The Peak Oil Crisis

Gas prices rising!

By Tom Whipple

It seems like a good time to revisit everybody's least favorite topic— gasoline prices. Since mid-February, unleaded regular has increased more than 40 cents per gallon, 15 cents in the last two weeks, and commentators are saying $3 by summer is a sure thing— even without a hurricane going through oil country.

There are so many forces affecting the oil market today that balancing them out over the short term is becoming difficult. Somebody will issue a report on something or other and the oil speculators will rush to sell, driving the price down several dollars a barrel. After thinking about it overnight, and reading each other's comments, enough will decide that they misunderstood the report and the price of oil will go flying back up. As we approach peak oil, the old rules and maxims seem to become less relevant.

The major force behind oil prices right now is lack of much cushion between supply and demand. While it is too early to declare world oil production has peaked, several observers have noted there has been little or no increase in worldwide production for many months. All the evidence that has come to light recently suggests that if production has not yet peaked, the fateful year is getting mighty close.

The Nigerian and Iraqi situations continue to get worse. Unless there is some remarkable turn around, it seems increasingly doubtful their oil production will be at present levels by the end of the year. The recent leak of secret reports from inside the Kuwaiti and Mexican oil companies suggests their production will be significantly lower within a few years. Finally, we are still waiting for someone to leak the secret Saudi depletion study that will administer the coup de grace to the oil age.

On the demand side, the US and Chinese economies are still doing well. Demand for gasoline in the US is up 1.6 percent over last year. The Chinese say they are on track to grow their economy by 8 or 9 percent, put millions of new cars on the road, and fill their newly created strategic oil reserve depots. Beijing recently reported that oil imports in February were up 4.4 percent over last year and India 's imports were up 27 percent. Every major purchaser of oil in the world recognizes prices will be going up and there are numerous imminent threats of supply interruptions. Thus, the large purchasers of crude —refiners, wholesalers, governments— that can afford to hold large inventories at $60-$65 barrel, are filling every available tank in anticipation of higher prices to come.

The returns aren't in yet, but it seems apparent that with little or no increase in world production, and only modest increases in world prices, the gap is being filled by demand destruction in the world's poorer nations who simply can't afford their normal purchases of $60+ oil. Barring some major catastrophe over the rest of the year, Americans will continue to drive their SUVs, China and India will continue to grow, and world's poor countries will slowly drop out of the oil age. At some point the poor will have foregone as much oil consumption as they can, so bidding for oil will be fought out amongst the OECD countries, and the fast developers such as China and India .

All this seems to say that for the short run, and unless we get hit by yet another damaging hurricane or some major oil exporter quits exporting (don't rule this out), the world's supply/demand balance does not seem poised to run US gas prices up or down all that much in the near future. The catalyst for more expensive gasoline this year may be closer to home.

First, let me remind you the US is currently producing about 6.7 million barrels a day of oil and natural gas liquids, and using about 20.5 barrels a day. As a matter of interest, about 1 million of the 14 million barrels a day difference appears at the refineries through a phenomenon know as "processing gain," but the rest is being sold to us by our friends, and even a foe or two who likes money, from around the world.

A number of oil companies have announced plans to drop the pollution-reducing additive known as MTBE from their gasoline this summer and replace it with ethanol made from corn. This is great for the farmers, but a debate is raging in the oil industry as to whether there is going to be enough ethanol to replace all the MTBE we have been using. There are 33 new ethanol production plants under construction in the US , but summer is getting close. Even the staid old Department of Energy has warned that "the rapid switch from MTBE to ethanol could . . . . serve to increase the potential for supply dislocations and subsequent price volatility on a local basis." Translation: "This summer your local station may run out of gas (or raise the price so high that you can't afford to fill up) because there may not be enough ethanol to put in everybody's gas."

Already industry leaders are calling on the EPA to suspend the clean air rules requiring the ethanol. The oil companies can't stay with MTBE because several states have banned it and, as MTBE is yet another cancer-causer, they are afraid of being sued out of their ample bottom lines. After all what is clean air in comparison to lots of cheap gasoline?