Ceilidh

Michael Zey
futurist3000@aol.com

--------------------------------------------------------------------------------

Authors:                  Holman W. Jenkins Jr.

Pagination:               A.19

ISSN:                     00999660

Subject Terms:            Gasoline pricesCrude oil
                         Commodity prices

Classification Codes:     9180: International
                         8510: Petroleum industry


Abstract:

That's not to say that all forces behind today's higher prices are a godsend.
The futures market puts oil for delivery next summer at $35, well under
today's $41. Seers are not hard pressed to explain why. On April 24, three
small boats operated by suicide commandos hit Iraq's southern oil terminal
and a few days later kamikaze gunmen shot up a Saudi petrochemical plant.
Osama bin Laden has a plan: Get control of Saudi Arabia through subversion
and put himself in charge of its oil, foundation of a new Islamic empire.
That is, Saudi survival can't be taken for granted.

Note that the issue is not whether the world is running out of oil. The
debate concerns a theoretical milestone called Hubbert's peak, after which
output from any given field slows and becomes more costly to produce long
before the last drop is lifted. Half of Saudi Arabia's oil comes from the
giant and venerable Ghawar field; much of the remainder comes from four
other aging giants that may be at or near their Hubbert's peak.

What's true of a single field must, at some point, become true in aggregate
of the world's inventory of productive oil fields. Various authorities
have been sounding the SOS for the past year, their debate hosted in the
pages of the Oil & Gas Journal. How much oil is left is far less significant
than how quickly and cheaply it can be extracted, especially from a relative
handful of large, cheap-to-produce fields that have carried industrial
man for a century. Some believe that getting much above today's 80 million
barrels a day would be horrendously costly if not impossible. If they're
correct, two billion Chinese and Indians, right now beginning to trade
their bicycles for Toyotas, would be stuck trying to achieve modernity
by outbidding the rest of us for a share of the world's current rate of
oil production rather than benefiting from additional output.
Copyright (c) 2004, Dow Jones & Company Inc. Reproduced with permission
of copyright owner. Further reproduction or distribution is prohibited
without permission.

Full Text:

Thank you, Lord, for 40-dollar oil.

Obviously the Almighty has a better understanding of our interests than
we do. John Kerry lays a higher oil price as one more charge in his indictment
of the Bushies. Motorists available for interviewing by TV reporters during
daylight hours (otherwise known as senior citizens) lament two-dollar gasoline
as a crime against humanity, if not a mortal sin.

Meanwhile, six and half billion people need to eat, clothe themselves and
find shelter, and do a little better job of it each year. That takes oil,
at least as far as the eye can see.

Something like a trillion barrels remain in the ground. But, for technical
reasons, a few old, extremely large fields the world has depended on for
50 years may be about to start dropping off rapidly, without much hope
of replacing the output with new, affordable production. That's the worry
anyway, though there's much debate how urgent and dire this effect will
be. But no matter: Unless economics has no purchase on reality, the only
solution out there is one of price incentives.

That's not to say that all forces behind today's higher prices are a godsend.
The futures market puts oil for delivery next summer at $35, well under
today's $41. Seers are not hard pressed to explain why. On April 24, three
small boats operated by suicide commandos hit Iraq's southern oil terminal
and a few days later kamikaze gunmen shot up a Saudi petrochemical plant.
Osama bin Laden has a plan: Get control of Saudi Arabia through subversion
and put himself in charge of its oil, foundation of a new Islamic empire.
That is, Saudi survival can't be taken for granted.

Traders say five to 10 bucks of today's price is due to terrorism fears.
Notice also that the biggest speculator out there is the U.S. government,
which has been frantically topping off the Strategic Petroleum Reserve
ever since November 2001, yelps from private energy buyers notwithstanding.

Amid it all comes a debate about where the world stands in its consumption
of its total endowment of hydrocarbons. Are reserve estimates that have
been generally accepted for decades even accurate? Shell's recent move
to strike 4.35 billion barrels off its reserves is a sideshow, having mostly
to do with a corporate governance failure. The Big Kahuna is a suspicion
that long-standing OPEC reserve claims are inflated for political reasons,
especially those of the Saudis.

Houston energy banker Matt Simmons, who's pored over technical studies
produced by Saudi petroleum engineers, has a forthcoming book challenging
claims about the reliability of Saudi output. "We could be on the verge
of seeing a collapse of 30% or 40% of their production in the imminent
future, and imminent means sometime in the next three to five years --
but it could even be tomorrow," he told reporters at a Washington meeting
last month.

Note that the issue is not whether the world is running out of oil. The
debate concerns a theoretical milestone called Hubbert's peak, after which
output from any given field slows and becomes more costly to produce long
before the last drop is lifted. Half of Saudi Arabia's oil comes from the
giant and venerable Ghawar field; much of the remainder comes from four
other aging giants that may be at or near their Hubbert's peak.

What's true of a single field must, at some point, become true in aggregate
of the world's inventory of productive oil fields. Various authorities
have been sounding the SOS for the past year, their debate hosted in the
pages of the Oil & Gas Journal. How much oil is left is far less significant
than how quickly and cheaply it can be extracted, especially from a relative
handful of large, cheap-to-produce fields that have carried industrial
man for a century. Some believe that getting much above today's 80 million
barrels a day would be horrendously costly if not impossible. If they're
correct, two billion Chinese and Indians, right now beginning to trade
their bicycles for Toyotas, would be stuck trying to achieve modernity
by outbidding the rest of us for a share of the world's current rate of
oil production rather than benefiting from additional output.

All this has some petroleum engineers predicting resource wars, famine
and pestilence, preventable only by a massive effort of central planning
to shift the world to a less hydrocarbon-intensive lifestyle. If so, we
might as well pass around the cyanide caplets right now. Such global planning
is certainly beyond the wisdom and power of politicians to manage.

Yet the unwillingness of doomsayers to credit price signals with eliciting
changed consumption behavior, new technology, a thousand substitutions
and other adaptive responses is more than a little peculiar here. Oil companies
have held back from investing in deep- water searches, Canadian oil sands
and Venezuelan bitumen for fear oil prices will plummet to $15. Shareholders
have kept Big Oil on a short leash, tolerating only low-risk investment
projects that will generate cash flow in a small number of years. Won't
this change now if higher prices seem a permanent feature of the landscape?

Motorists might or might not be willing to swallow price hikes, but what
about other industries that use petroleum as feedstock? They're price sensitive
and would be expected to adapt in ways that aren't all easy to foresee
from today's vantage.

Scare talk is a hardy perennial in the global petroleum business, a passport
to fun and attention from the media. Industrial society is frequently painted
as a fragile, vulnerable machine, yet all the evidence suggests the opposite:
It's a machine that has grown more resilient and adaptable the more complex
and interdependent the world becomes. In short, as long as the price mechanism
is allowed to work, mankind seems likely to muddle through. Hallelujah,
then, for higher oil prices.

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Mr. Jenkins edits "Political Diary," the editorial page's daily e- mail
newsletter with commentary, analysis and gossip on election-year politics.
With John Fund. Subscribe at www.politicaldiary.com.