What's Up with That? - Oil Prices and the IEA

[Dale Allen Pfeiffer looks into the boom in oil prices and a none-too-honest report by the IEA. -FTW]

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June 30, 2005 1000 PST (FTW) -- Everybody is wondering what has happened to the price of oil. Have we reached the peak in world oil production? Or is it simply a matter of greed on the part of suppliers and producers? The answer to both of these questions is a qualified no. I'm sure there is an element of greed here, but that isn't the major factor behind rising oil prices. And we probably haven't reached the peak of world oil production just yet. Of course, we will only know that after the fact.

What is happening is a display of supply and demand mechanics. As we are nearing the peak in global oil production, there is very little spare capacity remaining to boost production. And the new fields coming on line are doing little more than making up for the lost production in older fields. Supply is approaching a threshold, yet demand is surging ahead of it.

Half a year ago, I said that we could see a weakening in oil prices this year as the last of the megafields comes on line. Boy was I wrong. What I did not figure on was the surge in demand, particularly from China and India. These two countries are modernizing at a spectacular rate, and their thirst for oil has grown tremendously in just the last year. On top of this, the infrastructure which supplies oil to the world and which refines that oil into commercial products is strained to capacity and is proving itself unable to keep up with rising demand. Add to this the business practice of supply for demand without overproduction or a substantial reserve, and you have a situation where any little disruption anywhere ripples throughout the system, resulting in rising prices.

Many analysts are saying that what we need are more refineries, more supertankers, and more exploration. And the reason why oil companies aren't investing in these things, they say, is the bane of any free market endeavor-those dreaded environmental restrictions. It simply costs too much, they insist, to meet those unfair restrictions. Pollution and human health are of no concern when measured against economic health. While environmental regulations do raise the price of infrastructure, they are not preventing it from being built.

The bottom line is that infrastructure is not being built because the industry knows it will not pay back their investment. It is for the same reason that they are cutting exploration instead of increasing it. This is why, at a time of record oil prices, companies continue with their mergers and downsizing. They are trimming themselves down to the bone so that they can survive for as long as possible after world oil production begins its irreversible decline.

I still believe that we could see an easing in oil prices this year, if (and it is a big if) rising demand can be brought to heel and there are no disruptions. Curbing demand would pretty much mean allowing a recession, and all economic philosophy is against that. Oil prices could be one of the factors holding the US at bay from Iran and Venezuela. Oil supply disruption from either of these countries could be enough to send oil prices surging toward $100/barrel. But it is difficult to say what delusions might be entertained in the fantasy world of George W. Bush. Should god tell him it is his holy duty to attack Iran, I have no doubt that he will do so.

There is also the question of Ghawar, the world's largest oil field, located in Saudi Arabia. Reports are coming out which indicate that Ghawar may be on the verge of collapse due to overproduction and unsound production practices. Many of the wells in that field are rumored to be already producing half water. The collapse of Ghawar would send a shock around the world which would announce the end of the oil age.

So it would seem that the old Chinese curse is being fulfilled, and we are living in interesting times. It is difficult to foresee all the factors which might play into our future. Without a doubt, we are living through a singular period in history such as has never happened before, and will never happen again.

GM's plan to cut 25,000 jobs and close several plants in the US is making big news. But once again, the media are reporting this from the perspective of investors, not workers. Wall Street was pleased with this news, though they would like to see even deeper cuts. To judge from the media and Wall Street, nobody really understands what is happening here.

GM is culling itself in preparation for the irreversible decline in oil production and ensuing economic havoc. The company has been looted, and now it will begin a long process of downsizing. Forget about the hydrogen fuel cell vehicles, forget about the hybrids. That is just a smokescreen to prevent Wall Street from panicking while the company is fleeced and the workers are given the pink slip. The simple fact is that it requires too much energy to sustain an automobile culture, not just for fuel to burn in the automobiles, but for the production of those vehicles, and for the infrastructure to drive them on.

We fully expect that in the upcoming years, GM will announce more layoffs and more plant closings. As we move beyond the peak in global oil production, GM will trim itself right down to the bone. And the price of the automobiles it does produce will rise as a multiple of oil prices, whether they are diesel vehicles, hybrids, or fuel cell powered.

It will be interesting to see what happens with their business in China. As GM slashes their American workforce and closes up plants in this country, will they make any cuts in China? This is highly unlikely. However, if they increase their presence in China, it could be a sign that the major financiers are looking for China to come out on top in the struggle for post-peak position.

It remains to be seen how the UAW will react to all this. The chances are it will allow its workers to go down with little more than a whimper. Workers in the US need to remember their labor history and rise up. It was not through the magnanimity of employers that we have made all of our gains, but through hard struggle and bloodshed. Will we meekly allow everything to be stripped away from us without so much as a single wildcat strike? We owe it to the ancestors who fought for our rights, and we owe it to our children. When GM announced mass layoffs in Europe, the workers there went on strike. Let us take a cue from them.

This goes double for employees of the airlines. The major airlines are also becoming early casualties of peak oil. And to cut off ballast so that they can continue to fly for a while longer, they are eager to renege on their pension plans. It's as though aging employees of the airlines are to be pushed out of the door of flying planes without a parachute. Next they will ask passengers to fly their own planes.

Be sure to keep GM and the airlines in mind as you read the further installments of Dmitry Orlov's series Post-Soviet Lessons for a Post-American Century. He has some very interesting things to say comparing how Russian companies handled economic crash in contrast with what will happen in the US.

The International Energy Agency (IEA) has issued a 130 page report titled Saving Electricity in a Hurry - dealing with temporary shortfalls in electricity supplies. Some people, on seeing the title of this report, have thought that the IEA is admitting that our electrical infrastructure and supply are heading for a crisis. This is not what the report says.

This report is issued as part of the IEA's mandate to provide policies for energy security, economic growth and environmental sustainability. Power outages throughout the world over the past few years have no doubt provided the stimulus for this study. But the IEA is in no way worried about major, irresolvable crises in energy production. They have not backed away from their view that hydrocarbon depletion is a distant problem which will be resolved by new energy sources before it ever impinges upon the economy.

Instead, the IEA is concerned with temporary shortfalls where an end to the shortfall is in sight, the infrastructure remains intact, yet the shortfall is more serious than can be handled through the utility's standard Demand Response program. The report examines previous shortages in the US, Sweden, Japan, Brazil and New Zealand to see how these countries dealt with their shortages by immediately cutting consumption up to 20%.

The report suggests a number of conservation tactics which people can use: re-setting thermostats, switching off non-essential lighting, switching off office equipment or placing it in "sleeper" mode, installation of energy efficient lighting, and replacing old equipment (including refrigerators) with newer, energy efficient models. The report also offers cute but dubious suggestions such as having fast food joints print energy saving tips on their packaging (though the energy expense of producing this wasteful packaging is not discussed). I am not saying that energy conservation is unimportant. But by itself, energy conservation will not avert a crisis.

Nowhere in this report is there a mention of anything as serious as a Natural Gas Cliff.

The only major recommendation is an overhaul of electrical infrastructure. The main thrust of the report is the need for an advertising blitz to get consumers to conserve. As if we can avoid an energy crisis with a cute advertisement and a funny joke, and by turning off that porch light. This while severe outages continue to pop up around the world, most recently in Russia, where the official response was to go out and arrest someone they could blame for the outage.

So we march on toward the end of the hydrocarbon era with our denial securely intact.