The Peak Oil Crisis: New Years 2006

Falls Church News-Press

January 5, 2006

It's a good time to review -- looking backwards at what we learned in 2005 and forward at what might be in store for 2006.

During the past year, the average price of oil increased 33 percent almost matching the 34 percent increase of 2004. If one wants to think of peak oil just as steadily increasing prices, then we are clearly on our way. Since 2001, oil prices have nearly tripled.

The most memorable feature of 2005 from the peak oil perspective was the pair of powerful hurricanes that smashed into the Gulf oil facilities, momentarily sending oil to over $70 per barrel, and causing extensive damage to Gulf oil production and refining facilities that has still not been fully repaired

Among the noteworthy features of the storms however was how little they seemed to have harmed the US economy. Obviously a lot of people were directly affected by the destruction of one major and numerous smaller cities and towns. However, by moving quickly, the government was able to import, and withdraw from the national reserves, enough crude and refined products to forestall shortages. For now, the US economy gives every appearance of continuing to grow and most observers are forecasting further growth in 2006. From the peak oil perspective, however, this "good news" means more demand for oil in the year ahead and still higher prices coming sooner rather than later.

America , however, is slowly coming to the realization that high energy prices are here to stay. In their annual end-of-year-review, the general consensus among Wall Street analysts was the energy situation has indeed tightened and $30-40 oil is unlikely to be seen again. Even governments are starting to perceive a problem is ahead. A peak oil caucus has been formed in the US House of Representatives and the administration has asked the National Petroleum Council to look into the future availability of "affordable" oil. In December, the Swedish government, in a bold step, publicly acknowledged that peak oil is indeed imminent and formed a commission to study how the country can eliminate the use of fossil fuels by 2020.

In retrospect, those following the peak oil situation are coming to appreciate that 2004 was the watershed year in the history of petroleum production. That was the year worldwide demand grew by 2.8 million barrels a day (3.5%), nearly double the usual annual growth of 1.8 percent. This unprecedented surge, largely occasioned by increased demand from China , nearly eliminated any spare capacity in worldwide oil production. From then on, supply and demand has been precariously balanced so that sudden increases in demand or supply interruptions are likely to result in significantly higher prices.

Understanding of the peak oil phenomenon and the forces governing what is about to about to happen also improved during the past year. The idea that "proven reserves," shale oil, tar sands, or arctic oil, has much, if anything, to do with the peaking of world oil production is now rejected by objective analysts.

The reason is simple. World oil production is now so massive —84 million barrels a day (30 billion barrels a year)— that new sources of oil simply are not being discovered and brought into production fast and cheaply enough to make any difference. The ability to maintain the size of the current flow, and the availability of the resources to do so, is all that counts.

The concept of "accessible" oil reserves is coming into the literature. Accessible reserves are those that can be brought into production soon enough so they can increase or help stem declines in current production, and cheap enough so users can afford them. Discussions about significantly increasing world production by spending trillions of dollars on new exploration and production efforts are sounding less and less realistic in a situation in which we may be only months away from peak production.

What, then, is likely to happen in 2006?

It is clear that if we have not already arrived at peak oil, then we have at least entered the run-up to the final peak. This year is certain to start with increasing demand for oil. Current world daily consumption of circa 84 million barrels a day (the exact number is always murky) is forecast to increase by about 1.7 million barrels during 2006. Nearly every detached analyst who has looked at the balance between production from new projects and the likely rate that production from existing fields will decline has concluded, at best, the worldwide oil production can grow for another four or five years.

When you throw in the idea that we live in a turbulent world —hurricanes, wars, political instability, etc.— the odds of worldwide oil production being able to meet any annual increase in worldwide demand of 1.8 percent much beyond the next 2-3 years are not very good.

As demand must drop to meet available supply, we will have rationing by price, unless government steps in to ration or cap prices— then we will have shortages. There is little doubt oil prices in coming years will be marked by unprecedented volatility. In the last six months we have seen the price of gasoline in the US spike to over $3 per gallon, retreat to around $2, and then start climbing again. It seems likely that swings of this magnitude and frequency will become the norm as the world undergoes the most important paradigm shift in the last 500 years.

Because of the many uncertainties involved, forecasts as to the future price of oil and gas are all over the map. Eternally optimistic Wall Street and government analysts see prices pretty much the same for the next year or so. Other serious observers are talking of oil being over $200 per barrel within a few years, either because Saudi Arabia has gone into depletion or serious disruptions to our supplies have occurred.

One thing we have leaned in the last year is that $60-65 per barrel oil is still deemed affordable by most American consumers. In retrospect, the September spike to $65-70 didn't really curb demand for gasoline and diesel fuel in America although, as Detroit has learned, it didn't do much for sales of large gas-guzzling cars. Many observers believe the demand for gasoline will hold firm until we hit $6-7 per gallon and then we might see a significant modification in driving habits. Beyond that, traffic jams and the economic activity that goes with them will be reduced dramatically.

When will we see $6-7 dollar gasoline? In the unlikely situation nothing untoward happens, than it could be around the end of the decade. However, given the likelihood something really bad will happen —an assassination, coup, a civil war, hurricane, major cold snap— then the real troubles could start at any time.

http://www.fcnp.com/544/peakoil.htm