Am I an energy speculator? In light of recent letters and op-ed pieces in the Daily Record, a primer on energy seems timely.
The world's petroleum consumption and production are just about balanced now, at around 86.5 million barrels per day (mbpd). Unlike in 1973-1982, when artificial supply constraints boosted prices, now the taps are mostly all wide open; but production levels are stagnant, despite record prices. The graph lines of consumption and production have relentlessly converged since the early 1990s, causing today's nasty prices. Unfortunately, monthly world production apparently peaked around June 2006 and has not, despite high prices, surpassed those levels since. Could it? Maybe, but as time elapses, Peak Oil theorists (who tell us that world production will peak due to geologic limits, then start to decline) increasingly appear to be on target.
I wish it weren't so, but it's Economics 101-- static supply plus rising world demand equals higher prices. This year, China will produce around 10.5 million new cars, most going to first time car owners. Imagine this one impact on demand. India's a similar case. Oil exporters' domestic consumption also rises, which leaves Russia and Mexico, among others, with less oil to export. In fact, Mexico's president recently indicated in a speech that exports could cease by 2012.
The United States consumes around 20 mbpd, or 24 percent of the world's total daily production of petroleum, and about half is imported. While discretionary driving is down, a high demand for fuel is still built into our economy; we can't cut consumption rapidly without causing economic dislocation and hardship (e.g., cold homes or empty shelves this winter) . However you slice it, with just 4 percent of the world's population, we consume 24 percent of the liquid fossil fuels. I leave the ethics of this to your individual consciences.
Be skeptical of any discussion of oil prices that fails to mention depletion. In the end, geology, not economics, determines the amount of oil that can be supplied.
Wall Street pundits often ignore depletion, but its effects are critical. While 86.5 mbpd (annualized basis) is now produced and consumed, the productivity of mature oil fields slips ever downward at a combined rate around 3.5 mbpd per year. To put it another way, every year, the world's producers collectively have to bring 3.5 mbpd of new supply from new finds online, just to maintain existing production levels!
Want specifics? As predicted, U.S. oil production peaked in 1972 and has declined ever since. The North Sea fields tipped more than two years ago. Mexico, one of the USA's key suppliers, has seen its huge Cantarell field peak and rapidly decline, despite enhanced recovery techniques. So production declines from depletion appear to be offsetting new finds, drill as we may wish.
Recent finds are smaller, expensive, offshore, or in nations much less friendly to U.S. interests than Canada and Mexico -- so frantic drilling won't cut prices anytime soon. Tar sands and oil shale hold lots of oil but require high energy input to yield usable fuel, so don't expect it to be cheap.
Some blame tight supply on underinvestment in the industry in the 1980s, when oil prices crashed. Others point to the Reagan era cancellation of federal alternative energy subsidies. Either way, we're behind the eight ball now.
Unless there's a fleet of loaded tankers anchored off Bayonne, speculation is not affecting prices that much; but political tension is impacting supply -- just not as much as depletion is. The "shut-in" (i.e., oil fields not being pumped) of Iraqi oil is around 1 mbpd, and Nigeria is down 500,000 bpd. If 1.5 mbpd magically hit the market, prices would ease before ever-rising world demand and ongoing depletion raise prices back up again next year.
Meanwhile, depletion and rising demand continue. Indonesia, no longer an exporter, left OPEC last month. It's unclear whether even Saudi Arabia can increase production substantially. In this election year, beware of any politician promising energy "independence" for the United States: 35 years after the 1973 oil embargo, we import more oil than ever.
Over the past four years, I've based my decisions on the expectation that oil prices would rise. Does that make me a speculator? If so, I have lots of company, from major oil firms to start-up alternative energy companies, from T. Boone Pickens to former CIA chief James Woolsey. For more facts, I recommend the following Web sites:
And many others.
Geoffrey Thomas is a resident of Madison.