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The Peak Oil Crisis: Summer's End

 As Labor Day nears, a quiet summer seems poised to turn into an autumn to remember. Our concern here, as it has been for many years now, is the price and availability of oil products vital to our civilization. One of the many ways to think about peak oil is the point in time when our gasoline and other petroleum-fueled endeavors, such as air travel, become too expensive for casual use. As the use of petroleum products slows (US consumption is down by 4.4 percent from last year), our economy activity gradually drops to a slower pace. This year, the price of crude dropped about $35 a barrel between April and June as tensions in the Middle East seemed to be easing. Since July, however, it has climbed $25 higher despite gloomy economic prospects for much of the industrialized world.

More important however, is that the price of gasoline in the US is now up to the highest level ever for this time of year. Despite lower gasoline consumption, we seem to be setting a new record for the amount of money going into our gas tanks and not available for other uses. Some of this price increase is due to transient factors: hurricanes, refinery fires, and saber rattling in the Middle East; however, underlying all this is the simple fact that the production of conventional oil, which powers most of our transportation, has hardly risen in the last 8 years. Don't be fooled by the increases in bio-fuels, and natural gas liquids production. While we may be mixing a lot of corn-based ethanol into our gas tanks at the minute, ethanol and natural gas liquids do not power 18-wheelers, airplanes, ships, or pave roads – conventional oil does and it is the production of this fuel which is not growing at the pace we need for robust economies. Moreover, don't be fooled by the hype about fracking for oil in Texas and North Dakota. Production from these wells, is very expensive, lasts only a few months and will someday be recognized as but a small blip in the 30 billion barrels of oil the world consumes each year.

As the US Presidential election moves into high gear, it is conventional wisdom that a major spike in gas prices in the next two months would swing votes in the Presidential election. There is, however, little the incumbent administration can do about the underlying causes of high oil prices. The end of cheap oil is the end of cheap oil. There are, however, things that can be done to lessen the chances of a price spike in early November. First is to do everything possible to keep the Israelis from dropping bombs on the Iranians prior to the election as they are continuously threatening to do. Unfortunately, some key members of the Israeli government, including the Prime Minister and Defense Minister, continue to say that only the bombing of Iranian nuclear facilities, (with the eventual help of America) can save the Middle East from the apocalypse of a nuclear armed Iran. How Washington handles this threat could easily be key to the election, our future oil supplies, and the stability of the Middle East for many years to come.

The only other option that the President has to mitigate prices is to release crude from the US Strategic Petroleum Reserve in coordination with the International Energy Agency and other IEA members. Last week the IEA was adamantly opposed to such a release, well aware that hostilities in the Middle East could erupt in the next two months leading to a real emergency not just a politically inconvenient price spike. Analysts are already opining that the closure of offshore oil production and refineries along the US's Gulf coast insures that a release of crude will take place shortly. Given the likelihood that the hurricane-caused outages will only last for a few days and the current size of US commercial crude stocks, it is difficult to see how a release will have much of an impact.

Last week, the Republican candidate for President announced his energy plan which basically consists of relinquishing federal control over oil drilling to state governments – on land (federal property included) and offshore. The plan implies, without giving specifics, that this move will result in so much oil production that the US will not be dependent on foreign oil imports in eight years and that 3 million new jobs will be created as a side effect.

Such a plan is little more than empty rhetoric. In the last two years, the Obama administration has opened more federal land to oil exploration than the oil industry can possibly exploit in the next decade. With the costs of extracting oil rising rapidly, even the cash-laden oil companies will need to be careful as to where they deploy their resources in coming years. With new oil deposits being found off the coast of Brazil and Africa, the demand for drilling equipment is already so heavy that orders for new rigs will be backlogged for many years. Then there is always the possibility that the global economy will turn so sour that the price of oil will fall below the price required to extract oil from fracked wells, deepwater formations and even the tar sands. In this case drilling for new oil could decline rapidly as it did in 2008.

The next few months could easily bring about major changes in the prospects for the global oil supply. While a change in the US's administration would likely bring with it a wave of deregulation, it seems unlikely that this would have any real effect on the availability and price of oil. Of more importance would be a change in the US's policies towards the Middle East where tensions and passions are increasingly hourly. Steering a course through what is almost certain to become a more turbulent region without interrupting the region's oil exports is likely to become increasingly difficult.

For now, all that most of us can do is wait and watch. 

 


Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.

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