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Roller Coaster Petroleum

Posted by | January 3, 2009

Budgeting for fuel costs was never more challenging than in 2008. Our worst agony was in July, with household budgets straining under the cost of getting to work and back.  Half a year later, prices have plummeted to where they were much earlier in this decade.

Lots of people have asked me – and pretty nearly every other geologist in the nation – what’s likely to be in store for fuel prices. In the shorter term, I’m expecting low prices, but in the longer run I fear we’re likely to see price spikes again and again.

Let me refresh your memory about the recent history of oil prices – the underlying factor behind gasoline and diesel costs. In early 2007, oil was selling for just over $50 per barrel. One year later, in early 2008, that had almost doubled, to $90. But in the summer of 2008, oil broke all records by trading north of $140, almost three times what it had been 18 months earlier.

That’s a spike. And it hurts.

Here’s the big-picture about oil: we have used about half of the Earth’s stores of petroleum. Naturally, we first took advantage of the large pools of oil lying close to the surface. That means the second half of the Earth’s total petroleum supplies will be harvested at increasing expense per barrel of crude.

The reality is, there’s only so much oil in the ground. So nations that led the way in the oil era are the first to feel the pinch in production. The United States reached peak production in the 1970s. The amount of oil we’ve pumped since that time has been in decline. Despite new oil strikes, despite better extraction techniques, despite a whole world of hard work by geologists, production has gone down – as it simply had to do.

The world as a whole is just now reaching peak oil production. You can see that the flattening curve of total petroleum production, and you can read the background to the story in the geologic literature about oil fields around the world.

Total, global oil production in the future is going to come down. It has to, and that will mean higher prices.

Here’s a second factor that’s crucial to the long-range future.

Saudi Arabia is the world’s largest oil producer. Earlier in this decade, the Saudis started pumping and producing oil at their maximum capacity. In other words, their oilfields have been working flat-out as hard as they can, 24-7, all year round. True, the Saudis could invest in more infrastructure to produce oil faster – more wells, more pipelines, more everything. But they are not doing that. They can see the bottom of their own oil barrel, and they’ve made the decision they don’t want to reach the bottom any faster than they already will.

Here’s the important point: when the largest producer in the world cannot increase what it’s putting out per day, shortages and “hiccups” in supply will be part of the scene.

My old teacher Ken Deffeyes of Princeton University taught me about this cause of “fluttering” prices several years ago. Oil prices will be high, he argues, and they will also be highly variable.

It’s not easy to plan for substantial cost variations, but that’s our challenge, both individually and as a nation.

But in the shorter run matters look quite different. Our recession has cut American demand for oil, and the global economic slow-down now affects even China and India.

In short, grim economic news is leading to vastly lower oil prices.

Prices are so low, the Saudis are cutting production, dropping below the maximum they can produce each day – for the first time in years. My own guess is that the Saudis’ actions will keep petroleum prices from dropping much more.  And having flexibility in their production may well mean more stable prices for a time.

We consumers clearly have a bit of a breather when it comes to gasoline and diesel prices. It will be interesting to see if we are lulled back to sleep by cheap fuel, or if we’ll keep the implications of the bigger picture in mind.