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Thursday, May 18, 2006

Peak Oil: Possible Future or Oil Oligarch Fantasy?

$200 a barrel oil by 2010? If oil were to reach $200 per barrel, gasoline would cost about $10 per gallon. Global peak oil proponents believe worldwide oil production is in the process of peaking. Peak oil occurs when half of worldwide oil reserves have been pumped out of the ground, and worldwide oil production declines as exploration and production costs increase. The peak oil event signifies the world’s oil glass is half empty, not that the world’s oil is gone. But it is harder to find and pump the remaining oil. As production declines in an environment of increasing oil demand driven by China, India, and the US, oil prices might skyrocket as high as $200 per barrel.

Peak oil predictions are based on the work of M. King Hubbert, a Shell geophysicist. In 1956, Hubbert predicted US oil production would peak in the late 1960’s or early 1970’s. Although his peers rejected his analysis, Hubbert was proven correct when US oil production did indeed peak in 1970. Ever since then, US oil production has been in decline. Hubbert’s prediction was based on estimating total US oil reserves and developing a mathematical model of production depletion. Hubbert estimated the size of the US oil glass and how fast the oil was being slurped to predict when it would be half empty. Dr. Colin Campbell, a geologist and founder of the Association for the Study of Peak Oil & Gas, has applied Hubbert’s techniques to predict worldwide oil production will peak in the 2005 to 2010 timeframe. Worldwide peak oil predictions cannot be proven until subsequent production drops occur.

As in Hubbert’s day, Dr. Campbell’s prediction of global peak oil faces criticism from oil industry experts. Michael Lynch, President of Strategic Energy & Economic Research, argues that Dr. Campbell has made “A series of predictions of near-term peak and decline, which have had to be repeatedly revised upwards and into the future.” Daniel Yergin, chairman of Cambridge Energy Research Associates, believes demand growth from China and India, terrorism, Iraq, and political instability in oil rich nations have driven oil prices to the $70 per barrel range. “Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day -- from 85 million barrels per day to 101 million barrels a day -- a 20 percent increase,” said Yergin. “This is not the first time that the world has ‘run out of oil.’ It's more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry,” added Yergin, as chronicled in his Pulitzer Prize winning book, "The Prize: the Epic Quest for Oil, Money and Power”.

Anecdotal evidence supports the global peak oil case. Alaska and the North Sea were the last supergiant oil fields to be discovered back in the 1960’s. In 2004, Royal Dutch Shell shocked industry peers and investors by cutting their proven oil reserves by 20%. Oil production and reserve replacement have been flat to down for many major integrated oil companies including ExxonMobil. Last year, Chevron decided to drill for oil on Wall Street and acquire Unocal for $17 billion, fending off Chinese rival CNOOC. Chevron’s takeover highlighted their belief that high oil prices are permanent. With $70 oil, Saudi Arabia has been unable to reclaim their role as swing oil producer and flood the market with crude oil, sparking speculation that their production may be peaking.

Realization of global peak oil predictions could trigger a global recession and reshape the US economy and society. How would $10 gasoline impact your lifestyle? At this price, filling up your sport utility vehicle would cost $250. Matt Savinar, founder of, speculates peak oil will result in “The End of Suburbia”. However, these dire peak predictions are not immutable; recessions, technology, conservation, and new oil discoveries could invalidate them and delay the peak oil day of reckoning. Oil is a limited resource; global peak oil may occur in the next five, ten, or twenty-five years; no one can be certain in advance. Global peak oil is just another reason – with Iranian nuclear ambitions, Nigerian rebels, and Venezuelan President Hugo Chavez’s anti-American policies being the latest -- the US should aggressively pursue alternative fuels and renewable energy technologies instead of relying on oil and fossil fuels alone.

(Written on Tuesday, May 1, 2006)

Tuesday, May 16, 2006

America needs a $1 per gallon Gas Tax

After Hurricane Katrina, I was shocked by $3 per gallon gas like most Americans. I was commuting two hours a day to work, and I needed two $50 fill-ups per week. Ouch! So why would I be crazy enough to recommend a hefty gas tax? The high prices encouraged me to combine trips and lightened my foot on the gas pedal. Overall, Americans responded by lowering gas consumption and helped bring supply and demand back into balance. Even SUV sales slowed as a result.

I experienced my first $50 gas fill-up in Europe. European gas prices are two to three times more expensive than the US because of consumption taxes. As a result, Europe uses half as much oil as the US on a per person basis. Even with a flat $1 gas tax, our pump prices would remain low relative to international prices. And like Katrina, the higher gasoline prices resulting from the tax would lower gas demand, reduce oil imports, and reward conservation. Increased conservation would create a virtuous cycle with fewer miles driven, more car pooling, reduced traffic congestion, and increased use of public transit.

In addition, I learned another tax trick from Europe. The Europeans use their consumption taxes to encourage the use of diesel fuel instead of gasoline. As a result, diesel costs 25% less at the pump than gas, and market forces encourage diesel fuel and car sales. Their rationale is simple; diesel requires less refining and contains more energy per gallon than gas. As a tradeoff, Europeans have decided to accept the drawbacks of diesel. Diesel cars are 20% more expensive, and diesel burns a bit dirty with particle emissions. While diesel might not be the best answer in the US, market shaping tax policies are enabled by a $1 gas tax. I propose using a similar consumption tax scheme to encourage the use of ethanol E85 (85% ethanol and 15% gas mix) with flex fuel vehicles. A flex fuel vehicle has an engine modified to consume E85 or gas but costs only $200 more.

How should the proceeds from the gas tax be used? Although Federal gas taxes have been spent to maintain our roads in the past, I believe the incremental gas tax revenues should be reinvested in renewable fuels and alternative energy technologies. Did you know The Energy Policy Act of 2005 mandates the doubling of ethanol blended with gasoline by 2012? While I support ethanol and other renewable fuels, there are some drawbacks to ethanol. So far, corn based ethanol has been more expensive to produce than gasoline, and it has less energy per gallon than gas. I believe the gas tax should fund the ethanol subsidies required by this mandate as well as renewable fuel production research.

An intangible benefit of a gas tax is what I call the security dividend. By lowering oil imports, the gas tax will promote the US goal of energy security and independence. In his 2006 State of the Union Address, President Bush said, “America is addicted to oil, which is often imported from unstable parts of the world. Now that President Bush has admitted America’s energy abuse problem, the $1 gas tax is a first step on the path to facing this oil addiction. In general, I am opposed to new taxes and meddling with markets, but US dependence on imported oil has accelerated since the 1973 Arab Oil Embargo. I urge the US Congress to enact a $1 gas tax with bipartisan legislation. Islamic terrorists and belligerent oil rich nations would be sent a message. America won’t continue to be held hostage by our energy gluttony.


(Written on Tuesday, February 14, 2006)