In the grip of oil - Coming to terms with the new realities of supply, pricing
By Thomas Kostigen, MarketWatch
SANTA MONICA, Calif. (MarketWatch) -- Extremists have warned for years of an impending economic disaster due to the end of oil; the movement is dubbed "Peak Oil." It posits that one day all the oil in the world will be depleted, prices will soar and disaster will ensue.
And many are saying that day has come.
"Peak Oil is no longer on the way. It is here," says Michael Ruppert, who runs a Web site and pens a newsletter on topics that range from government corruption to insider trading to Osama bin Laden.
Ruppert and those like him who preach about the days of fire and brimstone are taking their cue from the fact that no significant oil deposits have been found as usage soars. The Energy Department last week released its short-term forecast, which sees demand increasing five percent over the next two years. Meanwhile, suppliers are dour about oil reserves.
"Oil is no longer in plentiful supply. The time when we could count on cheap oil and even cheaper natural gas is clearly ending," ChevronTexaco Chairman David O'Reilly said in a recent speech.
Economists and oil ministers say there is no need for alarm. Indeed, James Flanigan, the economics columnist for the Los Angeles Times flatly says, "Oil prices will not -- repeat, will not -- climb inexorably in coming years, for one simple reason. It's called human nature." He says people will react and make changes in their daily lives to consume less energy.
Alternative energy sources too will alleviate some of the demand on oil. Yet, those sources are far away from replacing petroleum-based fuels.
In the meantime, consumers will suffer with leaps in gas prices and energy bills, as has been the case recently in the United States. Crude hit $55 per barrel last week, and -- closer to home, at least in California -- gas prices topped $2.20 for a gallon of regular at the pump.
The confluence of increased oil usage as nations such as China and India industrialize with a winnowing of supplies winnow accounts for much of the price increases. That situation is unlikely to change. But it doesn't mean the end of oil; it means the end of oil pricing as we know it.
"It's [oil] there if you want to spend the money to extract it," says Richard Dickson, oil analyst and senior market strategist at Lowry's Research Reports in Palm Beach, Fla. "No one knows how much the Saudis have, or how much oil there is in Iraq."
He also notes that there are most likely deposits in Alaska or in deep-water areas such as the Gulf of Mexico that have yet to be exploited. On top of that, there are domestic sand and shale deposits that heretofore have been too expensive to develop.
"Look, hypothetically if oil per barrel goes up to $100, then the cost of converting those deposits at $70 or $80 per barrel doesn't look so bad. There is always oil, it's just a matter of how much it will cost to extract it," Dickson says.
Alternatives and economics
Until now it hasn't made much economic sense to explore other energy possibilities. Hydrogen fuel, which many say is the next giant step in energy, is far too expensive to produce for mass consumption. Nuclear energy, which could be the fastest energy source to be brought online, is too controversial -- and even at that would be about a decade away from wide accessibility, Dickson says.
So, oil is what's on the table. The question will be at what cost.The Organization of the Petroleum Exporting Countries meets in Iran this week, and Saudi Arabia is already calling for a production increase and a price reduction. That proposal isn't being embraced by Iran, which is hosting the meeting for the first time in 34 years, or Venezuela, the third largest producer in the cartel (after the Saudis and Iran).
Those countries claim the supply of oil on the world market is within historic range, and there is enough to meet current demand, which is typically less in the second quarter of the year anyway.
Saudi Arabia is reportedly concerned about price volatility. As well, higher prices send consumers in search of alternative energy sources, which doesn't bode well in the long term for oil-producing nations.
Whether the Saudi proposal passes or not, analysts don't see oil trading significantly lower. In addition, there will be assuredly a full-court press on to further oil exploration and innovation.
This week, the House and Senate budget committees are expected to vote on the President's 2006 budget, which contains language that authorizes drilling in the Arctic National Wildlife Refuge. That has environmental activists are up in arms.
Whether we're at "Peak Oil" or not, don't expect we'll ever be at Cheap Oil again.