AACOG: Advancing the Choice Conference
Guns and Butter: Which Will It Be?
Commissioner Tommy Adkisson
July 26, 2007

Thanks to AACOG, Gloria Arriaga, Clean Cities Coordinator,
Andrew Hudgins and all the sponsors of this visionary event!

According to Daniel Yergin's Pulitzer Prize-winning book entitled The Prize, toward the end of World War II, "On a night journey to the struggling remnants of Germany's Tenth Army in Italy, Albert Speer had seen before him a clear vision of one of the primary reasons why the Reich that was to last for a thousand years had, in fact, only weeks to go. For on that trip, he had encountered 150 German Army trucks. To each were hitched four oxen, which were dragging the trucks forward. It was the only way the vehicles could move. They had no fuel."

To have inadequate energy is to be vulnerable as a nation militarily and economically!

According to a July 2007 report from Bloomberg, the largest financial news and data company in the world, "the $100-a-barrel oil that Goldman Sachs Group Inc. said would prevail by 2009 may be only a few months away."

Earlier this week, the price of Brent Crude oil, which at least for now seems to be the world standard, got within 25 cents of breaking the all-time record of $78.65 a barrel set last summer when the Middle East appeared to be coming unglued.

Jeffrey Currie, a London-based commodity analyst at the world's biggest securities firm, says $95 crude is likely this year unless OPEC unexpectedly increases production, and declining inventories are raising the chances for $100 oil. Jeff Rubin at CIBC World Markets predicts $100 a barrel as soon as next year.

"We're only a headline of significance away from $100 oil," said John Kilduff, an analyst in the New York office of futures broker Man Financial Inc. "The unrelenting pressure of increased demand has left the market a coiled spring." New disruptions of Nigerian or Iraqi supplies, or any military strike against Iran, might trigger the rise, Kilduff said in a July 20 interview.

Oil prices could triple in three months to more than $200 a barrel given the right circumstances, according to the well-known energy expert, Matthew Simmons, chairman of Simmons & Co., a Houston investment bank.

Still Cheap

"Oil is still cheap," Simmons said. "In the 20th century, with a few exceptions, oil was almost free. The only exceptions were during 1973, 1979 and when Iraq invaded Kuwait."

Prices rose in 1974 after an oil embargo that followed the Arab-Israeli war and from 1979 through 1981 after Iran cut oil exports.

Goldman's View

"Ultimately, the key to the outlook going forward is when will Saudi Arabia ramp up production," he said in an interview. "If you have a situation in which inventories globally get drawn to critically low levels, the volatility in this market is likely to explode, which significantly increases the probability of $100 oil." Oil might slip to $73.50 if OPEC were to start producing more now, he said.

The Organization of Petroleum Exporting Countries is scheduled to next meet in September. No members have called for a gathering before then. A decision to raise output at that time would lead to greater supplies toward the end of the year.

Accelerating Demand

The failure of near-record fuel prices to restrain global oil demand growth is what concerns Rubin, chief strategist at the brokerage unit of Canadian Imperial Bank of Commerce in Toronto.

"Prices have doubled, and demand is alive and well and accelerating," Rubin said in a July 18 interview. "The argument that rising prices would choke demand and bring increased output is falling to the wayside."

"There are questions about whether the oil industry can keep up with demand," U.S. Energy Secretary Samuel Bodman said last week, commenting on the Petroleum Council report.

Gasoline Sales Rise

Gasoline pump prices averaging more than $3 a gallon across the U.S., the consumer of 25 percent of the world's oil, haven't dented sales. "It appears that high prices are acceptable to the American consumer," said Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington. "People want the house with a yard and white-picket fence so they are moving further and further out of the cities. They have to just get up earlier and drive further."

Outside the U.S., demand increases are being led by India and China, where growing economies mean more cars and trucks and more factories that burn oil and gas.

Rising Costs

The cost of finding and pumping oil is rising steadily, convincing analysts such as Rubin and Deutsche Bank AG chief energy economist Adam Sieminski that higher prices will last. Shortages of deepwater drilling ships and rigs has pushed daily rents to records, and the skilled workers needed to run rigs, weld pipes, pilot vessels, fix refineries and build oil-sands projects command ever-higher wages.

While crude oil prices are approaching the records they set at this time last year, not everyone is convinced $100 crude will happen.

Pickens' Opinion

A pullout from Iraq may be the event that pushes oil to $100 a barrel, according to Boone Pickens, the Dallas hedge fund manager who has joined Forbes Magazine's list of billionaires because of his bullish bets on energy prices. Pickens predicted a year ago that $100 oil would probably occur by now. Today he is looking for $80 within six months, and he says growing chaos in Iraq would be a bad sign. "That could run prices pretty high," he said.

"At face value this market is strikingly similar to a year ago," Currie said. "What is different? Supply is down a million barrels a day, demand is up a million barrels a day. The market is in a deficit."

So what are we to do?

  1. Improve fuel economy.
  2. Ramp up spending on alternative fuels. (Texas produces approximately 30% of the total natural gas in the U.S., making Texas the largest producer of natural gas in the U.S.!)
  3. Redouble our commitment to efficiency.
  4. Get serious about solar and wind.

Ladies and Gentlemen: This is why we are here today. We are here to secure the well-being and the future of the greatest nation on earth. Let's make it happen!!

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