The dress rehearsal is over
As oil crosses $100 on its way south, not even a hurricane in the Gulf of Mexico and a statement from OPEC that the cartel will cut production by over 500,000 barrels per day seems capable of halting the bloodletting. In response, the Financial Post features an article titled “Peak Oil peak,” quoting this writer out of context; compare this with my commentary, which was the source of the quote).
Wasn’t the price of oil supposed to rise endlessly? Wasn’t the world supposed to end by now? What happened? What does it all mean?
Patience, gentle reader. All will be explained.
First, why did the price of oil rise this summer to nearly $150? On this there is little agreement among the mavens. A new report by hedge fund managers Michael Masters and Adam White (released Sept. 10 by Sens. Byron Dorgan, D-N.D., and Maria Cantwell, D-Wash.) chalks it all up to speculation. Pension funds, college endowments, and other institutional investors bought heavily into commodity index funds earlier this year, and that sent the price of crude to the moon. Recently the same investors have taken their money out of oil futures, and this accounts for petroleum plunging back to earth. Move along, folks, nothing to see here.
Then there is the argument spinning through the rumor mill (sorry, no www attribution available on this one) that says the fall in oil prices since the end of July shows support by Wall Street for Republicans as the nation moves toward the November elections. After all, the reasoning goes, JP Morgan controls 40% of the puts and calls in the oil market; add Goldman Sachs and a few other big brokerage houses and there is the potential for manipulation of roughly half the total oil futures market.
If gas prices are rising, the electorate will be more likely to want to throw the (Republican) bums out and demand Change™. Wall street likes the favors the Bush administration has doled out over the past few years and wants more of the same. Or so the story goes.
The more prosaic explanation for the price spike: oil demand was rising, supply wasn’t, so the price went up. When the price got high enough, it (along with the credit crisis) caused the US (and world) economy to go into recession. That has seriously undercut demand for oil. Look at the drop in vehicle miles traveled, for example.
One thing we can be sure of: price matters; when the market speaks, people listen. During the weeks when petroleum was breaking a record nearly every day, there was unprecedented discussion of the Peak Oil concept in financial journals, both print and online. What’s more significant, people started driving less. Hummers sat on car lots, unsold. Airline companies and auto manufacturers teetered on the verge of bankruptcy.
In short, people woke up to the profound vulnerability implied by having based their economy, and by extension their very lives, on an impossibility—the extraction of a non-renewable resource at ever-increasing rates.
As the oil price fell, eyelids drooped.
But the price spike of early 2008 was merely a dress rehearsal. The fall in oil demand gives the world a moment to catch its breath before the inevitable price-ratcheting process starts up again. Meanwhile, at $100 or so, the price of oil is still 50 per cent higher than last year and 10 times the level of a decade ago.
When the next supply crunch comes, we could well see prices of $200, $250, or $300. But again, the rise won’t be steady and unending; we will again see a spike followed by a plunge—this time maybe back to $150.
Meanwhile, will oil at $100 be an occasion for sleepwalking or strategic regrouping? For policy makers, this is a time to think clearly about long-term measures to reduce demand pro-actively and support the development of renewable energy sources. For citizens, it is an opportunity to make the effort to change habits, buy a smaller car, and get involved in community Peak Oil prep work.
For those of us who have been involved in such work for several years, this is the hour to prepare for the inevitable tsunami, when journalists will call us day and night struggling to understand the concepts, and when city governments, businesses, and national politicians will plead for advice on how to cope. We’d better be ready.
The world has had an unmistakable wake-up call from the global oil alarm clock; merely to press the snooze button would waste what may be our last opportunity to act before necessity makes us react in ways that are less than optimal.
image credit: flattop341 (creative commons)