A: “Who knows?” and “It doesn’t really matter.” Much higher gasoline prices that are sustained for a long, long time are now inevitable.
The fundamentals in the oil market are that we are in the beginning stages of peak oil. Supply can no longer keep up with demand, which keeps soaring even in the face of record prices. The U.S. Energy Information Administration has the surprising statistics [PDF]:
Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development (OECD) was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels … Total world oil consumption is expected to grow by a little over 1 million bbl/d during the second half of 2008 and by almost 1 million bbl/d in 2009 compared with year-earlier levels.
That’s right, even after “the largest half-year consumption decline in volume terms in the last 26 years” in this country, global demand continues to grow 1 million bbl/d each year. Why?
Over the next year and a half, lower OECD consumption is expected to be more than offset by continued non-OECD consumption growth, led by China, the Middle East, Latin America, and India.
Yes, speculation overextends every move in market price — but why shouldn’t people speculate that oil prices will be much higher in the future? That seems like a very solid bet. And yes, a rising dollar can temporarily help lower prices — but we are headed for a $10 trillion cumulative trade deficit just in oil between now and 2020. So which way do you think the dollar is headed long-term?
Ultimately only much, much greater demand destruction can stop the inexorable rise of oil prices. And that obviously requires much higher prices than what we’ve seen in the first half of this year!
Global consumption is now about 85 million barrels a day. Until the last few years, the United States was the major contributor to rising oil demand. From 1995 to 2004, China’s annual imports grew by 2.8 million barrels a day. Ours grew 3.9 million. Since then, growth has come mostly from China, India, the Middle East countries themselves, and other developing countries that subsidize their fuel.
The world just can’t deal with oil demand rising one million barrels a day or more year after year. In January, Jeroen van der Veer, chief executive officer of Royal Dutch/Shell, e-mailed his staff that the world will peak in conventional oil and gas within the decade. He wrote: “Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand.” It used to be unheard of for oil executives to talk about limits to oil production. Now it happens all the time.
John Hess, chairman of Hess Corp., a global oil and mineral exploration company, said recently, “An oil crisis is coming in the next 10 years. It’s not a matter of demand. It’s not a matter of supplies. It’s both.” In October, Christophe de Margerie, CEO of French oil company Total S.A., said that production of even 100 million barrels a day by 2030 will be “difficult.” In November, James Mulva, CEO of ConocoPhillips, the third biggest U.S. oil company, told a Wall Street conference: “I don’t think we are going to see the supply going over 100 million barrels a day … Where is all that going to come from?”
In the short-term, I suppose it is possible that we can go back to $3 gasoline, although that would probably require a deep global recession, and prices would only stay low for the extent of the downturn.
But the far more important point is that it is now simply too late to adopt policies that can prevent much higher oil prices, as high as $300 a barrel in 10 years, if you believe oilman T. Boone Pickens. Why?
Replacing oil in the transportation sector requires strong government action two decades before a peak because of the time needed to replace vehicles and fuel infrastructure. That was the conclusion of a major study [PDF]funded by the Department of Energy in 2005 — yes, the Bush DOE — on Peaking of World Oil Production. The report notes:
The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.
If we start an aggressive move soon to end our addiction to oil, to shift to highly fuel-efficient vehicles and plug-in hybrids, we can perhaps spare our children from the worst impacts of peak oil (and, of course, global warming). But that require a far more progressive President than we have had for the last eight years.