National Commentary

The Peak Oil Crisis: At Mid-Year

The last six months have been a wild ride. The Arab awakening, the Japanese tsunami, the EU’s continuing economic crises, rising temperatures, drought, floods, and another major surge in oil prices have combined to darken the outlook for the months ahead. Political stagnation continues in Washington, where nearly everybody knows we have a problem, but few have yet comprehended just what kind of a problem, much less what are sensible solutions.

As we enter July, the insurrection in Libya which removed 1.3 million barrels a day (b/d) of oil from the export markets is still going on. As a cartel, OPEC is refusing to make up for this loss, but the Saudis and their Gulf friends say they are stepping up production over the next few months to make up for the loss of Libyan crude and increasing demand. Oil prices which are currently around $95 a barrel in NY and $114 in London are down about $15 dollars a barrel from their highs in April, but are substantially above where they were last year.

What is forgotten in all this is that during the great 2008 oil price spike prices ran up quickly in the first half of the year and then collapsed by over $100 a barrel in the summer, thereby saving the global economy from much worse than it would have been had prices stayed higher. US average gasoline and diesel prices are still running about a dollar a gallon above where they have been for the last few years, creating a great strain on the U.S. and global economy. Keep in mind that comes out to about $540 million additional dollars U.S. consumers must pay out each day to keep our transportation running at the same pace it did last year. It doesn’t take much to figure out just where that $540 million is coming from.

Climate change is beginning to take its toll across the world. While more rain than ever is falling due to faster evaporation, this rain is not falling on the usual places at the usual time, leaving vast stretches of the world in an environmental mess. Hydro dams and rivers are drying up in many important areas while in others people are scrambling to get out of the flood waters. Neither of these circumstances is good for food production – or economic growth in general.

A combination of less hydro power, unaffordable oil, and in some cases problems with nuclear power, is closing down power grids around the world and subjecting hundreds of millions to rolling blackouts. While the lack of power is causing suffering to many, in the case of well-off business it is forcing a switch to back-up emergency power as the only way to keep factories and office computers functioning. In many cases, this is of minor concern, but it places like China which is now the world’s factory, the increased demand for diesel is likely to bring on shortages and higher prices as it did during the 2003 and 2008 electrical shortfalls.

Climate change is beginning to take its toll across the world. While more rain than ever is falling due to faster evaporation, this rain is not falling on the usual places at the usual time, leaving vast stretches of the world in an environmental mess.

The next six to 18 months will be dominated by the race between stagnating economic activity in many parts of the world, which will reduce the demand for oil, and high temperatures which will increase the demand for fossil energy to power air conditioning and to keep factories and businesses running during power shortages.

Most observers with insight into the global oil supply and demand balance, and that are free of any institutional constraints that prevent them from speaking out freely, are looking for much tighter oil markets in the next year and a half. If many economic situations and the weather does not change markedly in the next three months, some of this imbalance in supply and demand could come before fall.

This of course will translate into higher oil prices – but how much higher? A few years ago it was fashionable to forecast that oil prices would soon get to $200 or even $300 a barrel thereby putting U.S. gasoline prices in the vicinity of $10 a gallon. Much current thinking and the experiences of 2008 say this will never happen. Somewhere north of $150 a barrel, demand for oil will slow markedly and so will the global economy. There is simply not enough discretionary money being taken home to support $10 a gallon gasoline so most forms of motorized transport would fall precipitously should gasoline prices ever go this high, at least in the United States. Gasoline of course is already pushing $10 in some parts of Europe, but this situation has come from decades of high taxes that have allowed individuals and transportation systems to adapt to very high cost fuels.

The most recent numbers from the International Energy Administration say that global oil supply in May was 87.41 million b/d and that demand during the rest of this year will be over 90 million b/d. A 2.5 million barrel daily shortfall is a big deal which, if it comes to pass, will have to be made up from reserves for a while. An actual unmistakable decline in global oil production is still believed to be a few years away, but this does not stop demand from pushing oil prices to economy-damaging levels. When the decline in global oil production comes, and this is what peak oil is fundamentally about, the problem will be compounded.




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