Oil Crisis Redux?

Gas prices are at the highest they’ve been since the summer of ’08, and are expected to continue upward.   Every dollar spent on energy is a dollar not spent somewhere else in the economy; if oil prices continue upward, the domestic and global economic recovery is in doubt.   Moreover, concerns about decreasing oil supplies and a long term energy crisis, subdued by lack of demand during the global recession, will return.   This would wreck havoc on US budget estimates and hopes to reduce the deficit.   In short, another energy crisis could precipitate a renewed economic crisis just when people think we’re starting to see signs of possible growth.

There are reasons to think this likely.  The high prices in 2008 came amidst high demand alongside an inability of oil producers to increase production.    Part of it was real, part of it was a speculative bubble.  The impact of the high prices was to puncture the property bubble and bring to the surface all of the shady and fraudulent practices done by big finance to try to profit on the bubble.   Cheap oil brought us the most prosperous century in history; expensive oil brought it to a granding halt.

Many people have a reflexive “if we run short on oil, we’ll fine something else” attitude towards all this, a kind of faith that science will find something if oil runs short, and there’s no need to worry.   This kind of thinking is similar to the way people dismissed worries about the stock and property bubbles, insisting that the US economy could not be stopped.   We have the freest markets, high population, and superior innovation, the argument went — the gloom and doomers lack faith in the American free enterprise system.

Alas, such faith was misplaced.   Lack of regulation lead to massive abuse by those “in the know” to essentially shift pension funds, retirement accounts, and personal investments into the pockets of big money on Wall Street.   This “legal theft” was part of a “something for nothing” mentality whereby people thought getting wealthy was a birthright for anyone clever enough to invest or perhaps flip real estate.   We now know the economy was built on a house of cards — debt, deficits, and cheap foreign goods — and we’re dealing with thirty years of growing structural imbalances.

Oil has been used for energy for thousands of years.   Baghdad had paved roads as early as 800 AD.   But it wasn’t until the “gushers” in Texas were discovered in 1901 that oil could be used in such quantities that it could fuel a century of growth.  It could well be that the 20th century will ultimately be remembered as the “oil century” as the discovery of massive amounts of oil made it easy to build industry, travel the globe, and create a lifestyle based on power at the push of a button.

No form of energy is as efficient and easy to use as oil.  It is relatively light, but has an intense amount of power.   That made an airline industry possible, allowed nearly everyone in the first world to be able to propel themselves wherever they wanted to go with an automobile, and gave us literally lives of luxury.   We call elevators, run factories, and heat households with this cheap, light, source of intense power.   Without oil, the prosperity of the last century would not have been possible.   What humans like to attribute to human ingenuity, or perhaps capitalist markets, was in many ways simply the result of harnessing an unbelievably potent energy source.

So what if it’s running low?   Many experts, like Matthew Simmons, have done extensive studies of Saudi oil production and reserve claims, and conclude that the Persian Gulf is starting to run out of oil.   This supports “peak oil” theory, which is not just a theory, but based on a fact.   Back in the 1950s M. King Hubbert did some research as to when US oil would run out.  He calculated based on the estimated reserve levels and geographical expectations on where more oil might be found.  He concluded back in 1956 that US oil production would peak in 1973, and then decrease.   The rise and decline of oil production would roughly follow a normal curve.

That is exactly what happened.   US oil production peaked in the early seventies as US prosperity boomed.  Then it started to decline, just as the power of OPEC and Mideastern states increased.  Now we are way down the backside of the curve; even if we opened up all off shore oil drilling and Alaska it would only make a minor burp on the curve — it is impossible for the US to drill it’s way into oil independence.

If it happened here, it can happen in the Persian gulf.   And despite some off shore finds and oil in western Africa, nothing new has been found to alter the general consensus of how much oil exists in the world.   Moreover, during the so-called oil glut of the 80s, as production increased faster than demand, OPEC countries “recalculated” their reserves in order to increase their quotas.   In one year many countries doubled their reserve estimates — most likely to get a higher sales quota.    Based on stated oil reserves, most experts expect an oil peak around 2030, that gives us time to find new sources — though even then it will be difficult.

