Oil price - $200?
By James Quinn,
a certified public accountant
and a certified cash manager
Emanuel’s famous quote regarding the current financial crisis, "Never
let a serious crisis go to waste...it's an opportunity to do things
you couldn't do before." was ignored last summer when oil prices
reached $147 a barrel. The Obama administration has taken advantage
of the financial crisis to ram through their socialist agenda which
will add trillions to the National Debt. It will stimulate unions,
bureaucrats, government employees, and defense contractors. It will
do nothing to address the looming energy crisis which will sweep
over the country shortly. Again, politicians and pundits will be
shocked and astonished when oil soars. They will vilify oil companies,
OPEC, and the dreaded speculators. They ignore the old fashioned
supply and demand equation that even a dimwitted Congressman should
be able to comprehend.
Instead of addressing the crucial issues that have led to the U.S.
being dependent on foreign oil to the tune of $500 billion per year,
Congress decided to spend your tax dollars on the following vital
items (compliments of Casey
- $200,000 for tattoo removal for gang members in California.
- $98 million for a Coast Guard ice breaker closing an ice-breaking
gap. (what about global warming)
- $950,000 for a bikeway in Kentucky.
- $2 million for astronomy awareness in Hawaii.
- $190,000 for a Buffalo Bill Historical Center.
- $650 million for the digital to analog converter box program.
- $1.8 million to study the effect of swine odor on the environment.
(rumor has it the study will be conducted in the halls
When oil prices collapsed from $147 a barrel in the summer of 2008
to $35 a barrel in January, American drivers, Congress, government
bureaucrats, and the mainstream media refocused on other more pressing
issues like executive bonuses, Michele Obama’s wardrobe, and the
tax law knowledge of Obama’s cabinet. The attention span of the
average American is shorter than a gnat’s. As they text and twitter
through life, the energy infrastructure continues to rust away,
decades old wells are closer to depletion, and alternative energy
projects have been scrapped by the thousands. Peak oil likely occurred
between 2005 and 2009. The production of oil will now embark on
a long slow decline. The world is not prepared.
The history of energy in the United States is really only 160 years
old, with coal being utilized starting in 1850 and oil only becoming
a viable fuel beginning in 1900. Essentially, the world has found
lakes of oil under the crust of the earth. If you pump 82 million
barrels of oil from a lake per day, the lake will eventually go
empty. New lakes are found every year, but the easy to get to lakes
have all been found. The new lakes are deep under the sea or in
tar sands and shale deposits. These sources take as long as a decade
to reach and billions of infrastructure investment. With petroleum
in permanent decline, the U.S. needed to have a plan 20 years ago.
Source: Department of Energy
Matt Simmons, the brilliant energy analyst and author of Twilight
in the Desert, recently told Reuters, "We are three,
six, maybe nine months away from a price shock. We are not talking
about three to five years away -- it will be much sooner. These
prices now are dangerously low. The lower prices fall, the less
oil will be produced and the greater the chance of an oil spike."
In this scenario, low oil prices will continue to take oil fields
out of production and reduce exploration. Once prices recover, companies
will have trouble gearing back up due to the credit crunch, resulting
in production increase delays.
Simmons describes what will happen. "Unless oil demand falls
by 10 or 15 percent per annum, which it is not going to do, then
we don't need to wait for oil demand to come back before we have
a supply crunch." This is on no one’s radar.
When pundits on CNBC speak authoritatively about peak oil being
a fallacy, their misleading blather is believed by supposedly intelligent
people. They expound that we are not running out of oil. There are
billions of barrels left inside the earth. Peak oil does not mean
that we are in imminent danger of running out of oil. Peak oil is
the point in time when the maximum rate of global petroleum extraction
was reached, after which the rate of production enters terminal
decline. The aggregate production rate from an oil field over time
usually grows exponentially until the rate peaks and then declines—sometimes
rapidly—until the field is depleted. This concept is derived from
the Hubbert curve, and has been shown to be applicable to the sum
of a nation’s domestic production rate, and is similarly applied
to the global rate of petroleum production. M. King Hubbert created
and first used the models behind peak oil in 1956 to accurately
predict that United States oil production would peak between 1965
Source: Department of Energy
The depletion of existing sources is more rapid than any new sources
that can be brought online. Production in the United States is in
relentless decline. The view of Alaskan oil production from 1975
until today clearly shows how rapidly oil fields can decline. What
has happened in the United States is now happening on a worldwide
basis. The U.S. Department of Energy published a report from some
of the top energy minds in the world in 2005. The lead author Robert
Hirsch produced a comprehensive report on the peak oil issue called,
Peaking of World Oil Production: Impacts, Mitigation, and
Risk Management. The conclusions were frightening. What
has the U.S, government done in response? NOTHING
The overwhelming majority of industry petroleum geologists, scientists,
and economists who worked on the report projected global peak production
being reached between 2005 and 2010. The report’s disturbing conclusions
are as follows:
World oil peaking is going to happen, and will likely be abrupt.
