The Peak Oil Crisis

Independence Day 2006 – America's last fling?

By Tom Whipple

The final reckoning isn’t in yet, but by early accounts we had a bang up 4 th of July this year. A record 40 million of us got into our cars, SUVs and pickups and went forth. We went to the beach, to the mountains, to grandma’s, to our national parks, to our state parks, to amusement parks. Anywhere there was a “destination” worth driving to, we went to it.

Three-dollar gasoline didn’t bother most of us one bit. Gasoline supplies were ample and so long as the pump still accepted the credit card, we had a great time. Here and there were a few dark clouds. Those lucky enough to own a large power boat with a 300+ gallon gas tank and a one-mile-per-gallon or less cruise speed, were reported to have been taken aback when boat fuel at the marina rose to $4 per gallon ($5 in Canada ). Many spent the weekend at anchor— just enjoying the view and pondering what it would be like to own a sailboat.

On July 5 we paid for our profligacy when the commodities markets, having learned we had gas-guzzled ourselves to a new consumption record and were showing few signs of easing up, sent the price of oil to over $75 a barrel— a new all-time high.

As we cross the halfway mark of 2006, it’s time for another quick review. Was this the last gas-guzzling 4 th or will Mother Nature let us get one or more under our belts before the inevitable year when many of us can no longer afford to drive in the manner to which we have become accustomed.

Last week the US Energy Department released the stats on how it's going with oil supply and consumption so far in 2006. The first piece of news is bad. Daily US oil production for the first half of 2006 dropped by 7.1 percent to 5.1 million barrels a day vs. 2005 when we produced 5.4 million. Those hurricanes last fall coupled with aging, depleting, oil fields are really doing a number on us. Not much progress on the “energy independence” front so far in 2006.

Our overall oil consumption for the first six months is down just a smidgeon, but unfortunately the big drop was in heating oil. Remember that warm January we had last winter. Where it really counts, gasoline and jet fuel, we are still forging upward, with gasoline consumption in June up 1.4 percent over last year and jet fuel up 3.3 percent. The biggest energy surprise of 2006 is that $3 gasoline is only slowing the poorest among us. For the rest of us, $3 is cheap, (our Canadian cousins are paying $4) or we are finding ways to compensate.

We are not refining as much as we used to, but that’s OK because our imports of refined gasoline and blending components are now running about 1 to 1.3 million barrels a day. That’s about double what it was 10 years ago. This week the average price of gasoline in the US made it to $2.97, just a few cents below the hurricane high last fall.

In thinking about the state of peak oil and all it implies, it is difficult to foresee any good news that would delay the arrival of much higher prices and shortages.

World oil production has been basically stagnant for the last year. If this production reaches a new high in the next year it is likely to be a minimal increase of a few hundred thousand barrels a day or less. It is becoming increasing difficult to envision just where production increases on the order of millions of barrels per day that we saw a few years ago are going to come from. Every few weeks another report of actual oil depletion or new statistics looking suspiciously like depletion, surfaces.

In the meantime, consumption in China , some parts of Asia , the rich Middle East Oil producers, and the US shows little sign of slowing. By the next 4th of July, another 31 billion barrels will have gone into somebody's fuel tank, somewhere. There is simply not enough slack in the system or oil currently being consumed by poor nations that will soon be priced out of the market to make up for the supply demand imbalance. Some are beginning to talk about a dollar a year addition to the price of a gallon of gasoline as what we might expect for a while.

If this rate of increase proves to be the case, we can look for circa $4 gasoline next July and $5 in July 2008, just prior to the Presidential election. The new President can then deal with the $6 or $7 gasoline that many believe will do some real damage to the economy.

These supply vs. demand increases, of course, presuppose nothing particularly bad happens in the interim-- a hurricane across the oil fields, a well placed explosive, a diplomatic miscalculation, a timely assassination, or a civil war in an oil exporting country. While it is hard to imagine any geopolitical development that would significantly lower the price of oil, there are half a dozen festering situations that are screaming "serious trouble ahead."

From Baghdad to Gaza to Basra to Tehran there are situations deteriorating by the week. To these we might add the Niger Delta and perhaps even Mexico , should oil production drop precipitously in coming months.

Taken together, all the evidence suggests there are so many developments likely to reduce oil production significantly, just waiting to happen, that it is highly unlikely that world oil production will get through another year or so unscathed.

Thus, the evidence seems to be mounting that from both the supply/demand/depletion perspective as well as several decaying geopolitical situations, Independence Day 2007 might involve much less freedom to travel than that one we just celebrated.