The perils of cheap oil

Enjoy your trips to the gas pump while you can. It won't be long until the energy crisis is back, bigger and better than ever.


Andrew Leonard
November 18, 2008 5:00PM (UTC)

My kids and I drove to Southern California (from Berkeley) and back this past weekend to visit my grandmother. Three tanks of gas in total -- averaging roughly $2.35 a gallon. At 16 gallons a tank, the cost of gasoline for the whole trip came to about $113.

But if I'd made that trip in July, it would have gouged twice as much out of my wallet. Gas prices in California are half what they were five months ago. And like every American who has gone for a drive in the last couple of months, I'm grateful for that. When layoffs mount and stock portfolios crash, every penny seems to count just a bit more than in flusher days. Bloomberg News reported on Monday that in October, the U.S. cost-of-living recorded its sharpest drop, month-to-month, in 60 years. I witnessed that, loud and clear, on California freeways this past weekend.

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On Sunday, "60 Minutes'" Steve Kroft asked President-elect Barack Obama if the astonishing drop in gas and oil prices made dealing with energy issues "less important." Obama responded forcefully: "It makes it more important." He observed that there is a cycle of "shock and trance" in American attitudes toward energy. When gas prices go up, there's a "flurry" of activity, but when they go back down, well, never mind.

That's exactly what I want to hear from my president, because the truth is that the current low gas and oil prices are engendering a false sense of security. We are being set up for an even more painful energy crisis in the very near future.

Support for this thesis comes from the recently released World Energy Outlook from the International Energy Agency. The rate of production decline in existing fields is accelerating, to the point "that by 2030 the world needs to find and produce 45 million [new] barrels of oil a day."

You don't have to be a believer in peak oil to recognize that developing that much new production will be a huge and expensive task. But at the moment, investment in new oil production capacity is getting hammered by the double whammy of low oil prices (which makes existing facilities offshore and in, for example, the Alberta oil sands, uneconomic) and the unforgiving credit environment, which is making it very hard to get the financing necessary to undertake new projects.

James Herron, writing for Dow Jones Newswires, has a great look at how these factors are imperiling the prospect of squeezing new oil production out of the waning North Sea oil fields. Scores of smaller oil companies are finding that their business plans do not work in the current climate. The mere lack of action could even result in additional production declines.

But one danger specific to the U.K. North Sea is that a prolonged trough in the oil price could lead to aging pipelines and platforms needed to tap new fields being dismantled early. "Existing infrastructure is very important for companies to sweep up the remaining reserves," said Wood Mackenzie's Thomas. "There is a danger that as companies review capital expenditure and budgets and look to control their costs, they reduce investment. If that's sustained over a long period of time it could cause long-term damage to infrastructure."

OPEC, of course, has an obvious incentive for higher oil prices, but the same basic story comes through in the comments of Chakib Khelil, Algeria's energy minister and the current president of OPEC, as reported by the Financial Times.

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"Our objective is to reach a price of $70-$90... Because it's the price of the marginal cost for new developments, whether that's Canadian bituminous sands, the Brazilian deep offshore or even Venezuelan heavy crude. If we don't have $70-$90 in the next few years then eventually we'll go much higher [in price] because we will have no production from these deep reserves, from the bituminous sands or from the kind of reserves that need $70."

Bloomberg News, also reporting on OPEC, notes that the drop in global demand for oil will likely result in a drop in global supply:

"The current financial situation has pressured companies to cut their planned capital expenditure, which has sharply influenced the supply forecast," the group said. "All regions contributed to the downward revision," according to OPEC, with the biggest contribution from former Soviet countries.

So where does that leave us? When economic growth resumes across the globe, demand for oil will surge once again. Only this time around, given the constraints presented by declining oil fields and the current apparent freeze in investment in new oil production capacity, the supply-demand equation will likely send oil prices shooting back up, perhaps even further than before.

Which is why now is the time, more than ever, for government leadership that promotes conservation, energy efficiency, fuel economy, and increased production of renewable energy. Waiting until the economy recovers before tackling energy would be a huge, huge mistake.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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