Sunday, January 29, 2006

The Peak Oil Crisis: Iran

Falls Church-News Press

By Tom Whipple
January 26, 2006

The world moves quickly these days. Since the New Year, oil has risen by more than $7 per barrel and currently is in sight of the all-time high of $70 a barrel. Cold weather in Eastern Europe and threats of supply disruptions from Nigeria and Iran are raising the possibility of an economy-threatening spike in oil prices later this year.

How high would oil prices have to go to before serious economic consequences begin? From our experience in 2005, we know $3 a gallon gasoline won't do it. Gasoline consumption in the US actually increased a bit during the past year despite much higher prices and numerous lengthy supply interruptions caused by the various hurricanes.

Each of us has a personal gas price at which we start to curtail our non-essential driving and a higher price at which our non-emergency driving comes to close to stopping. Most of us have no idea just where these prices might be for we have never had to think about the issue before. Gasoline has always been so cheap, few have had to worry.

There are, of course, numerous variables that would go into a drive/no drive decision: the fuel efficiency of your vehicle, the length and frequency of your trips, the importance to you of your trips, how much disposable income or credit you have, and can you pass some or all of the fuel cost on to somebody else.

After adjusting the previous high of $1.80 a gallon for inflation, several observers have come up with the estimate that it will take somewhere around $6-7 per gallon to force major reductions gasoline consumption in the US and thereby cut into the economic activity that goes with discretionary driving.

At the minute, the most serious of the several threats facing the world's oil supply is clearly the Iranian situation. Iran 's leadership is determined to start a uranium enrichment program. Tehran claims it is for electric power, but the US and Europe say "nuclear weapons." To make matters worse, nearly every major world power (and numerous minor ones) has a finger in the Iran pie either as an actual or potential customer for Iranian oil, or as a friend or foe of Tehran . As with so many previous mid-east confrontations, this situation is rife with possibilities for miscalculation.

The important new factor in this crisis, however, is the lack of much spare oil production capacity anywhere in the world. There certainly is not enough to offset the 2.4 million barrels a day Iran is currently exporting. Thus, for the first time we are seeing the threat of a completely new kind of economic embargo called "who gets hurt the worst"— the world economy, or the one embargoed.

Both sides are aware of this situation with Tehran threatening to send world oil prices to over $100 per barrel if anyone interferes with their enrichment program. The US spokesmen seem to be saying that we must pay any economic price to keep the Iranians from nuclear weapons. At this point it is impossible to say how this multi-facetted situation will play out. Both sides seem determined.

From a peak oil point of view, however, stoppage of Iranian exports either by formal UN embargo (unlikely) or by Tehran 's retaliatory or preemptive cutting of exports (more likely) would be a seminal event.

Oil prices obviously would be driven higher. Whether they get to the "serious damage" level is hard to say because so many factors go into shaping the price of oil. A complete stoppage of the 2.4 million barrels a day would of course be a real problem, while a token stoppage would only provoke a short-lived spike.

The length of the stoppage would be important. A token stoppage would mean little, while a complete 2.4 million barrels a day stoppage lasting for years would trigger much unpleasantness.

Given that we are very close to peak oil, it is quite possible a major stoppage of Iranian exports could play a significant part in the actual event. Several years from now, when studying the history of world oil production, it just might be possible to point to the day when Iranian oil exports ceased to flow and say "Yes, that was the exact day of peak oil."


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