So, what's the answer? Is it going to be $50 oil, or $500 oil? As usual, there is no simple answer. There's just a lot going on. The following is an attempt to lay out some of the key factors.
Overarching theme: As previously published (and as paraphrased from the wise words of Tom Whipple of ASPO-USA), "Worldwide oil depletion is in a race with demand destruction." Curent oil prices would indicate that the credit crisis-induced demand destruction is currently winning. The recently published EIA demand data shows a 6.4% drop in July 2008 demand, versus that of July 2007.
What could affect/interrupt demand destruction over the next few years?
- some sort of military event, which you can probably imagine, which could close the Straits of Hormuz or damage other key chokepoints or installations. This scenario is likely the only one (save hyperinflation) which could deliver Matt Simmons' $500 pricing, over the next few years.
- Venezuela, Nigeria and Mexico are the 3rd, 4th and 5th largest suppliers of crude oil to the US. In late September, Chavez was in talks with the Chinese to ramp up exports from a current 250,000 BO/D to 1 MMBO/D by 2012. The US currently imports about 1.2 MMBO/D from Venezuela, so presumably the Chinese increase would come at the expense of the US. Meanwhile, Nigeria appears about to blow, literally, at any time. And Mexico is reeling from "Peak Oil Posterchild", Cantarell, which has recently declined 30 % year-over-year. My guess is that Mexico will have to cease all exports by about 2010!
- the BTC pipeline in/near Georgia is scheduled to transport some 840,000 BO/D for the rest of 2008, then 1 MMBO/D in 2009. Obviously, it is subject to further Russian mischief. This oil primarily supplies the EU.
- the "groupthink" at the recently held ASPO-USA conference seems to have been that natural gas may be in short supply within the next few years. Two reasons. First, it seems that due to the delay/retraction of proposed coal plants (due to all the protests), utilities are being forced to "pencil in" simple, combined cycle natural gas plants as their near term solution to meeting demand. Andy Weissmann and others believe that they all may be counting on the same gas, which may not be there. Secondly, others believe that production from shale gas is not sustainable in the near term. (This author believes that shale gas as well as other unconventional and conventional natural gas sources can, in fact, supply enough gas for incremental power generation as well as for the replacement of some portion of gasoline and diesel fuels in vehicles - over, say, a 10 to 20 year term.) Also realize that other groups believe that there may be a near term glut of natural gas, due to substantial shale gas drilling and new LNG landings.
- energy conservation (this is where we can have the greatest effect, the soonest)
- mass transportation retrofits (likely optimized and marketed bus and carpool efforts)
- natural gas vehicles and stations (start with fleets to solve the Catch-22)
- expanded natural gas drilling (solve infrastructure & supply problems)
- wind energy (stop the tax credit hocus pocus - fix it for a reasonable time period)
- vehicular electrical storage research (cost effective and reliable batteries or other devices)
- design & production of more efficient cars (lighter, smaller EV's, plug-in hybrids and diesels)
- offshore drilling (offshore West Coast, East Coast, Florida Coast)
- biofuels research (enzyme & pyrolysis-based cellulosic ethanol, algae-based oil production)
- nuclear plants (fast-track & standardize the design, licensing and construction, use breeders and reprocessing to minimize waste)
- coal plants (use best available, cost-effective clean up technology)
- solar thermal innovations & implementations
- geothermal and waste heat recovery installations
Furthermore, at least one group has advanced, albeit not very articulately, that "energy is the solution to the economy".
What is meant by this?
Well, despite my personal aversion to additional government involvement, the fact of the matter is that we face both an economic abyss, and an energy abyss. Time is short, both for the economy and for oil. Rather than spending a trillion dollars on buying toxic derivatives, or on a war, these funds would be better spent in helping private enterprise jump-start the above referenced conservation techniques and alternate energy research and implementation. The use of our hard-earned tax dollars to help accelerate these initiatives would create jobs and new businesses. The bottom-line is that solving the energy problem - which must be dealt with anyway, and soon - is the perfect solution to solving the consumption- and credit-induced economic dislocation we are now beginning to experience. There would be a third, important benefit. Energy conservation, increased natural gas use and alternate energy implementation all help lower CO2 emissions.