Peak Oil: Serving Notice
Media Frenzy Signals Potential Turning Point in Oil Market
The public seems oblivious to the concept of peak oil, which is very dangerous, since public sentiment will likely respond dramatically if and when the day arrives that politicians are forced to acknowledge the situation, and history will show that the problem was predicted with likely enough time for governments to have provided pre-emptive solutions.
Yet, there are hints that some awareness is starting to creep into the public domain.
The mainstream media is suddenly coming to grips with the reasons for rising gasoline and crude oil prices, suggesting that those long on oil should be watching prices very carefully.
MSNBC reported: "An NBC News-Wall Street Journal poll found this week that rising gasoline prices were Americans' biggest concern this week, more than the nuclear threat from Iran and illegal immigration."
Over the weekend even NBC's "Meet The Press" was featuring the story, while Fox News.com ran an article on Peak Oil.
According to MSNBC: Energy Secretary Samuel Bodman 'said on NBC's "Meet the Press" that the shortfall was a sign of a stronger economy under President Bush, but he acknowledged that, at least for now, "the suppliers have lost control of the market." '
The opposition blamed the Bush administration: "Senate Minority Whip Dick Durbin of Illinois said the price of gasoline had almost doubled since Bush took office. "All of these things were predictable," he said, pointing to provisions of the energy bill Bush signed last year, which did not shield producers of cleaner-fuel additives like MTBE from legal liability, thereby slowing the transition and squeezing gas supplies."
And Bodman pulled out the Chavez card: "Bodman said the U.S. companies faced competition primarily from government-owned and -controlled firms, which can manipulate market forces to their advantage. "A lot of it is controlled by what [Venezuelan President] Hugo Chavez does, for instance," he said."
$100 Oil Shocker Predicted
Some in the mainstream media seem to have grasped the peak oil concept, although the public still seems oblivious.
In the U.K., the Observer/Guardian Web site predicted a "new oil shock ahead," noting that "The growing international crisis over Iran's nuclear program could trigger a catastrophic oil price spike, sending crude prices over $100 a barrel, senior Wall Street analysts are warning."
The article added that "A single political shock could be enough to send oil markets into panic."
Peak Oil Acknowledged
Fox News.com, using a Live Science article startled us, since the article acknowledges the essence of the Peak Oil argument.
According to the author, Ker Than, "Energy experts no longer debate about whether Hubbert's peak will occur, but when."
Citing familiar arguments discussed by this scribe on the Financial Sense News Hour numerous times, Than noted: "Once we reach this tipping point, known as "Hubbert's Peak," also known as "peak oil," global oil production will begin an irreversible decline and less oil will be available with every passing year, scientists say."
The article added: "On this point, estimates vary wildly. Kenneth Deffeyes, a professor emeritus at Princeton University, believes it has already happened in late 2005. Others figure we still have another 20-30 years."
The Hirsch Report
What is most interesting is that this article, very much following the outline we have discussed on the Financial Sense Newshour with host Jim Puplava cites the Hirsh Report.
Here are some key points in Than's article:
1. "In all of the historical cases they examined, it was not obvious that peaking was going to occur until about a year before the event."
2. "Also, the peaks were followed by sharp declines in oil production - it did not gently slope or flatten out as some forecasters have predicted global production will."
3. "The authors also stressed that steps must be taken to identify and deploy alternatives fuels at least 10 years before peaking occurs. Even then, there will be some dire economic consequences."
Dr. Duarte's review of the Hirsh Report (http://www.netl.doe.gov/publications/others/pdf/Oil_Peaking_NETL.pdf), revealed the following:
Hirsch predicted that when the peak arrives, oil prices will soar, and that there will be problems in the developed and undeveloped world, with the latter having a more difficult time than the former.
The most interesting notion put forth in the report is the fact that conservation alone won't be enough to mitigate the results of peak oil.
Hirsch notes that the situation will call for the "production of large amounts of substitute liquid fuels," and that the methods to produce them are "currently available," further describing the solution as "feasible."
Hirsch concludes that only through the "construction of a large number of substitute fuel production activities coupled to significant increases in transportation fuel efficiencies," will the problem be mitigated.
There are some eerie aspects of this situation, as we heard the CEO of Core Labs (NYSE: CLB) tell CNBC last week that production problems are quite evident around the world now.
Over the last year Royal Dutch Shell had to backtrack on its reserve estimates.
Venezuela's oil production is now widely accepted to be well below the official government estimates.
Significant questions about the actual amounts of oil left in Saudi Arabia are being raised routinely.
And consistent with Hirsh's predictions, it seems as if production is starting to fall at a rapid pace, with many fields around the world starting to flow more slowly than expected, sometimes years before they were expected to run dry.
Two perfect examples are the North Sea, as well as key fields in Mexico.
In our opinion, what we are seeing is a significant set of developments.
First, the media is starting to pick up the drumbeat. CNN recently had a weekend special on Peak oil. Now Fox News, has had a prominent article on its web site.
Next, the U.S. Energy Secretary has predicted that the current high prices of gasoline may not improve for years.
And the whole thing started during the President's State of the Union address in January, with President Bush calling for increases in the use of alternative energy sources, uttering the "oil addiction" phrase.
In other words, the peak oil concept is now in play, in the mainstream, which means that volatility in prices, another requisite of the concept, is about to rise.
Oil And Commodity Summary:
$75 Latest Line In The Sand
Oil traders bought back into crude futures overnight, keeping prices above $71, but not moving too close to $75, the latest new all time high.
It's that $75 area that holds the key, both in a market sense, and in a psychological sense.
If prices reach the $80 area, it could spark an unpredictable set of reactions from businesses, politicians, and consumers.
For example, if regular gasoline moves close to the $4.00 over the next few weeks, as the driving season gets into high gear, it may be enough to change normal summer behavior, and cause changes in behavior.
If business travelers stop flying, airline profits will start to fall, as will hotel revenues from decreasing numbers of travelers.
Since there is now e-mail, teleconferencing, and instant messaging, not to mention cell phones, and other ways to communicate, business may not suffer as much, other than the loss of a face to face meeting.
But many communities, especially along the Gulf Coast, Florida, and areas of the West Coast, live off of the business that comes in the spring and summer seasons, with the latter providing the bulk of the year's revenues in some cases.
Although consumption has yet to be stalled by current gasoline prices, the effect of crude prices above $80, if indeed that is what happens over the next few weeks, will have unpredictable results for the economy.
The U.S. Energy Information Agency reported, on 4-26, that gasoline inventories remained some 5.6% below last year's levels, even as U.S. refinery capacity rose 2% to 88.2%, suggesting that there is still lots of room for improvement.
The new oil ETF (AMEX: USO) remained below $70.