What Do Falling Oil Prices Tell Us ?
Source Jim Devine
Date 06/10/03/19:33

What Do Falling Oil Prices Tell Us about War with Iran, the Elections,
and Peak-Oil Theory

by Michael T Klare

TomDispatch (September 27 2006)

WHAT THE HELL IS going on here? Just six weeks ago, gasoline prices at
the pump were hovering at the $3 per gallon mark; today, they're
inching down toward $2 - and some analysts predict even lower numbers
before the November elections. The sharp drop in gas prices has been
good news for consumers, who now have more money in their pockets to
spend on food and other necessities - and for President Bush, who has
witnessed a sudden lift in his approval ratings.

Is this the result of some hidden conspiracy between the White House
and Big Oil to help the Republican cause in the elections, as some are
already suggesting? How does a possible war with Iran fit into the
gas-price equation? And what do falling gasoline prices tell us about
"peak-oil" theory, which predicts that we have reached our energy
limits on the planet?

Since gasoline prices began their sharp decline in mid-August, many
pundits have attempted to account for the drop, but none have offered
a completely convincing explanation, lending some plausibility to
claims that the Bush administration and its long-term allies in the
oil industry are manipulating prices behind the scenes. In my view,
however, the most significant factor in the downturn in prices has
simply been a sharp easing of the "fear factor" - the worry that crude
oil prices would rise to $100 or more a barrel due to spreading war in
the Middle East, a Bush administration strike at Iranian nuclear
facilities, and possible Katrina-scale hurricanes blowing through the
Gulf of Mexico, severely damaging offshore oil rigs.

As the summer commenced and oil prices began a steep upward climb,
many industry analysts were predicting a late summer or early fall
clash between the United States and Iran (roughly coinciding with a
predicted intense hurricane season). This led oil merchants and
refiners to fill their storage facilities to capacity with $70-80 per
barrel oil. They expected to have a considerable backlog to sell at a
substantial profit if supplies from the Middle East were cut off
and/or storms wracked the Gulf of Mexico.

Then came the war in Lebanon. At first, the fighting seemed to confirm
such predictions, only increasing fears of a region-wide conflict,
possibly involving Iran. The price of crude oil approached record
heights. In the early days of the war, the Bush administration tacitly
seconded Israeli actions in Lebanon, which, it was widely assumed,
would lay the groundwork for a similar campaign against military
targets in Iran. But Hezbollah's success in holding off the Israeli
military combined with horrific television images of civilian
casualties forced leaders in the United States and Europe to intercede
and bring the fighting to a halt.

We may never know exactly what led the White House to shift course on
Lebanon, but high oil prices - and expectations of worse to come -
were surely a factor in administration calculations. When it became
clear that the Israelis were facing far stiffer resistance than
expected, and that the Iranians were capable of fomenting all manner
of mischief (including, potentially, total havoc in the global oil
market), wiser heads in the corporate wing of the Republican Party
undoubtedly concluded that any further escalation or regionalization
of the war would immediately push crude prices over $100 per barrel.
Prices at the gas pump would then have been driven into the $4-5 per
gallon range, virtually ensuring a Republican defeat in the mid-term
elections. This was still early in the summer, of course, well before
peak hurricane season; mix just one Katrina-strength storm in the Gulf
of Mexico into this already unfolding nightmare scenario and the fate
of the Republicans would have been sealed.

In any case, President Bush did allow Secretary of State Condoleezza
Rice to work with the Europeans to stop the Lebanon fighting and has
since refrained from any overt talk about a possible assault on Iran.
Careful never explicitly to rule out the military option when it comes
to Iran's nuclear enrichment facilities, since June he has nonetheless
steadfastly insisted that diplomacy must be given a chance to work.
Meanwhile, we have made it most of the way through this year's
hurricane season without a single catastrophic storm hitting the US.

For all these reasons, immediate fears about a clash with Iran, a
possible spreading of war to other oil regions in the Middle East, and
Gulf of Mexico hurricanes have dissipated, and the price of crude has
plummeted. On top of this, there appears to be a perceptible slowing
of the world economy - precipitated, in part, by the rising prices of
raw materials - leading to a drop in oil demand. The result? Retailers
have abundant supplies of gasoline on hand and the laws of supply and
demand dictate a decline in prices.

[in addition, the high prices during the summer encouraged the
speeding up of repair of the pipeline in Alaska, along with other
increases in the amount supplied to the world market.]

Finding Energy in Difficult Places

How long will this combination of factors prevail?

Best guess: The slowdown in global economic growth will continue for a
time, further lowering prices at the pump. This is likely to help
retailers in time for the Christmas shopping season, projected to be
marginally better this year than last precisely because of those lower
gas prices.

Once the election season is past, however, President Bush will have
less incentive to muzzle his rhetoric on Iran and we may experience a
sharp increase in Ahmadinejad-bashing. If no progress has been made by
year's end on the diplomatic front, expect an acceleration of the
preparations for war already underway in the Persian Gulf area
(similar to the military buildup witnessed in late 2002 and early 2003
prior to the US invasion of Iraq). This will naturally lead to an
intensification of fears and a reversal of the downward spiral of gas
prices, though from a level that, by then, may be well below $2 per

Now that we've come this far, does the recent drop in gasoline prices
and the seemingly sudden abundance of petroleum reveal a flaw in the
argument for this as a peak-oil moment? Peak-oil theory, which had
been getting ever more attention until the price at the pump began to
fall, contends that the amount of oil in the world is finite; that
once we've used up about half of the original global supply,
production will attain a maximum or "peak" level, after which daily
output will fall, no matter how much more is spent on exploration and
enhanced extraction technology.

