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Originally published March 5, 2011 at 10:01 PM | Page modified March 7, 2011 at 11:30 AM

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Jon Talton

Jon Talton: Higher oil prices are a danger to economic recovery

While oil prices rise and fall, and some speculation may be responsible for price movements, the reality is that production across the Middle East is flat or falling.

Special to The Seattle Times

Oil, again. Crude futures rose above $100 a barrel last week because of unrest in Libya, and world markets trembled.

This might seem no big deal for America. Most of Libya's oil and natural gas goes to Europe. But if Europe sees tight supplies, it will bid on the world market for fossil fuels, driving up prices for everybody.

Reassurances by officials and some economists notwithstanding, oil at these prices is a danger to the fragile, molasses-paced recovery. It raises prices on the wide range of products made from petroleum, the costs to transport them and especially in America the price people pay at the gas pump. Oil shocks were directly responsible for the recessions of 1973, 1979 and 1991. They played a major role in the Great Recession.

Higher oil prices also increase the danger of inflation.

Federal Reserve Chairman Ben Bernanke claims the central bank can turn on a dime to snuff out the threat. But the necessary tightening of credit could bring on a new recession.

In addition, Bernanke would face the political and economic dilemma of his 1970s predecessors, Arthur Burns and G. William Miller, who hesitated in combating inflation for fear of raising unemployment.

Behind the upheaval in the Middle East, however, the more interesting and ominous oil story is to be found.

Several weeks ago, WikiLeaks released documents from U.S. diplomats saying oil reserves in Saudi Arabia, the world's leading producer, were overstated by as much as 40 percent. This received little play in the U.S. media, but it's part of a broader challenge to world energy that requires no skulduggery to understand.

While oil prices rise and fall, and some speculation may be responsible for price movements, the reality is that production across the Middle East is flat or falling.

Egypt, for example, is soon to become a net oil importer. In Saudi Arabia, oil reserves are a state secret, but experts have long questioned whether the kingdom can long maintain its pledge to be the producer of last resort (promising lately that it could make up any shortfall from Libya).

The late Matthew Simmons, an investment banker catering to the oil industry and a prominent theorist of "peak oil," questioned Saudi reserves in 2005. Already, the kingdom is holding back more oil for domestic uses as its population grows.

As the influential industry blog, The Oil Drum, wrote recently: "It is almost certain that the Saudis are overstating their capabilities. The reserves for Saudi Arabia and the rest of the Middle East are not audited, nor are their supposed 'spare production capacities.' They may have some spare capacity, but not the amount stated. When oil prices spiked to $147 barrel in July 2008, Saudi Arabia and others in the Middle East increased their production a bit, did not really come through with a huge surge in production, the way one would expect from their supposed spare capacity."


The same is true worldwide. Mexico's vital Cantarell field peaked in 2004, for example. This is true for most of the world's giant "elephant fields," and none has been discovered in years. Not for nothing did many oil-exporting nations start holding back exports for domestic use in 2006-07.

According to the International Energy Agency (IEA), hardly an alarmist group, conventional oil production peaked in 2006 at around 66 million barrels a day. Between 2030 and 2035, it's expected to fall below 20 million barrels a day, even as world demand is forecast to rise to 96 million. (The United States consumes about 20 million barrels a day.)

This doesn't mean we're running out of oil. It does mean the world has reached, or is rapidly approaching, the point when it has used up half of this one-time gift of geology. That took about 150 years. Depleting most of the remainder would take only a few decades — even industry executives admit this — given rising world demand.

The Great Recession caused a pause in demand, but it rapidly snapped back, especially in developing countries. China is already reaching U.S. levels of demand and must import nearly all of it. Demand is driven, pun intended, by rising populations, economic output and a desire for a car-based American lifestyle.

The remaining oil will be harder to reach and costlier to refine. It won't be the "light sweet" crude that powered the 20th century, but dense and high in sulfur and other impurities, what the industry calls "heavy" crude.

The IEA projects the energy shortfall will be made up with a variety of sources, including natural gas, tar sands, oil shale and oil fields yet to be developed or discovered. This latter will either be very expensive or prove to be a mirage. The others bring their own environmental and cost trade-offs. All contribute to greenhouse gases causing climate change.

Many cleaner alternatives require more fossil-fuel inputs than the energy outputs they produce. And while electric cars sound good, they are not in themselves an energy source. In any event, a report from the Marshall School of Business at the University of Southern California found that fossil fuels receive 12 times more in subsidies worldwide than more sustainable sources.

Oil peak is closely associated with economic trouble. America, which remains a large producer, hit its national peak around 1973. World peak will bring new instability and friction among nations as they race to lock in remaining resources. It will enhance the power of oil-and-gas rich Russia.

The time line may seem long, but adapting to a high-energy future will take a lengthy transition time and Americans have done little to begin preparations. China is building high-speed rail and gaining command over renewable-energy technologies while America bickers and its political leadership is paralyzed on the big, real issues.

No wonder a recent report by oil giant Shell saw a rocky decade or two before healthy economic growth returns. This is why I see energy as another part of the Great Disruption, a long arc of turmoil ahead, of which the Great Recession was only part.

Our car-based lifestyle, global economy and 10,000-mile supply chain might survive. More likely, as contrarian urbanist James Howard Kunstler puts it, "We will have to make other arrangements."

You may reach Jon Talton at

Information in this article, originally published March 6, 2011, was corrected Dec. 7, 2011. A previous version of this story incorrectly stated the world has "used up this one-time gift of geology." It has been corrected to note that the world has used half of "this one-time gift."

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Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest



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