- Oil peaking will adversely affect global economies, particularly
those most dependent on oil.
- Oil peaking presents a unique challenge (“it will be abrupt
- The problem is liquid fuels (growth in demand mainly from transportation
- Mitigation efforts will require substantial time.
- 20 years is required to transition without substantial
- A 10 year rush transition with moderate impacts is possible
with extraordinary efforts from governments, industry, and
- Late initiation of mitigation may result in severe consequences.
- Both supply and demand will require attention.
- It is a matter of risk management (mitigating action must come
before the peak).
- Government intervention will be required.
- Economic upheaval is not inevitable (“given enough lead-time,
the problems are soluble with existing technologies.”)
Source: Hirsch Report
Considering that global oil production peaked or is peaking between
2005 and 2010, we are destined for the 3rd scenario of severe consequences.
Economic upheaval is now inevitable. It is the American way to not
do anything until it is too late. The Hirsch Report urges a crash
program of new technologies and changes in manners and attitudes
in the US and as well implying more research and development. The
urging has gone unheeded. The worldwide global recession is the
only reason you are not paying $5.00 a gallon for gasoline today.
Supply did not increase, demand leveled off.
World demand “plummeted” from 87 million barrels per in early 2008
to 84 million barrels per day in early 2009, a full 3.5% decline.
If the world economy levels off and resumes growth, demand will
immediately surpass previous levels. The problem is that production
has peaked and will likely drop below 80 million barrels in 2010.
When demand is rising and supply is declining, only one thing can
happen – higher prices.
The peaking of hydrocarbon supply is vital not just to our country’s
future, it is enormously critical to our global economic conduct.
Optimists argue that oil has not peaked, and will not peak for decades.
They base this on widely held beliefs, including the extent of the
world’s energy resource endowment, the ability of technology to
recover larger amounts of oil once left behind, the lag time between
high oil prices and the ramped-up drilling they kindle, the remarkable
amount of unconventional oil that has become commercially feasible
because of high prices, and undetermined technology advancements.
Those who ridicule peak oil, think the term means "running
out of oil" instead of the true definition: "oil production
can no longer grow."
The optimists dismissed the fact that oil prices reaching $147
a barrel had anything to do with constricting market fundamentals.
Instead, they argued that lofty crude prices were merely a by-product
of a weak dollar, hedge fund speculation, geopolitical trepidation,
downstream log jams, the Iraq war, Nigerian political turmoil and
the craving for high prices within OPEC, which kept enormous spare
capacity shut in. When prices skyrocket again, these optimists will
produce new excuses. Facts are facts. Easily found cheap sources
of energy are in terminal decline.
Matt Simmons explains the long and winding road to our current
- Between 1970 and 1979, world oil demand grew from 47 million
barrels per day to 65 million barrels per day, a jump in 10 years
of an astonishing 18 million barrels per day. This is how we ate
up the world’s spare capacity and at the same time caused U.S.
supply to peak. Thus, the price of oil skyrocketed.
- From 1979 through 1983, demand fell four straight years, retreating
back to 59 million barrels per day. Most of this change came as
oil ended its role as a prime feedstock for power generation.
This probably would have happened even if oil prices had not gone
so high, as the world was finally rolling out nuclear fuel.
- Once demand hit bottom in 1983, it quietly began to grow again,
though the growth was masked by the beginning of a prolonged collapse
of oil use throughout the USSR. Nevertheless, total world demand
grew from the 59 million base in 1983 to 69 million in 1994, an
increase of 10 million barrels per day. This increase, interestingly,
came at a time when most of the oil pundits were wringing their
hands, declaring that oil demand was so stagnant that low oil
prices were the new world order.
