Archive for category Oil crisis
Probably not. If you’re like me, you’ve been watching them fall daily, from a high of $4.00 per gallon in early May to $3.55 in Farmington today (down from $3.59 yesterday). Yet it wasn’t that long ago that Republicans from Mitt Romney to John Boehner eviscerated President Obama on high gas prices. They rose because of his policies towards oil companies, his foreign policy, or the lack of domestic drilling.
But, Democrats complained, the President doesn’t control gasoline prices? Hogwash, was the reply – Obama’s policies are one of the main reasons that they are high — and look for them to get higher this summer!
So what happened?
Remember back in 2008 when the economic crisis hit energy prices went way down. Within less than a year we fluctuated from $160 a barrel to $35 a barrel. The reason is simple: oil supplies are pretty stable in the short term, and demand is generally price inelastic. This means that if demand exceeds supply at a particular price, large price increases are necessary to reach a new equilibrium point. In the booming economy of 2006-07 oil demand world wide went up, while supplies could not increase. The result – a spike in oil prices.
To be sure, speculation did accentuate that, but that speculation was based on a belief that demand would continue to exceed supply and oil prices would continue to rise. Of course, if demand falls dramatically, the opposite happens — oil prices go way down. Unless supplies are cut, a drop in demand can mean a steep drop in price to reach a new equilibrium.
Perhaps what we saw earlier this year was an increase in oil prices due to a belief that economies were starting to move out of the recession and that oil demand would again increase. Add fear of a war with Iran (fears which have seemed to subside since then) and its not surprising that oil again went above $110 a barrel.
However, now it’s down to $85, and seems to be settling in at that price. Yet all the people who were blaming Obama for price increases are not crediting him with bringing the price down. Clearly that was an opportunity attack – if something goes wrong, anything, blame the President. If it starts going right, look the other way.
To me the question becomes: are we in a cycle whereby every time the economy starts to show life, oil prices will rise, ultimately stifling the economic progress? With lower oil prices we might get another burst of economic growth in the second half of 2012 — perhaps leading to another jump in oil prices which thwarts the recovery.
If so, we’re in a conundrum that requires either increased oil supplies or an increase in the use of alternative energy sources. Unfortunately, it doesn’t look like oil supplies with increase soon.
In Europe, there has been an intense effort to invest in wind turbines, solar panels, and a variety of other sources. The Europeans say the future is with electricity, and they are bent on discovering how to efficiently generate electricity without fossil fuels. They’ve made a lot of progress, which is why they were able to meet the Kyoto accord goals.
Some might point to natural gas and oil shale development in the US and Canada. Those sources could potentially add to the oil supply, but on a time frame out that is too long to help in the near term.
This means that as we work through the financial problems, the debt crises in Europe and the US, and all the concerns about infrastructure and economic rebalancing, energy is a main barrier to change. The last century was the century of cheap oil, our lifestyle, our global population boom, our expectation for easy access to goods from all over the world was built on cheap oil. We’ve electrified and powered every aspect of our lives, from our homes to our appliances, lawn mowers and tools.
If the era of cheap energy is ending, our economy will never get to what one would have in the past called “normal.” We’re destined to years of economic malaise, only to end when we both work through the debt crises, get banks back under control, and find a way to keep energy costs down. We should be investing in all sorts of alternatives, like the Europeans are, but instead our stagnating, with Congress unwilling to act, and politicians enamored with a failed “free market” fantasy that markets can magically take care of everything.
Indeed the future might be won by whoever develops sustainable alternatives first and adapts their economy to use them. In that, we’re already way behind.
Most indications are that world wide oil production is at its peak. A recent Wikileaks document suggests that the US believes the Saudis are overstating oil reserves and are already at their peak. If that’s true, the world may be producing more oil now than it ever will in the future. This could last a few more years, but at some point production will start to drop off.
If you’re an optimist you can hope that oil sands, off shore finds, and alternative energy can pick up the slack. That’s not very likely. Oil production drops off relatively rapidly and its not easy to replace the amounts of oil Saudi Arabia produces. At the time of the Iraq war there was hope that Iraq might have more reserves than thought (Saddam had been inefficient at discovering/drilling for oil, thanks to all his foreign policy adventures), but continued sabotage and instability there assure that any significant Iraqi oil won’t be on line for probably a decade or more. Off shore finds are modest, and oil sand production is actually down from its highs. It will take a lot of investment to have enough production to alter the trends. Even if we opened up Alaska and off shore areas to unrestrained drilling it won’t change the fact that oil production will slow.
The long term problems that could cause are numerous, but right now we’re dealing with the short term. The trouble with peak oil is that any slight change in demand or concern about supply can turn into a major price shift. Nothing illustrated this better than the price run up of 2008, followed by a massive collapse of oil prices when the recession hit. Oil prices leaped to over $145 a barrel, though a portion of that was due to the weakness of the dollar. When the recession was in full bloom after the financial crisis hit, the price went down to about $30 a barrel. Now with unrest in Egypt and Libya, the price is hovering at near $100 a barrel. That sounds cheap compared to 2008, but as recently as five years ago people were alarmed by the prospect of $100 a barrel oil.
Consider this graph of oil prices:
From 1996 to 2005 we hovered between $20 and $40 a barrel. That price indicated that production was still easily meeting demand, as those prices were historically still quite low adjusted for inflation. Even during the late nineties boom years the price stayed low. That helped the economy boom, and was one reason the US budget could be balanced for a short while. Between 2005 and the summer of 2007 price started rising up to consistently around $60 a barrel. This was considered high, and reflected the increased demand for oil caused by the economic boom – especially continued growth in India and China. Then in 2008 the price soared. Some of this was simply increased demand, and some of it was due to factors like unrest in Nigeria, the kinds of oil produced, etc. But if we’ve hit a peak, this is how it would look.
