leading proponent of the Peak Oil hypothesis. The book is
titled Twilight in the Desert - The Coming Saudi Oil Shock and the World
Economy. Simmons has been an oil industry analyst for over 30 years and for
this book has poured over 235 technical papers written by engineers and
scientists familiar with the key Saudi oilfields. He does a field by field
assessment of 12 oilfields and concludes that Saudi Arabian oil production is
at or very near its peak sustainable volume, and will likely go into decline
in the very near future. The biggest problem is with Ghawar. This mammoth
oilfield has been producing oil at prolific levels for the past 25 years, and
it may have been irrevocably damaged by efforts to maintain its production
through massive water injection. Simmons calls this "overproducing" - a term
that is common in the oil industry and implies two things: (1) less oil being
ultimately recoverable from the oilfield, and (2) a precipitous decline in
production once damage from all the water injection fails to maintain
pressure. Saudi Aramco (the state-owned oil company) started injecting water
into Ghawar since the early 1960's, but it found itself having to inject more
and more water over time to maintain production levels. The amount of water
injected started in the tens of thousands of barrels per day and steadily grew
to 12 million barrels per day by 1998. Today, Simmons suspects that the Saudis
are injecting 15 to 18 million barrels of water per day into Ghawar - three
times the quantity of oil that is being produced. Simmons believes Saudi oil
production can collapse at any time. The proof will be in the pudding. If the
Saudi's are unable to increase oil production, this will become most clear in
the fourth quarter when OPEC is scheduled to increase production to 30.5 - 31
million barrels per day from the 28 mbpd it produces currently.

So the prospects for global oil supply look tenuous at best, but let's
not forget the demand side of the equation. Many interesting data points can
be found here too. Chinese car sales in the month of May were up 24%
year-over-year, and are expected to be up at least 15% for the year as a
whole. Similarly, car sales in India were up 20% in the month of May. To put a
historical perspective on what this means for oil demand, back in the 1950's
and 60's when automobiles started to become ubiquitous in the Western world,
oil demand grew from 10 million barrels per day in 1950 to 50 million barrels
per day by 1970. Clearly, there won't be enough oil to go around for this kind
of automobile demand in developing countries as well.

Although the world for the most part is still in denial when it comes
to the pending oil crisis, the markets haven't been oblivious to these
developments. Even though we are seasonally in a low demand period, the price
of oil is quickly approaching $60 as we speak - an all-time high and an
increase of $12 in the past month alone. The futures price of oil is now in
contango (future price higher than spot) until 2007 and, early last week
before the run-up in the spot price, was in contango all the way to December
2011 (the longest contract available). A contango in the oil market was
practically unheard of as recently as the beginning of this year. However, the
way events are unfolding, posterity may well show that buying a 2011 barrel of
oil for $55 today was the bargain of the century!

How high can oil go? In a crisis the sky's the limit. Even the threat
of a shortage can send the price parabolic. Back in 1970 when US oil
production unexpectedly peaked (nobody believed Hubbert back then), the price
of oil shot up from $1 per barrel in 1970 to $12 per barrel by 1973. (This all
happened before the Arab oil embargo.) There wasn't a de facto shortage of oil
back then, as the Middle East was able to pick up the slack in US production.
Unfortunately, there is nobody left to pick up the slack today. All the data
points are confirming that we have a problem in oil, and by inference the
entire energy sector. It is the biggest problem the world faces today.

------------------------------------------------------------------------

[The latest from the brilliant Richard Heinberg only combines with
energy production news to make it clear that we are out of time. - MCR]

MUSELETTER
No. 159 - July 2004
by Richard Heinberg
http://www.museletter.com/archive/159.html

Threats of Peak Oil to the Global Food Supply

A paper presented at the FEASTA Conference, "What Will We Eat as the
Oil Runs Out?", June 23-25, 2005, Dublin Ireland

Food is energy. And it takes energy to get food. These two facts,
taken together, have always established the biological limits to the human
population and always will.

The same is true for every other species: food must yield more energy
to the eater than is needed in order to acquire the food. Woe to the fox who
expends more energy chasing rabbits than he can get from eating the rabbits he
catches. If this energy balance remains negative for too long, death results;
for an entire species, the outcome is a die-off event, perhaps leading even to
extinction.

Humans have become champions at developing new strategies for
increasing the amount of energy - and food - they capture from the
environment. The harnessing of fire, the domestication of plants and animals,
the adoption of ards and plows, the deployment of irrigation networks, and the
harnessing of traction animals - developments that occurred over tens of
thousands of years - all served this end.

The process was gradual and time-consuming. Not only were new tools
developed, but, over centuries, small inventions and tiny modifications of
existing tools - from scythes to horse-collars - enabled human and animal
muscle power to be leveraged more effectively.

This entire exercise took place within a framework of natural limits.
The yearly input of solar radiation to the planet was always immense relative
to human needs (and still is), but it was finite nevertheless, and while
humans directly appropriated only a tiny proportion of this abundance the vast
majority of that radiation served functions that indirectly supported human
existence - giving rise to air currents by warming the surface of the planet,
and maintaining the lives of countless other kinds of creatures in the oceans
and on land.

The amount of available human muscle power was limited by the number
of humans, who, of course, had to be fed. Draft animals (bred for their
muscle-power) also entailed energy costs, as they likewise needed to eat but
also had to be cared for in various ways. Therefore, even with clever
refinements in tools and techniques, in crops development and animal breeding,
it was inevitable that humans would reach a point of diminishing returns in
their ability to continue increasing their energy harvest, and therefore the
size of their population.

By the nineteenth century these limits were beginning to become
apparent. Famine and hunger had long been common throughout even the
wealthiest regions of the planet. But, for Europeans, the migration of surplus
populations to other nations, crop rotation, and the application of manures
and composts were gradually making those events less frequent and severe.
European farmers, realizing the need for a new nitrogen source in order to
continue feeding burgeoning and increasingly urbanized populations, began
employing guano imported from islands off the coasts of Chile and Peru. The
results were gratifying. However, after only a few decades, these guano
deposits were being depleted. By this time, in the late 1890s, the world's
population was nearly twice what it had been at the beginning of the century.
A crisis was again in view.

But again crisis was narrowly averted, this time due to fossil fuels.
In 1909, two German chemists named Fritz Haber and Carl Bosch invented a
process to synthesize ammonia from atmospheric nitrogen and the hydrogen in
fossil fuels. The process initially used coal as a feedstock, though later it
was adapted to use natural gas. After the end of the Great War, nation after
nation began building Haber-Bosch plants; today the process produces 150
million tons of ammonia-based fertilizer per year, equaling the total amount
of available nitrogen introduced annually by all natural sources combined.

