National Commentary

The Peak Oil Crisis: The Case for 2008

It is conventional wisdom for most of the people following the peak oil story that we still have a few years to go before the real troubles begin. Some say 2011, others 2015 or later, but in general, among those calculating the depletion vs. new supply balance most have been talking about troubles starting in years rather than months.

Let’s ponder for a second the meaning of “peak oil.” Ever since the concept was invented some 50 years ago, peak oil has meant the point in time when world oil production increases to a level that never again will be reached. For most of us, however, peak oil will not be a point on a government chart, but will be the day when we drive up to a gas station and find the tanks empty, restrictions on how much we can buy, or more likely a price that makes us realize our lifestyles are going to change. We can no longer afford to use our cars in the manner that we have been doing all our lives.

In recent weeks there have been developments suggesting that the troubles associated with peak oil may be coming faster than many realize.

First, it is necessary to recall that world oil production has been essentially flat for the last three years. We did hit a new nominal “peak” a couple of months back, but the increased production was minor as compared to the forces of demand building across the world. With production stagnant, consumption in the rich countries holding about the same, and consumption in China, India, Russia and the Middle Eastern oil producers surging higher, something had to give. The “give” was in those places that could afford $20 a barrel oil, but could not afford it at $120 a barrel. For the last few years, an increasing share of the oil flow going to poor countries has been redirected to those that could pay the price. Outbidding the world’s poor is finite, however, so that at some point there simply won’t be enough oil going to poorer places for the richer ones to buy up.

Then we have the interesting news from the big producers. After ten years of rapid post-Soviet growth, Russian oil production seems to have reached a plateau. As Russian domestic consumption is rising rapidly, there is nowhere for their exports to go but down – and they are.

Next the Saudis, who after spending $100 billion or so on new oil wells in recent years, say they will soon have the capacity to produce 12.5 million barrels a day. However, the King of Saudi Arabia announced last week that he has decided to leave some of their oil in the ground for the grandchildren. Somebody passed the word the Saudi production was going down to 9 million barrels a day from 9.2 million — so much for the hope that the Saudis were going to keep us in our accustomed lifestyles.

Then we have Mexican production and exports dropping faster than predicted and Venezuela doing its best to sell its oil to anyone but the U.S.

The most important factor, however, may be the Chinese who insist on growing their economy at 10 or 11 percent a year. Chinese oil imports are up 14 percent over last year in the first quarter and by almost 25 percent in March as domestic production stagnates and Beijing prepares for the Olympics. Chinese imports for May are already looking to be above normal.

As could be expected, given flat or dwindling world exports, and stiff competition for the remainder, U.S. imports of crude and petroleum products have not been keeping up during the last few weeks and U.S. stockpiles have been dropping more than normal for the time of year. Some say this is because our economy is slowing and we will need less oil.

Others say ordering and refining more oil is about to pick up so that all will be well shortly. The definitive answer to this question is not far away, for this is the time of year when our stockpiles of crude oil, gasoline, and distillates normally build. If the situation stabilizes and stocks start climbing in the next few weeks, we can relax a little for another year. This week’s stockpile report shows some improvement with crude inventories up, but gasoline and distillate inventories still falling. Despite the weakening U.S. economy, the Department of Energy still shows U.S. oil and gasoline consumption up by nearly one percent over last year. Thus far in 2008 our crude imports are down 1.7 percent over last year and our net imports of refined products are down by 5.2 percent.

If our stockpiles do not start to build more rapidly in the next month or two, then watch out, for in recent years the U.S. has slowly moved towards a just-in-time system for oil and products to lower inventory costs. Keep in mind that much of our “stockpile” is trapped in pipelines, sitting in partially-processed tanks at refineries, and aboard ships and barges where it is no use to the consumer. It was only a couple of years ago that we were hours away from shortages.

There are many forces at work in the world’s oil markets today. How they will all balance out over the rest of the year is impossible to tell. During the last few months, however, developments suggesting much higher prices and shortages have come to the fore as witnessed by the steadily increasing prices for oil and gasoline. Unless something comes along to reverse these forces in the next few months, we are likely to suffer very serious economic troubles before the year is out.