Because demand for oil will stay pretty much the same if price changes are minor or moderate, a slight imbalance between supply and demand will require significant changes in price to reach a new equilibrium. For example, if due to stagnant supply or high demand the desire for people to buy $70 a barrel oil increases by 2%, it might require the price to double in order to cut some of that demand so that demand ultimately equals supply. If a recession causes a drop in demand (which it did), then the price will fall dramatically as suddenly supply easily meets demand.
You’d expect this kind of behavior at peak because if production can increase, states would do so at prices well over $100 a barrel — there are huge profits to be made. If production were actually dropping, however, decreases in demand would not yield such a dramatic drop in price — the decline in supply would factor in. Note that even though the world economy did not revert back to the boom years of the early 00′s, oil prices started to climb back to over $80 a barrel by mid-2010, before the unrest in Egypt and Libya. An increase in economic growth will start a quick and significant increase in oil prices. That in turn causes recessionary pressures, as money going to pay for oil does not go into the economy. This will make it much more difficult to grow out of this recession.
In the past when a recession hit you took your lumps, the economy adjusted, and then it was back to onward and upward. Yet since 1900 our economic health has been increasingly dependent on cheap energy. The last 100 years has been an era of incredibly cheap, plentiful and easy to transport energy via oil and coal. Oil has been essential to increased transportation of goods and services, and without it the economy would collapse. If we’re hitting a peak, high oil prices aren’t only here to stay in the long run, but while we’re at the peak price fluctuations will be common, and higher prices are likely to undercut nascent economic recoveries.
Now add in Libya and Egypt — or other unrest in the region. A lion’s share of the oil comes from the Mideast and an Arab world that has seen dictatorships and corruption blossom due to oil revenue. Citizens were paid off with the money that came in, while leaders grew corrupt and spoiled. Gaddafi could play military games throughout Africa, and fancy himself an anti-western Arab nationalist. The Saudi Royal family could act like a mafia family, but with the protection of sovereignty and royal titles. As the youth rise up against those practices, any unrest or shortfall in oil production (Libya’s production is down 50%) can cause significant price increases. The current $100 a barrel is due less to that than fears of what might yet be to come in the region, but clearly events in the Arab world directly affect our economy.
We’re going to have to get used to this volatility. It reinforces the fact that this recession can only be cured by restructuring our economy, and ultimately by preparing for much more expensive (and perhaps hard to get) oil. From behavioral changes to policies designed to create a more energy efficient economy, the need for major adjustment cannot be ignored. There’s no magic spell either — “drill baby drill” won’t cut it, and just investing in alternatives isn’t enough either. We have to question policies, regulations, and our very way of life.
Because, even though things still seem normal now, this challenge is coming just as sure as change is coming to the Mideast. The ride has just begun.
We live in an exciting era, one of vast cultural change, political transformation, and economic turmoil. Yet as we near 2011, it feels different, as if we’re entering territory even more uncharted, confusing, and dangerous than in the past. Even as technology soars and it seems that daily life remains wired (or Wifi) and normal, the list of uncertainties is large.
1. Oil. As I noted, we are emerging from the oil century, where very cheap energy allowed a massive increase in production and enhanced mobility. The IEA believes oil production peaked in 2006, meaning we could be facing tremendous increases in oil prices soon, especially if the economy perks back up. Even in recession oil is inching back towards $100 a barrel. What will a perpetual oil crisis look like? How will the world respond, and how different will the reactions be on different parts of the planet?
2. Dollars. The tremendous growth of public and private debt in the US threaten the role of the dollar as the main global reserve currency. Already shifts towards Euros and Yen are taking place, with the dollar helped by the fact those other currencies have their own problems. Gold has increased in value, and unless there is some sign that the US can both decrease debt and reduce its current account deficit, it’s only a matter of time before the dollar loses significant value. That may not be a bad thing, if it’s a moderate loss of value. In a worst case scenario, it could be hyperinflation. Of course, Japan has gone into tremendous debt and its suffering deflation. That’s a possibility too!
3. Climate Change. The propaganda war waged by big business in the US has made skepticism of global climate change the norm, but world wide scientists are convinced it’s happening, and we’ve already seen examples. Weather has gotten more extreme and dangerous, and this is likely to continue. What will that do to the world economy, to political stability, and world food supplies? Again, estimates range from complete havoc to relatively minor adjustments. And it’s not just heat, but extreme cold and harsh winter weather can be an outcome of climate change.
4. Terrorism. It never warranted the fear that overtook the population after 9-11, but it’s also more dangerous than the apathy the issue of terrorism evokes now. The most dangerous type of attack would be one that hits oil supplies, but the possibility of nuclear terror as well as simply high profile attacks is real. There are also home grown radical groups that could strike, it’s not just Islamic or third world terror that is a threat. Except for terrorism that hits oil supplies, most scenarios suggest limited and minor physical destruction in any terror attack. Even nuclear terror would be contained to a relatively small area. Yet the cultural, economic and psychological ramifications could be tremendous. Terrorism is most effective when it causes the victim of the attack to engage in self-destructive behaviors, something that we experienced after 9-11 as we got involved in a war in Iraq which weakened us, and we opened up the spigots of cheap credit which helped bring about the economic crisis. What we do in response to terrorism is potentially more dangerous than the attack itself.
5. Global depression. Beyond concerns about the dollar noted above, the world economy could remain enmeshed in a global depression driven by high debt levels across the industrialized world, higher energy costs, and no clear engine of growth to pull us forward. If this persists, crises and war would become more likely in the third world, while the first world would experience growing unrest and instability.
