Penetration
by Jim "Happy Talk" Kunstler

The telling moment last week was Robert Hirsch's appearance on the CNBC morning "Squawkbox" financial show in which he proposed the probability of $500-a-barrel oil within "a three-to-five-year time-frame." Squawkhead Becky Quick was clearly nonplussed by the stolid Mr. Hirsch, author of a (then)-startling 2005 US Dept of Energy report (since referred to as the Hirsch Report and buried by the Secretary of Energy) that warned of dire effects on the American way of life as the Peak Oil predicament gained traction. Perhaps more reality-challenged was the uber-idiot Larry Kudlow on CNBC's night-time money show, who kept repeating the mantra "drill, drill drill" when presented with signs that something other than "oil speculators" was driving up the price and creating global scarcity. These idiots always return to the shibboleth that "there's plenty of oil out there." What they don't get is that even while the world is enjoying the all time peak of production (somewhere around 85-million barrels-a-day), that same world is demanding at least 86-million barrels -- so even though there's more oil than ever, there's not enough. And the gap is only bound to get bigger. The difference between what's available and what's demanded is being felt by poor countries and poor people in richer countries. Third world nations lacking their own oil are simply dropping out of the bidding, and the lower classes in the US are having to choose between buying gasoline and velveeta. The floods in the corn belt will surely aggravate the problem here in the USA. Lunch breaks may soon be a thing of the past for WalMart Associates. Maybe they'll just play video games on their cell phones in the parking lot to allay their hunger.

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Primer: Peak Oil

The record run-up in oil prices over recent years is igniting fierce debate over the "peak oil" theory — that once the maximum rate of global crude production is reached, it begins a terminal, and possibly steep, decline. It has become a high profile debate — Boone Pickens weighed in on it before Congress — that depends not just on whether one tends to see the barrel half empty or half full — it’s often a question of getting a good look at the barrel. That’s certainly a debate swirling around OPEC countries — which produce about a third of the world's oil — which are widely believed to overstate their reserves. Just how much, no one knows. The reason: cartel members' reserves are the basis for calculating quotas; the lower the reserves, the less oil they can sell. (Non-OPEC, oil-producing countries are more transparent on the subject because their respective international oil companies have to report estimated reserves to investors.) So far, there is no definitive indication that production is headed southward, much less that any decline is permanent. Saudi Arabia, for instance, recently demonstrated its heft by bringing on excess capacity. To be sure there are warning signs. Global production fell last year (by 0.2 percent), while consumption continued to grow (by 1.1 percent), and peak oil proponents (which includes an international association) say this squeeze will really bite by 2010. Skeptics insist oil remains a cyclical business, where the question is always how much oil at a certain price. By this reckoning, today's high prices will eventually lead to more supply — through more exploration, enhanced recovery and development of "unconventional" oil. Geological variables are just part of the supply equation. Human factors — politics, taxes, investment levels, and that 80 percent of the world’s oil is state-controlled — can be equally important. It's no wonder, then, that passions can run high in the peak oil debate, sometimes to a pitch that makes it a challenge to bring rival camps to share a stage. That's where a cyber soapbox comes in handy. Here we present two opposing views from long-sparring rivals.

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Saudi Arabia - opening the tap?

One wonders, sometimes, why folk would want to get into political office these days, given the pervasive problems starting to arise from the end of cheap and easy to produce oil and natural gas. The rising costs of providing fuel for everything from school buses to emergency responders eats away at one end of a budget. The demands for wage increases to help employees cope with rising fuel and food prices nibbles away both at another part of the budget, but also at public and labor relations. And then there is the cost to repair and maintain the existing infrastructure, let alone make provision for future alternate choices for power and transportation. Sectors of the population, such as truckers, are becoming less shy in complaining about their problems, as unemployment bites into their numbers. Fortunately there are legislators and candidates for office that do understand both the problems and the complexity in finding answers where options are not immediately responsive or popular. For the rest it often becomes easier to try and unify a constituency by invoking an enemy –someone who can, by their actions, be blamed for constituents’ problems. Sadly the world’s history has been filled with stories of such scapegoats, as an easy way of switching attention. Today it is possible that as oil prices rise, both OPEC and Saudi Arabia may become the villain in articles and political slogans. Given the possible outcomes of such positioning, it is perhaps not surprising that, as another American election swings into the beginning of the end game, that oil suppliers, perhaps sensing this, are indicating the chance of a greater flexibility in supply. Categorizing the response of Saudi Arabia and OPEC to market pressures is not an easy undertaking, and has been the subject of considerable debate here and elsewhere. To begin there are the different grades of crude that are available. And while the initial impression of the latest Saudi offer is that this will be sweet, light crude (i.e. easy to refine) that has been the historic quality Saudi product, this is not necessarily the case. Bear in mind that the Kingdom also produces a heavier crude, that is frequently sour (i.e. having a high sulfur content) and this has not been easy to market .

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