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Opinion Forum:
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Saturday's
Lagniappe
Reading
the Gas Pump Numbers
What Do Falling Oil Prices Tell Us about War with Iran, the
Elections, and Peak-Oil Theory
By Michael T. Klare
What
the hell is going on here? Just six weeks ago, gasoline prices
at the pump were hovering at the $3 per gallon mark; today,
they're inching down toward $2 -- and some analysts predict
even lower numbers before the November elections. The sharp
drop in gas prices has been good news for consumers, who now
have more money in their pockets to spend on food and other
necessities -- and for President Bush, who has witnessed a sudden
lift in his approval ratings.
Is this
the result of some hidden conspiracy between the White House
and Big Oil to help the Republican cause in the elections, as
some are already suggesting? How does a possible war with Iran
fit into the gas-price equation? And what do falling gasoline
prices tell us about "peak-oil" theory, which predicts
that we have reached our energy limits on the planet?
Since
gasoline prices began their sharp decline in mid-August, many
pundits have attempted to account for the drop, but none have
offered a completely convincing explanation, lending some plausibility
to claims that the Bush administration and its long-term allies
in the oil industry are manipulating prices behind the scenes.
In my view, however, the most significant factor in the downturn
in prices has simply been a sharp easing of the "fear factor"
-- the worry that crude oil prices would rise to $100 or more
a barrel due to spreading war in the Middle East, a Bush administration
strike at Iranian nuclear facilities, and possible Katrina-scale
hurricanes blowing through the Gulf of Mexico, severely damaging
offshore oil rigs.
As the
summer commenced and oil prices began a steep upward climb,
many industry analysts were predicting a late summer or early
fall clash between the United States and Iran (roughly coinciding
with a predicted intense hurricane season). This led oil merchants
and refiners to fill their storage facilities to capacity with
$70-80 per barrel oil. They expected to have a considerable
backlog to sell at a substantial profit if supplies from the
Middle East were cut off and/or storms wracked the Gulf of Mexico.
Then came
the war in Lebanon. At first, the fighting seemed to confirm
such predictions, only increasing fears of a region-wide conflict,
possibly involving Iran. The price of crude oil approached record
heights. In the early days of the war, the Bush administration
tacitly seconded Israeli actions in Lebanon, which, it was widely
assumed, would lay the groundwork for a similar campaign against
military targets in Iran. But Hezbollah's success in holding
off the Israeli military combined with horrific television images
of civilian casualties forced leaders in the United States and
Europe to intercede and bring the fighting to a halt.
We may
never know exactly what led the White House to shift course
on Lebanon, but high oil prices -- and expectations of worse
to come -- were surely a factor in administration calculations.
When it became clear that the Israelis were facing far stiffer
resistance than expected, and that the Iranians were capable
of fomenting all manner of mischief (including, potentially,
total havoc in the global oil market), wiser heads in the corporate
wing of the Republican Party undoubtedly concluded that any
further escalation or regionalization of the war would immediately
push crude prices over $100 per barrel. Prices at the gas pump
would then have been driven into the $4-5 per gallon range,
virtually ensuring a Republican defeat in the mid-term elections.
This was still early in the summer, of course, well before peak
hurricane season; mix just one Katrina-strength storm in the
Gulf of Mexico into this already unfolding nightmare scenario
and the fate of the Republicans would have been sealed.
In any
case, President Bush did allow Secretary of State Condoleezza
Rice to work with the Europeans to stop the Lebanon fighting
and has since refrained from any overt talk about a possible
assault on Iran. Careful never explicitly to rule out the military
option when it comes to Iran's nuclear enrichment facilities,
since June he has nonetheless steadfastly insisted that diplomacy
must be given a chance to work. Meanwhile, we have made it most
of the way through this year's hurricane season without a single
catastrophic storm hitting the U.S.
For all
these reasons, immediate fears about a clash with Iran, a possible
spreading of war to other oil regions in the Middle East, and
Gulf of Mexico hurricanes have dissipated, and the price of
crude has plummeted. On top of this, there appears to be a perceptible
slowing of the world economy -- precipitated, in part, by the
rising prices of raw materials -- leading to a drop in oil demand.
The result? Retailers have abundant supplies of gasoline on
hand and the laws of supply and demand dictate a decline in
prices.
Finding
Energy in Difficult Places
How long will this combination of factors prevail?
Best
guess: The slowdown in global economic growth will continue
for a time, further lowering prices at the pump. This is likely
to help retailers in time for the Christmas shopping season,
projected to be marginally better this year than last precisely
because of those lower gas prices.
Once the
election season is past, however, President Bush will have less
incentive to muzzle his rhetoric on Iran and we may experience
a sharp increase in Ahmadinejad-bashing. If no progress has
been made by year's end on the diplomatic front, expect an acceleration
of the preparations for war already underway in the Persian
Gulf area (similar to the military buildup witnessed in late
2002 and early 2003 prior to the U.S. invasion of Iraq). This
will naturally lead to an intensification of fears and a reversal
of the downward spiral of gas prices, though from a level that,
by then, may be well below $2 per gallon.
Now that
we've come this far, does the recent drop in gasoline prices
and the seemingly sudden abundance of petroleum reveal a flaw
in the argument for this as a peak-oil moment? Peak-oil theory,
which had been getting ever more attention until the price at
the pump began to fall, contends that the amount of oil in the
world is finite; that once we've used up about half of the original
global supply, production will attain a maximum or "peak"
level, after which daily output will fall, no matter how much
more is spent on exploration and enhanced extraction technology.
