Peak Oil News: An Oil Boom - Without The Oil

Thursday, October 06, 2005

An Oil Boom - Without The Oil

The Daily Reckoning

By Byron King

It is very doubtful that the domestic oil industry going to locate any newpetroleum frontiers in the lower 48 states. There really aren't any bignew discoveries out there, awaiting their time.

What about the endless droning of the politicians and their campaignpromises (they are always campaigning, election or no) that "We are goingto develop a national energy policy and stop relying for oil on thevolatile Middle East?" Yeah, right, Mr. Politician.

Your typical U.S. political leader, of either major political party, willsend the Marines to fight like hell in Fallujah. But collectively, theylack the guts to permit the drilling of new wells off the coast ofSouthern California, or off the west coast of Florida, or out in thefrozen moose pasture east of the Alaska North Slope. What do all of thosesmart politicians know about producing oil that people who do this for aliving do not?

And how long has it been since the United States drilled for some oil inDetroit by raising fuel efficiency standards on vehicles? Oh, about 25years or so. Still, mileage standards or not, when you boil it all down,you will still need something to put in the tank and the crankcase.

The oil companies collectively know that North America is yesterday'snews, and they budget accordingly. Have you followed what the majorinternationals are doing? Drill for oil in the United States? Drill where?When they are not acting like big banks, the larger oil companies arefocused on the big action in deepwater, or the international arena. If youare not ready to spend serious bucks going far offshore, or to play on aninternational level, you are making a conscious decision to spend the restof your life scrambling for whatever somebody else's land man overlookedout in south Succotash County.

One famous oilman, T. Boone Pickens, says that there is nothing left todrill in North America, and he ought to know. Boone has drilled for oil injust about every part of the geologic column worth drilling, including theasphalt pavement of Wall Street. (In 1983 he was instrumental in causingthe demise of my former employer, Gulf Oil Corp.) Boone has a nose foroil, and a nose for money, which in my book is one heck of a nose. IfBoone is coming up dry, then we all have a problem.

We seem to be in the midst of an oil boom, but it is an oil boom withoutthe oil. With gasoline selling at well over $3 per gallon (higher, inother parts of the country, or so they tell me), we are paying at the gaspump for the boom, but without getting much in the way of new discovery orincreased production out in the U.S. oil patch. As with much of everythingelse that we need in order to run the U.S. economy, we import oil fromabroad and export dollars to pay for it. What is that, perpetual motion?

If it is, I must say that a long time ago I had a physics professor whoproved to a mathematical and thermodynamic certainty that there is no suchthing as perpetual motion. It all works for a while, but only until itdoes not work anymore. Then it all runs down and stops.

When the "oil-for-dollars" trade comes to an end, you will still need realoil wells pumping real oil. Or you need some useable substitute, likeshale oil. (But, oh the problems with shale oil! Don't get me started!)

Or you need a robust Department of Homeland Security and lots of NationalGuard troops with riot gear, the performance of which in the aftermath ofHurricane Katrina gives me pause. And then, compounding peoples'misunderstanding of the whole situation, you have talking heads (as oftenas not, they are economists) saying really dumb things like, "But indollar terms, the oil industry is only 4% of the U.S. economy." To which Isay, "Try running the other 96% of the economy without it."

And what about this bumper sticker prayer pasted on the rear end of many avehicle in America's oil patch back in the 1980s? "Please God, Just GiveMe One More Oil Boom. I Promise Not to Blow It Next Time." Isn't theUnited States a shining city on the hill? Isn't God on our side, like thered state people believe and the blue state people just take for granted,even if they don't admit it out loud?

What is God going to do for us? Why is the Good Lord giving us the oilboom, but without the oil? Beats the heck out of me. I cannot speak forthe Almighty, but I believe that this boom has more to do with themonetary expansion of Mr. Alan Greenspan, and the predictions of a fellownamed Dr. M. King Hubbert, than with the Big Guy upstairs.

Here is the fundamental problem: We live in a material world (in thisrespect, Madonna was correct), that yields more or less linear increasesin oil production for some period of time. M. King Hubbert called it a"material-energy system." (I was at one of his talks back in the 1970s,when he laid it all out.)

But then, after some period of time, comes the peak of oil production,which is another way of saying that about half of the Earth's easy-to-getoil endowment has been produced and consumed. After that, as mankindproduces the "other" half of the world's petroleum endowment, it is alldownhill, despite every effort to find a substitute (another discussionfor another time).

Courtesy of the late deceased Woodrow Wilson and Franklin D. Roosevelt, wealso live in a monetary world, in which the national currency is a fiatcurrency accounting gimmick. That is, the U.S. dollar is not backed by anysubstance of immutable value, such as gold. And in this current monetaryworld, the number of dollars in circulation has been increasing for 92years, courtesy of the Fed (and more recently, increasing exponentially atthe behest of the world's most famous central banker). For many decades,the increasing monetary base did not overwhelm the linear productionphenomenon. But at Peak Oil, that is all about to change. The future isnow.

When you throw the U.S. fiat currency debacle up against the Earth'srather linear material-energy system, you get a world that has racedthrough its reserves, consuming them and depleting the resource base at anartificially high rate. We see the direct result on a daily basis. Thereis an acute scarcity of oil (as well as a scarcity of a good many othernatural resources), which is driving up the nominal cost of oil and ofmost other commodities.

There is not any time to spare for the world to make many dramatic changesto its consumption patterns. I tend to make few predictions about thefuture. But I assure you that the world faces the next 10, 20, or 30 yearsafter the irreversible post-Peak Oil decline kicks into gear, when a lotof rice bowls are going to get smashed. It will not be pretty.

Will mankind figure a way out of it? Beats me, amigos. But whateverhappens, I believe that it is always better to have little debt and lotsof money in the bank. What form of money, and where is the bank? That is atrick in and of itself. Just keep in mind that you may as well do yourbest to keep your head above the troubled financial waters.


Byron King for The Daily Reckoning



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