6. Political jihad. At a time when our problems are greatest, our politicians seem inept. To be sure, President Obama does seem willing to try to work with Republicans and look for common ground to solve problems, but in both the GOP and the Democratic party strong forces want to simply fight war with the other side. At some level this is OK — feverish rhetoric and political theater are the norm, so long as at the end of the day the two sides recognize that they have to do something to address the problems, even if it doesn’t fit their ideological druthers. Too often, though, deluding themselves that standing in “principle” means never compromising, democracy gets sabotaged by extremists. The rhetoric on the right seems more poisonous, as talk radio and Fox News skew coverage in a way that to me is clearly propagandistic. MSNBC does so on the left, but without as much efficacy. Right now, it’s still more spectacle than reality, but we’re close to a line where democracy could become dysfunctional if people start seeing the other side as evil, un-American or akin to traitors. This would be a bad time for that to happen.
7. Regional conflicts. Tensions in Korea, the Mideast, Iran, and elsewhere could create a crisis that could have disastrous ramifications. Given the other problems we face, we’d be best advised not to meddle in other peoples’ conflicts. Unfortunately, the US like any great power has a hard time reconciling a loss of power with a need to reduce commitments. We have to rebalance our commitments with our capabilities to avoid getting dragged into something very dangerous and self-defeating.
All that said, the future isn’t necessary going to be suffering and pain! Technology is growing by leaps and bounds, and the globalization that makes us vulnerable to China’s choice of what to hold as a reserve currency also makes China vulnerable to any impact a US economic collapse would have on world markets. We’re in this together, and as long as leaders can see that, they can avoid taking the path of fear and scapegoating.
In Europe the EU is a shining example of how cooperation and recognition of mutual self-interest yields results far superior to the myopic self-interest of the first half of the 20th Century. They’ve also been quietly positioning themselves for effective reaction to both environmental and energy crises. If they can make subsidiarity real, and recognize that new technologies mean more power can be devolved back to individuals and localities, and not centralized in Brussles or even state governments, they can model a new kind of political organization, one that might suggest a successor to the increasingly obsolete sovereign state.
If worst case scenarios are avoided, and cooperative innovation embraced, we can chart a future in which we overcome these challenges. The key is to let go of past ways of thinking about the world, and recognize that we’re entering a new era where a new kind of thinking about politics, self-interest, and human values is necessary. Are we up to that challenge? Can the US play a leading role, or will we try to hold on to old ideals, kicking and screaming as reality brushes aside the old order? I guess that’s up to us.
Few people talk about the skyrocketing oil prices of 2008. News later that year of a financial crisis and resulting recession have dominated discussions, as oil prices fell drastically on declining demand. Yet oil is back up to near $90 a barrel, even though the world economy has not roared back. And, of course, the more we pay for oil, the less we have to buy other things.
Oil price increases have been a factor in the timing of the last three major recessions. The oil price hike in the wake of the Iranian revolution in 1979 ignited the 1980-83 recession, and the short lived hike at the start of the Iraq war in 1991 led to a small but intense recession from 91-92. Those recessions would have happened anyway at some point, but the rise in oil prices pushed the economy over the edge. And, of course, the dramatic run up in oil prices to nearly $150 a barrel helped prick an already deflating housing bubble, laying bear the financial shenanigans engaged by the big investment banks.
Having oil back up near $100 a barrel at this point in time enhances concern that the days of cheap energy are over. Back in the late 1800′s most oil in the US was found in Pennsylvania with wells yielding 10-20 barrels of oil per day. Then in January 1901, following the hunch of a geologist, oil was found on Mt. Spindletop, Texas, shocking people with initial yields of 100,000 barrels a day. The oil age had begun, just as cars and air planes were being invented. For the next century cheap oil would define our lives. It would help us light up cities, engage in unprecedented global trade, and create a standard of living in the industrialized West that was second to none. With oil plentiful and the price low it seemed that this could go on forever. Our life style, our ability to have power at our fingertips whenever we want it, is based on cheap oil.
The oil shocks of the 70s made it clear how vulnerable we could be to disruptions in the oil supply or sudden price hikes, but those shocks were followed by declining prices, again lulling people into a sense of complacency. When gas was 80 cents a gallon in 1999, it was even said we had a oil glut. However, that may have been a very dangerous delusion.
Oil demand is price inelastic. That means that changes in supply can have a dramatic effect on price. A slight increase in demand (or decrease in supply) can drive up prices dramatically, as it takes large increases to get people to buy less oil — people still need to drive, heat their homes, and run cities. If demand drops, like it did in 2009, it can have a similar effect downward, the price can fall radically. This means that either an increase in demand caused by a reviving economy, or a decrease in production caused by aging oil fields, could yield another round of skyrocketing oil prices.
This is not controversial. Nor is the fact that oil at some point will “peak,” with production starting to decline as the oil fields of the Mideast begin to run dry. Large increases start when half the oil is gone, because that’s when production starts declining (oil wells and fields follow a normal curve of increasing and then decreasing production). Moreover, it can go down rapidly, as it becomes more expensive to recover remaining oil. Even if we turned Alaska into a giant oil field, that would not alter the dynamics, Alaska doesn’t have that much oil and natural gas. Off shore drilling can expand the supply somewhat, but without another major oil find (the last one was in the 60s, and people have been looking all over), we’re seeing a change in our way of life looming ahead.
