National Commentary

The Peak Oil Crisis: Watching a Mega-Crisis

In the last few weeks there have been a number of developments that may provide an insight into the next few years – but first let’s review.

We, in America, are deep in the midst of a four-sided crisis. The first side is an economic slump; second, surprisingly, is our government’s panicky efforts to stabilize the situation; third, the imminent peaking of fossil fuels and numerous other resources that seems to be in abeyance for the moment; and fourth, global warming which in the long run could overshadow the other three by a wide margin and is attracting considerable amounts of government and Congressional attention.

The important point is that the four aspects of what could easily turn out to be the mega-crisis of the century are all interrelated. Developments in any of the four will cause perturbations for better or worse in the others.

Most believe our current economic problem was caused by the extension of too much credit, too freely, and to the wrong people, over the last 30-40 years. Some, however, are suspicious that the many-fold run-up in oil prices from their historic $10 or $20 a barrel that sopped up so much consumer purchasing power may have had more than a little to do with our current economic problems.

While the consequences of the economic downturn are well understood, we are just starting to appreciate that the massive governmental effort to keep a recession from turning into a depression is threatening unprecedented repercussions of its own. In the last 10 months, the U.S. government and its central bank have spent or issued guarantees approaching $12 trillion in efforts to boost the economy. During the current fiscal year, the US will sell $3.25 trillion in new securities vs. $892 billion worth last fiscal year. Some are already calling this phenomenon the “bailout bubble” and are worried that deficit financing on this scale could destroy the dollar and take much of the U.S. economy with it.

People who claim to understand such things continue to assure us that additional trillions in deficit financing will not be a problem and that anything is better than allowing our economy to slip into another great depression. Despite the government’s best efforts, however, interest rates have begun to rise and last week took a rather substantial jump. This in turn could hamper a recovery in the housing market. The recent fall of the U.S. dollar is a companion signal that all is not well. Whether the falling dollar and the increase in interest rates will continue much longer is anybody’s guess, but it won’t take much more of a move before prospects for an early economic recovery are seriously harmed.

While many different natural resources – fossil fuels, minerals, fresh water – are in danger of running short within next few decades, oil production which probably has already passed its all-time peak looks like the best bet to interfere with, and eventually stymie, an economic recovery. Crude oil prices have doubled since the end of January and may go higher on expectations that an economic recovery is underway. While crude prices are still less than half the $147 a barrel they reached last July, it is getting close to the level where economic damage could be inflicted. While the demand for commercial fuels for trucks and jet planes is down, gasoline demand has not fallen much as prices have edged up.

While the interaction among the four major factors that will have much to do with our economic future – the recession, the bailout, peak oil, and global warming – is easy to understand, the timing and nature of all the possible interactions are difficult to comprehend. Oil supply and demand are relatively easy to track, but no one as yet seems to have a firm insight into whether, when, and how fast massive deficit spending is going to lead to serious trouble.

Any increase in demand from a revitalized economy is almost certain to drive oil prices higher. In the last eight months, OPEC has reduced its oil production by about three million b/d which has kept production closer to demand for the time being. Although a few members of OPEC currently have surplus production capacity that could be turned into increased production, every year we are extracting some 30 billion barrels of mostly easy and cheap-to-produce oil. The simple message is that in three to four years excess production capacity is likely to be eaten up by depletion. After that increased oil production will become very expensive and take considerable effort. Much higher prices and considerable economic damage are virtually certain.

To summarize our situation: If and when the U.S. and world economy rebounds significantly, the increased demand for oil will quickly lead to higher prices which in turn is likely to choke off the rebound; if the U.S. and world economy continues to contract, demand for oil and oil prices will fall for a while, but the economy will be approaching depression levels; if the massive deficit-financed bailouts lead to lack of interest in U.S. government securities and a weaker dollar, interest rates will soar and choke off economic growth; if the U.S. and other governments seriously clamp down on carbon emissions to control global warming, higher energy prices are likely. Our economy and future stand at a crossroad.

No one can claim to have much insight into the likelihood and timing of the many possible developments that could spring from our multi-sided crisis. The one thing we can be sure of, however, is that the four sides of our mega-crisis are inextricably connected. Any change, either for good or ill, sooner or later will cause changes in one or more of the others.

None of this bodes well for a return to life as we knew it only a few years ago.