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Climate, Copenhagen and energy.

There is an old saying in resource management circles: "Resources do not exist, they become." A brief inspection of the economic evolution of any civilization demonstrates the truth of that wisdom.

Oil was nuisance seepage 150 years ago, but it is now the single largest resource-based industry in the world.

The price and availability of all resources exist within the intersection of technology, demand and availability, but at some point, all resources are finite, and no amount of money can obtain resources that do not exist.

In 2008, demand for oil, fertilizer and other commodities peaked in a speculative frenzy that saw crude oil prices push towards $150 per barrel. The subsequent recession saw demand fall below supply, and oil prices plummeted to almost 60% lower man the peak. Was that peak in prices driven by demand outstripping supply alone? The most likely answer is no, as we did not see world oil production fall behind demand. But ongoing developments in global energy markets suggest increasing and unstable prices ahead.

The four primary sources of pricing uncertainty are governmental regulation, global economic expansion, international competition for economic growth and the growing consumption of a limited quantity of cheap, plentiful fossil fuels. Consider the following:

* If nations do not have access to cheap, plentiful energy and food, they will not experience economic growth and their citizens will not see a quality of life improvement. Almost 70% of the world's population lives in poor or developing nations.

* Rich nations consume large amounts of energy per capita; poorer nations consume much less.

* The developed nations have stabilized their energy consumption, with 1% annual growth rates forecast for decades.

* Global consumption of energy is expected to almost double in the next 25 years due to developing nations' appetite for fossil fuels. By 2035, developing nations will consume more than two-thirds of the world's energy. In 2009, the growth in Chinese oil demand was almost 2% of total world production.

* The International Energy Agency (IEA) predicts a peak in global oil production, possibly within five to 10 years, after which oil production is expected to steadily decline, forcing energy demand towards other sources.

* Through national and international agreements and regulations, various governmental bodies are both controlling energy prices (through ownership/control of carbon energy resources) and access to use of the atmosphere for the disposal of combustion waste gasses. This is expected to drive costs for energy higher than present levels while limiting commercial access to carbon fuels.

* Neither the U.S. Department of Energy (DOE) nor IEA currently forecasts any meaningful reduction in global carbon fuel use over the next 25 years.

* Neither DOE nor IEA forecast increases in renewable energy that would allow material reductions in the global use of carbon fuels within the next 25 years.

* In a recession, developed nations are likely to reject further reductions in their economic well-being through government mandated energy cost increases.

* Developing nations typically reject any proposals that limit their access to growing energy supplies and the economic growth that comes with it.

The foundations for a global energy challenge are laid before us, and mankind faces a series of dilemmas. Developing nations want to consume more energy, and they want access to cheap, plentiful energy resources to support economic growth. Developed nations want continued access to unlimited, cheap sources of energy to support their existing economies. Climate scientists and environmentalists continue to warn of the potential risks associated with climate change caused by unrestricted consumption of carbon-based fuels. The traditional global energy resource bases are finite, and some are declining in size. Efforts are being made--through the United Nations--to restrict or limit consumption of carbon-based fuels without immediate, practical options to replace carbon-based fuels with alternative energy resources. No matter which way the global economy turns, someone is going to get hurt.

By many accounts, the Copenhagen Climate Summit of late 2009 was a failure because the process of addressing human-caused climate change (use less carbon fuels) pitted the near-term interests of rich nations against those of poor nations. No one knows how to develop a low-carbon economy that produces an acceptable quality of life for its citizens, but that "solution" to climate change was what the United Nations-supported scientific community tried to sell to the world.

At this moment, it is not clear whether regulations, cost or supply limitations will reduce access to energy resources, but it does appear that the cost of energy is going to increase over the next decade or so.

With a high probability that domestic energy prices are going to rise, more energy-intensive metalcasters are at greater risk during extended periods of price instability. That risk is even greater if U.S. energy policy causes domestic prices to increase faster than international prices, a very real risk if the U.S. adopts significant domestic carbon taxes before China and India.

If higher energy prices are coming, the risk management response open to domestic casting facilities is the same option they use when foreign competitors sell castings that are cheaper because of lower labor costs: get more efficient without compromising quality. MC

Redmond Clark, CBL Industrial Services, Cary, Illinois
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Title Annotation:Shaping Strategy
Author:Clark, Redmond
Publication:Modern Casting
Geographic Code:1USA
Date:Sep 1, 2010
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