Oil Prices and Recession
Pfeiffer, FTW Contributing Editor for Energy
Isn't it nice
to know the recession is over? Al Greenspan, George W. and
big business are all patting themselves on the back and
talking about how resilient our economy is. Some of them
are even venturing to wonder if this little economic bump
was really a recession at all. Sure, the recovery is somewhat
anemic, but the worst is behind us, they say. Corporate
Average Fuel Economy limits? Who needs them? Increase the
percentage of electricity generated from renewable sources?
Why bother? Don't worry about anything, folks. Just go out
there and spend, spend, spend for your country.
Do people really buy this snake oil? I'm not one for polls,
but in a recent Netscape poll, 62 percent of over 300,000
respondents said they did not believe the recession was
over. Average folks are still feeling it in the pocketbook,
in lack of job security, and in their stock portfolio. And
once the 2001 tax returns come in, and people realize where
last year's tax rebate came from, the dissatisfaction is
bound to increase. And, if anyone hasn't noticed at the
gas pumps, the price of oil is already on the increase.
So what has been going on over the last couple years, what
is the deal with this "weak recovery," and what
do we have to look forward to?
I won't claim
oil was solely responsible for the recession. Among other
major factors were the overvalued tech market, consumer
debt, and the manipulation of currency values. However,
it was the surge in oil prices from 2000 to early-2001 that
originally plunged the world into recession.
Conventional oil production does appear to have peaked in
the year 2000. As production could no longer keep up with
demand, the price of oil began to climb. And soaring oil
prices sparked inflation, sending a very susceptible economy
into recession. Here in the U.S., this was reflected by
higher prices at the pumps, but we have only to look at
Europe to see how seriously this event affected others.
"French fishermen blockaded the Channel Ports because
their fuel costs had doubled, even though their fuel was
already tax-free," wrote oil industry expert Colin
J. Campbell. "The dispute spread rapidly to England
and other countries. Schools were closed. Hospitals had
red alerts because staff and patients could not reach them.
Supermarkets started rationing bread. Trade and industry
was seriously interrupted: the cost was huge." The
recession was not just a phenomenon of the U.S. economy.
It was felt around the whole world.
So why did oil prices dive over the past year, once the
recession had begun? The answer to this is really quite
simple. Rising oil prices brought on a recession, which
in turn cut oil demand and reduced pressure on prices. In
response, prices weakened to the point that OPEC was nearly
in a panic. Oil producing countries had to straddle a tightrope
between their own debts and decreasing production in order
to hold prices steady.
In the U.S., the Federal Reserve Board made a record number
of interest rate cuts in a desperate effort to bring inflation
under control. And President Bush launched another major
transfusion of money from the general public to the rich,
with his tax rebate of last year and the further economic
stimulus package he forced through Congress after 9-11.
But none of this seemed to make any difference. Nothing
affected the recession until weak oil prices allowed the
economy room to breathe again. And now that the weight on
our chest has been eased, we are beginning to recover. Yet
this recovery is very susceptible to disruption, and it
is very possible that peak oil production will prevent us
from ever making a full recovery.
From the chart below, courtesy of Campbell, we can see that
we have produced almost half of the oil that is available.
There remains only about 150 Gb (billion barrels) yet to
be found, and we are consuming four barrels of oil for every
one discovered. Because of this, we are depleting our oil
inheritance at a rate of about two percent per year. From
all of this we can deduce that conventional oil, which is
the vast majority of the oil produced and consumed, has
Produced-to-date / 873 Gb
Reserves / 928
Discovered-to-date / 1801
Yet-to-Find / 149
Yet-to-Produce / 1077
Ultimate recovery / 1950
Current consumption (2001) / 22 Gb/y
Current discovery rate / 6 Gb/y
Current depletion rate (ann. prod. as % of Yet-to-Produce)
For the last
few years demand and production have been in a neck and
neck horse race. Production had the lead until 2000, at
which time production hit its limit and demand took the
lead. In 2001 the recession curbed demand to the point that
production bounded well ahead and the price sagged. This
gave the economy a chance to gain its second wind, and now
demand is ready to rebound and overtake production again.
