Hubbert's Peak, the New Economy and Coming Oil Wars

M. King Hubbert was a geologist specializing in global oil resources. He worked for Shell Oil in Houston and in the fifties began formulating a mathematical formula for the prediction of oil resources and the impact of production upon these resources. Initially, his work was met with skepticism. Hubbert's "curve" (a bell shaped curve tracking the world's oil production) was sort of a "black box." Few in the industry understood the math and formula behind it, adding to the initial skepticism. In the sixties, Hubbert elaborated and refined the curve, predicting that "peak" oil production would occur around the year 2000 and thereafter begin to decline.

While I don't pretend to understand the mathematical assumptions behind the curve, I may imagine that it is based essentially on the best historical production figures Hubbert could obtain, combined with a healthy margin of error regarding potential new discoveries, coupled to an understanding of supply and demand. Essentially, Hubbert forecast that "peak" oil production would occur at a point in time at which the world's oil resources would be generally known and its complete depletion could be reasonably forecast. At that point, in defiance of the normal law of supply and demand, wherein supply always rises to meet demand, production would instead begin to drop in anticipation of the end of the era of oil and the resultant rise in prices.

Hubbert's 2000 production peak wasn't exactly on target, but close enough to emphasis the obvious: oil is a depletable resource and the industrial age has depleted it much faster than it can be replaced. One, of his followers, Kenneth S. Deffeyes, a retired professor of geology from Princeton, in a book entitled "Beyond Oil," published in 2005 and updated in 2006, estimates that we hit peak oil production in December of 2005. Today, most geologists believe that we have either already hit peak production or will shortly (within the next ten years).

What this basically means is that the world, at some point within this century, will lose the cheap energy source that fueled the industrial revolution and most of the material conveniences we enjoy today. Worse, this is occuring at a time when political and technological changes are "promising" to bring those same material conveniences to approximately half of the world's population that had been denied to them under communism.

In theory, eventually, the price of oil will rise until a less expensive alternative energy source is found, so that, in the long run, the transition to a new renewable and inexpensive energy source will be but a blip in human progress. But, the key concern today is, as is the case in globalization, the degree of disruption occuring in the transition.

To minimize this disruption a key element of U.S. foreign policy must be to ensure the more or less uninterupted flow of oil, at more or less free market prices, from the Persian Gulf. Basically, four countries: Saudi Arabia, Iran, Iraq and the UAE hold two-thirds of the world's oil reserves. The continued participation of these countries within the global free market system, even though they may not be democratic, is essential to global economic stability for at least the next fifty years.

Although no longer the strong industrial power we once were, the U.S. remains the world's largest single user of oil. With it, we heat our homes and offices, fuel our transportation system, etc. Indeed, much of our entire "new economy" has been built around the premise of cheap energy: suburbs, shopping centers, highway systems, drive-through everythings, etc. As a result, hegemony, if not outright occupation, in the Middle East is of prime importance to U.S. economic national security, which in turn, is directly linked to our status as the world's remaining superpower. Indirectly, it is also linked to our rather tenuous relationship with the world's new and growing industrial base, the southeast asian "tigers," India and China.

The United States retains its superpower status primarily due to three factors: consumption - i.e. what we import (increasingly based on credit), a safe harbor for investment and stable currency - i.e. Wall Street and the dollar, and military force - i.e. the ability to "project" control abroad. [Agriculture exports might constitute a fourth]. All three of these factors are reaching their limits and the limits are becoming increasingly visable to the rest of the world. And, as this visibility becomes clearer, our superpower status becomes increasingly in doubt.

Throughout the Clinton years we managed to sustain the fiction by means of selling much of the world with the idea of a "new economy" and the coming of a post-industrial age, in which the United States continued to dominate through cutting edge information technology. Unfortunantely, the nature of the technology we touted undercut the rationale of a U.S. advantage. To maintain an industrial advantage, requires hardware - i.e. the physical infrastructure of factories, equipment and cheap labor. To maintain a "new economy" advantage requires a "license" - i.e. a piece of paper that promises to respect intellectual property rights.

In a sense, we leapt ahead of much of the world's political development and "bet" our economic future on the global acceptance of democratic principals, the rule of law, and universal property rights. We believed our own hype, in a post Cold War world.

Two events caused the world to "reevaluate" our worth. One was the dot.com bubble burst. Any new technological innovation that comes hard and fast tends to be over-valued in a free market economy. It has happened periodically throughout the history of capitalism and, I should think, pretty much confirms human nature and Adam Smith's "invisible hand" of free and rationale choice in the market. But this time, it happened on a global basis and the result was a reappraisal of the U.S. advantage in a "new global economy."

The second shoe dropped on 9/11. Our attackers flew airplanes (taken over with box cutters) not into the National Cathederal or Riverside Church, or the George Washington Monument but into the World Trade Towers and the Pentagon. In other words, they selected their targets as those representative of the foundations of our superpower status, instead of targets representative of our religious beliefs or our democratic values.

Our response has been consistent with our own self-image, in turn distorted by a failure to appreciate the genuine causes contributing to the end of the Cold War and the failure to come to grips with the substantial changes in the global situation wrought by that end. And, if left unevaluated and unchallenged, these false assumptions leave us on a path toward a future of on-going "oil wars" and the continuing decline of American society. In sum, unless we are now ready to institute serious political and economic reforms and face the serious errors made in our post Cold War history, things just "ain't goin to get better."

[More to come]