Peak Oil Confusion and the World Economy

American Chronicle

By Thomas Dawson
October 18, 2005

What is a person to believe? Has oil production already peaked? Is Peak Oil another twenty years away? Or perhaps Peak Oil is a misunderstanding or even a hoax perpetrated by those controlling the oil supplies. Recent articles indicate that new or renewable sources are ready to save the day in any case. Everyone from the government to the wind generator manufacturers have their reasons to spin their points of view. New and conflicting points of view appear almost daily in the media and especially on the Internet.

Certainly the Iraq Invasion has contributed to the rising price of oil. Unfortunately, this occupation of Iraq has probably prematurely sparked a permanent increase in the price of oil. The same should not be said of the hurricanes in the Gulf. In a few months, the government tells us, the normal flow of oil should resume and prices should return to more reasonable levels. The Internet portion of the media is in doubt.

This desperate search for oil is not a misunderstanding and is certainly no hoax. Setting aside the proposed political excuses, we invaded Iraq to guarantee the continuation of the American Middle East oil supply. We are not only in Iraq; we intend to remain on the doorsteps of Iran and Saudi Arabia to protect our oil interests. China and India are scouring the world; especially South America and Africa to insure their oil supply. Oil companies are investing in expensive offshore and deep-water wells and looking to extract very expensive oil from coal, tar sands, and shale. Farmers around the world are raising crops with high vegetable oil content, hoping to cash in on the surge of bio-diesel fuels.

We have all felt the inflation over the past couple of years and now it has caught up with the particular kind of inflation that our government is inclined to measure. It is not just the hurricanes. The UK inflation rate for August was 2.4% and that was before the hurricanes. The UK inflation rate was 2.5% for September, only one tenth of one percent higher, but the highest in eight years and trending upwards. Greenspan has just indicated that the rising fuel costs would continue to be a drag on the global economic expansion from now on. It is easy to blame all this on oil prices, but the reality is that the western world is experiencing a very fragile economic crisis and oil prices are only one of many contributors to the problem, albeit an important one.

Some say that technology will save the day. Someone will make a breakthrough in hot fusion, or cold fusion, or hydrogen fuel. Others are looking to harness the movement of ocean waves and ocean tides. Although they are not yet cost effective, we see many hybrid automobiles. In certain places windmills have become marginally cost effective. The idea of nuclear plants has regained popularity. Coal plants are again being looked at seriously. Harnessing energy from the biological destruction of waste is not out of the question. There is no end to the possibilities. Sometime, in the not too distant future, many solutions and workarounds will be found

On the other hand, there are the purveyors of gloom and doom. We have a tendency to discount whatever they may say because we tend to think that inevitable progress is forever on our side. Let it be said that as much as we may not agree with them, they do have compelling reasons for their point of view. The supply of cheap liquid oil is no longer increasing and is no longer able to keep up with an ever-increasing demand. The western countries continue to consume more oil with each passing year. The vast populations of the Asian countries are now on the cusp of economic growth. As most of the world’s industrial output moves toward Asia, their success and the success of western investors are dependent on abundant energy supplies. With a growth of between 5% and 20% each year in their economy, these Asian countries will double their energy consumption very quickly and many times over.

Liquid oil is a finite commodity and when the rate of demand rises above the rate of production, some countries must go without fulfilling their needs. Prices will continue to spike up and down, but will not stay down for extended periods of time as they continue in an upward trend. With few exceptions, those who own oil will allow the price to ration it to the world. Some countries have already been priced out. These purveyors of doom and gloom point out that the world’s standard of living is diminished proportionally and permanently as the price of energy rises. This may well be true. Lifestyle changes will be forced upon the lower and middle classes. No one will contend the immediacy of this problem. It is also true that there are other, more destructive, environmental processes at work in a world of ever-rising population that must be resolved.

Has oil production peaked? Probably the light sweet variety has peaked in the last couple of years or is peaking now. Other heavier and sour types have probably not peaked and will not peak soon. Oil from tar sands is just in the infant stage. So what is the point of this brouhaha?

The point is that we have entered a period where energy costs will continue to rise for the foreseeable future unless there is a major breakthrough in an alternative cheap source. Currently there is no cheaper source of abundant energy than liquid crude oil. The extraction of other currently available sources is either not commercially feasible or more expensive as well as hazardous to the environment. In the long run, our government will not allow environmental considerations to stand in the way of the expansion of business and globalization.

There are plans now to use coal gasification and liquefaction in the United States to produce electricity. Countries around the world are considering nuclear plants. Shell oil is experimenting with extracting oil from shale. Like it or not, governments around the world are supporting any measures that will reduce the cost of energy. Unfortunately all of these last minute endeavors will take time. In many cases, substantial results of sufficiently useful volume may take five or ten or more years.

The major concern is that we may not have the time necessary to adjust to the increase in energy costs. Although many of the economies of the world are already experiencing a growth in inflation, the ripple effect of energy prices is just beginning to arrive at the consumer level in the United States. Many are upset with the increases in gasoline prices, but the increase in the cost of home heating and electricity has yet to be felt. Manufacturers and retailers, to ensure a good Christmas, will probably absorb much of the increased transportation costs of imported goods, but what then? Can the precarious asset bubble withstand an inflationary spiral that may last more than a couple of years? With a drop in consumer spending, how much can our service industries contract before unemployment begins to rise? How high does the interest rate climb before the financial sector begins another round of mergers, with the usual layoffs of extraneous employees? Protracted high prices for energy could well be the trigger that leads to a global recession in the near future.

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