IT ONLY TOOK A GLOBAL DEPRESSION TO REDUCE GAS PRICES BY 40 CENTS

You can’t watch the mainstream media propaganda channels for more than ten minutes without a talking head breathlessly announcing that gas prices have dropped for the 24th day in a row and are now back to $3.55 a gallon. Wall Street oil analysts, who are paid hundreds of thousands of dollars per year to tell us why prices rose or fell after the fact, are paraded on CNBC to proclaim the huge consumer windfall from the drop in price. This is just another episode of a never ending reality show, designed to keep the average American sedated so they’ll continue to spend money they don’t have buying crap they don’t need. The brainless twits that pass for journalists in the corporate mainstream media never give the viewer or reader any historical context to judge the true impact of the price increase or decrease. The government agencies promoting the storyline of those in power extrapolate the current trend and ignore the basic facts of supply, demand, price and peak oil. The EIA is now predicting further drops in prices. Two months ago they predicted steadily rising prices through the summer. What would we do without these government drones guiding us?

Inflation Adjusted Gasoline Prices (Monthly)

As you can see from the chart, gas prices tend to be volatile and unpredictable in the short term. You can also see that since 1998 the trend has been relentlessly higher. The average inflation adjusted price of gasoline in 1998 was $1.41 per gallon, versus $3.55 today, a 152% increase in fourteen years. Over this same time frame the BLS manipulated CPI was up only 44%. If we are swimming in oil, as the MSM pundits claim, why the tremendous surge in price? It must be those evil oil companies. It couldn’t possibly be the impact of peak oil. To acknowledge the fact that worldwide oil production has reached its peak would be to concede that our suburban sprawl, just in time world is drawing to an excruciating end. So the politicians spout their assigned storylines, supported by their paid off “experts” (aka Daniel Yergin), and unquestioningly reported as fact by their designated corporate media outlet. Those of a liberal bent assail oil companies and speculators; refuse to acknowledge the law of supply and demand, while touting green energy as the solution to all our energy needs. Those of a conservative bent believe in attacking foreign countries to secure “our” oil, refuse to acknowledge the law of supply and demand, and spout “drill, drill, drill” slogans because dealing with facts is inconvenient. The willfully ignorant public believes whichever storyline matches their preconceived beliefs. All is well – no one is required to think critically. Thinking is hard.

There are numerous factors that affect the price of oil on a daily basis, but at the end of the day supply and demand determine price. The chart below documents the key external events that have had a major impact on oil prices since 1970. The vital fact that you won’t hear on CNBC is that every recession since 1970 has been immediately preceded by an oil price spike. Anyone living in the real world (this excludes Cramer, Liesman, Bartiromo, & Kudlow) knows we have entered part two of the Greater Depression. The surge in oil prices in the last two years has precipitated this renewed downturn.

The MSM blathering baboons of bullshit dutifully report the price of gas on a given day. People who live in the real world fill up their gas tanks every week, so the average price over a period of time is what matters. The average price of a gallon of gasoline in 2008 was $3.39. The average price in 2011 was $3.48. The average price in 2012 has been $3.62 thus far. This data paints an entirely different picture than the one painted by the politicians, experts and the clueless captured media. Gas prices are higher than they were prior to the last economic implosion. Cause and effect is a concept beyond the intellectual capabilities of MSM journalists and the millions of government educated zombies they mesmerize with misinformation. The lack of intellectual curiosity and critical thinking skills plays directly into the hands of those with a storyline to sell or truth to obscure.

Swimming in Oil

The recent storyline proliferated by the MSM at the behest of Washington DC politicians and the corporate interests that control them, is that the U.S. is on the verge of energy independence, with hundreds of years of plentiful oil right under our feet. The chart below made the rounds last week on Bloomberg, defender and mouthpiece of billionaires everywhere. This chart surely proves that peak oil is bullshit. Right?

Besides the false representation of oil production and the misleading conclusion that we have more oil than we need, the chart and Bloomberg screed does not provide the true context of why worldwide demand is tumbling. The chart is NOT showing global crude oil production. It is showing global oil and other liquids supply, which includes crude and condensate, natural gas plant liquids, other liquids (mostly ethanol), and processing gains (increase in volume from refining heavy oil). The MSM would rather mislead the public than provide the true picture of the supposed oil production boom. The question is whether the MSM is misleading the public due to their own journalistic incompetence or are they carrying out their assigned mission on behalf of the corporate oligarchs running the kingdom.