Fossil fuels went on to offer still other ways of extending natural
limits to the human carrying capacity of the planet.

Early steam-driven tractors came into limited use in 19th century;
but, after World War I, the size and effectiveness of powered farm machinery
expanded dramatically, and the scale of use exploded, especially in North
America, Europe, and Australia from the 1920s through the '50s. In the 1890s,
roughly one quarter of US cropland had to be set aside for the growing of
grain to feed horses - most of which worked on farms. The internal combustion
engine provided a new kind of horsepower not dependent on horses at all, and
thereby increased the amount of arable land available to feed humans.

Chemists developed synthetic pesticides and herbicides in increasing
varieties after WWII, using knowledge pioneered in laboratories that had
worked to perfect explosives and other chemical warfare agents. Pesticides not
only increased crop yields in North America, Europe, and Australia, but also
reduced the prevalence of insect-borne diseases like malaria. The world began
to enjoy the benefits of "better living through chemistry," though the
environmental costs, in terms of water and soil pollution and damage to
vulnerable species, would only later become widely apparent.

In the 1960s, industrial-chemical agricultural practices began to be
exported to what by that time was being called the Third World: this was
glowingly dubbed the Green Revolution, and it enabled a tripling of food
production during the ensuing half-century.

At the same time, the scale and speed of distribution of food
increased. This also constituted a means of increasing carrying capacity,
though in a more subtle way.

The trading of food goes back to Paleolithic times; but, with advances
in transport, the quantities and distances involved gradually increased. Here
again, fossil fuels were responsible for a dramatic discontinuity in the
previously slow pace of growth. First by rail and steamship, then by truck and
airplane, immense amounts of grain and ever-larger quantities of meat,
vegetables, and specialty foods began to flow from countryside to city, from
region to region, and from continent to continent.

William Catton, in his classic book Overshoot, terms the trade of
essential life-support commodities "scope expansion."1 Carrying capacity is
always limited by whatever necessity is in least supply, as Justus von Liebig
realized nearly a century-and-a-half ago. If one region can grow food but has
no exploitable metal deposits, its carrying capacity is limited by the lack of
metals for the production of farm tools. Another region may have metals but
insufficient topsoil or rain; there, carrying capacity is limited by the lack
of food. If a way can be found to make up for local scarcity by taking
advantage of distant abundance (as by exporting metal ores or finished tools
from region A to help with food production in region B, and then exporting
food from B to A), the total carrying capacity of the two regions combined can
be increased substantially. We can put this into a crude formula:

CC of A+B > (CC of A) + (CC of B)

From an ecological as well as an economic point of view, this is why
people trade. But trade has historically been limited by the amount of energy
that could be applied to the transport of materials. Fossil fuels temporarily
but enormously expanded that limit.

The end result of chemical fertilizers, plus powered farm machinery,
plus increased scope of transportation and trade, was not just a three-fold
leap in crop yields, but a similar explosion of human population, which has
grown five-fold since dawn of industrial revolution.

Agriculture at a Crossroads

All of this would be well and good if it were sustainable, but, if it
proves not to be, then a temporary exuberance of the human species will have
been purchased by an eventual, unprecedented human die-off. So how long can
the present regime be sustained? Let us briefly survey some of the current
trends in global food production and how they are related to the increased use
of inexpensive fossil fuels.

Arable cropland: For millennia, the total amount of arable cropland
gradually increased due to the clearing of forests and brush, and the
irrigation of land that would otherwise be too arid for cultivation. That
amount reached a maximum within the past two decades and is now decreasing
because of the salinization of irrigated soils and the relentless growth of
cities, with their buildings, roads, and parking lots. Irrigation has become
more widespread because of the availability of cheap energy to operate pumps,
while urbanization is largely a result of cheap fuel-fed transportation and
the flushing of the peasantry from the countryside as a consequence of their
inability to buy or to compete with fuel-fed agricultural machinery. Roads
that cover former cropland are built from oil, and the erection of buildings
has been facilitated by the mechanization of construction processes and the
easy transport of materials.

Topsoil: The world's existing soils were generated over thousands and
millions of years at a rate averaging an inch per 500 years. The amount of
soil available to farmers is now decreasing at an alarming rate, due mostly to
wind and water erosion. In the US Great Plains, roughly half the quantity in
place at the beginning of the last century is now gone. In Australia, after
two centuries of European land-use, more than 70 percent of land has become
seriously degraded.2 Erosion is largely a function of tillage, which fractures
and loosens soil; thus, as the introduction of fuel-fed tractors has increased
the ease of tillage, the rate of soil loss has increased dramatically.

The number of farmers as a percentage of the population: In the US at
the turn of the last century, 70 percent of the population lived in rural
areas and farmed. Today less than two percent of Americans farm for a living.
This change came primarily because fuel-fed farm machinery replaced labor,
which meant that fewer farmers were needed. Hundreds of thousands - perhaps
millions - of families that desperately wanted to farm could not continue to
do so because they could not afford the new machines, or could not compete
with their neighbors who had them. Another way of saying this is that
economies of scale (driven by mechanization) gave an advantage to ever-larger
farms. But the loss of farmers also meant a gradual loss of knowledge of how
to farm and a loss of rural farming culture. Many farmers today merely follow
the directions on bags of fertilizer or pesticide, and live so far from their
neighbors that their children have no desire to continue the agricultural way
of life.

The genetic diversity of domesticated crop varieties: This is
decreasing dramatically due to the consolidation of the seed industry. Farmers
on the island of Bali in Indonesia once planted 200 varieties of rice, each
adapted to a different microclimate; now only four varieties are grown. In
2000, Semenis, the world's largest vegetable seed corporation, eliminated 25
percent of its product line as a cost-cutting measure. This ongoing, massive
genetic consolidation is also being driven by the centralization of the seed
industry (the largest three field seed companies - DuPont, Monsanto, and
Novartis - now account for 20 percent of the global seed trade), which is in
turn consequent upon fuel-fed globalization.

Grain production per capita: A total of 2,029 million tons of grain
were produced globally in 2004; this was a record in absolute numbers. But for
the past two decades population has grown faster than grain production, so
there is actually less available on a per-head basis. In addition, grain
stocks are being drawn down: According to Lester Brown of the Earth Policy
Institute, "in each of the last four . . . years production fell short of
consumption. The shortfalls of nearly 100 million tons in 2002 and again in
2003 were the largest on record."3 This trend suggests that the strategy of
boosting food production by the use of fossil fuels is already yielding
diminishing returns.

Global climate: This is being increasingly destabilized as a result of
the famous greenhouse effect, resulting in problems for farmers that are
relatively minor now but that are likely to grow to catastrophic proportions
within the next decade or two. Global warming is now almost universally
acknowledged as resulting from CO2 emissions from the burning of fossil
fuels.

