August 21, 2005, Energy for a strong America
As the price of oil (as measured by the cost of my filling up the tank of the TD-station wagon) hits a new record ($34.00, at $2.99 per gallon at the local self-service), and oil is in the mid $60's/bbl., it's a pretty good time to take a look at this lengthy article by Peter Maass of the Grey Lady's Sunday Magazine on whether we have reached "peak oil".
It's a fascinating article: Maass speaks with many in the oil-patch, including Saudis, and we have an interesting discussion of a phenomenon that dare not speak its name. That is, Saudi may have lots of oil, but there is a finite rate at which it can be extracted from the ground, and worse, pushing too hard now may screw up the ability to extract more later, as a matter of geology.
Further, the article notes the ultimate Saudi paradox (shared by the rest of OPEC): sure, a few more bucks a barrel of oil now is great... unless it triggers a world wide recession, thereby lowering demand, and hence, the price... or worse still, if it gets too high, suddenly alternative energy sources look good by comparison... in short, higher prices if too high can be a revenue disaster.
With all this, then, one wonders why the Saudis were so keen on having their agent (the one who lives at 1600 Pennsylvania Avenue) launch a war of aggression at their oil producing neighbor to the North... sure, it would drive the price up in the short run, but might having a few million barrels a day of Iraqi oil around help the Saudis maintain their swing production position?
Well... this is a rare congruence of generational issues: the Saudi leadership is superannuated, with the new king in his 80's and the new crown prince in his 70's... while our nation is governed by a man with the maturity of (at best) a teenager still giddy from having been given the keys to the car, who has been surrounded with the most impressive group of yes-men since, well... I don't want to have Godwin's Law invoked!
Anyway, the Saudi leadership also realizes that its best days may be right this second; it has lost control over a great many of its underlings, some of whom financed the events of 9-11, for example, as well as stage-managing its aftermath including the invasion of Iraq. So... from their perspective, it's let the good times roll! For the moment, explosive Chinese demand will keep the world from going into the kind of recession or worse that will result in reduced oil revenue, and as I have noted before, Americans have not adjusted their behavior one iota to the new high price regime.
It's amazing that we have all put our collective heads in the sands of the Saudi desert... perhaps $65/bbl. oil will start to change some perspectives. Or perhaps $85, $95 or beyond for a barrel of oil will let the world's economic engine continue to rev along just fine... or perhaps not...
Comments
...we old farts may do well to remind the young-un's out there that those price-spike crises that stimulated all the interest in fuel-efficient vehicles in '73 and '78 were the result of unavailability of gas, not just high prices. The appearance a few months ago that the market for pick-ups and SUV's had gone soft because of gas prices has been blown away by those "employee discount" sales by the automakers, which resulting in breath-taking sales gains in those categories. We aren't likely to see any change in attitudes or behavior until people have to sit in long, long lines again for hours on end just to buy fuel at high prices with quantity limits (like, say, 10 gallons per customer).
Posted by Jack K. at August 22, 2005 4:14 PM