Eighty Dollar Oil

Oil finally traded above $80 per barrel today for the first time in history. This is something that I’ve been waiting for since about three years ago, although it took a year longer than I expected for it to get this high. And by "waited," don't assume that I'm happy it's that high.

Most people who hear about high oil prices think that the biggest problem is that gas prices will go up. They certainly do increase when the price of crude goes up, although it’s not a perfectly parallel relationship. There are a lot of minor issues, especially related to refinery capacity and location and quality of the crude, which can make fuel prices increase more or less quickly than oil goes up and down.

Anyway, the cost of gas is certainly something that affects a lot of people, but only in a very superficial way. The bigger problem is that crude oil and related fossil fuels are the most important building blocks for our civilization. We literally “eat” crude oil. Oil is the most important component of fertilizer. As oil goes up, and fertilizers become prohibitively expensive in the next several years, global crop yields are going to plummet. Add on top of that the fact that most food consumed in North America must travel, on average, well over a thousand kilometers from where it is grown to where it is consumed. In the next five to ten years, as food production declines significantly, and population pressures go up, agriculture will have to become a lot more localized because the costs of shipping the food to other regional markets will be prohibitive.

On top of that, most manufactured goods (especially plastics and rubbers) are based on oil as an input. And we use enormous inputs of crude for energy to mine and process most metals. In short, as oil (and natural gas) become more scarce and expensive, our society is in a lot of trouble. This will be especially hard-hitting in the heavily industrialized countries of Europe and North America – the bigger they are, the harder they fall. In third world countries, the daily struggles of life are something that the populations are already used to. For North American suburbanites, some people are going to be in for a rude awakening in the next five to ten years.

Where are oil prices heading from here? Well, to put it bluntly, the world isn’t running out of oil yet. We’ve been extracting and consuming it for well over a hundred years, and we have probably used less than half of the global reserves during that time. The problem is that we’ve used all the stuff that’s easy to get. Right now, the world is probably producing about 86 million barrels per day, but many countries are already experiencing heavy declines in production as all the big and easy fields have been depleted. Oil companies are fighting to maintain production by using smaller and smaller fields, and by getting into regions which are extremely inhospitable, either because they are deep under the oceans, in the far northern Arctic, or in regions of the world which are extremely instable. And to top it off, demand is surging in large countries like India and China, so that global demand is finally starting to exceed available production. That’s going to make the price of oil skyrocket in the next few years. I predict that it will be less than two years before oil hits $100 per barrel, and when that happens, we’re in a big heap of trouble. Hundreds of thousands of businesses will no longer be viable because of rising energy prices, unemployment will skyrocket, the global financial markets will be rocked, and life will generally be a lot less fun. And we’ll be fighting to feed ourselves. Do you want a recommendation for a good book? Let’s start with “The Idiots’ Guide To Backyard Farming.”

I’m an optimist of sorts, and I hope that we can come up with a lot of changes to mitigate some of these problems. However, I’ve studied the global energy situation for years, and it’s hard to be optimistic. On a positive note, we can still enjoy the global energy party for a couple more years. Over the next couple of months, I’ll see if I can touch on some more energy-related issues, and also give some recommendations on some good books to learn more about these problems. Like it or not, this is going to be the most important problem facing our society in another ten years. Or maybe a lot sooner.