Available fresh water: In the US, 85 percent of fresh water use goes
toward agricultural production, requiring the drawing down of ancient aquifers
at far above their recharge rates. Globally, as water tables fall, ever more
powerful pumps must be used to lift irrigation water, requiring ever more
energy usage. By 2020, according to the Worldwatch Institute and the UN,
virtually every country will face shortages of fresh water.

The effectiveness of pesticides and herbicides: In the US, over the
past two decades pesticide use has increased 33-fold, yet, each year a greater
amount of crops is lost to pests, which are evolving immunities faster than
chemists can invent new poisons. Like falling grain production per capita,
this trend suggests a declining return from injecting the process of
agricultural production with still more fossil fuels.

Now, let us add to this picture the imminent peak in world oil
production. This will make machinery more expensive to operate, fertilizers
more expensive to produce, and transportation more expensive. While the
adoption of fossil fuels created a range of problems for global food
production, as we have just seen, the decline in the availability of cheap oil
will not immediately solve those problems; in fact, over the short term they
will exacerbate them, bringing simmering crises to a boil.

That is because the scale of our dependency on fossil fuels has grown
to enormous proportions.

In the US, agriculture is directly responsible for well over 10
percent of all national energy consumption. Over 400 gallons of oil equivalent
are expended to feed each American each year. About a third of that amount
goes toward fertilizer production, 20 percent to operate machinery, 16 percent
for transportation, 13 percent for irrigation, 8 percent for livestock
raising, (not including the feed), and 5 percent for pesticide production.
This does not include energy costs for packaging, refrigeration,
transportation to retailers, or cooking.

Trucks move most of the world's food, even though trucking is ten
times more energy-intensive than moving food by train or barge. Refrigerated
jets move a small but growing proportion of food, almost entirely to wealthy
industrial nations, at 60 times the energy cost of sea transport.

Processed foods make up three-quarters of global food sales by price
(though not by quantity). This adds dramatically to energy costs: for example,
a one-pound box of breakfast cereal may require over 7,000 kilocalories of
energy for processing, while the cereal itself provides only 1,100
kilocalories of food energy.

Over all - including energy costs for farm machinery, transportation,
and processing, and oil and natural gas used as feedstocks for agricultural
chemicals - the modern food system consumes roughly ten calories of fossil
fuel energy for every calorie of food energy produced.4

But the single most telling gauge of our dependency is the size of the
global population. Without fossil fuels, the stupendous growth in human
numbers that has occurred over the past century would have been impossible.
Can we continue to support so many people as the availability of cheap oil
declines?

Feeding a Growing Multitude

The problems associated with the modern global food system are widely
apparent, there is widespread concern over the sustainability of the
enterprise, and there is growing debate over the question of how to avoid an
agricultural Armageddon. Within this debate two viewpoints have clearly
emerged.

The first advises further intensification of industrial food
production, primarily via the genetic engineering of new crop and animal
varieties. The second advocates ecological agriculture in its various forms -
including organic, biodynamic, Permaculture, and Biointensive methods.

Critics of the latter contend that traditional, chemical-free forms of
agriculture are incapable of feeding the burgeoning human population. Here is
a passage by John John Emsley of University of Cambridge, from his review of
Vaclav Smil's Enriching the Earth : Fritz Haber, Carl Bosch, and the
Transformation of World Food:

If crops are rotated and the soil is fertilized with compost, animal
manure and sewage, thereby returning as much fixed nitrogen as possible to the
soil, it is just possible for a hectare of land to feed 10 people - provided
they accept a mainly vegetarian diet. Although such farming is almost
sustainable, it falls short of the productivity of land that is fertilized
with "artificial" nitrogen; this can easily support 40 people, and on a varied
diet.5

This seems unarguable on its face. However, given the fact that fossil
fuels are non-renewable, it will be increasingly difficult to continue to
supply chemical fertilizers in present quantities. Nitrogen can be synthesized
using hydrogen produced from the electrolysis of water, with solar or wind
power as a source of electricity. But currently no ammonia is being
commercially produced this way because of the uncompetitive cost of doing so.
To introduce and scale up the process will require many years and considerable
investment capital.

The bioengineering of crop and animal varieties does little or nothing
to solve this problem. One can fantasize about modifying maize or rice to fix
nitrogen in the way that legumes do, but so far efforts in that direction have
failed. Meanwhile, the genetic engineering of complex life forms on a
commercial scale appears to pose unprecedented environmental hazards, as has
been amply documented by Dr. Mae Wan-Ho among many others.6 And the
bio-engineering industry itself consumes fossil fuels, and assumes the
continued availability of oil for tractors, transportation, chemicals
production, and so on.

Those arguing in favor of small-scale, ecological agriculture tend to
be optimistic about its ability to support large populations. For example, the
2002 Greenpeace report, "The Real Green Revolution: Organic and Agroecological
Farming in the South," while acknowledging the lack of comparative research on
the subject, nevertheless notes:

In general . . . it is thought that [organic and agroecological
farming] can bring significant increases in yields in comparison to
conventional farming practices. Compared to "Green Revolution'"farming
systems, OAA is thought to be neutral in terms of yields, although it brings
other benefits, such as reducing the need for external inputs.7

Eco-agricultural advocates often contend that there is plenty of food
in the world; existing instances of hunger are due to bad policy and poor
distribution. With better policy and distribution, all could easily be fed.
Thus, given the universally admitted harmful environmental consequences of
conventional chemical farming, the choice should be simple.

Some eco-ag proponents are even more sanguine, and suggest that their
methods can produce far higher yields than can mechanized, chemical-based
agriculture. Experiments have indeed shown that small-scale, biodiverse
gardening or farming can be considerably more productive on a per-hectare
basis than monocropped megafarms.8 However, some of these studies have ignored
the energy and land-productivity costs of manures and composts imported onto
the study plots. In any case, and there is no controversy on this point,
Permaculture and Biointensive forms of horticulture are dramatically more
labor- and knowledge-intensive than industrial agriculture. Thus the adoption
of these methods will require an economic transformation of societies.

Therefore even if the nitrogen problem can be solved in principle by
agro-ecological methods and/or hydrogen production from renewable energy
sources, there may be a carrying-capacity bottleneck ahead in any case, simply
because of the inability of societies to adapt to these very different energy
and economic needs quickly enough, and also because of the burgeoning problems
mentioned above (loss of fresh water resources, unstable climate, etc.).
According to widely-accepted calculations, humans are presently appropriating
at least 40 percent of Earth's primary biological productivity.9 It seems
unlikely that we, a single species after all, can do much more than that. Even
though it may not be politically correct in many circles to discuss the
population problem, we must recognize that we are nearing or past fundamental
natural limits, no matter which course we pursue.

