This is an excerpt taken from Gregor Macdonald’s newsletter. You can sign up to get the whole thing HERE.
The saga of North American oil is well underway. The current financial crisis, triggered in part by the global oil crisis, is only serving to mask the decline of oil supply in this region. That the supply of oil would move in reverse to the advance in price over a 6 year period—a sustained period—is a brutal fact that can no longer be denied. Remember, much of this oil is extracted with the benefit of the latest technology and profit-maximizing, “rational” actors. While this is less true in Mexico, I maintain that PEMEX, the state run oil company, while not in the league of Saudi Aramco is no Venezuelan PDVSA. PEMEX avails itself of the latest technology, and Mexico is well explored. While it’s also true that offshore California, offshore Florida, and parts of Alaska are undeveloped, even a Marshall Plan to develop those resources would not result in oil coming on stream until several years from now.
Accordingly, I am calling for substantial new price highs in oil no later than the Presidential Election of November 2012. I expect oil to go above 200.00 dollars per barrel, and to consolidate thereafter between the old price high of 150.00 and 200.00. The seeds for this price spike have been sewn all decade, and are furiously at work right now. We are currently at risk of reaching the old price high of 147 by as early as Spring of 2010. If monetary conditions interfere, this could be sooner. If a global depression develops, obviously, this could be later. A simple progression would take oil towards 75 later this year, then 150 in late 2010, 200 in late 2011, and then the spike above 200 in early 2012.
Moreover, if you look again at the supply data I’ve provided, you will have concluded correctly that I am also calling for North American production to fall below 10 Mb/day this year, 2009. North American supply was down 9% over the past 5 years. If North American supply fell 9% over a five year period as oil rose from 30 to 150, what will happen to North American supply if current low prices persist? If North American supply falls towards 9 Mb/day in late 2011, with attendant reductions in exports from Mexico, I certainly hope the leaders of Ottawa, Washington, and Mexico City have made preparations. And therein lies a big part of this problem. Buildout of public transport in North America is poor. There is little understanding of energy issues among G20, G7, or North American leaders. And, we are a continent of great distances to boot. It’s not a hopeful picture.
In Washington of course we find the most enduring, multi-decade lack of realism as it pertains to energy and energy supply. The current administration is no different. I find among the kaleidoscope of political parties in the US that the versions of energy misunderstanding are maintained in somewhat equal proportions across party lines. It’s just that the configuration of the misunderstandings change from party to party.
Currently, the new administration is targeting emissions and carbon in such a way as to make the looming issue of liquid fuels subordinate to the climate change problem. My position remains politically neutral. My role as an analyst demands as such. While not the subject of this newsletter, per se, my research indicates for example that Ocean Acidification is demonstrable and accelerating. It was inevitable that a future administration would try to tackle both the carbon issue and the energy supply issue all at once. And why not. Well, that administration has arrived.
That said, I am obligated to point out that the richest motherlode of emissions in the US is from our fleet of 300 million vehicles. Given that the stimulus bill only devoted about 1.2% to Rail, while nearly 5.0% or more to Roads and Bridges, one is hard pressed to find any policy from the current administration that would help Americans reduce their driving miles.
I would further point out that my work suggests once one calculates the lost time, lost productivity, and emissions especially from traffic congestion in our major cities–in addition to the energy burn–that commuter rail and light rail are impressive value propositions for society and for a region’s economy. A value proposition that cannot be measured in fare revenues or construction costs alone. In a future letter I will go into this issue in more detail. But much of my work has looked at both BART in the SF Bay Area and LAMetro in the LA Basin. I have been truly impressed at how many driving miles are being displaced by these two systems. And even now, especially in Los Angeles, the systems function in regions where public transport still has enormous room for growth.
The bottom line is that Washington’s neglect of its own, depleted national energy supply in a country that is structurally married to liquid fuel transport is a big part of the reason the coming price spike will be so damaging. The extreme difficulty the administration presently faces in the financial crisis is a kind of preview of what’s to come when oil makes its next ascent well above the previous price high of 150.00. It may appear as ironic, but the North American country that has to import the bulk of its oil supply, the US, is also the least realistic about global oil depletion, and its ability to continue bidding for free market oil.
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