The chart below reveals a truer picture of the worldwide energy situation. Conventional oil production hit its peak/plateau around 74 million barrels per day at the end of 2004, and has barely budged from that level over the last eight years. Despite all the rhetoric about the North American oil boom, conventional oil production is at virtually the same level today as it was in 2004. The U.S.(shale oil) and Canadian (tar sands) gains in production have been matched by the collapse in Mexican production. The Middle East countries produced 23.3 million barrels in September 2004. The average price of a barrel of oil in 2004 was $38. They are now only producing 23.9 million barrels when prices are 120% higher.

World Oil and Other Liquids Supply

Global oil demand in 2004 was around 84 million barrels per day. To increase liquid fuel supply to meet the 90 million barrels per day demand we had to turn to unconventional fuels like tar sands, tight oil, and biofuels, all of which have far higher production costs and far less energy content than sweet crude. As the easy to access, cheap to produce ($20 per barrel in Saudi Arabia), close to the surface sweet crude has been depleted, it has been replaced by heavy crude, tar sands, deep-water oil, and shale oil, with production costs in excess of $80 per barrel. Anyone anticipating a long-term decline in fuel prices must be smoking tar sands in their bong. The liquids that have “replaced” conventional crude have a few slight drawbacks. Natural gas liquids provide about 70% as much energy per barrel as crude oil, so a barrel of NGL is not equivalent to a barrel of crude. Have you filled up your SUV lately with some NGL? Ethanol provides only 60% as much energy per barrel as crude oil and its EROEI is pitifully low. The energy returned on energy invested for these non-conventional sources of energy approaches the minimum limits unless prices rise dramatically. The Obama green army does not want this chart making its way into the public discourse. Their fantasyland of renewable energy solutions is proven to be a fool’s errand.

Catch-22 Energy Edition

The price of a barrel of West Texas crude is currently $86 per barrel, down from $109 per barrel in February. Obama supporters will proclaim that his threat to crack down on speculators had the desired effect. He must have scared those nasty speculators with his gravitas. The price rise surely didn’t have anything to do with the U.S. led attack on Libya, the act of war economic sanctions on Iran, the beating of Israel/U.S. war drums, Japan demand due to the shutdown of their nuclear power industry, or the relentlessly higher demand from China and India. And now the MSM is trying to spin a yarn that prices have dropped by 21% because worldwide supply is surging. That is so much more palatable than telling the truth and admitting that we’ve entered the 2nd phase of the Greater Depression.

It took $140 a barrel in oil in 2008 to tip the world into recession. Worldwide economies were much stronger then. The U.S. National Debt has risen by $6.5 trillion, or 70% since 2008. Real GDP has risen by $200 billion since 2008, or a 1.5% increase. Debt to GDP has risen from 64% to 102%. Consumer debt at $2.55 trillion is exactly the same as the 2008 level even after Wall Street banks have written off over $1 trillion, subsidized by the American taxpayer. The consumer deleveraging storyline is completely false. In 2008 there were 234 million working age Americans and 145 million of them were employed. Today there are 243 million working age Americans and 142 million of them are employed. In 2008 there were 28 million Americans in the food stamp program. Today there are 46 million Americans collecting food stamps. The economic situation in Europe has deteriorated at a far greater rate. Therefore, it is not surprising that it only took $109 a barrel oil to push the world back into recession.

The main reason prices are dropping is the collapse in demand from Europe and the United States. The bumpy plateau of peak oil is in full force. Prices rise to the point where they push economies into recession, demand crashes due to the recession, and prices decline. The double whammy of oil prices reaching $111 a barrel in 2011 and $109 a barrel in 2012 have sapped the life out of the American consumer. This is reflected in the plunge in gasoline and petroleum usage since 2008, with a temporary leveling off in 2010, followed by a further nosedive since 2011. As this recession deepens over the next six months, prices will likely fall further. But this is where the Catch-22 kicks in.

Once prices drop below $80 a barrel it sets in motion a reduction in capital investment, as new production projects are not economically feasible below $80 per barrel. Oil analyst Chris Nedler explains the Catch-22 aspect of oil prices in a recent article:

Research by veteran petroleum economist Chris Skrebowski, along with analysts Steven Kopits and Robert Hirsch, details the new costs: $40 – $80 a barrel for a new barrel of production capacity in some OPEC countries; $70 – $90 a barrel for the Canadian tar sands and heavy oil from Venezuela’s Orinoco belt; and $70 – $80 a barrel for deep-water oil. Various sources suggest that a price of at least $80 is needed to sustain U.S. tight oil production.

Those are just the production costs, however. In order to pacify its population during the Arab Spring and pay for significant new infrastructure projects, Saudi Arabia has made enormous financial commitments in the past several years. The kingdom really needs $90 – $100 a barrel now to balance its budget. Other major exporters like Venezuela and Russia have similar budget-driven incentives to keep prices high.