Given the fact that fossil fuels are limited in quantity and we are
already in view of the global oil production peak, the debate over the
potential productivity of chemical-gene engineered agriculture versus that of
organic and agroecological farming may be relatively pointless. We must turn
to a food system that is less fuel-reliant, even if it does prove to be less
productive.

The Example of Cuba

How we might do that is suggested by perhaps the best recent
historical example of a society experiencing a fossil-fuel famine. In the late
1980s, farmers in Cuba were highly reliant on cheap fuels and petrochemicals
imported from the Soviet Union, using more agrochemicals per acre than their
American counterparts. In 1990, as the Soviet empire collapsed, Cuba lost
those imports and faced an agricultural crisis. The population lost 20 pounds
on average and malnutrition was nearly universal, especially among young
children. The Cuban GDP fell by 85 percent and inhabitants of the island
nation experienced a substantial decline in their material standard of
living.

Cuban authorities responded by breaking up large state-owned farms,
offering land to farming families, and encouraging the formation of small
agricultural co-ops. Cuban farmers began employing oxen as a replacement for
the tractors they could no longer afford to fuel. Cuban scientists began
investigating biological methods of pest control and soil fertility
enhancement. The government sponsored widespread education in organic food
production, and the Cuban people adopted a mostly vegetarian diet out of
necessity. Salaries for agricultural workers were raised, in many cases to
above the levels of urban office workers. Urban gardens were encouraged in
parking lots and on public lands, and thousands of rooftop gardens appeared.
Small food animals such as chickens and rabbits began to be raised on rooftops
as well.

As a result of these efforts, Cuba was able to avoid what might
otherwise have been a severe famine. Today the nation is changing from an
industrial to an agrarian society. While energy use in Cuba is now
one-twentieth of that in the US, the economy is growing at a slow but steady
rate. Food production has returned to 90 percent of its pre-crisis levels.10

The Way Ahead

The transition to a non-fossil-fuel food system will take time. And it
must be emphasized that we are discussing a systemic transformation - we
cannot just remove oil in the forms of agrochemicals from the current food
system and assume that it will go on more or less as it is. Every aspect of
the process by which we feed ourselves must be redesigned. And, given the
likelihood that global oil peak will occur soon, this transition must occur at
a rapid pace, backed by the full resources of national governments.

Without cheap transportation fuels we will have to reduce the amount
of food transportation that occurs, and make necessary transportation more
efficient. This implies increased local food self-sufficiency. It also implies
problems for large cities that have been built in arid regions capable of
supporting only small populations on their regional resource base. One has
only to contemplate the local productivity of a place like Nevada, to
appreciate the enormous challenge of continuing to feed people in such a city
such as Las Vegas without easy transportation.

We will need to grow more food in and around cities. Currently,
Oakland California is debating a food policy initiative that would mandate by
2015 the growing within a fifty-mile radius of city center of 40 percent of
the vegetables consumed in the city.11 If the example of Cuba were followed,
rooftop gardens would result, as well as rooftop raising of food animals like
chickens, rabbits and guinea pigs.

Localization of the food process means moving producers and consumers
of food closer together, but it also means relying on the local manufacture
and regeneration of all of the elements of the production process - from seeds
to tools and machinery. This would appear to rule out agricultural
bioengineering, which favors the centralized production of patented seed
varieties, and discourages the free saving of seeds from year to year by
farmers.

Clearly, we must minimize chemical inputs to agriculture (direct and
indirect - such as those introduced in packaging and processing).

We will need to re-introduce draft animals in agricultural production.
Oxen may be preferable to horses in many instances, because the former can eat
straw and stubble, while the latter would compete with humans for grains.

Governments must also provide incentives for people to return to an
agricultural life. It would be a mistake simply to think of this simply in
terms of the need for a larger agricultural work force. Successful traditional
agriculture requires social networks, and intergenerational sharing of skills
and knowledge. We need not just more agricultural workers, but a rural culture
that makes agricultural work rewarding.

Farming requires knowledge and experience, and so we will need
education for a new generation of farmers; but only some of this education can
be generic - much of it must of necessity be locally appropriate.

It will be necessary as well to break up the corporate mega-farms that
produce so much of today's cheap grain. Industrial agriculture implies an
economy of scale that will be utterly inappropriate and unworkable for
post-industrial food systems. Thus land reform will be required in order to
enable smallholders and farming co-ops to work their own plots.

In order for all of this to happen, governments must end subsidies to
industrial agriculture and begin subsidizing post-industrial agricultural
efforts. There are many ways in which this could be done. The present regime
of subsidies is so harmful that merely stopping it in its tracks might in
itself be advantageous; but, given the fact that a rapid transition is
essential, offering subsidies for education, no-interest loans for land
purchase, and technical support during the transition from chemical to organic
production would be essential.

Finally, given carrying-capacity limits, food policy must include
population policy. We must encourage smaller families by means of economic
incentives and improve the economic and educational status of women in poorer
countries.

All of this constitutes a gargantuan task, but the alternatives -
doing nothing or attempting to solve our food-production problems simply by
applying more technological intensification - will almost certainly result in
dire consequences. In that case, existing farmers would fail because of fuel
and chemical prices. All of the worrisome existing trends mentioned earlier
would intensify to the point that the human carrying capacity of Earth would
be degraded significantly, and perhaps to a large degree permanently.

In sum, the transition to a fossil-fuel-free food system does not
constitute a utopian proposal. It is an immense challenge and will call for
unprecedented levels of creativity at all levels of society. But in the end it
is the only rational option for averting human calamity on a scale never
before seen.

Notes

1. William Catton, Overshoot: The Ecological Basis of Revolutionary
Change (1980), University of Illinois Press.

2. Flannery, T. F., The Future Eaters (1994), Reed Books.

3. Lester Brown, Outgrowing the Earth : The Food Security Challenge in
an Age of Falling Water Tables and Rising Temperatures (2004), Norton &
Norton, p. 4.

4. David Pimentel and Mario Giampietro, "Food, Land, Population and
the U.S. Economy" (1994). See also Dale Allen Pfeiffer, "Eating Fossil Fuels,"
.

5.www.home.cc.umanitoba.ca/~vsmil/ pdf_reviews/Nature%202001.pdf

6. See, for example, Mae Wan-Ho, Genetic Engineering Dream or
Nightmare? : Turning the Tide on the Brave New World of Bad Science and Big
Business (2000), Continuum.

