We hear it a million times a day from the talking heads on CNN (communist news network) and read about Sam's Clubs and CostCo rationing the sale of rice in their stores. Every time we go to the pump our eyes roll back in our heads as we wonder if the bank will give us a loan on our first born.
The human reaction is to moan and complain........trying to get someone to have pity on us and DO SOMETHING.
I've written before of my friend Renato Longato who is a most interesting fellow. A deep thinker...........and an unusual thinker due to some of his experiences and associates.
He sent me an article he has written which may answer a few question...........give food for thought.....and perhaps some ideas on how to cope with coming changes.
It rather a long article, but, one I think you will be glad you read.....if you do.
There is no link to it, so I'll have to copy and past it here. I'd very much like your reaction to it..........so comment or email me if you will, please.
REPORT
A HARSH REALITY: OIL, FOOD COST RISE AND SOCIAL IMPACT
BY
RENATO LONGATO
Since 2006, those who followed closely world events felt the price of oil was bound to go through the $100 a barrel mark on the international market in the near future. Their diagnosis turned out to be true, but what was further seen by these watchful experts was that the price is not expected to come down from these levels in the next 4 or 5 years. This is due to several factors, plus having to add in the “speculation” factor in the volatile financial market A recent report by the International Energy Agency pointed out that Russia, during the trimester of 2008, lowered its oil production one percent. The reason given was the extraction rate in wells located in western Siberia had reached its peak production capacity. This news caused the price of crude to rise even more.
That was not the only factor. Proponents of “Peak Oil” theory are seeing their predictions come true, as well, due to geological factors. Wells located in Mexico, along with those in Nigeria are also reducing their crude oil extraction rates. Here are some figures. The production of Mexican crude peaked out in 2004 at 3.4 million barrels a day. Today, it is 3.08 million barrels. According to information provided by the Mexican Energy Ministry, the reduction trend in oil production is irreversible. In 2006, production fell 12% and in 2007, 18%.
The case of Nigeria is particularly unsettling because of attempts by terrorists to blow up the pipelines. This situation, combined with the pirate attack on a Japanese oil tanker off the Somalia coast, the fall in Russian production, and the speculative action in international financial markets pushing the price of oil even higher, is creating economic pressure that is being felt by the consumer worldwide in terms of higher prices.
If we add to all this to the opening of new consumer markets caused by a rapidly growing middle class in India and China, where improved purchasing power is enabling this class of workers to afford automobiles, an additional demand for gasoline, we have a complicated situation, and getting more so with the passing of each day.
The High Cost of Oil.
The vice president of Lukoil, the largest private Russian oil company, Leonid Fedun, says it would require an investment of one trillion dollars over the next 20 years to maintain existing Russian production levels of 8.5 to 9 million barrels a day. The difference with Russia compared to other countries is the tax structuring. The Russia government takes 80% of all revenue over $27 a barrel, meaning it is the government that profits from higher prices, not the Russian oil companies, leaving them with little for investment in exploration and production. The wells in Siberia and Artic Circle are especially expensive due to their depth and the frigid weather. The question is if the Russian government is willing to assist in making this large investment or will continue to allocate oil revenue to political purposes.
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In the case of Mexico, the enormous infrastructure cost required to drill the 13,500 to 20,000 new wells during the next 15 years in the new oil field of Chicontepec is in the neighborhood of 30 to 38 billion dollars. This huge cost is due basically to two factors: profound depths and off-shore drilling. These wells require the most advanced technology and take 4 to 5 years before becoming operative. A major problem for Mexico is that the national oil company, PEMEX, has an internal policy of not permitting foreign companies, particularly those of the U.S. to trade oil for technology. Such a policy limits the budget necessary for such a large undertaking, especially when taking into account that PEMEX supplies 40% of all the revenue of the Mexican government. The Mexican government has been unable to enact legislation enabling new terms and conditions for oil extraction because disagreement in the Mexican congress. Such is a situation similar in Russia. How will the increased revenue from rising oil prices be used is the important question. Will Mexico consider a commercial deal between China and Russia to exploit the Chicontepec field?
