Oil Storm

With the price of gas back at levels seen five years ago, the world seems in stasis again--except possibly for the sucking economy. However, the pressure of high gas prices has lifted and everyone seems to be breathing a sigh of relief. If only that were the case.

We are cursed with poor long-term memory. Just nine months ago, the US (indeed, the whole world) was in crisis precipitated by rapidly rising oil prices. Granted that much of that price fluctuation was the result of financial speculation. However, the fact remains that 1) oil consumption is growing faster than oil discovery; 2) what oil is newly discovered is more costly to produce than previous fields; and 3) oil is a finite resource--we are going to run out at some point.

I am reminded of a movie that was broadcast on the FX cable channel back in 2005 called "Oil Storm." [Link to a YouTube trailer for the movie: http://tinyurl.com/87jlh8] Before many similar actual events occurred, it depicted the impact of a large hurricane hitting the critical oil region of the Louisiana coast. Except for the riots and general breakdown in civil law, it was a very good prediction of the events that resulted from Katrina.

While the similarities end with Hurricane Katrina, the movie also points to several additional weaknesses in the US dependency on oil:

1. Both China and India are rapidly increasing their consumption of oil. As a result, they are now cash-rich competitors for our oil dollars. This will place additional pressure on oil prices over the long-term. These countries can outbid the US for oil on the open market. Oil prices will go back up.
2. While most of our oil is imported from "friendly" countries such as Canada and Mexico, over time, we will become more dependent on other emerging countries such as Venezuela, Russia, and the "Stans." To say the least, these countries do not particularly love the US. At worst, they can hold the US for oil ransom. This doesn't address the fact that many of these emerging oil nations are unstable and therefore their oil production is questionable at any given time. A perfect case in point is that as this post is written, Russia has cut natural gas supplies to the Ukraine. Since the major pipelines that supply natural gas to Europe pass through the Ukraine, Russia's actions are already causing short natural gas supplies in Germany. The same could happen with oil supplies.
3. While oil speculation has been tamped-down on the US-based commodities markets, there is nothing to prevent the same thing from happening again on other international markets that are closely-coupled to US markets. Therefore, volatility in oil prices should be expected over the next several decades, with the general trend being upward prices.

The problem is, we are in an "oil storm" now. We just don't realize it or we are in denial. While T. Boone Pickens has some personality aspects that I rather detest, he is one of a few that have stood up to state that we should reduce our dependence on foreign oil and has mapped a strategy to achieve that goal. [Link to Pickens Plan here: http://tinyurl.com/94z22d] Former Vice President Al Gore has done the same thing although his approach will be harder to achieve because it is more aggressive. [Link to Al Gore Site: http://tinyurl.com/24w6sq] Of course, Gore is attempting to halt global warming in addition to reducing our dependence on one of the causes, fossil fuels.

All this is nice, but cannot have an impact unless the actions can be converted to legislation. President-elect Obama has demonstrated strong support through the environment and energy leaders he has designated. Whether his agenda can be pushed through Congress remains to be seen. The fact is reducing our dependence on oil will require sacrifices in the short-term. Whether we feel enough pain to do that remains to be seen. One thing is for certain, like the old Fram Oil Filter advertisement, "You can pay me now or you can pay me later," the price will only go up over time. Therefore, it is in our mutual best interest to act now rather than later.