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  • Lessons Of The Gas Pump

    LESSONS OF THE GAS PUMP
    by Michael Klare

    ZNet, MA
    Oct 4 2006

    Tom Paine

    What the hell is going on here? Just six weeks ago, gasoline prices
    at the pump were hovering at the $3 per gallon mark; today, they're
    inching down toward $2--and some analysts predict even lower numbers
    before the November elections. The sharp drop in gas prices has been
    good news for consumers, who now have more money in their pockets to
    spend on food and other necessities--and for President Bush, who has
    witnessed a sudden lift in his approval ratings.

    Is this the result of some hidden conspiracy between the White House
    and Big Oil to help the Republican cause in the elections, as some
    are already suggesting? How does a possible war with Iran fit into the
    gas-price equation? And what do falling gasoline prices tell us about
    "peak-oil" theory, which predicts that we have reached our energy
    limits on the planet?

    Since gasoline prices began their sharp decline in mid-August, many
    pundits have attempted to account for the drop, but none have offered
    a completely convincing explanation, lending some plausibility to
    claims that the Bush administration and its long-term allies in the
    oil industry are manipulating prices behind the scenes. In my view,
    however, the most significant factor in the downturn in prices has
    simply been a sharp easing of the "fear factor" --the worry that crude
    oil prices would rise to $100 or more a barrel due to spreading war
    in the Middle East, a Bush administration strike at Iranian nuclear
    facilities, and possible Katrina-scale hurricanes blowing through
    the Gulf of Mexico, severely damaging offshore oil rigs.

    As the summer commenced and oil prices began a steep upward climb,
    many industry analysts were predicting a late summer or early fall
    clash between the United States and Iran (roughly coinciding with
    a predicted intense hurricane season). This led oil merchants and
    refiners to fill their storage facilities to capacity with $70-80 per
    barrel oil. They expected to have a considerable backlog to sell at
    a substantial profit if supplies from the Middle East were cut off
    and/or storms wracked the Gulf of Mexico.

    Then came the war in Lebanon. At first, the fighting seemed to confirm
    such predictions, only increasing fears of a region-wide conflict,
    possibly involving Iran. The price of crude oil approached record
    heights. In the early days of the war, the Bush administration
    tacitly seconded Israeli actions in Lebanon, which, it was widely
    assumed, would lay the groundwork for a similar campaign against
    military targets in Iran. But Hezbollah's success in holding off the
    Israeli military combined with horrific television images of civilian
    casualties forced leaders in the United States and Europe to intercede
    and bring the fighting to a halt.

    We may never know exactly what led the White House to shift course on
    Lebanon, but high oil prices--and expectations of worse to come--were
    surely a factor in administration calculations. When it became clear
    that the Israelis were facing far stiffer resistance than expected,
    and that the Iranians were capable of fomenting all manner of mischief
    (including, potentially, total havoc in the global oil market),
    wiser heads in the corporate wing of the Republican Party undoubtedly
    concluded that any further escalation or regionalization of the war
    would immediately push crude prices over $100 per barrel.

    Prices at the gas pump would then have been driven into the $4-5 per
    gallon range, virtually ensuring a Republican defeat in the mid-term
    elections. This was still early in the summer, of course, well before
    peak hurricane season; mix just one Katrina-strength storm in the
    Gulf of Mexico into this already unfolding nightmare scenario and
    the fate of the Republicans would have been sealed.

    In any case, President Bush did allow Secretary of State Condoleezza
    Rice to work with the Europeans to stop the Lebanon fighting and has
    since refrained from any overt talk about a possible assault on Iran.

    Careful never explicitly to rule out the military option when it
    comes to Iran's nuclear enrichment facilities, since June he has
    nonetheless steadfastly insisted that diplomacy must be given a chance
    to work. Meanwhile, we have made it most of the way through this year's
    hurricane season without a single catastrophic storm hitting the U.S.

    For all these reasons, immediate fears about a clash with Iran,
    a possible spreading of war to other oil regions in the Middle East,
    and Gulf of Mexico hurricanes have dissipated, and the price of crude
    has plummeted. On top of this, there appears to be a perceptible
    slowing of the world economy--precipitated, in part, by the rising
    prices of raw materials--leading to a drop in oil demand. The result?

    Retailers have abundant supplies of gasoline on hand and the laws of
    supply and demand dictate a decline in prices.

    How long will this combination of factors prevail?

    Best guess: The slowdown in global economic growth will continue for
    a time, further lowering prices at the pump. This is likely to help
    retailers in time for the Christmas shopping season, projected to
    be marginally better this year than last precisely because of those
    lower gas prices.

    Once the election season is past, however, President Bush will have
    less incentive to muzzle his rhetoric on Iran and we may experience a
    sharp increase in Ahmadinejad-bashing. If no progress has been made
    by year's end on the diplomatic front, expect an acceleration of
    the preparations for war already underway in the Persian Gulf area
    (similar to the military buildup witnessed in late 2002 and early
    2003 prior to the U.S. invasion of Iraq). This will naturally lead
    to an intensification of fears and a reversal of the downward spiral
    of gas prices, though from a level that, by then, may be well below
    $2 per gallon.

    Now that we've come this far, does the recent drop in gasoline prices
    and the seemingly sudden abundance of petroleum reveal a flaw in the
    argument for this as a peak-oil moment? Peak-oil theory, which had
    been getting ever more attention until the price at the pump began
    to fall, contends that the amount of oil in the world is finite;
    that once we've used up about half of the original global supply,
    production will attain a maximum or "peak" level, after which daily
    output will fall, no matter how much more is spent on exploration
    and enhanced extraction technology.