Regarding Nigeria, that country is facing a situation that could endanger up to one third of its total oil production between now and 2015. The government of Umaru Ya’Adua has been warned by the oil companies, Shell, Exxon/Mobil and Chevron, that if Nigeria does not contribute its part in the investment required that oil production will fall a significant 30% by 2015.
Furthermore, there are serious doubts among some political observers of Nigeria that all the revenue generated by oil production is being collected by the government. It is strongly suspected that much revenue is being diverted by corrupt officials into private hands. This could be fatal for the Nigerian economy when adding in the factor of terrorists in the Delta disrupting the normal flow and distribution of crude oil.
These last three examples are only the tip of the iceberg relative to the precarious medium term situation of oil prices. Geo-politics is playing a more important role than ever before. Each oil exporting country is looking for new fields to satisfy the increasing international demands. Furthermore, it has now been made public by the Brazilian oil company, PetroBras, the huge find of oil in the Carioca and Tupi fields, which lie deep in the ocean. While these fields are very promising, rivaling those of Venezuela and Mexico, but the cost of exploitation is around 50 billion dollars. Time, too, is a factor, for it is estimated that it will take 10 years in order for wells to start producing.
Also, we are seeing that American geologist Hubbert’s theory of limited production capacity of oil fields is turning out to be true. Large oil companies are searching the planet for sources in order that we consumers are not faced with a scenario from the movie Mad Max. We must come to grip with the likelihood that we are the last generation of oil users.
The Market of Fear
Reports from the World Bank indicate that the prices of basic food stuff will remain relatively high until 2015. A recently published list of 33 countries that are seriously affected by rising food prices indicates that the impact on the people in the poorest class of these countries can produce a grave social crisis, if measures are not taken soon.
To mitigate this troublesome situation, the President of the World Bank, Robert Zoellick, warned the 7 richest countries of the world of the need to create a “New Policy Treaty on Global Food”, which calls for donations of no less than $500 million dollars. Donations would go to countries in the Sub-Sahara area of Africa, whose extremely impoverished inhabitants number in the several millions. But this is the best the World Bank and the United Nations can do: ease as much as possible the starvation in countries with fragile governments. Although the recent protests in Haiti and Egypt are not the only ones, they were the 2
loudest heard around the world. In order to better understand this situation, let us examine some of the factors that have contributed to the rising food prices. They are:
1.
Adverse climate conditions
2.
Increase in demand for bio-fuel
3.
Speculation on strategic products
4.
A weakening dollar
5.
Increased prices on oil dependent products and services, such as fertilizers, plastics and transport.
These are the “upsetting elements” or “secondary effects” appearing throughout the economies of the world. The World Bank is saying the high food prices will continue to rise through 2009, but will drop somewhat, nevertheless remaining above those of 2004, and will continue high for as long as the year 2015.
The five factors mentioned above are the major contributors to high food prices, but there is a sixth one: fear. This factor is obviously a psychological one, but it had penetrated the minds of the people, exacerbated by the constant rise in fuel and food prices, and disheartening reports of a not bright future. Although in a matter of a few months, oil has risen from $8O a barrel to $120, there have not been the corresponding protests by the world consumer. For the moment, there has not been that massive public cry of “That’s enough!” It was believed by many economists that $3.00 a gallon for gasoline in the U.S. would be the resistance point, the drop-in-use level, but that has not happened. The prices can rise further before there is a reduction in demand. The market of fear will then cause an economy of shortages.
The International Energy Agency also adds to the disheartening news by reporting that there exists an increase of consumption of 1.3 million barrels daily despite higher costs and the economic crisis of the United States. This phenomenon of increased demand is further worsened to due to economic growth in other countries, greater demand for grains and metals, resulting in the increase of the automobile production, all of which has contributed to new financial reality. Again, the automobile plays an important factor because of a jump in sales in China and India, where an invigorated middle class also want to enjoy the “American dream”.
