The Energy Predicament

The Daily Reckoning PRESENTS: Oil prices ended pretty much where they began last year, reassuring the American public that the Peak Oil debate is easily dismissible. However, James Howard Kunstler points out that there are ominous trends that contributed to the stall in oil prices. Read on…


Oil ended 2006 roughly where it began, at just over $60 a barrel. This reassured the public that all talk about Peak Oil was hysterical blather from a lunatic fringe. It was reinforced by the publication of the mendacious Cambridge Energy Research Associates (CERA) report issued this fall – a tragic document put out by a giant public relations firm representing the oil industry – with the mission of staving off windfall profits taxes and other regulatory moves that a true resource emergency might recommend.

But beyond this debate, in the background, another ominous trend can account for the stalling of oil prices in 2006 – totally unrecognized by the public and ignored by the news media: Prices on the oil futures market leveled off because the Third World has effectively dropped out of bidding for it – and using it. They cannot afford it at $60 a barrel.

The Third World has entered an era of energy destitution and it is manifesting itself in symptoms like local resource wars, genocides, falling life expectancies, and in many places a near-total unraveling of the sociopolitical order. American mall-walkers and theme park visitors are oblivious to this tragic process, but it is perhaps the major reason why we are not now suffering from $100 a barrel (or greater) oil prices (with the consequent unraveling of our sociopolitical and economic order).

The major trend on the oil scene for the past 12 months has been the apparent inability of the world to lift total production above 85 million barrels a day – with demand now rising above that line. It is unclear how much more demand destruction will come out of the Third World before bidding intensifies between the developed nations.

One commentator in particular, Dallas geologist Jeffrey Brown – a frequent contributor on the web’s best oil debate site, – is advancing the idea that we are entering an oil export crisis that will presage a more general permanent world-wide oil emergency. Brown holds that the major oil exporting nations are using so much of their own product, because of rising populations, that their net exports are falling at an alarming rate, perhaps as much as 9% annually. This trend combines with general depletion rates now said to be around 3% a year.

The question of total oil reserves around the world remains somewhat murky, but Brown, Kenneth Deffeyes of Princeton, and others using a straightforward mathematical model, have stated that the world is roughly at the same point in all-time production as the lower-48 United States was in 1970, when America passed its all-time production peak. We know for certain that three of the four super giant oil fields (Daqing in China; Cantarell in Mexico; Burgan in Kuwait) are past peak and there is plenty of evidence that the greatest of them all, 50-year-old Ghawar in Saudi Arabia, is not only past peak but perhaps “crashing” into a super-steep decline.

Discovery of new oil to replace the production from declining fields remains paltry. Chevron announced it’s “Jack” discovery in the deepwater Gulf of Mexico with great fanfare this year, but neither conclusively demonstrated that all the wished-for oil was down there (between 3 and 15 billion barrels, Chevron said) nor that they could get it out of there in a way that made sense economically, since the oil was extraordinarily deep and difficult to lift up.

Meanwhile, companies developing tar sand production in Alberta announced that their costs of production were rising substantially, while a reckoning lay ahead as to how much of Canada’s fast-disappearing natural gas reserves will be squandered in melting tar. The oil shale project is going nowhere. American corporate farmers have entered into a racket with congress to subsidize ethanol production from corn and biodiesel fuel from soybeans.

But the American public remains ignorant of the tragic futility of this project, which depends on oil-and-gas “inputs” to keep the crop yields up and ultimately is a net energy “loser.” As the world crosses into the uncharted territory of “The Long Emergency,” Americans will find themselves having to choose between eating food and making fuel to keep the car engines running.

The signal failure of public debate in this country is embodied in our obsession with this particular theme – how to keep the cars running by other means at all costs. Everybody from the greenest enviros to the hoariest neoliberal free market pimps believe that this is the only thing we need to worry about or talk about. The truth, of course, is that we have to make other arrangements for virtually all the major activities of everyday life – farming, commerce, transport, settlement patterns – but we are so over-invested in our suburban infrastructure that we cannot face this reality.

