The world price of light, sweet crude oil – known as “Arabian Light” – traded above $100 a barrel for the first time ever last week. Soon the price is expected to hit an all-time record high on an inflation-adjusted basis around $102 a barrel.
“The long-term trend of prices is clearly higher,” says the nation’s first Energy Secretary James R. Schlesinger. He took office 30 years ago. Since the first oil crisis, the U.S. government has created an energy bureaucracy but has not adopted a realistic energy policy. In fact, complacency prevailed through the 1979 energy crisis, too and it continues to prevail. The U.S. Strategic Petroleum Reserve consists of 700 million barrels, only about two weeks’ supply.
The 1979 crisis coincided with the Iranian Revolution which overthrew the Shah, the pro-Western strongman we had set up with the British to guard the Persian Gulf. Around that strategic waterway lay two-thirds of the world’s known oil reserves. The young radical students in Tehran who staged the Revolution took the U. S. embassy and made our diplomats hostage, a display of American impotence that deflated President Jimmy Carter and elected Ronald Reagan, to whom the hostages were at once released.
$100-A-Barrel Oil – and What Comes Next
The U.S. still has no policy toward Iran worthy of the name. Today, the former student radicals run Iran and watch for signals from Washington. Schlesinger is conscious of their gaze and of unfinished diplomatic business in Tehran.
A U.S. attack on Iran to destroy nuclear-related targets could send oil prices soaring to $200 a barrel or higher, says Richard Haass, President of the Council on Foreign Relations. An oil supply interruption or a vessel sunk in one of the narrow “choke-points” of the Gulf could send prices sharply higher over the indefinite duration of a crisis.
Even without a formal energy policy, the market price signals from the U.S. economy have made the U.S. increasingly energy-efficient. The process that began with the 1973 Arab oil embargo, long gasoline lines and scarcity rationing has led, all these years later, to fuel-efficient homes, cars, offices and infrastructure. Oil prices have gyrated wildly, twice surging and then collapsing, causing then-Vice President George H. W. Bush to ask me one day in the mid-1980s: “Dick, do you realize what ten buck oil means? It means ruin to American oil drillers.”
Oil rose and fell again before the end of the decade of the 1980s. In 1998, it hit $10 a barrel again.
Now, however, that wild gyration won’t be repeated unless the U.S. economy slides into recession. “Sure, there will be some speculative profit-taking, and perhaps prices will temporarily fall back to as low as $80 a barrel,” says Schlesinger. “But the long-term upward trend of oil prices is clearly established.”
The main reason, he explains, is that in the 1970s and 1980s, the OPEC oil cartel the world still had some shut-in Saudi Arabian reserve supply capacity to meet rising demand. Today, as demand grows rapidly in China and India, as well as the rest of the world, there is a very small reserve to meet it.
Experts believe we may be nearing “peak oil,’” perhaps as early as 2022. At that point, as one expert puts it, “reserves are defined as the known amounts of (oil) that can be profitably produced at current prices.” As prices rise, a small amount more can be produced. As exploration continues, technology advances and prices rise, more oil becomes economically feasible to produce – what may be called the Pollyanna School of Oil Production.
Schlesinger laughs and says: “People in the industry tell me that we’re at 86 million barrels of daily production and we are likely to ‘plateau’ at around 100 million barrels.” His conclusion: “We’re not likely to explore and produce our way out of this tight spot by finding giant new fields of hydrocarbons. Even the newly opened substantial Caspian Sea oil fields, he notes, are small by today’s enormous standards of world production.”
What about alternative energy sources? “None approaches the efficiency and cost effectiveness of petroleum,” says Schlesinger. He points out that government-subsidized ethanol alcohol produced from corn has only about 70 percent of the “energy density” of petroleum.
This time, energy experts are agreed, global oil demand has radically changed the near-term scenario. “Barring a recession or a depression,” writes energy expert Philip K. Verleger, Jr. in The International Economy, “‘triple-digit’ oil prices may become a regular feature of the global economy within three or four years, and soon the first digit may become something other than one. Without drastic changes to energy policies, oil-exporting countries that only eight years ago earned less than $200 billion per year may realize annual revenues as high as $2 trillion.” Verlegar cites six factors to support his thesis: “(1) economic growth; (2) under investment; (3) nationalism; (4) investment uncertainty; (5) nationalism in countries endowed with resources; and (6) scale…. The stage is set for a period of very high energy prices.”
