National Commentary

The Peak Oil Crisis: Some Perils of 2010

Last week we discussed a new report outlining the outlook for global oil production and noted that the conventional wisdom in the peak oil community now says that global oil production will start its inexorable fall circa 2014.

After that supplies will inevitably get shorter and oil prices higher unless the global economy has collapsed so far that the amount of oil that can be produced is no longer relevant.

This does not, however, mean that we will have smooth sailing with respect to oil prices during the next few years, as there are many geopolitical and economic events that could occur as early as this year. Most of these potential developments are likely to drive oil prices higher, but one or two could drive prices lower.

At the minute the standoff between Iran and most other nations over Tehran’s intention to either enrich uranium for power plants and a medical reactor, or build nuclear weapons, would appear to be the most dangerous situation that could threaten world oil supplies. Although this standoff has been going on for several years, in recent weeks it has taken a decided turn for the worse. Currently the major Western powers are attempting to coax Beijing into giving up its desire for increasing amounts of Iranian oil and join harsher UN-sponsored sanctions on Tehran.

The Iranians continue to bluster, denounce their adversaries, and threaten retaliation for any meaningful sanctions. Such retaliation would likely involve cutting Tehran’s oil exports. In return, the Saudis, who say they have enough spare capacity to replace Tehran’s exports and are no friend of a nuclear-armed Iran, could jump into the breach and keep the world running. This, of course, would not happen overnight and higher oil prices are a virtual certainty in the event of an embargo.

The next escalation of the conflict would be efforts by Tehran to close the Straits of Hormouz to the 17 million or so barrels of oil that transit the passage each day. This would be tantamount to the attack on Pearl Harbor for without the oil from the Gulf global industrial civilization would be seriously hurt. Should this happen bullets would fly and Presidential limos would be nearly the only cars on the road.

Moving down the list of threats to our well-being this year, we come to the financial stability of the United States. For the last year or so the country has been kept afloat, with rising stock markets, slow but steady house sales, and low interest rates, by massive creation of money by our central bank, the U.S. Federal Reserve. This money has been used to buy nearly everything in trouble – automobile factories, insurance giants, banks, worthless mortgages, hundreds of billions worth of U.S. government securities, some say stocks and to finance a massive stimulus.

Washington realizes that this give-away cannot go on much longer without disastrous results and says it will stop creating money and let the economy stand on its own this spring. If Washington actually stops the bailouts and the economy can’t stand as well as the optimists hope, there could be numerous disastrous consequences – higher interest rates, less economic activity, a real crash in housing prices, a collapsing dollar leading to much higher oil costs. The list goes on and on. Overshadowing all this is the contraction of the U.S. money supply which is a strong signal of more serious economic troubles ahead, and beyond that is the possibility of hyperinflation.

Beijing has been spending and handing out money and loans like there is no tomorrow.

The next major concern is the Chinese economy. This problem could cut two ways. For the last 18 months, Beijing has been spending and handing out money and loans like there is no tomorrow. The U.S. stimulus package is small in comparison to what the Chinese have been spending. Economic growth has soared to 10 or some say maybe 14 percent. This would all be good, except many believe the money is being spent on wasteful projects of no real use to the Chinese consumer and that a bursting of the great Chinese economic bubble can be expected soon.

Chinese oil imports have increased rapidly in the past year and are likely a major factor keeping oil prices in the vicinity of $75-80 a barrel. Should Beijing be able to keep its rapid growth going for the next year or so, increased oil imports by China and the other Asian countries that are exporting to Beijing could well push oil prices higher later this year. The downside, of course, is the inevitable bursting of Beijing’s bubble with unknown economic consequences. When this comes, and it could be in 2010 or years from now, the reverberations will be felt all over the world with a greatly reduced demand for oil and lower prices being a likely consequence.

There are a couple of other developments in the wind which could stir the energy pot in 2010. Iraq is having elections next month and the government’s opponents are running around blowing up things and usually innocent people. Should the elections go well and the Iraqi people are willing to settle down and become the new Saudi Arabia, there could be so much oil flowing that some are suggesting that peak oil could be delayed for another decade.

Should things go badly, however, and the Iraqis revert to the habits of the last 1,200 years, not only would the oil bonanza be delayed indefinitely, they might have trouble getting their current oil production out of the ground and country.

Don’t forget the drought in Venezuela which is just weeks away from shutting down 75 percent of the nation’s electricity production. Some are already speculating that when the crunch comes Chavez will have to slow oil production rather than leaving the rest of the country without power. There goes nearly a million barrels a day of U.S. oil imports from Venezuela.

All this is just a reminder that the last halcyon 18 months of cheap gasoline prices is bound to come to an end — perhaps sooner rather than later.

Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.