The bottom line for oil in 2007: Expect the bidding on the futures markets to regain intensity between the United States, China, Europe, and Japan. A contracting U.S. economy could take some demand out of the picture, but the sad truth is that we burn up most of the oil we use in cars, and American life is now so hopelessly based on incessant motoring that citizens cannot even go down to the unemployment office without driving. Geopolitical events can only make the oil supply situation worse and probably will.

We are probably also in the early stages of a natural gas crisis in the United States. Over the next decade, the gap between U.S. demand for natural gas and dwindling supply may amount to one-and-a-half times the current equivalent of our oil imports. This is a staggering deficit. Natural gas is used for heating in more than half the houses in the United States and accounts for just under 20 percent of our total electricity production. Domestic supply is crashing. We are drilling as fast as we can, with more and more rigs each year, just to keep up.

And to make matters worse, the means of gas delivery – through a vast web of pipeline networks around the nation – makes “just-in-time” delivery the norm and, tragically, also makes “just-in-time” pricing normal, too. Thus, gas prices are responding only to the shortest-term signals – for instance, unusually mild winter weather – rather than to the catastrophic long-term reserve picture.

Finally, we are unlikely to solve our natural gas problems with imports for technical reasons having to do with the cost and difficulty of moving the stuff by means other than pipelines and for geopolitical reasons, namely that most of the remaining gas in the world is in Asia.


James Howard Kunstler
for The Daily Reckoning
April 18, 2007

P.S. Bottom line: We could enter a home heating and electricity production crisis anytime. Massive price increases are likely to be required in order to reduce demand to the level of available supplies. This will be one of the major factors in the disabling of suburbia – which is to say, normal American life.

Editor’s Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.

His latest nonfiction book, “The Long Emergency,” describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.

You can get more from James Howard Kunstler – including his artwork, information about his other novels, and his blog – at his Web site:

Oh, the wacky world of modern economics…no matter how hard you try, you’ll never know exactly what’s going to happen.

All the experts…analysts…economists, they have their fancy charts and indicator systems, but when you get right down to it: the market has its own agenda.

Take the U.K. for instance. Yesterday, the data that was released showed a significant rise in inflation (at least, significantly more than anticipated), pushed the pound above the psychological $2 level for the first time in 15 years – and caught everyone quite a bit off-guard.

And as the analysts and experts scramble to ‘reforecast’ in the U.K., inflationary fears are spreading across the pond.

Philadelphia Fed President, Charles Plosser is particularly concerned, urging the central bank to “stay vigilant.”

During a speech at the Rutgers University School of Business Quarterly Outlook conference, Plosser eloquently said, “If inflation doesn’t moderate as we expect, the Fed will have to sort of think about what’s the appropriate action.”

Yes…we think the Fed should “sort of” think about it, too. Nothing to strenuous – maybe just chat about how these inflationary fears have pushed the dollar down close to an all-time low against the euro. You know, maybe work it into the conversation over nine holes of golf.

Bloomberg reports: “The dollar fell to $1.36 against the euro for the first time since December 2004 on speculation slower U.S. inflation will spur investors to seek fixed-income assets in nations where interest rates are climbing.”

And where do people turn when the dollar is floundering? Gold. Today, the yellow metal climbed to its highest point since last May.

“Gold may easily climb above $750 an ounce in the 4th quarter,” asserted Michael Widmer, head of metals research at Caloyn in London.

This is good news for long-suffers of the DR – that is, if you’ve taken our advice and held onto some gold to hedge against the falling dollar.

Then again, as we pointed out – you can never know anything for sure. But if history is any indicator, gold has proved to be a better measurement of wealth (and a better way to hold onto that wealth) over paper money time and time again. Bill has called gold “nature’s money” – and for good reason. You can’t turn on a printing press or create it out of thin air; this naturally limits the “money supply,” generally keeping it in line with the economy itself.


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“The dollar doesn’t have much going for it these days. The negativity is really building once again, and it finally looks as though the dollar has returned to the depths of the weak dollar trend.”

