National Commentary

The Peak Oil Crisis: A Mid-Year Review

It now appears that the run-away oil well will soon be brought under control and will stop gushing into the Gulf. While the litigation, cleanup, and economic impact of the sub-sea blowout are likely to go on for years, if not decades, the world’s attention will soon shift elsewhere. Even now the economic and employment impact of the administration’s drilling embargo is moving to center stage as attention shifts to the possibility of a US political upheaval at the mid-term elections — now less than four months away.

The state of the U.S. and other OECD economies clearly is not good. The most telling economic report was a poll conducted by the PEW research center two weeks ago which says that more than half of America’s working adults have been directly affected by the recession by unemployment, pay cuts, reduced hours, or working at part-time or poorer paying jobs than they previously held. Six out of ten Americans say they have cut down on spending and borrowing due to their economic circumstances. This is a far cry from the statistical fiction that only 9.5 percent of us are unemployed and devastating news for an economy built on consumer spending and confidence. In comparison to numbers like this, other economic news and hype pales into insignificance.

No wonder that, according to a recent Washington Post poll, 58 percent of Americans are mad at President Obama, 68 percent mad at Congressional Democrats, and 72 percent mad at Congressional Republicans, and 62 percent want to throw somebody out of office in hopes of finding a shining knight who will solve their economic problems. If only it were as easy as going out and voting.

Interestingly, six in ten surveyed by Pew believe that the economic situation will be better soon and that the recession is only temporary. This alone vividly illustrates how poorly the true state of the global economic situation is understood and the size of the shock that most of us are in for.

Nearly everyone will admit that continuing oil shortages and that high (above $100 a barrel) oil prices would be devastating to the prospects for economic recovery and that persisting very high (say above $200 a barrel) oil prices would send the U.S. and many other economies into a deep, long-lasting depression. The problem is that few are willing to consider seriously the accumulating evidence that increasing oil prices and eventually oil shortages within the next few years are as inevitable as the sunrise. Most of us have no thoughts about the issue other than the current price of a gallon of gas. Among those who appreciate that the world’s petroleum resources are finite, few understand the proximity of the crisis.

Most of us have no thoughts about the issue other than the current price of a gallon of gas.

So where do we stand in mid-July 2010? While, the U.S. and OECD economies may not be doing so well, the global demand for oil has recovered nicely. After taking a two-year 3 percent dip in obeisance to the economic downturn, global oil consumption is now reported to be back in the vicinity of its 2008 high of 86.6 million barrels a day (b/d) for 2010. While U.S. demand is down a million barrels a day or so, demand from China and India are up more than enough to offset what is called “weak” US and European consumption. The International Energy Agency (IEA) tells us that it currently expects world demand to increase by 1.3 million b/d next year to a new annual high of 87.8 million b/d.

As nobody who carefully watches global oil production expects it to increase in coming years, we are left with “total productive capacity” which is currently estimated by the IEA to be 89.7 million b/d. This is about 3 million b/d above what we are currently using – maybe. Most of this spare capacity is supposed to be in Saudi Arabia; a land of eternal optimism where oil reserves never go down no matter how much is pumped up and sold. Many are skeptical that all of this “spare capacity” is really ready-to-go, reasonable quality, sustainable, production capacity. If not we are in worse shape than we believe.

It does not take much arithmetic ability to figure out that if we are currently using some 86 million b/d, and that we can go to 89 million at best, and that we are supposed to be increasing demand at around 1.5 million b/d each year, then something has got to give in the next 24 months. That something is called price – of barrels of oil or gallons of gasoline if that is what is the most meaningful to you.

It is interesting to note that the IEA says that global oil production dropped by 575,000 b/d in May and another 255,000 b/d in June or 830,000 b/d in the last two months. Because of the excessive secrecy in many oil producing states, some of these numbers are squishy – the only number that counts is the one on your gas pump. Three or four dollar a gallon gasoline may again become a reality in America before most people think and with it will come much harder economic times.

 


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


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