OIL DRIVES TOWARD $100 A BARREL

As oil drives toward $100 a barrel, it is sweeping prices at the pump upwards into levels never before seen by Joe Six-Pack.

Gas that cost $3 a gallon last week will cost $4 when the world reaches the $100-a-barrel milestone. That's because crude oil makes up about half the cost of gas prices at the pump.

Smashing down the gas pedal on his two-ton SUV, Joe Six-Pack is really mad. "They ought to bomb those big oil companies," he fumes. A somewhat more rational public prefers to solve the problem by increasing regulation of the big oil companies. A recent poll showed that 53% of Americans want to hit the oil biggies with, not bombs, but more regulation.

But is Joe Six-Pack getting mad at the right people?

He would be better off yelping at the Chinese and Indians, who are sucking up oil faster that it can be supplied. In the good old (cheap oil) days, the big oil users were just three: the USA, Europe and Japan. Now there are five, a 67% increase in the number of big oil guzzlers. Back in the wonderful (cheap gas) year of 1960, the world only slurped 20 million barrels a day (mbd). By 2005, the world was into heavy drinking, imbibing over 82 mbd, an increase of over 300%. But the increase in proven oil reserves has been less than 90% – and much of the increase is based on dubious data. Worse yet, the oil production of aging oil fields all over the world is in steady decline.

When an oil field "peaks out" at its highest point in production, it begins a sharp decline for several years before leveling off at about 35% of its highest production. It then declines at a much lower rate until it eventually becomes economically unfeasible.

• Joe Six-Pack could yell at the USA, which peaked out as an oil producer in 1971 at 9.6 mbd and is now producing only 5.5 mbd, despite enormous efforts in secondary and tertiary recovery. Even Alaska's more recently discovered Prudhoe Bay field peaked out in 12 years at 1.5 mbd and is now putting out only 0.4 mbd – a 75% drop.
• He could toss an empty at the Mexicans, whose state-owned oil company, Pemex, has so badly mismanaged the giant Cantarelle oil field that it is now spouting more water than oil.
• He might heave a can of Bud at the Brits, who have seen their North Sea Forties and Brent assets peak out in 1980 and 1985. Forties' output is down 85%, with Brent sagging nearly 90%.
• Joe might drop a case of Old Milwaukee on Russia for allowing its great Romashkino field to deteriorate from a peak of 1.6 mbd to a paltry 0.3 mbd. Even worse, Russia's Samotlor field has declined from a peak of 3.1 mbd in 1982 to a mere 0.4 mbd now.
• Even though Joe would be angry at China's demand for oil, he would have to admire China's management of its Daqing field. Most big oil fields were greedily exploited for quick profits and peaked out in fewer than 10 years. But China's managers kept Daqing producing over 1 mbd for over 35 years. But now the decline has started.
• Thanksgiving Day in 2005 was a bad day in Kuwait. The government believed its giant Burgan field would be at top production for another 40 years. But petroleum engineers showed the government that, like all great oil fields, Burgan too has peaked out, and started its inevitable steep decline.
• Trouble-making Iran pushed its oil production to an artificial high of 6 mbd in 1978, followed by a big fall due to political turmoil. When the turmoil ended, the national oil company got the wells pumping again, but could only reach an output of 4 mbd. The country's four major fields (Aghajari, Ahwaz, Gach Saran and Marun) have long peaked out, with top production falling from 4.4 mbd to less than 1.6 mbd.
• Joe might heave a quart of ale at the Nigerian rebels, whose hit-and-run raids have cut Nigerian oil production at least 25%.
• He might throw a Corona at Venezuela's Hugo Chavez, who has diverted oil from the USA to Cuba and other countries he is trying to influence. Lately, he has ordered Venezuela-owned Citgo to withhold oil products from Citgo stations in 10 states and lower availability in six more. That's not going to play out well at the pump.
• Despite all this bad news, some people still believe that the Saudi princes are going to "open the valves" and push output up from 9.5 mbd to 15 mbd or even 20 mbd. But others warn that Saudi Arabia's major fields are about 40 years old and have either peaked out or are close to doing so. Despite spending many billions on oil discovery and secondary recovery, no new oil sources have popped up in the Arabian desert.

For the next ten years, the name of the game is going to be depletion – not discovery.

At this time, only Canada – with its great Alberta oil sands resources – seems capable of upping oil output significantly. The government says that Canada's synacrude will increase from the current 1 mbd to 5 mbd by 2010. But nobody has yet calculated the high costs of new infrastructure, conversion energy use, fresh water injection and slurrying and environmental degradation. Canada is still a big maybe.

Wind, waves, geothermal, ethanol, nuclear and coal will all grow. But not fast enough to replace the massive global depletion in oil assets taking place during the next ten years.

Joe might get mad enough to drive his thirsty SUV right over the offending pump.

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