7. www.greenpeace.org.uk/MultimediaFiles/ Live/FullReport/4526.pdf

8. See, for example,
www.growbiointensive.org/biointensive/brocolli.html

9. P. M. Vitousek, et al., "Human Appropriation of the Products of
Photosynthesis," Bioscience 36 (1986)

10. See, for example, Bill McKibben, "What Will You Be Eating when the
Revolution Comes?", Harper's, April 2005. See also Dale Allen Pfeiffer,
"Drawing Lessons from Experience,"

11. Conversation with Randy Hayes, Sustainability Director of the City
of Oakland, June 2005.

Richard Heinberg is the author of Powerdown - Options and Actions for
a Post-Carbon World. He is a journalist, educator, editor, and lecturer, and a
Core Faculty member of New College of California, where he teaches courses on
"Energy and Society" and "Culture, Ecology and Sustainable Community."

If you wish to republish any of these essays or post them on a web
site, please contact rhei...@museletter.com for permission.

------------------------------------------------------------------------

One in six countries facing food shortage

John Vidal and Tim Radford
Thursday June 30, 2005
The Guardian
http://www.guardian.co.uk/climatechange/story/0,12374,1517831,00.html

One in six countries in the world face food shortages this year
because of severe droughts that could become semi-permanent under climate
change, UN scientists warned yesterday.

In a stark message for world leaders who meet in Gleneagles next week
to discuss global warming, Wulf Killman, chairman of the UN food and
agriculture organisation's climate change group, said the droughts that have
devastated crops across Africa, central America and south-east Asia in the
past year are part of an emerging pattern.

"Africa is our greatest worry," he said. "Many countries are already
in difficulties ... and we see a pattern emerging. Southern Africa is
definitely becoming drier and everyone agrees that the climate there is
changing. We would expect areas which are already prone to drought to become
drier with climate change."

The food and agriculture organisation and the US government, both of
which monitor global food shortages, agree that 34 countries are now
experiencing droughts and food shortages and others could join them. Up to 30
million people will need assistance because of the droughts and other natural
disasters such as the Asian tsunami.

The worst affected countries include Ethiopia, Zimbabwe, Malawi,
Eritrea and Zambia, a group of countries where at least 15 million people will
go hungry without aid. The situation in Niger, Djibouti and Sudan is reported
to be deteriorating rapidly. Many countries have had their worst harvests in
more than 10 years and are experiencing their third or fourth severe drought
in a few years, the UN said.

Climate change could also trigger the growth of deserts in southern
Africa. A report published in Nature today predicts that as greenhouse gases
fuel global warming, the dunes of the Kalahari could begin to spread. By 2099,
shifting sands could be blowing across huge tracts of Botswana, Angola,
Zimbabwe and western Zambia. Much of the region was covered by shifting dunes
more than 4,000 years ago.

"Dunes are composed of soft sand. If you sift away their protective
vegetation cover, and there is enough energy in the wind, then that sediment
has the potential to move, especially if it is dry," said David Thomas, of the
University of Oxford.

"In western Zambia there are quite a lot of these ancient sand dunes.
They were quite active 4,000 years ago, which isn't long in geological terms.
There have been plenty of times when it has not been a great place to live."

Severe droughts have also badly affected crops in Cuba, Cambodia,
Australia, Afghanistan, Vietnam, Morocco, Guatemala, Honduras and Nicaragua.
According to the UN's famine early warning system, 16 countries, including
Peru, Ecuador and Lesotho, face "unfavourable prospects" with current crops.

In Europe, one of the worst droughts on record has hit Spain and
Portugal and halved some crop yields. Both countries have applied to the EU
for food assistance. In Morocco the same regional drought has devastated
farming and the government fears an influx of people into the cities.

Researchers are reporting a general drying of the land and growth of
desertification in the Mediterranean region. "The 20-year average clearly
shows a dramatic increase of desertification and drought," said a leading
agricultural economist, Professor Giovanni Quaranta, of the University of
Basilicata in southern Italy.

Henri Josserand, the UN's famine early warning system director, said:
"In southern Africa especially, there is no question that drought has become
much more frequent in the past few years. There has been a sequence of drought
years for four or five years. What is unusual is the repeat patterns".

The situation in Malawi and Zimbabwe is giving particular cause for
concern.

In Malawi, where a government report suggests more more than 430,000
tonnes of maize will be needed to avert the second food shortage in three
years, one in three people are expected to need help by the end of the year
following poor rains. Thousands of people died in 2002-03 in what became known
as a "hidden famine", which affected the poorest and remotest people.

"It's going to get rapidly worse and we will have to move substantial
amounts of food very fast," said one non-governmental group working in the
worst-hit southern region of Malawi.

In Zimbabwe, where the effects of drought have been exacerbated by a
deteriorating political situation, 4 million people may need help this year,
the US government's famine early warning system showed.

"In all rural districts of Zimbabwe, crop production was poor and well
below normal," said a report last week.

UN sources suggest that getting food to the country will not be
difficult because neighbouring South Africa had a surplus this year, but
distribution in the politically volatile circumstances may be hard.

A report by Britain's leading development and environment groups this
week backed the UN studies that suggest Africa will most feel the effects of
drought and desertification under climate change, and will experience
continued food shortages.

"Africa is more exposed to the impacts of climate change than many
other regions in the world. Climate change is happening, and it is affecting
livelihoods that depend on the natural environment, which, in Africa, means
nearly everyone," said Andrew Simms, spokesperson for the Working Group on
Climate Change and Development.

------------------------------------------------------------------------

[Is it time for everyone to get together on this (i.e., all the
members of the NWO)? At the end of the day, if and when the bombs start
flying, will Russia side with Europe and against Asia on grounds of race - a
stumbling-block from Peter the Great's Francophilia to the latest debacle in
Georgia? We shall see. -FTW]

Putin calls on France, Germany to aid US

By Maria Danilova, Associated Press
July 4, 2005
http://www.boston.com/news/world/europe/articles/2005/07/04
/putin_calls_on_france_germany_to_aid_us/

SVETLOGORSK, Russia -- President Vladimir Putin yesterday called on
the world community to work with the United States to bring stability to Iraq,
saying after meeting with French and German leaders that past disputes over
the US-led war should not prevent future cooperation.

Like France and Germany, Russia sharply opposed the invasion of Iraq
and has expressed concerns about continuing violence and the increased attacks
that have been blamed largely on Sunni Arab insurgents.

''All of the disagreements on the Iraqi problem must remain in the
past," Putin said. ''We should be pooling efforts with the United States and
with the countries that are present in Iraq today and that have assumed the
function of promoting stability in that country in order to help the Iraqi
people assume responsibility for its future."

President Jacques Chirac of France and Chancellor Gerhard Schroeder of
Germany came to this city outside the Baltic Sea port of Kaliningrad at
Putin's invitation to mark the 750th anniversary of the founding of
Kaliningrad -- formerly Koenigsberg and now a Russian enclave cut off from the
rest of Russia by EU members Poland and Lithuania.

