Hear the Warning in Energy Crunch
For those paying more than $2 a gallon at the gasoline pump or monstrous heating bills in the frozen Northeast and Midwest this winter, it wouldn’t be unreasonable to assume that once war with Iraq plays out, the energy crunch will ease and prices will come down rapidly.
It would, though, be incorrect.
The reality is that two-buck gasoline is bound to be with us for longer than many think -- no matter what happens on the battlefields around Baghdad.
“The U.S. energy tank is empty,” says economist Philip Verleger, a consultant based in Newport Beach. Inventory levels of oil and natural gas are “very low and replenishment will be difficult or impossible.”
If anything, experts say, the outlook for natural gas is even worse than that for oil. Shortages in North America seem certain for the next several years, at least. That means prices will run between $4 and $5 per thousand cubic feet -- 70% to 100% higher than the pattern of recent decades. That will, in turn, affect the price of electricity in many states.
How did the energy crisis come on so suddenly?
Unrest in Venezuela, the nation that founded the Organization of the Petroleum Exporting Countries, is one big reason. A leading oil supplier to the U.S., Venezuela suffered a general strike and oil industry revolt against President Hugo Chavez. That labor strife has ended with Chavez firing skilled workers at the state-run petroleum company. But production of Venezuelan oil has been sharply reduced, something that isn’t going to correct itself quickly.
“Hundreds of millions of barrels have been lost to the world’s supply,” says Joseph Tovey, head of Tovey & Co., a New York investment bank specializing in energy. Venezuela’s full strength as an oil exporter, he fears, “may never come back.”
Meanwhile, war in the Middle East could exact a heavy toll on the petroleum front -- and not just for the duration of the conflict. Many wells could be destroyed in Iraq, either by a U.S.-led bombing campaign or intentionally by Saddam Hussein’s retreating forces, and they aren’t going to return to production anytime soon.
The Paris-based International Energy Agency, which represents oil-consuming countries, said last week that Saudi Arabia had only 400,000 barrels of spare capacity -- not enough to offset a loss of Iraq’s oil. The Saudi oil minister, Ali Naimi, contradicted that judgment Friday, saying his country would keep the world supplied. But Naimi’s well-known predecessor, Ahmed Zaki Yamani, told reporters that really there isn’t enough capacity among OPEC members to compensate for Iraq’s lost supplies for any length of time.
The per-barrel price of oil could skyrocket “above $50 and ruin the world’s economy,” predicted Yamani, now a consultant in London.
The longer-term outlook is more troubling. The basic problem is one of economic fundamentals: Production is declining in many places, while consumption of oil is rising rapidly in countries that never used much of the stuff before.
China, for instance, is burning up gasoline and other oil products at double the pace it did 10 years ago. That nation now uses one-fourth as much oil as the U.S., whereas a decade ago it used less than one-seventh. India too has doubled its use of oil over the same span. As these countries continue to develop economically, their need for oil will only get bigger.
Yet production is falling, not only in old fields in Alaska and the North Sea, but in the Middle East as well. “Saudi Arabia’s main wells are past their peak,” says Matthew Simmons, head of Simmons & Co., a Houston-based energy investment banking firm.
Simmons, whose company has worked in the industry for 30 years, says that world oil and gas output may never catch up; new reserves simply won’t be able to keep up with rising demand.
Certainly, not every expert agrees with this dire conclusion. Joseph Stanislaw, president of Cambridge Energy Research Associates, believes that new streams of oil in Russia and the Caspian region “will add enormously” to world reserves. What’s more, Iraq’s reserves “are very large, and there is more to be developed in Saudi Arabia and West Africa too.”
British energy giant BP has just signed a $6-billion agreement to jointly explore for new reserves in Russia. ExxonMobil Corp. is drilling for oil at Sakhalin Island. And China’s government is investing in ventures in the Caspian Sea. On the natural-gas front, a pipeline could bring ample Alaskan reserves to the Lower 48.
But all of these projects will take years to bring to fruition. In the meantime, the outlook is for markedly tighter energy supplies and, as a result, shifting business plans.
Alcoa Inc. shuttered aluminum plants in Oregon and Washington in part because of high energy costs in 2001. But the company has opened facilities in Australia, where more-reasonably priced energy is available.
More such moves are certain to occur. Verleger, for one, says that petrochemical and fertilizer factories could do better in Trinidad because it has lots of natural gas.
High prices also will affect the overall economy, reducing consumers’ ability to buy other goods. Already, some analysts predict that this winter’s high gasoline and heating-oil charges could trigger another recession by the fall.
But beyond the short term, what we are witnessing is the end of an industrial model that counts on new discoveries of oil and gas to meet the swelling demand for energy. Reserves are declining in too many areas for discoveries to keep up for very long.
That’s why the coming decade will see increasingly serious efforts to develop alternatives to petroleum energy. Fuel-efficient cars and trucks could well become fashionable very soon.
Goodbye, SUVs. Hello, hybrid electric-and-gas vehicles.
Indeed, two-buck gas is going to prove more than an annoyance or, for some, a temporary hardship. This is really a wake-up call.
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James Flanigan can be reached at jim.flanigan@ latimes.com.
