National Commentary

The Peak Oil Crisis: Bailouts & Shortages




We are witnessing one of the most eventful weeks in modern history. Stocks and oil prices plunged on Monday and bounced on Tuesday; credit markets seem to be freezing; the Congress remains in gridlock as members watch the approaching elections fearful of what could happen to their incumbency.

In the South gasoline supplies have been short for two weeks and prices there have bounced back to $4 a gallon. The economic news gets worse with every release of new numbers.

Start with the gas shortages. Here in Northern Virginia we have lucked out. Despite the fact that our gasoline and diesel usually comes through a pair of pipelines from Louisiana and Texas, we are close enough to the Northeastern refineries and gasoline import terminals so that gasoline can be brought into the region from the North rather than being totally dependent on the Gulf refineries as are most of the Southern states.

While the two hurricanes did not do much physical damage to oil facilities along the coast, the widespread electrical outages and evacuation inland of oil workers means that a month after the first hurricane, Gulf oil production is still only 40 percent of normal.

While production and refining will be restored in the next couple of weeks, the bigger problem is that the oil companies have let our stockpiles of gasoline sink to the lowest levels in 40 years. Refilling these stocks could take a long time and will depend on the oil companies’ ability to import more finished gasoline from Europe.

In the cities such as Atlanta with serious shortages, there were runs on the pumps with people filling up at every opportunity. Governmental action mostly was limited to investigating price gouging, but in some areas either the gas stations or local governments were limiting the amount that could be purchased in order to spread available supplies as far as possible.

A number of observers have noted that the hurricane-induced gas shortages offer us a preview of what life could be like in the years ahead when gasoline shortages begin to develop from inadequate production and imports. Hopefully governments will absorb the lessons of these shortages and will take steps to mitigate the consequences of inadequate supplies when they develop.

The more important problem of the week, however, is the financial/liquidity crisis and the deteriorating economic situation. At the minute, the oil markets are telling us that without a “solution” to the current financial squeeze, a major recession or worse is likely and world oil consumption is likely to plummet. Don’t become too hopeful for further drops in gasoline prices as the OPEC cartel is already contemplating production cuts to keep prices above $100 a barrel.

How does peak oil fit into all this? Somewhere in the next few days (or perhaps weeks) the U.S. Congress either will or will not pass some sort of multi-billion financial bailout that is supposed to restore confidence in the financial system and set the economy growing again. Many find this absurd. The U.S. has problems in the trillions of dollars so bailouts in the 100s billions are unlikely to have more than a short term impact. While an “affordable” bailout may unfreeze loans, it certainly will not solve the myriad of economic problems that are accumulating.

In recent months, world oil consumption has been dropping due to high prices and the worsening economic situation. Whereas worldwide demand for oil had been increasing by about 1.5 million barrels a day (b/d) every year, that is probably down to a few hundred thousand b/d annual increase and if current trends continue, demand for oil seems likely to go into an actual decline.

If, as seems probable, the financial bailouts do little good and the world goes into a prolonged period of recession, then we have seen the peak of world oil production. Demand will drop, production will be slowed, and new multi-billion dollar oil projects will be deferred or cancelled due to lack of demand for oil or the capital to pay for them.

The world, however, will still be producing some 31 billion barrels of oil each year. This number, of course, will drop as the situation deteriorates, but we are still likely to be draining billions of barrels from the world’s oil fields each year. As new production projects come to a halt, depletion will take over so that it is virtually certain that we will never again reach the production highs we have seen in recent years.

Peak oil, however, has another even more important message for us. In recent days there has been much discussion of the “business cycle” and the “rebound” that has always occurred in the past. Some believe that the rebound will start as soon as Congress bails out Wall Street, others say in a few months, a few say in “quarters”, or if you are really pessimistic, in a few years. No one outside of those who understand the meaning and imminence of peak oil recognize that the “business cycle” of the industrial age is about to be turned on its head.

Talk of “rebounds” during an era when oil, natural gas, and eventually coal production will be declining shows a failure to understand the reality, which is that we depend on prodigious quantities of cheap energy for nearly everything. Unless in the unlikely case that we stumble upon some great breakthrough, there are many decades of tough economic times ahead.

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