by Rodger Digilio
The buzz in commodity circles in recent months has been the startling rise in the price of a barrel of oil. That is, perhaps, less then the buzz in the community around the pumps as prices rocket past $4 for a gallon of gas.
Everyone has a favorite target to blame for this increase. It’s the oil companies, the speculators, OPEC, China & India, politicians, environmentalists and terrorists. There actually is a little bit of truth to all of these. There is, however, one large truth that seems to be ignored. That large truth is that the world is running out of oil at an accelerating pace.
An even more alarming truth is that the oil we have extracted and used to date has been the best oil and the easiest oil to get at. The remainder is generally harder to refine and lies deeper in more remote locations or is locked into mediums from which it must be extracted. All of this costs energy.
Early on in the oil game, companies used to spend a barrel of oil to extract 27 barrels of oil. Today, in some areas, companies spend a barrel of oil to extract 2 barrels of oil from near depleted fields. The amount of energy needed to extract a barrel of oil from the Canadian oil sands is staggering. Only sheer desperation would find someone willing to spend a barrel of oil worth of energy to extract a barrel of oil.
Now oil is likely to decline in price sometime in the not too distant future. Rising price has destroyed demand. The Federal Government has reported that Americans drove 11 Billion fewer miles in March of 2008 then in March of 2007. The biggest drop ever recorded. Prices have continued to increase in April and May and driving should continue to decrease.
This Memorial Day I sped to the Eastern Shore at 1:30 p.m. on Friday marveling at the lack of traffic anywhere. My partner came at 4:30 p.m. and once she cleared the Woodrow Wilson Bridge she had a non-stop trip. The trip back on Monday afternoon was equally quick. Clearly we have stopped driving for the present. The drop in demand will eventually cause a drop in price although the international nature of the oil business will cause it to be slower and shallower then in the past.
It is no wonder. Putting 15 gallons of gas in the tank at $1 a gallon costs $15. At $4 a gallon the cost is $60, a much more meaningful dent in the wallet. At $10 a gallon it will cost $150 to fill the tank and the bad news is that gas at $10 a gallon is around the corner. Rising world demand and falling world production will continue the relentless upward push on oil prices in the long term. A short term pullback in oil prices will be followed by another major escalation.
The United States economy is based on cheap oil. The American lifestyle is supported by cheap oil. Cheap oil is now headed to the history books and our continued thriving as a society dedicated to high ideals let alone our very survival will depend upon how we deal with this sea change. The events of the last few years do not present an optimistic picture.
Our politicians from the President on down including both political parties are looking for ways to restore cheap oil. Let’s drill more they say oblivious to the fact that there is not much left to get and it will take years and much expense to get what there is. Let’s get OPEC to produce more even though it is unlikely they can. Let’s get alternatives to oil although they are not as good, disrupt other things like food production, have serious drawbacks and are years in the future.
I believe that we will see massive dislocation before our leaders believe they have to come to grips with this. It is not clear we even can. A Congress that can not end $30 billion in subsidies to farmers in years of record prices for agricultural commodities is a very bad joke. Our system is built on excess built upon cheap oil. The odds of it surviving scarcity based upon expensive oil do not look good.
Locally we should all begin planning for a future of $150 gas tank fill-ups. Our civic leaders have to contend with running a City who’s workforce does not live here. We all have to plan for spending more on everything that gets transported and what, in our multinational economy, does not? We will have to face the fact that tourism will decline with discretionary travel. Perhaps we should be grateful that National Harbor was built across the river and not here. Conference centers are of little use if people can not afford to travel to the conference.
We would like to hear you views on the oil crisis. Only informed citizens can force the elected leadership to take on a serious problem. We should strive to become informed and we should share our thoughts with each other.
See you at the gas pump although not as frequently as in the past!