Greasing the Skids

Monday's Barron's contains a review of the oil situation (subscription required) by a leading industry expert.

Charles T Maxwell reinforces the view of those who say we're going to have major problems due to lack of oil. For some reason, those problems won't be obvious until the end of the Bush Administration. He urges major conservation efforts ASAP.

 

The dean of energy analysts sees a difficult future

By CHARLES T. MAXWELL

THE ENERGY CRISIS WE ARE IN today is entirely different from the temporary problems we experienced in 1973-74, 1979-86, 1990-91 and 2000. Then, there were political issues: Some nations were willing and able to produce oil for our use and some were not. There was always sufficient worldwide geological capacity to produce additional barrels of crude oil to meet the world's needs.

No longer. In the next major energy crisis, that capacity will likely be eroded. So the crisis should have a severe impact, be global in scope, and be difficult to solve. Plainly, it will be unprecedented. What may emerge could well be a restructured world, as well as a restructured oil industry.

Over the next 25 years, a new world energy economy will arrive in three waves. We are near the top of the first and smallest one, a warning wave. A second more powerful wave likely will hit in the 2009-2010 period when the non-OPEC world may reach its all-time highest output of crude oil, subsequently declining to become ever more dependent on OPEC for incremental barrels of production. The final wave should break around 2020, or earlier, as even OPEC's vast reserves are tapped at a maximum rate of production. After that, oil volume should head down and keep falling, never to revive.
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For the period 1987 to 2003, the historical range of oil prices was approximately $10 to $40 per barrel, with an average of $20. For 2004 to 2010, the price range could be $30 to $60, with an average of $40. For 2011 to 2020, the range could be $50 to $100, with an average price of $70 per barrel.

Such prices would unleash both destruction and creativity throughout industry and finance. As occurred in the 1970s, the design of cars, trucks, ships, planes and trains would change, commercial buildings and homes would be modified; chemical and industrial processing and most machinery would be redesigned to emphasize fuel economy or substitute fuels; tax systems would be thoroughly overhauled, with changed incentives and penalties. Urban planning and residential patterns would change. Living standards might slip a bit and they would recover in different shape: Cooler rooms in winter and warmer rooms in summer, changing clothes instead of thermostats, taking quicker showers and buying fewer hot tubs, using less lighting, indoors and out, accepting smaller and lighter cars, walking and bicycling more, and using public transportation; these are the obvious changes to come. Europeans, who long ago forced themselves to accept this lifestyle by imposing high energy taxes, might at last receive an economic return on their investment, while the U.S. struggles to change.

Could all this really result from the lack of a few extra barrels of oil in the non-OPEC world, and only five or six years out? Actually, a crisis could develop even earlier if one or two of the main OPEC producers were closed down for an extended period by a political or military emergency.

Close to 40% of global energy consumption is based on petroleum. Currently, we are utilizing about 98% of our world crude oil-producing capacity. The system should be considered stressed at a 95% utilization rate. We are no longer investing enough to lift capacity additions above the level of future demand growth on a consistent basis.
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Our country's leaders have three main choices: Taking over someone else's oil fields; carrying on until the lights go out and Americans are freezing in the dark; or changing our life style by deep conservation while heavily investing in alternative energy sources at higher costs.

The first two choices can be only temporary palliatives. Taking over foreign energy fields would be against this country's principles, and, like most violations of principle, it wouldn't work. This strategy wouldn't protect us from war, terrorism and the exhaustion of our military and moral resources. Carrying on as we are until we crash looks more like "surrender" than "adjustment."

By elimination, if not by wisdom, we will eventually turn to a massive national and international conservation effort. It should be launched with further development of coal and nuclear energy, along with imported liquid natural gas, tight-sands gas, coal-bed methane, gas-to-liquids conversion, tar sands and wind power. (Solar and biomass are not yet sufficiently developed to play a leading role.)

Whenever we decide to confront this reality, the resulting program surely will require many years of investing vast amounts of capital. It could, therefore, pre-empt some other lines of investment in economies already strapped for adequate returns to support the promises they have made to their aging societies. Without discipline, mental and physical preparedness and an intelligent selection of priorities conceived early enough to keep us from wavering, we will not pass the oncoming test.