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The peak oil crisis: 2006 in review

As the year draws to a close, it is a good time to look back at what has happened and what clues we can discern about 2007.

The most notable event affecting the advent of peak oil during 2006 was, most likely, the great summer price spike. Oil started the year around $62 a barrel, steadily increased to just below $80 and then fell to close out the year about where it started. Now there are a number of observations that can be made about this spike.

First it drove average US gasoline prices from $2.21 in late December 2005 to a high of over $3.00 per gallon during the summer. This was significant in that it caught a lot of people’s attention for the first time that there just might be a problem out there. At the height of the spike, Congressmen were running around like rabbits proposing new laws and making pious speeches about how they were doing something about gasoline prices. Although the US economy as a whole seems to have held up pretty well under $3 gasoline, Detroit took a hard hit. Sales of low-mileage vehicles that had been the bread and butter of the US auto industry plunged, tens of thousands of auto workers lost their jobs, and dozens of factories closed. By year’s end Toyota was poised to become the world’s largest automotive manufacturer.

From the public’s point of view and unfortunately most of the media’s, peak oil seems to be only about gasoline prices. Above $3 a gallon there is concern. Let gasoline sink back towards $2 and we are back in Camelot.

The 2006 price spike is widely perceived as being caused by an excess of speculation. Hedge fund managers read forecasts of a bang-up hurricane season in the offing and that, coupled with greater-than-normal turmoil in the Middle East, led them to speculate wildly in oil futures. When the Middle East turmoil subsided a bit and the hurricanes failed to appear as advertised, oil prices collapsed. All this of course is perfectly true, but is only part of the story.

Largely unnoticed was the underlying supply and demand situation, and a new factor: oil affordability. The final returns won’t be in for several months, but it is beginning to look as if world oil production stayed about the same or increased insignificantly during 2006. Consumption in China, Russia, and the Gulf oil states increased while staying about the same in the industrialized states of North America, Europe and Asia.

With flat production and steady or increasing consumption in those countries that publish detailed reports, something had to give or else we would be seeing considerably higher oil prices. The give came in the underdeveloped world where $20 or $30 oil was affordable for generating electricity, running pumps, and for cooking, but $60 or $70 per barrel oil was not. Again, the returns are not in yet, but anecdotal evidence is accumulating that many parts of Africa, Central America, and Asia are starting to shut down. For these peoples, the oil age, such as it was, is already over. There is little to look forward to for a long, long time.

Nearly every aspect of the various Middle Eastern political conflicts deteriorated further during 2006. From the peak oil perspective 1.5 million barrels a day of Iraqi oil exports appear to be the most precarious, but what ever falls out of Iran’s nuclear ambitions are a close second. A general conflagration occasioned by the collapse of the Iraqi government or renewed Arab-Israeli fighting are well with in the realm of possibility for the near future. The insurgency in Nigeria is picking up steam and there will be either a presidential election or civil war there next year. The prospects for a large percentage of the world’s petroleum exports sure did not get any better in 2006.

When the history of the year is written, resurgent Russian nationalism is sure to have prominent place. During the year, Moscow made good on its goal to bring exploitation of Russian oil by the international oil companies back under its control. President Putin clearly sees the opportunity to regain superpower status by controlling a significant share of pipeline-supplied natural gas on the Eurasia landmass. It seems likely a reduced role for the international oil companies can only lead to reduced investment and delays in the exploitation of Russian oil and gas deposits.

As yet no major developments in the world’s oil depletion story have emerged in 2006. Production from numerous major oil deposits – the North Sea, Mexico’s Cantarell, Alaska’s Prudhoe Bay, Kuwait’s Burgan – continues to decline. Many analysts harbor suspicions that Saudi production has or will shortly go into decline. The situation is obscured, perhaps on purpose, by OPEC production cuts that have “required” the Saudi’s to make reductions in their oil production. It may take many years to sort out their actual production capacity.

So where do all the developments of 2006 leave us as regards to peak oil? Maybe further than is currently apparent. One thing is for certain, the earth has 30 billion barrels less cheap, easy-to-produce crude at its disposal than it did 12 months ago because we burned it up. World oil production currently is giving every indication of at least plateauing for a while, perhaps forever. Many new production projects are being delayed as the cost of exploration and drilling new wells increases to unheard of heights. Oil availability for the rich nations still appears adequate because the poor are shutting down. But this is a one-time phenomenon. Soon, increasing demand from the rich and rapidly developing nations will cause them to bid against each other for stagnant or decreasing production.

Then the troubles will begin in earnest.

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