From a peak oil perspective, the last couple of weeks seemed pretty quiet. Oil prices continued to drift down into the $50s amid gloats from peak oil skeptics. The Dow Jones climbed to all-time highs, in part, due to optimism the "oil bubble" had finally burst and there would be lower inflation and lower interest rates ahead. Alaskan oil production returned to normal levels and financial analysts spoke enthusiastically about the "new frontier" of deep-water oil. The geopolitical world was quiet. Iran, Lebanon, Nigeria, and Venezuela— everywhere one looked there were no imminent threats to oil supplies.
Even the SUV dealers were in a better mood with commercials prattling on about the end of high oil prices and the great deals could that could be had.
However, events move quickly these days and during the last couple of weeks there were a number of new developments that may, in the long run, turn out to be more detrimental to our future well-being than we have yet perceived. Some of these developments took place well below the radar of the popular media. Others were well reported, but it will be awhile before their import sinks in.
Currently, the most important oil story is the impending OPEC production cut of 1 million barrels a day (b/d). This plan, however, has been in the works for the last two weeks without an official announcement, thus leading to suggestions that OPEC cannot reach an actual agreement on a production cut. Several OPEC members —Iran, Venezuela, Indonesia, and Nigeria— are already producing well below their quotas. As these countries are straining to maintain production, many doubt they would actually cut exports by an amount necessary to drive up prices.
Other OPEC members are currently above their quotas and could easily afford some temporary revenue loss. Saudi Arabia, Kuwait, Qatar, and the UAE, however, are highly dependent on the US for their security in a very dangerous part of the world. Washington is adamantly opposed to OPEC cutting production at this time as higher gas prices is the last thing the Administration wants to see prior to the mid-term elections.
Thus, current efforts at a quota cut may or may not result in actual production cutbacks and higher prices, at least for the next month. What is interesting in all this is that there seems to be the beginnings of a consensus within OPEC that $60 a barrel is the new price floor to be defended by quota cuts. There are, however, major implications of a $60 a barrel price floor on oil. While $60 oil may sound great to Americans, prices like this effectively make petroleum products unaffordable in many poorer countries. For people living in these countries, the oil age is nearly over.
The next big development on the horizon with potential to damage Middle East oil exports is still Iranian nuclear enrichment. The sanctioning Iran situation was further complicated earlier this week when the North Koreans detonated their first nuclear bomb. This unwelcome test naturally got nearly every country in the world, especially China, very upset. The UN Security Council is thrashing around trying to get an agreement on just how badly it can punish Pyongyang short of going to war.
Last week, the five permanent members of the UN Security Council and Germany met in London and agreed in principle to sanction Iran. In the wake of the North Korean nuclear test, Russia and China, which previously have appeared more interested in maintaining good trade relations with Teheran than in thwarting Iranian nuclear ambitions, may come to look at the situation in a new light. In the meantime, Tehran continues to warn that sanctions will lead to dire consequences.
Something about the Iraqi situation is bound to change soon. As chaos and casualties steadily increase, there seems no future other than all out civil war. In recent days, however, the voices in the US calling for a change are becoming louder and recent polls are suggesting that the Bush Administration could face a major defeat over Iraq in next month's elections.
The Iraqis are currently producing about 2 million barrels of oil a day, down from 2.2 million in August. It is increasing difficult to believe that Baghdad will be able to produce such quantities of oil much longer. If the government should collapse completely, then the US and her allies would be faced with very difficult choices: soldier on amidst greatly increased chaos for years or decades; abandon the cities to sectarian slaughter; pull out of the cities and defend only the Iraqi oil fields; pull back to defend Kuwait, Jordan, and Saudi Arabia from the on slot of refugees and sectarian fighters.
None of these prospects bode well for oil exports from the region. At a minimum, it is difficult to believe that Iraq will be exporting much oil a year or so down the line. In the best case, only Iraqi oil production goes. In the worst case, a wider sectarian conflict involves more countries and more oil production. It is hard to be optimistic.
Our final development is the marked increase in Russia's efforts to keep the International Oil Companies out of its projects. Not only has Moscow halted Shell's work on the Sakhalin-2 project, it has also severely restricted Exxon's planned production from Sakalin-1. Now Moscow has announced that it will develop the massive Shtokman natural gas field by itself.
All of these are technically difficult and expensive projects. While there is little doubt the Russians can ultimately bring them into production, there will likely be lengthy delays. The Sakhalin projects are to produce major amounts of oil for the Asian market, while Shtokman was to supply large quantities to LNG to the US in the next decade. Neither of these appears to be good prospects to produce as much or as soon as was planned.
While we have been enjoying $2 gasoline and new highs on Wall Street this fall, there have been forces at work that make the future, perhaps the immediate future, look a lot less bright.