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Peak oil crisis: Our government is speaking

You have to be quiet… and listen very carefully, for our government is trying to tell us something. If the news were good, of course, the White House would announce it at the daily press conference. If the news were very good, the President himself might come out into the rose garden and tell us the news himself.

But this news is bad, perhaps very bad, so the government relies on a third tier civil servant to break the bad news gradually so as not get the people too upset or cause a run on anything—banks, mutual funds, gas stations, or grocery stores. The bad news of course is something that many of us have been aware of for many months; this is likely to be a very tough winter for energy prices.

On Monday, Guy Caruso, head of the U.S. government's Energy Information Administration broke the bad news; although he never mentioned the dreaded words “peak oil,” the situation he describes is coming awfully close. The first announcement was that according to EIA models, gasoline prices are due to go up another 20 cents a gallon in the next few weeks. Considering that the AAA had just announced that the average U.S. price was now $3.10, having gone up by 30 cents in the last few weeks, this piece of news made headlines from coast to coast.

To see gasoline at new highs around $3.25 in December (and on the order of $3.75 on the West Coast) suggests that unless there are major changes such as a sharp and sudden decline in economic activity or OPEC discovers a spare million or two barrels a day, then we are all likely to be seeing $4 a gallon and higher next spring.

In recent weeks, there has been much commentary to the effect that the U.S. economy is so strong that it can shrug off $100 oil. Analysts note that gasoline is still a smaller part of the average family’s budget than it was 30 years ago and America does so little manufacturing these days that fuel is not a major part of production costs. Nonetheless, doubts are starting to pop up here and there. They note that this time high gasoline prices did not come from a political problem but are the result of a gradual narrowing of supply and demand which is unlikely to go away until there is a considerable cut in demand.

Caruso’s real message was not the headline grabbing 20 cents gallon, but that the EIA is coming to believe there has been a major change in the oil markets. In the Administrator’s words, “We think we're in a different era with relatively higher real oil prices going out through 2030. Rising demand coupled with ‘insufficient’ investment, lack of access to resource bases in the U.S. and elsewhere, and a ‘dramatic rise in the cost of doing business' are boosting prices.” Caruso added that he expects crude oil prices to remain high through the first three months of 2008, and warned that supplies coming onto the market after that will be more costly.

In a swipe at a new Saudi mantra, echoed by many on Wall Street and in the media, that speculators, traders, and hedge funds are responsible for high prices, Caruso said that while speculators may have helped push the price rise, their impact "is really a symptom of market fundamentals" because demand for oil remains high.

Over in Paris, the OECD’s International Energy Agency monthly report says that "There are strong indications that high prices are depressing demand," and cut its forecasts for demand during the remainder of 2007 and for 2008 by a small amount.

The IEA ominously reports that the OECD still continues to draw down stockpiles by nearly 30 million barrels in September and 21 million in October. Japanese crude stocks are at close to the lowest level in 20 years. Although OECD stockpiles are still close to average, the trends are not good. Since summer, the world has been using more oil than it has been producing, a situation that can not go on much longer without devastating consequences.

OPEC production remains the key to how quickly the troubles come. World production has been on a plateau for two years now and few knowledgeable observers expect that it will ever get more than a couple of million barrels a day beyond current production levels before settling into the long decline that will signal the end of the oil age.

Currently OPEC is on the books to increase production by an 500,000 barrels a day starting on November 1 and there are early indications that production did in fact increase a bit last month. Given the secrecy surrounding production numbers in many OPEC countries, it usually takes a couple of months to sort out what has actually happened.

In the meantime, all indications are that unless we have a major demand-killing economic setback in the next few months, the 500,000 barrels a day increase will not be enough to prevent higher prices so a major effort is underway to convince the Saudis to increase production still further. There are many who doubt that the Saudis really have much spare capacity left, especially in marketable grades of light oils. This may be the reason they continue to rebuff requests for higher production with an emphatic “not at this time.”

The upshot of all this should be clear in the next three to six months. Either OPEC can produce another 500,000 barrels a day or more on a sustainable basis, or they can’t. Either the world economy will continue to grow merrily along at the IMF projected 4 percent growth rate or economic difficulties, perhaps lengthy ones, will set in.

There is clearly some kind of major turning point in the industrial age just ahead and this may be what our government is trying to tell us --- or at least should be.

What do you think? Leave a comment below.

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