Globally, Skrebowski estimates that it costs $80 – $110 to bring a new barrel of production capacity online. Research from IEA and others shows that the more marginal liquids like Arctic oil, gas-to-liquids, coal-to-liquids, and biofuels are toward the top end of that range.

My own research suggests that $85 is really the comfortable global minimum. That’s the price now needed to break even in the Canadian tar sands, and it also seems to be roughly the level at which banks and major exploration companies are willing to commit the billions of dollars it takes to develop new projects.

Oil prices may temporarily drop below $80, but prices below that level for a prolonged period will lead to supply being constricted, which will ultimately lead to higher prices. The storyline of hundreds of years of Bakken shale oil that will make the U.S. energy independent is the latest fiction to be peddled by the oligarchs as a way to sedate and confuse the masses.

What the Frack

U.S. oil production in 2007 averaged 8.5 million barrels per day. Today, the U.S. is producing 10.7 million barrels per day. We must have hit the jackpot. Not quite. Actual crude oil production has increased by 1 million barrels per day, a 20% increase. The other 1.2 million barrels have been from liquefied natural gas (up 34%) and government subsidized ethanol (up 100%).

The U.S. crude oil production is at the same level it was in 1998, but somehow we are on the verge of becoming energy independent. The recent increase is solely due to the horizontal drilling and hydraulic fracturing of shale deposits in Texas and North Dakota. You don’t hear much about Alaskan production declining for the ninth year in a row and California production declining to the lowest level in three decades. The paid shills predicting Bakken production of 3 million barrels per day are purposely lying or just plain delusional.

North Dakota oil production has reached 550,000 barrels per day versus 187,000 barrels per day in 2009. Simpletons in the MSM will just extrapolate this growth to 3 million barrels by 2020. No need to examine the facts. Oil market expert Tom Whipple reveals the dirty secrets behind the Bakken shale oil miracle:

It took the production from 6,617 wells to produce North Dakota’s 546,000 b/d in January. Divide the daily production by the number of wells and you get an astoundingly low 82 b/d from each well. I say “astounding” because a good new offshore well can do 50,000 b/d. BP’s Macondo well which exploded in the Gulf a couple of years ago was pumping out an estimated 53,000 b/d before it was capped.

Now a North Dakota shale oil well is not in the cost class of a deep-water offshore platform which can run into the billions, but they do cost about three times as much as a classic onshore oil well as they first must be drilled down 11,000 feet and then 10,000 horizontally through the oil bearing layer before the fracturing of the rock can take place. The “fracking” involves at least 15 massive pumps that inject water and other chemicals into the well. Take a Google Earth flight over northwestern North Dakota. The fracked wells are hard to miss as there are now about 9,000 of them and they are each the size of a football field.

There is still more — fracked wells don’t keep producing very long. Although a few newly fracked wells may start out producing in the vicinity of 1,000 barrels a day, this rate usually falls by 65 percent the first year; 35 percent the second; and another 15 percent the third. Within a few years most wells are producing in the vicinity of 100 b/d or less which is why the state average for January is only 82 b/d despite the addition of 1300 new wells in 2011.

The rapid depletion of these wells, enormous expense to drill new wells, oil prices barely above cost of production, low EROEI, swiftly falling Alaskan and shallow water production, and the snail’s pace of deep water production are not a recipe for energy independence. Shale oil production will never exceed 1 million barrels per day. And if you believe Saudi Arabia’s promises to fulfill any shortfalls, I’ve got some delightful beachfront property in Afghanistan to sell you. Saudi conventional crude oil production is at the same level it was in 2005.

Saudi Arabia Oil Production

The seven year Saudi plateau is just a precursor to what is going to happen over the next decade. Saudi Arabia began pumping oil in 1945. It will all be gone by 2045. You can’t extract an infinite amount of oil from a finite world. Pretending this isn’t true won’t make it so. Oil has been the lifeblood of our nation since the late 1800s. The depletion of this essential ingredient of the modern world will not lead to a sudden death for our way of life but a slow downward spiral of waning supply, escalating prices, and economic decay.

The sustained high and rising oil prices will be economically destructive as our debt saturated, suburban sprawl, mall centric, SUV crazed, cheap oil dependent society methodically and agonizingly implodes. Chris Skrebowski describes our future succinctly:

“Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices.”

We’ve entered one of these periodic economic crashes. They are coming faster and faster. So enjoy that 40 cent drop in gas prices as you drive down to sign up for food stamps. The Saudis have a saying that acknowledges their luck in being born on top of billions of barrels of oil and the inevitability of its depletion:

“My father rode a camel, I drive a car, my son flies a jet plane, his son will ride a camel.”   

