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The Peak Oil Crisis
New Years 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
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
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
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
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.
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