Officially, this peak is expected around 2030, based on reserve estimates from OPEC countries. However, there is reason to worry that these reserve claims, which have not been verified, are false. Consider this graph posted on theoildrum.com:
Notice the sudden increases in the Mid-eighties, and the apparent lack of draw down on oil reserves. The increase in the 80′s took place as oil prices plummeted. It is suspected that these sudden increase in reserve estimates were made not because of new discoveries, but in order to increase the quota of how much oil states could sell (OPEC quotas are based on oil reserves). Oil countries were reeling due to price reductions, and wanted to sell more in order to earn more.
More than that, oil production now has no relevance to the quota. All states except Saudi Arabia produce at full capacity, and even the Saudi capacity is doubted. If we are already at the peak of production, then any economic growth in the global economy will drive up oil prices quickly. Moreover, it gets dramatically worse within a few years, oil prices could quickly rise over $200 or $300 a barrel.
That would take us into completely new economic territory, altering every aspect of our lives and could lead to a massive depression or global unrest. After all, not that long ago the prices we paid in 2008 were seen as the stuff of alarmist fantasy.
The global economy is still slow, yet oil prices are rising. Partially that’s due to growth continuing in China and elsewhere (China’s demand for oil has been steadily increasing), but it could be a sign that the problems we face are deeper than saving banks or sovereign debt crises. It may be that we’re at the start of a fundamental restructuring of how we live on every level, not just going through another bad recession.
Alarmist? So were folk who warned about al qaeda in the 90s, talked about the housing bubble and tremendous rise in public and private debt back in 2006. The evidence is very strong that this could be happening. I would go so far as to see it’s probable that the peak of oil production is around now or at the very least much closer than 2030. If that’s the case, we don’t have time to fully develop alternatives, reality is going to impose itself on us in very painful ways.
The other day I pushed the elevator button to go up to the third floor from the basement. The slow elevator was already on floor three, and when I saw that I decided to zoom up the stairs rather than wait. It occurred to me that I have been spoiled to not even think about that as using a tremendous amount of energy, just to carry one person up three flights. And when it wasn’t right there, I didn’t even use it! We’re all spoiled by the age of cheap energy and power at our finger tips. If that era is ending we need to start working now to develop alternatives and plans to transition. Unfortunately, humans are good at ignoring problems until they become so severe there are no easy solutions.
“Now they’re planning the crime of the century
Well what will it be?
Read all about their schemes and adventuring
It’s well worth the fee
So roll up and see
How they rape the universe
How it’s gone from bad to worse
Who are these men of lust, greed and glory
Rip off the masks and let’s see
But that’s not right, oh no, what’s the story
But there’s you and there’s me
(that can’t be right…)
– Crime of the Century, Supertramp, title track from their 1973 LP
(Song by Roger Hodgson and Rick Davies)
As the oil gushes into the Gulf of Mexico, the fingers of blame are pointed everywhere. Some on the right blame Obama for not being “forceful” in his response. Others blame British Petroleum (BP) for overlooking dangers and possible design flaws. Still others blame the oil industry in general for undertaking deep sea drilling without really making sure it’s safe. Even others blame Halliburton for shoddy work.
But if we rip off the masks to see who’s really to blame, we look in the mirror. We are the ones demanding oil. I’m probably more to blame than many — we heat our home with oil, I help lead travel courses to Europe, we drive to camp grounds and on vacations. Our house has too many square feet, and I buy countless petroleum based products. I consume, buy my kids too many cheap toys, and waste. Moreover, even as I know this is the problem — that we are addicted to oil and consumption — I can’t break my habit.
I know people who really do try to live an energy conscious life style. But when I think of what I’d have to give up, and the fact that most people would go on consuming and nothing would really change, it seems normal to simply go along with the flow. Anyway, just about everyone does it, right?
Therein lies the problem. As long as oil is relatively cheap, and the consequences of our addiction tolerable (just think of what drug addicts will endure before they change) we go on. Oil companies drill in deeper water, politicians scream “drill, baby, drill” and people scoff about global warming or warnings that such deep drilling is dangerous. Such is our nature as humans.
If we want to believe that we can consume oil without regard to the environment, that oil supplies will last, and that drilling is always safe, there will be those who will give us a story to rationalize not looking closely at our choices and their consequences. Drilling is safe, there is undiscovered oil everywhere, global warming is a myth, go on and live without regard to the consequences of our actions. People believe what they want to believe; they want to believe that which allows them continue their habits and hold on to beliefs they’ve become used to.
Serious commentators will develop sophisticated arguments to support their position. Oil companies will nurture bloggers and the press with trips to oil rigs and seemingly flawless studies to support their position. Books supposedly “debunking” global warming theory will pop up, questions about one bit of evidence (something all science has) will be used to dismiss all evidence. Weird bits of evidence will be presented as if they disproved science (e.g., a claim that deep oil rigs prove that oil is simply an earth by product of virtually unlimited supply). Those who believe what is for them convenient will think that the others are duped.
In all the noise, of course we’ll find support for what we want to believe. How could we not? There is a blog to fit every point of view, movements from the tea party to “yes we can.” Anarchists will find like minded folk convinced that government is the only real evil; socialists will find comrades who believe capitalism is the reason for all our woes. And, of course, there is always uncertainty — an opening to simply grasp what we want to believe and hold it.
So we consume. It’s good for the economy, after all, and there’s always someone telling us we need X, and credit is easy to get for Y. We demand more oil. And the consequences follow. And suddenly it’s BP’s fault. Obama’s fault. The lax regulation of the Bush Administration’s fault. But really, it’s our fault. And those like me who are concerned about global warming, peak oil, and the environment have no business proclaiming any superiority to those who don’t — I consume as much if not more than most of them. Talking the talk is meaningless if you don’t walk the walk.
