July 03, 2005
Crash May Be Sooner Than We Think
The "oil crisis" may be much closer than most thought. It may be less than six months away. Matt Simmons, CEO of Simmons & Company International (an investment banking consultant firm to the energy industry) recently stated that Oil 'will hit $100 by winter'. A forty dollar a barrel rise in oil in six months could indeed shake the global economy. It could lead us into the war game scenario recently played out - Oil Shockwave. In that simulation, former US officials were presented with a scenario of escalating oil prices and global economic instability. What they determined was that there was virtually nothing that the United States could do to avert economic collapse. [See Oil Crash Would Crash the U.S.]
The issue of peak oil revolves around remaining oil reserves. That is actually a generic statement. Peak oil is when the "light" or "sweet" crude has largely been used and the "heavy" or "sour" crude remains. Sweet crude is relatively easy to pump, and has lower sulfur content. Sour crude is more expensive to pump, has higher sulfur content, and is more expensive to refine. All reports clearly indicate that the oil coming out of OPEC is sour crude. OPEC has consistently been increasing the amounts of oil they are pumping, but have also said that this will have little effect on meeting global needs or lowering gas prices. That is because the real issue driving oil prices is demand for sweet oil. Most sweet oil reserves are in western Africa and the North Sea.
This places Africa, particularly Western Africa, in the center of a massive competition for oil reserves. [See related article Oil and Politics - Africa and the World] However, Africa holds slightly less than 8% of the global reserves. That means that the majority of the demand for sweet crude is coming out of 8% of the global reserves. I have no idea how much of those reserves are sweet crude, but let's assume 50%. That means that 4% of the global reserve is now the focus of intense competition. Those reserves are likely not being fully exploited at this point, and would likely need more wells put in action to rapidly extract the oil. That, would take time, and likely more time than escalating global demand "requires." Inevitably, this is going to mean a growing sweet crude shortage, and makes Simmons prediction of $100 a barrel by winter a grim likelihood.
Part of the increasing demand for sweet crude is because of increasing pollution restrictions for automobiles. The sulfur content in the heavier oils makes them unsatisfactory for decreasing emissions. Removing those controls would make more of the heavy crude available for gasoline use, but would also dramatically accelerate the global warming problem. Truly, the world is between a "rock and a hard place" in its dependence on petroleum.
In the Oil Shockwave scenario, the triggering "crisis" was a decrease of 3.5 million barrels of oil out of the 83 million barrel daily supply. That is only a decrease of 4.2%. What is amazing about that number is how close to the edge we are running if there is less than 4.2% "wiggle room" in the global (and U.S.) economy. In early June of 2005, the FX cable channel aired a documdrama called "Oil Storm. The movie focuses around a hurricane that breaks the Louisiana oil pipeline, and a series of things go wrong after that. The result is that the U.S. experiences at 3% decrease in available oil. What results from this scenario is chaos, the collapse of the U.S. economy, and U.S. troops trying (unsuccessfully) to protect Saudi Arabia's oil pipelines.
Just how fine a margin are we running? It seems likely that margin is well below 4%. That is a very frightening thought, and there are lots of things that could move us into the danger zone - storms, conflicts, equipment failures, refinery fires ... or a slight increase in demand. This year, global demand increased by 3% - mostly from the United States and China. It would seem likely that 2006 will see a similar (if not larger) increase in demand as U.S. demand will certainly go up, China is still in boom mode followed only slightly by India. However, by all accounts the world is at virtually maximum production. As OPEC continues to tell us, they are nearing capacity. Unfortunately, it is not OPEC that is meeting the burgeoning demand from its heavy crude fields.
If we have less than a 4% margin of global economic stability, and we have another 3% increase in demand, then that takes us down to a minimum of 1% margin of disaster. Likely, it takes us over it.
If Simmons is correct in his $100 a barrel prediction, that is an 80% increase in oil prices in a six month period. What kind of "shockwaves" would that send to a global economy, and to a U.S. economy that is far from stable? Likely, the disaster movie version of a peak oil crisis.
The figures from the U.S. Department of Energy This Week in Petroleum report shows a grim trend.
This reflects a cost increase in gasoline of 42% in 2005 after an increase of after a 45% increase in 2004 and a 30% increase in 2003. For heating oil the figures are a 46.5% increase in 2005 after a 16% increase in 2003-2004. Since 2005 is not yet over, it seems likely that this year's increases are going to be over 50%. Decreasing supply of sweet crude will drive prices up dramatically - perhaps even to $100 a barrel.
The implications of this are huge. This crash would happen in the midst of highest heating oil demand for the Northern Hemisphere and we could see tens of thousands of people freezing in their homes. The trucking industry is already teetering from the current cost increases, and the effects of those are slowly starting to show up in consumer prices. Another dramatic increase is likely to see a consumer price escalation much more rapidly. Of particular concern are critical needs - such as fuel and food supply. Farmers in the U.S. are already experiencing impaired production because of shortage of diesel for planting and harvesting, and shortage of fertilizer as oil has been diverted to other needs (or has been too expensive to make fertilizer). These changes will be hitting grocery stores soon, and will only get worse with another dramatic increase.
If we are looking at an oil and economic crash within the year, there is no time to buffer against it. While the U.S. is increasing its stockpiles, it will not be enough to get through this predicted crisis. Even if it did buffer some of the U.S. domestic effect, the U.S. is in no position to stabilize the world economy - the U.S. is just too far in debt to respond.
Of course, all the other peak oil consequences such as unemployment, business closures, and escalating prices will come into play. This could be a very bad winter, but if the prices do go through the roof, the resulting global effects are likely to be with us for quite a while.
If we are really running less than a 4% margin of stability, then a crisis will throw us into an oil debt situation. Bailing out of that will be tremendously expensive - both economically and socially - if it is possible at all.
I have a strong feeling that we are not looking at a gradual peak situation culminating in 2012 or 2020. It could very well hit this winter.
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Tracked on July 10, 2005 05:12 PM
161641: Hey, does anyone know where I can find a list of gas stations with low prices in my area?
Posted by: Debra Riley at October 18, 2005 03:27 AM
Try Gas Buddy
Posted by: rowan at October 18, 2005 06:20 AM
Try Gas Buddy
Posted by: rowan at October 18, 2005 06:21 AM