This horse race could last for a few years before production
WHAT IS TO
With Bush's oil
wars, or as they are officially known, the "War on
Terrorism," muddying up the pond, it is very difficult
to say what lies ahead. However, we can be certain that
oil production will eventually begin to decline, and the
world will have to adjust. Despite all the variables that
could enter into play, we can make some deductions about
what lies ahead.
oil production peaked in 2000, but the give and take between
production and demand may put off the decline of production
for a few years. So it appears that we have entered what
could be called the "oil plateau," a kind of limbo
where we will alternate between stagnation and viability.
From our perspective in the midst of things, this will hardly
be perceived as a smooth plateau. We have entered a cyclic
pattern of peaking production leading to a price surge,
which results in recession, which then reduces demand, leading
to production surplus and weakening oil prices. This will
in turn permit an economic rebound and an increase in demand,
bringing us back to peak production again. This cycle could
continue for the next several years until the inevitable
decline of production sets in. The only way out of this
cycle is to hold back demand below the rate of production,
and this is unlikely to happen in a free-market economy.
Outside of the
Middle East, world production is already in decline. This
means that the Middle East must increase production to make
up for declines elsewhere simply to keep production where
it is right now. Within the next few years, the Middle East
will take control of world oil production. And probably
by the year 2010, the world oil production curve will dovetail
into the Middle Eastern production curve. There are reasons
to doubt that the Persian Gulf states can rise to meet this
demand. Many Middle Eastern countries are already pumping
at maximum. As the importance of Middle Eastern oil grows,
the entire world will be at the mercy of political and social
instabilities in this region. And in any case, the Persian
Gulf oil fields are aging, and their production is approaching
peak as well.
The roller coaster
ride should end by 2010, at which point we may begin to
look back fondly on the years of cyclic recession. By this
time we will slide out of the plateau into an irrevocable
decline of oil production. We have the next several years
to wean ourselves from oil and prepare. A century of conspicuous
consumption must come to an end, and we must learn to be
frugal. If we are not prepared, then the suffering will
There are reports
that major oil discoveries are popping up all over the world,
but none of these appear to be valid. Some of the reports
are due to companies and governments attempting to put a
spin on their assets in an effort to attract foreign investment.
Whenever the claims are investigated, the size of the oil
deposits decreases significantly. Two of the largest claims
are the Arctic National Wildlife Refuge (ANWR) and the Caspian
the U.S. Geological Survey (USGS), in the case of ANWR the
most likely reserve estimate is in the neighborhood of 7.7
Gb, which is hardly enough oil to cover U.S. demand for
As for the Caspian
Sea reserves, these do truly represent a major find, equal
to the North Sea fields. Their discovery is anomalous, due
to the fact that the Caspian region only opened up to exploration
after the dissolution of the former Soviet Union. Geologic
studies of rock type and remote sensing data had long ago
identified this as an area of interest, so the investigators
rushed in just as soon as the iron curtain was raised.
should in no way be taken as an indication that there are
other major fields just waiting to be found. Scientific
advances have done a great deal to explain where oil won't
be found, and technological advances mainly serve the purpose
of finding the small deposits which are still scattered
about, and pumping the last few obtainable drops out of
the fields that are in production.
There is also
a great deal of confusion about the amount of oil contained
in the Caspian fields. The most reliable figures place Caspian
reserves on par with the North Sea oil fields -- 18 to 34
Gb of proven reserves, with a potential of maybe 50 Gb.
While this is an impressive find, it is not enough to make
a difference to the oil peak, but will only serve to help
ameliorate the coming decline, and only if these Caspian
reserves are fully brought on line in the next few years.
Figures as high as 250 Gb are often bandied about, but they
are meaningless. The U.S. Energy Information Administration
(EIA) has stated that the Caspian region may yield as much
as 235 Gb, but the EIA has admitted to doctoring its figures.
This is one
of the major causes of disinformation regarding energy issues.
The U.S. government relies on the EIA for all of its energy
information. Yet the EIA, a division of the Department of
Energy, has admitted that it reverse-engineers its studies.
"These adjustments to the USGS and MMS estimates are
based on non-technical considerations that support domestic
supply growth to the levels necessary to meet projected
demand levels," stated the EIA in a report titled,
"Annual Energy Outlook 1998 with Projections to 2020."
This means that the EIA first looks at projected figures
for demand, then juggles reserve and production figures
to meet demand!
reports can no longer be trusted either since the agency's
about face in 2000. Prior to 2000, the USGS was talking
about oil depletion and the cross-over event between demand
and supply. In 2000, however, the agency published a rosy
report stating there would be abundant oil for many decades.
