The US is in the first stages of a major energy crisis, the likes of which the world has not seen previously, explains industry analyst Matt Simmons, President of Simmons and Company, Int'l. Simmons said the energy crises of the 1970s were actually energy shocks, which were of short duration and isolated to a single source of energy, such as oil or gas. The current shortage of capacity will affect all three of the major energy sources: oil, gas, and electricity.
The problem of energy capacity in the US is so widespread that, Simmons said, the only remedy is a complete overhaul of existing infrastructure, from tankers to refineries, along with a 30% increase in worldwide capacity. He blames the problems on the shortsightedness of the "new economy," in that assumptions were made that economic expansion would not require additional energy. Recent events in the state of California highlight Simmon's point that for the economy to boom, power consumption must also increase. This went unnoticed until it reached a crisis level.
Irony of energy
The same low energy prices that have been credited with the US's decade-long period of economic expansion were responsible for the deterioration of the energy infrastructure and stagnant capacity. Returns on investment have been so low for so long in the energy sector that there was no way to justify building a new refinery, for example.
The refineries that are in place are aged to the point of being "rotten," Simmons said. At the same time, wellhead capacity is not high enough at present to supply a larger number of refineries if they already existed. If wellhead capacity were to magically expand overnight, there would be insufficient tanker and pipeline capacity to move the additional production to market.
Because there are bottlenecks and infrastructure problems at every step of the energy chain, Simmons said, this problem cannot be app-roached as a sequential project. All stages must be expanded simultaneously.
Difficult alternatives
Without a concerted effort to increase energy capacity, the economy is likely to contract to accommodate the limited capacity. This would be catastrophic to the economy. Even so, it would also not be a solution to the problem. By the time a substantial increase in capacity developed, pipelines, refineries, tankers, and other forms of product transport and refinement would be even more decrepit and inadequate, requiring further investment of time and money.
Simmons said his research indicates this country is already a year or more into an energy crisis that will change the face of the industry forever. One thing that will change, for example, is the price of energy. Simmons said as capacity tightens, prices will continue to rise. This is a necessary part of developing more infrastructures and expanding the oil and gas reserves.
The only way to encourage such development is to offer reasonable returns on the capital employed. This means higher prices at the retail market, but also an expansion in the oil and gas sector. Because there is no blueprint for what exactly would be involved in increasing the industry capacity by 30%, Simmons said it is impossible to estimate how high sustainable energy prices will go.
A Marshall Plan
Simmons uses the example of the Marshall Plan, which was developed after World War II to rebuild war-torn Europe and Japan, to demonstrate the level of action necessary to avert a full-blown energy crisis. He put preliminary estimations of the cost in the area of $1 trillion dollars and said he believes this project could be even more expensive than the Marshall Plan, designed by George Marshall and unveiled on the 300th Anniversary of Harvard University.
In addition to its similarity in size to the Marshall Plan, Simmons said the "Marshall Plan for the Energy Industry" would also rely heavily on the private sector. According to Simmons, the original Marshall Plan drew only 5% of its funding from the public sector.
He said the government should take a similar role in this initiative. By setting the stage with initial contributions, the government could open the door to private involvement. "After all, the government doesn't drill wells," Simmons said.
Crisis windfall
In addition to the primary benefit of averting a global energy crisis and deep US economic recession, Simmons said the Marshall Plan for the Energy Industry would have the added benefit of economic stimulation. By bringing around $1 trillion dollars of contracts into the economy, it would act as a public works project, stimulating activity in the construction sector, as well as the oil and gas exploration and production industry.
An offshoot of this initiative would be a better appreciation of the energy sectors' importance to economic growth. Simmons said that by focusing attention and capital on this problem, opinions might change in regions of the US where refineries and oil exploration are legislatively and politically despised.
Critical to the success of this concept will be government support at the federal level. Simmons said he has been involved in meetings with the current US administration during the pre-election period when President George W. Bush was forming an energy policy. He said energy needs to take a front seat, beyond the current issues of healthcare and education.
This increase in activity also may attract new graduates to the petroleum industry. Simmons said the energy industries have done a terrible job of attracting and retaining new talent. If there is an aggressive expansion in capacity, a greater number of new engineers and profressionals will have to choose careers in the energy sector.
Extracting value
Using the OPEC countries as examples, Simmons points out how tight energy prices have affected the industry. Once wealthy countries, the OPEC nations have seen their populations swell from around 200 million, including Mexico, to more than 600 million. Excluding Kuwait and the UAE, Simmons said these are some of the poorest countries in the world. However, if this expansion does take place, it will offer the OPEC nations an opportunity to develop a middle class through the contract revenues and higher energy prices. If this were to occur, it would mean a global economic expansion far beyond the much-celebrated Asian Tigers growth period that drove much of global economic expansion in the early 1990s.
Simmons said the first step is a widespread realization that an impending global energy crisis is upon us. He said he is not encouraged by the reaction he has seen so far in California. What is happening there he describes as "a witch hunt, denial, and band-aid fixes."
