Oil Hits All-Time High Amid Peaking Supplies, Soaring Demand

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Waning global production, geopolitical fears, push crude to historic heights. "Welcome to peak oil," one expert says

Crude oil prices surged to all-time nominal highs this week, eclipsing last summer's record and renewing fears that world oil production may have reached its historic peak. Front-month crude futures on NYMEX closed at $78.21 a barrel on Tuesday -- $1.38 higher than the previous high of $77.03 set on July 14, 2006 amid shutdowns at Alaska's Prudhoe Bay oil fields and a widening military conflict in Lebanon.

The previous all-time settlement high of $77.03 was set July 14, 2006 amid shutdowns at Alaska's Prudhoe Bay oil fields and a widening military conflict in Lebanon.

This summer, market watchers say many of the same fears remain -- and some have worsened. While oil is flowing again in Alaska, crude output from key global producers is ebbing. Mexico -- the United States' second biggest supplier -- reports that crude production from its national oil company PEMEX fell 19% from last year and could run out in as few as seven years.

Production from the North Sea continues to fall from its 2000 peak, while Nigeria, a top global exporter, is struggling to keep crude flowing in the face of a bitter insurgency targeting Western oil operations. Meanwhile, conflicts in the Middle East continue to simmer with the specter of a clash with Iran looming large over the Persian Gulf, the source of 28% of global crude exports.

Perhaps most worrisome for oil markets are growing indications that Saudi Arabia, the world's top oil exporter, may have peaked. Crude output has fallen 10% over last year and many observers say the desert kingdom -- and by extension OPEC -- may be unable to boost flows to cool prices.

"A new meta-concern is beginning to take hold," says Richard Katz with SF Informatics, an energy-education organization based in San Francisco. "Everywhere you look, crude production has either hit a plateau or is declining." If the trend continues, he says, world oil production as a whole may tip into permanent decline, if it hasn't done so already. "Welcome to peak oil," says Katz.

Despite skyrocketing prices, the world's thirst for oil remains as strong as ever, raising fears of further spikes. Americans are hitting the road in record numbers this summer and business activity appears brisk, with the economy growing at an annual rate of 3.4% in the second quarter. Meanwhile, rapidly industrializing nations such as China and India have emerged as powerful new draws on oil supplies.

The combination of anemic supply and surging demand has some market watchers predicting stratospheric oil price levels within months. Goldman Sachs now says that $100 oil may be months away and CIBC World Markets says it could arrive next year.

The triple-digit forecasts from Goldman and CIBC come on the heels of unusually grim outlooks issued by two major industry groups. A report in July by the International Energy Agency (IEA) warned of imminent shortfalls in five years. And the National Petroleum Council, an industry group chaired by Lee Raymond, retired chief of ExxonMobil, said in its report "Facing the Hard Truths about Energy" that "oil and gas may run short in 2015."

With increasing signs that high oil prices are here to stay or may climb higher, experts are wondering how high oil can go before it stifles economic growth. Some observers say surging oil prices played a role in the recent stock market plunge. "Higher oil is starting to hurt, said Larry Peruzzi, equity trader at Boston Company Asset Management, as reported last week in the Wall Street Journal.

Longer term, the bleak logic of peak oil, which promises continuing declines in petroleum output for decades, has led some analysts to declare the coming end of the oil age and the energy-intensive way of life that goes with it. James Howard Kunstler, author of "The Long Emergency", says the oil crunch could threaten the stability of the global financial system that owes its existence to oil-driven economic growth.

"Perhaps the most imminent danger," he said in a recent blog, "is that the financial markets, which have been driving our insane, hollowed-out economy, will soon recognize what's in store and implode, creating a crisis of capital that will leave us with no ability to make any emergency investments."

Given peak oil's wide-reaching ramifications, Katz with SF Informatics urges an all-out education program along with a new Manhattan Project to deal with the fallout from diminishing oil availability. "We're going to have to come to terms with peak oil sooner or later," he says. "Probably much sooner than you think."

About SF Informatics
SF Informatics represents a group of citizens committed to researching and communicating critical environmental trends worldwide. Among its projects is a data-rich and colorful poster called The Oil Age that traces the history of oil production worldwide and displays key energy statistics from government and industry sources. Copies of The Oil Age poster can be purchased at http://www.oilposter.org. It will be on display at the American Museum of Science and Energy, Oak Ridge, TN, September 7, 2007- January 7, 2008 as part of Indiana University's "Places & Spaces: Mapping Science" exhibit. For more information: dave @ oilposter.org .

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RICHARD KATZ
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