Delusional Americans believe they have a right to cheap plentiful oil forever. They refuse to acknowledge that luck has played the major part in their rise to economic power. The American saying will be:

My great grandfather rode a horse, my grandfather drove a Model T, my father drove a Buick, I leased a Cadillac Escalade, my son died in the Middle East fighting for my oil, his son will never be born.  

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ENERGY INDEPENDENCE – THE BIG LIE

 

 PRICE OF A BARREL OF OIL 1978 – $14.00

“We are the generation that will win the war on the energy problem and in that process, rebuild the unity and confidence of America.” – President Jimmy Carter, 1979

“We have it in our power to act right here, right now. I propose $6 billion in tax cuts and research and developments to encourage innovation, renewable energy, fuel-efficient cars, and energy-efficient homes.” – President Bill Clinton, 1998

“I think that in ten years, we can reduce our dependence so that we no longer have to import oil from the Middle East or Venezuela. I think that’s about a realistic time frame…That’s why I’ve focused on putting resources into solar, wind, biodiesel, geothermal. These have been priorities of mine since I got to the Senate, and it is absolutely critical that we develop a high fuel efficient car that’s built not in Japan and not in South Korea, but built here in the United States of America.” – President Barack Obama, 2008

“We don’t have to wait on OPEC anymore. We don’t have to let them hold us hostage. America’s got the energy. Let’s have American energy independence.”- Rick Perry, CNN Debate, October 18

“We must become independent from foreign sources of oil. This will mean a combination of efforts related to conservation and efficiency measures, developing alternative sources of energy like biodiesel, ethanol, nuclear, and coal gasification, and finding more domestic sources of oil such as in ANWR or the Outer Continental Shelf (OCS).”Mitt Romney  

PRICE OF A BARREL OF BRENT OIL 2011 – $114.00

 

It is too bad that our 255 million cars can’t run on hot air. American presidents have propagated the Big Lie of energy independence for the last three decades. The Democrats have lied about green energy solutions and the Republicans have lied about domestic sources saving the day. These deceitful politicians put the country at risk as they misinform and mislead the non-thinking American public. They have been declaring our energy independence for 30 years, but we import three times as much oil today as we did in the early 1980’s. The CPI has gone up 350% since 1978, but the price of a barrel of oil has risen 800% over the same time frame. Today, I hear the same mindless fabrications from politicians and pundits about our ability to become energy independent. Any critical thinking analysis of the hard facts reveals that the United States will grow increasingly dependent upon other countries to supply our energy needs from a dwindling and harder to access supply of oil and natural gas. The fantasy world of plug in cars, corn driven vehicles and solar energy running our manufacturing plants is a castle in the sky flight of imagination. The linear thinking academic crowd believes a technological miracle will save us, when it is evident technology fails without infinite quantities of cheap oil.

I know the chart below requires some time to grasp, but I’m sure the average American can take five minutes away from watching Jersey Shore, Dancing with the Stars, or the latest update of the Kardashian saga to understand why the propaganda about energy independence is nothing but falsehoods. You have U.S. energy demand by sector on the right and the energy source by fuel on the left. Total U.S. energy use is nearly 100 quadrillion Btu. In physical energy terms, 1 quad represents 172 million barrels of oil (8 to 9 days of U.S. oil use), 50 million tons of coal (enough to generate about 2% of annual U.S. electricity use), or 1 trillion cubic feet of natural gas (about 4% of annual U.S. natural gas use).  

Please note that 37% of our energy source is petroleum, which supplies 95% of the energy for our transportation sector. That means your car and the millions of 18 wheelers that deliver your food to your grocery stores and electronic gadgets to your Best Buy. You can’t fill up your SUV with coal, natural gas, nuclear energy or sunshine. Without the 7 billion barrels of oil we use every year, our just in time mall centric suburban sprawl society would come to a grinding halt. There is no substitute for cheap plentiful oil anywhere in sight. The government sponsored ethanol boondoggle has already driven food prices higher, while requiring more energy to produce than it generates. Only a government “solution” could raise food prices, reduce gas mileage, and bankrupt hundreds of companies in an effort to reduce our dependence on oil. Natural gas as a transportation fuel supplies 2% of our needs. The cost to retro-fit 160,000 service stations across the country to supply natural gas as a fuel for the non-existent natural gas automobiles would be a fool’s errand and take at least a decade to implement.   

