The Duh Factor

May 10, 2004
The price of gas at the pump goes up relentlessly. Here in the northeast, we are just now topping two dollars a gallon, but in California, dogged by refinery problems, the price has been over the two dollar hump for months. NASCAR fans in Atlanta and the southeast have generally paid the lowest prices. When they go over the hump, things will get ugly.

The media still hardly gets it. This morning, NPR quoted Trilby Lundberg (of the oil industry's Lundberg Letter) to the effect that gasoline prices were going up because the price of a barrel of crude was going up. Duh. I wonder if we will bring the same laser-like intelligence to the hydrogen economy project.

The reason that gas is going up is because there are no swing producers anymore. A swing producer is someone who can pump any amount extra a day to meet world demand. America was the world's swing producer for a hundred years until 1970, when US production peaked and no amount of pumping would ever again increase the flow coming out of the ground. For the past 34 years, Saudi Arabia has been the world's swing producer -- with a lot of "inspiration" from England and Norway's North Sea bonanza (which saved the West's ass). Alas, the North Sea peaked in 2001.

Saudi Arabia has used its pricing power very conservatively because they prefered an orderly flow of income to the political unknowns of sick and angry Western economies. It has been a good strategy. They succeeded in putting the American public to sleep over energy issues. And with the North Sea fields recently passing peak, the Europeans haven't dared to intrude in Islamic affairs.

But the status quo of the past thirty-odd years is unraveling quickly. Saudi Arabia may not be the world's swing producer anymore. We don't know for sure because the information they release is dodgy and unreliable. But they may be pumping as much as they can, which is one way of saying that they may have reached peak production sooner than anybody expected. Their Ghawar oil field (the world's largest), which accounts for over half of Arabian production, is so old and feeble that they have to pump millions of gallons of sea water into it a day to keep the pressure up. Unfortunately, this huge "water cut" also has the tendency to damage the field and impinge on future production. Meanwhile, 2003 was a signal year in the oil exploration industry; no significant new finds were made anywhere in the world.

We're in uncharted territory now. If the world has no swing producer then there is no power on earth that can keep oil markets stable. The price will probably not go up in a straight diagonal line, though, because each major price rise will sicken the industrial economies enough to dampen demand. Instead, we will see a kind of ratcheting movement. If the industrial economies get sick enough, prices may even fall back a little before ratcheting up again. The trend, however, will be ever upward.

The upshot will be a persistent lack of economic "growth," job loss, and hardship. The housing mania will subside into a repossession fiesta. The Dow will head south, perhaps even below 1000. This will all be very confusing to NASCAR Nation, since neither the Republicans nor Democrats will be able to do anything about our oil predicament. My guess is that we will go through some years of intense blame-gaming, and that new parties, perhaps very sinister ones eager to use the powers of coercion, will crop up. Of course, the Islamic oil nations will not be immune to political turbulence. The Sauds will be tossed out. International jihad will get more intense. America will probably not have the cash or the political will to maintain a meaningful military presence in that part of the world for more than a decade. China will go adventuring for the world's remaining oil. We will retreat into our hemisphere and try to figure out how to live in a post oil world. (Hint: there's not going to be any hydrogen economy.)

The little children now being ferried about in SUV's with Finding Nemo playing on the DVD on their way to the WalMart, are going to grow up into that world. What will they think of us?

Comments

[amarettiXL]

Do you really think we're going to figure out how to make a post-oil economy work? Maybe I'm just feeling especially pessimistic today, but from where I stand all I can see is America, ever the oil-junkie, withering away in an endless series of DT's. I see the nuclear industry salivating over the idea of the wells going dry, and re-selling nukes to the public with the false promise of "jump-starting" the hydrogen economy with nuclear power. (and see, look at the phrasing...'jump-starting'...can't even get the car-references out of the language!).

The idea of staying more local makes too damn much sense. It goes against a core American myth..'bigger is better'. It'll take a lot to rebuild local networks, local farms, local methods of building design....but not as much as it'll take to convince Americans that bigger is not necessarily better. The idea of 'progress' (progress as never-ending expansionism) trumped 'liveability' a looonnngg time ago. I mean, hell, we work longer hours for fewer benefits than anyone else in the industrialized world, and many in the semi-industrialized world. You think we're gonna give up our cars?

[Jo]

You are a very interesting person. Nice to read someone who is thinking. Will check in to see you periodically. Thanks!

[michael]

gasoline > $2 is certainly a first for me, altho they say in real dollars the carter years were worse. we recently bought a kia minivan, wh is a gas guzzler even by minivan standards; with 3 kids (+ friends) and a large dog, a small-form wagon (eg, subaru forester, etc) is just hell on wheels... a hondota van is more efficient but 30% higher in price.

when you're raising a middle-class family, you make decisions on price... quality of life can wait. because real estate is prohibitively expensive in sub-metro nyc / stamford / hartford / springfield / 128 / forget about boston, people happily live with 3 hours r-t commutes... $300k buys a lot of house in eastern connecticut (although a lot less than it used to) plus money leftover for a comfortable car in wh to sit in traffic... otoh, $500k buys you zilch w/in half an hour of boston. of course, it's a dream to work local, but that would be doing...? hmmm, government work is great if you can get it, it's a shame all levels of gov't are insolvent.

a pessimist would say the walk out of the woods is likely tb as long as the walk in; markets, ever the optimists, tend to retrace between 20% and a half. if we say the age of the guzzler runs from c 1955 to 2005, the early 80s would be a chronological midpoint. http://www.nationmaster.com/graph-T/eco_gdp_gro_198
although it's mixing apples with oranges for me to compare years to gdp growth, the graph on the above link really does give one pause: i mean, gosh, what a lot of growth there's been in the past 25 years, usa is pretty far down the list as far as gdp growers go. if the world has to back out even 10% of this python-dwelling pig, it's going to be way traumatic. the actual change in standard of living may not be too unpleasant or even unpleasant at all, but the transition will be wrenching. the big question, though, is when does this process begin, or more accurately, when does it begin to get scary?

of course, the more the shock is delayed, the worse it will be, but we procrastinate by nature. another 4 years of bush will usher in 12 years of feckless vacillation between carter-ford types... this takes us out to 2020. can the middle east be catastrophic without much real effect? look at the palestinian cause, you have to think radical islam is unable to get out of its own way. pakistan will fall apart, yet you'd hope m.a.d. with india constrains its islamic doomsday aspirations. as for us finances, they too can collapse w/o realworld effect... how many people really were bent out of shape by the nasdaq falling 80%; japan's finances have stayed collapsed for over a decade now, yet they're still pumping out cars.

i continue to flip flop betw optimism and pessimism, while you seem consistently pessimistic. argentina is a horrible model of the future, and yet, there isn't blood running in the streets of buenos aires, is there? argentines are still having sex, raising families, they haven't ceased to be simply because their country is in default on its loans. perhaps that's not such a horrible future after all.

[Gerard Van der Leun]

No more swing producers around you say?

Looks like we'd better get Iraq fully online toot sweet and ramp up production.

[John Taylor]

Google the phrase Peak Oil and you get some scary things.

I think the stock market, with it's persistent selling, is seeing that anything less than two dollars a gallon is pure nostalgia. You would think the market would foresee a full ramp in Iraq, but it doesn't seem to be there. We're returning to a very 70's scenario of inflation, oil shortage, and people fleeing for safety in gold.

[lindenen]

How much oil could the US still pump out if drilling here becomes more economical? The cost per gallon would have to go up incredibly to get to this point but I'm interested in how much they estimate we have left.