Matthew Simmons, a highly respected investment banker and adviser to the Bush administration, is quoted in Al-Jazeera (Feb. 22) as saying that “we may have passed peak oil.” This is significant in that peak oil represents the dividing line between cheap oil and expensive oil, or, put another way, between a supply of oil we don’t have to worry about and a supply of oil that may lapse into shortages and place our economy and the world economy in jeopardy.
Simmons recently investigated Saudi Arabia’s ability to continue producing large quantities of oil and has a book scheduled to appear at the end of May titled “Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy.”
Peak oil goes back to a concept introduced by M. King Hubbert that oil production follows a bell-shaped curve, reaching a peak in production similar to a rollercoaster slowing as it reaches the top of the curve and picking up speed again as it plunges off the other side.
Much debate has been spent on this point recently between those who believe that we will have an adequate amount of petroleum extending into the future and those who believe that the peak in production is nearly upon us or, in fact, may have already occurred.
The downside of this debate is that once the peak occurs, the price of oil will no longer be controlled from the production side, by the oil producers and the market, but instead will be controlled ruthlessly by the law of supply and demand. Oil will skyrocket in price and instead of selling for $35, $40 or even $50 a barrel, will quickly go to $100 or more a barrel. Such prices will injure economies the world over but will especially harm ours in that we consume a prodigious amount of oil each day, some 20 million barrels a day, or one-quarter of the world’s supply.
We have not made any preparation for this coming shortfall. President Carter, as one example, ordered the placement of solar hot-water panels on the White House roof to save energy. President Reagan, upon taking office, ordered that the panels be taken down and junked.
One might say we have a difficult time ahead of us, but in my view this understates the case: We will have a monstrously difficult time ahead of us. We are terribly in debt and a crippled economy will only make this problem much harder to manage. We have continued our high level of immigration and population growth. We are choosing to make China our enemy at a time when China has bought Boeing airliners and holds a considerable amount of our debt and promises to buy more of our debt into the future.
We have made no effort to curtail our use of petroleum or the size of our vehicles yet everything, including the dollar, is balanced precariously on the edge of a cliff. We have chosen force and belligerency to maintain our place in the world and our access to oil when cooperation and the rule of law are the only real options open to us. Peak oil means that we are entering into a reality far different and much more threatening than the one to which we are accustomed.