    

The green energy Nazis despise coal and nuclear power, which account for 31% of our energy supply. They want to phase coal out. They aren’t too fond of fracking either, so there goes another 23% of our supply. You might be able to make out that itsy bitsy green circle with the 7% of our supply from renewable energy. And more than half of that energy is supplied by hydro power. Less than 2% of our energy needs are met by solar and wind. For some perspective, we need to use the equivalent of 17 billion barrels of oil per year to run our society and solar and wind supplies the equivalent energy of about 300 million barrels of that total. I think our green energy dreams will come up just a smidgen short of meeting our demands. Nothing can replace oil as the lifeblood of our culture and there is no domestic supply source which will eliminate or even reduce our dependence upon the 10 million barrels per day we import from foreign countries. There are some hard truths that are purposefully ignored by those who want to mislead the public about the grim consequences of peak cheap oil:

  • The earth is finite. The amount of oil within the crust of the earth is finite. As we drain 32 billion barrels of oil from the earth every year, there is less remaining within the earth. We have drained the cheapest and easiest to reach 1.4 trillion barrels from the earth since the mid 1800s. The remaining recoverable 1.4 trillion barrels will be expensive and hard to reach.
  • The United States has about 2% of the world’s proven oil and gas reserves, but consumes 22% of the world’s oil production and 27% of the world’s natural gas production.
  • Demand for oil will continue to rise no matter what the United States does, as the developing world consumption far outstrips U.S. consumption. Oil is fungible and will be sold to the highest bidder.
  • The concept of energy returned on energy invested (EROEI) is beyond the grasp of politicians and drill, drill, drill pundits. EROEI is the ratio of the amount of usable energy acquired from a particular energy resource to the amount of energy expended to obtain that energy resource. When the EROEI of a resource is less than or equal to one, that energy source becomes an “energy sink”, and can no longer be used as a primary source of energy. Once it requires 1.1 barrels of oil to obtain a barrel of oil, the gig is up.
  • There is a negative feedback loop that revolves around oil supply, oil price and economic growth. As demand continues to rise and supply is more difficult to access, prices will rise. Since oil is an essential ingredient in every aspect of our lives, once the price reaches $120 to $150 a barrel economic growth goes into reverse. Demand crashes and investment in new sources of energy dries up. Rinse and repeat.

Finite World

World oil production peaked in 2005 has been flat since then, despite a continuous stream of promises from Saudi Arabia that they are on the verge of increasing production. The chart below from the U.S. Energy Information Administration propagates the standard fabrications about energy supplies. Even though worldwide oil production has clearly peaked, the oil industry PR whores and government agencies continue to project substantial production growth in the future. The mainstream media trots out Daniel Yergin whenever it wants to calm the masses, despite his track record of being 100% wrong 100% of the time. The brilliance of his July, 2005 Op-Ed shines through:

“Prices around $60 a barrel, driven by high demand growth, are fueling the fear of imminent shortage — that the world is going to begin running out of oil in five or 10 years. This shortage, it is argued, will be amplified by the substantial and growing demand from two giants: China and India. There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day — from 85 million barrels per day to 101 million barrels a day — a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.”

Oil production capacity has not grown by one barrel since Yergin wrote this propaganda piece. This is despite the fact that prices have almost doubled, which should have spurred production. The current energy independence false storyline – the Bakken Formation – has gone from production of 10,000 barrels per day in 2003 to 400,000 barrels per day now, while the hundreds of millions invested in developing the Canadian tar sands have increased production by 50% since 2005. Despite these substantial increases in output, worldwide production has remained flat as existing wells deplete at the same rate that new production is brought online.

 

The facts are there is approximately 1.4 trillion barrels of recoverable oil left in the crust of the earth. We currently suck 32 billion barrels per year out of the earth. This means we have 44 years of oil left, at current consumption levels. But we know demand is growing from the developing world. Taking this fact into consideration, we have between 35 and 40 years worth of recoverable oil left on the planet. That is not a long time. Additionally, the last 1.4 trillion barrels will much more difficult and costly to extract than the first 1.4 trillion barrels. The remaining oil is miles under the ocean floor, trapped in shale and tar sands, and in the arctic. Despite these hard facts, governmental agencies and politicians continue to paint a rosy picture about our energy future. I watched in stunned amazement last week as five bozos on the McLaughlin Group news program unanimously proclaimed the U.S. would become a net exporter of oil in the coming decade. Do these supposedly intelligent people not understand the basic economics of supply, demand and price?  

It seems the governmental organizations always paint the future in the most optimistic terms, despite all facts pointing to a contrary outcome. The EIA predicts with a straight face that oil production will rise to 110 million barrels per day, while the price of a barrel of oil remains in the current $100 to $125 per barrel range. Non-OPEC production has been in decline since 2004, but the EIA miraculously predicts a 15% increase in production over the next 25 years. OPEC production has been flat since 2005, but the EIA is confident their 50 year old oil fields will ramp up production by 25% in the next 25 years. Does the EIA consider whether OPEC even wants to increase production? It would appear that constrained supply and higher prices would be quite beneficial to the OPEC countries. And then of course there is the unconventional oil that is supposed to increase from 4 million barrels per day to 13 million barrels per day, a mere 325% increase with no upward impact on prices. These guys would make a BLS government drone blush with the utter ridiculousness of their predictions.

