The Peak Oil Crisis: Have the Troubles Begun?

In recent years, numerous books have been written about life after world oil production peaks. Most depict radical change, as oil-powered transportation, suburban living, and large-scale food production and distribution wither. The truth is nobody really has a good idea about what is going to happen. The world has never been to peak oil before. There are many complicating factors — rates of oil depletion and production, the state of the world’s economy, and the gap between rich and poor nations to name a few. Making a meaningful projection of what life will be like five, ten, or 20 years from now is, as usual, fraught with uncertainties.

The one thing everybody agrees on is that all sorts of “bad” things are bound to happen as we transition from plentiful oil to scarcity. For the sake of a better term, let’s call these bad things “the troubles.”

For each of us the troubles will begin differently. If you had spent the last 30 years building Fords and your factory closed recently, you know just when the troubles began. If you are one of the tens of millions in the underdeveloped world that are already suffering from power outages and planned power cuts (euphemistically termed “load-shedding”), then you too have already experienced the first of the troubles. For most of us in the developed world however, nothing much has happened, as yet, that unambiguously marks the beginning of troubled times.

For the last two years, we have seen gasoline prices spike to over $3 a gallon, but these were caused by transitory events and gasoline soon settled to what has become “acceptable levels.” We are now approaching a national average of $3 a gallon again, only this time it is happening in April with only the normal level price-inflating geopolitical threats out there and the hurricanes, if they come, are still four months away.

This time the problem seems to be more systemic and is based on the fact that we here in America simply can’t quite produce or import enough gasoline to keep up with even late winter, much less summer, demand. For the last couple of months, gasoline stockpiles have been dropping at unprecedented rates. If gasoline stockpile depletion continues much longer, could it be the unmistakable beginning of mass troubles for everyone?

Now, our current gasoline problems could go away in the next few weeks. Our refineries could recover from fires and other unplanned outages and start producing all the gasoline we need for a while. Our imports of gasoline could increase. We could even cut back on driving a bit or stop diluting our gasoline with mileage-robbing ethanol. Before you know it supply and demand would be back in balance and we could all have a great 4th of July.

However, it is looking doubtful that all the ingredients necessary to a normal summer driving season are going to come together this year. As we are becoming more accustomed to $3 gasoline, most observers believe it is going to take a substantial jump in prices to somewhere north of $5 a gallon before gasoline consumption slows substantially.

While US refinery utilization is now back up above 90 percent of capacity, a question remains as to how much longer the US can import sufficient quantities of finished gasoline and the proper grades of crude that enable our refineries to produce the optimum amount of gasoline in their current configuration. Two weeks ago, as a number of observers pointed out, refinery utilization increased while gasoline production dropped. This may be a one-time glitch, or it could mean that sufficient quantities of light, sweet crude, that are optimal for making gasoline, are becoming difficult to find. If this is indeed the case, then the US has a problem of major proportions.

Last week US gasoline inventories dropped for the 10th straight week by another 2.7 million barrels. While this is better than the previous two weeks when stockpiles dropped by over 5 million barrels a week, it should be noted that refinery utilization is getting back close to normal. Gasoline stockpiles, however, are dropping due to increased consumption (still running 2.5 percent over last year) and insufficient imports.

As an EIA spokesman said last week, “It’s too early to panic. There is still plenty of time to rebuild inventories.” Let’s hope so, for unless those imports start picking up soon, it’s going to be a long and perhaps troubled summer.