So as I reflect on the oil plunging into the Gulf, perhaps all summer and beyond, with other wells also at risk, I really don’t feel like demonizing an oil company or a politician. I can (and just have) criticized our oil addicted materialistic consumer culture, but in so doing I’m like a drunk condemning alcoholism. I’m a part of the problem. So, the challenge of the oil spill for me is not to blame others, but to look at the mirror. What can I change in my life? This event is real, the consequences will be with us for a long time. Likely, worse is yet to come. I’m as much to blame as anyone.
It won’t be easy, and it will take some time, but my behavior has to change.
Humans are imperfect, machines break down, mistakes get made, and thus throughout human history we’ve had disasters. They range from Chernobyl to knocking over your coffee by standing up carelessly, but they happen.
The current oil spill that is damaging the Gulf Coast and could damage much of the eastern seaboard depending on when they can stop the flow of oil into the sea is in and of itself not an argument against off shore oil exploration. The fact is that one should never support anything without taking into account the risk inherent in that action.
There is risk in everything. Later this month I’m traveling to Europe with students. I make that decision knowing that there is a risk that something will happen and I could die, leaving two young children behind. Of course, that risk is incurred every time I drive anywhere — and when I drive with the children on board, I’m putting their lives at risk.
According to a rational actor model, we should run a risk/cost-benefit analysis every time we undertake an action. The probability of a fatal car crash en route to a family hike is extremely low, the benefits of family time, the kids hiking, and the pleasure of the event is of high probability and value, therefore we choose to undertake the risk in order to get the benefit. Indeed, if one spent all of life avoiding risk, in the end death still wins, so what was the point of living?
We’re not rational actors though. We don’t usually think about the risk of the actions we take, so often people over-react when the risk becomes evident. The Simpsons parodied this aspect of human nature skillfully in their first season, as Homer becomes safety officer and seeks to try to remove all risk from Springfield life. The result was a kind of totalitarian hellhole where nothing was allowed so all could be safe. I’ve also discussed the positive correlation between freedom and risk — the more you try to minimize risk, the more you risk minimizing freedom. (I couldn’t resist that wording — think it through!)
So if we think about oil production, nuclear energy, coal burning, and other forms of energy, we should not react from the gut — be it “I like to drive an SUV so drill, baby, drill” or “look at the birds covered with oil, shut down the rigs!” We need to think about the risks, probabilities, and benefits of the activities.
Take oil. Oil prices are over $85 a barrel, a price that could imperil the global recovery. In fact, as the economy revives, higher oil prices could push us back into recession. So one benefit of drilling off shore is that it helps the global economy. If we drift into recession due to high oil prices hundreds of millions of people world wide could have their quality of life decreased, face unemployment, and suffer untold psychological and sociological difficulties. This could even lead to war and unrest, especially in poor, unstable regions of the world.
Moreover, given the amount of oil pumped daily from these rigs, the risk of a major spill happening is low. But as we see, the consequences can be immense, and low risk is not the same as no risk. Low risk events happen all the time. There is also the risk of global climate change if we maintain an oil based economy. Even those who are not convinced that the earth is warming because of carbon fuels have to admit that they might be wrong — there is a risk there, even if we disagree on how to assess the level of risk. How can one take that into account vis-a-vis economic dangers and alternatives?
One alternate to oil is nuclear energy, but there the same issue emerges. Nuclear energy done right has a low risk of catastrophe. But when not done right (like Chernobyl) the risk is much higher, and again — low risk does not mean no risk. Nuclear energy doesn’t contribute to global warming, however, and may be a way to relieve economic pressure, as well as to remove the economic and political power oil provides to a few dictatorships. Wind power also provides benefits, and has fewer risks. Indeed, many people oppose it more for aesthetic reasons (those turbines make the hills look ugly!) than dangers entailed. Go on through the list of potential energy alternatives, and there is always a mix of costs, benefits, and risks.
So what to make of all of this? First, there is a reason these issues have such diverse perspectives — there is uncertainty about the nature of the risk and benefits at play, and people have different starting priorities. Obviously someone with oil lapping up on their beach side property will see the issue of potential oil spills in a different light than those of us living far from the ocean. Anyone who takes dogmatic positions with an air of certainty is likely wrong. Second, we can’t avoid risk. Whatever we choose, there is a potential downside, ranging from a world depression that causes war and famine, to catastrophic global warming that causes war and famine.
To me the rational thing to do is accept a variety of risks in order to try to avoid the most horrible outcomes. I don’t know if not drilling more off shore or not building nuclear plants means global depression, but I’m willing to accept the risk of an oil spill or even a nuclear accident (albeit a slight risk) to make global depression as unlikely as possible. I don’t know for sure if our carbon fuel economy is going to cause catastrophic global warming, but I’m willing to accept the risks of nuclear energy to try to minimize that. An easier call is to invest heavily in alternate energy sources — this will benefit us even if global warming fears or misguided.
So, avoiding dogmatic positions, I think we should continue offshore oil exploration for short term economic benefit, even as we work towards longer term alternatives. I think nuclear energy is a rational way to deal with short term energy issues, even as we try to work on developing economically feasible and safe long term alternatives. The possibility of catastrophic global warming, along with the political and economic difficulties inherent in relying on oil make it rationale to work towards rapidly shifting our energy economy to one based on alternatives to oil. Finally, the dangers inherent in all of these convince me that we should try to move away from a culture based primarily on consumption and materialism, to one that recognizes value in community and life experience.