Earlier, the two leaders told Putin that the positive relations
between Russia and the EU were vital for world stability and for the
prosperity of Kaliningrad.

''The relationship between Russia and the European Union is essential
for world equilibrium," Chirac told Putin.

Putin defended Russia's decision last month to reject a proposed
treaty with Estonia that would have delineated a final border between the two
former Soviet republics.

Moscow balked at Estonian lawmakers' proposal to insert a statement
about the five-decade Soviet occupation of the Baltic states.

Talks among the three leaders also focused on Iran's nuclear program,
North Korea, and other issues. Putin largely enjoys the support of the French
and German leaders, though some domestic critics blame the two countries for
not confronting him on human rights abuse in the war in Chechnya.

The three leaders were also attending ceremonies marking the founding
of Kaliningrad, a city founded in 1255 by the Teutonic Order of Knights and
called Koenigsberg until Soviet troops took it over in 1945.

The festivities, which were attended by the leaders of all of Russia's
89 regions, were meant to reassert Russia's commitment to this region, which
has been separated geographically from the rest of Russia since the Soviet
collapse.

------------------------------------------------------------------------

Bush administration annexes internet

By Kieren McCarthy (kie...@kmccarthy.eclipse.co.uk)
Published Friday 1st July 2005 10:41 GMT
http://www.theregister.co.uk/2005/07/01/bush_net_policy/

An extraordinary statement by the US government has sent shockwaves
around the internet world and thrown the future of the network into doubt.

In a worrying U-turn, the US Department of Commerce (DoC) has made it
clear it intends to retain control of the internet's root servers
indefinitely. It was due to relinquish that control in September 2006, when
its contract with overseeing body ICANN ended.

The decision - something that people have long feared may happen -
will not only make large parts of the world furious but also puts ICANN in a
very difficult position. The organisation has slowly been expanding out of its
California base in an effort to become an international body with overall
responsibility for the internet.

The US government is professing its full backing for ICANN (which it
created) at the same time that it awards itself control of the net's
foundations, which will have the inevitable effect of pulling the organisation
back into the US.

This is particularly relevant at the moment as a UN review of internet
governance will report later this year and indications are that the team is
considering handing over elements of internet control to a UN body, possibly
the International Telecommunications Union (ITU).

In fact, it is the UN report that has most likely focused the US
government's attention and prompted the statement, made yesterday at a
communications conference in Washington DC.

The decision is transparently a result of the culture permeating
through Washington as a result of the Bush Administration's world philosophy.
In an extraordinary presentation, assistant secretary at the National
Telecommunications and Information Administration (NTIA), Michael D.
Gallagher, outlined new "US principles" regarding the internet.

"The United States Government intends to preserve the security and
stability of the Internet's Domain Name and Addressing System (DNS). Given the
Internet's importance to the world's economy, it is essential that the
underlying DNS of the Internet remain stable and secure. As such, the United
States is committed to taking no action that would have the potential to
adversely impact the effective and efficient operation of the DNS and will
therefore maintain its historic role in authorising changes or modifications
to the authoritative root zone file," is the first of a four-point statement
which can be found here
(http://www.ntia.doc.gov/ntiahome/domainname/USDNSprinciples_06302005.htm).

The second point is that world governments can run their own
country-code domains (like .uk for the UK or .de for Germany). The third says
ICANN should be the organisation running the internet. And the fourth that
"there is no one venue to appropriately address [internet governance] in its
entirety" - which is basically a warning shot across the UN's bows.

But what is most disturbing about Gallagher's presentation
http://www.ntia.doc.gov/ntiahome/speeches/2005/WCA_06302005_files/frame.htm
is how it endlessly refers to the president. The first slide has a
picture of George Bush. The second begins "Thanks to the president's policies,
America's economy is strong". The next slide is "The president's broadband
vision". The next slide leads with a quote from Bush and two pictures of him.
And on and on it goes. There is barely a single slide that doesn't quote from
the president.

Clearly the internet has entered the Bush administration's vision and
the resulting DoC statement - which boldly tells the rest of the world that
the US will continue to run the Internet and everyone will just have to lump
it - is very in keeping with how the US government is currently run.

The big question now is whether the rest of the world will be cowed.
ICANN has yet to release a statement on the DoC's surprise declaration but it
knows which side its bread is buttered on and so will probably make a careful
and broadly supportive statement.

The vision of a US-controlled internet infrastructure will be anathema
to large parts of the world however and it is a demonstration of the US
administration's failure to think globally that it doesn't recognise that
there is surprisingly little preventing other parts of the world from creating
a second Internet outside of US control.

An already fractious situation has just got more difficult.

CENTR response
CENTR - an organisation representing a large number of country-code
domains - has responded to the US government's declaration. In a cautious
welcome, it agreed that the root files needed to be run in a neutral manner
and welcomed its support for ICANN, but pushed that ICANN should focus only on
its "core function and limited remit".

Disingenuously, CENTR also says that the stated approach to be taken
by the US government "de-politicises the role of the Root Servers and empowers
the relevant local Internet Registries". And this, says CENTR will "minimise
the need for any procedural intervention by other unrelated parties." CENTR
doesn't care who runs the root, so long as they do so neutrally and in a
purely technical fashion. As representative for country-code domains, CENTR
will be delighted by the US government's statement that it considers different
countries as having complete rights over their own country domain.

That statement was a necessity to prevent the rest of the world's
governments turning against the US, but it serves CENTR's ends. .

------------------------------------------------------------------------

New hurdle for China's Unocal bid

http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/4639849.stm

The US House of Representatives has voted to block the Bush
administration from backing a Chinese takeover attempt for US oil firm Unocal.

The Republican-led house voted against any backing for the $18.5bn
(#10bn) bid put forward by China's CNOOC oil firm.

But the move needs approval from the Senate, which has not considered
such a proposal.

CNOOC's bid trumps a $16.3bn cash and share offer tabled by fellow US
oil group Chevron.

US opposition
On Thursday the US government gave the go-ahead to Chevron's takeover
of its US rival, the ninth biggest oil firm in the US.

The approval turned up the heat on CNOOC's offer, leaving the group
just six weeks to persuade Unocal to take up its cash offer.

US politicians have opposed CNOOC's bid on national security grounds.

The concerns centre on both America's $160bn trade deficit with China,
whose economy is surging ahead, and Beijing's emerging political and military
power.

News of the vote followed a trading update from Unocal.

The oil and gas producer said it expected its profits to meet, if not
exceed, even the most optimistic forecasts thanks to the recent surge in oil
prices to record highs.

------------------------------------------------------------------------

Unocal Deal: A Lot More Than Money Is at Issue

By Leslie Wayne and David Barboza
The New York Times
June 24, 2005
http://www.nytimes.com/2005/06/24/business/worldbusiness/24china.html
?

