Oil and gas prices are likely to remain high at least through 2007, according to a remarkably clear-headed explanation in the May 3 issue of the Department of Energy’s “This Week in Petroleum” report (click here for the page with price charts, which is not a permalink).
Six years ago crude oil cost twenty to thirty dollars a barrel; on Tuesday it was selling for $74.62 a barrel. The DOE attributes the rise to (1) growth in demand for oil, “particularly in China and the United States,” (2) a drop in surplus production capacity, and (3) “weather and geopolitical risks.” The DOE doesn’t think any of the three are going to abate any time soon.
My simplified way of worrying about oil has always been to wonder when it’s going to run out. But the experts seem to worry instead about surplus production capacity. In 2002, the world was capable of producing 5.6 million barrels a day more oil than it was consuming. Now it can produce only about 1 million barrels more. This is a bit unsettling, because it means there’s not a lot of wiggle room, should something go wrong. As the DOE puts it, “because there is very limited surplus capacity, concerns about potential or existing supply problems in Nigeria, Iran, Iraq, Venezuela, and elsewhere, as well as the threat of more hurricane damage this summer, have exacerbated price increases.”
The absence of any give in the system would also seem to confirm the suspicion of Matthew R. Simmons that Saudi Arabia’s oil reserves have peaked. The Saudis keep the size of their oil reserves secret; Simmons made his guess after reading through reports on individual wells, which it hadn’t occurred to them to censor. If prices rise, Simmons’s guess looks right. The logic, not original to me, runs thus: America responded to the oil crisis of the 1970s by economizing on oil and switching to other fuel sources (especially natural gas) where possible. After a relatively brief (but very painful) spike in prices, we all started driving Hondas and their ilk, and oil prices then dropped for over a decade—partly because of the discovery of oil in the North Sea, but partly because of diminished U.S. demand. The thinking is that the Saudis learned a lesson: don’t make American consumers nervous, if you can possibly help it. They therefore are thought to have no wish today to end, or even discourage, America’s addiction to SUVs and other profligate petrochemical habits. If prices are rising, then there are two possible explanations: Either the Saudis no longer care about keeping America a gas guzzler, because they’re betting China and India will keep prices high even if America tightens its belt, or they have lost control of supply—can no longer add to the oil supply at will—because their wells have reached the peak of their capacity, and from now on will decline. The decline will be slow, at first . . .
The political gamesmanship of the last week or two—the $100 rebates, suspension of gas taxes, and struck-down-en-route-to-Damascus calls for new fuel efficiency standards—are silly. The opportunity for leadership on the issue was a few years ago, at the latest. Now there’s really no need for the government to do anything. As the DOE suggests, gas prices won’t be dropping in the foreseeable future, so consumers are now going to stampede to more efficient cars, regulations or no.
They’ll probably crush the U.S. auto industry underfoot, as they go. Who in their right mind would buy an SUV now? Whether there will be consequences more dire is beyond a literary critic. I read James Howard Kunstler’s The Long Emergency and a few too many NEXIS articles on the topic last fall, and ended up in a numb, Dr. Strangelove-esque aporia. Whether the tapering off of oil will be apocalyptic or merely inconvenient seems to hinge on an argument between economists and ecologists about this question: Is oil special? The economists think oil will behave like other commodities. Markets will soften the impact of oil’s waning, because as supplies dwindle, prices will rise, and people will have new incentives to conserve old energy sources and find new ones. The ecologists claim, however, that the important thing about oil, functionally, is its cheapness and abundance. Once the price rises, we may find other sources of energy, but nothing else will make life as easy for us, because there’s nothing else like it on the planet. Everything will become a little harder, at least until we get all the new nuclear plants running smoothly. Time will tell. It isn’t auspicious that worldwide socioeconomic turmoil followed the oil shock of the 1970s, but worldwide socioeconomic turmoil is always, as they say, overdetermined. Maybe it was just Carter’s sweater.