 

The picture below is an excellent representation of how the easy to access oil and gas of the earth have been tapped. They were close to the surface. The remaining oil and gas is deeper and trapped within shale and sand. The new technology for extracting gas from shale has concerns regarding whether fracking and disposal of waste water can be done safely, especially near highly populated areas. The relationship between fracking and earthquakes could also prove to be problematic. The wells also have rapid decline rates. Add a mile of ocean to the picture below and you have some really expensive to access oil and potential for disaster, as witnessed with the Deep Water Horizon.

 

The EIA projects natural gas supply to grow by 10% between now and 2035 due to a 300% increase in shale gas supply. It seems the EIA believes the fantasy of 8 Saudi Arabia’s in the Bakken formation of North Dakota and decades of gas within the Marcellus Shale. These fantasies have been peddled by the natural gas industry in order to get support for their fracking efforts. This false storyline is damaging to the long-term planning that should be taking place now to alleviate the energy scarcity that is our future. In 2006 the EIA reported the possibility of 500 billion barrels of oil in the Bakken formation, based on guesswork. The U.S. Geological Survey has since scaled this back ever so slightly to 3.65 billion barrels, which is six months of U.S. consumption. The deceptions peddled regarding Marcellus shale are also colliding with reality. The U.S. Geological Survey recently produced an estimate of Marcellus Shale resources, which will cause the EIA to reduce its estimate of shale gas reserves for the Marcellus Shale by 80%. The price of natural gas is currently $3.54 MMBtu, down from $13 a few years ago. Extracting natural gas from shale has high capital costs of land, drilling and completion. It is not economically feasible below $6 MMBtu.

 

Based on the known facts and a realistic view of the future, there will be less supply of oil and natural gas as time goes on. We can already see the impact of these facts today. Even though Europe and the U.S. are in recession, the price of oil continues to rise. The developing world continues to demand more oil and the supply is stagnant. Stunts like withdrawing oil from the Strategic Reserve are foolish and politically motivated. Is the world then running out of oil then? No, but any increase in future global oil production will be modestly incremental and production could be thrown off course by any number of possible events, from an Israeli attack on Iran to (another, but successful this time) al Qaida attack on Saudi Arabia’s Abqaiq oil refinery. Any forecast regarding future oil production and prices isn’t worth the paper it is written on unless consideration to wars, revolutions and terrorism are factored into the equation.

We Don’t Matter

Americans like to think we are the center of the universe. Those who propagate the misinformation about U.S. energy independence are clearly math challenged. The total proven oil reserves in the world total 1.4 trillion barrels and the United States has 22 billion barrels of that total, or 1.6% of the world’s oil. The U.S. burns 7 billion barrels per year, so we have enough oil to survive for three whole years. The U.S. consumes 22% of the world’s oil despite having 4.5% of the world’s population and less than 2% of the world’s oil. Do these facts lead you to the conclusion the United States will be exporting oil in the near future?

 

When you hear the pundits breathtakingly describe our vast natural gas resources you would think we are the dominant player in this market. Not quite. The United States has 4% of the world’s natural gas reserves. Predictably we consume 22% of the world’s natural gas. Russia controls 25% of the world’s natural gas reserves, with the Middle East countries controlling 40% of the world’s reserves. The pundits can hype our “vast” supplies of natural gas, but the facts clearly reveal it is nothing but hype.

  

The U.S. is consuming less oil than it was in 2005. U.S. consumption is not the crucial factor in determining the price of oil today and our consumption will matter even less in the future. Emerging market countries, led by China and India, will be the driving force in oil demand in the coming decades. According to the IEA, “Non-OECD [emerging markets] account for 90% of population growth, 70% of the increase in economic output and 90% of energy demand growth over the period from 2010 to 2035.”

 

This demand is being driven by the growth in vehicles in emerging markets. The U.S. market has reached a saturation point, but China, India and the rest of the world are just beginning their love affairs with the automobile. The accumulation of facts regarding both supply and demand should even convince the most brainless CNBC talking head that the price of oil will continue to rise. The 2008 peak price of $145 per barrel will not hold. The tried and true American method of ignoring problems until they reach crisis proportions will bite us in the ass once again.

