Oil Is Not Well

Oil Is Not Well
By R. Emmett Tyrrell, Jr.
Published 6/7/2007 12:08:27 AM

WASHINGTON -- Who are the major producers of oil in the world? The unsettling answer is Saudi Arabia and Russia. They produce about 9 million barrels of oil a day. And who are the world's major producers of natural gas. Again the answer is unsettling, Iran and Russia. There are students of geopolitics with a special knowledge of energy resources who worry about this. One, the economist Philip K. Verleger, Jr., believes that with regard to Russia and its energy reserves, we are in the second round of the Cold War.

As spring evanesces into summer and Americans take to the road in their gas-guzzlers, leaving their homes with air conditioners on high, it is perhaps an auspicious time to consider our energy needs. The presidential candidates, hustling for their parties' presidential nominations, tell us that they are going to make us "energy independent." At the same time they also tell us that $3.00-a-gallon gasoline at the pump is highway robbery. Some announce that they are going to investigate the oil companies. This is political schizophrenia. We cannot approach energy independence and maintain cheap oil prices simultaneously. In fact, in the near future neither goal is possible. America with 5% of the world's population uses 25% of the world's oil. And right now the world is consuming about as many barrels of oil a day as it is producing, which is 85 million barrels. In terms of oil production, the world is now at what is called "peak production."

The price of oil on the world market today is in the neighborhood of $70 a barrel, and Americans are complaining about paying over $3.00 a gallon for gasoline. But by the end of the summer the world will be consuming over 85 million barrels of oil. The economies of the world's leading oil consumers, China and the U.S., are that strong. Thus oil experts such as Boone Pickens predict $80 a barrel oil by the end of the year. He doubts that the world can produce more that 85 million barrels a day. That means the price of gasoline will be even higher than $3.00 a gallon. Verleger predicts $100 a barrel oil before the end of 2008. Imagine what you will be paying for a gallon of gas then.

Russia might regain its old position as a superpower on the basis of its oil and natural gas holdings alone. Verleger cites a 2006 article in the Financial Times that suggests this is very much on President Vladimir Putin's mind. "As a city official in St. Petersburg," Neil Buckley wrote in the FT, "[Putin] studied part-time at the city's State Mining Institute and wrote a dissertation entitled Mineral Raw Materials in the Strategy for Development of the Russian Economy. In it he argued Russia's rich natural resource base would secure not only its economic future but also its international position."

So let the presidential contenders begin their debate on energy independence or at least an energy policy. With oil at $70 a barrel and moving upwards, energy alternatives are more feasible. Pickens mentions ethanol and biodiesel. His favorite is nuclear, as he noted this month in the Dallas Business Journal. "It's clean. There have been no accidents with it, and you can get rid of the waste." He calls it the "fuel of the future."

Peak production of oil, however, is here and now. The world consumes 30 billion barrels of oil annually. Producers have not been able to replace 30 billion barrels of oil into the world oil supply since 1985. There are no vast reservoirs of oil left. Simple market forces are going to coax the U.S. toward oil alternatives. In the meantime, however, Russia, Saudi Arabia, and Iran are going to be prospering from our oil purchases, and Russia may emerge as a superpower.

Ellie