    Most industry analysts now agree that global oil output will eventually
    reach a peak level, but there is considerable debate as to exactly when
    that moment will arise. Recently, a growing number of specialists--many
    joined under the banner of the Association for the Study of Peak Oil
    --are claiming that we have already consumed approximately half the
    world's original inheritance of 2 trillion barrels of conventional
    (i.e., liquid) petroleum, and so are at, or very near, the peak-oil
    moment and can expect an imminent contraction in supplies.

    In the fall of 2005, as if in confirmation of this assessment, the CEO
    of Chevron, David O'Reilly, blanketed U.S. newspapers and magazines
    with an advertisement stating, "One thing is clear: the era of easy
    oil is over ... Demand is soaring like never before ... At the same
    time, many of the world's oil and gas fields are maturing.

    And new energy discoveries are mainly occurring in places where
    resources are difficult to extract, physically, economically, and
    even politically. When growing demand meets tighter supplies, the
    result is more competition for the same resources."

    But this is not, of course, what we are now seeing.

    Petroleum supplies are more abundant than they were six months ago.

    There have even been some promising discoveries of new oil and
    gas fields in the Gulf of Mexico, while--modestly adding to global
    stockpiles--several foreign fields and pipelines have come on line
    in the last few months, including the $4 billion Baku-Tbilisi-Ceyhan
    (BTC) pipeline from the Caspian Sea to Turkey's Mediterranean coast,
    which will bring new supplies to world markets. Does this indicate
    that peak-oil theory is headed for the dustbin of history or, at least,
    that the peak moment is still safely in our future?

    As it happens, nothing in the current situation should lead us to
    conclude that peak-oil theory is wrong. Far from it. As suggested
    by Chevron's O'Reilly, remaining energy supplies on the planet are
    mainly to be found "in places where resources are difficult to extract,
    physically, economically, and even politically." This is exactly what
    we are seeing today.

    For example, the much-heralded new discovery in the Gulf of Mexico,
    Chevron's Jack No. 2 Well , lies beneath five miles of water and rock
    some 175 miles south of New Orleans in an area where, in recent years,
    hurricanes Ivan, Katrina, and Rita have attained their maximum strength
    and inflicted their greatest damage on offshore oil facilities. It
    is naive to assume that, however promising Jack No. 2 may seem in
    oil-industry publicity releases, it will not be exposed to Category
    5 hurricanes in the years ahead, especially as global warming heats
    the Gulf and generates ever more potent storms.

    Obviously, Chevron would not be investing billions of dollars in
    costly technology to develop such a precarious energy resource if
    there were better opportunities on land or closer to shore--but so
    many of those easy-to-get-at places have now been exhausted, leaving
    the company little choice in the matter.

    Or take the equally ballyhooed BTC pipeline, which shipped its
    first oil in July, with top U.S. officials in attendance . This
    conduit stretches 1,040 miles from Baku in Azerbaijan to the
    Turkish Mediterranean port of Ceyhan, passing no less than six
    active or potential war zones along the way: the Armenian enclave of
    Nagorno-Karabakh in Azerbaijan; Chechnya and Dagestan in Russia; the
    Muslim separatist enclaves of South Ossetia and Abkhazia in Georgia;
    and the Kurdish regions of Turkey. Is this where anyone in their right
    mind would build a pipeline? Not unless you were desperate for oil,
    and safer locations had already been used up.

    In fact, virtually all of the other new fields being developed or
    considered by U.S. and foreign energy firms--ANWR in Alaska, the
    jungles of Colombia, northern Siberia, Uganda, Chad, Sakhalin Island
    in Russia's Far East--are located in areas that are hard to reach,
    environmentally sensitive, or just plain dangerous. Most of these
    fields will be developed, and they will yield additional supplies of
    oil, but the fact that we are being forced to rely on them suggests
    that the peak-oil moment has indeed arrived and that the general
    direction of the price of oil, despite period drops, will tend to
    be upwards as the cost of production in these out-of-the-way and
    dangerous places continues to climb.

    Some peak-oil theorists have, however, done us all a disservice by
    suggesting, for rhetorical purposes, that the peak-oil moment is ...

    well, a sharp peak. They paint a picture of a simple, steep, upward
    production slope leading to a pinnacle, followed by a similarly neat
    and steep decline. Perhaps looking back from 500 years hence, this
    moment will have that appearance on global oil production charts. But
    for those of us living now, the "peak" is more likely to feel like a
    plateau--lasting for perhaps a decade or more--in which global oil
    production will experience occasional ups and downs without rising
    substantially (as predicted by those who dismiss peak-oil theory),
    nor falling precipitously (as predicted by its most ardent proponents).

    During this interim period, particular events--a hurricane, an outbreak
    of conflict in an oil region--will temporarily tighten supplies,
    raising gasoline prices, while the opening of a new field or pipeline,
    or simply (as now) the alleviation of immediate fears and a temporary
    boost in supplies will lower prices. Eventually, of course, we will
    reach the plateau's end and the decline predicted by the theory will
    commence in earnest.

    In the meantime, for better or worse, we live on that plateau today.

    If this year's hurricane season ends with no major storms, and we get
    through the next few months without a major blowup in the Middle East,
    we are likely to start 2007 with lower gasoline prices than we've seen
    in a while. This is not, however, evidence of a major trend. Because
    global oil supplies are never likely to be truly abundant again,
    it would only take one major storm or one major crisis in the Middle
    East to push crude prices back up near or over $80 a barrel. This is
    the world we now inhabit, and it will never get truly better until we
    develop an entirely new energy system based on petroleum alternatives
    and renewable fuels.

    Michael T. Klare is a professor of peace and world security studies
    at Hampshire College in Amherst, Massachusetts and the author of Blood
    and Oil: The Dangers and Consequences of America's Growing Dependency
    on Imported Petroleum . This piece originally appeared in TomDispatch.
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