Nothing Is More Important Than Being Able to Afford Food

Richard Ha writes:

How are these two things related: The Aina Koa Pono biofuel project, which is subsidized by the rate payer at $200 per barrel, and Bill 79, the anti-GMO bill submitted by Councilwoman Margaret Wille? 

There is a very good chance that we will soon start down the backside of the world oil supply curve. If there is even the remotest chance this will happen, we need to be focusing sharply on the things that are crucial to us, living out here in the middle of the Pacific Ocean.

Nothing is more important than being able to afford food.

We cannot waste time subsidizing $200 per barrel oil; what is the objective there? And we cannot waste time pitting farmer against farmer. We need to focus on helping all farmers make money. Because food security involves farmers farming. And if the farmer makes money, the farmer will farm.

Here in Hawai‘i, nearly 90 percent of our food is imported. We are going to need the help of all farmers to achieve food security. Bill 79 is a distraction that takes our focus away from helping farmers become economically viable. Worse, and most distressing, is that it pits organic farmers against conventional farmers.

We need the help of all the farmers to make Hawai‘i food secure.

The problem is that farmers' customers are being squeezed by rising energy costs. The rubbah slippah folks can only go so far in supporting locally grown products. Oil costs have quadrupled in the last 10 years and electricity rates have continuously risen. It’s as if we had a massive tax hike. We’re in the middle of a crisis and we don’t even recognize it.

The small farmers on the Big Island know it, though. That's why they are taking valuable time off from work to show support for each other

An Interview with Steven Kopits

 | May 1, 2013

By Steve Andrews – The following is taken from an interview with Steven Kopits, managing director of the New York office of Douglas-Westwood, an international energy analysis firm.  The views expressed are atttributable to Mr. Kopits and do not necessarily represent those of Douglas Westwood.

…Peak oil does not occur when we run out of oil.  Peak oil occurs when the marginal consumer is no longer willing to pay the cost of extracting and processing the marginal barrel of oil.  And we can actually calculate what the related numbers are.

Q:  How do we do that?

Kopits: To begin with, we refer to the price a nation’s oil consumers are willing to pay as its “carrying capacity.”  For the US, carrying capacity is about $95-100 Brent [per-barrel oil price in London].  If the oil price is above this level, oil consumption will decline—which is exactly what we see and what we predicted four years ago.  But carrying capacity is not a static number.  It changes over time, specifically, with three things: GDP growth, efficiency gains in the use of oil, and dollar inflation.  So if GDP goes up, efficiency goes up and the CPI goes up, then the amount that consumers are willing to pay for oil will increase.  For China, by the way, we estimate the carrying capacity at around $115-120 / barrel Brent.  So oil consumption will increase in China at $115 Brent, but fall in the advanced economies—exactly the pattern we’ve seen in the last few years.

Q: So the story line getting a ton of ink of late—peak oil is dead….it isn’t actually quite dead yet, is it?

Kopits:   No.  But importantly, we’re going to peak out production not because we’re “running out of oil,” but because the marginal consumer is not willing to pay for the marginal barrel.  We seem to be pretty much at that level today.

We need to understand these dynamics better.  What are the combined effects of flat oil prices and rising production costs, that’s where I think the challenge is and where our professional work is focusing on the macro side…to better understand what these trends are, what they mean, and how companies in the industry should respond to it.

I’ll give you an example.  Normally, if you look at an oil production system, it tends to be symmetrical around the peak.  The rate at which you approach the peak is the rate at which you depart from the peak.  We haven’t done that.  What we’ve done is that we’ve approached the peak and we’ve leveled out production, the so-called “undulating plateau”.  But we’ve maintained that plateau by turning to non-oil liquids, by dramatic increases in upstream spend, and also by technological innovation related to hydrofracking.  All of these, as of today, look to be running their course.  Even shale oil.  Yes, it will grow for the next few years from the three majors plays in the US, but the peak of production growth is already behind us in the Bakken, for example.  On current trends, Bakken production will be increasing by single digits within two years.  Not a tragedy by any means, but not enough to move the global oil supply at that time, either.