The Peak Oil Crisis: Our 4 Storms

Last week I discussed how the great crisis could be thought of as four interrelated sub crises: peak oil production, peak oil exports, climate change, and economic decline. Each of these will have an impact on the others and the order in which they arrive and interact with each other is likely to have a lot to do with our lifestyles in decades to come.

Until last week, a good guess would have been that shortages in oil available for export would impact us first. This would be followed by economic decline, peak oil production, and finally a meaningful reduction in the burning of fossil fuel in response to global warming. News from the last few weeks, however, makes it look like more of a horse race.

Until very recently economic growth always trumped the need to curb fossil fuel consumption whenever the latter was considered. In America, the global warming discussion has always been rather theoretical. Yes, there were pictures of melting ice caps and stranded polar bears, but so far the direct impact of global warming has been limited— unless you happened to live in New Orleans or along the Gulf Coast. Last week there was news that might just bring the timetable for doing something about fossil fuel emissions back a little.

It seems the hurricane-suppressing El Nino in the Pacific has subsided, thus increasing the risk for another bang-up hurricane season this year. If America ever does something to make major reductions in fossil fuel emissions, it is a good bet that an endless succession of hurricanes tearing up our southern and eastern coast lines just might be the catalyst for change.

In China, the emissions-causing global warming crisis is shaping up as far more serious than in the Western Hemisphere. In large parts of China the air should not be breathed and the water not drunk or even put on the crops. To make matters worse, the air is getting dirtier and dirtier and the water available to the Chinese people is disappearing at an alarming rate. The melting of the Himalayan glaciers and persistent droughts are already causing such problems that even the growth-at-any-price Chinese government is starting to take notice. Alarming stories appear frequently in China’s press. The balance in Beijing is clearly beginning to tip in favor of reducing emissions even if economic growth has to be sacrificed.

Last week we saw new evidence of possible economic trouble when the world’s stock markets took a five day dive. Whether we are looking at the beginnings of serious economic problems or a “minor correction” somebody else can say. What is known, however, is that a lot of bad economic numbers have been emerging in recent months leading to the suspicion that more than a minor correction might not be too far ahead— peak oil or not. It is interesting to note that as the markets tumbled, oil prices did some tumbling on the theory that less economic growth will mean less demand for oil – not a bad idea.

The point here is that $60 a barrel oil might already be taking a toll on the world’s economy, or maybe the possibilities for deficit financing of governments and trade might run their course before oil depletion or declining exports set in. So we now have some more evidence that our economic storm is starting to gather or is at least worrying some investors.

Last week the focus of oil depletion returned once again to Saudi Arabia where oil production has dropped about 1 million barrels a day during the past year. As this is considerably more than the Saudis OPEC obligation to cut production, people are starting to ask questions about just what is going on.

The key question is whether the production drop is voluntary or whether the kingdom’s decades-old oil fields are starting to play out. The history of oil depletion is replete with examples of production from water-injected fields dropping like a brick. If this is indeed happening in Saudi Arabia, it will make headlines within the year and the world will never be the same.

A more benign interpretation of the decline in Saudi production is that they still have some years to go and are cutting production to drive up prices, save some oil for the grandchildren, or simply can’t unload the heavy, sulfur-laden crude that is becoming an increasing share of their production. If the latter situation is the case, then all should be well for a while as the Saudis are building new refineries to process the heavy crude and can then market the products.

If you should feel your worry-list can handle another item you might add rapidly declining Saudi oil production right after Iraq, the Iranian A-bomb, and the avian flu.

Our last sub-crisis is peak exports, and there the news is not good either. I guess everybody knows by now that world oil production has been essentially flat for the last two years; while Chinese and Indian consumption continues to grow, OECD consumption is flat and the third world in taking the hit. Some say world oil production has plateaued in advance of the inevitable decline. Others hold that production is just resting in preparation for new surges to ever higher levels and decades of oil supported growth.

Whichever is the case, it seems that US stockpiles of crude and finished products like gasoline have been dropping steadily for some weeks now. Remember, the US now imports about two thirds of our oil so our ability to find oil to import plays an important role in determining those stockpiles numbers. There is no cause for immediate alarm because our stocks are still in pretty good shape by historical levels. However, the trend is not good. Gasoline prices are rising and it is only a matter of time before the alarms start to clang.

All in all, the news was not good last week. Each of our four storms seems to be gathering strength.