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Rahm 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 Research):

  • $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 of Congress)

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.

Peak Oil

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 and 1970.

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 and revolutionary”).
  • The problem is liquid fuels (growth in demand mainly from transportation sector).
  • Mitigation efforts will require substantial time.
      • 20 years is required to transition without substantial impacts
      • A 10 year rush transition with moderate impacts is possible with extraordinary efforts from governments, industry, and consumers
      • 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.

Go to Part 2 >>

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Source: $200 Oil Is Coming While We Waste a Perfectly Good Crisis (Part 1)