Oil: How Much is Left and What it Means to the American Way of Life

Half a century ago, the United States made perhaps the most fateful policy decision in our nation's history. Fully industrialized in the wake of World War II, with our allies still reeling, the markets of the world were ours alone to serve. Our new and robust economy drank oil, much in the way we drink water. Though we possessed at the time an enormous capacity to produce this black gold, it became clear rather quickly that such would not be the case forever – or even for long – and that beyond our borders, most of this sticky stuff happened to be buried beneath what were historically the most geopolitically unstable regions of the world.

At that pivotal moment in our history, we faced a choice. We could focus our resources and energy on finding a viable alternative, or we could seek to assert our newfound influence to dictate a policy that allowed us to dominate those oil-rich regions and their resources. I don't need to tell you that we chose the latter. But is has become painfully clear in the last several years that our ability to maintain a steady flow of cheap oil into our economic engine has diminished considerably. It is imperative that we understand what this means, how potentially disruptive the changes in supply which are now inevitable can be, and our available options for dealing with the chaos that declining oil is sure to bring.

When did the oil warning light come on?

First, it is instructive to look at the relatively recent history in the oil market that best illuminates the situation. The United States was hands down the most spectacularly gifted nation in terms of oil at the dawn of the industrial age, and that is arguably the single greatest reason for our dominance of the 20th century and the historic wealth we've since accumulated.

In the 20's and 30's, oil continued to be discovered at an incredible pace, especially in the Amercian west. Domestic discovery peaked in the mid-30's, but there was still an enormous amount of known reserves. All the way until 1970, the United States was able to produce more oil than it needed, giving it the extremely important ability to ramp up production anytime supply stagnated elsewhere, or demand increased through growth anywhere in the world. The United States could effectively set the price of oil. Then in 1970, the U.S. domestic oil production peaked at just over 11 million barrels per day.

This would have seemed like a cataclysmic event were other forces not at work at the time. The profit in oil sales put world exploration at an all-time high and just as we were discovering that we were running out at home, some of the biggest oil discoveries in history were being found elsewhere. It seemed like it was a big world and there'd always be more. In fact, proven reserves worldwide just a couple years after we discovered we were at peak, were nearly 1,000 times what they'd been just 25 years earlier.

Also, the Soviet Union, a very oil-rich state in its own right, desperately needed cash to buoy their otherwise failing economy and massive military ambitions. Because of their state-socialist economic system, they were able to flood the markets with tons of oil – literally at fractions of the going price. During the same era, the Alaskan pipeline came online and the monstrous fields in the North Sea were discovered and exploited. Throughout the 80's and 90's, there was a two-decade flood of supply that forced prices downward and that seemed to carry us into our current situation with the false hope that the cheap oil way of life could be maintained.

Not that we shouldn't have known better. As I noted, up until the early 70's, the United States could set the price of oil by controlling supply. But once it peaked and was unable to supply more than was demanded, it became subject to the whims of other nations. In 1973, we got our first dose of outwardly political oil policy with the OPEC embargo that arose from the 1973 Yom Kippur War.

Prior to OPEC, a group of American oil companies controlled Saudi Arabia's massive oil reserves. From the end of WWII to the1970's, the world was awash with newly-discovered oil, keeping prices down. But until those aforementioned factors came into play in the 80's and 90's, supply and demand caught up for a brief period. As the politics of the oil-richest regions became more hostile, the world became aware for the first time just what a war-for-oil future might look like. Egypt led the war as an economic weapon crusade and Saudi Arabia began pushing out the American companies that had managed its oil business. America supported Israel's war effort and the OPEC spigot was turned off. The ”oil-weapon“ was born.

Though President Jimmy Carter attempted two draw the nation's attention to the reality of the crisis we faced, the discoveries in the North Sea and Alaska seemed to lull us back into complacency. The brief and painful energy crisis of 1979, driven by the Iranian Revolution, was another opportunity to reassess our energy policies. But the higher prices sparked investment in better exploration and extraction technologies that led to what turned out to be the last major discoveries of oil we'll ever see.

For decades, the earth has been geologically explored to the point that it is inconceivable that any significant oil fields that contain oil in the traditional sense of the word, are unknown. By the time of the first Gulf War, the political importance of oil had become deeply understood. By the time of the second, the severity of the supply/demand issue was crystal clear.