Others think we are peaking now, and the price rises in 2008 are not an anomaly, but what will soon be recognized as the new norm.   The anomaly may be the drop in prices, thanks to a global recession which cut demand.  Because of demand inelasticity price decreases and price increases can be dramatic if supply remains constant.  We could see $4.00 gas again this summer, and that could lead to a cycle of recurrent, deep recessions, with every recovery punctured by high oil costs.

In the abstract, people who haven’t studied alternative energy sources, it seems comfortable to say “science will take care of it.”  Others put their faith in some kind of natural gas finds and the like.   The reality is that almost no alternative can match oil in efficiency and energy output.   Nuclear plants take a long time to build, and uranium is also limited in supply.   It takes massive energy to build solar panels and wind turbines.   Not only would it take decades to build those sources to the point they can harness energy to maintain western life styles, but if we wait until oil is hyper-expensive to do so, the cost may be prohibitive.

So far hydrogen power is an energy transfer, so while it may help reduce global warming, it won’t solve an  energy crisis.   Oil shale and sands yield impressive finds, but aren’t massive enough to alter the basic supply — and it would take a long time and a lot of investment to get them to the capacity that they can save us.   Even then, China is actively pursuing existing supplies, even helping Canada built a pipeline to get their oil sand oil to the Pacific.   Simply: if you look at the details, there’s no magic bullet that will come to the rescue and allow us to maintain our “cheap energy” lifestyle.    If the peak isn’t really until 2030, we do have time to shift to alternates, and that should be a priority.  If the peak is already upon us, well, get ready for a real decline in material prosperity.    I’m sure at some point we’ll have a new equilibrium built on alternative energy sources.   The transition may take decades, however, and we need to be ready.

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  1. #1 by Mike Lovell on March 19, 2010 - 14:53

    Recently I heard, but have no confirmation of as of yet that Obama made promises of subsidizing or authorizing tax credits to companies to develop the nuclear power industry while at the same time closing off disposal options like Yucca Mountain. While we can recycle (reprocess) in a sense nuclear fuel rods to a certain degree, in order to use it over the longterm, we will still need depositories for the eventual waste matter created. And yes it will take a lot of time, money and effort to build new nuclear plants, I think it is the best option we have and ought to get cracking on such projects now before any peak/decrease/elimination of oil supplies, so we can be prepared for a switchover.

    You mentioned wind and solar power. The problem with these sources is that you have to have massive amounts of land to build enough to even make this a truly practical power source. the environmentalists favor the clean power concept of these options, but at the same time work hard to block the areas of optimal placement for planned placement. In a sense they ahve this something for nothing mentality breaching not only economics but their very ideological needs and wants.

    We have to figure out a solution, and we should be integrating the power grid with the new technologies faster while still suing our current energy supplies to keep things going. The big question in these matters is “When is everyone involved with makign these decisions going to stop talking out both sides of their mouths on the issue?”

  2. #2 by classicliberal2 on March 20, 2010 - 18:21

    Some words on the price of oil: It has nothing to do with demands, supply, or processing capacity. It’s all about the money. The incredible price hikes throughout the Bush years (not just in 2008) were the result of installing the Man From Oil in the White House, who allowed the industry to get away with all manner of profiteering and its financiers speculation. I don’t want to get too wonky on the subject, but oil production was vastly exceeding demand in every one of those years, and as it exceeded it even further in 2006, ’07,, and ’08, the price of oil continued to rise. That’s why the oil industry was turning in record profits every quarter, records not just for their industry but for all industries.

    Developing alternate energy sources is critically important, because we need petroleum for other much more important things than wasting in automobiles (which can just as easily be powered by an almost infinite number of other sources). Try doing anything when you don’t have plastics anymore.

    Unfortunately, we operate on the Golden Rule: Him what has the gold makes the rules. Big oil and the big finance behind it has all the gold in the world, and they don’t want a change. They have a long history of interfering in the market, including purchasing whatever legislative muscle they need to get their way about absolutely everything, conspiring with the auto companies to buy up then destroy urban mass transit systems, and snatch up and shelve every patent for any tech they think may be a threat to them in the future.

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