But whatever one supports, it should be done with eyes wide open. If you advocate for nuclear energy, you can’t say a nuclear catastrophe is impossible. If you advocate to stop off shore oil drilling, you can’t say global unrest and depression is impossible. And if you think you can personally assess precisely what the risk levels are as a citizen getting all your information from the media or internet, then I believe you over estimate your knowledge. Even the experts are unsure and disagree. That means any path we choose is risky, but that’s OK — life is about risk!
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.
As the United States public settles into debates on the economy and health care, foreign policy and the “wars” in Afghanistan and Iraq fade from public consciousness. Yet there are still soldiers over there, civilians are still being killed in the conflicts, and the future is uncertain. Ultimately, solving these problems will be necessary to assure that the 21st century is stable and relatively peaceful.
Israel and Palestine: If only this could be settled, things would be a lot easier. It appears on the surface that settlement should be easy. The Israelis cannot push the Arabs into the desert, and the Arabs cannot push the Jews into the sea. An secure viable Israel must exist alongside a secure viable Palestine. Just as the Arabs can no longer claim Jews there are mostly “European colonists” trying to steal their land, the Israelis cannot deny Palestinian identity and say they are just Arabs who could live elsewhere. The two peoples have linked destinies.
Yet the kind of commonsensical solution that seems so obvious to a neutral observer has proven virtually impossible to achieve. Israel correctly fears that extremist elements could use a Palestinian state to continue a war against Israel, and the Palestinians correctly resent and want to end decades of humiliation and mistreatment at the hands of the Israelis. Both sides see clearly their side of the issue and feel righteous; neither side has been able to adequately empathize with the other. I think some top politicians understand, but publics are fickle and easily manipulated, especially when their emotions are played.
Iranian regional ambitions. Iran, buoyed by the fact the US military has proven relatively weak in the region, and that the American public does not want any more war, has set its sights on becoming a regional central Asian power. Iran fancies itself as a major player between China and Russia in the region, with global import due to the world addiction to oil. To secure its position, however, Iran must confront numerous threats. First, there is American and EU opposition to Iran’s regime and its effort to expand its military might and potentially develop nuclear missiles. Second there is the geopolitical rivalry against more powerful states, Russia and China. Third, Iran’s regime is feared by Sunni Arab states who see the Shi’ite Persian Iran as a threat. Finally, Iran’s influence will be limited by the rule Pakistan can play in the region, and however the Afghan situation develops. Iran is the natural regional power, but faces intense rivalries and threats.
Iraq: The failure of the US to turn Iraq into a pro-American ally has been key to Iran’s power play. Once it became obvious the US could not pay the price it would take to dominate Iraq and subdue it, Iran slowly infiltrated all levels of Iraqi government and is very close to the current government of PM Maliki. The Saudis and their allies would have no problem giving some support to al qaeda elements and Sunni Bathists to try to undermine the pro-Iranian Iraqi government and shift it to one more neutral. Whatever one thinks of the old Hussein Bathist regime in Iraq, it was part of a stable regional balance of power. Shifting Iraq to the Shi’ites and making it a defacto Iranian ally has been destabilizing.
Oil: Of course, all of this might be easy to ignore if not for oil. China and Russia each see it in their interest to woe rather than work against Iran. China wants access to Iranian oil, Russia fears a Chinese-Iranian alliance. They also do not want American or western military action to expand in the region, because of the threat that might pose to their oil interests. This gives Iran some cover as it pursues its goals. As the planet runs shorter on oil, the price and regional geopolitical stakes will rise. Iran knows that if it is to be a true regional power, a real player in future global battles over oil reserves, it has to position itself now. That brings us back to Israel and Palestine.
Terrorism: One way Iran can counter the Sunni Arab efforts to limit its power is to emerge as a dominant force supporting the Palestinians against Israel. That has emotional appeal in Arab lands, and could create chaos in the region which Iran might ultimately see in its favor. Iran has supported Hezbollah, a Lebanese Shi’ite organization ironically created in the early eighties in response to Israel’s invasion of Lebanon. Iran has tried to make inroads with the Sunni Hamas organization, and is on good terms with the Syrian government. Syria’s leadership is Shi’ite, though the public is overwhelmingly Sunni. Syria is not a loyal ally of Iran, and even Hezbollah has shown it refuses to be simply an Iranian proxy, but Iran has positioned itself to benefit from on going tension between the Israelis and Palestinians.
Since the Hezbollah-Israeli war in the summer of 2006, the prospect of a joint Hamas and Hezbollah uprising against Israel, funded and supported by Iran and Syria, has been the nightmare of Israeli officials. The power of these organizations has also helped marginalize Palestinian moderates who truly want to find a path to peaceful co-existence. Fear, of course, inspires nationalists, and the right wing in Israel has used this to drum up support for anti-Arab sentiment. This creates a powder keg waiting for a spark.
Right now, no state benefits from war. Israel realizes that its ability to truly ‘defang’ Iran is limited, and worries that if they start a war, Hezbollah and Hamas will be able to respond effectively. The US simply wants to leave Iraq, and the Obama Administration hopes to be leaving Afghanistan by 2012 — they know the American people are sick of war. Iran wants to be a regional power, but knows its vulnerabilities. A real war could mean the end of the Iranian regime, and they understand that. The Sunni Arab states essentially want stability with the oil states hoping to milk their oil reserves for all they’re worth.
The wild cards are the terror organizations and oil. Lacking a geographical center, terror groups have less to lose if things get out of control, and they often are motivated by emotional extremism rather than rational self-interest. But that can be overstated. Many terror leaders are very comfortable running something that is akin to an organized criminal organization — they do not want to risk their power for a quixotic cause.