War for Oil

War for resources is as old as war itself. The only historic reasons that man has gone to war have been to gain something his opponent had or prevent him from taking what was already his. Whether it was land, slave populations, gold, water ports, minerals, etc. – war has been about getting or keeping valuable stuff. The colonial powers of Western Europe have never been oil rich, a major influence on where they chose to colonize after the oil age begun – and on their current way of life.

It can (and has) been argued rather effectively that the greatest single reason Germany lost World War II was that it literally ran out of gas. While the U.S. has become quite adept at exploiting the oil riches of other countries since spending the bulk of its own, its success has dwindled, especially over the last decade.

Aside from its military dominance, the major advantage the United States has over other oil-seeking nations is its currency. The dollar's role as the world's reserve currency saves American companies from having to convert them to purchase oil on world markets. If petrodollars were their own currency or pegged to something like the Chinese Yuan, the U.S. would feel it sharply. The United States understands this clearly and it is conceivable that a major influence on the U.S. decision to invade Iraq was Saddam Hussein's mumblings about the possibility that Iraq would stop accepting dollars for oil and swtich to the Euro or trade directly with China in their currency.

The most important thing to understand in terms of oil is the tightness of supply and demand and how failure to maintain sharp increases in supply have been met with near exponential increases on the demand side. It is hard to know how much oil is left, but production figures do not give rosy indications. We'll only know we've hit peak and begun using declining reserves in the years following, and at that point we'll still have exactly as much as we've used for our entire history. But demand is growing so fast that unless consumption is reigned in sharply, there's much less than a century's worth of oil left – perhaps as little as 4 decades worth if current demand trends continue at their current pace. The big problem; economic growth and decreased oil consumption have become mutually exclusive.

Regardless of peak, it is understood by oil experts that we will never again have excess oil, even if we were to drill endlessly, without thought of environmental consequence. Oil's role in everything from food supply to pharmaceuticals – as well as the exploding population of the world, which continues at around ? of a billion people each decade – not to mention the continued industrialization of formerly third world countries, all make it certain that even the best case oil production scenario will be eaten up by rising demand, especially as China and India continue to put prolific numbers of cars on the road every year, as their newly created middle classes seek to live the same American dream we've marketed to them for so long. Simply put, the demand for oil is not going down anytime soon.

For that reason, the most powerful nations in the world will continue to have a very serious interest in the political happenings of the countries that have a lot of oil. As we've seen, even the slightest ripples through the Middle East cause fluctuations at the price of gas at the pump. One might be tempted to say that Europe has been getting by fine with high gasoline prices for years. But the European way of life more accurately reflects the knowledge that they have very little oil of their own and are subject to such disruptions.

The American way of life on the other hand, quite literally demands tons of cheap oil to transport our workers from suburbia and ship goods across our vastly disconnected landscape. At above $4 per gallon, demand in the U.S. usually falls. Consumers seem to cut whatever little ”optional“ consumption exists and it can usually, all else being equal, reign in price, if only a bit. However, another embargo or the fall of a major exporter to say, a fundamentalist regime not afraid to turn off the flow of petrodollars, and optional consumption wouldn't matter.

At $5 a gallon and above, the U.S. economy locks up. The math simply doesn't work. Too many goods cannot be shipped the distances required and then sold for a profit at a price the consumer can afford. Choices between meat and gas and keeping the electric on become impossible. At that point, the government would likely release oil from the strategic petroleum reserve, at which point ”foreign policy“ options of even the most desperate nature would surely be considered. That being said, is it so hard to understand why we take such a particular interest in what goes on politically in these nations? Americans who think there is a choice, should at least consider the reality of what might happen were the oil supply to this country to be critically disrupted.


What about new technological advances?

Though there is a lot of hype around different ways to separate carbon from fossils, the fact remains that viable substitutes for drilling and refining oil are nowhere in sight. Oil exploration and extraction have followed a pretty simple axiom. Resources are exploited along the path of least resistance (and hence greatest profit), thus the lowest hanging fruit is always picked first. We've recovered the most easily reached and refined oil already.

What remains of our oil reserves is increasingly expensive, dangerous and environmentally sensitive to extract. It also is the most energy intensive, meaning the return is much lower. Even when we get to the halfway point, there's no telling how much of what's left will be reachable and/or practical to get out. Increasingly, oil production requires oil or other expensive fuels to complete its recovery. At a certain point, it no longer makes sense to spend the input energy required, considering what's returned. Techniques such a ”fracking“ have raised serious questions about environmental problems, though as dark as this sounds, carcinogens in our water supply will ultimately come second to the oil that keeps our economy afloat when it comes down to it.

