– Oil Crisis...is the world about to be shocked

Global oil crisis lurking
Marilyn Geewax - Cox News Service

WASHINGTON - With oil prices receding from this summer's records, motorists and airline stockholders are hoping for relief from high gasoline and jet fuel bills.

But many energy experts predict that not only won't the price decline last long, but Americans soon will have to say goodbye forever to plentiful, cheap oil.

With demand for fuel growing rapidly in China, India and other developing nations, "the world is entering a period of runaway growth in demand for fossil fuels," said Matthew Simmons, founder of Simmons & Co. International Ltd.

At the same time, growth in the supply of the most desired fossil fuel - oil - is slowing. No major oil fields have been discovered in nearly three decades. And despite record revenues, oil companies are barely increasing their production capacity.

The result in coming years: fuel prices far higher than anything seen so far.

For oil companies, "it's the end of growth - that's what peaking is all about," said Simmons, whose Houston-based independent investment bank specializes in the oil industry.

"A production decline doesn't mean you're out of oil, but it means that by 2010, maybe you are producing 75 million barrels a day," he said, "and the world demand is maybe 90 to 100 million. It's that gap that creates chaos."

For many airlines, chaos already has arrived.

The Air Transport Association, an industry trade group, estimates that for U.S. airlines to simply break even, they need oil prices to stay below $31 a barrel. During the decade between 1992 and 2001, the median price was $20, allowing airlines to flourish.

On Aug. 19, the market peaked at a nominal record of nearly $49 per barrel. Though prices have receded, they remain high enough to guarantee losses for airlines.

If airlines raise fares to cover the steeper costs, customers stay home. But if they don't charge higher fares, they lose money on each flight.

"This is just untenable for us," said John Heimlich, the ATA's chief economist.

The airlines may be the canaries in the mine shaft, warning of the coming danger for the entire economy.

Already, inflation has been pushed up and consumer spending held down by a jump in gasoline prices that the Labor Department measured at 26.5 percent in urban areas for the year ended in July.

But oil is also used for heating and in plastics, fertilizers, ink, adhesives and many other goods. That means that oil price spikes reverberate throughout the economy, further pushing up inflation and interest rates.

Whether oil production can catch up to oil demand has become a hotly debated topic.

This year, two books have argued that the age of cheap oil is wrapping up: The End of Oil: On the Edge of a Perilous New World, by writer Paul Roberts, and Out of Gas: The End of the Age of Oil, by physics Professor David Goodstein of the California Institute of Technology.

One authority on oil, Kenneth Deffeyes, a Princeton geology professor emeritus, is writing a book due next year called Beyond Oil. To underscore the urgency of the situation, he pinpoints Thanksgiving Day of 2005 as the date world oil production will peak.

The notion that oil production from proven fields can fall off sharply is embodied in a concept called Hubbert's curve.

In 1956, geophysicist M. King Hubbert noted that oil fields do not produce evenly until the last drop is gone. After about half the oil has been sucked from the ground, the second half becomes more difficult - and expensive - to extract. When production falls off enough, the oil company abandons the field.

That means a typical field's production is represented by a curve that slowly rises to a peak and then falls sharply.

Using his model, Hubbert predicted that oil production in the continental United States would peak around 1971. It did, and has been declining ever since.

The solution has always been to move on to the next hole. But many geologists say that now, the entire planet is approaching the peak of Hubbert's curve.

Other respected economists and geologists say the pessimists go much too far, noting that the end of oil supplies has been predicted ever since derricks first rose up in 19th-century Pennsylvania.

After the Arab oil embargo of the 1970s drove oil prices to nearly $80 a barrel in today's dollars by 1980, companies became more motivated to produce oil. They drilled so vigorously that an oil glut caused prices to plummet after the mid-1980s.

"I've always been skeptical about this idea that we're moving into a new era and that we'll have to get used to high prices," said Fareed Mohamedi, chief economist for PFC Energy, a Washington consulting firm. The experts who believe demand will permanently outstrip supply say Americans must quickly learn to conserve energy and develop new fuel sources.

 

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