$100 trillion needed to rebuild energy infrastructure

[Rajiv]

$100 trillion needed to rebuild energy infrastructure (http://www.ogj.com/display_article/327833/7/ONART/none/GenIn/1/OTC:-$100-trillion-needed-to-rebuild-energy-infrastructure/)

The oil and gas industry will need to invest $50-100 trillion to rebuild its ageing infrastructure within the next 7 years and stave off a serious drop in oil and gas production, Matt Simmons, chairman of Simmons & Co. International, told OGJ May 5 at the Offshore Technology Conference in Houston.

In a worst-case scenario, Simmons said, oil and gas output could fall by 10-20% by 2013 if industry does not replace its rusting, corroded assets. Spare capacity also has run out because formerly cheap prices for oil and gas precluded upgrading and construction of new facilities .

The average age of offshore rigs is 25 years, and oil companies have ignored the problem for the past few decades because of the low energy prices, which meant that maintenance has been expensive.

However, the upward trend in prices can help pay for the rebuilding of the energy system, Simmons stated.

"There is no blueprint in place, and this is a global problem. The longer the blueprint is postponed, the more acute the crisis will get," he said.

[Lukester]

Rajiv -

With all respect to Finster, who's posts and style I much enjoy - this is what I don't understand about his thesis - that 100% of the petroleum price action is an inflationary result spilling over directly from currency abuse. That may be the way it looks on charts, when comparing oil's "price" with the gold price, or some such metrics. But then when you look at the ramifications of that thesis in light of the massive strain upon global resources (and finances!) which a 50 trillion dollar investment in new petroleum infrastructure represents, the thing doesn't add up. If 100% of the price of petroleum today (or is it just the 'cause' of the price run-up?) is equivalent to currency depreciation, that implies that none of this imminent gargantuan outlay, will have been funded by any premium in the price of oil compared to a decade earlier. If there exists no real price premium in the commodity this entire project is expressly undertaken to augment, what has caused all this urgency to spend 50 trillion dollars on oil infrastructure to begin with?

Here's Simmons, a petroleum industry banker, talking about truly historic sums of money being needed to fund a massive rebuild of oil infrastructure globally - but unless this was being dreamed up as a massive WPA "make-work" project, all this enormous financial outlay would presumably be needed instead expressly to counter faltering production of petroleum worldwide? We must go with the latter theory as the likelier for the sake of discussion. Yet at iTulip we are given to understand that all (or even the overwhelming part of) what is occurring in the oil price is inflation of the currency denominator, because it's price has "not gone anywhere" in terms of gold in eight years? That may be so, but it certainly seems to suggest a massive paradox. For that to be true, we are shortly to witness an infrastructure project greater by orders of magnitude than any project in history, which will be undertaken and funded by revenue from petroleum prices where the oil is priced the same in inflation adjusted terms as it was when there was a glut on global markets in the late 1990's and petroleum was selling for $10 a barrel?

iTulip invokes classical economic theory - talking about demand destruction - how a rising price must govern consumption because this is an immutable economic law. And the classical economic corollary to that is presumably that a growing bid on an asset must cause it's real price to rise - also an immutable economic law according to the same set of economic 'rules'. Yet here you have a truly colossal project, without peer in history, yet despite it's percieved urgent necessity (who's going to shell out 50 trillion unless they regard it as 'urgent'?) the commodity underlying this projects urgent need has not managed to command any premium in price over it's inflation adjusted price from a decade earlier? Because gold has also risen in nominal price along with the 'price' of oil, we are to regard the real inflation adjusted price relative to other goods and the cost of labor to be 'neutral' compared to the price of those goods and services from a decade past, when oil in a near glut worldwide and pricing power in the oil producer nations was non-existent.

For a theory to be correct, it must match the observable end results. If the theory appears entirely consistent and holds up well across the board (gold and all commodities prices are quite observably rising together), you still have to validate it at the conclusion of the trajectory. And the conclusion of this trajectory is the point at which the world decides to spend 50 trillion dollars on oil production infrastructure. Nobody has that kind of change to throw away - unless the securing of the underlying commodity is percieved as critical. Yet the inflationary thesis underpinning the rise of all commodities does not contain any provision for any premium of real price worth mentioning today, while the proceeds from the sale of that commodity is supposed to provide the bulk of the funds with which the project will be finance. It does not add up, as it contravenes other clauses of the same market discipline theories which iTulip espouses elsewhere. The imperatives underlying the need for a gargantuan infrastructure project with a price tag that is without peer in the history, cannot plausibly be assumed to contain no significant price premium in the underlying commodity, relative to a decade earlier.

