Friday, October 5, 2007

Mainstream Media Waking Up

This article in the Atlantic Monthly discusses the analysis by Stuart Staniford on "oildrum.com" which I have previously linked. The AM article summarizes Staniford's detailed study that presents extensive evidence that the world's largest oil field - the Ghawar field of Saudi Arabia - has begun to go into decline. Because the Saudis do not release their reserve figures, it can't be known for certain whether the field has begun its inevitable decline. But the article notes that there has been a discernible decline of oil exports since 2006, at which time oil prices rose from $60 a barrel to $74.

In its way, the article ends on something of a note of warning, though in far more subdued a manner than its conclusion may merit: "At a bare minimum, the era when excess Saudi capacity could cushion geopolitical disruptions in oil supplies may well be over, even though the threat of such disruptions is greater than ever. And if Saudi production continues to decline even as world demand keeps growing, in a few years we will look back at the summer of 2007 as the last of the days when gasoline—even at $3.50 a gallon—was still plentiful and cheap."

Today the price of oil stands at about $82 a barrel, at a time when there are no significant geo-political shocks that have caused this substantial price gain. The most elementary economic explanation must be considered: decreasing supply and increasing demand are causing prices to rise. The decline of Ghawar effectively means that supply will be permanently unable to meet demand. In economic theory, the result is ultimately what is called "demand destruction." However, because this is oil we're talking about - the life blood of our modern civilization - this technical economic term is simply a nice way of saying "worldwide Depression." And that phrase may be too mild by half. In several year's time we may look back at the summer of 2017 as the last of the days when we had enough to eat.

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