Geologists working for the USGS have stated off the record
that they do not trust USGS oil data.
A WORD ABOUT
There is some
speculation that oil is abiotic in origin -- generally asserting
that oil is formed from magma instead of an organic origin.
These ideas are really groundless. All unrefined oil carries
microscopic evidence of the organisms from which it was
formed. These organisms can be traced through the fossil
record to specific time periods when quantities of oil were
are two primal energy forces operating on this planet, and
all forms of energy descend from one of these two. The first
is the internal form of energy heating the Earth's interior.
This primal energy comes from radioactive decay and from
the heat energy originally generated during accretion of
the planet some 4.6 billion years ago. There are no known
mechanisms for transferring this internal energy into any
secondary energy source. And the chemistry of magma does
not compare to the chemistry of hydrocarbons. Magma is lacking
in carbon compounds, and hydrocarbons are lacking in silicates.
If hydrocarbons were generated from magma, then you would
expect to see some closer kinship in their chemistry.
The second primal
energy source is light and heat generated by our sun. It
is the sun's energy that powers all energy processes on
the Earth's surface, and which provides the very energy
for life itself. Photosynthesis is the miraculous process
by which the sun's energy is converted into forms available
to the life processes of living matter. Following biological,
geological and chemical processes, a line can be drawn from
photosynthesis to the formation of hydrocarbon deposits.
Likewise, both living matter and hydrocarbons are carbon
oil generation is in part a geological process, it proceeds
at an extremely slow rate from our human perspective. Geological
processes take place over a different frame of time than
human events. It is for this reason that when geologists
say that the San Andreas fault is due for a powerful earthquake,
they mean any time in the next million years -- probably
less. Geological processes move exceedingly slow.
matter has accumulated on the sea floor, it must be buried
by the process of deposition. In geological time, in order
for this matter to be a likely prospect for hydrocarbon
generation, the rate of deposition must be quick. Here is
an experiment you can conduct to get an idea how slow the
rates of deposition are. Place a small stone on the bottom
of a motionless pond. Take another stone of about the same
size and place it at the mouth of a small stream, a stream
where the current is not so great that it will sweep the
stone away. Check both of these stones yearly until they
have been buried by deposition. You might see the stone
at the mouth of the stream covered over within a few years,
but it is unlikely that you will see the stone in the pond
buried within your lifetime.
It is a simple
geological fact that the oil we are using up at an alarming
rate today will not be replaced within our lifetime -- or
within many lifetimes. That is why hydrocarbons are called
non-renewable resources. Capped wells may appear to refill
after a few years, but they are not regenerating. It is
simply an effect of oil slowly migrating through pore spaces
from areas of high pressure to the low-pressure area of
the drill hole. If this oil is drawn out, it will take even
longer for the hole to refill again. Oil is a non-renewable
resource generated and deposited under special biological
and geological conditions.
IS IN THE PUDDING
If oil has a
rosy future, one where there will be plenty of oil to pump,
then what is the industry doing to prepare for that future?
The major oil companies and other related industries have
been merging and shedding staff. Likewise, they are buying
their own stock. These are the moves of an industry preparing
to downsize. On top of this, the major companies are not
investing in new refining capacity. It has been over a decade
since there was any talk of building new refineries. These
are signs that the oil companies know there are no major
investment opportunities left. As Colin Campbell notes,
"Their past is worth more than their future -- and
they know it."
And now, while
claiming that the rest of us should increase our consumption
for the good of the economy, and while claiming that conservation
and renewable energy are not as important as increasing
oil and gas production, developing nuclear power and burning
coal, George W. Bush and Dick Cheney have been busy renovating
their own households. George W.'s new home in Texas is fueled
by solar power and features a 25,000-gallon cistern that
collects house wastewater and rainwater for reuse in irrigation.
His house will also utilize a geothermal heating and cooling
system that uses 25 percent of the electricity of traditional
systems. Water at a constant 67 degrees is piped up from
a source 300 feet below ground and channeled through the
house for cooling in the summer and heating in the winter.
Similarly, the Cheney vice presidential house is equipped
with state of the art energy conservation devices installed
by Al Gore.
Who said, "Let
them eat cake?"
For an in-depth scientific look at the oil peak and the
economy, read Colin J. Campbell's excellent article, "Peak
Oil: an Outlook on Crude Oil Depletion," revised February