ECONOMIC SCENE: $4 a gallon gas? Peak-oil experts say yes

Gas prices will soar as oil production peaks, then falls.

Bob Fila/Chicago Tribune/MCT/File
Anthony Taunton operates a crane where workers pressure-wash and rack drilling pipe aboard Thunder Horse, a BP drilling platform in the Gulf of Mexico. BP's large find there probably won't help global oil prices, which may be edging up toward $4 per barrel.

Get ready for $4-a-gallon gasoline.

That’s the forecast of adherents of the “peak oil” thesis, the idea that oil production has flattened and will decline because of economic, geological, and technical restraints. Once considered a fringe theory, peak oil has become mainstream thinking in the oil industry in the last six months, says Steven Kopits, who runs the New York office of Douglas Westwood, an energy analysis firm.

So what about all those new oil finds – some 200 announced on five continents this year – including BP’s giant discovery in the Gulf of Mexico last month? Development of such new fields, many deep under the ocean, takes years and will only help offset the decline in oil production elsewhere, analysts say.

What about a boost in Iraq’s production from 2.5 million to 6 million or even 8 million barrels per day (b.p.d.) if all goes well in that country? Rising world demand will easily outstrip that gain.

Biofuels? Canadian oil sands? Ditto.

“In the next few years the supply [of oil] will tighten and this will lead to higher prices,” says David Bowden, executive director of the Association for the Study of Peak Oil & Gas-USA (ASPO-USA) in Denver.

Rising energy prices will have a profound impact on the economy and the American way of life, peak-oil enthusiasts say. Higher prices could even lead to a seesaw economic recovery, some argue. If oil prices rise much higher, the economy will slow down again until the demand for oil is curtailed, pushing prices lower once more. Then the economy could surge forward again. And the pattern could repeat.

Mr. Kopits figures the $147-a-barrel peak price on July 11, 2008, was one factor in exacerbating the “great recession.” Crude oil has been running around $70 a barrel in recent New York trading.

When exactly the world reaches peak oil is up for debate.

Kopits says oil probably reached a “practical peak” in late 2004 when world output flattened out, not keeping pace anymore with rising economic growth. (A practical peak means production would rise only if prices skyrocketed and stayed there.) Several investment banks hold that the world’s July 2008 production of 86.7 million b.p.d. was the practical peak. An Australian-based investment advisory firm, Macquarie, says peak oil is happening this year at 89.6 million b.p.d.

The International Energy Agency, adviser to 28 industrial nations, is far more optimistic, expecting global supply to rise through 2015, though not keeping up with demand.

Peak-oil issues are to be discussed by some 500 attendees expected at the ASPO-USA’s annual conference Oct. 11-13 in Denver.
Although President Obama deserves credit for boosting US fuel economy standards for cars, neither the Bush nor the Obama administrations have tackled the problem adequately, says Mr. Bowden. Nor do Bowden or Kopits see an easy substitute for liquid fuel in transportation.

There’s an abundance of natural gas. But it would take a new service station infrastructure before compressed gas could replace gasoline on a wide scale. The American auto fleet could resemble that of Europe with its smaller, more efficient vehicles, but that would take a decade or so.

Combined, these factors make $4-a-gallon gasoline more probable in the years ahead, peak-oil analysts say.

“It’s probably not going to get better,” Kopits warns. No one in the industry expects a breakthrough in discovering relatively affordable new oil. “There are no bulls in oil,” he adds.

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