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The Next Oil Shock

May 26, 2009

The Next Oil Shock

By INVESTOR’S BUSINESS DAILY |26 May 2009

Energy Policy: A top expert tells Congress that oil will be around for a long time and high inventories and low prices are no excuse not to find more. Oil shock? How about a no-oil shock?

Be careful what you wish for, goes the old proverb. Well, as we all had hoped, energy prices have fallen — but only as part of the global decline in economic activity. This has been used as an excuse to further discourage exploration for and development of domestic oil resources. But if the economy does recover, that policy could provoke another recession.

Daniel Yergin, chairman of HIS-CERA, testified before the Joint Economic Committee of Congress last week that we have already experienced a “demand shock” with very high prices driven by rising global demand led by the economies of China and India.

We’ve also experienced what he calls a “recession shock” with flat or falling demand and low prices. But there might be another “long aftershock” in our future with high demand returning with a vengeance along with a global economic recovery, leaving those who buried their heads in the oil sands in the economic lurch.

The current recession has wiped out demand growth for the last four years. Oil prices have tumbled $100 a barrel or more from their high point. Spare production capacity is expected to be 6.5 million barrels per day through 2009. Anticipating a robust future, other countries such as China and Brazil have continued to look for oil while we continue to research . . . switch grass.

Interestingly, as Yergin notes, current spare capacity is equal to the combined total output of Iran and Venezuela — or the combined exports of Iran, Venezuela and Nigeria.

These are three of the most unstable nations on the earth, and two of them are implacably hostile to the U.S. This does not bode well for our economic and energy security.

While low prices and excess capacity sound good, they could vanish like the morning dew. The long lead times, up to a decade for a new field, needed to expand capacity and replenish supplies should compel us to drill like there’s no tomorrow — for there might not be.

Oil will continue to be a big player in our energy mix no matter how many windmills we tilt at or how many clown cars we place in front of 18-wheelers on our interstates.

“Today,” Yergin notes, “fossil fuels — oil, natural gas, and coal — supply over 80% of our total energy. Oil by itself is about 40%. That alone makes clear the importance of oil — and the evolution of the oil market — to our economy and security in the decade ahead.”

America’s oil and natural gas energy needs will grow. A study by ICF International, commissioned by the American Petroleum Institute, finds that our domestic energy resources placed off limits by Congress in ANWR, in Rocky Mountain shale and in the Outer Continental Shelf could generate more than $1.7 trillion in government revenue and create thousands of new jobs.

The irony is that in North America we have enough oil to ensure our energy and economic security. The U.S. and Canada together hold 15% of the world’s proven reserves, and that’s not even including the potential of American oil shale and Canadian oil sands — which are massive.

The current decline in demand has also sparked a decline in investment and added further justification for its deliberate policy of thwarting any expansion in domestic supply.

“As the economy picks up, spare capacity will start to erode, and the oil market could tighten again in the first half of the next decade,” Yergin said. “The result could be another adverse shock to the U.S. economy and global energy security.”

The result could be another recession where we drive to the unemployment office in our government-designed clown cars.

* -Note:  GOVERNMENT DESIGNED CLOWN CARS- Don

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