- In 1995, global oil demand finally edged over 70 million barrels
per day for the first time in history. Between 1994 (the last
time it was under 70 million barrels per day) and the end of 2008,
demand grew to 86 million barrels per day – a jump of 16 million
barrels per day in 13 years. This explains why we used up every
last pocket of spare productive capacity and ran out of drilling
Saudi Arabia is Lying
Saudi Arabia has been claiming that they are capable of ramping
up oil production from its many oil fields. The chart below tells
a different story. The largest Saudi fields have entered permanent
decline. The largest field in the world, Ghawar, was discovered
in 1948 and peaked at 5.6 million barrels per day in 1980. It now
produces 5.0 million barrels per day. The 3rd largest field in the
world, Safaniyah, was discovered in 1951 and peaked at 2.1 million
barrels in 1998. It now produces 1.3 million barrels per day. One
third of global oil supply comes from 20 large fields discovered
prior to 1970. They have all peaked. 94% of global supply comes
from 1,500 wells. If Saudi Arabia had the ability to ramp up production,
they most certainly would have in 2008 when prices rose over $100
a barrel. They did not, because they could not.
Source: Oil Drum
“World reserves are confused and in fact inflated. Many of
the so-called reserves are in fact resources. They’re not delineated,
they’re not accessible, and they’re not available for production.”
Sadad I. Al Husseini, former VP of Aramco, October 2007.
Worldwide reserves peaked in 1980, when production first surpassed
new discoveries. Total worldwide reserves are reported to be 1,200
billion barrels. Much of the increases in reserves since 1980 are
lies. Al Husseini argues that 25% of the proven reserves in the
world are speculative and not accessible. The following chart tells
a fascinating story. Amazingly, each of these OPEC countries had
dramatic leaps in their proven reserves, with Saudi Arabia having
a 50% increase in one year with no major new discoveries. These
self reported figures are not audited or verified in any way. Since
production quotas are based on total reserves, the higher your reserves,
the bigger your piece of the pie. Since 1988, Saudi Arabia has pumped
at least 44 billion barrels of oil, but still has proven reserves
of 264 billion with no major new discoveries. If you believe that,
I have a package of 1,000 subprime mortgages that is rated AAA I’d
like to sell you.
Dr. Ali Samsam Bakhtiari a former senior expert of the National
Iranian oil Company, has estimated that Iran, Iraq, Kuwait, Saudi
Arabia and the United Arab Emirates have overstated reserves by
a combined 320-390 billion barrels, and "As for Iran, the usually
accepted official 132 billion barrels is almost one hundred billion
over any realistic estimate". Petroleum Intelligence
Weekly reported that official confidential Kuwaiti
documents estimate reserves of Kuwait were only 48 billion barrels,
half as much as their reported 101 billion barrels. Essentially,
the amount of oil reserves in the world is much lower than people
think. The good news is that OPEC may have less clout in the future
than they have had for the last 40 years.
Mexican Hat Dance
I’m sure that not many people in the U.S. realize that we get
more oil from Mexico than Saudi Arabia. We are dependent on Mexico
to supply us with 600 million barrels of oil per year. Without this
supply, there would be shortages and much higher prices. Tijuana,
we have a problem. Within five years, we will be getting ZERO barrels
of oil per day from our neighbor to the south. Mexico has the distinguished
honor of having a government more inept and short-sighted than our
own. Hard to do.
Virtually all of the oil supplied from Mexico comes from the 2nd
largest oil field in the world, Cantarell. It was discovered in
the shallow waters of the Gulf of Mexico in 1977. It is run by the
state owned oil company, Pemex. It held 17 billion barrels of oil.
