Oil Prices Back Over $70 per Barrel; IEA Chief Economist Speaks

An unexpected draw on gasoline inventories leading up to the peak driving months of July and August surprised the market and helped vault oil prices above the $70 level. In its Wednesday inventory report, the Energy Information Administration posted a decline in heating oil stocks. Although consumers won't worry much about heating oil until the fall, the market expects to see builds in inventories during the summer.

Is this just a short-term aberration?  Almost certainly not, at least if you listen to the chief economist at the International Energy Agency in Paris.  According to Fatih Birol:

Within 5 to 10 years, non-OPEC production will reach a peak and begin to decline, as reserves run out. There are new proofs of that fact every day. At the same time, we'll see the peak of China's economic growth. The two events will coincide: the explosion of Chinese growth, and the fall in non-OPEC oil production. Will our oil system be capable of facing this twin shock, that is the question.

As if all this is not bad enough, Birol adds that "[i]f Iraqi production does not rise exponentially by 2015, we have a very big problem, even if Saudi Arabia fulfills all its promises."  Iraqi production rising "exponentially" by 2015?  Anyone want to place any bets on THAT possibility?

But wait, the outlook gets even WORSE, as Birol appears to question Saudi oil reserves ("I understand the Saudi government claims 230 billion barrels of reserves, and I have no official reason not to believe these numbers.")  Whoops, no "official reason?"  That sounds a bit shaky to me, especially given the almost complete lack of transparency on Saudi oil reserve statistics, combined with the fact that key Saudi oil fields are decades old and aging fast.  The problem is, if Saudi oil production does NOT increase as we are all counting on, and/or if Saudi oil reserves are not what they've been made out to be by the Saudis, we're going to be in deep, deep trouble.  Can we say $150, $200 per barrel oil?  Higher?

Finally, Birol has some comments on biofuels, which can be described as a combination of "highly skeptical" and "scathing."  For instance:

*"Biofuels will never replace OPEC oil, as some hope. Their contribution will remain minor."

*"Many governments encourage biofuel consumption, notably Europe, Japan and the US. Some of these policies are not based on a solid economic rationale: the biofuels will remain too expensive to produce. But even if these policies succeed we think that the biofuel portion of total hydrocarbons will only be 7% in 2030." 

*"But even if these policies succeed we think that the biofuel portion of total hydrocarbons will only be 7% in 2030."

*Not only that, but Birol notes that biofuels production competes with "traditional agriculture" for food.  According to Birol, "that is already the case and it isn't good." 

The point is, if we want to avert a major oil crunch and potential economic disaster just a few years down the line, we'd better start slashing our oil consumption today.  Such a course of action would serve three major purposes: 1) enhancing national security by reducing the amount of money flowing to unstable, anti-Western regimes and groups; 2) cutting greenhouse gas emissions; and 3) moving us quickly towards alternative fuels in order to avoide economic disaster down the line.  We know that biofuels are not the answer, only a small part of the answer AT BEST. 

All this leaves two possibilities, both of which we've known for years: 1) massive improvements in energy efficiency; and 2) rapid development of alternatives to oil (wind, solar, nuclear).  On the latter, let me just emphasize that coal-to-liquids is NOT the answer, as it's very expensive AND terribly damaging to the environment.  So let's ditch that idea right now. Instead, let's move quickly in the areas we KNOW will make a difference; the time for procrastination is over, as the chief economist at the IEA makes clear.

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