"Peak Oil" And The Bush Energy Policy

by Steve

I want you to take a close look at this piece in today’s San Francisco Chronicle by their top-notch business writer David Lazarus. Earlier this week, ChevronTexaco used its oil profits to buy Unocal. The early conventional wisdom was that ChevronTexaco was marrying its oil and gas inventories with Unocal’s strategically located natural gas inventories in Central Asia to create a ready supply of natural gas that would make a new natural gas mega-terminal here in California more likely.

But in today’s piece by Lazarus, he posits another reason why ChevronTexaco may have moved on Unocal:

There's been a lot of ink spilled this week about the risk ChevronTexaco's chief exec, David O'Reilly, has taken in paying about $16.4 billion for rival Unocal and its oil resources

Because Unocal's stock has soared 75 percent over the past year, the thinking goes, ChevronTexaco could find itself with a white elephant on its hands if currently sky-high oil prices end up coming back to earth.

Well, I'm prepared to say this much: O'Reilly isn't stupid. He knows more than most people about world oil markets.

So if the head of San Ramon's ChevronTexaco is prepared to gamble more than 16 billion bucks on oil prices staying at stratospheric levels, I'm ready to give him the benefit of the doubt.

And reading between the lines, that means only one thing.

Peak oil.

We're basically there.

Peak oil is a controversial notion that's been floating around the oil industry for decades. It concerns the inevitable moment when world oil production hits its peak and, from that point on, reserves are on an ever- dwindling downward spiral.

Peak oil means prices will inexorably push higher and higher in the face of surging demand. This in turn will have a catastrophic impact on oil- addicted economies around the planet and, according to some prognosticators, could lead to wars over remaining supplies.

Amos Nur, a professor of geophysics at Stanford University, told me that if we're not at peak oil right now, "we're in the neighborhood. ChevronTexaco and the other oil majors know this as well, he said, and this is why they're scrambling to secure as much global reserves as they can.

"There's no question in my mind that they are aware of this and that they are right," Nur said. "Oil prices are not coming back down."

Of course the Bush Energy Department thinks that there will be more and more drilling and oil production until the year 2037. But they are in the minority, as even Wall Street heavyweights like Goldman Sachs see the tightening supplies hitting up against SUV-driven demand in this country and the booming Chinese and Indian economies thirst for oil to create $105 per barrel oil and $6/gallon gas sooner than we think.

First off, oil was trading Thursday around $54 per barrel. This price level led Wall Street investment bank Goldman Sachs, a major energy trader, to warn last week that "oil markets may have entered the early stages of what we have referred to as a 'super spike' period."

By Goldman's reckoning, this could result in oil trading as high as $105 per barrel, which would have a ripple effect on everything from gas prices ($6 per gallon) to manufacturing costs.

And while the Bush Administration has done nothing in four years to deal with our consumption of oil, and has left our national security vulnerable as a result, it leaves oil companies with no choice but to buy their way into more supplies like ChevronTexaco, while waiting for the Bush Administration to once again rely on its only real energy strategy.

Stanford's Nur believes that runaway demand from China (and to a slightly lesser extent India), coupled with America's reliance on oil imports, will lead to an almost certain clash of interests once we've passed the point of peak production.

"Each country has the same national security policy -- to get as much oil as it can for itself," he said. "If this isn't managed well, we could have a military conflict."

And this has been building since the end of the last decade when the industry consolidated by buying up and eliminating refining capacity, blaming environmental regulations under a Democratic president, instead of developing new capacity. It was a recipe for an eventual huge payout when supplies and delivery systems finally smashed up against unfettered demand. With domestic refining capacity now limited, demand encouraged here and abroad, and new supplies located in volatile areas or fields still underdeveloped, oil companies will be the only short-term winners as they get higher and higher prices from overseas customers while the US economy tanks.

Since getting quick control of Iraq’s supposedly “they can finance their own recovery” supplies has proven to be trickier than PNAC assumed, how far behind can a manufactured crisis in Iran be?