The Mexican government took the oil revenues and funded their wish
list of programs in the country. Pemex has provided 40% of all revenues
for the state. The state became so dependent they had Pemex build
a nitrogen injection project on top of the well to push the oil
out faster. It worked. In 2004, the well was providing 2.5 million
barrels per day. It is now in irreversible decline at a rate of
15% per year. By 2012, it will only be producing 500,000 barrels
Mexico has ridden this pony hard. They have not done any serious
exploration in the Gulf of Mexico in 30 years. A newly discovered
deep water well takes 10 years and billions of investment to bring
on line. There is no doubt that Mexico’s oil output will collapse
in the next five years. They will not be capable of exporting any
oil to the U.S. With the rest of the world having no spare capacity
and demand higher than 2008, prices for gasoline in the U.S. will
soar. In the meantime, we will ponder higher gas mileage requirements,
not allow offshore drilling, and make no effort to convert our transportation
fleet to natural gas. Congressmen will be outraged and indignant
at the oil companies, when the writing was on the wall for a decade.
Crisis Part II
The flowchart below gives an extremely clear picture of what happened
in the last year and what will happen in the next few years. The
financial crisis and the energy crisis were intertwined and will
continue to feed upon each other. Worldwide oil production peaked
between 2005 and 2009. This, along with refinery shutdowns, hurricane
related issues, and hedge fund speculation led to oil reaching $147
a barrel. This was the straw that broke the camels back and helped
accelerate a downward spiral for consumers. The combination of plunging
home values, retirement savings being cut in half and gas prices
doubling led to the worst recession since the 1930’s. The dramatic
worldwide slowing caused by American consumers not going to Malls
reduced demand enough to make the speculators go running for the
hills. Oil prices plummeted 76% in a couple months to $35 a barrel.
Now we are about to enter phase two of this comedy of errors. Again,
the clueless leaders of our country will be taken by surprise. They’ve
It may sound like sacrilege, but prices below $50 a barrel are
dangerously low. The crash in gasoline prices to below $2.00 a gallon
has led to demand in the U.S. rising 6% above the demand in September
2008. Our American twitter society has already forgotten the $4.00
a gallon prices. Hybrids are rotting on car dealership lots. Everything
that has happened since the price collapse will contribute to Crisis
- OPEC cut supply by 4.2 million barrels per day from levels in September
- Projects that were viable at $80 a barrel have been scrapped. Ethanol and Tar Sands are only profitable above this level. Natural gas wells are being capped as prices plunged from $13 to $4.
- Worldwide rig counts have plunged from 3,500 to 2,700 in a matter of months.
- Existing wells throughout the world continue to decline at ever increasing rates.
- The Obama administration will restrict the expansion of coal powered plants, construction of new refineries and new drilling in the U.S.
- The enormous stimulus being rolled out throughout the world will generate increased energy demand as supply remains restricted.
- The banking crisis has resulted in no financing for energy projects that could relieve the long-term supply issues.
- Energy companies have been laying off skilled workers as their business has plummeted. When demand resumes, these workers won’t be there.
Most people do not understand that all prices are set at the margin.
There are 75 million houses in America. Only 4 to 5 million homes
are sold per year. Therefore, 5% to 6% of the homes in the U.S.
set the price for the other 70 million homes. This same concept
applies to the last barrel of oil. When worldwide demand exceeded
worldwide supply in late 2007 and early 2008, those last barrels
of oil set the price. This explains why those last barrels of oil
set the price above $100 a barrel. It wasn’t greedy speculators
and evil oil companies.
Source: International Energy Agency
It is clear that supply has stayed in the range of 86 million barrels
per day while demand has dropped to the range of 84 to 85 million
barrels per day. If oil demand rises by 3%, demand will outstrip
Source: International Energy Agency
$200 Oil Will Arrive
When I was ten years old my parents told me to never touch our
stainless steel sink and the electric light switch above the sink
at the same time. I couldn’t resist. I tried it and got knocked
on my ass. I never did it again. Americans are a different lot.