If peak oil theory is correct and oil resources start running low once the world economy starts growing again, there will be an increased threat of oil wars. States like the US, Russia and China could be involved directly, or through proxies. Such a situation could escalate quickly. Word is that Vice President Cheney wanted to attack Russian forces during the 2008 Georgian war. That was rejected because it could have expanded into a broader war whose limits could not be predicted. The same could happen if larger states, driven by the need for oil, are willing to risk military action.
The failure of the US operation in Iraq has shown the world how difficult it is to use military power to try to shape the region. It should make it less likely that larger states will think it easy to achieve interests int he region through war. The success of Hezbollah in 2006 makes an Israeli offensive less likely, especially against Iran. The cost to Hezbollah of that success, however, makes Hezbollah less willing to risk all out conflict. Given the loses they suffered, their ‘success’ was in some ways pyrrhic.
Still, however much we shift focus to domestic affairs, and however likely it appears that Obama will successfully end the US military operations in Iraq and Afghanistan by 2012, the Mideast is still a dangerous place, and an even minor event could unleash a chain of reactions that lead to major war.
“In a nation that was proud of hard work, strong families, close-knit communities and our faith in God, too many of us now tend to worship self-indulgence and consumption. Human identity is no longer defined by what one does but by what one owns. But we’ve discovered that owning things and consuming things does not satisfy our longing for meaning.”
It has been called a speech that should have changed history. Thirty years ago President Jimmy Carter gave what at the time seemed a successful speech. He noted that the problems the country was facing — an energy crisis, an economic recession, and a question of confidence after a failed foreign policy venture in Vietnam and the Watergate scandal that brought down President Nixon — required a national renewal of purpose. The speech was inspirational, but later pilloried for as the “malaise” speech, contrasting Carter’s supposed pessimism with Ronald Reagan’s optimism.
Carter had the fate of any prophet of doom — he was quickly pushed aside by the optimists who said nothing is wrong, we can keep moving onward and upward! And within years, as oil prices dropped (ending the concern about dependence on foreign oil — at least for awhile) and the economy rebounded (albeit through increased debt and foreign goods from abroad), Carter’s warning was forgotten. President Reagan took the solar panels off the White House and dismissed Carter’s call for a national renewal, including Carter’s claim that we had become overly materialistic and risked severe consequences if we didn’t change our ways.
Carter was prophetic. Even though he wasn’t able to follow through and bring the change needed, in part due to actions of his administration, in part because of the nature of American capitalism, his speech rings true today.
In that speech, Carter offered a course of action the country should now reconsider:
First of all, we must face the truth, and then we can change our course. We simply must have faith in each other, faith in our ability to govern ourselves, and faith in the future of this Nation. Restoring that faith and that confidence to America is now the most important task we face. It is a true challenge of this generation of Americans.
We are at a turning point in our history. There are two paths to choose. One is a path I’ve warned about tonight, the path that leads to fragmentation and self-interest. Down that road lies a mistaken idea of freedom, the right to grasp for ourselves some advantage over others. That path would be one of constant conflict between narrow interests ending in chaos and immobility. It is a certain route to failure.
All the traditions of our past, all the lessons of our heritage, all the promises of our future point to another path, the path of common purpose and the restoration of American values. That path leads to true freedom for our Nation and ourselves. We can take the first steps down that path as we begin to solve our energy problem.
(Read the whole speech)
Carter left office in 1981 with very low approval ratings. The country had fallen into recession after the oil spike in 1979, Americans had been held as hostages in Iran at the US embassy for over 400 days, as our former ally had become a foe with the overthrow of the Shah.
1979 stands as a pivotal year, with the Iranian revolution in January, and the Soviet invasion of Afghanistan in December. The decline in the ability of the US to use military power to shape events had been shown in Vietnam, and it appeared that the hegemony of the post-war era was over, America was in decline. Carter offered a way out. He called for a massive effort to develop alternative sources of energy and move towards energy independence. He called for a “rebirth” of the national spirit. Instead, the country embraced the superficial but seductive optimism of Ronald Reagan.
The journalist Walter Lippmann once talked about what came to be known as the “Lippmann gap,” the gap between national commitments and the ability to follow through on them. Carter was essentially saying that we were suffering from that kind of gap, and would have to pull together and work as a community to set things right. Ronald Reagan effectively dismissed the idea of there being a gap, and we embraced the “you can have it all” mentality.
In 1979 our total debt was 30% of GDP, about $640 billion. Our budget deficit that year was $28 billion. Now we have total debt of $12 trillion, and a deficit of over a trillion dollars. In 1979 we had the capacity to change course, we were in relatively good economic shape fundamentally, but needed to react to growing economic imbalances caused by a new trend of increased global interdependence — what would later be called globalization. Oil prices fell dramatically in the early eighties, and that gave us the chance to balance economic health with a concerted effort to keep our economy productive (e.g., save the steel industry, invest in infrastructure) and achieve energy independence. It would not have been easy, we’d have had to deal with some lean years in terms of economic growth and spending, but we’d arguably have been able to create a sustainable and environmentally friendly long term economic future.
Instead, we partied! Run up the debt! Consume, consume, consume! Bigger cars, more stuff, and stay close to the Saudi royal family so they supply the cheap oil. Yup, those were a fun thirty years. We enjoyed a bubble economy where it seemed easy to get rich, stock market increases promised everyone an early and wealthy retirement, and cheap credit with low (observable) inflation that made it seem like there were no dark clouds on the horizon. We therefore didn’t save for a rainy day (US saving rates reached zero in 2006), and entered a series of wars to boot (Grenada, Panama, Iraq, Bosnia, Kosovo, Afghanistan, and Iraq again).