The ”other biggest problem“ with fracking as well as many other alternative methods of converting fossil fuels to energy is that they use an unthinkable amount of another precious and dwindling resource – water. Though it receives very little attention, more than half of the world is in a water crisis and the U.S. continues to use water at many times the rate it is naturally replenished – increasingly relying on well water, which we also pump out of the ground at 15 times the rate which it is returned through the water cycle (sinkholes anyone?) The very fact that we even consider methods of fuel production that are incredibly water-intensive further highlights how desperate we've become to get oil.


What if we just ramp up domestic production?

There is a persistent myth that the U.S. is still completely capable of being oil independent, were it not for a few hippie-treehuggers and the Rainbow Warrior. Yes, the United States still has tremendous proven reserves. But again, they are increasingly difficult and dangerous to recover with an increasingly lower net energy return. We've also seen the potential ramifications of pushing the limits and the off-setting costs in the economy created in events like the recent Gulf Oil Spill.

Even the oil industry's most optimistic estimates are only for a few weeks worth of domestic oil demand, in terms of what rests in each the Gulf of Mexico and ANWR. Drill baby drill is not going to impact the price at the pump. That's a proven fact. Most importantly on this front, we would have to nationalize our oil industry for increased domestic drilling to be a major factor – which I don't hear anyone suggesting. If we simply drill anywhere we please, we'll merely contribute a relatively insignificant amount of oil to the world markets that it is sold on, making a pennies-per-gallon impact and only years into the future.

As demand continued to rise in India and China on the back of the higher output, that oil would quickly disappear, leaving behind only the mess created in recovering it. Make no mistake, we will eventually attempt to recover every drop feasible with little concern for anything other than whether we can get it out for less energy than it will produce. Our failure to develop alternatives will at some point, leave us very little choice. But doing it now and exploiting every last drop in our current situation would line a handful of pockets, while leaving us all the more vulnerable as the worst days of depletion continue to approach. It would be a stupid and completely irresponsible tactic – penny wise and pound foolish as they say – which is probably the best reason to fear it's one we'll employ.


So what's the score?

The reality is that cheap oil is gone and it ain't coming back – ever. This means the end of growth, at least in the way that we've defined it for the last century. This means that the political uprisings in oil-rich parts of the world will continue to cause panic and almost undoubtedly incite conflicts as people frantically confront the scarcity of this all-important resource that has been the golden goose of all financial prosperity known to man over the last century. This means there will continue to be war for oil.

Saudi Arabia, long the world's leading oil producer, though they've recently traded spots with Russia, still sets the tone for oil markets and optimism. Once able to ramp production through their excess capacity at the drop of a dime, the kingdom has become frighteningly stagnant in terms of production growth over the last decade – even in times of biggest demand surges. Reserve data on their fields is closely guarded and considered a state secret, so the world has to be satisfied with whatever numbers they give them.

It's already known that their biggest field ( Ghwar, which is the largest oil field in the world) has been subject to a technique where water is injected into its wells to incite pressure for the oil to spill out faster than is any longer occurring naturally for several years. Wiki Leaks cables suggest that they may have exaggerated reserve stats by as much as 40 percent! If this is true, which many geologists had already suspected, it would mean that they no longer have the most oil of any nation and are unable to control price through their output even if they wanted to.

The U.S. also consumes unthinkable – and clearly unsustainable amounts of oil. The United States produces 5.4 million barrels of oil per day (down from 11.3 million at its peak in 1970), making it still the third biggest producer in the world. Yet due to its massive consumption (25 percent of the global supply), the U.S. doesn't make the list of the Top 20 exporters of oil and is the still the number one importer in the world.

As oil markets continue to tighten (and especially if they are plagued with events that further disrupt supply), the United States will be the hardest hit country in the world. Despite evidence of its futility, we've chosen to remain on the half-century old and painfully outdated path of simply bullying the markets into our favor via our massive military and favored position as holder of the world's reserve currency.

I'll address the roles of alternative energy and other fuels like natural gas and coal in a future column, but suffice it to say that none of them offer a practical or painless replacement for the role of oil at this late stage in the game. It might be time to start thinking about an actual oil policy – one that does more than offer token nods to anything other than the status quo of subsidized record-profits for the handful of industrialists who grow fat off of the nonsensical way we've approached energy use.

Related Article: Want Cheaper Gas Prices? Forget Domestic Drilling, Regulate Speculation on Oil.

Dennis Maley is a featured columnist and editor for The Bradenton Times. An archive of his columns is available here. He can be reached at dennis.maley@thebradentontimes.com.