Flat-earther blind to oil facts

Celebrated New York Times columnist Thomas L Friedman, a flat-earthling, in a provocative polemic this week accused the United States president of being the nation’s addict-in-chief to oil with “a massive, fraudulent, pathetic excuse for an energy policy”. (“Mr Bush, Lead or Leave”, June 22, 2008).

Friedman talks as if he wants the president to be an autocratic dictator. Does Friedman not know that with $4.50 gas and $100 oil, a large number of working people will not be able to make ends meet with their current income, or retirees on social security will not be able to heat their homes this winter? Airlines and other transportation companies would face bankruptcy? Does he not know that in a democracy, sustained $100 oil translates into a serious political problem? The oil problem does not lend itself to simplistic solutions. Yet that is precisely what our flat-earthling proposes.
Even multinational corporations are being forced to raise prices to ward off losses from high energy costs. For example, Dow Chemical has just announced it will raise the price of its products by as much as an additional 25% in July, on top of the 20% increase in June, in an effort to offset the continuing relentless rise in the cost of energy and hydrocarbon feed stocks. The company also will implement a freight surcharge of $300 per shipment by truck and $600 per shipment by rail, effective August 1, 2008.

Furthermore, Dow is temporarily idling and reducing production at a number of manufacturing plants, having reduced its ethylene oxide production worldwide by 25%, and idled 30% of its North America acrylic acid production. Dow also will idle 40% of its European styrene production capacity, and has reduced its European polystyrene production rate by 15%.

In light of a sharp decline in auto sales, Dow’s Automotive unit is announcing a series of cost reduction measures covering facilities, people and external spending, divesting its paint shop sealer business and is implementing plant consolidations resulting in the closure of three production units. In addition, Dow Building Solutions temporarily idled 20% of its European capacity for producing Styrofoam insulation.

Earlier this month, Dow announced plans to idle three Dow Emulsion Polymers plants representing 25% of North America capacity and 10% of European capacity related to declines in the housing and consumer sectors, as well as rising costs. Dow chairman and chief executive Andrew N Liveris described the steps as “extremely unwelcome but entirely unavoidable” as the global cost of oil, natural gas and hydrocarbon derivatives surge ever higher, despite company efforts to improve energy efficiency by 22% from 1995 to 2005, and to target another 25% by 2015, to cut costs significantly, and with an array of efforts around alternative energy and alternative feed-stocks. Over the past five years, Dow’s bill for hydrocarbon feed stocks and energy has surged four-fold, from $8 billion in 2002 to an estimated $32 billion-plus this year.

General Motors announced plans to close four plants manufacturing trucks and SUVs, citing decreased sales of large vehicles in the wake of rising fuel prices. Ford took similar actions. Yet about 65% of oil consumption is related to transportation, a sector where alternative fuel technology is relatively easy to tackle, with alternatives such as electric and substitute fuel engines.

In China, steelmakers were forced to agree to a record increase in annual iron ore prices in a move likely to boost the cost of cars, machinery and other products globally. Chinese millers agreed to pay Anglo-Australian miner Rio Tinto up to 96.5% more for their ore supplies this year, the largest ever annual increase and 10 times the 9.5% increase paid in 2007, surpassing the record increase of 71.5% in 2005 when the commodities boom began to gather pace.

The development fuels fears that global commodity-led inflation will continue.

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In 2005, I listed 10 new economic facts created by $50 oil. I now adjust these facts for $100 oil as proposed by Friedman to see if his proposal makes sense. The key fact is that while $100 oil may stimulate development of alternative energy modes, such development cannot be expected to bring the oil price back down, or the stimulated alternative energy sector will go bankrupt. While there is no known solution that will lead to lower oil prices short of a global recession, $100 oil is not without problems.

Asia Times