10.31.13

Hallowe’en 2013: Nightmare on Main Street

Posted in Uncategorized at 8:54 pm by Administrator


It must be admitted that the circumstances were unique.

The consequences, although predicted by a few (or so they claimed) were dismissed as impossible by political leaders and the general public.

And yet there had been warning signs.

For months the price of oil had been moving monotonically higher; not at an alarming rate but without any obvious underlying cause.

Those with technical knowledge of the subject would have pointed out that the increase in daily oil production capacity had not been keeping pace with the increasing daily demand for several years.  As a result the world markets were susceptible to any major problem in the supply chain.

But people had been hearing threats about “peak oil” for decades.  They were immunized against this conspiracy by the oil industry to increase “Big Oil’s” money grab.  Peter had cried “wolf” too many times.

So when oil passed $150/barrel public outrage called for an end to oil company creed.  Politicians the world over, most being disciples of Reagan and Thatcher, refrained from interfering with the sacrosanct “market forces” that they believed in so deeply.

And then on October 31 those laws of supply and demand, both respected and feared, passed judgment on the world.

A late season hurricane shut down production along the Gulf Coast of the United States.  The same week an earthquake in Southern Iran caused extensive damage to a number of pipelines serving the port of Ras Tanura in Saudi Arabia.  Over 5 million barrels of oil at the terminals were spilt into the Persian Gulf when storage tanks were ruptured by that same earthquake.

Within days the price of oil had hit $200/barrel and gasoline prices in the U.S. spiked to $5/gallon.  Service stations began to run out of gasoline and lineups reminiscent of the 1970’s became the norm.

Over the next several months oil production in the Gulf of Mexico returned to normal and significant progress was made on repairs to the Middle East infrastructure.  Despite the increasing supplies the world oil crisis continued.  World oil prices rose to $300/barrel and gasoline prices in the U.S. rose to $6/gallon.

It was clear that there was now a serious imbalance between supply and demand.  When pressed to increase production the most prolific oil producers in the world stated categorically that there were no large untapped pools available.  The old standbys, Saudi deep reservoirs and the Canadian Tar Sands had long ago been tapped and were producing at close to maximum output.  Production continued its inexorable decline in the North Sea and the Alaskan North Slope as well as all of the older conventional oil fields.

As the new reality became accepted the world reacted as it had several times before to oil price spikes.  Sales of pick-up trucks, the cash cows of the North American automobile industry, came a crashing halt.

Unable to deal with the endless line-ups at service stations many people started commuting via mass transit.  While this was considered by most to be a positive development it stressed urban transit systems almost to the breaking point.  Too often the destination signs on buses read “Sorry – Bus Full”.   Subway and train riders frequently watched as car doors opened and closed with no opportunity to board.

As consumers had to allocate more of their disposable income to fuel purchases of one sort or another retail spending slowed dramatically pushing the developed economies into recession.

There were, of course, winners from the energy chaos.  Oil and Gas exploration companies, flush with cash, began to expand their workforces.  However, not quite believing that they were truly into a new era this expansion was tempered.

Manufacturers of electric vehicles saw record sales but were hard pressed to ramp up production lines quickly.  But here again uncertainty about the future held back aggressive expansion plans.

And still the crisis deepened.

It was discovered that China, through its 5 year planning process, had secured the majority of its projected oil import requirements through fixed-price, long-term purchase agreements with major oil producers.  Although not completely sheltered from the economic chaos being experienced elsewhere the Chinese economy continued to grow albeit at a slower rate, driven more and more by internal demand.  The result was further pressure on the global oil supply.

As oil prices touched $400/barrel many consumers began to switch energy sources to use natural gas whenever possible.  And that is when the other “shoe” dropped.

A fracking project in SE Ohio was identified as the source of a significant landslide which buried a small town resulting in more than 100 deaths and the destruction of several hundred homes.  It was found that the local groundwater supply had been contaminated with fracking fluids making the water unfit for human consumption.  As a result a national moratorium on fracking was imposed until the situation could be thoroughly investigated.

With a cloud hovering over the entire fracking industry the price of natural gas spiked to $10/MMBtu.  The downstream impacts on employment and energy costs were felt almost immediately, pushing many economies further into recession.

In Europe declining tax revenues and rising unemployment caused the debt crisis to rear its ugly head once again.  But this time the German and French economies were not strong enough to be able to rescue the weaker members of the EEC.

Greece and Spain quickly defaulted on bond payments and had to revert to National currencies leaving many Euro zone lenders with huge holes in their balance sheets.  Several other countries teetered on the edge of loan defaults.

There were calls within the United Nations General Assembly for global rationing of oil resources.  In an ironic twist Communist China declared that the commercial contracts that it had signed with oil exporters should trump any U.N. resolution.  Because of its permanent seat on the Security Council and associated veto these discussions went nowhere.

Finally, out of frustration and desperation, the United States declared an embargo on all oil and natural gas exports from North America.  All production from the Canadian Tar sands and Mexican oil fields not used domestically was diverted to U.S. refineries.  LNG exports to Japan and elsewhere were halted.

As global political tensions kept rising the oil crisis did not abate.  Even with lowered demand around the world and a significant increase in exploration activity discoveries could not replace declining production in the mature oil fields of the world.

China demanded that the U.S. lift the embargo on exports from the Canadian Tar Sands that China had contracted for.  The United States refused and requested that China join U.N. discussions about oil rationing.

For the first time in decades diplomats around the world began to discuss the possibility of a global armed conflict.

 

 

 

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