For the last two decades, investments in finding and producing energy, tankers to export oil, refineries for producing oil by-products, pipelines to transport it and power plants that utilize it have been under-funded and under-invested. The result is that we have run out of spare capacity in oil, natural gas and electricity. In the words of Matthew R. Simmons, President of Simmons & Company International,

“Today’s energy crisis is the equivalent of a Perfect Storm…
The energy crisis is a convergence of pending shortages in all three forms of energy:
oil, natural gas and electricity.” ⁱ

The prosperity of the last century was driven by inexpensive oil-based energy. We aren’t running out of oil and natural gas. We’ve simply run out of spare capacity and cheap forms of energy. Oil discovery peaked in the 1960’s. Oil production peaked in the U.S. in 1971 and for rest of the world outside the Middle East in 1997. We are now finding only one barrel of oil for every four that we consume. We are at a key inflection point in history. The power shortages in the Midwest last summer and the current energy crisis in California are but the first tremors that are about to send shockwaves through the world’s economic system. These tremors won’t be temporary. They will reflect the onset of a new permanent condition of energy constraints. Future shortages are in the formative stages.

As these graphs illustrate, oil discovery peaked in the U.S. during the 1930's while production peaked 40 years later in 1971. For the world as a whole, discovery peaked in the 1960's while production has peaked outside the Middle East in 1997. Middle East production is expected to peak by 2005 before production begins to decline. The Decline of U.S. Supply of Oil In the U.S., despite a dramatic increase in oil and natural gas rig counts, oil and natural gas production continues to decline. Inventory levels of natural gas and oil continue to decline as a result of demand exceeding supply. Demand is being driven by economic and population growth and the advancement of technology. The Internet, which is run on servers, and PCs are adding to the demand for electricity. Last year in California, electricity demand grew by 10%.ii The U.S. was blessed by an abundant source of energy with coal, oil, and natural gas. Its abundance in a variety of energy sources was unmatched by any other region of the world. It enabled the U.S. to become the richest and most powerful nation in the world. That abundance of natural resources allowed us to supply our industrial economy, power our factories and win wars. But that abundance is quickly evaporating. Up until 1971, the United States was energy self-sufficient. Today we make up 5% of the world’s population and use about a third of the world's annual energy supplies.

Estimated World Oil Distributed
(Billions of Barrels)

We must now import close to 60% of our oil. ⁱⁱⁱ We have depleted most of our original oil endowment and are down to about a third of our original reserves. As the above table indicates, we have consumed much of our oil endowment – making us more dependent on Middle East oil.

Over the next decade, the challenge of meeting our energy demands is going to require vast amounts of investment dollars. We will need to build more tankers to bring imported oil to the U.S., more refineries to process it, thousands of miles of new pipelines to transport it, and new power plants to produce electricity. The investment will be formidable.

The Need for A Millennium Infrastructure in Oil
Once again, we are not running out of oil and natural gas. We have simply run out of spare capacity and the ability to deliver it. This nation is short on energy reserves, tankers, pipelines, and power plants and has an underdeveloped power grid to deliver electricity. There are many experts who have spoken about this issue – most notably Dr. Colin Campbell. More recently Walter Youngquist, Michael Economides and Ronald Oligney have written books about these very issues. The investment-banking firm of Simmons & Company International led by Matthew Simmons has raised a clarion call on the crisis we now face. With California’s energy crisis making front-page headlines, their warnings will hopefully not go unanswered.

Oil’s Potential for Geo-Political Conflict
One of the unacknowledged realities of today’s present political environment is the world’s growing dependence on Mideast oil. As the world transitions to a decline in global oil production, global tensions are bound to rise. This could produce another oil war as various western and eastern states may consider military intervention as a means of securing oil. Until the oil wells run dry and a new energy source is discovered, this small group of Middle East nations will exert a growing influence over world economic affairs.

This growing importance of Middle East oil will cause a major geo-political shift of power among regions and nations. The most visible sign of this power shift is the United States moving from a creditor nation to a debtor nation. In the short run and until this crisis is resolved, the U.S. standard of living will continue to fall. Our energy dependence will alter our own ability to control our own destiny. With no new continents to explore, nations will increasingly confront each other over dominion of the earth’s remaining natural resources. Future military conflicts are more likely to be over energy, water, minerals and fertile soil. It will take consummate statesmanship by world leaders to avoid a future conflagration.

I have only scratched the surface on the energy crisis the world and in particular, the United States now face. It is going to take massive amounts of money to correct it, requiring a large investment infusion by government and industry to rectify it. Matthew Simmons believes it will take the equivalent of another Marshall Plan to solve it. Its relevance to stagflation is that it will raise the level of inflation in the United States at a time of declining economic activity. Higher energy costs translate into higher production costs. Just look at the number of companies from DuPont, Procter & Gamble, to Gillette who have sighted higher energy costs behind their profit shortfalls. Higher energy costs will also mean higher utility bills and higher food costs since energy is required to fertilize crops and produce food.

March 22, 2001

© 2001 James J. Puplava
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