Rationing by Price
By Tom Whipple
Falls Church News-Press, On-Line Issue
March 9-15, 2006
We are just about through winter, and as yet, nothing really bad seems to have happened to the world's energy supplies. Unless, of course, you were among the unlucky folk who keep warm with Russian natural gas and, depending on where you live, were subjected to state blackmail, or diverted gas, or blown-up pipelines, or perhaps reduced flows during one of the coldest winters in recorded history.
On the American side of the globe, however, all was well. An unusually warm winter led to bulging oil and gas stockpiles and somewhat lower prices. In the Mid-East, the Saudis stopped Al Qaeda from blowing up an important oil facility and, despite significant increases in the violence in Iraq and the rhetoric in Iran , for now, oil continues to flow from both countries.
Demand is growing nicely. In the United States , we managed to consume 2.5 percent more gasoline in February that we did last year. That’s an additional 9.1 million gallons per day. The Chinese just announced they had imported 3.2 million barrels a day during January— a 69% increase over last year. Some economic forecasters have noted how little $60 oil seems to be affecting economic growth, and are predicting banner years ahead with world economic growth doing better than 4%.
On the supply side, however, things did not fare quite as well during the winter. A combination of conflict in Iraq , hurricane damage in the Gulf of Mexico , and the insurgency in the Niger delta resulted in about a million barrels a day of "normal" production being stopped. In fact, world oil production, after surging higher and higher early in the decade, has been basically flat at around 84.5 million barrels a day since 2004.
We are all getting used to the pattern of oil cycling around $60-65 per barrel as it has since just after the hurricanes last fall. Many analysts are attributing what we think of as high prices mostly to geopolitical instability. They may have a point. There are least five political situations in the world —Iraq, Iran, Nigeria, Venezuela, and Al Qaeda— that frequently flare up in a way that threatens to close down some important share of the world's oil production. We could add Atlantic hurricanes to the threat list as the season starts in another three months and forecasters are already talking of another bad year.
If demand for oil products in the US, China, and presumably other parts of the industrialized world continues to grow, and production remains stagnant, then obviously prices have to go up, perhaps way up.
So far, we have learned gasoline costing $2.50 or so a gallon does not reduce consumption in the US any more that $6 per gallon does in Europe . It is going to take much higher prices than the industrial world has experienced so far to force changes in the habits of people who can afford cars.
There are some 220 oil-consuming countries in the world (a few are rather small islands). If, however, you rank these by their annual oil consumption per capita, interesting insights emerge. A few, like the US and Canada are really into using oil, going through a 1000+ gallons per capita each year. Others, like many European nations, seem to get along rather well on 400-800 gallons per person each year.
As you move down the list, you find average world consumption currently is about 200 gallons per capita per year. The bottom half of the list contains nearly 100 countries that consume 100 gallons per person per year or less, one-tenth of what we each consume in the US . About 4 billion people or two-thirds of the world's population live in countries that consume less than 100 gallons per capita per year. Finally, at the absolute bottom are about 20 countries using 10 gallons per capita per year, or 1/100th of what we burn in America .
In many countries, government traditionally has subsidized oil products so that citizens can afford their benefits. This, of course, contrasts markedly with North America and Europe where oil has been taxed or heavily taxed. The sad fact, however, is that in the last year or so a number of countries, particularly in Asia , have come to the point where they could no longer afford to subsidize oil products to the traditional extent. Remember the eight-cent per gallon gasoline in Baghdad .
We don't read much about the removal of these subsidies, except when they lead to riots. In America , mostly grumbling results when gasoline goes from $1.50 to $2.50 per gallon. If you live in the underdeveloped world however, and find the fuel for your truck or taxi, or perhaps your cooking kerosene suddenly going from 20 or 50 cents per gallon to much higher, you have an unaffordable problem to which the only answer is to stop consuming.
In the last few months, riots, some resulting in many deaths, have taken place across the underdeveloped world as governments have been forced to raise fuel prices. The returns aren't in as yet but the conclusion seems obvious. To Americans and others in the industrialized world $2.50 or even $6 gasoline is, or will be, an inconvenience requiring some adjustments in lifestyle; to most of the world however, $60 per barrel oil is beyond what most can afford to enjoy even the barest minimum trappings of industrial civilization.
The irony of all this is that the demand destruction currently taking place in the third world simply frees up sufficient fuel to allow the industrialized and industrializing nations to carry on with business as usual for a few more months or, perhaps, a few more years. But peak oil will come. With the same inevitability as the rising and setting sun or the changing of the seasons, it will come.