Last year we got knocked on our ass by $4.00 gasoline. Instead of
learning, we have sauntered back to the kitchen sink and we’re reaching
up for the electric light switch. I wonder what is going to happen
Americans are used to making tough choices. They have made choices
between the Hummer H3 (13 mpg) and the Hummer H2 (8 mpg). They’ve
made choices between a BMW 650i (16 mpg) and a Mercedes S600 (13
mpg). The coming energy crisis will lead to choices between food
or fuel for many people. The coming crisis is as clear as the housing
bubble. Anyone with half a brain could see that home prices would
need to fall 30% to 50% to get back to equilibrium. Therefore, no
one in Congress, Wall Street, or CNBC saw it coming. Total world
oil supply is in a permanent decline. Oil demand will continue to
rise. Only a half wit would argue that prices will not rise dramatically
in the coming years. Turn on CNBC to get the half wit view of oil
Now the bad news for Americans; we make up 4.3% of the world’s
population and consume 26% of the world’s oil. Europe makes up 6.8%
of the world’s population and consumes 11% of the world’s oil. After
the oil shock of the 1970’s Europe decided to dramatically increase
taxes on gasoline. The high cost of gasoline forced people to buy
smaller fuel efficient cars. Today in Germany, their cars average
44 mpg, while in the U.S. our cars average 22 mpg. Whether Europe
spent the taxes wisely is another question, but they did change
behavior. No crude oil refineries have been built in the United
States since 1976. During that time, hundreds of ethanol refineries
have been built. It requires more energy to produce ethanol than
ethanol produces. The United States has between 250 and 300 years
of a coal supply. That is more than the amount of recoverable oil
contained in the entire world. We will not utilize this resource
because environmentalists say it is bad. Congressman Gary Miller
describes the U.S. response to the 1970’s oil shock.
In 1973, America imported 30 percent of its crude oil needs.
Today, that number has doubled to more than 70 percent. Gas prices
are as high as they are now in part because we've had no comprehensive
national energy policy for the past few decades.
The peak oil shock that is coming will affect the United States
more dramatically than any other country. Are you prepared for $5.00
a gallon gasoline? We are 20 years too late to stop this from happening.
The American way of kicking all tough issues down the road is about
to kick us in the ass, and no one is preparing Americans for the
result. Happy talk and confidence building exercises will not solve
the problem. We are not in control of our destiny. Our supply is
drying up. More drilling will not work. Higher fuel efficiency standards
will not work. Congressmen and TV pundits will posture, expound,
skewer oil executives on TV, and get red in the face, but they have
failed the American public again. The social upheaval that could
occur from fuel shortages and outrageous prices will be ugly. Most
Americans live in suburbs far from work. Our food supply requires
trucks to deliver to our stores. The U.S. military consumes 400,000
barrels of oil per day and spends $13 billion of your tax dollars
per year to keep their machines functioning. War for oil becomes
more likely in that environment. Is that a farfetched scenario?
The population of the world will continue to rise. The United States
has no control over that fact. Developing countries will grow more
prosperous. People utilize more fossil fuels as they become more
prosperous. $2,500 cars are now becoming available in China and
India and the rest of Asia. In a Chinese car ownership survey, 96%
of respondents said they paid cash for their cars. How un-American
like. Imagine if GMAC could gain a foothold in China. More than
20,000 new cars per day are being sold to Chinese citizens who have
never owned an automobile before. This is massive new demand being
created for gasoline. China now has a middle class estimated at
nearly 300 million people. 37% of people driving in China today
did not know how to drive 3 years ago.
Oil will continue to be discovered, just not enough to keep up
with demand. The pie chart below paints a disturbing picture. Only
30% of total oil reserves are light sweet crude. The other 70% is
difficult and costly to bring to market. Few U.S. refineries can
convert heavy crude into gasoline. Oil sands require massive amounts
of water and natural gas to convert it into usable oil. The oil
remaining to be discovered will be in deepwater wells. It takes
at least 10 years to bring a deepwater well online. We are losing
the race with time.
The only two people sounding the alarm have been Matt Simmons and
T. Boone Pickens. Mr. Simmons warns that the best energy geologists
and engineers are now retiring, with no one to take their place.
The global oil and gas system infrastructure is rusting away and
falling apart. The cost to rebuild our global energy infrastructure
would be close to $100 trillion and would require 10 to 20 million
workers. This would not be wasted money. Mr. Pickens argues that
by investing $1 trillion to build wind facilities in the corridor
from Texas to North Dakota we could produce 20% of the nation’s
electricity by 2020. This would free up our vast natural gas resources
to be used as fuel for truck fleets and ultimately automobiles.
The ideas of both men would create jobs in America and make us less
dependent on Middle East oil.
None of these ideas will avert $5 gasoline in our near future.
They may avert $10 gasoline and potentially a resource instigated
World War 3. The choice is ours.
Published - May 2009