The Oil Crunch

By Paul Krugman

The New York Times

  Before the start of the Iraq war his media empire did so much to promote, Rupert Murdoch explained the payoff: "The greatest thing to come out of this for the world economy, if you could put it that way, would be more than $20 a barrel for oil." Crude oil prices in New York rose to almost $40 a barrel yesterday, a 13-year high.

  Those who expected big economic benefits from the war were, of course, utterly wrong about how things would go in Iraq. But the disastrous occupation is only part of the reason that oil is getting more expensive; the other, which will last even if we somehow find a way out of the quagmire, is the intensifying competition for a limited world oil supply.

  Thanks to the mess in Iraq - including a continuing campaign of sabotage against oil pipelines - oil exports have yet to recover to their prewar level, let alone supply the millions of extra barrels each day the optimists imagined. And the fallout from the war has spooked the markets, which now fear terrorist attacks on oil installations in Saudi Arabia, and are starting to worry about radicalization throughout the Middle East. (It has been interesting to watch people who lauded George Bushs leadership in the war on terror come to the belated realization that Mr. Bush has given Osama Bin Laden exactly what he wanted.)

  Even if things had gone well, however, Iraq couldnt have given us cheap oil for more than a couple of years at most, because the United States and other advanced countries are now competing for oil with the surging economies of Asia.

  Oil is a resource in finite supply; no major oil fields have been found since 1976, and experts suspect that there are no more to find. Some analysts argue that world production is already at or near its peak, although most say that technological progress, which allows the further exploitation of known sources like the Canadian tar sands, will allow output to rise for another decade or two. But the date of the physical peak in production isnt the really crucial question.

  The question, instead, is when the trend in oil prices will turn decisively upward. That upward turn is inevitable as a growing world economy confronts a resource in limited supply. But when will it happen? Maybe it already has.

  I know, of course, that such predictions have been made before, during the energy crisis of the 1970s. But the end of that crisis has been widely misunderstood: prices went down not because the world found new sources of oil, but because it found ways to make do with less.

  During the 1980s, oil consumption dropped around the world as the delayed effects of the energy crisis led to the use of more fuel-efficient cars, better insulation in homes and so on. Although economic growth led to a gradual recovery, as late as 1993 world oil consumption was only slightly higher than it had been in 1979. In the United States, oil consumption didnt regain its 1979 level until 1997.

  Since then, however, world demand has grown rapidly: the daily world consumption of oil is 12 million barrels higher than it was a decade ago, roughly equal to the combined production of Saudi Arabia and Iran. It turns out that Americas love affair with gas guzzlers, shortsighted as it is, is not the main culprit: the big increases in demand have come from booming developing countries. China, in particular, still consumes only 8 percent of the worlds oil - but it accounted for 37 percent of the growth in world oil consumption over the last four years.

  The collision between rapidly growing world demand and a limited world supply is the reason why the oil market is so vulnerable to jitters. Maybe well get through this bad patch, and oil will fall back toward $30 a barrel. But if that happens, it will be only a temporary respite.

  In a way its ironic. Lately weve been hearing a lot about competition from Chinese manufacturing and Indian call centers. But a different kind of competition - the scramble for oil and other resources - poses a much bigger threat to our prosperity.

  So what should we be doing? Heres a hint: We can neither drill nor conquer our way out of the problem. Whatever we do, oil prices are going up. What we have to do is adapt.

The World is Drawing Down its Oil Reserves at an Unprecedented Rate

By Oil and Gas Journal editors

HOUSTON, Aug. 12, 2002 -- The world is drawing down its oil reserves at an unprecedented rate, with supplies likely to be constrained by global production capacity by 2010, “even assuming no growth in demand,” said analysts at Douglas-Westwood Ltd., an energy industry consulting firm based in Canterbury, England.

“Oil will permanently cease to be abundant,” said Douglas-Westwood analysts in the World Oil Supply Report issued earlier this month. “Supply and demand will be forced to balance — but at a price.”

The resulting economic shocks will rival those of the 1970s, as oil prices “could double and treble within 2 or 3 years as the world changes from oil abundance to oil scarcity. The world is facing a future of major oil price increases, which will occur sooner than many people believe,” that report concluded.

The International Energy Agency recently forecast that world oil demand (not supply!) would reach 119 million b/d by 2020.

“The world’s known and estimated ‘yet to find’ reserves cannot satisfy even the present level of production of some 74 million b/d beyond 2022. Any growth in global economic activity only serves to increase demand and bring forward the peak year,” the report said.

