National Commentary

The Peak Oil Crisis: Masking the Peak

As world oil production has never peaked before, there is no historical basis for making informed judgments as to what is going to happen.

All we know is that some six billion people, living in some 200 economies on this earth are soon going to be confronted with getting by on less than the 86 million barrels of oil per day (b/d) that we currently consume. The outcome of the interaction among all those people, all those countries and all that oil is too complex to foresee with any clarity.

It has long been recognized among those studying the peak oil phenomenon a severe, lengthy, worldwide economic setback could reduce the demand for oil to such an extent that peak production could be lost in the chaos.

Other scenarios involve oil prices rising to such level that demand drops significantly, which would be followed by a major drop in prices, followed by increased demand and rising prices, and the cycle continues.

In the last three weeks, world oil prices have dropped steadily so they are now nearly $30 a barrel below what they were in early July.

Now this decline could be the result of those pesky speculating hedge funds selling short the oil futures contracts. It could be the $4 gasoline keeping an increasing number of Americans off the roads, or even the Olympics, which forced Beijing into a two-month shutdown of a sizable piece of its economic activity in an effort to clean up the air.

Incidentally, China’s imports of petroleum products, which grew rapidly in the first half of the year, look like they are going to drop precipitously in August.

If it turns out speculators, $4 gasoline or a lull in Chinese purchases are major factors behind the current weakness in oil prices, then the current declines are likely to reverse in a couple of months.

The speculators will change their positions, the summer discretionary driving season will be over and the Olympics will be in the history books so that China can go back to making its normal amount of air pollution.

If this is indeed what we are witnessing, then oil prices should rebound as the winter heating season approaches. The Organization of Economic Co-operation and Development (OECD) oil stocks are unusually low at the minute, and if the world remains in even middling economic conditions, demand from China should return.

At the minute, the Chinese are facing a serious electric power shortage stemming from a mismatch between the new coal fired generating plants they have built in recent years and their ability to mine and transport coal to these facilities.

Some are talking of a renewed surge of Chinese oil, coal and liquefied natural gas (LNG) imports if Beijing is to keep its factories humming on and continue to grow at the planned 10 percent a year.

However, suppose for a minute the pessimists are right and the world is on the brink of a major economic setback. The evidence for a setback abounds, starting with the credit and housing crises in the U.S. through rising unemployment, inflation and more.

Ditto for the E.U. and much of Asia. If U.S. imports shrink significantly, all sorts of economic ills will follow in the economies of our trading partners. The Chinese, however, still remain adamant that their surging economy will power right through a drop in Western demand for their exports.

Evidence is accumulating, however, that all is not well with China’s economy. Exports are no longer growing, petroleum imports are dropping and outside economists are now saying that GDP may only grow by nine percent this year. All of this suggests China’s imports of crude and petroleum products may slow markedly before the year is out rather than increase as some are suggesting.

Judging from what happened two years ago, OPEC is likely to cut production again should oil prices slip below $100 a barrel, which in turn would set off on another round of price increases. The course of all this will depend on just how the U.S., China’s and the world’s economies fare over the next year or so.

If things get really bad, the demand for oil, which will be expensive by historical standards no matter what happens, may drop precipitously. Then both production and prices are likely to fall amidst much volatility and suffering in the poorer countries that are already taking serious economic hits.

Falling demand for oil obviously is going to cut production so that a nominal “peak” in world oil output will occur. From there on, the situation has so many variables as to become unpredictable. Worldwide demand for oil could fall by hundreds of thousands or perhaps millions of barrels per day.

Oil consumption, however, is so deeply rooted in the sinews of the world’s economy, it is difficult to image demand dropping by many millions of barrels from the current 86 million b/d. But then again, nobody can realistically foresee what is going to happen.

If worldwide economic problems should stretch out into years, then we would be in the midst of what most foresee will be the geologic/economic decline in world oil production.

If demand has already dropped due to bad economic times, then the geologic peak is likely to go undetected. For in our rearview mirror, world production would have been dropping for months or years simply because fewer have enough money to pay for the stuff.

The message is that there are many ways to perceive the coming years. Either the lack of enough oil due to geologic constraints will create unimaginable economic troubles, or economic troubles from some other cause can kill the demand for oil.

A major blow-up in the Middle East, for example, could create so much turmoil that world oil production would peak on the spot, never again to return to current levels of production.

It is getting very complicated out there, and none of us really know what is going to happen.

The only thing we can be sure of is that somewhere along the line, changes in our lifestyles are coming – perhaps faster than we think.