Recognize that large "reserves" elsewhere are political power. They qualify nations for loans and control daily quotas. Observer Simmons & Co. believes the Saudis overstate reserves, and the German think-tank L-B-Systemtechnik concluded that the peak in discovery occurred 25 years ago, and that the peak in production that's when demand outruns supply is near. Also, oil comes in different flavors, so some producers are favored. Would you redo your floors with oak or balsa? Do you think the stock of Valero has nearly quadrupled in a year because they are robber barons, or because they buy junk oil at a 15 percent discount and can turn it into gasoline? How long does it take to build a refinery? Maybe nobody knows since our "leaders" haven't allowed that in 30 years, but it takes five years to just get a permit, and by then we'll be riding bikes.
On the demand side, annual additional consumption has exceeded new discoveries every year since the early 1980s and is increasing at 3 percent per year. Today, at peak efficiency, there is a 500,000 barrel cushion between supply and demand. Any hurricane, attack, strike or malfunction causes a shortfall. Shortfalls raise prices, profits and stock prices. Traders have been acting on this for a year. They are better positioned than the dot-com boys, and these companies actually make profits. It's about Adam Smith, not cartels.
Can you see the bunny yet? Well, here's another dot. A third of the world's people, previously slumbering, are awake. And they want to be like Mike. DVDs and the Internet have shown them the malls, air conditioning and John Deere. India and China have arrived at a gas station near you. Steve Forbes smirks and says that oil will be at $35. T. Boone Pickens sternly says $100-$125. Somehow the media presents them as equals. The facts? The United States has 5 percent of the people and uses 26 percent of the oil. Per capita we are using at 15-20 times India and China. The United States has 800 million cars and trucks; China has 7 million. China has doubled consumption in 10 years, to 6 mbpd. What happens when it really gets started?
How bad can it get? Remember, you don't have to be out of oil to have a crisis; you just need demand bigger than supply. Think of it like being in an airtight room with 10 other people. Fine for a while. Then a glimmer of trouble. What would you do? Run in place (buy an SUV)? Breathe shallow (hybrid)? Kill the guy next to you? Or, you are one of six heroin addicts. Supply is OK, but then two heavy users show up. Your dealer says he can't get anymore, not yet. What happens? First you blame the supplier, or the two guys, but that's because you don't want to use your mirror. Second, you hope "yet" is soon. Then?
In 2003, 25 percent of global supply came from five countries: Abu Dhabi, Iran, Iraq, Kuwait and Saudi Arabia. If survival means depending on them, how do you feel? Eighteen countries, 29 percent of production, have passed their peak. Production is declining, demand is rising. Getting the picture? Natural gas is in crisis now. The October contract is an all-time high, and December is higher. Chesapeake's wells used to be 5,000 feet, now they are 15,000. Thirty-three percent of gas is used by business; the price increases will be paid by us. We import some of our gas now and the DOE says demand will exceed supply by 2010. The gas companies will make big profits and become evil. Maybe that will be enough for you.
Here's the scary thing: When the crunch comes, likely 2008-2011, it will not be gradual. Russia won't keep pumping and sell it to us. They will keep it, using energy to surpass us. Then even less supply means even higher prices. The Arabs will bargain concessions from us (dealer/addict); they won't need to fight. Our military can't go anywhere, except on water. You won't be going anywhere either. Do our leaders know this? Last year Cheney said oil production would peak before 2010. Last Dec 2, Deutsche Bank opined that war would develop over oil. There are a lot of good reasons why our military is in the Middle East. Terrorists are bad, democracy is good, stoning women is bad. Culture-sustaining energy is another reason to be there. Don't tangent off on polemics now, this is a reality show. The reality is that long-range planning is a good thing.
If we talk about this again, we should talk about what to do. There are no silver bullets, but just waiting and hoping is dumb. Let's stop talking about cartels and believing politicians. Let's start believing in ourselves, change our ways and help change our patterns. Or get ready to have a shooting war with China within 10 years. Like Ursula in "The Little Mermaid" said, "Life is full of tough choices, idn't it?" Remember that, like our friends in D.C. do today, Hollywood changed the ending of that story; they knew we couldn't handle the truth. S
Don Smith is the retired chief operations officer of Wheat First Butcher & Singer, the predecessor firm to Wachovia Securities.
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