Most industry analysts now agree that global oil output will
eventually reach a peak level, but there is considerable debate as to
exactly when that moment will arise. Recently, a growing number of
specialists - many joined under the banner of the Association for the
Study of Peak Oil - are claiming that we have already consumed
approximately half the world's original inheritance of two trillion
barrels of conventional (that is, liquid) petroleum, and so are at, or
very near, the peak-oil moment and can expect an imminent contraction
in supplies.

In the fall of 2005, as if in confirmation of this assessment, the CEO
of Chevron, David O'Reilly, blanketed US newspapers and magazines with
an advertisement stating, "One thing is clear: the era of easy oil is
over ... Demand is soaring like never before ... At the same time,
many of the world's oil and gas fields are maturing. And new energy
discoveries are mainly occurring in places where resources are
difficult to extract, physically, economically, and even politically.
When growing demand meets tighter supplies, the result is more
competition for the same resources."

But this is not, of course, what we are now seeing. Petroleum supplies
are more abundant than they were six months ago. There have even been
some promising discoveries of new oil and gas fields in the Gulf of
Mexico, while - modestly adding to global stockpiles - several foreign
fields and pipelines have come on line in the last few months,
including the $4 billion Baku-Tbilisi-Ceyhan (BTC) pipeline from the
Caspian Sea to Turkey's Mediterranean coast, which will bring new
supplies to world markets. Does this indicate that peak-oil theory is
headed for the dustbin of history or, at least, that the peak moment
is still safely in our future?

As it happens, nothing in the current situation should lead us to
conclude that peak-oil theory is wrong. Far from it. As suggested by
Chevron's O'Reilly, remaining energy supplies on the planet are mainly
to be found "in places where resources are difficult to extract,
physically, economically, and even politically". This is exactly what
we are seeing today.

[also, nothing in the current situation should lead us to conclude
that peak-oil theory is right.]

For example, the much-heralded new discovery in the Gulf of Mexico,
Chevron's Jack No 2 Well, lies beneath five miles of water and rock
some 175 miles south of New Orleans in an area where, in recent years,
hurricanes Ivan, Katrina, and Rita have attained their maximum
strength and inflicted their greatest damage on offshore oil
facilities. It is naive to assume that, however promising Jack No 2
may seem in oil-industry publicity releases, it will not be exposed to
Category 5 hurricanes in the years ahead, especially as global warming
heats the Gulf and generates ever more potent storms. Obviously,
Chevron would not be investing billions of dollars in costly
technology to develop such a precarious energy resource if there were
better opportunities on land or closer to shore - but so many of those
easy-to-get-at places have now been exhausted, leaving the company
little choice in the matter.

Or take the equally ballyhooed BTC pipeline, which shipped its first
oil in July, with top US officials in attendance. This conduit
stretches 1,040 miles from Baku in Azerbaijan to the Turkish
Mediterranean port of Ceyhan, passing no less than six active or
potential war zones along the way: the Armenian enclave of
Nagorno-Karabakh in Azerbaijan; Chechnya and Dagestan in Russia; the
Muslim separatist enclaves of South Ossetia and Abkhazia in Georgia;
and the Kurdish regions of Turkey. Is this where anyone in their right
mind would build a pipeline? Not unless you were desperate for oil,
and safer locations had already been used up.

In fact, virtually all of the other new fields being developed or
considered by US and foreign energy firms - ANWR in Alaska, the
jungles of Colombia, northern Siberia, Uganda, Chad, Sakhalin Island
in Russia's Far East - are located in areas that are hard to reach,
environmentally sensitive, or just plain dangerous. Most of these
fields will be developed, and they will yield additional supplies of
oil, but the fact that we are being forced to rely on them suggests
that the peak-oil moment has indeed arrived and that the general
direction of the price of oil, despite period drops, will tend to be
upwards as the cost of production in these out-of-the-way and
dangerous places continues to climb.

Living on the Peak-Oil Plateau

Some peak-oil theorists have, however, done us all a disservice by
suggesting, for rhetorical purposes, that the peak-oil moment is ...
well, a sharp peak. They paint a picture of a simple, steep, upward
production slope leading to a pinnacle, followed by a similarly neat
and steep decline. Perhaps looking back from 500 years hence, this
moment will have that appearance on global oil production charts. But
for those of us living now, the "peak" is more likely to feel like a
plateau - lasting for perhaps a decade or more - in which global oil
production will experience occasional ups and downs without rising
(as predicted by those who dismiss peak-oil theory), nor falling
precipitously (as predicted by its most ardent proponents).

During this interim period, particular events - a hurricane, an
outbreak of conflict in an oil region - will temporarily tighten
supplies, raising gasoline prices, while the opening of a new field or
pipeline, or simply (as now) the alleviation of immediate fears and a
temporary boost in supplies will lower prices. Eventually, of course,
we will reach the plateau's end and the decline predicted by the
theory will commence in earnest.

In the meantime, for better or worse, we live on that plateau today.
If this year's hurricane season ends with no major storms, and we get
through the next few months without a major blowup in the Middle East,
we are likely to start 2007 with lower gasoline prices than we've seen
in a while. This is not, however, evidence of a major trend. Because
global oil supplies are never likely to be truly abundant again, it
would only take one major storm or one major crisis in the Middle East
to push crude prices back up near or over $80 a barrel. This is the
world we now inhabit, and it will never get truly better until we
develop an entirely new energy system based on petroleum alternatives
and renewable fuels.

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