Oil ended 2006 roughly where it began, at just over $60 a barrel. This reassured the public that all talk about Peak Oil was hysterical blather from a lunatic fringe. It was reinforced by the publication of the mendacious Cambridge Energy Research Associates (CERA) report issued this fall – a tragic document put out by a giant public relations firm representing the oil industry – with the mission of staving off windfall profits taxes and other regulatory moves that a true resource emergency might recommend.
But beyond this debate, in the background, another ominous trend can account for the stalling of oil prices in 2006 – totally unrecognized by the public and ignored by the news media: Prices on the oil futures market leveled off because the Third World has effectively dropped out of bidding for it – and using it. They cannot afford it at $60 a barrel.
The Third World has entered an era of energy destitution and it is manifesting itself in symptoms like local resource wars, genocides, falling life expectancies, and in many places a near-total unraveling of the sociopolitical order. American mall-walkers and theme park visitors are oblivious to this tragic process, but it is perhaps the major reason why we are not now suffering from $100 a barrel (or greater) oil prices (with the consequent unraveling of our sociopolitical and economic order).
The major trend on the oil scene for the past 12 months has been the apparent inability of the world to lift total production above 85 million barrels a day – with demand now rising above that line. It is unclear how much more demand destruction will come out of the Third World before bidding intensifies between the developed nations.
One commentator in particular, Dallas geologist Jeffrey Brown – a frequent contributor on the web’s best oil debate site, TheOilDrum.com – is advancing the idea that we are entering an oil export crisis that will presage a more general permanent world-wide oil emergency. Brown holds that the major oil exporting nations are using so much of their own product, because of rising populations, that their net exports are falling at an alarming rate, perhaps as much as 9% annually. This trend combines with general depletion rates now said to be around 3% a year.
The question of total oil reserves around the world remains somewhat murky, but Brown, Kenneth Deffeyes of Princeton, and others using a straightforward mathematical model, have stated that the world is roughly at the same point in all-time production as the lower-48 United States was in 1970, when America passed its all-time production peak. We know for certain that three of the four super giant oil fields (Daqing in China; Cantarell in Mexico; Burgan in Kuwait) are past peak and there is plenty of evidence that the greatest of them all, 50-year-old Ghawar in Saudi Arabia, is not only past peak but perhaps “crashing” into a super-steep decline.
Discovery of new oil to replace the production from declining fields remains paltry. Chevron announced it’s “Jack” discovery in the deepwater Gulf of Mexico with great fanfare this year, but neither conclusively demonstrated that all the wished-for oil was down there (between 3 and 15 billion barrels, Chevron said) nor that they could get it out of there in a way that made sense economically, since the oil was extraordinarily deep and difficult to lift up.
Meanwhile, companies developing tar sand production in Alberta announced that their costs of production were rising substantially, while a reckoning lay ahead as to how much of Canada’s fast-disappearing natural gas reserves will be squandered in melting tar. The oil shale project is going nowhere. American corporate farmers have entered into a racket with congress to subsidize ethanol production from corn and biodiesel fuel from soybeans.
But the American public remains ignorant of the tragic futility of this project, which depends on oil-and-gas “inputs” to keep the crop yields up and ultimately is a net energy “loser.” As the world crosses into the uncharted territory of “The Long Emergency,” Americans will find themselves having to choose between eating food and making fuel to keep the car engines running.
The signal failure of public debate in this country is embodied in our obsession with this particular theme – how to keep the cars running by other means at all costs. Everybody from the greenest enviros to the hoariest neoliberal free market pimps believe that this is the only thing we need to worry about or talk about. The truth, of course, is that we have to make other arrangements for virtually all the major activities of everyday life – farming, commerce, transport, settlement patterns – but we are so over-invested in our suburban infrastructure that we cannot face this reality.
The bottom line for oil in 2007: Expect the bidding on the futures markets to regain intensity between the United States, China, Europe, and Japan. A contracting U.S. economy could take some demand out of the picture, but the sad truth is that we burn up most of the oil we use in cars, and American life is now so hopelessly based on incessant motoring that citizens cannot even go down to the unemployment office without driving. Geopolitical events can only make the oil supply situation worse and probably will.
We are probably also in the early stages of a natural gas crisis in the United States. Over the next decade, the gap between U.S. demand for natural gas and dwindling supply may amount to one-and-a-half times the current equivalent of our oil imports. This is a staggering deficit.
Natural gas is used for heating in more than half the houses in the United States and accounts for just under 20 percent of our total electricity production. Domestic supply is crashing. We are drilling as fast as we can, with more and more rigs each year, just to keep up.
And to make matters worse, the means of gas delivery – through a vast web of pipeline networks around the nation – makes “just-in-time” delivery the norm and, tragically, also makes “just-in-time” pricing normal, too. Thus, gas prices are responding only to the shortest-term signals – for instance, unusually mild winter weather – rather than to the catastrophic long-term reserve picture.
Finally, we are unlikely to solve our natural gas problems with imports for technical reasons having to do with the cost and difficulty of moving the stuff by means other than pipelines and for geopolitical reasons, namely that most of the remaining gas in the world is in Asia.
James Howard Kunstler
for The Daily Reckoning
Editor’s Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis. His latest nonfiction book, “The Long Emergency“, describes the changes that American society faces in the 21st century.