National Commentary

The Peak Oil Crisis: Protests, Tsunamis & Deficits

Events seem to be moving faster and faster these days. Perhaps it is due to the new ways of communicating that are now available. Or maybe it is the speed of travel or even that there are now nearly seven billion of us running around on the earth making more things happen.  Anyway it is coming to the point that one’s world outlook has to be modified every few months as the old ways of looking at things are changed by events.

So it is with oil — supply, demand and, of course, price. At the beginning of the year the future of oil was thought to be mostly about China and how fast its economy and demand for oil would grow during 2011. In last two months, however, the world situation has changed markedly and we now have a multiplicity of factors vying to influence the global oil markets in ways as yet unknown.

There are a few givens, however, that we can use as guideposts. First is that world oil production has already or is very close to reaching peak production. From here, it may creep up by a couple of million barrels a day, but then the inexorable laws of depletion will begin to take hold and global oil production will steadily melt away until it is no longer useful as a major source of energy.

Although world population will undoubtedly peak and begin declining sometime in the next century or two this is unlikely to happen in the next decade or two.

Finally, the world’s climate clearly has become destabilized, with the preponderance of scientific thought attributing this to excessive burning of fossil fuels.

Since December a wave of political protests has been roiling the Middle East. So far two less-than-democratic governments have fallen, several others are sorely threatened and a few more, including the Chinese, are having second thoughts as to the proper balance between efficient authoritarianism and messier democracy going forward.

Thus far only one major oil producing state, Libya, has undergone so much political unrest that its oil production has been essentially halted. The loss of roughly 1.3 million barrels a day (b/d) of oil exports has already destabilized the oil markets and sent prices some $10 – $15 a barrel higher. Should the same fate befall a second or third major oil exporter, the world is unlikely to ever be the same again.

There is no end in sight to the unrest in the Middle East for its root causes run deep and are unlikely to be held in check with the traditional carrots and sticks. No matter how fighting in Libya goes in the next few months, the damage has been done and we are unlikely to see Libyan oil exports resume their former levels for quite some time. Although the Saudis seem to have intimidated away a recent challenge to the authority of the ruling family, the Kingdom’s incursion in Bahrain early this week shows just how worried they are that Shiite dissent may spread down the causeway joining the two countries.

As the U.S. State Department pointed out in a recently leaked cable, the real threat to Saudi stability may come from a succession crisis and not from protesters in the street. The current King is ailing and his designated successor is not in much better shape. It is only a matter of time.

The real threat to Saudi stability may come from a succession crisis and not from protesters in the street.

The unprecedented series of disasters that struck Japan this week are of such a magnitude that they are sure to impact the global oil markets in the year ahead. Initially, the earthquake and subsequent events have driven down global oil prices, but whenever the radiation leak situation stabilizes, and the country gets back to business, it is clear that the Japanese will be importing considerably more oil and products, simply to clean and rebuild from the mess left by a 10-meter tsunami sweeping across much of their country. The permanent loss of at least six of the country’s 54 nuclear power reactors will lead to the need to import more crude, natural gas, and oil products to keep Japan’s highly industrialized economy functioning.

As about 30 percent of Japan’s refining capacity was closed down by the earthquake and the floods and fires that followed in its wake, initially there will be a great demand to import refined gasoline and diesel. There is already talk of how this might impact prices on the U.S.’s west coast. When the refining recovers, the economy regains its balance, the need to clean up the massive damage and the rebuilding begins, the demand for imported oil is likely to set new records. All this, of course, assumes that the radiation leaks from the damaged reactors can be contained. If the contamination becomes widespread then Japan’s government and people are likely to be preoccupied for an indeterminate period.

Our final new development is in Washington where the new majority in the House of Representatives is dead set on cutting $60 or perhaps $100 billion annually from federal spending. In a perfect world, these cuts would be spread around so that the Defense Department, Homeland Security, and the various entitlements would take some of the load. Alas, a disproportionate share of the cuts seems destined to fall on the energy programs that were designed to mitigate the overuse of fossil fuels and prepare us for an age when fossil fuels will not be so cheap or readily available.

It is only March and already Beijing has announced that its electricity consumption in February, a basic indicator of how fast its economy is growing, was up nearly by nearly 16 percent over last year. If China’s economy is going to undergo a major setback that will lead to a reduction in its demand for oil, then it had better get going, 2012 is fast approaching.


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