 

Slippery Road Ahead

The concept of EROI is incomprehensible to the peak oil deniers. When Larry Kudlow or one of the other drill, drill, drill morons proclaims the vast amount of oil in North Dakota shale and in Alberta, Canada tar sands, they completely ignore the concept of EROI. Some estimates conclude there are 5 trillion barrels of oil left in the earth. But, only 1.4 trillion barrels are considered recoverable. This is because the other 3.6 trillion barrels would require the expenditure of more energy to retrieve than they can deliver. Therefore, it is not practical to extract. When oil was originally discovered, it took on average one barrel of oil to find, extract, and process about 100 barrels of oil. That ratio has declined steadily over the last century to about three barrels gained for one barrel used up in the U.S. and about ten for one in Saudi Arabia.

The chart below clearly shows the sources of energy which have the highest energy return for energy invested. I don’t think I’ve heard Obama or the Republican candidates calling for a national investment in hydro-power even though it is hugely efficient. The dreams of the green energy crowd are shattered by the fact that biodiesel, ethanol and solar require as much energy to create as they produce. Tar sands and shale oil aren’t much more energy efficient. It’s too bad Obama and his minions hate dirty coal, because has the best return on energy invested among all the practical sources.   

 File:EROI - Ratio of Energy Returned on Energy Invested - USA.svg

Worse than the peak oil deniers are those who pretend that oil isn’t really that important to our society. They declare that technology will save the day, when in reality technology can’t function without oil. Without plentiful cheap oil our technologically driven civilization crashes. We are addicted to oil. Americans consume petroleum products at a rate of three-and-a-half gallons of oil and more than 250 cubic feet of natural gas per day each.  You might be interested in a partial list of products that require petroleum to be produced.

Solvents Diesel fuel Motor Oil Bearing Grease
Ink Floor Wax Ballpoint Pens Football Cleats
Upholstery Sweaters Boats Insecticides
Bicycle Tires Sports Car Bodies Nail Polish Fishing lures
Dresses Tires Golf Bags Perfumes
Cassettes Dishwasher parts Tool Boxes Shoe Polish
Motorcycle Helmet Caulking Petroleum Jelly Transparent Tape
CD Player Faucet Washers Antiseptics Clothesline
Curtains Food Preservatives Basketballs Soap
Vitamin Capsules Antihistamines Purses Shoes
Dashboards Cortisone Deodorant Footballs
Putty Dyes Panty Hose Refrigerant
Percolators Life Jackets Rubbing Alcohol Linings
Skis TV Cabinets Shag Rugs Electrician’s Tape
Tool Racks Car Battery Cases Epoxy Paint
Mops Slacks Insect Repellent Oil Filters
Umbrellas Yarn Fertilizers Hair Coloring
Roofing Toilet Seats Fishing Rods Lipstick
Denture Adhesive Linoleum Ice Cube Trays Synthetic Rubber
Speakers Plastic Wood Electric Blankets Glycerin
Tennis Rackets Rubber Cement Fishing Boots Dice
Nylon Rope Candles Trash Bags House Paint
Water Pipes Hand Lotion Roller Skates Surf Boards
Shampoo Wheels Paint Rollers Shower Curtains
Guitar Strings Luggage Aspirin Safety Glasses
Antifreeze Football Helmets Awnings Eyeglasses
Clothes Toothbrushes Ice Chests Footballs
Combs CD’s & DVD’s Paint Brushes Detergents
Vaporizers Balloons Sun Glasses Tents
Heart Valves Crayons Parachutes Telephones
Enamel Pillows Dishes Cameras
Anesthetics Artificial Turf Artificial limbs Bandages
Dentures Model Cars Folding Doors Hair Curlers
Cold cream Movie film Soft Contact lenses Drinking Cups
Fan Belts Car Enamel Shaving Cream Ammonia
Refrigerators Golf Balls Toothpaste Gasoline

 

The propaganda blared at the impressionable willfully ignorant American public has worked wonders. The vast majority of Americans have no clue they have entered a world of energy scarcity, a world where the average person is poorer and barely able to afford the basic necessities of life. This is borne out in the vehicles sales statistics reported every month. There have been 10.5 million passenger vehicles sold through the first 10 months of 2011. In addition to the fact they are “purchased” using 95% debt and financed over seven years, the vast majority are low mileage vehicles getting less than 20 mpg. Only 1.8 million small energy efficient vehicles have been sold versus 6.1 million SUVs, pickup trucks and large luxury automobiles. Americans have the freedom to buy any vehicle they choose. They also have the freedom to not think and ignore the facts about the certainty of higher prices at the pump. By choosing a 20 mpg vehicle over a 40 mpg vehicle, they’ve sealed their fate. How could the average soccer mom get by without a Yukon or Excursion to shuttle Biff and Buffy to their games? Have you ever tried to navigate a soccer field parking lot in a hybrid? The horror!