Looking at Latin America, Peru is benefiting from the highest economic growth in the region in the last 30 years, and where automobile sales are up an amazing 77% from the first trimester of 2007. However, this does not mean that the Peruvian lower class are the beneficiaries; to the contrary, rising food prices have forced the Peruvian government to implement a give away of basic food staples pilot project to offset the adverse effects of higher prices.
Buyers of crude oil have come to realize that the demand has gone up, production is going down, meaning prices will continue to rise, and if they want oil, they will have to pay more for it. Various market experts are predicting that oil prices will reach $180 within two years. The assumption is that oil prices will continue increasing, and so will food prices, making the world population enter into a new era of “less” and with it, a change in life style. Such changes will oblige governments to take steps to assure that its “common” people have enough to eat. The question is, How to do that without inserting too many 3
distorting factors into the economy? Furthermore, there are countries with large reserves of U.S. dollars that are worth less each day. What are they going to do? Probably start buying basic food commodities. China has already begun. That will only drive up more food prices.
Protectionism and Fall of the Dollar
A report from the Brookings Institute shows that the prices of rice in the Philippines went up 70% in one year, and that rice prices in Thailand tripled since the beginning of this year. At the same time, a report coming out of the Hyundai Economic Research Institute of South Korea revealed that there are signs of an increased flow of refugees from neighboring North Korea due to higher food prices, and where rice is a staple. Aside from Africa, Asia is the continent most vulnerable in this present food crisis. With rice being the principal source of food, and wheat not being a viable substitute, for the price of wheat has risen significantly as well, plus wheat is not a regular part of the diet. The specter of starvation hovers ever closer and is a real threat to the collapsed nations of Africa and to certain ones in Asia. To not take timely measures could mean chronic hunger for these people in the coming years. This, of course, has grave consequences for the infant population, signifying a great hindrance for normal development.
This series of negative factors could spawn effects of massive migration. A population that can not feed itself is capable of anything. Acts of defiance against established governments are only the beginning, and could easily spread to attacks against the better-off segments of the society, ending up in serious internal civil strife.
Part of the cause of rice prices rising 100% in the last few months is also due to the major rice exporting countries, Vietnam and China, putting limits on exportation. China is not only limiting export, but buying and warehousing vast quantities for future internal needs. This buy-up policy is further pushed by the enormous dollar reserves China holds, which are only lessening in value; spend the dollars now while they are worth more makes sense to the Chinese. There exists a close relationship between the devaluation of the U.S. dollar again the Euro and the cost of fuel. Following are comparative charts which clearly illustrate the imbalance.
Rice price vs Euro/US$ rate, April 15, 2007 to April 15, 2008 4
As the chart makes clear, the ascent of the cost of rice to $24 from $10 per hundredweight over the past year tracks the declining value of the American dollar. The link between the declining parity of the US unit and the rising price of commodities, including oil as well as rice and other wares, is indisputable. China has bid aggressively for rice all year, and last week banned rice exports, along with Vietnam and several other producers
Euro/US$ rate vs rice and oil, April 16, 2007 to April 16, 2008
For those emerging countries, and dependent on the U.S. dollar, the risks are potentially even greater. Their purchasing power falls as the dollar falls. Historically, this has not happened before, in spite of different organizations assuring that grain crops are not endangered when they cite that world rice production is at the highest level ever reached, 423 million tons for the 2007-2008 period. While this amount suffices to meet world needs, its export distribution is only 7%.
This panorama is affecting all countries on the planet in one degree or another, clearly some more than others, even the U.S. is not exempt. According to James Weil, president of Food Research and Action Center, the request for Food Stamps in the U.S. has risen. These requests reached record level, 27.7 million, in January of 2008, an increase of 1.3 million from January 2007. Laurie True, Executive Director of California Women & Infants group of the Children Program Association states that more members are enrolling than ever before. At the same time, reports are coming out about the severe impact charity organizations are feeling with rising food prices. This coupled with fewer donations, and surging transportation costs are forcing these organizations to cut back on aid to poor countries.
