In the late winter of 2006, the citizens of Burlington, Vermont prepared to elect one of five candidates to a three-year term for an open mayor’s seat.  At one forum, a citizen stood up and asked, “Within the next mayoral term, it’s likely the price of oil will hit $90 a barrel and gas will be $5 a gallon.  If elected, what will you do to prepare the city for this?”

A few candidates mumbled platitudes about energy, environment and economy, but no one had an answer.  (The price of oil then was $56/barrel and gas around $2.25/gallon.)  Less than two years later, oil has topped $90/barrel and gas is around $2.90/gallon, indicating the price rise has yet to work its way through the system.

(Just two years ago, Hurricane Katrina caused a “massive jump” in the price of oil.  What was the “unheard of” price oil was then demanding?  Sixty dollars a barrel.)

Daniel Yergin, of Cambridge Energy Research Associates, said Wednesday that $100/barrel oil was not only possible, but likely in the near future.  (Hello, home-heating season!)  He attributes the sudden rise to two factors: political turmoil in the oil-producing regions of the world and the weak dollar. “What we’re seeing in the oil market today is rooted more in the cauldrons of geopolitics and the impact of financial markets, expectations, and psychology than in supply and demand, but these are real factors,” Mr. Yergin said.

Mr. Yergin’s quick to discount of the effects of supply and demand; recently he estimated the global oil supply at 4.8 trillion barrels, as opposed to the generally accepted two trillions barrels economists use in supply/demand calculations.  Mr. Yergin is the “don’t worry, keep driving” oil economist beloved by the oil companies and their wholly owned subsidiaries on Pennsylvania Avenue.

At the “Oil and Money” conference in London this week Sadad al-Huseini gave a presentation on supply and demand.  Mr. al-Huseini is the former head of exploration and production at Saudi Aramco.

Demand (obviously) is up, which in addition to unrest and weak dollars, accounts for the high price of oil.  We all know the stories of the roaring Chinese and Indian economies.  Spending on exploration by the oil companies is also up.  What’s not up is production, the supply side.  The reason for that, Mr. al-Huseini says, is there’s nothing more to produce.

On paper, the oil nations have billions and billions of barrels in reserve they should be pumping and earning huge revenues.  Instead the production curve has flattened out.

Why?  Mr. al-Huseini dates the problem to the late 1980s when OPEC reapportioned the quotas under which various oil countries could bring their product to market.  To keep the price high, OPEC limited the total amount of oil on the market, but divided the pie by the amount of oil each nation had in production or reserve.  The more oil a nation had, the bigger its share of the quota, the more it could bring to market and the more money it could earn.

The price of oil was running at about $13/barrel in those days, who could resist gilding the lily just a bit?  According to Mr. al-Huseini, the lily was gilded to the tune of 300 billion barrels of oil.  Those are barrels of oil OPEC nations said they had in reserve and in fact did not, or as Mr. al-Huseini admitted, they may have but the oil may be in such a state that it will never be economically recoverable.

He said 75 percent of Iran’s oil comes from fields that are more than half depleted and the 38 “giant” fields (1 billion+ barrels each) in the Arabian Gulf are approximately 41 percent depleted.  Production in that part of the world will now plateau and will begin to diminish in 15 years or less, Mr. al-Huseini said.  Meanwhile, demand – and the price of oil – will continue to rise.  He predicted an annual increase of $12 per barrel.  The price of oil hit $96/barrel yesterday, so that would mean $108/barrel in 2008 and $120/barrel in 2009.  When the next presidential election cycle ends in 2012, it would be $155/barrel.

Is Mr. al-Huseini an OPEC employee with a reason to lie, to cover the fact that OPEC nations have plenty of oil, but are crying depletion just to see how far they can goose the price per barrel?  Maybe, but whether the problem is politics, weak dollars, empty oil wells or deceit, the answer should be the same: get our nation off its oil addiction.  Mayors, governors, presidents – and the people who elect them – should be thinking about little else these days

© Mark Floegel 2007