Schlesinger, a no-nonsense blunt-spoken policy intellectual is one of the most dedicated public servants I’ve known in four decades in Washington. In addition to launching the Energy Department, he served in the old Budget Bureau, as Chairman of the Atomic Energy Commission, Director of Central Intelligence and Secretary of Defense. He brings to policy a rare combination of expertise and experience and to strategy, a masterful grasp of geopolitics.
Schlesinger says candidly that he does not know what, if anything, President Bush will do about Iran before he leaves office. Whatever he does, Bush could not send a better prepared, more impressive emissary to Tehran than Jim Schlesinger.
A U.S. attack on Iran to destroy nuclear-related targets could send oil prices soaring to $200 a barrel or higher, says Richard Haass, President of the Council on Foreign Relations. An oil supply interruption or a vessel sunk in one of the narrow “choke-points” of the Gulf could send prices sharply higher over the indefinite duration of a crisis.
Even without a formal energy policy, the market price signals from the U.S. economy have made the U.S. increasingly energy-efficient. The process that began with the 1973 Arab oil embargo, long gasoline lines and scarcity rationing has led, all these years later, to fuel-efficient homes, cars, offices and infrastructure. Oil prices have gyrated wildly, twice surging and then collapsing, causing then-Vice President George H. W. Bush to ask me one day in the mid-1980s: “Dick, do you realize what ten buck oil means? It means ruin to American oil drillers.”
Oil rose and fell again before the end of the decade of the 1980s. In 1998, it hit $10 a barrel again.
Now, however, that wild gyration won’t be repeated unless the U.S. economy slides into recession. “Sure, there will be some speculative profit-taking, and perhaps prices will temporarily fall back to as low as $80 a barrel,” says Schlesinger. “But the long-term upward trend of oil prices is clearly established.”
The main reason, he explains, is that in the 1970s and 1980s, the OPEC oil cartel the world still had some shut-in Saudi Arabian reserve supply capacity to meet rising demand. Today, as demand grows rapidly in China and India, as well as the rest of the world, there is a very small reserve to meet it.
Experts believe we may be nearing “peak oil,’” perhaps as early as 2022. At that point, as one expert puts it, “reserves are defined as the known amounts of (oil) that can be profitably produced at current prices.” As prices rise, a small amount more can be produced. As exploration continues, technology advances and prices rise, more oil becomes economically feasible to produce – what may be called the Pollyanna School of Oil Production.
Schlesinger laughs and says: “People in the industry tell me that we’re at 86 million barrels of daily production and we are likely to ‘plateau’ at around 100 million barrels.” His conclusion: “We’re not likely to explore and produce our way out of this tight spot by finding giant new fields of hydrocarbons. Even the newly opened substantial Caspian Sea oil fields, he notes, are small by today’s enormous standards of world production.”
What about alternative energy sources? “None approaches the efficiency and cost effectiveness of petroleum,” says Schlesinger. He points out that government-subsidized ethanol alcohol produced from corn has only about 70 percent of the “energy density” of petroleum.
This time, energy experts are agreed, global oil demand has radically changed the near-term scenario. “Barring a recession or a depression,” writes energy expert Philip K. Verleger, Jr. in The International Economy, “‘triple-digit’ oil prices may become a regular feature of the global economy within three or four years, and soon the first digit may become something other than one. Without drastic changes to energy policies, oil-exporting countries that only eight years ago earned less than $200 billion per year may realize annual revenues as high as $2 trillion.” Verlegar cites six factors to support his thesis: “(1) economic growth; (2) under investment; (3) nationalism; (4) investment uncertainty; (5) nationalism in countries endowed with resources; and (6) scale…. The stage is set for a period of very high energy prices.”
Schlesinger, a no-nonsense blunt-spoken policy intellectual is one of the most dedicated public servants I’ve known in four decades in Washington. In addition to launching the Energy Department, he served in the old Budget Bureau, as Chairman of the Atomic Energy Commission, Director of Central Intelligence and Secretary of Defense. He brings to policy a rare combination of expertise and experience and to strategy, a masterful grasp of geopolitics.
Schlesinger says candidly that he does not know what, if anything, President Bush will do about Iran before he leaves office. Whatever he does, Bush could not send a better prepared, more impressive emissary to Tehran than Jim Schlesinger.
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