Wasting a Good Crisis: Result is $200 Oil

Rohm Emanuel’s famous quote regarding the current financial crisis, "Never let a serious crisis go to waste...it's an opportunity to do things you couldn't do before." was ignored last summer when oil prices reached $147 a barrel. The Obama administration has taken advantage of the financial crisis to ram through their socialist agenda which will add trillions to the National Debt. It will stimulate unions, bureaucrats, government employees, and defense contractors. It will do nothing to address the looming energy crisis which will sweep over the country shortly. Again, politicians and pundits will be shocked and astonished when oil soars. They will vilify oil companies, OPEC, and the dreaded speculators. They ignore the old fashioned supply and demand equation that even a dimwitted Congressman should be able to comprehend.

Instead of addressing the crucial issues that have led to the U.S. being dependent on foreign oil to the tune of $500 billion per year, Congress decided to spend your tax dollars on the following vital items (compliments of Casey Research):

• $200,000 for tattoo removal for gang members in California.

• $98 million for a Coast Guard ice breaker closing an ice-breaking gap. (what about global warming)

• $950,000 for a bikeway in Kentucky.

• $2 million for astronomy awareness in Hawaii.

• $190,000 for a Buffalo Bill Historical Center.

• $650 million for the digital to analog converter box program.

• $1.8 million to study the effect of swine odor on the environment. (rumor has it the study will be conducted in the halls of Congress)

When oil prices collapsed from $147 a barrel in the summer of 2008 to $35 a barrel in January, American drivers, Congress, government bureaucrats, and the mainstream media refocused on other more pressing issues like executive bonuses, Michele Obama’s wardrobe, and the tax law knowledge of Obama’s cabinet. The attention span of the average American is shorter than a gnat’s. As they text and twitter through life, the energy infrastructure continues to rust away, decades old wells are closer to depletion, and alternative energy projects have been scrapped by the thousands. Peak oil likely occurred between 2005 and 2009. The production of oil will now embark on a long slow decline. The world is not prepared.

$200 Oil Will Arrive

When I was ten years old my parents told me to never touch our stainless steel sink and the electric light switch above the sink at the same time. I couldn’t resist. I tried it and got knocked on my ass. I never did it again. Americans are a different lot. Last year we got knocked on our ass by $4.00 gasoline. Instead of learning, we have sauntered back to the kitchen sink and we’re reaching up for the electric light switch. I wonder what is going to happen this time.

Americans are used to making tough choices. They have made choices between the Hummer H3 (13 mpg) and the Hummer H2 (8 mpg). They’ve made choices between a BMW 650i (16 mpg) and a Mercedes S600 (13 mpg). The coming energy crisis will lead to choices between food or fuel for many people. The coming crisis is as clear as the housing bubble. Anyone with half a brain could see that home prices would need to fall 30% to 50% to get back to equilibrium. Therefore, no one in Congress, Wall Street, or CNBC saw it coming. Total world oil supply is in a permanent decline. Oil demand will continue to rise. Only a half wit would argue that prices will not rise dramatically in the coming years. Turn on CNBC to get the half wit view of oil prices.

Now the bad news for Americans; we make up 4.3% of the world’s population and consume 26% of the world’s oil. Europe makes up 6.8% of the world’s population and consumes 11% of the world’s oil. After the oil shock of the 1970’s Europe decided to dramatically increase taxes on gasoline. The high cost of gasoline forced people to buy smaller fuel efficient cars. Today in Germany, their cars average 44 mpg, while in the U.S. our cars average 22 mpg. Whether Europe spent the taxes wisely is another question, but they did change behavior. No crude oil refineries have been built in the United States since 1976. During that time, hundreds of ethanol refineries have been built. It requires more energy to produce ethanol than ethanol produces. The United States has between 250 and 300 years of a coal supply. That is more than the amount of recoverable oil contained in the entire world. We will not utilize this resource because environmentalists say it is bad. Congressman Gary Miller describes the U.S. response to the 1970’s oil shock.

In 1973, America imported 30 percent of its crude oil needs. Today, that number has doubled to more than 70 percent. Gas prices are as high as they are now in part because we've had no comprehensive national energy policy for the past few decades.

The peak oil shock that is coming will affect the United States more dramatically than any other country. Are you prepared for $5.00 a gallon gasoline? We are 20 years too late to stop this from happening. The American way of kicking all tough issues down the road is about to kick us in the ass, and no one is preparing Americans for the result. Happy talk and confidence building exercises will not solve the problem. We are not in control of our destiny. Our supply is drying up. More drilling will not work. Higher fuel efficiency standards will not work. Congressmen and TV pundits will posture, expound, skewer oil executives on TV, and get red in the face, but they have failed the American public again. The social upheaval that could occur from fuel shortages and outrageous prices will be ugly. Most Americans live in suburbs far from work. Our food supply requires trucks to deliver to our stores. The U.S. military consumes 400,000 barrels of oil per day and spends $13 billion of your tax dollars per year to keep their machines functioning. War for oil becomes more likely in that environment. Is that a farfetched scenario?

The population of the world will continue to rise. The United States has no control over that fact. Developing countries will grow more prosperous. People utilize more fossil fuels as they become more prosperous. $2,500 cars are now becoming available in China and India and the rest of Asia. In a Chinese car ownership survey, 96% of respondents said they paid cash for their cars. How un-American like. Imagine if GMAC could gain a foothold in China. More than 20,000 new cars per day are being sold to Chinese citizens who have never owned an automobile before. This is massive new demand being created for gasoline. China now has a middle class estimated at nearly 300 million people. 37% of people driving in China today did not know how to drive 3 years ago.

Oil will continue to be discovered, just not enough to keep up with demand. The pie chart below paints a disturbing picture. Only 30% of total oil reserves are light sweet crude. The other 70% is difficult and costly to bring to market. Few U.S. refineries can convert heavy crude into gasoline. Oil sands require massive amounts of water and natural gas to convert it into usable oil. The oil remaining to be discovered will be in deepwater wells. It takes at least 10 years to bring a deepwater well online. We are losing the race with time.

The only two people sounding the alarm have been Matt Simmons and T. Boone Pickens. Mr. Simmons warns that the best energy geologists and engineers are now retiring, with no one to take their place. The global oil and gas system infrastructure is rusting away and falling apart. The cost to rebuild our global energy infrastructure would be close to $100 trillion and would require 10 to 20 million workers. This would not be wasted money. Mr. Pickens argues that by investing $1 trillion to build wind facilities in the corridor from Texas to North Dakota we could produce 20% of the nation’s electricity by 2020. This would free up our vast natural gas resources to be used as fuel for truck fleets and ultimately automobiles. The ideas of both men would create jobs in America and make us less dependent on Middle East oil.

None of these ideas will avert $5 gasoline in our near future. They may avert $10 gasoline and potentially a resource-instigated World War 3. The choice is ours.