The Oil Drain

The Oil Drain

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
October 19, 2007

If the market thinks $88 for a barrel of oil is high, it should wait a little longer. By year-end 2008, some economists say that it will hit $100 a barrel as global demand surges ahead of available supplies. When boiled down, the basic choices involve conservation, drilling for more oil or identifying and deploying more alternative fuels.

The time to start preparing for higher oil prices and possible oil shortages is right now. Not only will western nations continue to advance, but the developing countries will also do so and at rapid rates. Meanwhile, the oil producing countries of the Middle East (OPEC), Mexico and Russia are also growing. They will first and foremost attend to their own domestic needs before parceling out fewer barrels of oil to other nations.

"Domestic demand growth of as much as 5 percent per year in key oil producing countries is already beginning to cannibalize exports and will increasingly do so in the future as production plateaus or declines in many of these countries," says Jeff Rubin, chief economist for CIBC World Markets, an investment banking firm. "At current rates of domestic consumption the future export capacity of OPEC, Russia and Mexico must be increasingly called into question. These trends are likely to result in a sharp escalation in world oil prices over the next few years."

OPEC members together with such independents as Russia and Mexico consume over 12 million barrels per day. They have surpassed Western Europe to become the second largest oil market in the world, says Rubin. He spoke at a conference in Ireland on the study of peak oil, which predicts petroleum supplies will eventually dwindle and cause economic devastation. Some academicians say that the peak has already occurred while others argue that plenty remains and new technology will allow access to it.

At the same time, demand for oil in developing nations such as China and India has been growing at six times the level of advanced countries. In fact, oil consumption outside of the world's most developed economies is anticipated to grow by four percent a year for the rest of the decade.

With exports from OPEC, Russia and Mexico expected to decline by 7 percent over the next three years, markets will seek greater reliance on higher cost unconventional deposits, says Rubin. He expects Canadian oil sands will surpass deep water wells as the single largest source of new oil exports by the end of the current decade. The caveat, though, is that the processes to make the fuel are complicated and dirty.

That said, the appeal of Canadian oil sands is that Canada is open to private investment and provides the incentives to attract such needed capital. That's compared to other proprietary nations such as those in the Middle East that hold the view that their natural resources - the inherent wealth of their countries - belong in the hands of state-run enterprises. Foreign investors are therefore less likely to take risks in those areas, meaning that deposits stay in the ground for longer periods.

"Based on [our] analysis, [we] would expect conventional oil to peak closer to the middle than to the beginning of the 21st century," the U.S. Department of Energy wrote in a 2004 report.

Finite Source

The Energy Department predicts the oil peak will occur in 2037. But, in its report, it says that nearly all of the largest oil fields have been discovered and that production is past its peak in some areas. As such, the cost to find new discoveries is getting expensive. The department emphasizes that the practical effect of peaking - as opposed to running out of oil -- is prohibitively high prices in the absence of lower-cost alternatives.

Oil prices are now escalating because of geo-political events happening around the world. War in Iraq, saber rattling from Iran and a defiant government in Venezuela mean that everyone is paying more at the pump. While oil has been and will continue to be used as an economic weapon to whip the west into line, many scientists assert that the greater dynamic at play is a natural peak in global oil production.

The effect could be catastrophic if additional resources are not plowed into alternative fuels and new technologies. Nations are clearly addicted to oil and they will be competing for limited supplies. Prices will rise as a result. That's a major issue for all countries but particularly for the United States, which uses 25 percent of the world's oil and imports two-thirds of what it consumes.

If the peak oil theory is correct, it is either already happening or will happen over time and subtly. But such an insipid approach should not lull the populace into complacency. Declines in production rates, for instance, are real in the North Sea and in parts of the United States. The phenomenon could occur throughout the world.

"The simple fact of the matter is that oil is a finite resource, which will eventually run out," says George Bell, chief executive of UNOR, a Canadian exploration company. "Higher oil prices will only encourage utilities to move towards alternative fuels, in an effort to keep costs low."

Great thinkers disagree as to when oil production will plateau and then decline. The prudent response should then be to begin preparing for that eventuality by finding new ways to diminish the reliance on oil. The solution, it would seem, would mean more conservation in combination with the use of greener alternatives and non-traditional oils.