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The peak oil crisis: Twin problems

As we move into June, we are still confronted with a pair of energy crises that have the potential to upset our way of life. At the global level, worldwide oil production has been stagnant for the last two years. This is true for all the various kinds of liquid fuels we now consume: ethanol, conventional crude, liquids separated from natural gas, synthetic crude from tar sands, as well as other flavors of hydrocarbons that can be converted to liquid fuels. Demand for oil from China, India, Russia, and the oil producing Gulf States is still increasing dramatically; demand from the developed countries is flat or increasing slowly; and as usual, the poor countries, who cannot afford $70 a barrel oil, are going without.

Although OPEC theoretically can increase production a bit, spokesmen for this organization remain adamant there is no need to examine the issue of production levels until fall. Right now, the race between declining production from old oil fields and production from new discoveries is just about a dead heat. Actually oil depletion is somewhat ahead, but extraction of liquids from increased natural gas production is making up the difference. While oil prices have risen, so far the bidding war has been largely between the rich countries and the poor countries, which is obviously no contest. It didn't really take much to knock Central Africa and small island nations out of the competition for available oil.

Someday soon, however, the poor countries of the world will be importing so little oil that increasing demand will leave only the rich bidding against the richer, prices will move up again and still fewer will be sharing in the last years of the oil age.

This situation could change for the worse, even before the end of the year, as knowledgeable observers are starting to issue stronger warnings. This week at an energy summit, Guy Caruso, the head of the EIA, called on OPEC to increase production immediately; otherwise the world faces higher prices and shortages due to increasing demand. The normally optimistic Caruso noted that with potential outages from Nigeria, Venezuela and Iraq, there are few reasons to think global oil prices will fall anytime soon. "Most of the price risk is on the upside."

Before we have to deal with the tightening world energy market, America has to get through its immediate problem of potential gasoline shortages this summer. This week's oil stockpiles report is mixed. Our demand for gasoline continues to grow. In April we were burning 9.2 million gallons a day; we are now over 9.5 million and this will probably increase by another 200 - 300,000 barrels a day in July and August. Our demand for gasoline is running 1.5 percent higher than last year and our demand for all petroleum products is up 2.4 percent.

Again there is good and bad news. The good is that our ability to attract gasoline imports remains high with 1.5 million barrels a day arriving last week so that U.S. gasoline stockpiles increased by a satisfactory 3.5 million barrels.

The bad news is that U.S. refinery utilization actually dropped a bit to below 90 percent and, coupled with reports of continuing outages, shows no indications of getting back over the desirable 95 percent in the near future. Once again we have an imbalanced import problem with gasoline stockpiles on the West Coast growing by 1.3 million barrels while on the East Coast stocks dropped by 800,000 barrels.

Part of the problem was a several-day outage in the pipeline that brings gasoline from the Gulf Coast to tank farms along the east coast. As stockpiles in the Midwest grew during the week, it appears more gasoline was directed north from the gulf while the pipeline was out of service.

Some analysts are already questioning the validity of this week's EIA stockpile numbers. They note that with production and imports down from last week, and demand going up, it seems strange that the total U.S. stockpile would jump so much. I guess we will have to wait for another day to get an explanation or correction.

So where does all this leave us? The short answer is still highly vulnerable. As U.S. refineries seem to be unable to increase production sufficiently to meet increasing demand, we are increasingly dependent on imported gasoline to keep prices under control and shortages from developing. The situation is the most serious along the Atlantic Coast from New York to Florida, where stockpiles continue to drop and may be getting very close to the unknown level at which shortages develop.

The current East Coast stockpile situation makes it more likely that disruptions from a hurricane hitting the Gulf will promptly lead to gasoline shortages, unlike two years ago when local stockpiles were sufficient to get us through. As the pipelines pumping gasoline from Gulf Coast refineries to East Coast tank farms are reported to be at capacity, it is unlikely we will see an improvement in the situation anytime soon.

For the next week or so, gasoline prices probably will ease a bit as traders perceive reported increases in total U.S. gasoline stockpiles as a good thing. The fundamentals, however, are still not good. Although very high U.S. gasoline prices should, in theory, allow us to outbid others for cargos of gasoline, there are many possibilities for disruptions to gasoline imports before the summer is over. Any piece of bad news is likely to lead to higher prices very quickly.

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