So here we stand, the problems of 1979 didn’t go away, we just hid them by consuming and borrowing, making wars and losing clout, responding to crisis much like the old Roman Empire did — refusing to confront the need for real change until too late. In 1979 the decline could have been turned around. President Obama claims we still can — but he has to claim that, doesn’t he? Perhaps we can, but the price will be higher, and the pain (real pain of people out of work, earning less, losing homes, not being able to pay for college, having stresses that tear apart families — not just metaphorical pain) more intense than if only we had listened 30 years ago.
Right now Americans are enjoying what just a couple years ago would have been shockingly high gasoline prices. The $3.549 I paid at the pump yesterday felt painless compared to the $4.199 I was paying just a month and a half ago. It’s amazing how quickly we get used to changed conditions. Still, while people now reckon with stable gasoline and fuel oil prices, the economy has not rebounded and we’re not out of the woods by any stretch of the imagination. Moreover, things could get worse really quickly.
First there’s Ike. Ike is now over Cuba, doing considerable damage as it stays on land and affects perhaps half the island. Consider it Eisenhower’s revenge for the 1959 revolution. It will leave Cuba as a tropical storm, and then continue into the Gulf of Mexico. Chances are it will, like Gustav, be more bark than bite, but right now it’s projected path goes straight toward Houston, Texas, and the place where much of the oil business in the US takes place. If — and these are still very speculative ifs — the storm strengthens back to a major hurricaine, and if it hits Houston and the ports on the coast directly, we could sese a rapid increase in oil prices as they work to repair the damage. It says something about our economy that we are so vulnerable to a storm; clearly our economic health is not in our own hands. A storm, a foreign policy debacle, or another country’s unrest can put Americans out of work, make homes and cars unaffordable to many, and directly effect our economic life. That is real vulnerability — and, of course, over time those sorts of events will occur, with unknown severity.
Then look to the Mideast. Iraq’s current situation is leading thankfully to an American withdrawal of troops. Moreover, we aren’t going to be sucked in to the kind of long term presence that the neo-conservatives wanted, and their policy goals of creating a model democratic Iraq to expand democracy in the region have failed. Instead, Iran has emerged the king maker, and in fact is probably the reason for Iraq’s current state. Still, this apparent stability masks a plethora of dangers.
Israel faces challenges it has not had to face in the past, and there is internal debate on how to do it. Their main challenge is Iran and its proxy in Lebanon, Hezbollah. Hamas is also a real foe in Gaza, while Syria still wants return of the Golan Heights. Back in the Cold War Israel thought it was in danger as the Arab states aligned against it. But there the danger was clear: states with armies. And the response was rather straightforward: defeat those armies. Now things are murky. Unlike the weak and divided Arab states on Israel’s border, the main state it is concerned about is Iran. Iran is a regional power, quite a ways away, whose threat isn’t its army, but it’s support for terror organizations. Those organizations, especially Hezbollah, do not behave like armies do, and in 2006 Hezbollah proved especially resistant to and resilient against a heavy Israeli assault.
Israel’s choice is: a) let Iran develop nuclear weapons and continue to fund groups like Hezbollah, and hope the peace process and diplomacy deter any sort of aggression; or b) try to deal with Iran and Hezbollah, and risk a war that could threaten Israel’s very existence, and could expand into a greater war. Right now, Israelis are undecided. They appear to think that at the very least they should take out Iranian nuclear facilities to avoid having to confront a nuclear Iran, but it’s not clear they can do that effectively, or what the consequences would be.
In essence, the calm now in the Mideast could be illusionary. It may well be the calm before a brewing storm. Regardless of what this storm might ultimately mean — regional war, destruction of Israel, destruction of the Iranian regime, or some kind of crisis management muddling through — it almost certainly will mean oil price spikes and threats to the oil supply.
Add to all that the continuing increase in demand in China and India, and you get the picture. Moreover, the current price decline is less some kind of bubble bursting, but more a reaction to decreased demand in the US (which consumes a quarter of the world’s oil) as a response to higher prices. Not only have we had the first decreases in driving mileage in a long, long time, but people are shifting from fuel wasting SUVs (which you can find embarrasingly cheap these days) to hybrids and smaller cars. Here in Maine people are giving up fuel oil in favor of wood pellet stoves, with geothermal, solar and even wind (I’ve seen a house with a tall windmill in its backyard, installed this year). That reduction in demand has an impact, but we are one major storm away from disaster.
I hope that this summer’s price spike has started to change habits that will lead towards fundamental chanage. SUV plants are closing, people are shifting to different fuels, and it seems like there has been a change in culture away from the kind of dismissal of energy concerns given in the past. It also helps deal with global warming, as most of the new energy sources are more ecologically friendly. The trends I noted in Oil Denial remain; we are heading towards lower production while growth in especially Asia means growing world demand. I do not believe conditions are fundamentally different than they were when I wrote The Economic Storm back in July when oil hit its peak price.
This is the largest issue we face. It is bigger than terrorism — terrorism alone can create spectacular effects like on 9-11, but the real physical damage is minimal. If done at the right time with the right target, however, a terror strike could create a devastating economic backlash, based largely on our need for oil. Wars in the Mideast, concern about Georgia and Russia, and our current economic downturn are all built around oil and our economic addiction to it. The candidates talk a good talk, but it’s empty rhetoric. Sure, we can drill more here off shore, but there isn’t enough oil there to make a real difference. Sure we can invest in alternates, but that’s been promised for decades. There needs to be a sense of urgency that goes beyond government and is internalized by each person. Unfortunately, it seems that once it looks like things are a bit more stable, people put it out of their mind. That is a mistake.