The American public has been lulled back into a sense of security as gas prices have receded from $4.00 a gallon back to $3.40 a gallon. This lull will be short lived. Oil prices have surged by 15% in the last two months, even as the world economy heads into recession. The link between high oil prices and economic growth are undeniable, even though the deceitful pundits on CNBC will tell you otherwise. Ten out of eleven recessions since World War II were associated with oil price spikes. Gail Tverberg sums up the dilemma of energy scarcity for the average American:

“High-priced oil tends to choke economies because high oil prices are associated with high food prices (because oil products are used in food growing and transport), and people’s salaries do not rise to offset this rise in food and oil prices. People have to eat and to commute to their jobs, so they cut back on other expenditures. This leads to recession. Recession leads to lower oil consumption, since people without jobs can’t buy very much of anything, oil products included. In some sense, the reduction in oil extraction is due to reduced demand, because citizens cannot afford the high-priced oil that is available.”

But don’t worry. The rising oil and food prices will only impact the 99% in the U.S. and the poorest dregs across the globe that spend 70% of their income on food. The 1% will be just fine as they will bet on higher oil prices, therefore further enriching themselves while the peasants starve. The market for caviar, champagne, NYC penthouses, and summer mansions in the Hamptons will remain robust.

There is no escape from the ravages of higher priced oil. There is plenty of oil left in the ground. But, the remaining oil is difficult, slow and expensive to extract. Oil prices will rise because they have to. Without higher prices, who would make the huge capital investment required to extract the remaining oil? Once oil prices reach the $120 to $150 per barrel range our economy chokes and heads into recession. We are trapped in an endless feedback loop of doom. The false storyline of renewable energy saving the day is put to rest by Gail Tverberg:

“Renewables such as wind, solar PV, cellulosic ethanol, and biogas could more accurately be called “fossil fuel extenders” because they cannot exist apart from fossil fuels. Fossil fuels are required to make wind turbines and other devices, to transport the equipment, to make needed repairs, and to maintain the transport and electrical systems used by these fuels (such as maintaining transmission lines, running-back up power plants, and paving roads). If we lose fossil fuels, we can expect to lose the use of renewables, with a few exceptions, such as trees cut down locally, and burned for heat, and solar thermal used to heat hot water in containers on roofs.”

Predictably, the politicians and intellectual elite do the exact opposite of what needs to be done. We need to prepare our society to become more local. Without cheap plentiful oil our transportation system breaks down. Our 3.9 million miles of road networks will become a monument to stupidity as Obama and Congress want to spend hundreds of billions on road infrastructure that will slowly become obsolete. The crumbling infrastructure is already the result of government failure, as the money that should have been spent maintaining our roads, bridges and water systems was spent on train museums, turtle crossings, teaching South African men how to wash their genitalia, studies on the mating habits of ferrets, and thousands of other worthless Keynesian pork programs. If our society acted in a far sighted manner, we would be creating communities that could sustain themselves with local produce, local merchants, bike paths, walkable destinations, local light rail commuting, and local energy sources. The most logical energy source for the U.S. in an oil scarce scenario is electricity, since we have a substantial supply of coal and natural gas for the foreseeable future and the ability to build small nuclear power plants. The Fukushima disaster is likely to kill nuclear as an option until it is too late. The electrical grid should be the number one priority of our leaders, as it would be our only hope in an oil scarce world. Instead, our leaders will plow borrowed money into ethanol, solar, and shale oil drilling, guaranteeing a disastrous scenario for our country.

The United States is a country built upon the four C’s: Crude, Cars, Credit, and Consumption. They are intertwined and can’t exist without crude as the crucial ingredient. As the amount of crude available declines and the price rises, the other three C’s will breakdown. Our warped consumer driven economy collapses without the input of cheap plentiful oil. Those at the top levels of government realize this fact. It is not a coincidence that the War on Terror is the current cover story to keep our troops in the Middle East. It is not a coincidence the uncooperative rulers (Hussein, Gaddafi) of the countries with the 5th and 9th largest oil reserves on the planet have been dispatched. It is not a coincidence the saber rattling grows louder regarding the Iranian regime, as they sit atop 155 billion barrels of oil, the 4th largest reserves in the world. It should also be noted the troops leaving Iraq immediately began occupying Kuwait, owner of the 6th largest oil reserves on the planet. Oil under the South China Sea and in the arctic is being hotly pursued by the major world players. China and Russia are supporting Iran in their showdown with Israel and the U.S. As the world depletes the remaining oil, conflict and war are inevitable. The term Energy Independence will carry a different meaning than the one spouted by mindless politicians as the oil runs low.

And as things fell apart
Nobody paid much attention

Nothing but Flowers – The Talking Heads