[Rajiv]

Lukester,

You know my views fairly well -- they go somewhat along Gail Tverberg's (http://www.ourfiniteworld.com/resume.html) analysis (http://itulip.com/forums/showthread.php?t=3842) (2 links) - this is one of the clearest expositions of the impact of peak oil on the economy that I have come across.

I also noted that nobody here responded to that one.

Ultimately, today all money is credit -- credit requires that somebody borrow money -- the Fed may drop the interest rates to virtual zero, however, the banks that borrow that money, do not lend at zero interest (there is no profit in that!) -- so if the ultimate consumers and businesses cannot take on more debt, the whole ponzi scheme come crashing down. Then the FED really would have to helicopter money down to the consumers -- but that would mean the end of the FIRE sector. Therefore I do not expect to see that scenario in my lifetime -- I do not expect any meaningful financial reform until things really do go to hell in a hand basket.

Hudson and EJ skirt around this issue in the interview posted by EJ today.

[Olduvai]

Rajiv -

Here's Simmons, a petroleum industry banker, talking about truly historic sums of money being needed to fund a massive rebuild of oil infrastructure globally - but unless this was being dreamed up as a massive WPA "make-work" project, all this enormous financial outlay would presumably be needed instead expressly to counter faltering production of petroleum worldwide? We must go with the latter theory as the likelier for the sake of discussion. Yet at iTulip we are given to understand that all (or even the overwhelming part of) what is occurring in the oil price is inflation of the currency denominator, because it's price has "not gone anywhere" in terms of gold in eight years? That may be so, but it certainly seems to suggest a massive paradox. For that to be true, we are shortly to witness an infrastructure project greater by orders of magnitude than any project in history, which will be undertaken and funded by revenue from petroleum prices where the oil is priced the same in inflation adjusted terms as it was when there was a glut on global markets in the late 1990's and petroleum was selling for $10 a barrel?

Oil will follow gold shortly.
http://www.theoildrum.com/node/3947
I don't think gold and oil are anywhere comparable. I don't see gold as a finite commodity, it isn't being consumed. It's (the only real) money.
You can't compare apples with pears as my mom used to say.
I expect the Oilprice to outpace inflationary trends fast, if it hasn't done so already.

[Rajiv]

I don't see gold as a finite commodity, it isn't being consumed. It's (the only real) money..

Read "The Remonetization of Gold (http://www.lewrockwell.com/north/north196.html)" by Gary North

If gold is to be re-monetized, then this must mean that it has been de-monetized. But isn’t gold money?

No, gold is not money. It has not been money for Europeans since 1914, when the commercial banks stole it from depositors at the outbreak of World War I, and central banks then stole it from commercial banks before the war was over. Gold has not been money for Americans since 1933, when Roosevelt unilaterally by executive order stole it from the public.

Gold is high-powered money for central bankers, who settle their banks’ accounts in gold. But this is so far removed from the decisions of consumers that I can safely say that gold is not money.

The question is: Will it ever again become money?

This is the most important of all monetary questions.

THE MARKETABILITY OF GOLD

Money is the most marketable economy. Gold is therefore not money. You have to buy gold from a specialized broker. There are so few gold brokers any more that they are all known to each other. Local coin stores don’t do much business in bullion gold coins such as the American eagle or Canadian maple leaf. The large wholesale firms like Mocatta don’t deal with the public. There are so few full-time bullion coin dealers that you could have a convention of them in a Motel 6 conference room. (When was the last time you were in a Motel 6 conference room?)

But . . . it costs $39 to rent a Motel 6 room. That tells us something. It’s not $6 a room any longer. Inflation has done its work.

Money is liquid. Liquidity means that you can exchange money for goods and services directly without the following costs:

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Discounting
Waiting There is a price spread between what you can sell a gold coin for (in money) and what you buy a gold coin for (in money). Gold coins therefore are not money.

I realize that old-time gold bugs go around saying "gold is the only true money" and similar slogans. These slogans reflect a lack of understanding of either gold or money.

The rest of the article is well worth reading.