National Commentary

The Peak Oil Crisis: As Summer Ends

The economic news has been relatively quiet in recent weeks. The wild plunges in the various indexes that were happening last winter have subsided. The financial writers and cable networks are busy interpreting or, where necessary, spinning each new economic report as yet more evidence that the recession is nearly over.

Oil prices have been hovering around $70 a barrel of late and gasoline has been selling for circa $2.65 a gallon since June -a dollar less than this time last year. This must be a satisfactory price, for given the decrease in world prices for goods and services in the last year, OPEC has stopped complaining about low oil prices and has even been sneaking a touch more oil onto the world markets. U.S. gasoline consumption has been holding steady despite a major drop in economic activity — diesel consumption is down 10 percent so far this year – and millions being added to the unemployment rolls.

Lost in the din of “recovery is here” and “cash for clunkers”, much of the underlying economic news that will determine our future is simply being ignored – foreclosures, commercial property, unemployment, sales, and industrial production. Interest rates, government securities, and the stock market are all being propped up by the Federal Reserve’s monetizing of the national debt. The realization is growing that it is going to take decades, at best, to get out of this mess.

Among the more dramatic news is the growing realization that instead of centuries worth of coal reserves, worldwide coal production may start declining in as little as 15 years. Here in the U.S. our Geologic Survey recently reported that production of saleable Appalachian coal may begin declining within the next ten years. We had better learn to live with fewer, dimmer lights, less or more efficient air conditioning and drying our clothes in the backyard. We are going to have a hard time building enough wind generators fast enough to keep up with declining coal production.

Then there is the current natural gas conundrum – we in America are swimming in the stuff this year. A combination of increased production from new shale drilling techniques, a steep drop in industrial demand, and a mild summer on the populous East coast has left the storage caverns full and prices dropping to less than $3 per million BTUs. While natural gas supplies are finite, the relative abundance, domestic origin, and lower emissions may lead to natural gas playing a larger role in generating our electricity or even powering an increasing share of our cars.

The price of oil at the moment is an enigma. After falling from nearly $150 a barrel, which nearly throttled the world economy last summer, to circa $30 a barrel last December, prices have crept back to where they are now flirting with $75 a barrel. World consumption is down by about 3 million barrels a day (b/d), but this drop seems to be mostly in OECD nations where industrial activity has undergone a major decline. The developing nations such as China and India seem to be maintaining or even increasing their oil consumption.

This situation has left forecasts of future oil prices all over the map, with some predicting declines to last winter’s levels and others foreseeing spikes. While a price drop would help the US economy, a spike to $100 a barrel and beyond would be disastrous.

Keep in mind that for every 10 cents the price of a gallon of gasoline goes up, it currently costs US consumers $38 million per day, $266 million per week or $1.2 billion per month. A dollar a gallon price increase would cost Americans $14 billion each year that could not be spent on other retail items.  Giving the increasing restrictions on credit cards, it is unlikely that as much of the next price spike will be financed by Visa and MasterCard, so it is likely that gasoline consumption would drop more precipitously than it did last summer.

Numbers like this, of course are meaningless to most; annual gasoline consumption and the need to drive varies so widely in this country that while some would be devastated by much higher prices, others with larger incomes, more efficient cars and less need to drive long distances would hardly notice a many dollar price increase – but the economy would.

At the minute it is impossible to say just when the next price spike will be upon us – there are simply too many variables involved, particularly the course of the recession in major oil consumers around the globe. We do know that the world’s conventional oil production has not increased since 2005 and somewhere within the next five years, depletion from existing fields is almost certain to get ahead of new production and spare production capacity.

Unless the world’s economy continues to deteriorate and the worldwide demand for oil falls more rapidly than depletion, large price spikes somewhere ahead are almost inevitable.