The end of oil


Gassing up

Courtesy morguefile


By Phil Coleman

When Hurricane Katrina damaged southern ports, refineries, and drilling platforms and sent the price of gasoline over three dollars, Americans and their official representatives insisted that something ought to be done. At $3 a gallon how could we afford to drive our SUVs to the store, to soccer practice, to work? And how long would this spike in prices last? Shouldn’t the nation’s oil reserves be used to offset prices? Shouldn’t Pennsylvania abandon its gas tax?

Right now, everyone’s blaming a hurricane, but a tsunami is coming and when it hits, we’re in for a jolt.

The production capacity of oil no longer exceeds demand, which means that oil prices are going to rise—and continue rising. Since oil production in the United States peaked in 1970, our growing demand has meant a growing dependence on foreign oil. But now we face a new problem.

Although world production is still increasing, it’s not increasing nearly as fast as demand. China and India, with one third of the world population, both have a rapidly growing middle class, which translates into a rapidly growing demand for oil. Until recently, China was an exporter of oil. Now it’s an importer with ever increasing needs, which explains why China bid $18.5 billion for American oil company Unocal.

The official view of the American government is that Saudi Arabia has tremendous reserves, including undeveloped fields that will supply the world’s oil need for another two or three decades. But Matthew R. Simmons, an investment banker and the author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, has studied all available public documents about the Saudi oil fields and concludes that the present fields are nearly played out and that there will be no new finds to match them.

Using methodology based on the work of the late geophysicist, M. King Hubbert, who correctly predicted in 1956 that American oil production would peak in 1970, Kenneth S. Deffeyes predicts in Beyond Oil: the View from Hubbert’s Peak, that oil production will peak in November of this year and then decline as sharply as it had previously increased.

Although we may have a hard time determining who’s right and who’s wrong on the supply side, there is no question about demand. The world demand for oil now exceeds supply and the gap between demand and supply is widening. 

If Simmons and Deffeyes are right, America will go from being a country whose economy boomed because of affordable oil to a country struggling to maintain its industrial base.

We currently export little to China other than wood, Big Macs, and the money we spend to import a wide array of Chinese goods. Which means that in a few years, China, and to a lesser degree, India, will be able to pay more per barrel for oil than we will—and $3 a gallon will be remembered as the good old days.

Phil Coleman is a member of the Allegheny Group and has twice served as Chapter chair.

Published November 2005