Wednesday, May 10, 2006


By Bob Van Velkinburgh

Americans just got a glimpse of reality concerning a looming problem and it looked real ugly. This huge ugly problem is our energy dependence on oil. When "Colonel" Edwin Drake struck oil by drilling down 79 feet on August 29, 1859 near Titusville, Pennsylvania his discovery eventually changed the way we live.

Crude oil, because of its high release of energy and the many products that can be made from it, became a most important factor in shaping and defining the world economy today. Almost all countries ave based their economies on oil as an energy source. Too bad we are running out of it.

Before I tell you when, let me introduce you to M. King Hubbert a geophysicist who worked for Shell Oil Company. Hubbert devised a method of analysis that enabled him to predict when the United States crude oil production would peak and then start to decline. He presented his analysis to the American Petroleum Institute in 1956, predicting that U.S. oil production would peak in the early 1970's and then start a slow decline. Crude oil actually peaked in 1970 and as a result we are now dependent on foreign imports for about 60 percent of our supply of crude.

In 1995 several oil analysts, using Hubbert's methods and applying them to world oil production came up with the prediction of a peak between 2004 and 2008. Their findings were published in such widely circulated publications as Nature, Science, and Scientific American.

Today American motorists are paying close to $3.00 a gallon for gasoline, crude oil is selling for over $70.00 a barrel (compared to $29.00 a barrel a few years ago), and oil company profits are at record highs. Americans are asking how all this happened. For a possible answer let's take a look at something we learned in Economics 101. It's called the Law of Supply and Demand. It has three components: supply, price, and demand.

If everything is working right under our so called "free enterprise system" a price will be established when the supply of a product equals the demand for that product. Here is the way this works. If supply is reduced and demand remains the same the price goes up until a balance is reached again. Some customers will not buy at the new price thus binging balance to the market. If supply stays the same and demand increases a higher price is established bringing stability to the market. Conversely when supply is increased and demand stays the same a new lower price is established. Also if demand falls off and supply remains constant the price will fall until a new balance is created. Are You Listening? OK, then what will happen if the supply is diminished and the demand increases? Right! Price goes out of sight until a new balance is achieved. Ugly!!

That is what we are faced with today. Let's list some of the things that are affecting supply and demand today.

1. The economies of China and India in particular and the economies of far eastern countries are demanding more energy in the form of oil. China's President, Hu Jintao, went to the following oil producing countries after his recent visit with President Bush; Saudi Arabia, Kenya (where he signed an agreement to develop Africa's oil wealth), Morocco, and Nigeria. These are countries that possess potential oil resources.
2. Recently Hugo Chavez President of Venezula, shut down oil fields operated by foreign interests. He wants to make the fields a part of the Venezuelan government run oil industry. He doesn't like us. Hummm!

3. At present Iraq is producing only 900,000 bbl/day of crude. Far below pre- war levels.

4. The threat of Iran using oil as a bargaining chip in her desire to become a nuclear weapons power portends a reduction in supply.

5. Katrina Hurricane. Existing crude oil refineries are in the process of being repaired but are running only about 85 to 90 percent of capacity. When they are repaired they will not be able to process all the crude necessary to meet the growing U.S. demand. There hasn't been a new refinery built in this country in over 30 years. Why? Well that is another story.

6. According to the Energy Information Administration of the U.S. Government, 9,105,000 barrels per day (382.4 million gallons/day) is consumption for U.S. transportation needs. Total U.S. petroleum consumption is 20,731,000 barrels/day. That is 20.7 million barrels! In one day! Yet U.S. Government regulations under the Corporation Average Fuel Economy act (CAFÉ) mandating miles/gallon of U.S. automobile manufactures has remained unchanged for the last 20 years.

The President and Congress, with an eye to the November elections, would like to achieve some near term relief. A $100.00 rebate to motorists was suggested. This is a ridiculous idea that would cost millions of dollars just to administrate and in the long run would not solve the problem. A gasoline tax holiday for a few months was suggested. Sure, until after the elections then back it goes. The President proposed to stop buying crude oil for the National Oil Reserve which is to be used only for emergencies. This would amount to about 150,000 bbls/day. Compared to the 2.7million bbl/day we use it's an empty gesture.

How can we solve this short term problem? We can't do much in the short term but hunker down, however the problem can be solved in the long term. Alternative energy sources are available. They need to be researched, tested, and implemented. This is not easy and is going to take a while. Perhaps a generation (20 years) is a very optimistic guess.

As democrats and Americans we need to lay it out before the voting public. We need to get behind a project like the Manhattan Project of WWll that developed the nuclear bomb. By utilizing alternate energy sources we can make America self sufficient for energy, clean up pollution, stop global warming, and provide jobs.

The Administration's solution, on the other hand, is to drill more holes in the ground, destroy the fragile Alaskan tundra, make "Big Oil' more profits, increase pollution and global warming, and drive small businesses into bankruptcy because of high gasoline prices.

If you have read this far I congratulate you. This energy thing is so important and complicated it can't be dealt with in a few short paragraphs. In the near future I intend to research the various alternative sources of energy and report the pros and cons of many of them.


Bob Van Velkinburgh

No comments: