National Commentary

The Peak Oil Crisis: Stifling a Rebound

Since the beginning of the economic troubles some 18 months ago, the question on nearly everyone’s mind was; “When will the recovery begin?”

A lot of water has gone over the dam in the last 18 months. An official recession has been declared, millions have lost their jobs, much of Detroit has gone bankrupt and the government has spent trillions on bailouts and stimuli. Three months ago the collective wisdom of investors concluded that the recession was nearly over. This resulted in one of the faster rebounds the stock markets have ever known — based on the flimsiest of evidence and much wishful thinking.


In the last six months the demand for oil has fallen and stockpiles grew while, oddly enough, prices rose. Part of this increase was caused by speculators hedging against the falling dollar, and part was caused by still more wishful thinking that the demand for oil would soon recover.

A year ago prices rose to the previously unimaginable high of almost $150 a barrel. Oil producers made one last effort to keep up with demand and in doing so may have pushed world oil production to an all time high – the “peak” in peak oil. While it took six years for oil prices to climb, it only took six months for them to plunge into the $30’s causing panic amongst the exporters of OPEC.

This led to a series of OPEC production cutbacks which were supposed to reach 4.2 million barrels a day (b/d) but petered out around 3 million due to quota-cheating by several of the more desperate and less honorable OPEC members. In the world outside of OPEC oil production has been steady in the last year with some notable drops in production. In Mexico, output from its largest oil field has been dropping much faster than expected due to depletion. In Nigeria insurgent attacks on oil facilities have brought production down to about 1 million b/d when the country should be producing closer to 3 million. In Venezuela, President Chavez has been busy expropriating the remaining pieces of the oil industry still owned by foreigners. Drops in production can be expected soon.

The net result of all these voluntary and involuntary cuts is that world oil production has dropped significantly since reaching an all-time high last year. This drop in production when coupled with the normal declines in output from aging oil fields and the prospects that less oil will be coming into production from new fields than expected, has led many to declare that the all time peak in world oil production took place last year. While it will take several years to verify that this was indeed the case, inability of the world’s oil industries to ever again increase production has unfathomable implications which are not as yet widely recognized.

A corollary of the low oil prices and the lack of easy credit have led to a slowdown in the investment going into new oil production projects. While this has little immediate impact on the availability of oil, some years down the line it means that all of the new oil needed to offset depletion will simply not be there and that world production will decline faster than expected.

One can conjure up numerous scenarios of how oil, which at least currently is indispensible for economic growth, may or may not play a part in an economic rebound.

One scenario could be that the credit and financial markets are so far beyond redemption that the world economy will continue to decline indefinitely without reference to how much oil is available. The demand for oil would continue to decline and prices would remain relatively low so that there will continue to be sufficient oil available to support the deteriorating world economy. This scenario, of course, is one that few are willing to entertain, especially in light of the trillions being spent by governments all over the world to revive their economies.

While the notion of a quick recovery this year or early next year seems to be fading, most now believe that while a recovery may be slower than we would like, it will come eventually – it always has, particularly in the experiences of most living today.

The latest estimates from the International Monetary Fund say that world-wide GDP will be down about 2.7 percent this year. The world’s spare oil production capacity currently is around six million b/d. This, however, is not a static number as the world’s capacity to produce oil from existing sources is withering away at 3 or 4 million b/d each year and unless this much new supply is opened, then total world supply must inevitably shrink.

Now there is no question that very high oil prices would quickly choke off economic growth. Every dollar per gallon increase in the price of oil products drains about $800 million each day from the pockets of consumers in America. Worldwide it drains about $3.5 billion each day. Most observers believe that as soon as worldwide demand for oil gets ahead of supply there will be multi-dollar per gallon increases in the prices of oil products.

There seems to be little doubt that over the next few years, the world’s oil supply will be forced into irretrievable decline from a combination of geologic and geopolitical reasons coupled with a lack of adequate investment. Should the demand for oil increase in the next year or so, there will still be some room for increased production without unacceptable prices increases for a while. The longer a recovery is delayed, however, the better the chances that oil prices will quickly surge to recovery-choking levels. While there are long-term solutions to this problem they will take decades to implement.

At last some governments are worried about the slowly emerging situation. Last week the British Prime Minister ordered his cabinet to start working on emergency plans to prevent rising oil prices from destroying the prospects that there will ever be an economic recovery.