Most industry
analysts now agree that global oil output will eventually reach
a peak level, but there is considerable debate as to exactly
when that moment will arise. Recently, a growing number of specialists
-- many joined under the banner of the Association for the Study
of Peak Oil -- are claiming that we have already consumed approximately
half the world's original inheritance of 2 trillion barrels
of conventional (i.e., liquid) petroleum, and so are at, or
very near, the peak-oil moment and can expect an imminent contraction
in supplies.
In the
fall of 2005, as if in confirmation of this assessment, the
CEO of Chevron, David O'Reilly, blanketed U.S. newspapers and
magazines with an advertisement stating, "One thing is
clear: the era of easy oil is over... Demand is soaring like
never before... At the same time, many of the world's oil and
gas fields are maturing. And new energy discoveries are mainly
occurring in places where resources are difficult to extract,
physically, economically, and even politically. When growing
demand meets tighter supplies, the result is more competition
for the same resources."
But this
is not, of course, what we are now seeing. Petroleum supplies
are more abundant than they were six months ago. There have
even been some promising discoveries of new oil and gas fields
in the Gulf of Mexico, while -- modestly adding to global stockpiles
-- several foreign fields and pipelines have come on line in
the last few months, including the $4 billion Baku-Tbilisi-Ceyhan
(BTC) pipeline from the Caspian Sea to Turkey's Mediterranean
coast, which will bring new supplies to world markets. Does
this indicate that peak-oil theory is headed for the dustbin
of history or, at least, that the peak moment is still safely
in our future?
As it happens,
nothing in the current situation should lead us to conclude
that peak-oil theory is wrong. Far from it. As suggested by
Chevron's O'Reilly, remaining energy supplies on the planet
are mainly to be found "in places where resources are difficult
to extract, physically, economically, and even politically."
This is exactly what we are seeing today.
For example,
the much-heralded new discovery in the Gulf of Mexico, Chevron's
Jack No. 2 Well, lies beneath five miles of water and rock some
175 miles south of New Orleans in an area where, in recent years,
hurricanes Ivan, Katrina, and Rita have attained their maximum
strength and inflicted their greatest damage on offshore oil
facilities. It is naive to assume that, however promising Jack
No. 2 may seem in oil-industry publicity releases, it will not
be exposed to Category 5 hurricanes in the years ahead, especially
as global warming heats the Gulf and generates ever more potent
storms. Obviously, Chevron would not be investing billions of
dollars in costly technology to develop such a precarious energy
resource if there were better opportunities on land or closer
to shore -- but so many of those easy-to-get-at places have
now been exhausted, leaving the company little choice in the
matter.
Or
take the equally ballyhooed BTC pipeline, which shipped its
first oil in July, with top U.S. officials in attendance. This
conduit stretches 1,040 miles from Baku in Azerbaijan to the
Turkish Mediterranean port of Ceyhan, passing no less than six
active or potential war zones along the way: the Armenian enclave
of Nagorno-Karabakh in Azerbaijan; Chechnya and Dagestan in
Russia; the Muslim separatist enclaves of South Ossetia and
Abkhazia in Georgia; and the Kurdish regions of Turkey. Is this
where anyone in their right mind would build a pipeline? Not
unless you were desperate for oil, and safer locations had already
been used up.
In fact,
virtually all of the other new fields being developed or considered
by U.S. and foreign energy firms -- ANWR in Alaska, the jungles
of Colombia, northern Siberia, Uganda, Chad, Sakhalin Island
in Russia's Far East -- are located in areas that are hard to
reach, environmentally sensitive, or just plain dangerous. Most
of these fields will be developed, and they will yield additional
supplies of oil, but the fact that we are being forced to rely
on them suggests that the peak-oil moment has indeed arrived
and that the general direction of the price of oil, despite
period drops, will tend to be upwards as the cost of production
in these out-of-the-way and dangerous places continues to climb.
Living
on the Peak-Oil Plateau
Some
peak-oil theorists have, however, done us all a disservice by
suggesting, for rhetorical purposes, that the peak-oil moment
is© well, a sharp peak. They paint a picture of a simple,
steep, upward production slope leading to a pinnacle, followed
by a similarly neat and steep decline. Perhaps looking back
from 500 years hence, this moment will have that appearance
on global oil production charts. But for those of us living
now, the "peak" is more likely to feel like a plateau
-- lasting for perhaps a decade or more -- in which global oil
production will experience occasional ups and downs without
rising substantially (as predicted by those who dismiss peak-oil
theory), nor falling precipitously (as predicted by its most
ardent proponents).
During
this interim period, particular events -- a hurricane, an outbreak
of conflict in an oil region -- will temporarily tighten supplies,
raising gasoline prices, while the opening of a new field or
pipeline, or simply (as now) the alleviation of immediate fears
and a temporary boost in supplies will lower prices. Eventually,
of course, we will reach the plateau's end and the decline predicted
by the theory will commence in earnest.
In the
meantime, for better or worse, we live on that plateau today.
If this year's hurricane season ends with no major storms, and
we get through the next few months without a major blowup in
the Middle East, we are likely to start 2007 with lower gasoline
prices than we've seen in a while. This is not, however, evidence
of a major trend. Because global oil supplies are never likely
to be truly abundant again, it would only take one major storm
or one major crisis in the Middle East to push crude prices
back up near or over $80 a barrel. This is the world we now
inhabit, and it will never get truly better until we develop
an entirely new energy system based on petroleum alternatives
and renewable fuels.
Michael
T. Klare
is a professor of peace and world security studies at Hampshire
College and the author of Blood and Oil: The Dangers and Consequences
of America's Growing Dependency on Imported Oil (Metropolitan
Books). Petroleumworld
not necessarily share these views.
