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The Peak Oil Crisis: Waiting for Winter

In the fourth quarter, worldwide demand for oil goes up by 2.5 million barrels per day over summer demand to keep the northern latitudes warm during the winter months. Given that we might have an unusually cold winter this year, the demand increase might be conservative.

The Chinese government recently announced their economy is going to grow another nine or ten percent this year. Maybe they have figured out how to grow without increasing their oil consumption. If they expect in keep this up, their oil imports should start increasing The US economy is still bouncing along fairly well with predictions of pretty good growth next year. More oil needed!

Although many of our flooded refineries are getting back into operation, about a million barrels per day of refining capacity has not yet recovered from the hurricanes. Two-thirds of our Gulf oil production is still shutdown and it’s beginning to look as if government predictions that all will be well in the Gulf by Christmas are optimistic. In Iraq , the insurgents continue to blow up oil pipes at a steady pace and it is only a matter of time before they figure out how to shut down production completely. The shipments of refined gasoline to the US from our fellow International Energy Agency members will soon be drawing to a close. The first signs of serious inflation are beginning to stir.

Despite all this bullish-for-oil news however, prices have dropped some 15 percent since the Katrina peak of over $70 dollars. Wall Street oil traders and analysts are starting to tell financial reporters that the hurricane dislocations are over for a while and the good times may roll for a while longer. Indeed earlier this week the Dow flew up 170 points on the idea that our oil problems no longer look as bad as they did a few weeks ago.

Where did all this optimism come from? Is it justified? The root cause, of course, is that the securities industry is based on eternal optimism and growth. Few have grasped, or are willing to admit, how close we are to the final oil crisis of all time.

The more immediate reasons for the spectacular price drop in the price of oil, and the price at our gas pumps, seems to be the lack of more production-damaging hurricanes and the perception that we Americans have slowed our driving in response to "expensive" gasoline.

After two months in which one hurricane after another has threatened or actually wiped out Gulf oil production and refining, any news that this is not about to happen in the immediate future drives oil traders to sell and sell some more.

Another reason for the price drop, however, is the "demand destruction" (a fancy term for "it costs too much so I am not going to buy as much) said to be taking place in the United States .

Last week the Department of Energy reported US demand for petroleum products had dropped by 2.3 percent as compared to 2004. The American Petroleum Institute did DOE one better by announcing that demand during September had dropped by nearly 4 percent. This was backed up by a consumer survey in which 69 percent claimed to be driving less.

There you have it. Economic theory worked. Higher gas prices have finally driven Mr. and Mrs. America to slow down, ride a bus now and them, or to simply stay at home and watch TV. Supply and demand will soon be back into balance and the crisis will be over for a while. There is no doubt some are cutting back on their driving, but how much and will it last enough to bring supply and demand back into balance without sharply higher prices?

That the US 's hurricane-disrupted crude production fell to less than 4 million barrels per day during September — the lowest since 1943 — does not seem to bother anybody. Just for the record, this means we are currently importing or withdrawing from our strategic reserve some 80 percent of our daily oil consumption.

Why didn't we fall flat on our backs with much of our crude production and significant pieces of our refinery production still out of service in the last six weeks? The answer is, our fellow members in the International Energy Agency (IEA) are letting us have an additional 800,000 barrels of gasoline per day out of their reserves. Moreover it seems our domestic refineries are still deferring maintenance and are still cranking out gasoline rather than switching over to more heating oil production at the end of the summer driving season. It is this combination that has kept us going.

The IEA, however, has already voted to stop letting us have world reserves beyond what was voted immediately after Katrina and the advent of colder weather will quickly force a choice between driving and staying warm.

On top of all this, some commentators are voicing concern that instead of reporting an actual reduction in demand, the government is really measuring a reduction in refinery output which, given all the flooded refineries, should be completely obvious.

The replacement for reduced gasoline production comes from local storage tanks and increased imports of foreign gasoline. In the current hurricane-induced dislocations in much of the US oil industry, one would suspect it is difficult for the government to accurately track just what is going on.

All this is saying it may be a touch too early to start celebrating the end of $3 gasoline. Even if the Caribbean is through generating hurricanes for the year, the world's supply/demand balance is very tight. So fill up your tank while prices are low and hold off on that new SUV for a while. It looks like a long harsh winter ahead and Katrina's second shoe has yet to drop.

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