The battle for Unocal, the large independent American oil company, is
shaping into as much a test of Chinese-American strategic and economic
relations as it is a boardroom showdown.

Most takeover battles can be settled by price - the highest bidder
wins. But judging by the sharp reaction yesterday in Washington, that may not
be the case with Unocal.

Just a day after the China National Offshore Oil Corporation, or
CNOOC, one of China's largest state-controlled oil companies, made an
unsolicited bid of $18.5 billion for Unocal, senators and representatives, as
well as lawyers, bankers and lobbyists, are taking jabs at what may become one
of the thorniest strategic business challenges facing the administration.

At issue is whether CNOOC can buy Unocal, which in April agreed to a
$16.4 billion merger deal with Chevron, the American energy giant.

The unexpected foreign bid for Unocal comes at a time when oil prices
are hitting $60 a barrel, energy reserves are gaining more value, and the
United States is concerned about its own oil and gas resources. At the same
time, the administration needs to work with China on trade and currency
issues, even as concerns are increasing about the growing economic power of
China.

"It does raise questions about how much of the country we are willing
to sell to a Communist country that we might be fighting someday," said
Michael O'Hanlon, an international military specialist at the Brookings
Institution. But he added, "I'd be surprised if we really fall on our sword to
prevent the sale."

CNOOC's bid is also forcing Unocal shareholders to weigh the higher
price that the Chinese are willing to pay against the risks that the deal
faces in Washington. On top of that, there is the possible backlash that might
arise from selling a potentially strategic American asset to China.

Unocal said that it had received permission from Chevron to hold
discussions with CNOOC.

The question is how - if Unocal decides to switch from Chevron to
CNOOC - the politics will play out in Washington, where critics are already
speaking out and where the deal would be subject to approval by the Committee
on Foreign Investments in the United States. The panel, a federal multiagency
group, can prevent any foreign investment on the grounds of national security.

For years, the government has placed restrictions on the extent of
foreign ownership in a variety of industries, from airlines to the media to
military contractors. In the past, these restrictions have mostly affected
developed countries like Japan and Britain.

"This is a remarkable arrival of China into the world of global big
business deals and international investing," said Clyde V. Prestowitz Jr., a
former trade negotiator in the Reagan administration and president of the
Economic Strategy Institute in Washington. "And it does raise the issue of
whether this gives influence or some kind of potential importance to a
government that may not always be friendly to us."

In Washington, CNOOC is already laying the groundwork. It has hired
Public Strategies, a public relations firm whose vice chairman, Mark McKinnon,
led President Bush's media campaign in the 2004 election. The company has also
lined up some of the nation's savviest financial advisers - among them Goldman
Sachs and J. P. Morgan - as well as such well-connected legal and lobbying
firms as Akin Gump Strauss Hauer & Feld and Davis Polk & Wardell.

Many in Washington said that the deal, on its merits, might gain
approval from the foreign investment committee. In any case, the committee
would not review the case until a formal deal is completed. In recent deals
involving China, the committee's responses have been mixed.

In 2003, a negative review by the foreign investment committee caused
Hutchison Whampoa, which is based in Hong Kong, to withdraw a bid for Global
Crossing, the telecommunications carrier that later filed for bankruptcy. But
this year, the committee permitted the $1.75 billion sale of I.B.M.'s personal
computer business to Lenovo of China.

"The national security argument is a fair one," said William A.
Reinsch, president of the National Foreign Trade Council and a former trade
official in the Clinton administration. "When you talk about energy supplies,
and the market is tight, there is a national security issue. You are going to
have a lot of people pounding the table."

CNOOC is already trying to play down any concerns that the transaction
could hurt the American oil and gas markets. It is stressing that 70 percent
of Unocal's oil and gas reserves are in Asia and that its American reserves
amount to only about 1 percent of America's oil consumption, with none of it
now supplying the military.

Unocal also has a pipeline hooked up to American strategic oil
reserves, as well as a rare-earth mine, the only one in the United States.
CNOOC has said it will consider selling these assets, if that is necessary to
close the deal.

In addition, CNOOC has promised not to take supplies from Unocal's oil
and gas reserves in the United States and sell them outside the country. It
also said it would retain "substantially all" of the American employees.

In Washington, two Republican congressmen, Richard W. Pombo, chairman
of the House Committee on Resources, and Duncan Hunter, chairman of the House
Armed Services Committee, wrote to President Bush last week, saying that "such
an acquisition raises many concerns about U.S. jobs, energy production and
energy security."

"We fear that American companies will find it increasingly difficult
to compete against China's state-owned and/or controlled energy companies,
given their mandates to supply China's ever-growing demand for energy, which
will increasingly need to come from foreign sources," the letter said.

For China, which is scouring the world for oil, gas and minerals to
help power its economy, the deal is important. That puts the administration in
an awkward position as it tries to negotiate a variety of trade frictions and
geopolitical debates.

"The deal has got the administration over a barrel," said Michael R.
Wessel, a member of the United States-China Economic and Security Review
Commission, a group established by Congress. Not only is the administration
trying to work out trade issues with China over textiles, currency and a
number of other matters, it is also increasingly relying on China to play a
more aggressive role in containing North Korea.

"We want the Chinese to invest part of their dollars in our economic
system," Mr. Wessel said, "yet we have to worry about the impact of this
transaction on our national security. Everyone is concerned about the
migration of jobs and research and development to China. Now we have oil
hitting $60 a barrel. China is going to be on the center of our radar screen."

For CNOOC, an offshore oil company, Unocal offers huge gas reserves in
14 countries. It has Asia's largest storehouse of liquefied natural gas. A
combined company would go from a Chinese offshore oil producer with high
expenses, as it searches for oil around China, to a diversified oil and gas
company with global reserves.

Oil industry analysts offered mixed views about a potential deal.

"There are a lot of people in Washington who are really torn," said
Robin West, chairman of PFC Energy, an oil consultant in Washington. "They
believe in open markets and don't want to exacerbate matters with China. Yet,
do you want a Chinese company that doesn't play by American rules to take
advantage of American rules and get an American company?"

Alexei Barrionuevo contributed reporting for this article.

------------------------------------------------------------------------

Chinese factories face power cuts

June 14, 2005
BBC NEWS
http://news.bbc.co.uk/2/hi/asia-pacific/4093878.stm

Shanghai is to begin rationing power supplies for industrial use on
Wednesday as part of efforts to avoid electricity shortages this summer.

Thousands of firms are likely to suspend production or shift output to
off-peak hours in the Chinese city.

Public areas like shopping malls will also have to set
air-conditioning dials to above 26C (78.8F).

