Deutsche Bank: $150 Oil Within Two Years
Thu Feb 28, 2008 at 01:01:37 PM PDT
Oil is essential to our economy, ingenuity, transportation and development as a nation. We are addicts, held hostage to the vagaries of global supply and internal demand. Try as we may, oil has us - and we can't stop shooting up. Unfortunately, our addiction to this rare and expensive drug will only grow worse if the status quo is maintained. We are nearing the end of the oil era - and we must swiftly and adroitly deal with the consequences. After perusing the following post at the Wall Street Journal, I am more convinced than ever that the United States must find the proverbial Methadone to ease our withdrawal symptoms:
Deutsche Bank’s oil team is jumping into the swirling peak-oil debate, arguing that steep decline rates in existing oil fields will make it all but impossible for producers to break beyond a 100 million-barrel-a-day ceiling.
Not a serious problem, you think? Think again.
The current world demand for oil is about 86 million barrels per day. This figure is, depending on the analysts you ask, either dangerously close to outstripping world production or already past the threshold. World oil production is hovering below 90 million bpd, according to most estimates. So what makes the Deutsche Bank estimate so significant? World oil demand will skyrocket to 118 million barrels per day by by 2030, and the Energy Information Administration acknowledges that the growing demand will largely be fueled by transportation needs.
It's not as if things aren't bad already: yesterday, oil futures closed at a record high of 100.88 dollars per barrel. And if today's trading is any indication, we will likely see more record highs. Currently, oil is trading well above the mark that it set yesterday. See for yourself at Bloomberg's energy page, where you can monitor the daily fluctuations in the price of crude oil.
Deutsche Bank is hardly a firm full of environmentalists. They have repeatedly scourged the notion of peak oil as a "stopped clock school of analysis" and heaped scorn upon predictions of drastic reductions in supply, despite a great deal of evidence to the contrary. But now, even Deutsche Bank sees the writing on the wall, and the three digit number that they predict will be scrawled on it by 2010 is $150:
The bank says that supply constraints could push the price of oil to $150 a barrel by 2010. The big question will be whether prices at that level will finally lead to a sharp break in demand, something that $100-a-barrel oil has yet to do.
Deutsche Bank bases its supply-side gloom on how much harder it is for oil producers to make up the difference for slumping production in aging fields. For the last 36 years the world has managed to add, on average, around 4.2 million barrels a day to annual supplies. But with a conservative 5% decline rate in existing fields, that figure will have to rise to over 7 million barrels a day to get to 100 million barrels a day—a level “that has never been achieved,” according to the report.
Even a fifth grader with a marginal conception of the laws of supply and demand could plainly see a crisis on the horizon: the world wants (and needs) more oil. But there is less and less of it to go around. Rising demand from the developing world is expected to jolt the world crude markets - already, impacts from demand in Brazil, China and India is affecting futures markets. And China isn't helping the world oil markets much: it is following the model of the 1950s United States, building vast corridors of highway and creating new areas of cities accustomed to the car culture. According to a recent article in the Washington Post, car ownership in China has trebled in only six years. A 300% increase in ownership means that approximately 1,000 new cars are being added to the roads every single day. Cars use oil - lots of it. And the fact that China's development model favors the automobile will cause many supply constraints as the Dragon joins the 21st century.
The weakening US Dollar may also inflict pain on consumers at the pump. If inflation spirals out of control, it will certainly find its way into the energy markets. And the price of oil will rise yet again. If the major exchanges of the world begin to move from denominating oil in dollars towards more stable currencies like the Euro, our pain will be even worse. Right now, the Euro, a currency that our policymakers mocked as little as 8 years ago, has just hit a record high against the dollar.
Another worry is US refining capacity. Take a look at this image.
There has been a steady decline in US refining capacity - in fact, we haven't built a new refinery in America since the year 1976. Our oil infrastructure is crumbling along with our regulatory environment - and production and delivery has suffered as a result. The end result is that these fluctuations are passed on to you when you pay for gas.
Political events are the wild card in the Deutsche Bank estimation, but one can safely guess that instability will afflict the major oil producing countries during the next several years. Recurring political turmoil in the Nigerian Delta, the continuation of Turkish incursions into northern Iraq, terrorist attacks in Saudi Arabia, corruption in Russia, tensions with Venezuela, and problems in the Caspian could all negatively impact the oil markets. And I'm not being an alarmist here: all of these events have already occurred, so it would be in our best interest to take the specter of political turmoil at face value and prepare for it.
So, what can we as a nation do? The answers aren't sexy, and they aren't popular with the Bush administration or the automotive and oil industries. But they are very clear: we must make every effort to increase the fuel efficiency of our cars. And the excuses from Detroit that we don't have the technology to accomplish that feat are lame: if European fleets can achieve high km/L fuel efficiency, we can most definitely achieve high MPG fuel efficiency. But improving fuel economy is only one piece of the puzzle. My next proposal is controversial, but it is the only long-term solution to the problem of oil usage in transportation: we must ultimately reduce the number of cars on the road. Our nation must move toward buses, subway systems, light rail and carpool lanes on existing highway. It's not a popular answer, but it's the right one.
In terms of energy, we must explore alternatives. Solar, wind and geothermal power carry light footprints, and we should seek to increase their employment. I also think that nuclear power is absolutely essential to electricity generation and a necessary tool in the fight against oil addiction. Many progressives will disagree with me on this point, but I think any progressives who are truly concerned with reducing oil and coal dependence must recognize that nuclear power has gotten safer, more efficient, and cheaper to harness. The waste problem can be mitigated by the newer classes of breeder reactors. But nuclear power is a task for a different diary - for now, I'll leave my pleas at that.
We must make changes in our personal lives. It's time to stop driving when we can walk, it's time to turn the lights off when we leave the house, it's time to start buying energy efficient appliances, and it's time to recognize that cheap and endless energy is neither cheap nor endless.
Finally, as Americans, we must listen to scientists and engineers more often. The oil companies and the Bush administration have a fondness for censoring the scientific evidence that does not fit their preconceived worldview. It's time we take the twin threats of peak oil and global warming seriously and elect policymakers who will implement the recommendations of the scientific community, even when those recommendations may not be politically expedient.
On the oil issue, I think Barack Obama said it best:
I don’t want to see that the oceans have risen a few more inches, and that the planet has reached a point of no return because we couldn’t find a way to stop buying oil from dictators.
It is a noble sentiment. But we have a long way to go. Will you help us?
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