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FinalCall.com News
Business & Money
Peak Oil, At Our Door
By Cedric Muhammad
-Guest Columnist-
Updated Dec 10, 2007 - 9:25:00 AM
At the present time petroleum is most likely the dominant financial center because there is such an enormous difference between “cost” and “selling price.” The oil czars control the rest of the economy to ensure the use of petroleum. They restrain competition everywhere.”
- L. Fletcher Prouty to Cedric Muhammad, letter dated, August 23, 1994
High oil prices in the 1970s set the stage for the most severe global downturn since the Great Depression. Indeed, the high prices of 1980 were at the beginning of the worst three-year period of economic growth of the past four decades. For the oil price to potentially play a similar role in a significant economic slowdown, prices would have to average from $100 to $120 per barrel for six months to a year.
- Cambridge Energy Resource Associates, November 12, 2007
When Iranian President Mahmoud Ahmadinejad, in Riyadh, Saudi Arabia, where the heads of state of the Organization of Petroleum Exporting Countries (OPEC) recently gathered, called the dollar a “worthless piece of paper,” and Venezuelan President Hugo Chavez called the euro a better option than the dollar, it drove the price of oil to $95 a barrel.
The comments, and price rise, drew attention once again to the intertwined story of the falling dollar and the supply and demand for oil. One has to keep an eye on both factors in order to understand what is going on.
Because oil is denominated or priced in dollars due to the determination of oil-rich nations to receive payment for their commodity in the most valuable currency in the worldit automatically provides a significant amount of demand for dollars all over the world. To get an idea of the relationship between the supply, and demand for oil, its price, and the demand for dollars, just consider that most analysts agree that the current production of oil is about 85 million barrels a day.
If one were to multiply that amount of oil by the price that January 2008 oil closed at this past Friday, Nov. 23rd—$98.18—we get $8,345,300,000 as the amount necessary to buy 85,000,000 barrels of oil. Remember, this is just one day’s worth of production. If one were to multiply 85 million barrels by 365 days, we would see that the total amount of oil produced in one year is 31,025,000,000 barrels. If one were to take that amount and multiply it by $69—the year-to-date annual average for West Texas Intermediate, also known as Texas Light Sweet Oil—the type of crude oil used as a benchmark in oil pricing and the underlying commodity of New York Mercantile Exchange’s oil futures contracts—we see that the total amount of oil produced this year, on average, would bring back $2,140,725,000,000.
That’s 2 trillion, 140 billion, and 725 million dollars.
Hopefully this shows what is at stake.
Hopefully, it provides the context and background necessary to understanding what William Clark describes when he wrote over two years ago, (in an article titled, ‘Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse.’) “‘Operation Iraqi Freedom’ was a war designed to install a pro-U.S. government in Iraq, establish multiple U.S military bases before the onset of global Peak Oil, and to reconvert Iraq back to petrodollars while hoping to thwart further OPEC momentum towards the euro as an alternative oil transaction currency.”
The last part of what Mr. Clark wrote, “while hoping to thwart further OPEC momentum towards the euro as an alternative oil transaction currency,” is significant when one considers the following statement from Hugo Chavez, made at a Paris, France, news conference on Nov. 20th, “The dollar has lost 40 percent of its value in three years, so we could use the euro.”
Adding more details to his thoughts on how OPEC could move away from using the dollar in how it prices or denominates, the Venezuelan leader said, “Yesterday in Tehran we had a chance to talk about it, creating together a sort of currency, a basket of currencies. So instead of carrying out transactions only in dollars, including in that basket the euro, the yen, the yuan and why not the (Venezuelan) bolivar? We are going to reinforce our currency and in future we are going to have a South American currency. That is one of the projects we have in mind.”
Now, if the thinking of many is correctthat one of the motives behind the war in Iraq was oil in general, and more specifically preventing a movement away from the dollar by Iraq (and Iran), one can only imagine what the planning must be like to prevent what President Chavez describes.
Mr. Clark, here made reference to a critically important phrase, “Peak Oil.” He used it in the fuller context of, “‘Operation Iraqi Freedom’ was a war designed to install a pro-U.S. government in Iraq, establish multiple U.S military bases before the onset of global Peak Oil...”
What is Peak Oil?
It is a thesis, theory, or viewpoint held by many oil experts and analysts that the world is reaching a level of oil productionpeak oil outputthat it cannot surpass. In effect, ‘Peak Oil,’ refers to a ceiling in the amount of oil that can be produced each day. Many individuals who subscribe to this theory, thesis or viewpoint are dismissed as ‘doomsday forecasters’ or ‘conspiracy theorists.’
However, a recent article in The Wall St. Journal (‘Oil Officials See Limit Looming On Production,’ Nov. 19) makes it clear that the ‘Peak Oil’ analysis is now ‘mainstream,’ with many leading executives and the industry’s most respected observers subscribing to it. Even James Mulva, the chief executive of ConocoPhillips, at a recent conference admitted that oil production may be reaching a limit, “I don’t think we are going to see the supply going over 100 million barrels a day.”
Compounding this problem for America is the reality that most of the unexplored oil of the world exists in regions that are unstable or hostile, or increasing so, where the United States and Western interests are concerned. While evidence and suspicion abounds about rich oil fields in shores near Cuba and Brazil, and in places like Sudan, the discovery of giant oil fields becomes less and less frequent. The Wall St. Journal reports, “Many people think most of the world’s giant fields already have been discovered. By 1970, oil-industry explorers had discovered 10 giants that could each produce more than 600,000 barrels a day, according to Matt Simmons, chairman of energy investment banking firm Simmons & Co. International. Exploration in the next 20 years, to 1990, yielded only two. Since 1990, despite billions in new spending, the industry has found only one field with the potential to top 500,000 barrels a day, Kazakhstan’s Kashagan field in the Caspian Sea. And Mr. Simmons notes it is proving expensive and difficult to extract.”
Whether one calls it a peak or a plateau, the result may be the same—with demand for oil rising (due to booming economies like China and India); available ‘giant fields’ dwindling; the value of the dollar falling; economic resource nationalism (in places like OPEC—member nations: Iran, Venezuela, Nigeria, and Ecuador) growing; tensions rising between America and the world’s current largest oil producer, Russia and OPEC nations in no hurry to increase oil production in time to address heating oil supply concerns going into winter—the American economy is facing some hard times as soon as next year.
Matt Simmons told the Wall St. Journal, “Peak oil is likely already a crisis that we don’t know about. At the furthest out, it will be a crisis in 2008 to 2012.”
The highly respected Cambridge Energy Resource Associates wrote in its recent Nov. 12th bulletin (‘$100 Oil: More Or Less—Moving Deeper Into Uncharted Territory’), “To be sure, negative economic repercussions on consumer spending and economic growth will also materialize even at prices in the $90s range.”
We are already there.
A long cold winter is about to begin.
(Cedric Muhammad is a business and political economist who advises entrepreneurs and small businesses through his company, CM Cap (http://www.cmcap.com). He can be reached via e-mail at [email protected]. His weekly “Cedric Muhammad and Black Coffee Program” can be viewed every Wednesday from 12 p.m. to 4 p.m. EST at The Black Coffee Channel by visiting www.blackcoffeechannel.com)
