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The Peak Oil Crisis: The Washington Post tries to explain oil prices

On Monday, our colleagues over at the Washington Post ran a front-page story in an effort to explain to official Washington why oil prices have soared by $25 a barrel in the last ten weeks and just what it might mean.

Now anyone who follows the peak oil story knows the answer already. World Oil production stopped growing two years ago; consumption of oil in China, India, and the major oil producing countries themselves continues to grow rapidly; a gap between demand and supply is opening which for a while will be filled by drawing down world stockpiles; increasing prices are forcing the poor nations to get by with less oil.

Those who follow peak oil also know that within the next few years, unless a really bad economic recession cuts consumption massively, depletion from existing oilfields will run ahead of efforts to develop new oil fields and alternatives. Liquid fuels production then will begin to drop.

If, however, you have not taken on-board these easily observable facts of life in the 21st century, you must search for other explanations to account for rapidly rising oil prices. Sadly, this is the course that the Washington Post’s 1,800-word story takes.

The Post starts out by asking the rhetorical question “How high can [oil prices] go?” This of course is an irrelevant question, for the answer is “as high as necessary to keep supply and demand balanced”. Oil will eventually be $100 a barrel, $200 a barrel, and ultimately many hundreds or perhaps thousands of dollars a barrel. The key point is that the era of unlimited oil supplies is over and from here on there will be increasingly severe supply limitations.

The Post clearly does not yet grasp this point for in the second paragraph they opine that unlike previous oil spikes, the current one does not appear to be linked “to any physical shortage.” NO SHORTAGE? For weeks now the U.S. and the International Energy Agency have been shouting “shortages coming this winter” and imploring OPEC to boost production as much as they can.

Perhaps the Post has been listening to OPEC spokesmen endlessly repeating their mantra that “the market is well supplied,” the market is well supplied.” OPEC is right of course, for whatever the price of oil, be it $100, $200, $500 or even $10,000 a barrel there will never be a “shortage” of supply. There may not be too many oil-powered cars running around, but supply will be there to meet demand at the going price.

After declaring we are not running short on supplies, the Post settles on “traders” – a polite word for speculators – as a key reason prices are going up. These traders, taking advantage of a weak dollar and using money fleeing from an uncertain stock market, are buying oil as something with intrinsic value.

Polling “veteran” oil analysts the Post suggests that our current price spike may be a bubble that might just burst when we have a warm winter, slower economic growth, or when OPEC cranks out a few more barrels per day.

To maintain journalistic balance, the writer sought out some traders to get their side of the story. Being well grounded in reality, the traders pointed out that we have an unusually thin cushion of excess capacity so when you consider continuing rapid growth in Chinese and Indian consumption, you have a different situation than during earlier price spikes.

A little realism then creeps into the Post’s story which notes that we live in a world that is now consuming 85.9 million barrels a day and only has 2 million barrels a day of spare capacity, most of which is undesirable heavy Saudi crude. The Post draws the obvious conclusion that with almost no reserves, the oil market is much more sensitive to threats that would have been disregarded in other years.

To get back on a cheerier note, the story notes that some experts say “high prices will change the balance, creating new supplies and lower demand.” It quotes Daniel Yergin of Cambridge Energy who tells us those very high prices “will “catalyze responses in supply and demand and innovation.” Whatever that means it sounds promising!

After pointing out that oil prices went into slumps in the late 1980’s and late 1990’s the story gets back to the underlying question of whether or not our current oil spike is fundamentally different than the last. So in its most lucid moment, the story says “A few argue that the world is running out [of oil]” and notes that massive growth of U.S. suburbs and exurbs coupled with major economic advances in China and India means that very high demand for oil is not going to go away with increasing prices.

The story ends with the question of if and when the U.S. economy will be laid low by increasing oil prices. After noting that many thought $50 or $60 oil would be the end, the story happily notes that at $96 we are still growing at nearly 4 percent with low unemployment and modest inflation. This happy development is explained by a more efficient economy that uses much less oil per unit of production and that energy costs are a much smaller piece of the average household budget.

What can we make from all this? The Post’s writer and editors who put this story on the coveted front page certainly know about most if not all the dots that make up the story of oil production and prices in the fall of 2007. The biggest missing dot is a failure to mention that oil fields run dry as you use them and if you cannot replace the ones that are drying up fast enough you are in trouble.

There is nothing wrong with pointing out that there are many intangible factors that can drive the futures market up and down. But the Post is missing the forest while discussing the trees. The forest of course is the fact that oil prices have risen nearly five fold in this decade and show no signs of retreating.

One of these days the Washington Post will connect all the dots and start explaining to official Washington and the many policy makers among their readers the true story of oil. We can only hope that day will not come too late.

What do you think? Leave a comment below.

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