To all of this I ask, In the case of an emergency, would ethnic minorities and illegal immigrants receive U.S. government help?
The Future of Wheat.
In February of this year, a news story shook up the grain exporter worldwide: Saudi Arabia announced a reduction in production to a minimum by 2016 - not of oil, but wheat! It will become a net importer of wheat in less than 10 years. Presently, Saudi Arabia harvests 2.5 million tons of wheat annually and is 5
planning a -12.5% yearly reduction. Such a startling announcement was followed by others from large wheat producing countries like, Khazakstan, Pakistan, Russia, Ukraine and Argentina, alleging that internal demand had grown by 52%, and they would be forced to limit wheat exports.
Before such alarming scenarios, what can be done? Personally, I have been monitoring the situation without underestimating neither the accuracy of the news nor the capacity of the human being to face adversities. For most cases, I recommend common sense, reflection, and action. For those who have begun to feel the economic pinch, this is the time to refresh memories and take certain precautions. (For video information, click the link below.)
http://video.google.com/videosearch?q=jim+jubak+saudi+arabia+wheat+&sitesearch=
Conversing with Mr. Garrison.
Oddly enough, I met Jason Garrison and his wife at a supermarket. What started off as a casual conversation, ended up with a dinner invitation at their home. Mr. Garrison had mentioned that he was a high officer in the Mormon Church in the area. After a delicious dinner, my host invited me to have a look in his basement to confirm the reputation of the Mormon family to store food. Food storage is a century old custom of the Mormons. While Mr. Garrison was showing the neatly organized storage area, he brought up the fact that wheat silos belonging to the Mormon Church in four states were empty, including the one in Georgia. Religious beliefs aside, I found it extremely interesting the organization and importance given by the Mormons to food storage. They, in effect, are one of the very few religious groups prepared to face a food crisis. When times are good and social unrest is at a minimum, one doesn’t concern himself too much about problems that might lie ahead and even less plan for them. As Mr. Garrison expressed, “What you see here with all this food is the result of organization and discipline. If I should lose my job, I could go for a several months without buying food, thus stretching out my savings while looking for a job.” (For more information, click here)
http://providentliving.org/content/display/0,11666,7585‐1‐4081‐1,00.html
Coincidently, a few days after my conversation with Mr. Garrison, two large U.S. food chains, Sam’s Club and Costco announced rice rationing nationwide, something that had not happened in the U.S. since World War II. Later, I came across articles published in the Wall Street Journal and New York Times recommended stocking up on non-perishable food, not so much as a reserve food supply, but rather as an investment which would return considerably more than buying CDs at your local bank. You reach your own conclusion about rising food prices.
This report has the sole intent of providing information. However, I feel that I need to give a few tips to the reader.
1.
Become informed, and become aware of the realities regarding food and fuel.
2.
Set up a budget, and stick to it, constantly tightening wherever you can.
3.
Be sure you know the difference between what you need and what you want. The difference can be huge.
4.
Begin to stock up on non-perishable food and personal hygiene products.
5.
Join groups that focus on inner growth and well being. 6
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Understand that we have entered an era of significant changes, and we are being forced to change our living styles. The longer you wait to initiate change the greater the effort will be, but you will change; you will be forced to. We are, as well, leaving a period of ethnic consciousness towards an even greater consciousness, that of the planet. It will not be easy for some, but as we become more aware, we will acquire the capacity to choose a life that is more respectful of the fragility of mother nature, and be given the opportunity to develop a new community of individual relationships and evolve as an integrated humankind.
NOTE: The acknowledge Robert Narhgang for his contribution.
Renato Longato
WWW.RENATOLONGATO.COM
Sipan4@yahoo.com
May 2008 - Georgia USA
UPDATE. Ignore the first long comment as the author is a cowardly idiot, and I don't know yet how to delete his or her verbal shit.
