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Peak Oil - How Did We Get Into This Energy Crisis?

In 1945 as the World War II came to a close everyone assumed that the old wartime gasoline rationing system would soon be scrapped. But exactly how should this be handled? Should the government simply cancel the gasoline rationing system and just let the open marketplace set oil prices?

Back then more than a few economists were predicting that the US economy would slide back into another economic depression similar to the Great Depression of the 1930s. Others predicted a ruinous wave of inflation.

In response to these fears the wartime rationing system was replaced with a system of federal price controls. The result of these controls was obvious. The price of gasoline which stood at twenty five cents per gallon way back in 1946 was held down so successfully that twenty five years later in 1971 the price remained unchanged – still twenty five cents a gallon!

That’s an amazing fact given that the cost of almost everything else had at least tripled over those same years. Was this price freezing a good idea? 

On the plus side - the artificially contained price encouraged the business community to dramatically increase their oil consumption. This allowed us to achieve an unprecedented wave of cheap-fuel driven prosperity and helped the US become the richest and most powerful country in the world.

But now all that has changed. Today cheap oil is dead. With China's and India's energy needs exploding, world energy demand is growing twice as fast as the supply - if the supply is growing at all! You don't need a degree in economics from Harvard to know that given the restricted supply and increasing demand the prices of all forms of energy will be on the rise from now on.

There's still plenty of oil in the ground but it's deeper in the ground which raises extraction costs and it's lower grade which means it yields less refined products such as gasoline or heating oil. How will our economy adjust?

You’ll be paying much more for not only your gasoline, but also for heating energy and electricity. The cost of food will rise steeply as most of our modern fertilizers are made from petroleum products and food is transported by oil-burning trucks. Plastic items and pharmaceutical medications will also rise as they are also made largely from petroleum products.

Few Americans realize how terribly dependent they are on the availability of petroleum-based fertilizers. Half of what we eat was made using fertilizers and pesticides made from oil or natural gas.

Americans are used to having a ready supply of inexpensive food. But a shortage of petroleum based fertilizers will inevitably trigger much higher food prices and perhaps even some food shortages.  

Shipping via railroad is much more fuel efficient than trucks but in our cheap energy economy the gas gulping truck long ago replaced the more fuel efficient train. Today our railroad system is in sad disrepair and the cost of any upgrade would be prohibitive.

When you travel to France or Japan you may see their high tech bullet trains flying along at speeds in excess of 200 miles per hour. Here in the US we’ve been talking about building such a system between New York City and Washington DC for years but the existing railroad track system is so terribly dilapidated it would cost billions of dollars to upgrade just that one rail link to high speed standards so the project remains on the drawing boards.

In your Grandfather’s day most of his food was produced locally. Then with the age of cheap oil, food began to travel over longer and longer distances. Today it’s not unusual for your tomatoes to come from Mexico, your bananas to come from Costa Rica and your lettuce to come from Chile. In the future you’ll see a return to more locally produced food products as the cost of moving food around will become prohibitive.


The “Peak Oil” Crisis

According the very best minds, we are today at or near world peak oil production. Global oil production will only grow around one percent a year over the next decade – and that number is based on some rather rosy and optimistic projections. Others predict that production levels will remain flat from now on. Permanently - forever.

At the same time worldwide demand for oil is steadily increasing around three percent per year. China is importing around 5% more oil each and every year while India is increasing it’s oil imports almost as much. 

The painful fact is - the US has become an “oil junkie” as dependent on it’s oil supply as a heroin addict is on his pusher. While America has only around 5 percent of the world’s population it manages to consume a staggering 26% of the world’s total energy production! You do the math. Anyway you cut it – all kinds of energy are about to get much, much more expensive.

Much has been made of a recent oil discovery in the Gulf of Mexico. While this new find does look promising, any real production is many years away and will require a massive investment. 

No large oil fields have been discovered during the past twenty years. While we won’t run out of oil anytime soon, cheap oil exists only in our past. Expect sudden price increases followed by more modest price drops - followed by even larger increases. But the long term trend is clear.

If you don't take steps now to protect yourself against this new world of scarce energy, your future is in jeopardy.

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