A 1% annual growth in world demand for oil could cause global crude production to peak at 83 million b/d in 2016, said Douglas-Westwood analysts. A 2% growth in demand could trigger a production peak of 87 million b/d by 2011, while 3% growth would move that production peak to as early as 2006, they said.

Zero demand growth would delay the world’s oil production peak only until 2022, said the Douglas-Westwood report.

Whenever they begin, worldwide natural shortages of oil and natural gas may lead to substantially higher prices for the gasoline, plastics, medicines, fertilizer, rubber and many other things that are made from oil and natural gas.

Rapid and substantial increases in energy efficiency and the use of renewable energy sources would delay the coming fossil fuel shortages and make us better prepared for the post-fossil fuel era.

Oil Consumption and Depletion

Americans use 23.4 barrels per capita yearly (BCY). Japanese and Italians consume 10-12 BCY. The global average is less than 4.7 BCY. China, and to a lesser extent India, are following the US in rapidly expanding their economies using the technologies of cheap oil. The high prices for oil today are a creating a widespread awareness that there isnt enough oil being pumped today to supply everybody. Poor Third World countries are already priced out of the market.

The best depiction of the past 100 years of human endeavor is exponential growth of the worlds population based on an exponentially growing world economy based on the utilization of  incredibly cheap fuel. What happens when there isnt enough oil to keep growing or maintain the current human population?

Please Dont be Fuelish!

Our nations oil production has been declining since 1970 due to natural resource limitations. Closing our eyes wont make the threat of oil shortages go away. On the contrary, denial will only lead to delay and increase the probability of a major disaster.

If we really want to protect ourselves and future generations against energy shortages and higher energy prices, then we need to reduce our dependence on foreign sources of fuel. Fuel shortages may occur again at any time due to hostile actions by foreign nations and they will occur because growing populations are competing with us for the rapidly dwindling remainder of fossil fuels.

Reducing the potentially catastrophic accumulation of greenhouse gasses would be a side benefit of using fossil fuels much more efficiently. Reducing fuel consumption will also reduce emissions of toxic mercury, lead, arsenic, nitrous oxides, and other pollutants that are released into our environment during combustion of fossil fuels.

Here are a few of the things we can do now:

Update and enforce building codes so that buildings will require much less energy while having very good indoor air quality.

Increase the use of solar and wind energy before we run short of the materials and energy needed to produce them.

Increase the use of cogeneration systems in buildings to provide electricity, hot water, absorption cooling and space heating. This is much more efficient than building additional central power plants that waste more than 60% of the fuel’s energy during generation and transmission.

Stop using tax dollars to subsidize the fossil fuel industry (let fossil fuels compete in a free market against energy efficiency and renewable energy sources).

NOTE: Eliminating government subsidies for fossil fuels would encourage fuel conservation and the timely development of enough renewable energy systems to sustain us in the post fossil-fuel era.

Our nations intransigent addiction on oil and gas has entangled us in the long-contentious Middle East, whose oil fields Western countries continue to try to dominate, at great cost in lives and fortunes. It has added to the greenhouse-gas pollution that many blame for global warming. They are fuels that everyone acknowledges have a limited future

The United States would be far better off weaning itself from non-renewables and plunging its wealth and expertise into developing alternatives such as fuel cells, wind, energy systems, solar heating and electrical systems, and more.

By taking vigorous actions now to reduce fuel consumption, we can become less vulnerable to wartime shortages, peacetime embargoes, and the inevitable shortages of fossil fuels as remaining supplies become exhausted.

As mankind turns to other forms of energy — in part because of dwindling oil supplies but mainly because of the mounting and unimpeachable evidence that we have a profound carbon problem on our hands; that even if we discover billions of new barrels of oil in the ground, we cannot keep burning them — and pumping vast amounts of carbon dioxide and other so-called greenhouse gases into the atmosphere — without potentially catastrophic consequences. According to the latest findings of the United Nations Intergovernmental Panel on Climate Change, in order to stabilize greenhouse gases in the atmosphere, global emissions must be reduced to at least 60 percent below 1990 levels. That is a radical change in the way the world uses energy. And to accomplish that, many people feel, will require nothing less than a new industrial revolution, an overwhelming retreat from societys mass reliance on the carbon fuels — oil, gas and coal — that have powered the global economy for more than a hundred years.

The personal choices that you and other Americans make in the marketplace and the voting booth will determine whether or not our nation  will successfully prepare for the coming fossil fuel shortages and price increases. Our actions, not our words, will determine how many humans will survive after most of the remaining fossil fuels have been consumed.