Volume 3 Issue 2 - Opinion

Over several issues of maxxTORQUE, I have commented on the energy dilemma facing the industrialized world and specifically the United States. In this column, I will give some factual information on where the energy equation stands and then give some advice on some things you need to do to be ready for the inevitable.

To understand the state of global oil supply, it is necessary to analyze the balance of production versus demand. Is enough oil being produced throughout the world to meet the total global demand? This seems like a straight forward task of comparing production numbers with demand numbers and seeing if there is an excess or shortage of oil. As usual, nothing could be further from the truth; the complexities of the equation are difficult, if not our ability to scrutinize them. Within the factors of production and demand are several subsets of variables that can only be estimated and these estimates can be altered by a single unexpected event that alters even the best projections. Think of a hurrican tracking to hit landfall at Cape Hatteras. A "jog" to the north and it is suddenly bearing down on Cape Cod. Similarly, the blowout of a single deep water well in the Gulf of Mexico has altered projected US oil production for at least the next five years. A war in the Middle East could drastically change the availability of oil in that region with catastrophic consequences.

Despite these unpredictable contingencies, it remains possible and is incumbent on energy specialists to provide their best forecast of energy supplies. So much rides on the supply of reasonably priced sources of oil and gas that knowing what to expect and planning accordingly is imperative for economic survival. So how do I see the future in my crystal ball? For what it’s worth, let’s take a look.

Economic Recovery Equals Energy Shortage

Worldwide oil demand in 2009 was right at 86 million barrels per day (bpd). The best estimates of oil production capacity are 89 million bpd; so we can currently produce more than we consume. Unfortunately, the world is in a serious recession and economic activity is down from a peak in 2008. As the economies of the world begin to revitalize and demand for oil starts to raise, it will result in an immediate shortage of oil. Additionally, somewhere close to 2013 the production will actually start to fall faster than the addition of new oil can offset and the potential a shortage will really begin to develop.

Let me explain the fall in production that can’t be offset by new oil discoveries. The average annual decline in existing oil fields production is 5% measured, not calculated; this is actually observed. As oil fields deplete the ease with which the oil can move to the well begins to fall off. It gets harder and harder to achieve the same level of flow over time and eventually this results in the 5% measured reduction in output. The math is pretty straight forward: 89 million bpd multiplied by 5% is 4.45 million bpd. This means that it is necessary to bring on line about 4.5 million bpd new oil production to keep up with the decline in current oil field production. Keep in mind this does not take into account the demand by an increasing economy. If the economic recovery underway continues and the 5% decline is accurate, the shortage will come in 2013 or 2014.

The prospect of increased production is actually good in the short term (next 10 to 15 years) but it depends heavily on the massive oil discovery off the coast of Brazil. This deposit is estimated to be over 100 billion barrels of oil, but it is located under 11,000 feet of water in the Atlantic Ocean. This is over twice the depth of the BP well that blew in the Gulf of Mexico. Additionally, the drill has to pass through a salt deposit that is up to 1 mile thick. Needless to say, this is a challenge that will test the best engineering technology known to man. Good news is that a test well has been successful and is pumping oil so the future looks bright. The bad news is that the projected rate of production on the giant field is now pushed back at least 7 years from the original estimates of full production of over 1 million bpd by 2015 to 2022 at the earliest. Additionally, the massive Kashagan oil deposit discovered in Kazakhstan (Caspian Sea) will also be delayed in reaching full production. The reality is that as we go looking in ever more difficult environs for valuable oil, it gets much more difficult to extract that oil. Net result, higher prices for finished petrochemical products, including gasoline, diesel, jet fuel, motor oil and heating oil.

Certainly the increased prices will cause a reduction in demand and a new equilibrium will be established. Just how high fuel prices will go is hard to estimate, but, a we have seen in the recent past, $5.00 per gallon forgasoline and $5.50 per gallon for diesel are not outlandish predictions. These prices for finished products are the result of crude oil going to approximately $175.00 per barrel. When is this likely to happen? Around 2014 give or take a year.

Be prepared for higher food prices, not only because of higher transportation cost, but also as a result of higher cost for chemical fertilizers as well as the increased cost to operate farm equipment. As fuel prices escalate, the government will push more and more ethanol production, which will drive up the price for grain and in turn drive up the prices for all food from live stock; this includes not only meat but eggs and dairy products. Imagine going to your favorite steak house and paying $25.00 for the house special. Oil and gas consumption is integral in every nook and cranny of our economy and unfortunately the coming increased cost of petroleum will be felt throughout our economy — again, as we have already seen.

Of course, just as we cannot forsee every negative impact on oil production, we also cannot know what positive events may unfold. There is always a chance something, like discovering a new "lake" of oil in friendly places, will occur. I sincerely hope so; I would be ecstatic if the energy shortage I see coming did not materialize! But, I assure you, the chances of plentiful cheap petroleum over the next 10 years is not something we could expect. Even if more discoveries provide hope for meeting demand, the oil cannot be brought on fast enough to avoid at least a temporary shortage.

Well, if I haven’t earned the title “Doctor Doom” with this article, I must at least be a candidate. I hope you take away from this article that NOW is the time to be preparing for the 20-teens (2013 thru 2019). This is the most unstable period of time for energy supplies and consequential cost for the next 25 years. When the real shortage, not an artificial shortage created by speculators, becomes known throughout the world, the real crises will begin; nations may literally go to war to ensure a reliable source of oil. The hope is that the high energy prices drive down consumption and a new equilibrium is reached. The new economy that emerges will be structured on much higher cost of energy and will require new strategies of energy efficiencies and alternative sources of energy. All of us can adjust and come through this transition with little loss of quality of life but alive and well if we are prepared and have developed a plan to navigate the coming energy adjustments.

So what should you do to be prepared for the coming shortage and high energy prices? There are numerous things you need to look at but let me be clear, he who hesitates will lose. The cost of fuel efficient vehicles or energy conserving appliances will rocket up just as soon as the manufacturers realize the demand is up. If you go to buy that high mileage diesel or hybrid vehicle now, the price will be low and the sellers are motivated. Should you wait until gas or diesel is $5.00, then the price of the vehicle will jump 50% or more. But, regardless of the timing you will be forced to buy a fuel efficient vehicle. Most Americans drive about 15,000 miles a year and if your vehicle gets 15 miles per gallon you use 1,000 gallons a year of gasoline. If the price of gas is $2.75 per gallon you spend $2,750.00 per year for the one vehicle. If the price goes to $5.00 per gallon you would spend $5000.00 per year for the one vehicle. Replacing the vehicle with a fuel efficient vehicle, that gets 30 miles per gallon, would allow you to continue to drive the 15,000 miles for about the same annual cost; even with gas at $5.00 per gallon.

Other common items may have to be up graded to afford to keep them, including air conditioners and other old inefficient appliances. Energy efficient windows and better attic insulation will be cost effective to install. One of the largest energy hounds in the house is the hot water heater and excellent alternatives are available to cut energy consumption and cost. There are several tax incentives to start these upgrades now, so don’t wait till the cost of electricity is forcing you to take cold showers and turn off the AC.

It is ggod to prepare for the challenging reality aheag even now. When all is said and done, denial only compounds the inevitable. I hope this information causes you to think ahead and encourages you to take action to be prepared.

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