For the rest of this story, see today’s issue of The Daily Pfennig


*** We’ve mentioned this a couple times in the last week – but since the possible disappearance of the Great and Powerful Mogambo caused such a disturbance, it is worth being redundant:

Rumors of the Mogambo’s demise have been greatly exaggerated. In fact, we have made it even easier for readers to commune with our masked economist directly, by setting up an RSS news feed.

Or you can read him in his usual spot on the DR site.

You read his brand-new installment in both places, later on today.

*** Now, over to Bill in Gualfin, Argentina…

“This is no place for the faint hearted,” Elizabeth commented. We had just come back from six hours on horseback, over the most rugged mountain trails we had ever seen. The horses slipped and skidded on rock ledges hundreds of feet above narrow mountain passes. We were so high – over 11,000 ft – we could barely breathe.

The idea was to explore more of the ranch. But we’ve ended up exploring more of ourselves.

What are we doing down here? We don’t know anything about cattle ranching. We barely speak Spanish. We are ignorant of the customs of the place. We are in another hemisphere, another continent, and five time zones away from where we usually live.

What gives?

We play our investments safe…but take chances with our lives. That is all we can make of it.

All we want from our money is for it to stay put. We ask nothing more.

Does an investment make sense? You can figure it out by weighing the rewards against the risks. As the rewards increase, typically, so do the risks. So you look for a happy balance. If the rewards are respectable and the risks are reasonable, you might make the investment. But apply the same formula to your life and you come up short.

Life is different. You can make the risk/reward analysis…make the reasonable choice…and come to the end of it and still be disappointed. And then it’s too late. You can’t make up your losses. Better to take some chances.

When we finally reached the “Fortress,” we had to dismount. The horses had already taken us farther than we thought possible. But the rest of the way was hopeless. We’d have to scramble up over the rocks themselves.

Edward, young and light, bounded up over a stone wall and then climbed up to the top. The rest of us found the air thinner and the going harder.

We also found that we could pick up pieces of ancient pottery with almost every step we took. There were pottery shards everywhere…most of them tile-colored, with zig-zag lines painted in black and red. There were also a few gray pieces…and some very thick pieces of black pots.

Finally, we reached the top and stood up on the huge rocks at the summit. The place was a natural fortress of large boulders on a steep hill, which the Hualfines tribe had filled in stone wall ramparts, giving themselves little terraces on which to live and shoot arrows down at their enemies.

“Edward, get back from the edge. You’re making me nervous,” said Elizabeth.

Edward did not immediately obey. Instead, he gave his mother a fright, by jumping from one rock to another.

Jorge is in his 50’s. But he showed no sign of fatigue or fright. We asked him for an explanation:

“The Spanish conquistadors came to this area in the 16th century. But they didn’t get up here until much later. And then, the Hualfines tribe and the other tribes in these mountains, were hard to control. They raided the haciendas down below. The Spanish tried to subdue them, but these people held out for 100 years. They were up in these hills where it was almost impossible to get them out.

“But then, the Spanish sent more soldiers and drove the Hualfines to this hill. You can see; the Fortress is completely secure. It was impossible for the Spanish to take it. So they just waited. The Indians had stocked up on cornmeal and water. That’s why you find so many pieces of pottery here. But their supplies must have run out pretty fast. And then, the Hualfines had to surrender. They were taken away and made to work in the haciendas. Most of them died, of course.

“But some of them survived…and some remained in these hills. One of them was still alive when I was young. I remember him. He dressed like an Indian and lived in a cave. We weren’t sure if he was a real Indian…or just crazy…because he had some relatives who lived like normal people. Juanita, who works in the kitchen, is from the same family.

“So, I don’t know exactly how it happened. Somehow, he just got missed by civilization. He was the last speaker of the local Indian language; he hunted rabbits and birds with a bow and arrow.

“And then, when he was in his 60’s or 70’s, he got sick, and the local people took him to the hospital. He died there. I think he would have lived a lot longer if they hadn’t taken him to the hospital. They said that once he got there he just stopped eating and died. It was so strange to him, I guess.”


The Daily Reckoning