Predicting Oil Prices, Part Two

Tom Whipple, who knows a thing or two about Peak Oil, says that the U.S. might just encounter the first real crisis of the oil depletion age before the year is out. I agree.

Production peaked in 2006; this is the year we really start to feel it.

The crisis at first will be one of spiraling prices for diesel and heating oil, followed by actual shortages here in the United States. In the last two weeks, the wholesale price of heating oil has moved up by nearly 70 cents a gallon and no end is in sight. Many observers are starting to note that what they call “a tight market for distillates” –- the industry’s term for diesel and heating oil – may be what is driving up the price of crude and consequently gasoline.

In Part One of this series, I focused on a lack of good data as one of the keys to the problem of predicting oil prices. But I hope that I made clear that the same absence of good data not only makes predicting oil prices difficult, but it should be alarming as well—what data we do have seems to indicate a certain amount of dissembling on the part of OPEC. I believe OPEC is lying when they say they can increase production whenever they want, they just don’t see the need for it right now. I believe, based on the evidence (inflated reserves), that OPEC can no longer increase production, and they are bluffing.

How do we call OPEC’s bluff? Obviously, we can’t send President Bush to Saudi Arabia and have him beg for an increase in production; that no longer works. Congress seems to think that cutting off shipments of weapons to Saudi Arabia will have some sort of an impact. Maybe we should think about this a little more carefully.

The United States of America and Saudi Arabia have enjoyed a “special relationship” since before World War II. In 1943, President Roosevelt granted lend-lease to Saudi Arabia. Lend-lease was a program that provided supplies to the United Kingdom, the Soviet Union, and China during World War II, as a way to help those nations fight the war. This aid was given to Saudi Arabia, too, and mostly at the urging of Secretary of the Interior Harold Ickes. This was Harold L. Ickes, who was the father of Harold M. Ickes, Chief of Staff for President Bill Clinton and an advisor for Hillary Clinton. (People like to talk about Bush/Saudi connections…) Ickes urged Roosevelt to take steps to assure control of sufficient oil reserves to meet the nation’s needs. And so we have a “special relationship” with Saudi Arabia.

That relationship seems to be headed for hard times. Congress is getting edgy; this talk about cutting off arms shipments to Saudi Arabia is only the first step, I fear. The 9/11 terrorists were mostly from Saudi Arabia, and while that has been noticed, there seems to be nothing to do about it. What happens if the Saudis continue to refuse to produce more oil? What will we do next? Can we afford to antagonize one of the only nations in the region that will deal with us? Remember, the United States now depends on imports for 65% of our daily petroleum requirement. What happens if the Saudi regime is destabilized? It seems almost certain that any replacement government will not be our friends.

America needs to find a way to reduce our need for oil, period. Even if we could cut our demand for the stuff in half, at this point, we need to bring in imports. Self-reliance is the only sure way to guarantee national security. If we are not self-reliant when the crisis hits, then we will find ourselves fighting in various places around the world to ensure our supply of oil. Some (including me) will say this has already begun.

Since the nation has shown no will and our leaders have shown no interest in doing anything but paying this lip service, the Goldman Sachs prediction ($141 for the second half of this year) is the most realistic one out there. But things could be worse. Nobody outside of the “peak oil crackpots” has really considered all of the ramifications of this. Lump me in with them, and I’ll be happy to be wrong about this. But I would not be surprised if oil hits $200/barrel before we get around to electing the last president of these United States.