Many cities across China face similar problems as power supplies
struggle to keep up with the booming economy.

The result is severe power shortages and widespread blackouts, the
BBC's Daniel Griffiths reports.

Peak season
Things are particularly bad in the summer, when extra electricity is
needed to power millions of air-conditioning units in the face of soaring
temperatures.

China's Energy Famine
It is thought that the energy problem may cut as much as 2% off
nationwide economic growth each year.

Shanghai faces a potential peak demand of 19m kilowatts - about 2m
more than the power grid is designed to handle, the Shanghai Daily newspaper
reports.

The city has invested in new generators, boosting its generating
capacity to 11.4m kWh, while it plans to buy in about 6m from other provinces.

The minimum temperature for air-conditioners will also apply to
government buildings, offices, hotels and entertainment venues.

Peak prices for electricity will be raised to 4.5 times off-peak
levels, from the usual 3.5 times, to further encourage off-peak use.

------------------------------------------------------------------------

[China's getting assertive and here they threaten to dump the dollar
if Congress keeps meddling in its business affairs. Since China has a
stranglehold on the US economy these threats cannot be taken lightly. FTW
gives China about a 60-40 edge in completing the deal. - MCR]

China Tells Congress To Back Off Businesses
Tensions Heightened by Bid to Purchase Unocal

By Peter S. Goodman
Washington Post Foreign Service
Tuesday, July 5, 2005; A01
http://www.washingtonpost.com/wp-dyn/content/article/2005/07/
04/AR2005070400551.html

SHANGHAI, July 4 -- The Chinese government on Monday sharply
criticized the United States for threatening to erect barriers aimed at
preventing the attempted takeover of the American oil company Unocal Corp. by
one of China's three largest energy firms, CNOOC Ltd.

Four days after the House of Representatives overwhelmingly approved a
resolution urging the Bush administration to block the proposed transaction as
a threat to national security, China's Foreign Ministry excoriated Congress
for injecting politics into what it characterized as a standard business
matter.

"We demand that the U.S. Congress correct its mistaken ways of
politicizing economic and trade issues and stop interfering in the normal
commercial exchanges between enterprises of the two countries," the Foreign
Ministry said in a written statement. "CNOOC's bid to take over the U.S.
Unocal company is a normal commercial activity between enterprises and should
not fall victim to political interference. The development of economic and
trade cooperation between China and the United States conforms to the
interests of both sides."

Those words, the latest rhetorical volley in an escalating trade
battle, officially elevated the takeover battle for Unocal into a bilateral
issue involving Washington and Beijing, raising the stakes of the outcome.

CNOOC's bid comes as China's emerging force in the global economy
continues to sow international tensions over competition for natural
resources, impacts on the environment, trade balances and security
relationships. The deal would be the latest in a string of Chinese purchases
of foreign companies as Beijing encourages domestic firms to seek new markets
abroad and secure raw materials for China's aggressive industrialization. The
Chinese government has urged energy companies in particular to buy foreign oil
fields as China's consumption soars, deepening worries about the country's
access to supplies.

Already, CNOOC's bid has taken China across a new threshold: It has
unleashed the first takeover battle between a Chinese company and a U.S. firm,
the oil giant Chevron Corp., which has its own deal to buy Unocal, for $16.5
billion. If completed, CNOOC's purchase -- its bid is for $18.5 billion --
would be the largest foreign takeover ever made by a Chinese firm.

But as the price of oil continues to soar, underscoring the finite
supply of global stocks, some members of Congress portray China's appetite for
energy as a threat to U.S. interests. They are painting CNOOC's effort to buy
Unocal as an attempt to siphon off oil that would otherwise land in the United
States, a proposition that analysts call dubious because most of Unocal's
outstanding contracts supply customers in Asia.

As the House adopted its resolution Thursday by a 398 to 15 vote, some
noted that CNOOC remains under the majority control of the Communist Party-led
state, suggesting that this alone made the deal a threat.

"We cannot, in my opinion, afford to have a major U.S. energy supplier
controlled by the Communist Chinese," said Rep. William J. Jefferson, a
Louisiana Democrat. Monday's reply from Beijing reinforced what CNOOC has said
from the beginning -- that the deal is nothing more than an attempt to expand
its business opportunities and invest capital sensibly.

Long before CNOOC emerged with its unsolicited offer for Unocal, the
United States-China relationship was already highly complex. There has been
friction in recent months over China's roughly $160 billion trade surplus with
the United States and surges this year in Chinese-made textiles reaching U.S.
shores. Some U.S. trade groups accuse China of manipulating its currency, the
yuan, to keep it artificially low, making Chinese goods unfairly cheap on
world markets. The Bush administration has pressured China to allow its
currency to float freely. China argues that it is being made a scapegoat for
the decline of U.S. manufacturing.

Tensions also have grown over North Korea's pursuit of nuclear
weapons. In Washington, some suggest that China is not doing enough to
pressure North Korea, its longtime ally, to return to stalled talks, while
propping up the regime in Pyongyang with food and fuel. Chinese officials have
criticized the United States for demonizing North Korea and undermining the
possibility of progress.

Taiwan is always a hot button. China claims the self-governing island
as part of its territory and threatens to reclaim it by force if Taiwan's
government moves toward declaring its independence. The United States is
nominally pledged to come to Taiwan's aid in event of war.

The battle over Unocal has injected yet another factor into this
already volatile relationship ahead of a planned visit to Washington by
Chinese President Hu Jintao this fall.

But analysts say the issue has thus far produced little that could
alter the relationship between the two governments, because Beijing has grown
sophisticated at distinguishing between rhetoric from Capitol Hill -- where
Thursday's resolution was nonbinding -- and policy from the White House, which
has said little on the subject.

But whatever comes of the Unocal battle, tensions over Chinese
investment are probably only beginning. Just as a rising Japan in the 1980s
snapped up high-profile assets in the United States and provoked widespread
American unease, China's expanding horizons are having a similar effect.

Moreover, key differences between Japan of that era and current-day
China could make this go-round more combustible: Japan was a U.S. military
ally and part of the same ideological bloc, whereas China is viewed by many in
Washington as an adversary.

But the simplest reason for tension may be the amount of cash at
China's disposal: As investment pours in and China's central bank buys dollars
to maintain the value of its currency, the country has amassed $650 billion in
foreign exchange reserves. China has plowed much of that money into U.S.
Treasury bonds.

But the quest for Unocal and other foreign companies is being
construed by some as a sign of diversification.

"We invest too much in U.S. federal bonds, and they don't make us much
money," said Pan Rui, a professor at the Center for American Studies at Fudan
University in Shanghai. "Now we're learning to invest more wisely, to try to
invest in American companies and industries."

) 2005 The Washington Post Company

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